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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

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

For the fiscal year ended December 31, 2001

Commission file number 0-19294
                              RehabCare Group, Inc.
             (Exact name of Registrant as specified in its charter)

          Delaware                               51-0265872
 (State or other jurisdiction of      (I.R.S.  Employer Identification No.)
  incorporation or organization)

          7733 Forsyth Boulevard, 17th Floor, St. Louis, Missouri 63105
              (Address of principal executive offices and zip code)

Registrant's telephone number, including area code: (314) 863-7422

Securities registered pursuant                     Name of Exchange
to Section 12(b) of the Act:                       on which registered:
Common Stock, par value $.01 per share             New York Stock Exchange
Preferred Stock Purchase Rights                    New York Stock Exchange

     Indicate  by check mark  whether the  Registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  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

     Indicate by check mark if disclosure of delinquent  filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not 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. ( )

     The  aggregate  market  value of voting  stock  held by  non-affiliates  of
Registrant at March 8, 2002 was  $415,043,191.  At March 8, 2002, the Registrant
had 17,359,341 shares of Common Stock outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

     Part II of this  Annual  Report  on Form  10-K  incorporates  by  reference
information  contained in the Registrant's Annual Report to Stockholders for the
fiscal year ended December 31, 2001.

     Part III of this  Annual  Report on Form  10-K  incorporates  by  reference
information  contained in the  Registrant's  definitive  Proxy Statement for its
Annual Meeting of Stockholders to be held on May 1, 2002.


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                                        1
<PAGE>

                                     PART I

ITEM 1.  BUSINESS


Overview of Our Company

     RehabCare  Group,  Inc., a Delaware  corporation,  is a leading provider of
temporary  healthcare  staffing and therapy program management for hospitals and
long-term  care  facilities.  From  the  112  supplemental  healthcare  staffing
branches of our StarMed Staffing Group, we provide temporary placement of nurses
and other healthcare  professionals on a supplemental basis using  locally-based
personnel.  We also provide traveling nurses from the tele-recruiting offices of
our  healthcare  travel  staffing  division  generally on a 13-week  basis.  Our
therapy  program   management   business  consists  of  the  management  of  109
hospital-based  inpatient  acute  rehabilitation  units  and  25  hospital-based
inpatient  skilled nursing units,  56  hospital-based  and satellite  outpatient
therapy   programs  and  305  contract  therapy  programs  with  long-term  care
facilities. For the year ended December 31,  2001, we had net operating revenues
of  $542.3   million  and  operating   earnings,   excluding   $9.0  million  of
non-recurring charges, of $45.9 million.  During this period, we earned 56.2% of
our net operating revenues from our healthcare  staffing business and 43.8% from
our therapy program management business.

     The terms  "RehabCare,"  "our company," "we" and "our" as used herein refer
to "RehabCare Group, Inc."

Industry Overview

     As  a  provider  of  temporary  healthcare  staffing  and  therapy  program
management  services,  our  revenues  and  growth  are  affected  by trends  and
developments in healthcare spending.  The U.S. Centers for Medicare and Medicaid
Services  estimated  that in 2000 total  healthcare  expenditures  in the United
States  grew by 7.0%  to $1.3  trillion.  It  projected  that  total  healthcare
spending  in the United  States  would grow by 8.6% in 2001 and by an average of
7.1% annually from 2002 through 2010.  According to these estimates,  healthcare
expenditures  will  increase by nearly $1.3  trillion in the next decade and, by
2010,  will  account for  approximately  $2.6  trillion,  or 15.9% of the United
States gross domestic product.

     Demographic  considerations  also affect long-term  growth  projections for
healthcare   spending.   According  to  the  U.S.   Census  Bureau,   there  are
approximately 35 million  Americans aged 65 or older in the United States today,
who comprise  approximately 12.7% of the total United States population.  By the
year 2030, the number of Americans aged 65 or older is expected to climb to 70.3
million,  or  20.0%,  of  the  total  population.  Due to  the  increasing  life
expectancy  of  Americans,  the number of people  aged 85 years or older is also
expected to increase from 4.3 million to 8.9 million by the year 2030.

     We believe that rising  projected  healthcare  expenditures and longer life
expectancy  of the  population  will  place  increased  pressure  on  healthcare
providers to find innovative, efficient means of delivering healthcare services.
Continued  spending  pressure will  encourage  efficiency by directing  patients
toward  lower  cost  settings  such as our  inpatient  units and our  outpatient
therapy and  contract  therapy  programs.  We also  believe that as part of this
trend the demand for  temporary  healthcare  staffing  services  will  expand as
healthcare  providers  seek to decrease  their  overall  labor costs and satisfy
their need for qualified healthcare employees, who are in high demand.

                                       2

<PAGE>
     Temporary Healthcare  Staffing.  The temporary healthcare staffing industry
provides   staffing  of  nurses,   physicians   and  other   allied   healthcare
professionals  such as physical  and  occupational  therapists,  speech/language
pathologists,  respiratory therapists, radiologic technicians, advanced practice
professionals,  pharmacists,  and medical and surgical specialized  technicians.
The  temporary  healthcare  staffing  industry  is  primarily  comprised  of the
following three services:


     o    Supplemental Staffing. Supplemental staffing comprises the majority of
          all   temporary   healthcare   staffing  and  involves   placement  of
          locally-based healthcare professionals on very short-term assignments,
          often for daily shift work.  Supplemental staffing often involves very
          short advance notice of assignments by the client.

     o    Travel  Staffing.  Travel  staffing  involves  placement of healthcare
          professionals on a contracted,  fixed-term basis on assignments  which
          may run several weeks to a year,  but are generally 13 weeks long. The
          healthcare professional  temporarily relocates to the assignment.  The
          staffing company is responsible for providing arrangements for travel,
          housing, licensure and credentialing.

     o    Placement   and   Search.    Placement    and   search    relates   to
          position-specific searches for specialized healthcare professionals to
          fill open positions on a permanent  basis.  Search firms offer a range
          of placement  and search  services on both a retainer and  contingency
          basis.

     Most temporary  healthcare staffing companies will specialize in one of the
three services set forth above. We currently offer all three services.

     The Staffing Industry Report, an independent staffing industry publication,
estimated that revenues in the United States for all temporary staffing services
were $84.8 billion in 2000. The temporary  healthcare staffing segment accounted
for approximately  $7.2 billion of revenues in 2000, and was expected to grow by
approximately  21% in 2001 and 22% in 2002.  We  believe  that  the  demand  for
temporary  healthcare staffing services will continue to increase due to various
factors including:

     o    Changes in the Healthcare  Payment System. As healthcare  expenditures
          in the United States have continued to increase,  healthcare providers
          have  experienced  increased cost  reduction  pressures as a result of
          managed care and the implementation of prospective payment systems and
          other changes in Medicare reimbursement. The need to control costs has
          forced  many  healthcare   providers  to  re-evaluate  their  staffing
          policies  and  seek  more  efficient  labor   management   techniques,
          including the use of temporary  employees to enhance  flexibility  and
          reduce costs by transforming a portion of their labor costs from fixed
          to variable.

     o    Shortages in Available Healthcare Professionals. Increasing demand for
          temporary healthcare professionals and shifts in the labor market have
          resulted in shortages in the availability of qualified nurses and many
          allied healthcare  personnel.  A recent study published in The Journal
          of the American  Medical  Association  estimates that based on current
          trends approximately 1,754,000 registered nurses will be needed in the
          United  States by 2020,  but only  635,000  registered  nurses will be
          available. The same study found that from 1983 to 1998 the average age
          of working registered nurses increased from 37 to 42 years. Within the
          next ten years, the average age of registered  nurses is forecasted to
          be 45.4 years,  with more than 40% of the registered  nurse  workforce
          expected to be 50 years old or older.  Further, a recent report by the
          American Association of Colleges of Nursing indicates that enrollments
          in  undergraduate  nursing  programs  decreased by 2.2% in 2000. Nurse
          graduation  rates have  declined 19% from 1995 to 2000. In addition to
          the shortage of available nurses,  changes in healthcare and the trend
          toward temporary staffing have resulted in shortages of various allied
          healthcare  professionals,  including radiologic  laboratory and other
          specialized  technicians,  pharmacists,  physician  assistants,  nurse
          anesthetists,  transcriptionists,  reimbursement specialists,  patient
          account representatives and medical clerical personnel.

