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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, 2001

                          Commission File Number 0-9407

                                REHABILICARE INC.

      MINNESOTA                                        41-0985318
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
                              -----    -----

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 21, 2001 was approximately $24,822,050 (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 21, 2001, was: Common Stock, $.10 par value, 10,815,945
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 13, 2001 are incorporated by
reference in response to Part III.



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            CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS


         The following Annual Report on Form 10-K contains various "forward
looking statements" within the meaning of federal securities laws. These forward
looking statements represent management's expectations or beliefs concerning
future events, including statements regarding anticipated product introductions;
changes in markets, customers and customer order rates; expenditures in research
and development; growth in revenue; taxation levels; the effects of pricing; and
the ability to continue to price foreign transactions in United States currency.
When used in this 10-K, the words "anticipate," "believe," "expect," "estimate"
and similar expressions are generally intended to identify forward-looking
statements. These and other forward looking statements made by the Company must
be evaluated in the context of a number of factors that may affect the Company's
financial condition and results of operations, including, but not limited to,
the following:

-    Like many medical device companies, the Company has a large balance of
     uncollected receivables. If it cannot collect an amount of receivables that
     is consistent with historical collections, it might be required to charge
     off a portion of uncollected receivables, significantly impacting earnings.

-    The Company's U.S. products are subject to reimbursement by private and
     public healthcare reimbursement agencies that 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 earnings
     or fines or both.

-    The Company maintains significant amounts of inventory on consignment at
     clinics and for distribution to patients. It may not be able to completely
     control losses of this inventory and if inventory losses are not consistent
     with historical experience, it might be required to write off a portion of
     the carrying value of inventory.

-    The clinical effectiveness of the Company's electrotherapy products has
     periodically been challenged. Publicity about the effectiveness of
     electrotherapy for pain relief or other clinical applications could
     negatively impact sales and earnings.

-    The Company formed a U.K. subsidiary in fiscal 1999 and acquired a Swiss
     company in the first quarter of fiscal 2000. These European operations may
     be more difficult to supervise, and may be subject to different economic
     influences than our United States operations, and may subject us to
     significant exposure from currency fluctuations.

-    The Company has periodically been the subject of litigation that has
     caused it additional expense, including a Medicare whistleblower suit
     settled in 2000 for approximately $1.6 million and, currently, a $2.3
     million product liability suit that proceeded to a default judgment without
     the Company's knowledge. The costs of these actions, and other actions that
     may arise, have negatively affected, and may continue to negatively affect,
     the Company operating results.

-    The Internal Revenue Service periodically reviews the Company's Federal
     income tax returns. They recently reviewed returns for the fiscal years
     ending June 30, 1997 and 1998 and proposed various adjustments, most of
     which relate to the timing of revenue or expense recognition. The Company
     believes its provision for income taxes and related reserves are adequate
     but resolution of specific issues could, at times, result in additional
     cash payments.



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                                     PART I

ITEM 1.       DESCRIPTION OF BUSINESS.

BACKGROUND

         Rehabilicare Inc. (the "Company") was incorporated as Medical Devices,
Inc., a Minnesota corporation, in 1972. The Company's name was changed to
Rehabilicare Inc. in 1994. Through its U.S. operations, the Company
manufactures, sells and rents rehabilitation and electromedical pain management
products and services used in clinical, home healthcare, and occupational
medicine applications. Through its Swiss subsidiary, Compex SA, the Company
provides similar clinical products, but also manufactures and sells products
designed for athletic training in most European countries.

         Through the late 1980s, most of the Company's activities related to the
sale of Transcutaneous Nerve Stimulation (TENS) and related devices through
dealers. During the late 1980s, amounts reimbursed for TENS rentals or purchases
were reduced by a number of insurance carriers, and margins for manufacturers
began to erode. As a result, the Company began in 1991 to distribute its
products directly to patients through direct sales representatives and various
healthcare providers, and to bill the patients and their insurance carriers
directly. In such direct rentals and sales, the Company makes 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.
In addition to the change in distribution techniques, the Company expanded
during the late 1980s and early 1990s the types of electromedical devices it
offered to include interferential stimulation, pulsed galvanic (direct current),
and microcurrent.

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

         On July 16, 1999, the Company acquired substantially all the assets of
Compex SA, a Swiss-based medical products and athletic 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.

         The Company's operations during fiscal 2000 were favorably impacted by
these acquisitions, but adversely affected by publicity surrounding, and a
one-time charge related to, a Qui Tam suit brought by a former employee under
the False Claims Act, and in which the United States Government intervened.
Although publicity surrounding the suit caused significant distraction of
personnel, the Company reached agreement during fiscal 2000 to settle the suit
for $1,588,510, which settlement amount was paid during fiscal 2001.


PRODUCTS

         The Company offers a number of electrotherapy devices for
rehabilitation, products for chronic and acute pain management and through its
Swiss subsidiary, products for athletic training. These products consist of
small, portable, battery-powered electrical pulse generators, which are
connected by wires to electrodes placed on the skin. Rehabilitation products
accounted for approximately 20 percent, 21 percent and 26 percent of revenue for
fiscal 2001, 2000 and 1999,



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respectively. Pain management products accounted for approximately 22 percent,
24 percent and 34 percent of revenue for fiscal 2001, 2000 and 1999,
respectively. Consumer products, which come from the Company's Compex
subsidiary, accounted for approximately 21 percent and 20 percent of revenue for
fiscal 2001 and 2000, respectively. The balance of the Company's revenue
resulted from the sale of accessories and supplies used with treatment
modalities.

Rehabilitation Products

         The Company offers a variety of electrotherapy products for the
rehabilitation market, including neuromuscular stimulators and pulsed direct
current devices.

         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.
The Company's NMES products include the NM III(TM), which features 16 preset
programs covering the most common applications, and the EMS+2(TM), 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. The Company's products include the GV II(TM), a high voltage
device used primarily for sprains and strains. The SPORTX(R) 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.

         CTDX(TM) Electrostimulation System The CTDX system is designed
specifically to treat repetitive stress injuries (RSIs) of the wrist and elbow,
including carpal tunnel syndrome. These cumulative trauma disorders represent a
multibillion-dollar annual workers' compensation cost to U.S. industry. The CTDX
system includes the SmartBrace(TM) (wrist) or SmartWrap(TM) (elbow),
application-specific electrodes and a CTDX stimulation device. It provides a
non-narcotic, noninvasive and conservative treatment for wrist and elbow pain.
The system can be effectively used at the work site or in a clinic specializing
in occupational and industrial medicine.

         Ortho DX(TM) Electrotherapy System. Introduced in 1998, the 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
recovery time for the patient. The Ortho DX is designed for ease of application
and use in hospital settings, in clinics or at home.

Pain Management Products

         The Company offers a wide variety of electrotherapy products for acute
and chronic pain management. These include transcutaneous electrical nerve
stimulation, 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 can continue for an
extended period of time after use.




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         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.

         The Company's current TENS line consists of five different products.
The Company's SMP-plus(TM) digital TENS is a state-of-the-art, digital device
that offers a unique modulation stimulation cycle which helps normalize a
disruption in the sympathetic nervous system. The SX-plus(TM) is also a digital
device(TM) and is a full-featured TENS stimulator with a high degree of
programming flexibility. The Nuwave(R) is an easy-to-use TENS device designed
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, even
if they had not responded to other TENS therapy. The Maxima(R)II is similar to
the SX-plus in its programming flexibility. The Maxima(R)III is the largest
selling TENS in the Rehabilicare line of TENS devices. It offers a unique
stimulation modulation that follows the "strength duration curve", a key element
in controlling many types of pain.

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

         The Company also distributes a modified TENS unit, the BabiTENS(R), in
the United Kingdom. It is manufactured by the Company for pain control during
labor and childbirth. It is distributed through a large pharmacy chain in the
United Kingdom and 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. The Company's IF
II(TM) 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.

         Iontophoretic Drug Delivery System. The Company markets the Iomed(TM)
Iontophoretic Drug Delivery System, which is marketed 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

Cervical and Lumbar Traction Devices

         The Company markets "The Saunders Cervical Hometrac(R)" and "The
Saunders Lumbar Hometrac(R)" devices, which are marketed to physicians, physical
therapists, and other healthcare specialists treating neck and back pain. These
traction devices use a handheld pump to produce



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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. The Company sells self-adhesive and reusable
electrode pads, disposable electrodes, leadwires, batteries, and a power pack
that eliminates the need for batteries in some of the Company's devices. The
Company purchases all of its electrodes and accessories from outside suppliers.
Accessories and supplies, including those provided separately to clinics with
initial product rentals, accounted for approximately 37 percent, 37 percent and
42 percent of revenue in fiscal 2001, 2000 and 1999, respectively.


COMPEX SA

         On July 16, 1999, the Company acquired Compex SA, a designer, developer
and marketer of home use electrotherapy products for the medical, sports and
fitness markets in Europe. Compex, headquartered in Lausanne, Switzerland, was
established in 1986. Compex accounted for $16.5 million or 26 percent and $15.7
million or 27 percent of the Company's consolidated net revenue for the years
ended June 30, 2001 and 2000, respectively.

         Compex sells a line of clinical products in Europe designed to perform
many of the same rehabilitation and pain management functions as the products
marketed directly by the Company. These products accounted for sales of $2.2
million or 14 percent and $3.1 million or 20 percent of Compex's consolidated
net revenue for the years ended June 30, 2001 and 2000, respectively. Although
Compex sells to medical markets in Switzerland, France and Italy, most of its
products do not require prescriptions.