                                       3
<PAGE>

     Therapy  Program  Management.  The growth of managed  care and its focus on
cost control has encouraged  healthcare providers to provide quality care at the
lowest cost  possible.  While  generally  less  aggressive  than  managed  care,
Medicare and Medicaid incentives have also driven declines in inpatient days per
admission.  In many cases,  patients  are treated  initially in the higher cost,
acute-care  hospital  setting;  after their condition has  stabilized,  they are
either moved to a lower cost  facility,  such as a skilled  nursing unit, or are
discharged  to their  home.  Thus,  while  hospital  inpatient  admissions  have
continued to grow,  the number of inpatient  days per  admission  has  declined.
According  to  the  American  Hospital  Association,  the  aggregate  number  of
inpatient days declined at an annual rate of 1.6%, from 215.9 million in 1993 to
192.4 million in 2000.

     Many  healthcare  providers are  increasingly  seeking to outsource a broad
range of services  through  contracts  with product line  managers.  Outsourcing
allows  healthcare  providers to take advantage of the specialized  expertise of
contract managers, enabling providers to concentrate on the businesses they know
best, such as facility and nurse management.  Continued  reimbursement pressures
under  managed care and Medicare  have driven  healthcare  providers to look for
additional  sources of revenue.  As constraints on overhead and operating  costs
have  increased  and  manpower  has been  reduced,  outsourcing  has become more
important in order to increase  patient volumes and provide  services at a lower
cost while maintaining high quality standards.

     By outsourcing services, healthcare providers are able to:

     o    Utilize Unused Space.  Inpatient services help hospitals utilize empty
          wings of their  facilities,  which enables them to recover the cost of
          capital investment and overhead associated with the space.

     o    Increase  Volumes.  Patients who are discharged from an intensive care
          unit or medical/ surgical bed and need acute rehabilitation or skilled
          nursing care,  and who in the past would have  otherwise been referred
          to other venues for treatment, can now remain in the hospital setting.
          This allows  hospitals  to capture  revenues  that would  otherwise be
          realized by another provider. Upon discharge,  patients can return for
          outpatient  care,  adding  additional  revenues for the  provider.  By
          offering new services, the hospital also attracts new patients.

     o    Sign  Agreements with Managed Care  Organizations.  We believe managed
          care  organizations  prefer  to sign  contracts  covering  both  acute
          rehabilitation,  skilled nursing services and outpatient  therapy with
          one entity rather than several  separate,  often  unrelated  entities.
          Program managers provide patient  evaluation systems that collect data
          on patients in each of their units  showing the degree of  improvement
          and the  related  costs from the time the  patient is  admitted to the
          unit through the time of  discharge.  This is an important  feature to
          managed care  organizations in controlling  their costs while assuring
          appropriate  outcomes.  Program managers may often have the ability to
          capture  and analyze  this  information  from a large  number of acute
          rehabilitation  and skilled  nursing units to improve  clinical  care,
          which  an  individual  hospital  could  not do on its  own  without  a
          substantial  investment  in  specialized  systems.  Becoming part of a
          managed care network  helps the hospital  attract  physicians,  and in
          turn, attract more patients to the hospital.

                                       4
<PAGE>

     o    Increase Cost Control.  Because of their extensive experience in their
          product  line,  program  managers can offer  pricing  structures  that
          effectively control a healthcare  provider's financial risk related to
          the service  provided.  For hospitals and other providers that utilize
          program managers,  the result is often lower average cost than that of
          self-managed  programs.  As a result, the facility is able to increase
          its revenues without having to increase  administrative staff or incur
          other fixed costs.

     o    Obtain Reimbursement Advice. Program managers may employ reimbursement
          specialists   who  are  available  to  assist   client   hospitals  in
          interpreting complicated  regulations,  a highly valued service in the
          changing healthcare environment.

     o    Improve  Clinical  Quality.   National  program  managers  focused  on
          rehabilitation  are able to develop and employ best  practices,  which
          benefit client hospitals.

     Of the  approximately  5,000  general  acute-care  hospitals  in the United
States, an estimated 900 hospitals operate inpatient acute rehabilitation units,
of  which  we  estimate  only   approximately  150  currently   outsource  acute
rehabilitation  program management  services.  We currently have therapy program
management   contracts  with  109  of  those   hospitals  that  outsource  acute
rehabilitation unit management services.

Overview of Our Business Lines

     Our  business  is  divided  into  two  main  business  segments:  temporary
healthcare  staffing and therapy program  management.  Our temporary  healthcare
staffing  business   encompasses   placement  of  nurses  and  other  healthcare
professionals  on either a  short-term  basis,  ranging  from one day to several
weeks, an interim basis,  generally 13 weeks, or a permanent  basis. Our therapy
program management  business consists of management of hospital-based  inpatient
acute rehabilitation and skilled nursing units,  outpatient therapy programs and
contract therapy  programs.  The following table summarizes the type of services
we offer and their benefits to our clients.

                                       5

<PAGE>

       Business Line          Description of Service      Benefits to Client
       -------------          ----------------------      ------------------
Temporary Healthcare        Placement of temporary     Enables the client to
Staffing                    healthcare professionals   manage fixed labor
                            in hospitals and           costs, turnover,
                            long-term care facilities  vacation, maternity and
                            for one day to thirteen    other temporary staffing
                            week assignments.          needs.
Therapy Program Management

      Inpatient

        Acute               High acuity                Utilizes formerly idle
        Rehabilitation      rehabilitation for         space and affords the
        Units:              conditions such as         client the ability to
                            stroke, hip replacement    offer specialized
                            and head injury.           clinical rehabilitation
        Skilled Nursing                                services to patients who
        Units:              Lower acuity               might otherwise be
                            rehabilitation but often   discharged to a setting
                            more medically complex     outside the client's
                            than acute rehabilitation  facility.
                            units for conditions such
                            as stroke, cancer, heart
                            failure, burns and wounds.

      Outpatient            Outpatient therapy         Helps bring patients
                            programs for               into the client's
                            hospital-based and         facility and helps the
                            satellite programs         client compete with
                            (primarily sports and      freestanding clinics.
                            work-related injuries).

      Contract Therapy      Therapy services in        Affords the client the
                            long-term care facilities  ability to fulfill the
                            under management.          recurring need for
                                                       therapists on a
                                                       full-time or part-time
                                                       basis, especially for
                                                       clients whose operations
                                                       do not warrant a
                                                       full-time therapist.
                                                       Offers the client a
                                                       better opportunity to
                                                       improve the quality of
                                                       the programs.

     Financial  information  about each of our business segments is contained in
Note 12 to the "Notes to Consolidated  Financial  Statements"  beginning on page
45.