         In addition to its products for clinical applications, Compex has
developed and markets a line of products for the sports and fitness markets.
Unlike the United States, where such muscle stimulation products would require a
prescription, Compex markets and sells these products directly to consumers in
Europe without prescription. Compex's most popular product, the Compex Sport, is
a high-precision muscle stimulator designed to improve the performance of
world-class and high-level amateur athletes. Compex Sport both strengthens
muscles and encourages muscle recovery after strenuous workouts. A lower cost,
less powerful muscle stimulator, the Compex Fitness, is targeted at "weekend
athletes" for use in their workout programs.

         The Compex line is sold directly to athletes for strength training and
for assisting in muscle recovery after strenuous workouts. The products are
customized for both elite athletes and "weekend warriors"; and are sold at
specialty sporting goods shops. In France, Switzerland, Germany and Spain,
Compex sells its products directly or through subsidiary corporations. In Italy,
which accounted for 51 percent of Compex's fiscal 2001 sales, products are
offered through an exclusive distribution arrangement.

         Compex markets its products through attendance and demonstrations at
the major athletic meets across Europe and through product endorsements by
Olympic athletes and teams. Compex Sport is also marketed directly to consumers
through sports magazine promotions, at sporting events and through high-end
sports shops.



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SALES AND MARKETING

         The Company distributes its 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.

         Key decision makers in recommending use of the Company's products to
patients include physical therapists, athletic trainers, occupational
therapists, podiatrists, chiropractors, neurologists, dentists, physiatrists,
general practitioners and orthopedic surgeons. Historically, the Company had
approached these decision makers through a network of home healthcare and
specialty equipment dealers. Since the early 1990s, the Company, along with most
of the rest of the industry, has emphasized direct rentals and sales to patients
through healthcare providers and third-party payors, rather than through
dealers. For fiscal 2001 and 2000, direct sales and rentals represented 63
percent of total Company revenue, compared with 87 percent in fiscal 1999. The
decrease in the percentage for fiscal 2001 and fiscal 2000 is the result of the
acquisition of Compex SA.

         Direct Distribution

         The Company's direct distribution activity offers the Company's
products through a nationwide network of independent sales representatives who
devote the major portion of their time to the sale of Rehabilicare products. As
of June 30, 2001, the direct sales force consisted of 120 representatives. The
combined retail sales force calls on about 9,000 active accounts, including
physical and occupational therapy clinics, orthopedic groups, sports medicine
practices, and other providers of the Company's and competitor's products. In
direct distribution, the Company's products generally are placed in clinics on a
consignment basis, and subsequently used, rented, and/or sold to patients as
needed with the appropriate physician prescription and supervision.

         The Company's billing and support operations for its direct
distribution channel 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 agencies to ensure prompt and
accurate billing and collection of sales and rental fees for the Company's
products; (3) a telemarketing sales staff which follows up with patients to
ensure that the product, supplies, and paperwork they have received from the
Company 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, the Company also employs 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

         The Company's products are also sold on a nonexclusive basis to
approximately 200 home healthcare and durable medical equipment (DME) dealers.
These dealers sell or rent the products to individual users who are referred by
a physician, physical therapist, or other medical professional. Wholesale sales
amounted to 8% of the Company's revenue in fiscal 2001.

         In addition to its sales through Compex, the Company markets its
products internationally through the use of foreign distributors and its
majority-owned subsidiary, Rehabilicare (UK) Ltd., a subsidiary formed in
February 1999 that acquired the business of one of the Company's distributors.
Beginning in fiscal 1995, the Company's former distributor in the United Kingdom
established a relationship with a large pharmacy chain, which utilizes the
services of midwives



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and specifically trained advisors to acquaint women with the advantages of
electrotherapy for pain relief during labor and delivery. The Company's BabiTENS
product was developed for this market.


NEW PRODUCT DEVELOPMENT

         The Company's research and development efforts during the past year
have been directed primarily at developing pain management devices using digital
solid state electronics and that may be manufactured at a reduced cost. The
SMP-plus and the SX-plus are two digital, TENS devices that were introduced into
the market in October of 1999. In September 2001, the Company introduced the
ProMax, a new fully-digital version of its TENS product that will replace the
Max III product. In addition, that Company has focused on developing
enhancements of existing products for use with specific diagnosed medical
problems. Successful examples of these development efforts are the Company's
CTDX(TM) Electrostimulation System and the Ortho DX(TM) Electrotherapy System.


COMPETITION

         Several other companies in the U.S. currently manufacture and
distribute electrotherapy rehabilitation and pain management devices. The
Company believes that its principal competitor in the electrotherapy
rehabilitation and pain management market in the U.S. is Empi, Inc. The Company
competes in these markets primarily on the basis of the variety and quality of
product offerings, marketing and distribution presence, and service. The merger
with Staodyn and the acquisition of Henley's Homecare division more than doubled
the Company's size, and substantially expanded its product offerings and sales
and distribution capabilities within the U.S. The electrotherapy rehabilitation
market for modalities other than NMS, such as interferential, pulsed galvanic,
and microcurrent, is more fragmented and more difficult to define. The Company
believes that its ability to offer all of these modalities is in contrast to the
focus of its competitors. The Company further believes that there are no
dominant competitors for these other modalities and that the number of
modalities it offers, together with the distinctive features of its products,
allow it to compete favorably in this market.

         With the acquisition of Compex SA and the forming of Rehabilicare (UK)
Ltd, the Company has now expanded into many European markets. Although Compex's
products are well known and marketed currently in six European countries, the
Company competes with numerous smaller competitors that vary considerable by
each individual country. Compex's fitness products have been subject to
increasing competition on the basis of price in a number of these countries.
Nevertheless, Compex continues to enhance its products and the Company believes
Compex 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

         The Company's U.S. electrotherapy devices are manufactured at its
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 package. To maximize quality and reliability, and decrease size and
weight, most of the Company's products incorporate surface mount technology and
the Company utilizes machinery automating surface mount and through-hole circuit
board manufacturing.

         Products distributed by Compex SA utilize offshore manufactured
components that are shipped to a Swiss contracted engineering company. This
engineering company is required to assemble Compex SA products using the
Company's strict quality requirements, and technology specifications supplied by
the Company.




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         The Company's electronic devices involve electromechanical assemblies
and proprietary electronic circuitry. Most of the raw materials and manufactured
components used in the Company's products are available from a number of
different suppliers. The Company maintains multiple sources of supply for most
significant items and believes that alternative sources could be developed, if
required, for present single supply sources without a material disruption of its
operations.


PATENTS AND TRADEMARKS

         Rehabilicare generally has not pursued patent protection on its
products, believing that patent protection did not offer a significant
competitive advantage in the marketplace for electrotherapy devices. The Company
did apply for, however, and in 1996 was issued, patents for the CTDx system,
including the SmartBrace wrist splint, SmartBrace electrodes, and CTDx
electrical stimulation device. During the past two fiscal years, the Company
submitted several more patent applications for approval. These applications are
pending. Historically some of the companies that Rehabilicare had acquired,
maintained a more aggressive approach to patent protection than the Company, and
the majority of their products are covered by more than 25 U.S. and Canadian
patents. Both the Company and its subsidiaries maintain trademark registration
for all of their branded product names.

         The Company believes that it owns or has the right to use all
proprietary technology necessary to manufacture and market its current products
and those under development. The Company has no knowledge that it is infringing
upon any patents held by others. The Company may decide for business reasons to
retain a patentable invention as a trade secret. In such event, or if patent
protection is not available, the Company must rely on trade secrets, know-how,
and continuing technological innovation to develop and maintain its competitive
position.


GOVERNMENT REGULATION

         The medical devices manufactured and marketed by the Company are
subject to regulation by the Food and Drug Administration (the FDA) and, in some
instances, by foreign governments. Under the 1976 Amendments to the Federal
Food, Drug and Cosmetic Act (the Act), and regulations promulgated thereunder,
manufacturers of medical devices must comply with certain controls which
regulate the testing, manufacturing, packaging, and marketing of medical
devices. The Act and regulations thereunder create three classifications for
medical devices, each of which is subject to different levels of regulatory
control, with Class I being the least stringent and Class III being subject to
the most control. Class III devices, 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 the Company's 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. The
Company believes that all of its 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 prior to the effective date of the 1976 Amendments, and
has been continuously marketed since that date, premarket approval requirements
are satisfied through a 510(k) premarket notification submission under which the
applicant provides product information supporting its claim of substantial
equivalence. This 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, the Company is also subject to
certain other FDA regulations, and its manufacturing processes and facilities
are subject to continuing review by the FDA




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to ensure compliance with the FDA's QSR requirements (formerly Good
Manufacturing Practices) and other applicable regulations. These regulations
require that the Company manufacture its products and maintain its documents in
a prescribed manner with respect to manufacturing, testing and control
activities. The Company believes that its manufacturing and quality control
procedures substantially conform to the requirements of the FDA regulations.

         The Company's products are also subject to laws and regulation in
foreign countries.