     We offer our portfolio of temporary healthcare staffing and therapy program
management  services to a highly diversified  customer base. We serve healthcare
staffing  clients in all 50 states and our therapy program  management  business
currently  manages  units  and  programs  in  41  states.  The  following  table
summarizes  by  geographic  region  the  locations  of our  healthcare  staffing
branches and therapy program management clients as of December 31, 2001:

                                       6

<PAGE> 7

<TABLE>
<CAPTION>
                                              Therapy Program Management
                                              --------------------------
                                                     Acute
                                                   Rehabili-
                                                    tation/
                                        Healthcare  Skilled Outpatient Contract
                                         Staffing   Nursing   Therapy   Therapy
Geographic Region                        Branches    Units   Programs  Programs
-----------------                        --------    -----   --------  --------
<S>                                        <C>     <C>          <C>       <C>
Northeast Region ...................         9       16/2        7         10
(CT, DE, MA, MD, ME, NH, NJ, NY, PA, RI, VT)
Southeast Region....................        32       15/6       20         44
(AL, FL, GA, KY, MS, NC, SC, TN, VA, WV)
North central Region................        26       26/6        7         79
(IA, IL, IN, MI, MN, ND, NE, OH, SD, WI)
Mountain Region.....................        10        2/1        2          3
(AZ, CO, ID, MT, NM, NV, UT, WY)
South central Region................        19       42/7       18        132
(AR, KS, LA, MO, OK, TX)
Western Region......................        16        8/3        2         37
(AK, CA, HI, OR, WA)................       ___     ______       __        ___
   Total............................       112     109/25       56        305
</TABLE>
     Temporary Healthcare Staffing Services

     Our StarMed Staffing Group meets a critical need of supplying nurses, nurse
assistants and other medical staff to hospitals and nursing homes in communities
across the United States,  helping healthcare  facilities operate to the optimal
level of staffing for their ever-changing patient population.  Additionally,  we
assist healthcare  facilities in alleviating pressures of the nationwide nursing
shortage,  as demand  for nurse  staffing  far  exceeds  supply.  We  introduced
temporary  healthcare  staffing to our portfolio of services in 1996.  Initially
focusing on  recruiting  traveling  physical  and  occupational  therapists  and
speech/language  pathologists  for hospitals and long-term care  facilities,  we
added  traveling  and  supplemental  nurses in 1998 and other allied  healthcare
personnel in 1999.

     Supplemental  Staffing  Operations.  Our supplemental  staffing  operations
provide nurses,  nurse assistants and other allied healthcare staff to hospitals
and other healthcare  facilities on short-term  assignments,  typically  ranging
from  one day to  several  weeks.  As of  December 31,  2001,  we  operated  112
healthcare  staffing  branches  throughout the United States. A typical staffing
branch  consists of  approximately  1,000 square feet of leased space.  A branch
director and a recruiter are initially hired to manage the branch. As the branch
matures,  measured  by  number  of weeks  worked  the  branch  has  placed,  new
recruiters, marketers and clerical staff are added to support growth. We believe
that the benefits program we provide for our temporary staff  differentiates  us
from many  other  companies  in the  industry.  These  benefits  include  direct
deposit,  next-day  pay,  401(k)  plan,  flexible  assignments,   vacation  pay,
continuing education reimbursements, health insurance, sign-on bonuses, referral
bonuses and a uniform  program.  We believe  another  significant  factor in our
performance has been the quality of our personnel.  Our supplemental staffing is
a local business,  and we believe the relationships that our branch managers and
our placement  and  recruiting  professionals  have with our clients have been a
significant  contributor to the continued  success of our supplemental  staffing
operations.

     Our supplemental staffing growth strategy is:

     o    increasing the volumes per branch

     o    increasing the number of branches in key geographic locations;

     o    diversifying  the  services our branches  provide by  furnishing  both
          nurse staffing and other allied medical staffing at each location; and

     o    continuing  to  evaluate   acquisition   opportunities  and  executing
          acquisitions where and when appropriate.

                                       7
<PAGE>

     Travel Staffing.  Our travel staffing  operations place nursing,  radiology
and allied  healthcare  professionals  typically  on thirteen  week  assignments
throughout  the  United  States.  We  employ  a staff  in a  central  branch  of
placement,   recruiting,  housing  and  benefits  specialists  to  support  each
traveler.  The  traveler is assigned a  specialist  who will assist the traveler
through every step of the  assignment.  Our staff is available 24 hours a day, 7
days a week to help  with any issue  the  traveler  may  have.  We  believe  our
placement  specialists have one of the industry's largest databases of positions
available in a wide variety of specialties in all 50 states. We also believe the
benefits  we offer play a critical  role in a  traveler's  decision to choose us
over our competition.  Benefits include  bonuses,  401(k) plan,  guaranteed pay,
assignment cancellation protection,  direct deposit, financial success planning,
health and dental  insurance,  housing,  travel  reimbursement,  frequent travel
program, licensing assistance, 24-hour support and continuing education.

     We  plan to  continue  to grow  our  travel  staffing  business  through  a
combination   of   controlled   internal   growth  and   selective   acquisition
opportunities.

     Therapy Program Management

     Inpatient

     Acute Rehabilitation.  At  our  inception  in  1982,  our  entire  business
consisted of management of acute  rehabilitation units within general acute-care
hospitals.  Today, our inpatient  division is a market leader in operating acute
rehabilitation  units in  acute-care  hospitals on a contract  basis.  We manage
inpatient  acute  rehabilitation  units  in  109  hospitals  for  patients  with
diagnoses including stroke,  orthopedic conditions,  arthritis,  spinal cord and
traumatic brain  injuries.  Of the  approximately  5,000 hospitals in the United
States, an estimated 900 operate inpatient acute rehabilitation  units; of which
we estimate only approximately 150 currently outsource management  services.  We
believe that as the  prospective  payment system is implemented in the inpatient
rehabilitation  environment,  our  acute  rehabilitation  division  will be well
positioned for internal growth. Of the approximately 4,100 acute-care  hospitals
that do not currently  operate acute  rehabilitation  units, we estimate that as
many as 1,000 meet our  general  criteria  for  support of acute  rehabilitation
units in their markets. In light of the changing reimbursement  environment,  we
believe that there is an opportunity for internal growth to the extent that many
of the 750 hospitals  currently operating their own acute  rehabilitation  units
reevaluate  the  efficiency  of  their   operations  and  consider   outsourcing
management services to companies such as ours.

     We establish acute rehabilitation units in hospitals that have vacant space
and unmet  rehabilitation  needs in their  markets.  We also work with hospitals
that  currently  operate acute  rehabilitation  units to determine the projected
level of cost  savings we can deliver to them by  implementing  our  scheduling,
clinical  protocol and outcome  systems.  In the case of  hospitals  that do not
operate acute  rehabilitation  units  already,  we review their  historical  and
existing  hospital  population,  as well as the  demographics  of the geographic
region, to determine the optimal size of the proposed acute  rehabilitation unit
and the potential of the new unit under our  management  to generate  additional
revenues to cover anticipated  expenses. We are generally paid by our clients on
the basis of a negotiated  fee per patient day or fee per discharge  pursuant to
contracts that are typically for terms of three to five years.  These  contracts
are generally  subject to termination or renegotiation in the event the hospital
experiences  a material  change in its  reimbursement  from  government or other
providers.  An acute  rehabilitation  unit  affords the  hospital the ability to
offer  rehabilitation  services  to  patients,   retaining  patients  who  might
otherwise be discharged  to a setting  outside the  hospital.  A unit  typically
consists of 20 beds and is staffed with a program director,  a physician-medical
director  and  clinical  staff which may include a  psychologist,  physical  and
occupational therapists, a speech/language pathologist, a social worker, a nurse
manager, a case manager and other appropriate supporting personnel.

                                       8

<PAGE>

     Skilled  Nursing Units.  In 1994, the inpatient  division added the skilled
nursing service line in response to client requests for management  services and
our strategic  decision to broaden our inpatient  services.  As of  December 31,
2001, we managed 25 inpatient  skilled nursing units.  The unit enables patients
to remain in a hospital  setting  where  emergency  needs can be met  quickly as
opposed to being sent to a freestanding  skilled nursing  facility.  The unit is
located within the acute-care  hospital and is separately  licensed as a skilled
nursing unit. We are generally  paid by our clients on the basis of a negotiated
fee per patient day pursuant to contracts  that are typically for terms of three
to five  years.  The  hospital  benefits  by  retaining  patients  who  would be
discharged to another setting,  capturing  additional revenue and utilizing idle
space.  A skilled  nursing  unit  treats  patients  who  require  low  levels of
rehabilitative  care,  but who have a greater need for nursing  care.  Patients'
diagnoses are typically  long-term and medically complex covering  approximately
60 clinical conditions,  including stroke,  post-surgical conditions,  pulmonary
disease, cancer, congestive heart failure, burns and wounds.

     We intend to achieve  continued  internal growth of our inpatient  services
through  cross-selling  our services to our existing  clients and generating new
client relationships.