         The Act and various state agencies also regulate the labeling of the
medical devices, including any promotional activities sponsored or marketing
materials distributed by or on behalf of the manufacturer or seller. 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, the Company's operating results. The cost
of a significant portion of medical care in the United States is funded by
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
the Company's products by third-party payors could have an adverse impact on the
Company. Management attempts to establish relationships with such payors to
assure coverage of its 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. Medicare
reimbursement has historically constituted only a small portion of the Company's
revenue. However, certain private insurance programs may follow HCFA in reducing
reimbursement rates. Accordingly, their can be no assurances that current levels
of reimbursement will be maintained.

         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 such as
the action recently settled by the Company.

         As part of the settlement of the whistleblower suit, the Company
entered into a five-year Corporate Integrity Agreement ("CIA") with the Office
of the Inspector General. The CIA requires that, to the extent that the Company
obtains Medicare reimbursement in the future, its operations will be subject to
audit and close scrutiny by federal regulatory agencies.



                                     Page 10

<PAGE>   11


EMPLOYEES

         As of June 30, 2001, the Company has 265 full-time employees in the
U.S. This includes 118 employees in sales and marketing, 8 in research and
development, 55 in manufacturing, and 84 in finance and administration.
Geographically, the Company had 94 employees in its New Brighton facility, 149
employees in Tampa, and 22 employees in various regional U.S. field sales
offices.

         As of June 30, 2001, the Company has 88 full-time international
employees. This includes 33 in sales and marketing, 10 in research and
development, 6 in production, and 39 in finance and administration.
Geographically, the Company's international employees include 47 in Switzerland,
22 in France, 7 in Germany, 7 in Spain and 5 in the United Kingdom.

         The Company's employees are not represented by any collective
bargaining organization and the Company has never experienced a work stoppage.
The Company believes that its relations with its employees are satisfactory.


ITEM 2.       PROPERTIES

         The Company's corporate headquarters are located in a 30,000 square
foot facility in New Brighton, Minnesota, a suburb of St. Paul. This facility
houses all of the Company's corporate activities including administration,
finance, sales and marketing, research and development, and manufacturing. The
Company owns this facility.

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

         The Company currently leases 4 facilities in Europe that total
approximately 7,400 square feet of leased space. These leases range in duration
from one to three years and are all renewable.


ITEM 3.       LEGAL PROCEEDINGS.

         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 products liability case brought in the California Superior
Court for Solano County. Until receipt of these documents, Rehabilicare had no
record of the proceedings. The case involved a product liability claim for burns
allegedly suffered by plaintiff through the use of a stimulation unit that was
allegedly manufactured by Rehabilicare. The action alleged damages for medical
expenses of approximately $1,000, for future medical expenses of approximately
$270,000 and for punitive damages and pain and suffering of approximately $2.0
million. The action apparently progressed to the entry of a default judgment on
January 11, 2001 against Rehabilicare for failing to respond to pleadings.

         In March 2001, Rehabilicare moved in Solano County court to set aside
the default judgment on various grounds, including irregularities in the filings
and other matters. Because the appeal period with respect to the default
judgment would have lapsed prior to the hearing on its motion in Solano County,
Rehabilicare also appealed the judgment to the California Court of Appeals. The
Solano County Court, however, refused to act on Rehabilicare's motion because of
the pendency of the appeal. Rehabilicare believes the judgment is void or
otherwise improper, has obtained a stay of execution of the judgment in both
California and Minnesota and intends to vigorously pursue available actions,
including its appeal, to set aside the judgment.




                                     Page 11


<PAGE>   12


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


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

         There were no matters submitted to a vote of the Company's shareholders
during the quarter ended June 30, 2001.































                                     Page 12


<PAGE>   13


                                     PART II

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

         The Company's 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 the Company's common stock for the periods indicated, as quoted by Nasdaq:

<TABLE>
<CAPTION>


                                                                              High            Low
                                                                              ----            ---

<S>                                                                          <C>             <C>
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

<CAPTION>

                                                                              High            Low
                                                                              ----            ---
<S>                                                                          <C>             <C>
Fiscal year ended June 30, 2000
         First Quarter                                                        $ 4.125         $ 2.875
         Second Quarter                                                         4.469           3.438
         Third Quarter                                                          4.375           2.375
         Fourth Quarter                                                         2.813           2.000

</TABLE>


         The last sale price reported by Nasdaq on September 21, 2001 was $2.39
per share. As of September 21, 2001, there were approximately 725 shareholders
of record (not including beneficial holders) and the Company estimates there
were approximately 3000 beneficial holders.

         The Company has never declared or paid a cash dividend on its common
stock. The Board of Directors presently intends to retain all earnings for use
in the operation and expansion of the Company's business and therefore does not
anticipate paying any cash dividends in the foreseeable future.


ITEM 6.       SELECTED FINANCIAL DATA.

<TABLE>
<CAPTION>

                                                      For the Years Ended June 30,
                              ----------------------------------------------------------------------------------------

                                    2001             2000              1999              1998              1997
----------------------------------------------------------------------------------------------------------------------
<S>                           <C>               <C>              <C>                <C>              <C>
Operating results -
   Revenue                    $  62,038,713     $  58,814,672    $  41,795,373      $  33,812,453    $  32,133,707
   Gross profit                  42,474,063        40,851,971       29,847,069         22,676,520       21,897,751
   Net income (loss)              3,319,989         2,202,777        2,859,834         (1,008,683)       1,793,328
----------------------------------------------------------------------------------------------------------------------
Per common share -
   Net income (loss)          $         .31     $         .21    $         .27      $        (.10)   $         .17

----------------------------------------------------------------------------------------------------------------------
Financial data/other -
   Cash                       $     759,611     $   2,227,352    $     561,207      $     919,765    $   2,654,118
   Working capital               22,391,874        21,495,832       21,547,312         19,204,614       19,127,284
   Total assets                  51,495,871        52,707,962       35,699,714         27,060,358       28,471,347
   Shareholders' Equity          28,459,216        25,269,554       23,053,309         20,091,230       21,372,451
   Long-term obligations         10,433,542        13,662,792        4,066,914          3,299,705        3,555,107
----------------------------------------------------------------------------------------------------------------------
</TABLE>




                                     Page 13

<PAGE>   14





ITEM 7.       MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
              RESULTS OF OPERATIONS.


OVERVIEW

         The Company designs, manufactures and distributes electrotherapy
products used for pain management, rehabilitation and training. Its products are
used in clinical, home health care, sports medicine and occupational medicine
applications. It also distributes other medical products used in related
applications. The Company operates in one business segment, distributing its
products through sales to medical product dealers and distributors, sport shops
and, in the United States, through direct rental or sale to patients.

         The direct rental or sale approach involves placing electrotherapy
units with physicians, physical therapists and other health care providers who
then refer those units to patients after determining an appropriate treatment
regimen. Units are left on consignment with the health care providers for such
referral. The Company then bills the patient or the patient's insurance carrier
directly after being notified that a unit has been prescribed and provided to
the patient. The Company takes responsibility for subsequent patient follow-up,
including extension of the rental period, sale of the unit, if appropriate, and
sale of additional supplies required for continued use of the electrotherapy
units. This distribution approach requires the Company to maintain significant
investments in inventories and receivables.

         In the fiscal year ended June 30, 1998, the Company began
implementation of a strategy to increase its business through consolidation with
other companies in similar markets. The strategy began with the merger with
Staodyn, Inc. on March 17, 1998 in a transaction accounted for as a
pooling-of-interests. On August 7, 1998, the Company acquired certain assets of
the Homecare division of Henley Healthcare, Inc. and the operations of that
business are included in the consolidated financial statements from that date
forward.

         In January 1999, the Company established a majority-owned subsidiary,
Rehabilicare (UK) Ltd., near London, England. Rehabilicare (UK) Ltd.
subsequently acquired substantially all of the assets of the Company's former
distributor in the United Kingdom, effective February 1, 1999. Its operations
are included from that date forward. Sales to the distributor prior to that date
are included in net revenue. Its primary business is the rental of pain
management products used by women during labor and child birth. The units are
rented directly to patients, through mail or phone order or through a large
chain of pharmacies.

         On July 19, 1999, the Company acquired all of the outstanding capital
stock of Compex SA, a Swiss-based designer, developer and marketer of home use
electrotherapy products for the medical, sports and fitness markets in Europe,
for cash of approximately $11.0 million. The purchase consideration and
transaction costs were allocated as follows:

<TABLE>


<S>                                                                  <C>
                   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
                                                                      ================
</TABLE>


In accordance with the purchase agreement, the Company also paid to the sellers
contingent consideration in fiscal 2000 and 2001 of $2 million.





                                     Page 14

<PAGE>   15


RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>


                                                                 Year Ended June 30,
                                                     ------------------------------------------

                                                         2001              2000          1999
                                                     -----------        ---------      --------

<S>                                                   <C>              <C>           <C>
Net sales and rental revenue                            100.0%           100.0%        100.0%

Cost of sales and rentals                                31.5             30.5          28.6
                                                       ------           ------        ------

Gross profit                                             68.5             69.5          71.4

Operating expenses
    Selling, general and administrative                  54.1             55.3          57.3
    Research and development                              3.0              2.2           2.1
    Medicare settlement expense                            --              3.6            --
    Non-recurring merger items                             --               --          (0.3)
                                                       ------           ------        ------
       Total operating expenses                          57.1             61.1          59.1
                                                       ------           ------        ------

Income from operations                                   11.4              8.4          12.3

Other expense, net                                        2.0              1.1           1.2

Income tax provision                                      4.0              3.6           4.2
                                                       ------           ------        ------

Net income                                                5.4%             3.7%          6.9%
                                                       ======           ======        ======

</TABLE>



COMPARISON OF YEAR ENDED JUNE 30, 2001 TO YEAR ENDED JUNE 30, 2000

          Revenue was $62,039,000 in fiscal 2001, a 6% increase from $58,815,000
in fiscal 2000. The increase was primarily attributable to United States
operations where revenue increased 6% in fiscal 2001 over the same period in
fiscal 2000. The Company continues its recovery from the impact of a
whistleblower lawsuit disclosed in fiscal 2000, which adversely impacted
earnings growth during the last half of fiscal 2000. Compex accounted for
$16,497,000 of revenue in fiscal 2001, compared to $15,703,000 in fiscal 2000.
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.