     Outpatient

     In  1993,  we began  managing  outpatient  therapy  programs  that  provide
management of therapy services to patients with work-related and  sports-related
illnesses  and  injuries,  and as of December 31, 2001, we managed a total of 56
hospital-based and satellite  outpatient therapy programs.  We realized that the
same  expertise we brought to hospitals in managing  their acute  rehabilitation
units could be modified to add value to a hospital's outpatient therapy program.
An outpatient therapy program complements the hospital's  occupational  medicine
initiatives  and allows  therapy to be continued  for patients  discharged  from
inpatient rehabilitation units and medical/surgical beds . An outpatient therapy
program also attracts  patients into the hospital and is conducted either on the
client hospital's campus or in satellite  locations  controlled by the hospital.
We also market our outpatient therapy  management  services to physician groups.
Our  physician-based  programs  are  located  at or in  close  proximity  to the
physician group's offices.

     We believe our management of outpatient therapy programs delivers increased
productivity  through our scheduling,  protocol and outcome systems,  as well as
through  productivity  training for existing  staff. We also provide our clients
with  expertise in  compliance  and quality  assurance.  The typical  outpatient
therapy program we manage  provides  services for 50 patient visits per day. The
program is staffed with a program  manager,  four to six  therapists  and two to
four  administrative and clerical staff. We are typically paid by our clients on
the basis of a negotiated fee per unit of service.

     As outpatient therapy programs remain  underdeveloped at most hospitals and
physician  practice groups,  we intend to continue to grow this line of business
by signing  contracts with new hospital clients and cross-selling our outpatient
therapy  programs to existing  inpatient  clients.  We also intend to expand our
therapy management services to additional physician groups. In addition, we will
actively  consider  strategic  acquisitions  to  accelerate  the  growth of this
division.

                                       9

<PAGE>

     Contract Therapy

     In 1997, we added contract therapy management to our service offerings. Our
contract   therapy   division   manages  therapy  services  for  long-term  care
facilities.  This  program  affords  the client the  opportunity  to fulfill its
recurring need for therapists on a full-time or part-time basis without the need
to hire and retain  full-time  staff.  As of December 31,  2001,  we managed 305
contract therapy programs.

     Our typical  contract  therapy  client has 100 beds, a portion of which are
licensed as skilled nursing beds. We manage therapy services, including physical
and occupational therapy and speech/language  pathology, for the skilled nursing
beds. Our broad base of staffing strategies,  full-time,  part-time and on-call,
can be adjusted at each location  according to the  facility's and its patients'
needs.  We are  generally  paid by our clients on the basis of a negotiated  per
diem  rate.  Our  contract  therapy  program  is  led  by  a  full-time  program
coordinator  who is also a  therapist  and two to four  full-time  professionals
trained in physical and occupational therapy or speech/language pathology.

     We believe the  introduction  of a prospective  payment  system for skilled
nursing  facilities  and units in 1998 has  created  demand  for our  management
systems and  expertise,  particularly  with regard to  controlling  costs.  As a
result,  we will focus our  growth  strategy  in this  division  on signing  new
contracts.

Government Regulation

     Overview.  The healthcare  industry is required to comply with many complex
federal and state laws and  regulations and is subject to regulation by a number
of  federal,  state  and  local  governmental  agencies,  including  those  that
administer  the  Medicare  and  Medicaid  programs,  those  responsible  for the
licensure of  healthcare  providers and  facilities  and those  responsible  for
administrating  and approving  health  facility  construction,  new services and
high-cost  equipment  purchasing.  The  healthcare  industry is also affected by
federal,  state and local  policies  developed  to regulate  the manner in which
healthcare is provided,  administered and paid for nationally and locally.  Laws
and  regulations in the healthcare  industry are extremely  complex and, in many
instances,  the industry does not have the benefit of significant  regulatory or
judicial  interpretation.  As a result, the healthcare  industry is sensitive to
legislative and regulatory changes and is affected by reductions and limitations
in healthcare spending as well as changing healthcare  policies.  Moreover,  our
business is impacted  not only by those laws and  regulations  that are directly
applicable to us, but also by certain laws and  regulations  that are applicable
to our  hospital,  skilled  nursing  facility and other  clients.  If we fail to
comply with the laws and  regulations  directly  applicable to our business,  we
could  suffer  civil  penalties,  criminal  penalties  and/or be  excluded  from
contracting with providers participating in Medicare, Medicaid and other federal
and state healthcare programs. If our hospital,  skilled nursing facility and/or
other clients fail to comply with the laws and  regulations  applicable to their
businesses,  they could suffer civil  penalties,  criminal  penalties  and/or be
excluded from  participating  in Medicare,  Medicaid and other federal and state
healthcare  programs,  which could,  indirectly,  have an adverse  impact on our
business.

     Facility Licensure,  Medicare  Certification,  and Certificate of Need. Our
clients are required to comply with state facility  licensure,  federal Medicare
certification, and certificate of need laws that are not generally applicable to
us.

     Generally,  facility licensure and Medicare  certification  follow specific
standards  and  requirements.  Compliance  is monitored  by various  mechanisms,
including periodic written reports and on-site inspections by representatives of
relevant government agencies.  Loss of licensure or Medicare  certification by a
healthcare  facility  with  which we have a  contract  would  likely  result  in
termination of that contract.

                                       10

<PAGE>

     A few states require that health  facilities  obtain state permission prior
to entering into  contracts for the  management of their  services.  Some states
also require that health  facilities  obtain state  permission  in the form of a
certificate of need prior to constructing  or modifying their space,  purchasing
high-cost medical equipment, or adding new healthcare services. If a certificate
of need is required,  the process may take up to 12 months or more, depending on
the  state  involved.  The  certificate  of need  application  may be  denied if
contested  by a  competitor  or  if  the  new  facility  or  service  is  deemed
unnecessary  by the state  reviewing  agency.  A certificate  of need is usually
issued for a specified  maximum  expenditure and requires  implementation of the
proposed improvement or new service within a specified period of time.

     Professional  Licensure  and  Corporate  Practice.  Many of the  healthcare
professionals  employed or engaged by us, including  nurses and therapists,  are
required to be individually licensed or certified under applicable state law. We
take steps to ensure  that our  licensed  healthcare  professionals  possess all
necessary  licenses  and  certifications,  and we  believe  that our  nurses and
therapists comply with all applicable state laws.

     In some states,  business  corporations  such as our company are restricted
from practicing  therapy through the direct  employment of therapists.  In those
states,  to comply with the restrictions  imposed,  we either contract to obtain
therapy services from an entity permitted to employ therapists, or we manage the
physical therapy practice owned by licensed therapists through which the therapy
services are provided.

     Staffing  Agency/Business  Licenses.  A  number  of  states  require  state
licensure for businesses that, for a fee, employ and assign personnel, including
healthcare  personnel,  to provide  temporary  services on-site at hospitals and
other  healthcare   facilities  to  support  or  supplement  the  hospitals'  or
healthcare  facilities'  work  force.  A number of  states  also  require  state
licensure  for  businesses  that  operate  placement  services  for  individuals
attempting to secure  employment.  Failure to obtain the necessary  licenses can
result in injunctions  against operating,  cease and desist orders and/or fines.
We endeavor to maintain all required state licenses.

     Reimbursement.  Federal and state laws establishing  payment  methodologies
and mechanisms for healthcare  services covered by Medicare,  Medicaid and other
government  healthcare  programs,  while  applicable  to  our  clients  and  not
generally applicable to us, still have an indirect impact on our business.

     Medicare pays  acute-care  hospitals for most inpatient  hospital  services
under a payment  system known as the  "prospective  payment  system." Under this
system,  acute-care  hospitals are paid a specific amount toward their operating
costs based on the  diagnosis-related  group to which each  Medicare  patient is
assigned. The amount of reimbursement  assigned to each diagnosis-related  group
is  established  prospectively  by the U.S.  Centers for  Medicare  and Medicaid
Services, an agency of the U.S. Department of Health and Human Services,  and is
not related to a hospital's actual costs. In general,  a hospital's  payment for
inpatient  care  provided  to  a  Medicare  patient  is  limited  based  on  the
diagnosis-related  group to which the  patient is  assigned,  regardless  of the
amount of  services  provided  to the  patient  or the  length of the  patient's
hospital stay.  However,  for certain Medicare  beneficiaries who have unusually
costly hospital stays, the U.S. Centers for Medicare and Medicaid  Services will
provide  additional  payments  above those  specified for the  diagnosis-related
group.  Under  the  diagnosis-related  group  system,  a  hospital  may keep the
difference between its  diagnosis-related  group payment and its operating costs
incurred in  furnishing  inpatient  services,  but is at risk for any  operating
costs that exceed the  applicable  diagnosis-related  group  payment  rate. As a
result, hospitals have an incentive to discharge Medicare patients as soon as it
is clinically appropriate.