         Gross profit was $42,474,000 or 68.5% of revenue for the year ended
June 30, 2001, compared with $40,852,000 or 69.5% for the year ended June 30,
2000. Cost of sales in fiscal 2000 included a one-time charge of $645,000
related to the step-up in basis inventory recorded in connection with the Compex
acquisition. Without that charge, gross profit would have been 70.6% of revenue
for fiscal 2000. The current year reduction in gross profit 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. This
change in strategy is expected to expand market penetration, but will also
likely result in margins that approximate the fiscal 2001 margins.

         Selling, general and administrative expenses increased slightly to
$33,566,000 in fiscal 2001 from $32,501,000 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. The Company expects that selling, general and administrative
expenses will continue to decline as a percentage of revenue in future periods
as it completes the integration of acquired businesses.


                                     Page 15

<PAGE>   16


         Research and development expenses increased 44% to $1,886,000 in fiscal
2001, compared to $1,311,000 during the same period 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. The
Company anticipates that research and development expenses will remain
relatively constant as a percentage of revenue in future periods.

         Interest expense decreased 20% from $1,600,000 for the year ended June
30, 2000, to $1,277,000 for the year ended June 30, 2001. The decrease resulted
from slightly lower interest rates and lower outstanding borrowings under the
Company's credit facility. The Company expects interest expense to continue to
decline with the declining balance of its indebtedness and lower interest rates
in future periods.

         The provision for income taxes for fiscal 2001 is 43% compared to 49%
in fiscal 2000. The effective tax rate for fiscal 2000 before the impact of the
Medicare lawsuit settlement expense was 42%. The Company now operates 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
certain expenses and the availability of certain credits for taxes paid to other
jurisdictions. In addition, the Company has relocated certain operations and
negotiated new agreements with certain European taxing authorities. The Company
believes that 43% is a reasonable estimate of the effective rate for fiscal 2001
based on most recent estimates of expected sources of revenue and expenses for
the entire year.

         As a result of all the above activity, net income increased from
$2,203,000 for the twelve months ended June 30, 2000 to $3,320,000 during the
same period in fiscal 2001. Diluted earnings per share increased from $.21 in
fiscal 2000 to $.31 in fiscal 2001.


COMPARISON OF YEAR ENDED JUNE 30, 2000 TO YEAR ENDED JUNE 30, 1999

         The Company's revenue increased $17,020,000 or 41% to $58,815,000 in
fiscal 2000 from $41,795,000 in fiscal 1999. The increase was primarily
attributable to the acquisition of Compex, which accounted for $15,703,000 of
revenue in fiscal 2000. U.S. revenue increased 3% in fiscal 2000, primarily as a
result of an increase in the number of patient referrals. International business
other than Compex was not significant as a percent of total revenue in either
year.

         Gross profit was $40,852,000 or 69.5% of revenue in fiscal 2000
compared with $29,847,000 or 71.4% of revenue in fiscal 1999. Cost of sales
included a one-time charge of $645,000 in the first quarter of fiscal 2000
related to the step-up in basis of inventory recorded in connection with the
Compex acquisition. Without that charge, gross margin would have been 70.6% of
revenue for fiscal 2000. The slight reductions in gross margin as a percentage
of revenue are due primarily to minor changes in the mix of product sales and
rentals.

         Selling, general and administrative expenses increased 36% to
$32,501,000 in fiscal 2000 from $23,962,000 in fiscal 1999. As a percentage of
revenue, selling, general and administrative expenses declined to 55% in fiscal
2000 from 57% in fiscal 1999. Several factors contributed to that decrease.
Fiscal 1999 included expenses of maintaining the former Staodyn building in
Longmont, Colorado which was sold in July 1999, and the costs of continuing
operations in facilities formerly operated by Henley Healthcare which were
closed during fiscal 1999. Decreases were also realized with the elimination of
many of the administrative costs associated with the former operations of
Staodyn and Henley Healthcare and various economies of scale resulting from the
Company's acquisition activity. The impact of those factors was partially offset
by incremental marketing and selling expenses incurred by Compex in connection
with its aggressive growth plan and by an additional $1,000,000 provision for
uncollectible accounts receivable recorded in the fourth quarter of fiscal 2000.

         Research and development expense increased $444,000 or 51% to
$1,311,000 in fiscal 2000 from $867,000 in fiscal 1999, but remained relatively
constant at approximately 2% of revenue in both years. The fiscal 2000 expenses
include approximately $364,000 incurred by Compex. The Company substantially
completed development of a new family of TENS products during fiscal 1999 and
anticipates





                                     Page 16


<PAGE>   17



relatively minor increases in the current expenditure level to fund current
product enhancement and development programs.

         Results of operations in fiscal 2000 include a $2,094,000 charge for
the $1,589,000 of settlement costs, and related legal expenses incurred in
connection with the whistleblower suit described above under "legal
proceedings." The settlement was accrued as of June 30, 2000 and was paid upon
completion of all documentation, including a Corporate Integrity Agreement.
Payment was made in fiscal 2001 from available funds under the Company's
revolving credit agreement.

         Interest expense increased from $499,000 to $1,600,000 in fiscal 2000
as a result of the addition of debt to finance the acquisition of Compex in July
1999, and higher interest rates.

         Operating results for fiscal 2000 include a gain on the sale of the
former Staodyn building in Longmont, Colorado in the amount of $1,076,000. The
Company exercised its option to purchase that building in the first quarter of
fiscal 1999 and closed the purchase and immediate sale on July 7, 1999. Lease
payments and operating costs associated with that building were expensed as
incurred throughout fiscal 1999.

         The provision for income taxes increased from 38% of income before
taxes in fiscal 1999, to 49% in fiscal 2000. The effective rate before the
impact of the Medicare lawsuit settlement expenses was 42%. The increment
resulted from the nondeductible portion of such expenses. In addition, the
Company now operates 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 certain expenses and the availability of
certain credits for taxes paid to other jurisdictions.

         Net income decreased from $2,860,000 in fiscal 1999 to $2,203,000 in
fiscal 2000. Diluted earnings per share decreased from $.27 to $.21. Before the
one time gain related to the building sale and the one time charges related to
the Medicare settlement and the Compex inventory step-up net income for fiscal
2000 was $3,482,000 or $.33 per share. Compex accounted for just over $.02 of
that amount after deducting goodwill amortization and interest expense on
acquisition debt from it's operating income.


LIQUIDITY AND CAPITAL RESOURCES

         During the fiscal year ended June 30, 2001, the Company's operations
provided cash of $4,164,000, mainly from net income. Significant changes in
current assets and liabilities included increases of $372,000 in inventories and
$255,000 in accrued liabilities and decreases of $570,000 in accounts payable.
The decrease in accounts payable was due mainly to the payment of $1,677,000 for
the settlement of the Medicare whistleblower suit.

         The Company used $997,000 in investing activities in fiscal 2001,
$717,000 of which represented purchases of property and equipment and increases
of rental inventory, and $200,000 of which represented contingent payments on
the Compex acquisition.

         The Company's financing activities used $4,029,000 of cash during the
twelve-month period ended June 30, 2001, mainly for the repayment of borrowings
under its $20,000,000 credit facility. The Company initially borrowed
$15,000,000 under the credit facility to finance the Compex purchase and to
repay an outstanding note. At June 30, 2001, $10,797,000 is outstanding under
the facility.

         Managing receivables represents one of the biggest business challenges
to the Company. The process of determining what products will be reimbursed by
third party payors and the amounts to be paid for those products is very complex
and the reimbursement environment is constantly changing. That risk is spread
across many payors throughout the United States. The determination of an
appropriate reserve for uncollectable accounts at the end of each reporting
period includes various factors including historical trends and relationships
and experience with insurance companies or other third party payors. The Company
believes that the reserve at June 30, 2001 is adequate to cover future losses on
its receivables based on collection history and trends. The provision for
uncollectable accounts recorded in the income





                                     Page 17

<PAGE>   18


statement may continue to fluctuate significantly from quarter to quarter as
such trends change. The reserve was 29.8% of receivables at June 30, 2001
compared to 25.4% at June 30, 2000. The Company believes that the ratio will be
favorably impacted in the future as a result of including receivables from
Compex SA and Rehabilicare (UK) Ltd. which are more traditional trade
receivables and not dependent on third party payors.

         The Company has no material commitment for capital expenditures. The
Company believes that available cash and borrowings under its credit line will
be adequate to fund cash requirements for the current fiscal year.


ITEM 7A.      QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

              The Company is exposed to market risk from changes in the interest
rates on certain of its outstanding debt. The outstanding loan balance under its
$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 the
year ended June 30, 2001, a 100 basis point change in interest rates would not
change interest expense by a material amount.