     During the past several years, acute rehabilitation  units, skilled nursing
units and hospital-based  outpatient therapy programs were generally exempt from
the  above-described  prospective  payment  system and were paid  instead on the
basis of their  direct and  indirect  costs under a  "cost-based"  reimbursement
system. As discussed below, the Balanced Budget Act of 1997 mandated new payment
systems and methodologies for acute rehabilitation  units, skilled nursing units
and hospital-based outpatient therapy programs.

                                       11

<PAGE>

     Under the  Balanced  Budget Act of 1997,  beginning  January  1, 2002,  the
Medicare  program is  phasing  in a  prospective  payment  system  for  eligible
inpatient  rehabilitation  hospitals  and  rehabilitation  units  in  hospitals,
collectively  referred to as "inpatient  rehabilitation  facilities."  Inpatient
rehabilitation  facilities may transition into the new payment system over a one
year period, during which payments would be based on a blend of rates paid under
the old and the new payment  system or inpatient  rehabilitation  facilities may
elect  to  go  directly  to  the  new  prospective  payment  system  rates.  The
prospective payment system for inpatient rehabilitation facilities is similar to
the diagnosis-related  group payment system used for inpatient hospital services
but uses a case mix group rather than a diagnosis-related group. Each patient is
assigned  to a case mix group  based on clinical  characteristics  and  expected
resource  needs as a result of  information  reported  on a "patient  assessment
instrument" which is completed upon patient  admission and discharge.  As is the
case  under  the  diagnosis-related  group  system,  a  hospital  may  keep  the
difference  between its case mix group payment and its operating  costs incurred
in furnishing  patient services,  but is at risk for operating costs that exceed
the  applicable  case mix group  payment.  As was the case under the old payment
system, an acute inpatient  rehabilitation  unit will be paid under the hospital
diagnosis-related  group system until it qualifies for exemption. To qualify for
exemption,  the unit must comply with a number of  operational  and patient care
criteria.  This  process  typically  takes one year  after  unit  opening.  Upon
qualification  for the  exemption,  the unit would then be reimbursed  under the
prospective payment system for inpatient rehabilitation facilities.

     We  believe  that  the  new   prospective   payment  system  for  inpatient
rehabilitation  facilities favors low-cost,  efficient  providers,  and that our
strategy of managing  programs on the premises of our hospital clients positions
us well for the changing reimbursement environment. However, in the event that a
client hospital  experiences a material reduction in reimbursement under the new
system,  in most cases,  the client  hospital will have the right to renegotiate
its contract with us, including the financial terms.

     The Balanced Budget Act of 1997 also mandated the phase-in of a prospective
payment system based on resource  utilization group  classifications for skilled
nursing facilities and units. This was targeted to reduce government spending on
skilled  nursing  services by 18%. All of the skilled  nursing units to which we
provide  management  services  are  now  fully  phased  in  under  the  resource
utilization group system for skilled nursing facilities.

     Medicare  reimbursement  for  outpatient  rehabilitation  services was also
affected by the Balanced Budget Act of 1997. Since 1999,  reimbursement for such
services is no longer based on a provider's  costs;  instead,  all reimbursement
for covered outpatient  rehabilitation services is currently based on the lesser
of the  provider's  actual charge for such services or the  applicable  Medicare
physician fee schedule amount  established by the U.S.  Centers for Medicare and
Medicaid Services.  This reimbursement  system applies regardless of whether the
therapy  services  are  furnished  in  a  hospital  outpatient   department,   a
physician's  office,  or the office of a therapist  in private  practice.  Under
current  law, an  outpatient  therapy  program that is not  designated  as being
provider-based  is subject to annual  limits on payment  for  therapy  services;
however,  these  limits have been  suspended  through  2002,  but may be renewed
thereafter. See discussion below entitled "Provider-Based Rules."

                                       12

<PAGE>

     Provider-Based  Rules. The U.S. Centers for Medicare and Medicaid  Services
recently  promulgated new rules regarding the  provider-based  status of certain
facilities  and  organizations   furnishing   healthcare  services  to  Medicare
beneficiaries.  Designation as a provider-based facility or organization can, in
some cases, result in greater reimbursement from the Medicare program than would
otherwise be the case. Under the new rules, a designation as provider-based also
mandates  compliance  with a specific  set of billing and  patient  notification
requirements and emergency medical treatment regulations. Until October 1, 2002,
any program, facility or organization treated as having provider-based status on
October 1, 2000, will retain this designation. All new programs,  facilities and
organizations  established after October 1, 2000 desiring  provider-based status
must obtain an affirmative  determination of  provider-based  status in order to
receive  reimbursement  as a  provider-based  facility for services  provided to
Medicare  beneficiaries.  As  of  October  1,  2002,  programs,  facilities  and
organizations that were in existence on October 1, 2000 will also need to obtain
an affirmative  determination of provider-based status to receive provider-based
reimbursement.  In November  2001,  the U.S.  Centers for  Medicare and Medicaid
Services clarified that the provider-based rules do not apply to skilled nursing
facilities,  to  inpatient  rehabilitation  units  that  are  excluded  from the
inpatient  prospective  payment  system  for  acute  hospital  services  and  to
facilities furnishing only physical, occupational or speech therapy patients for
as long as the $1,500  annual cap on coverage  of  physical,  occupational,  and
speech therapy remains suspended.

     Health   Information   Practices.   Subtitle  F  of  the  Health  Insurance
Portability and Accountability Act of 1996 was enacted to improve the efficiency
and  effectiveness  of  the  healthcare  system  through  the  establishment  of
standards and  requirements  for the electronic  transmission  of certain health
information.  To achieve that end,  the act  requires the  Secretary of the U.S.
Department  of Health and Human  Services to  promulgate  a set of  interlocking
regulations  establishing  standards  and  protections  for  health  information
systems, including standards for the following:

     o    the development of electronic transactions and code sets to be used in
          those transactions;

     o    the  development  of  unique  health   identifiers  for   individuals,
          employers, health plans, and healthcare providers;

     o    the security of individual health information;

     o    the transmission and authentication of electronic signatures; and

     o    the privacy of individually identifiable health information.

     Final rules setting forth  standards for electronic  transactions  and code
sets were  published  on August 17,  2000,  and for the privacy of  individually
identifiable  health  information  on December 28, 2000,  both of which apply to
health plans,  healthcare  clearinghouses and healthcare  providers who transmit
any  health   information  in  electronic   form  in  connection   with  certain
administrative  and  billing  transactions.  The  compliance  deadline  for  the
electronic  transaction  and  code  set  standards  is  October  16,  2003  if a
compliance plan is filed with the Secretary of the U.S. Department of Health and
Human Services by October 16, 2002; if no plan is filed,  the compliance date is
October 16,  2002.  Compliance  with the final rules  concerning  the privacy of
individually  protected  healthcare  information  is required by April 14, 2003.
Proposed  rules  that  include  standards  for  unique  health  identifiers  for
employers and healthcare providers, as well as standards related to the security
of individual health information and the use of electronic  signatures have been
published.

     We are  currently  evaluating  the effect of the  proposed  and final rules
published to date and have  developed a task force to address the  standards set
forth in these rules and their effect on our  business.  Given the fact that not
all of the standards have been issued in final form, we cannot  estimate at this
time the cost of compliance.