ITEM 8.       FINANCIAL STATEMENTS.

             The consolidated financial statements of the Company and the
Reports of Independent Auditors listed in the accompanying index to consolidated
financial statements are incorporated herein by reference.


ITEM 9.       CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
              FINANCIAL DISCLOSURE.

         On March 16, 2000, Rehabilicare Inc. (the "Company") received notice
from PricewaterhouseCoopers LLP ("PWC"), its independent accountants, that PWC
was resigning the client-auditor relationship between the Company and PWC. Such
resignation was effective on March 16, 2000.

         The reports of PWC on the financial statements of the Company for its
fiscal years ended June 30, 1999 and June 30, 1998 did not contain any adverse
opinion or disclaimer of opinion and were not qualified or modified as to
uncertainty, audit scope or accounting principles.

         During the Company's two most recent fiscal years and the subsequent
interim period through March 16, 2000, (i) there were no disagreements between
the Company and PWC on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure which, if not
resolved to the satisfaction of PWC, would have caused PWC to make reference to
the subject matter of the disagreement in connection with its reports on the
financial statements for such years (a "Disagreement") and (ii) there were no
reportable events (a "Reportable Event"), as defined in Item 304(a)(1)(v) of
Regulation S-K of the Securities and Exchange Commission (the "Commission").

         The Company has not, during the Company's two most recent fiscal years
or the subsequent interim period through March 16, 2000, consulted with any
other accounting firm from which it is seeking proposals regarding the
application of accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion that might be rendered on
the Company's financial statements, and no written report was provided to the
Company or oral advice was provided that any such accounting firm concluded was
an important factor considered by the Company in reaching a decision as to the
accounting, auditing or financial reporting issue.



                                     Page 18


<PAGE>   19


                                    PART III

ITEM 10.      DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.

              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 the Company's definitive proxy statement for its annual meeting
of shareholders to be held December 13, 2001 (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.

              The information under the heading "Security Ownership of Certain
Beneficial Owners and Management" 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.      EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

      (a)  1. Financial Statements

              The consolidated financial statements of the Company required by
this item are listed in the Index to Consolidated Financial Statements set forth
on page 24.

           2. Financial Statement Schedules

              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.

           3.  Exhibits

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

       2.1  Share Purchase Agreement dated July 19, 1999, between the
            Shareholders of Compex SA and Rehabilicare Inc. (j)

         3  Restated Articles of Incorporation (b)

       3.1  Articles of Amendment to Articles of Incorporation (i)

       4.1  Bylaws of the Company (b)

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

       4.3  1994 Employee Stock Purchase Plan (c)





                                     Page 19


<PAGE>   20


       4.4  Rehabilicare Inc. 1998 Stock Incentive Plan (i)

      10.1  Construction Loan Agreement dated October 20, 1994 between the
            Company 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 (d)

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

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

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

      10.5  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
            (e)

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

      10.7  $65,000 Limited Revenue Tax Increment Note payable to the Company by
            the City of New Brighton (e)

      10.8  Form of Severance Pay Agreement (f)

      10.9  Stock Pledge Agreement and Promissory Note dated March 11, 1997
            between the Company and David B. Kaysen (h)

     10.10  Credit Agreement dated July 14, 1999 between Rehabilicare Inc. and
            U.S. Bank National Association. (j)

     10.11  Security Agreement dated July 14, 1999 between Rehabilicare Inc. and
            U.S. Bank National Association. (j)

     10.12  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. (j)

     10.13  Guarantee dated July 19, 1999 executed by Compex SA in favor of U.S.
            Bank National Association. (j)

        21  Subsidiaries of the Company*

      23.1  Consent of Independent Auditors - Ernst & Young LLP*

      23.2  Consent of Independent Public Accountants - PricewaterhouseCoopers
            LLP*

      27.1  Financial Data Schedule for the period ended June 30, 2000*

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

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

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

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


                                     Page 20


<PAGE>   21



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

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

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

       (f)  Incorporated by reference to the Company's Form 10-KSB for the year
            ended June 30, 1997 (File Number 0-9407)

       (g)  Incorporated by reference to the Company's Form 10-QSB for the
            quarter ended March 31, 1998 (File Number 0-9407)

       (h)  Incorporated by reference to the Company's Form 10KSB for the year
            ended June 30, 1998 (File Number 0-9407)

       (i)  Incorporated by reference to Appendix E to the final prospectus
            included in Amendment No. 1 to the Company's Registration Statement
            on Form S-4 filed February 2, 1998 (file no. 333-44139)

       (j)  Incorporated by reference to the Company's Current Report on Form
            8-K filed August 2, 1999 (File No. 0-9407)

       (k)  Incorporated by reference to the Company's Form 10-KSB for the Year
            Ended June 30, 1999 (File No. 0-9407)



            * Filed as part of this report




                                     Page 21
<PAGE>   22


                                   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 28, 2001      By:   /s/ David B. Kaysen
                                      ------------------------------------------
                                          David B. Kaysen
                                          President and Chief Executive Officer


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

<TABLE>
<CAPTION>

                     NAME                                          TITLE                                 DATE
                     ----                                          -----                                 ----




<S>                                                  <C>                                     <C>
/s/ David B. Kaysen                                  President, Chief Executive Officer       September 28, 2001
-----------------------------------------------
David B. Kaysen
                                                     Vice President of Finance
                                                     (Principal Financial and
/s/ W. Glen Winchell                                 Accounting Officer)                      September 28, 2001
-----------------------------------------------
W. Glen Winchell


/s/ Robert C. Wingrove                               Chairman and Director                    September 28, 2001
-----------------------------------------------
Robert C. Wingrove


/s/ Frederick H. Ayers                               Director                                 September 28, 2001
-----------------------------------------------
Frederick H. Ayers



/s/ W. Bayne Gibson                                  Director                                 September 28, 2001
-----------------------------------------------
W. Bayne Gibson



/s/ Richard E. Jahnke                                Director                                 September 28, 2001
-----------------------------------------------
Richard E. Jahnke



/s/ John H.P. Maley                                  Director                                 September 28, 2001
-----------------------------------------------
John H.P. Maley

</TABLE>




                                     Page 22

<PAGE>   23





                            FINANCIAL STATEMENT INDEX
<TABLE>
<CAPTION>

SCHEDULE                                                                                                       PAGE
--------------------------------------------------------------------------------------------------------    -----------

<S>                                                                                                         <C>
Report of Ernst & Young LLP                                                                                     24
Report of PricewaterhouseCoopers LLP                                                                            25
Consolidated Balance Sheets as of June 30, 2001 and 2000                                                        26
Consolidated Statements of Operations for the years ended June 30, 2001, 2000 and 1999                          27
Consolidated Statements of Changes in Stockholders' Equity for the years ended June 30,                         28
  2001, 2000 and 1999
Consolidated Statements of Cash Flows for the years ended June 30, 2001, 2000 and 1999                          29
Notes to Consolidated Financial Statements                                                                    30-40

</TABLE>









                                     Page 23


<PAGE>   24

                         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, 2001 and 2000 and the related consolidated statements of
operations, stockholders' equity, and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our 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, 2001 and 2000 and the consolidated results of its operations and its
cash flows for the years then ended, in conformity with accounting principles
generally accepted in the United States.



ERNST & YOUNG LLP



Minneapolis, Minnesota
August 17, 2001



                                     Page 24
<PAGE>   25







                        REPORT OF INDEPENDENT ACCOUNTANTS




To the Board of Directors and
Stockholders of Rehabilicare Inc.


In our opinion, the consolidated statements of operations, of changes in
stockholders' equity and of cash flows for the year ended June 30, 1999 present
fairly, in all material respects, results of operations and cash flows of
Rehabilicare Inc. and its subsidiary for the year ended June 30, 1999, in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion.



PRICEWATERHOUSECOOPERS LLP



Minneapolis, Minnesota
September 2, 1999


                                     Page 25

<PAGE>   26


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

<TABLE>
<CAPTION>

                                                                              2001                   2000
                                                                       -------------------     -----------------

<S>                                                                    <C>                    <C>
                                   ASSETS
Current Assets:
   Cash and cash equivalents                                            $    759,611            $  2,227,352
   Receivables, less reserve for uncollectible accounts of $8,062,378     18,998,132              19,268,252
        and $6,575,715
   Inventories -
     Raw materials                                                         2,039,665               1,283,791
     Work in process                                                          55,895                 334,900
     Finished goods                                                        6,552,155               6,817,964
   Deferred tax assets                                                     4,075,317               3,351,294
   Prepaid expenses                                                        2,156,646               1,404,968
                                                                        ------------            ------------
         Total current assets                                             34,637,421              34,688,521

Property, plant and equipment, net                                         5,025,969               5,596,175
Intangible assets, net                                                    11,250,761              12,152,185
Deferred tax assets                                                          460,985                 223,923
Other assets                                                                 120,735                  47,158
                                                                        ------------            ------------
                                                                        $ 51,495,871            $ 52,707,962
                                                                        ============            ============
                    LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
   Note payable                                                         $         --            $  1,200,000
   Current maturities of long-term debt                                    2,430,173               2,170,468
   Accounts payable                                                        3,977,308               3,108,514
   Medicare lawsuit payable                                                       --               1,677,021
   Accrued liabilities -
     Payroll                                                                 787,314                 327,856
     Commissions                                                             338,491                 350,893
     Income taxes                                                          1,631,710               1,672,636
     Other                                                                 3,080,551               2,684,301
                                                                        ------------            ------------
         Total current liabilities                                        12,245,547              13,191,689

Long-Term Liabilities:
   Long term-debt                                                         10,433,542              13,662,792
   Deferred tax liabilities                                                  357,566                 583,927
                                                                        ------------            ------------
         Total liabilities                                                23,036,655              27,438,408

Stockholders' Equity:
   Common stock, $.10 par value:  25,000,000 shares authorized;            1,079,206               1,055,871
     issued and outstanding 10,792,060 and 10,558,710 shares,
     respectively
   Preferred stock, no par value: 5,000,000 shares authorized; none
     issued and outstanding                                                       --                      --

   Additional paid-in capital                                             21,420,378              20,873,737
   Less note receivable from officer/stockholder                            (189,417)               (210,417)
   Unearned compensation on restricted stock                                (186,563)                     --
   Accumulated other non-owner changes in equity                            (689,459)               (154,719)
   Retained earnings                                                       7,025,071               3,705,082
                                                                        ------------            ------------
         Total stockholders' equity                                       28,459,216              25,269,554
                                                                        ------------            ------------
                                                                        $ 51,495,871            $ 52,707,962
                                                                        ============            ============


</TABLE>


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





                                    Page 26


<PAGE>   27




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

<TABLE>
<CAPTION>

                                                                        2001                    2000                  1999
                                                                   ----------------        ---------------       ---------------

<S>                                                               <C>                      <C>                   <C>
Net sales and rental revenue                                         $62,038,713             $58,814,672           $41,795,373

Cost of sales and rentals                                             19,564,650              17,962,701            11,948,304
                                                                     -----------             -----------           -----------
     Gross profit                                                     42,474,063              40,851,971            29,847,069

Operating expenses:
   Selling, general and administrative                                33,566,340              32,500,805            23,961,728
   Research and development                                            1,885,711               1,310,694               866,698
   Medicare lawsuit expenses                                                  --               2,093,537                    --
   Non-recurring-merger items                                                 --                      --              (108,619)
                                                                     -----------             -----------           -----------
     Total operating expenses                                         35,452,051              35,905,036            24,719,807
                                                                     -----------             -----------           -----------

     Income from operations                                            7,022,012               4,946,935             5,127,262

Other income (expense):
   Interest expense                                                   (1,276,623)             (1,599,642)             (499,297)
   Gain on sale of building                                                   --               1,075,680                    --
   Other                                                                  78,600                 (81,196)              (18,131)
                                                                     -----------             -----------           -----------
     Income before income taxes                                        5,823,989               4,341,777             4,609,834

Income tax provision                                                   2,504,000               2,139,000             1,750,000
                                                                     -----------             -----------           -----------
     Net income                                                      $ 3,319,989             $ 2,202,777           $ 2,859,834
                                                                     ===========             ===========           ===========

Net income per common and common
equivalent share

     Basic                                                           $       .31             $       .21           $       .27
                                                                     ===========             ===========           ===========

     Diluted                                                         $       .31             $       .21           $       .27
                                                                     ===========             ===========           ===========


Weighted average number of shares outstanding
      Basic                                                           10,638,422              10,543,978            10,471,807
                                                                     ===========             ===========           ===========
      Diluted
                                                                      10,692,866              10,615,142            10,529,422
                                                                     ===========             ===========           ===========

</TABLE>



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



                                    Page 27

<PAGE>   28


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

<TABLE>
<CAPTION>

                                                                                                          Note          Unearned
                                                         Common Stock                                  Receivable     Compensation
                                                         ------------                 Additional      From Officer/    Restricted
                                                     Shares         Amount         Paid-In Capital     Stockholder        Stock
                                                     ------         ------         ----------------   --------------   ------------

<S>                                                <C>          <C>               <C>                <C>             <C>
Balance, June 30, 1998                             10,443,369   $  1,044,337         $ 20,641,922      $ (237,500)    $          --
  Net income                                               --             --                   --              --                --
  Translation adjustments                                  --             --                   --              --                --

   Total comprehensive income                              --             --                   --              --                --
  Exercise of stock options and related
   tax benefits                                        27,901          2,790               47,898              --                --
  Common stock issued through Employee
   Stock Purchase Plan                                 23,638          2,364               50,830              --                --
                                               --------------    -----------         ------------      ----------     -------------

BALANCE, June 30, 1999                             10,494,908      1,049,491           20,740,650        (237,500)               --
  Net income                                               --             --                   --              --                --
  Translation adjustments                                  --             --                   --              --                --

   Total comprehensive income                              --             --                   --              --                --
  Exercise of stock options and related
    tax benefits                                       26,766          2,677               33,500              --                --
  Common stock issued through Employee
    Stock Purchase Plan                                37,036          3,703               99,587              --                --
  Payments on note receivable                              --             --                   --          27,083                --
                                               --------------    -----------         ------------      ----------     -------------

BALANCE, June 30, 2000                             10,558,710      1,055,871           20,873,737        (210,417)               --
  Net income                                               --             --                   --              --                --
  Translation adjustments                                  --             --                   --              --                --

   Total comprehensive income                              --             --                   --              --                --
  Exercise of stock options and related
    tax benefits                                        8,158            816               20,185              --                --
  Common stock issued through Employee
    Stock Purchase Plan                                45,192          4,519               94,456              --                --
  Issuance of restricted stock                        180,000         18,000              432,000              --          (450,000)
  Amortization of unearned compensation                    --             --                   --          21,000           263,437
  Payments on note receivable                              --             --                   --              --                --
                                               --------------    -----------         ------------      ----------     -------------
Balance, June 30, 2001                             10,792,060    $ 1,079,206         $ 21,420,378      $ (189,417)    $    (186,563)
                                               ==============    ===========         ============      ==========     =============


<CAPTION>
                                                                                Accumulated
                                                                                 Other Non-
                                                                                   Owner                                   Total
                                                                                 Changes in         Retained          Stockholders'
                                                                                   Equity           Earnings             Equity
                                                                               --------------    ---------------    ----------------

<S>                                                                             <C>              <C>                <C>
Balance, June 30, 1998                                                          $         --      $ (1,357,529)       $ 20,091,230
  Net income                                                                              --         2,859,834           2,859,834
  Translation adjustments                                                             (1,637)               --              (1,637)
                                                                                                                      ------------
   Total comprehensive income                                                             --                --           2,858,197
  Exercise of stock options and related
   tax benefits                                                                           --                --              50,688
  Common stock issued through Employee
   Stock Purchase Plan                                                                    --                --              53,194
                                                                                ------------      ------------         -----------

Balance, June 30, 1999                                                                (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                                                                          --                --              36,177
  Common stock issued through Employee
    Stock Purchase Plan                                                                   --                --             103,290
  Payments on note receivable                                                             --                --              27,083
                                                                                ------------      ------------         -----------

Balance, June 30, 2000                                                              (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                                                                          --                --              21,001
  Common stock issued through Employee
    Stock Purchase Plan                                                                   --                --              98,975
  Issuance of restricted stock                                                            --                --                  --
  Amortization of unearned compensation                                                                                    263,437
  Payments on note receivable                                                             --                --              21,000
                                                                                ------------      ------------         -----------
Balance, June 30, 2001                                                          $   (689,459)     $  7,025,071         $28,459,216
                                                                                ============      ============         ===========
</TABLE>



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




                                    Page 28


<PAGE>   29



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

<TABLE>
<CAPTION>

                                                                     2001                2000               1999
                                                               ------------------   ---------------    --------------
<S>                                                            <C>                 <C>                <C>
Operating Activities:
   Net income -                                                   $  3,319,989       $  2,202,777       $  2,859,834
        Adjustments to reconcile net income to net cash
        provided by operating activities -
         Gain on sale of building                                           --         (1,075,680)                --
         Depreciation and amortization                               2,300,466          1,979,343            809,247
         Amortization of unearned compensation                         263,437                 --                 --
         Non-recurring merger items                                         --                 --           (266,156)
         Change in deferred taxes                                   (1,065,066)        (1,302,656)           120,104
         Minority interest                                                  --            (24,681)            24,681
         Changes in current assets and liabilities -
           Receivables                                                 (11,359)           142,142         (2,839,037)
           Inventories                                                (372,426)         2,013,480           (938,459)
           Prepaid expenses
           Accounts payable                                             43,810           (713,706)          (283,503)
           Accrued liabilities                                        (569,991)          (596,905)           319,758
               Net cash provided by operating activities               255,330          2,723,964            461,209
                                                                  ------------       ------------       ------------
                                                                     4,164,190          5,348,078            267,678
                                                                  ------------       ------------       ------------
Investing Activities:



   Purchase of property and equipment                                 (716,654)        (1,233,028)          (786,802)
   Cash paid in asset acquisitions, net of cash received              (200,000)       (13,034,143)        (3,699,763)
   Disposal of property, plant and equipment, net                           --          1,696,429                 --
   Increase in other assets                                            (80,703                 --             (8,487)
                                                                  ------------       ------------       ------------
         Net cash used in investing activities                        (997,357)       (12,570,742)        (4,495,052)
                                                                  ------------       ------------       ------------