                                       13

<PAGE>

     Fraud and Abuse.  Various  federal  laws  prohibit  the knowing and willful
submission of false or fraudulent  claims,  including  claims to obtain  payment
under Medicare,  Medicaid and other government healthcare programs.  The federal
anti-kickback statute also prohibits individuals and entities from knowingly and
willfully  paying,  offering,  receiving or soliciting money or anything else of
value in order to  induce  the  referral  of  patients  or to induce a person to
purchase,  lease,  order,  arrange for or recommend services or goods covered by
Medicare,  Medicaid, or other government healthcare programs.  The anti-kickback
statute  is  extremely  broad and  potentially  covers  many  standard  business
arrangements.  Violations can lead to significant  criminal and civil penalties,
including fines of up to $25,000 per violation,  civil monetary  penalties of up
to $50,000  per  violation,  assessments  of up to three times the amount of the
prohibited  remuneration,  imprisonment,  or  exclusion  from  participation  in
Medicare,  Medicaid, and other government healthcare programs. The Office of the
Inspector  General  of the U.S.  Department  of Health  and Human  Services  has
published  regulations  which  identify a limited  number of  specific  business
practices  which  fall  within  safe  harbors  guaranteed  not  to  violate  the
anti-kickback  statute. While many of our business relationships fall outside of
the published  safe harbors,  conformity  with the safe harbors is not mandatory
and failure to meet all of the  requirements  of an applicable  safe harbor does
not by itself make conduct illegal.

     A number of states have in place statutes and regulations that prohibit the
same general types of conduct as that  prohibited by the federal laws  described
above.  Some states'  antifraud and  anti-kickback  laws apply only to goods and
services covered by Medicaid.  Other states'  antifraud and  anti-kickback  laws
apply to all healthcare goods and services,  regardless of whether the source of
payment is governmental or private.

     In recent years,  federal and state government  agencies have increased the
level  of  enforcement  resources  and  activities  targeted  at the  healthcare
industry.  In  addition,  federal law allows  individuals  to bring  lawsuits on
behalf  of the  government  in what  are  known  as qui  tam or  "whistleblower"
actions,  alleging false or fraudulent  Medicare or Medicaid  claims and certain
other  violations of federal law. The use of these private  enforcement  actions
against   healthcare   providers  and  their  business  partners  has  increased
dramatically  in the recent past,  in part,  because the  individual  filing the
initial  complaint  is  entitled  to share in a  portion  of any  settlement  or
judgment.

     We endeavor to conduct our  operations  in compliance  with the  applicable
fraud and abuse  statutes  and to stay  informed as to evolving  regulatory  and
judicial interpretations of these broad and complex laws. Should we identify any
of our  practices  as being  contrary  to these laws,  we will take  appropriate
action to address the matter, including, when appropriate,  making disclosure to
the proper authorities.

     Anti-Referral  Laws.  The federal Stark law generally  provides  that, if a
physician  or a  member  of a  physician's  immediate  family  has  a  financial
relationship with a healthcare  entity,  the physician may not make referrals to
that entity for the  furnishing  of  designated  health  services  covered under
Medicare,  Medicaid,  or other  government  healthcare  programs,  unless one of
several specific exceptions applies.  For purposes of the Stark law, a financial
relationship  with a  healthcare  entity  includes an  ownership  or  investment
interest  in that  entity  or a  compensation  relationship  with  that  entity.
Designated  health services include physical and occupational  therapy services,
durable medical  equipment,  home health services,  and inpatient and outpatient
hospital services.  The Stark law has limited impact on our current  operations;
however,  as we expand our outpatient  division's business into new venues, such
as physician  offices,  our  physician  clients must  consider the impact of the
Stark law on their practice.  On January 4, 2001, U.S.  Centers for Medicare and
Medicaid  Services  published  the  first  phase of a set of  final  regulations
interpreting  the  Stark  law.  The  effective  date of  these  regulations  was
January 4, 2002.

     The federal  government will make no payment for designated health services
provided in violation of the Stark law. In addition, sanctions for violating the
Stark law include  civil  monetary  penalties  of up to $15,000  per  prohibited
service  provided and exclusion  from any federal,  state,  or other  government
healthcare programs.  There are no criminal penalties for violation of the Stark
law.

                                       14

<PAGE>

     A number of states have in place statutes and regulations that prohibit the
same  general  types of  conduct as that  prohibited  by the  federal  Stark law
described  above.  Some  states'  Stark laws  apply  only to goods and  services
covered by  Medicaid.  Other  states'  Stark  laws  apply to certain  designated
healthcare  goods and  services,  regardless of whether the source of payment is
government or private.

     Corporate Compliance Program. In recognition of the importance of achieving
and  maintaining  regulatory   compliance,   we  have  established  a  corporate
compliance program that establishes  general standards of conduct and procedures
that promote compliance with business ethics, regulations, law and accreditation
standards.  We  have  established  compliance  standards  and  procedures  to be
followed by our employees that are  reasonably  capable of reducing the prospect
of criminal conduct, and have designed systems for the reporting and auditing of
potentially  criminal acts. A key element of our  compliance  program is ongoing
communication  and  training  of  employees  so  that it  becomes  a part of our
day-to-day business  operations.  A compliance committee consisting of our board
of  directors  has  been  established  to  oversee  implementation  and  ongoing
operations of our compliance  program, to enforce our compliance program through
appropriate  disciplinary mechanisms and to ensure that all reasonable steps are
taken to respond to an offense and to prevent further similar  offenses.  We are
not aware of the  existence of any current  activities on the part of any of our
employees  that  would  not be  materially  in  compliance  with our  compliance
program.

Competition

     Our healthcare  staffing business competes in national,  regional and local
markets with  full-service  staffing  companies  and with  specialized  staffing
agencies.  We believe our strategic  advantages in this line of business include
our ability to match  qualified  employees  to specific  job  requirements,  our
ability to provide  qualified  employees  in a timely  manner,  the price of our
services,  monitoring of the job  performance of our employees and the diversity
of our staffing solutions.

     Our therapy program management business has no direct competitors  offering
all of the same program services, although other companies may offer one or more
of the same services.  Our therapy  program  management  business  competes with
hospitals and long-term care  facilities  that do not choose to outsource  their
acute rehabilitation and skilled nursing units,  outpatient therapy programs and
contract  therapy  programs.  The  fundamental  challenge in our therapy program
management business is convincing our potential clients, primarily hospitals and
long-term  care  facilities,  that we can provide  rehabilitation  services more
efficiently  than  they can  themselves.  The  inpatient  units  and  outpatient
programs  that we manage  are in highly  competitive  markets  and  compete  for
patients with other hospitals and long-term care  facilities,  as well as public
companies.  Among our principal  competitive  advantages  are our reputation for
quality,   cost  effectiveness,   a  proprietary   outcomes  management  system,
innovation and price.

     We rely significantly on our ability to attract, develop and retain nurses,
therapists  and other  healthcare  personnel who possess the skills,  experience
and, as required,  licensure necessary to meet the specified requirements of our
healthcare  staffing  clients,  as well as our own needs in our therapy  program
management  business.  We compete for healthcare staffing  personnel,  including
nurses and therapists,  with other temporary  healthcare staffing companies,  as
well as actual and potential  clients,  some of whom seek to fill positions with
either regular or temporary employees.

Employees

     As  of  December  31,  2001,  we  had  approximately  5,700  employees  and
approximately  12,000 additional  travel and supplemental  staff employed by our
staffing  division.  The physicians  who are the medical  directors of our acute
rehabilitation units are independent  contractors and not our employees.  Nurses
and  therapists  in our  temporary  healthcare  staffing  business may be on our
payroll  or the  client's  payroll.  None  of our  employees  are  subject  to a
collective bargaining agreement. We consider our relationship with our employees
to be good.

                                       15

<PAGE>

ITEM 2.  PROPERTIES

     We currently lease 71,000 square feet of executive office space in Clayton,
Missouri  under a lease that  expires in the year 2012,  assuming all options to
renew are  exercised.  In  addition  to the  monthly  rental  cost,  we are also
responsible  for  specified  increases in  operating  costs.  In  addition,  our
subsidiaries lease 10,000 square feet in Salt Lake City, Utah under a lease that
expires in 2011,  21,000  square  feet of  executive  office  space in  Andover,
Massachusetts  under a lease that expires in the year 2010, 8,000 square feet of
executive office space in Clearwater, Florida under a lease that expires in 2007
and 10,000  square feet of executive  office space in Phoenix,  Arizona  under a
lease that expires in 2003, each assuming all options to renew are exercised. We
also lease 112  store-front  locations  that serve as the branch offices for the
supplemental staffing operations of our StarMed Staffing Group.