Financing Activities:
   Proceeds from new financing                                              --         15,000,000          2,500,000
   Principal payments on long-term obligations                      (2,948,545)        (4,958,677)        (1,135,066)
   Proceeds from (payments on) line of credit, net                  (1,200,000)        (1,200,000)         2,400,000
   Proceeds from issuance of stock options                              21,001             36,177             50,688
   Proceeds from employee stock purchase plan                           98,975            103,290             53,194
                                                                   -----------        -----------        -----------
      Net cash provided by (used in) financing activities           (4,028,569)         8,980,790          3,868,816
      Effect of exchange rates on cash and cash equivalents           (606,005)           (91,981)                --
                                                                   -----------        -----------        -----------
      Net increase (decrease) in cash and cash equivalents          (1,467,741)         1,666,145           (358,558)




Cash and Cash Equivalents at Beginning of Year                       2,227,352            561,207            919,765
                                                                   -----------        -----------        -----------
Cash and Cash Equivalents at End of Year                           $   759,611        $ 2,227,352        $   561,207
                                                                   ===========        ===========        ===========

Supplemental Cash Flow Information:
         Interest paid                                             $ 1,276,610        $ 1,512,613        $   423,978
                                                                   ===========        ===========        ===========

         Income taxes paid                                         $ 3,383,228        $ 2,093,488        $ 1,670,897
                                                                   ===========        ===========        ===========

</TABLE>


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



                                    Page 29

<PAGE>   30

                       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 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. 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 64 percent of total revenue in
fiscal 2001, 63 percent in fiscal 2000 and 87 percent in 1999. 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 of specific insurance carriers, historical trends, patient
responsibility and other information.

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 returns and uncollectible
accounts and reserves for 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.

PROPERTY AND EQUIPMENT

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

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




                                    Page 30

<PAGE>   31


INTANGIBLE ASSETS

         Intangible assets consist primarily of goodwill, customer lists, the
value of acquired workforce and internally developed technology. These assets
are being amortized using the straight-line method over estimated useful lives
ranging from 5 to 20 years. The Company periodically reviews intangible assets
for indications of impairment in accordance with Statement of Financial
Accounting Standards (SFAS) No. 121. The amount of any impairment loss recorded
would be measured as the amount by which the carrying value of the assets
exceeded the fair value of the assets.

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.

RECENTLY ISSUED ACCOUNTING STANDARDS

         In July 2001, the FASB issued Statements of Financial Accounting
Standards No. 141, "Business Combinations" and No. 142, "Goodwill and Other
Intangible Assets". These standards change the accounting for business
combinations by, among other things, prohibiting the prospective use of
pooling-of-interests accounting and requiring companies to stop amortizing
goodwill and certain intangible assets with an indefinite useful life created by
business combinations accounted for using the purchase method of accounting.
Instead, goodwill and intangible assets deemed to have an indefinite useful life
will be subject to an annual review for impairment. The Company will adopt the
standards in the first quarter of 2002. The impact of adopting the standards and
stopping the amortization of goodwill will result in a decrease of amortization
expense of approximately $850,000 based on the current levels of goodwill.





                                    Page 31

<PAGE>   32
SHIPPING AND HANDLING COSTS

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

RECLASSIFICATION

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

SELECTED FINANCIAL STATEMENT DATA

<TABLE>
<CAPTION>

                                                                           As of June 30
                                                                --------------------------------------
                                                                    2001                      2000
                                                                ------------              ------------
<S>                                                           <C>                       <C>
        Property, plant and equipment -
          Land                                                  $    150,000              $    150,000
          Buildings                                                1,683,614                 1,683,614
          Clinical and rental equipment                            1,571,049                 1,356,347
          Production equipment                                     3,301,856                 2,658,929
          Office furniture and equipment                           6,701,427                 6,028,882
                                                                ------------              ------------
                                                                  13,407,946                11,877,772
          Less accumulated depreciation                           (8,381,977)               (6,281,597)
                                                                ------------              ------------
              Net property, plant and equipment                 $  5,025,969              $  5,596,175
                                                                ============              ============

</TABLE>

         Included in the Company's consolidated balance sheet at June 30, 2001
are net property, plant and equipment of the Company's foreign operations, which
are located in Europe and which total $1,296,847.

<TABLE>
<CAPTION>

                                                                    2001                      2000
                                                                ------------              ------------
<S>                                                           <C>                       <C>
        Intangible assets -
            Goodwill                                            $  9,060,772              $  8,860,772
            Technology                                             1,400,000                 1,400,000
            Workforce                                              1,400,000                 1,400,000
            Debt structuring costs                                   346,970                   346,970
            Customer lists                                         1,043,748                 1,043,748
            Patents                                                   36,716                    36,716
                                                                ------------              ------------
                                                                  13,088,206                13,288,206
            Less accumulated amortization                         (2,037,445)                 (936,021)
                                                                ------------              ------------
               Net intangible assets                            $ 11,250,761              $ 12,152,185
                                                                ============              ============
</TABLE>

2.       ACQUISITION OF COMPEX:

         On July 16, 1999, the Company acquired substantially all the assets of
Compex SA, a Swiss-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:

<TABLE>

<S>                                                                         <C>
                   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
                                                                              ===========
</TABLE>

         Included in goodwill are contingent payments, made during fiscal 2001
and 2000, to the former Compex shareholders in the aggregate amount of $2
million.


                                     Page 32
<PAGE>   33

         Pro forma operating results for fiscal 2000 are not separately
presented due to the short time frame that Compex's results are not included in
the Company's consolidated results. Pro forma operating results as if Compex had
been acquired at the beginning of fiscal 1999 are as follows (unaudited):

<TABLE>
<CAPTION>

                                                                       1999
                                                                   -----------
<S>                                                              <C>
                    Net revenue                                    $51,378,000
                    Income before taxes                              3,416,000
                    Net income                                       1,998,000
                    Earnings per share -
                        Basic                                              .19
                        Diluted                                            .19
</TABLE>

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. The initial term loan of $15,000,000 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. As of June 30, 2001, there were no borrowings
outstanding on the $5,000,000 revolving credit line.

         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 interest rate on the term loan was 6.34% at June
30, 2001 and the weighted average rate on borrowings under the revolving line of
credit was 7.00%.

         The Company was in compliance with all financial covenants in its
credit agreement as of June 30, 2001.

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

<TABLE>
<CAPTION>

                                                            2001                    2000
                                                         ----------              ----------
<S>                                                    <C>                     <C>
            Average balance outstanding                  $  463,000              $1,306,000
            Maximum balance outstanding                   2,000,000               3,000,000
            Weighted average interest rate                     8.73%                   8.63%
</TABLE>



                                    Page 33
<PAGE>   34

5.       LONG-TERM DEBT:

Long-term obligations at June 30 consisted of the following

<TABLE>
<CAPTION>

                                                                                           2001                2000
                                                                                       ------------        ------------
<S>                                                                                  <C>                 <C>
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 (6.34% at June 30, 2001);
collateralized by substantially all assets of the Company other than
those pledged as collateral on existing lease or mortgage                              $ 10,797,000        $ 13,400,000
obligations.

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.                                          649,020             675,148

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.                                                                               659,180             680,806

Capital lease obligations                                                                   709,140           1,027,931

Other                                                                                        49,375              49,375
                                                                                       ------------        ------------
                                                                                         12,863,715          15,833,260
Less current maturities                                                                  (2,430,173)         (2,170,468)
                                                                                       ------------        ------------
                                                                                       $ 10,433,542        $ 13,662,792
                                                                                       ============        ============
</TABLE>

         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, 2001, 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:

<TABLE>

<S>                                                             <C>
                 2002                                             $  2,051,905
                 2003                                                2,256,424
                 2004                                                6,658,345
                 2005                                                   66,701
                 2006                                                   72,535
                 Thereafter                                          1,048,665
                                                                  ------------
                                                                  $ 12,154,575
                                                                  ============
</TABLE>



                                    Page 34
<PAGE>   35

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:

<TABLE>
<CAPTION>

                                                            Capital                   Operating
                                                            Leases                      Leases
                                                          ---------                  ----------
<S>                                                      <C>                         <C>
           2002                                            $420,157                  $  232,995
           2003                                             231,326                     239,994
           2004                                             117,647                     247,184
           2005                                                  --                     254,599
           2006                                                  --                     262,237
           Thereafter                                            --                     810,322
                                                          ---------                  ----------
      Total future minimum lease payments                   769,130                  $2,047,331
      Less amount representing interest                     (59,990)                 ==========
      Present value of net minimum lease payments         ---------
      Less current portion                                  709,140
      Long-term capital lease obligation                   (378,268)
                                                          ---------
                                                          $ 330,872
                                                          =========
</TABLE>

         Rent expense for operating leases for fiscal 2001, 2000 and 1999 was
$431,226, $454,130 and $156,381, 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 the provision for taxes:

<TABLE>
<CAPTION>

                                             2001                  2000                 1999
                                          -----------          -----------          -----------
<S>                                     <C>                  <C>                  <C>
     Currently payable -
       Federal                            $ 2,647,161          $ 1,950,488          $ 1,458,000
       State                                  751,853              329,793              172,000
       Foreign                                292,434            1,161,375                   --
       Deferred                            (1,187,448)          (1,302,656)             120,000
                                          -----------          -----------          -----------
                                          $ 2,504,000          $ 2,139,000          $ 1,750,000
                                          ===========          ===========          ===========
</TABLE>