ITEM 3.  LEGAL PROCEEDINGS

     We are subject to various  claims and legal actions in the ordinary  course
of business. These matters include, without limitation,  professional liability,
employee-related  matters  and  inquiries  and  investigations  by  governmental
agencies relating to Medicare or Medicaid reimbursement and other issues.

     We have recently reached an agreement with the United States  Department of
Labor under which we will conduct a self-audit  of the  overtime  practices  for
temporary employees of our staffing division for the period from January 1, 1998
to October 26, 2001.  In order to implement  the  agreement,  the  Department of
Labor recently filed suit against us and certain of our  subsidiaries in federal
court in St.  Louis,  Missouri  and a  pre-negotiated  order was approved by the
court on November 2, 2001.  Pursuant to the order, we have commenced the process
of  determining  whether  any present or former  temporary  employee is owed any
additional  overtime wages that had not previously been paid. The suit serves to
bar multiple  future suits on the overtime wage issue by the persons  covered by
the order. In the fourth quarter of 2001, we reported a non-recurring  charge of
approximately  $6 million  relating  to costs  associated  with  these  overtime
payments,  including the associated costs of the audit.  While we believe the $6
million  will be adequate to cover these  payments  and costs,  the actual total
expenses incurred in this matter may be higher or lower.

     In  addition,  our  clients  may become  subject  to  claims,  governmental
inquiries  and  investigations  and legal actions to which we may become a party
relating to services  provided  by us.  From time to time and  depending  on the
particular  facts  and  circumstances,  we may  be  subject  to  indemnification
obligations  under our contracts with our clients relating to these matters.  We
have recently received a formal demand for  indemnification by the current owner
of a client facility for  liabilities,  including  attorneys' fees and expenses,
arising  out of a recent  assessment  of  liability  communicated  by the United
States  Department  of  Justice  to our  client  for  settlement  purposes.  The
Department's  claim is the  result  of its  investigation  of  alleged  improper
billing   practices  under  the  Medicare   program  relating  to  an  inpatient
rehabilitation  unit that we manage at the client  facility.  We have denied any
liability under the  indemnification  provisions of our contract with the client
facility  based upon our belief  that the  alleged  inaccuracies  in the billing
process  for  Medicare  patients  were not the  result of any of our  actions or
omissions in operating the rehabilitation  unit. At no time were we responsible,
either contractually or otherwise,  for the client facility's cost reporting for
Medicare patients,  nor do we believe that any of the clinical  information that
we provided to the client facility formed the basis for the allegedly inaccurate
cost reporting.  We are not a party to the Department of Justice's claim against
the client facility and we have declined our client's offer to be a party to the
settlement  discussions  based upon our belief  that we have no  indemnification
liability on this claim.

                                       16

<PAGE>

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

      Not applicable.
                                     PART II

ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
         STOCKHOLDER MATTERS

     Information  concerning  our Common  Stock is  included  under the  heading
"Stock Data" in our Annual Report to  Stockholders  for the year ended  December
31, 2001 and is incorporated herein by reference.


ITEM 6.  SELECTED FINANCIAL DATA

     Our  Six-Year  Financial  Summary  is  included  in our  Annual  Report  to
Stockholders for the year ended December 31, 2001 and is incorporated  herein by
reference.


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

Overview

     We provide  temporary  healthcare  staffing and therapy program  management
services for hospitals and long-term care facilities. We derive our revenue from
two  business  segments:  temporary  healthcare  staffing  and  therapy  program
management.  Our therapy program  management segment includes inpatient programs
(including acute  rehabilitation and skilled nursing units),  outpatient therapy
programs  and  contract  therapy  programs.  Summarized  information  about  our
revenues and earnings from operations in each segment is provided below.

                                       17

<PAGE>
<TABLE>
<CAPTION>
                                                Year Ended December 31,
                                                -----------------------
                                            2001        2000       1999
                                            ----        ----       ----
                                                   (in thousands)
<S>                                       <C>         <C>        <C>
Revenues from Unaffiliated Customers:
   Healthcare staffing..................  $304,574    $260,100   $148,180
   Therapy program management:
     Inpatient..........................   123,276     119,963    116,497
     Contract therapy...................    64,661      29,979     14,071
     Outpatient.........................    49,754      42,332     30,677
                                          --------    --------   --------
     Therapy program management total...   237,691     192,274    161,245
                                          --------    --------   --------
      Total.............................  $542,265    $452,374   $309,425
                                          ========    ========   ========

Operating Earnings (Loss): (1)
   Healthcare staffing..................  $    (65)(2)$ 12,011     $5,228
   Therapy program management:
     Inpatient..........................    24,081      21,815     18,123
     Contract therapy...................     6,773       3,331        333
     Outpatient.........................     6,178       7,032      6,238
                                          --------    --------   --------
     Therapy program management total...    37,032      32,178     24,694
                                          --------    --------   --------
      Total.............................  $ 36,967    $ 44,189   $ 29,922
                                          ========    ========   ========

(1)  Operating  earnings  for prior  years have been  adjusted  to  reflect  the
     corporate  expense  allocation  methodology  utilized in 2001.
(2)  Includes $9.0 million in non-recurring charges.
</TABLE>

Revenues

     We derive  substantially  all of our  revenues  from fees paid  directly by
healthcare  providers rather than through payment or reimbursement by government
or other third-party  payors.  Our inpatient and outpatient therapy programs are
typically  provided  through  agreements  with  hospital  clients  with three to
five-year terms. Our contract therapy and temporary healthcare staffing services
are typically provided under interim or short-term agreements with hospitals and
long-term care facilities.

     Our  healthcare  staffing  revenues and earnings are impacted by changes in
the level of  occupancy at  hospitals  where we provide our  staffing  services.
During  the  first  and  fourth  quarters  of  each  year,  hospitals  generally
experience  an increase in the number of  patients,  resulting in an increase in
the demand for our temporary healthcare staffing services and an increase in our
revenues and earnings in this line of business. Hospitals generally experience a
decrease  in the  number of  patients  during  the  second  and third  quarters,
resulting in a decrease in our revenues and earnings for our healthcare staffing
services line.

     As  a  provider  of  temporary  healthcare  staffing  and  therapy  program
management  services,  our  revenues  and  growth  are  affected  by trends  and
developments in healthcare spending. Over the last three years, our revenues and
earnings  from our therapy  program  management  services  have been  negatively
impacted  by an  aggregate  decline in  average  billable  lengths of stay.  The
decline in average  billable  lengths of stay  reflects the  continued  trend of
reduced rehabilitation lengths of stay.

     Material  changes in the rates or methods of government  reimbursements  to
our clients for services  rendered in the programs that we manage could give our
clients the right to  renegotiate  their  existing  contracts with us to include
terms that are less favorable to us. For example,  outpatient  therapy  programs
receive  payment from the Medicare  program under a fee schedule.  Under current
law,  an   outpatient   therapy   program  that  is  not   designated  as  being
provider-based  is subject to an annual limit on payments  for therapy  services
provided to Medicare  beneficiaries.  See  discussion  under "Item 1. Business -
Government  Regulation -  Provider-Based  Rules."  However,  application of this
limit is subject to a moratorium through December 31, 2002. The Secretary of the
U.S. Department of Health and Human Services is required to review reimbursement
claims for outpatient  therapy services while the moratorium is in effect and to
make a proposal to Congress to revise the payment system for outpatient  therapy
services.  Any changes  adopted by Congress,  which could include reduced annual
limits or a new payment  system,  could have an adverse effect on the outpatient
therapy program business.