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

<TABLE>
<CAPTION>

                                             2001                  2000                 1999
                                          -----------          -----------          -----------
<S>                                     <C>                  <C>                  <C>
       Statutory rate                     $ 1,980,156          $ 1,476,204          $ 1,567,344
       State taxes                            332,421              232,697              170,564
       Nondeductible goodwill                 331,304              297,784                   --
       Nondeductible payment                       --              255,000                   --
       Foreign                               (129,608)            (209,911)                  --
       Other                                  (10,273)              87,226               12,092
                                          -----------          -----------          -----------
                                          $ 2,504,000          $ 2,139,000          $ 1,750,000
                                          ===========          ===========          ===========
</TABLE>


                                    Page 35
<PAGE>   36

<TABLE>
<CAPTION>

                                                                       2001                  2000
                                                                    -----------          -----------
<S>                                                               <C>                  <C>
          Deferred tax benefits (liabilities) arising from -
            Reserve for uncollectible accounts                      $ 3,770,528          $ 2,630,286
            Accruals and other reserves                                 (79,689)            (370,148)
            Depreciation                                                103,501               67,600
            Inventory                                                   384,396              439,344
            Other                                                            --              224,208
                                                                    -----------          -----------
                                                                    $ 4,178,736          $ 2,991,290
                                                                    ===========          ===========
</TABLE>

7.       STOCKHOLDERS' EQUITY:

STOCK OPTIONS

         The Company has 925,000 shares of its common stock reserved under its
1988 Restated Stock Option Plan and 400,000 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.

         The following table summarizes information with respect to such plans
as of June 30, 2001:

<TABLE>
<CAPTION>

                                                    Weighted Average
                                                     Exercise Price           Number of Shares
                                                    ----------------          ----------------
<S>                                                <C>                      <C>
Balance outstanding at June 30, 1998                 $         2.90                832,508
  Granted                                                      2.42                193,500
  Exercised                                                    1.81                (27,901)
  Canceled                                                     2.76               (364,584)
                                                     --------------               --------

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
                                                                                  ========
Exercisable at June 30, 2001                         $         3.08                357,027
                                                                                  ========

Available for grant at June 30, 2001                                               490,480
                                                                                  ========
</TABLE>



                                    Page 36
<PAGE>   37

<TABLE>
<CAPTION>

                                           Stock Options Outstanding           Stock Options Exercisable
                                           --------------------------          -------------------------
                                                            Weighted                           Weighted
                                          Weighted           Average                            Average
                                           Average          Exercise                           Exercise
   Range of                               Remaining           Price                              Price
Exercise Price           Shares        Contractual Life     Per Share           Shares         Per Share
--------------           ------        ----------------     ---------           ------         ---------
<S>                    <C>              <C>                 <C>               <C>              <C>
$1.51 to $2.19            26,632           2.5 Years           $ 2.09            11,632           $ 1.96
$2.25 to $3.13           454,749           4.4 Years             2.64           173,375             2.78
$3.25 to $4.00           274,572           3.0 Years             3.41           159,947             3.39
$4.25 to $5.88            12,073           0.9 Years             4.53            12,073             4.53
                         -------                                                -------
                         768,026                                                357,027
                         =======                                                =======
</TABLE>

         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:

<TABLE>
<CAPTION>

                                                        2001                 2000                1999
                                                    -------------       -------------       -------------
<S>                          <C>                    <C>                 <C>                 <C>
Net Income                     As reported          $   3,319,989       $   2,202,777       $   2,859,834
                               Pro forma                3,214,544           2,036,184           2,689,542

Basic earnings per share       As reported                    .31                 .21                 .27
                               Pro forma                      .30                 .26                 .19
</TABLE>

         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 2001, 2000 and 1999: dividend yield of 0%;
expected volatility of 61.6%, 62.0% and 54.20%; risk-free interest rate of
5.45%, 6.2% and 5.31%; and expected lives of 5 years.

         The weighted-average fair value per option at the date of grant for
options granted in 2001, 2000 and 1999 was $1.68, $1.66 and $1.35, respectively.

         The Company loaned a total of $237,500 to an officer, $189,417 which
was outstanding as of June 30, 2001, for the exercise of certain stock options.
This loan is secured by a promissory note and a pledge of the stock purchased
and bears interest at the bank's prime rate (7.0% on June 30, 2001). Payments
are due quarterly, including accrued interest.

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.

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, which will be amortized over the
restricted stock vesting period. Restricted stock awarded may not be voluntarily
or involuntarily sold, assigned,



                                    Page 37
<PAGE>   38

transferred, pledged or encumbered during the restricted period. Of the
restricted shares, 25% vested immediately, and the remaining shares vest 25% per
year over a four-year period. During the year ended June 30, 2001, the Company
recognized $263,437 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 products liability case brought in the California Superior
Court for Solano County. Until receipt of these documents, Rehabilicare had no
record of the proceedings. The case involved a product liability claim for burns
allegedly suffered by plaintiff through the use of a stimulation unit that was
allegedly manufactured by Rehabilicare. The action alleged damages for medical
expenses of approximately $1,000, for future medical expenses of approximately
$270,000 and for punitive damages and pain and suffering of approximately $2
million. The action apparently progressed to the entry of a default judgment on
January 11, 2001 against Rehabilicare for failing to respond to pleadings.

         In March 2001, Rehabilicare moved in Solano County court to set aside
the default judgment on various grounds, including irregularities in the filings
and other matters. Because the appeal period with respect to the default
judgment would have lapsed prior to the hearing on its motion in Solano County,
Rehabilicare also appealed the judgment to the California Court of Appeals. The
Solano County Court, however, refused to act on Rehabilicare's motion because of
the pendency of the appeal. Rehabilicare believes the judgment is void or
otherwise improper, has obtained a stay of execution of the judgment in both
California and Minnesota and intends to vigorously pursue available actions,
including its appeal, to set aside the judgment. Because of the uncertainty
surrounding the ultimate outcome of the case, no amount has been accrued in the
financial statements.

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

401(K) PLAN

         The Company has a 401(k) plan in which substantially all employees are
eligible to participate. Participants may contribute 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
$193,617, $176,577 and $98,059 to the plan for the years ended June 30, 2001,
2000 and 1999, respectively.



                                    Page 38
<PAGE>   39

9.       SEGMENT INFORMATION:

         Rehabilicare and its consolidated subsidiaries operate in one
reportable segment, the manufacture and distribution of electromedical pain
management and rehabilitation 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:

<TABLE>
<CAPTION>

                                                                Year ended June 30
                                          -------------------------------------------------------------
                                             2001                      2000                      1999
                                          -----------              -----------              -----------
<S>                                     <C>                       <C>                       <C>
  U.S. revenue                            $44,435,030              $41,893,749              $40,867,574
  Foreign revenue                          17,603,683               16,920,923                  927,799
                                          -----------              -----------              -----------
    Total                                 $62,038,713              $58,814,672              $41,795,373
                                          ===========              ===========              ===========
</TABLE>

Net revenue by product line was as follows:

<TABLE>
<CAPTION>

                                                              Year ended June 30
                                          -------------------------------------------------------------
                                              2001                     2000                    1999
                                          -----------              -----------              -----------
<S>                                     <C>                       <C>                       <C>
  Rehabilitation products                 $12,096,113              $12,057,500              $10,946,399
  Pain management                          13,697,753               14,038,541               15,103,020
  Consumer products                        12,998,063               11,934,370                       --
  Accessories and supplies                 23,246,784               20,784,261               15,745,954
                                          -----------              -----------              -----------
    Total                                 $62,038,713              $58,814,672              $41,795,373
                                          ===========              ===========              ===========
</TABLE>

         During fiscal 2001, one customer accounted for approximately 13% of
total consolidated revenue. This customer represented approximately 4% of total
accounts receivable at June 30, 2001.

10.      QUARTERLY DATA (UNAUDITED):

<TABLE>
<CAPTION>

                                                          For the Year Ended June 30, 2001
                             -------------------------------------------------------------------------------------------
                                First              Second               Third              Fourth
                               Quarter             Quarter             Quarter             Quarter              Total
                             -----------         -----------        ------------         -----------         -----------
<S>                        <C>                 <C>                 <C>                 <C>                 <C>
Revenue                      $15,067,647         $15,028,717        $ 15,171,676         $16,770,673         $62,038,713
Gross profit                  10,317,807          10,382,360          10,348,858          11,425,038          42,474,063
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
</TABLE>





                                    Page 39
<PAGE>   40
<TABLE>
<CAPTION>

                                                            For the Year Ended June 30, 2000
                             -------------------------------------------------------------------------------------------
                                First              Second              Third               Fourth
                               Quarter             Quarter            Quarter              Quarter              Total
                             -----------         -----------        ------------         -----------         -----------
<S>                        <C>                 <C>                <C>                  <C>                 <C>
Revenue                      $13,876,212         $14,778,144        $ 13,949,721         $16,210,596         $58,814,673
Gross profit                   9,277,406          10,670,659           9,808,443          11,095,463          40,851,971
Net income                     1,434,296           1,231,828             669,416          (1,132,763)          2,202,777
  (loss)

Net income
  (loss) per
common share -
    Basic                            .13                 .12                 .06                (.10)                .21
    Diluted                          .13                 .12                 .06                (.10)                .21
</TABLE>




                                    Page 40