                                       18

<PAGE>

     In addition,  changes in the rates or methods of government  reimbursements
could negatively impact the benefits that we are able to provide to our clients.
The  enactment  of  the  Balanced  Budget  Act  of  1997,  which  established  a
prospective   payment   system  for  skilled   nursing   facilities  and  units,
significantly reduced the demand for therapists generally,  which had a negative
impact on our healthcare staffing business. It also resulted in reduction of the
per diem billing rates we were able to negotiate with the skilled  nursing units
that we manage. We believe the recently  released rates and other  reimbursement
regulations with respect to the  implementation of a prospective  payment system
for acute  rehabilitation  services  will be favorable  for many of our clients.
However,  we are unable to predict with  certainty  the impact of the changes at
this time,  and we may  experience  a decline in our revenue  and  earnings as a
result of the prospective  payment system or from any other changes in the rates
or methods of government reimbursements.

Acquisitions

     During  1999 and  2000,  we  completed  a  number  of  acquisitions.  These
acquisitions  are summarized in the table below.  Each of the  acquisitions  has
been accounted for by the purchase  method of  accounting,  which means that the
operating  results  of the  acquired  entity  are  included  in our  results  of
operations commencing on the date of acquisition of each entity.

     We have amortized the goodwill for each of our acquisitions,  the excess of
the cost of the acquisition over the book value of the net assets acquired, on a
straight-line  basis over 25 to 40 years  through  the year ended  December  31,
2001. As of January 1, 2001 the goodwill amortization periods were changed to 25
years on the  acquisitions  of  Physical  Therapy  Resources,  Inc.;  TeamRehab,
Inc./Moore Rehabilitation Services, Inc.; Rehab Unlimited,  Inc./Cimarron Health
Care, Inc.;  Rehabilitative Care Systems of America,  Inc.; Therapeutic Systems,
Inc.;  Salt  Lake  Physical  Therapy  Associates,   Inc.;  AllStaff,  Inc.;  and
DiversiCare  Rehab  Services,  Inc.  This  change  resulted  in a net  after-tax
increase  of  approximately  $0.5  million in the annual  goodwill  amortization
associated  with these  acquisitions  and a decrease in diluted net earnings per
share of  approximately  $0.03 for the year ended December 31, 2001. We retained
40-year  amortization  periods for the  acquisitions of Advanced  Rehabilitation
Resources,  Inc.; Healthcare Staffing Solutions,  Inc.; StarMed Staffing,  Inc.;
and eai Healthcare Staffing Solutions, Inc., which had businesses that were more
national  in scope.  As of January 1, 2002,  we adopted  the  provisions  of the
Financial  Accounting  Standards Board (FASB) Statement of Financial  Accounting
Standards (Statement) No. 142, "Goodwill and Other Intangible Assets." Statement
No. 142 requires that all acquisitions consummated after January 1, 2002 will no
longer be amortized,  but instead  tested for  impairment  at least  annually in
accordance  with the  provisions  of Statement  No. 142. See further  discussion
below under the heading "Effect of Recent Accounting Pronouncements".

                                       19

<PAGE>
<TABLE>
<CAPTION>
      Company             Date            Description         Consideration(1)
      -------             ----            -----------         ----------------
<S>                  <C>                <C>                   <C>
1999
----

Salt Lake Physical   May 20, 1999       Outpatient therapy
Therapy Associates,                     programs                   Aggregate
Inc.                                                                  of
                                                                     $17.3
AllStaff, Inc.       June 30, 1999      Temporary healthcare        million
                                        staffing (nurses and        in cash,
                                        nurse assistants)            notes
                                                                      and
eai Healthcare       December 20, 1999  Temporary healthcare         stock
Staffing Solutions,                     staffing (allied
Inc.                                    healthcare personnel)

2000
----

DiversiCare Rehab    September 15, 2000 Outpatient therapy    Aggregate of $8.5
Services, Inc.                          programs              million in cash
                                                              and notes

(1)  Amounts   include   contingent   payments  made  in  connection   with  the
     acquisitions listed.
</TABLE>
Results of Operations

     The following  table sets forth the  percentage  that selected items in the
consolidated  statements  of earnings  bear to operating  revenues for the years
ended December31, 2001, 2000 and 1999 and on an as adjusted basis for 2001:
<TABLE>
<CAPTION>
                                                Year Ended December 31,
                                                -----------------------
                                             2001                2000    1999
                                      ---------------------      ----    ----
                                      Actual   As adjusted (1)
                                      ------   --------------
<S>                                   <C>        <C>            <C>     <C>
Operating revenues..................  100.0%     100.0%         100.0%  100.0%
Cost and expenses:
   Operating .......................   72.8       71.8           71.0    71.7
   General and administrative.......   18.6       17.9           17.7    16.9
   Depreciation and amortization....    1.8        1.8            1.5     1.7
                                        ---        ---            ---     ---
Operating earnings..................    6.8        8.5            9.8     9.7
Other expense, net..................    (.4)       (.3)          (1.2)   (1.6)
                                        ---        ---            ---     ---
Earnings before income taxes........    6.4        8.2            8.6     8.1
Income taxes........................    2.5        3.3            3.4     3.2
                                        ---        ---            ---     ---
Net earnings........................    3.9%       4.9%           5.2%    4.9%

     (1) Excludes $9.0 million non-recurring charges and $0.5 million write-down
of an investment.  The $9.0 million of  non-recurring  charges  consists of $5.1
million in operating  expenses  and $3.9  million in general and  administrative
expenses.  The $0.5 million  write-down  of an investment is excluded from other
expense.
</TABLE>

                                       20

<PAGE>

Twelve Months Ended  December 31, 2001 Compared to Twelve Months Ended  December
31, 2000

     Revenues

     Operating revenues in 2001 increased by $89.9 million,  or 19.9%, to $542.3
million  as  compared  to $452.4  million in  operating  revenues  in 2000.  The
September 2000  acquisition of DiversiCare  Rehab Services,  Inc.  (DiversiCare)
accounted for 6.1% of the net increase.

     Staffing  revenue  increased by 17.1% from $260.1 million in 2000 to $304.6
million in 2001,  reflecting  a 4.4%  increase in weeks  worked from  223,951 to
233,898 and a 12.1%  increase in average  revenue per week worked from $1,161 to
$1,302.

     Inpatient  program revenue increased by 2.8% from $120.0 million in 2000 to
$123.3  million in 2001.  A 1.0%  increase  in the average  number of  inpatient
programs  managed from 135.8 to 137.2,  and a 2.8% increase in the average daily
billable  census per  inpatient  program  from 14.4 to 14.8  resulted  in a 3.3%
increase  in  billable  days to 740,938.  The  increase  in billable  census per
program for inpatient  programs is primarily  attributable to a 5.7% increase in
average  admissions per program from 373.0 to 394.3 offset by a 3.5% decrease in
the average length of stay to 13.7 days. The increase in patient days was offset
by a 0.4% decrease in the average per diem billing rates.

     Contract therapy revenue  increased by 115.7% from $30.0 million in 2000 to
$64.7  million in 2001,  reflecting  a 60.1%  increase in the average  number of
contract therapy  locations managed from 156.0 to 249.8, and a 34.8% increase in
revenue per  location.  The increase in revenue per  location is  primarily  the
result of opening larger, more efficient programs.

     Outpatient  revenue  increased by 17.5% from $42.3 million in 2000 to $49.8
million in 2001, reflecting $5.5 million from the September 15, 2000 acquisition
of DiversiCare, an increase in the average number of outpatient programs managed
from 53.1 to 61.5 (including a net increase of 7.7 from DiversiCare) and an 8.1%
increase in units of service per program.

     Operating Earnings

     Consolidated  operating  earnings  decreased by 16.3% from $44.2 million in
2000 to $37.0 million in 2001,  due  primarily to $9.0 million of  non-recurring
charges related to our staffing division recorded in the fourth quarter of 2001.
These  non-recurring  charges  consisted of approximately  $6.0 million in costs
associated with correcting  overtime  payments for the period January 1, 1998 to
October 26, 2001 and $3.0 million  related to  severance  and  technology  costs
associated with the  reorganization of certain  functions and processes.  Of the
$9.0 million  non-recurring  charges,  $5.1 million was recorded as an operating
expense,  while the remaining $3.9 million represents general and administrative
expenses.  Excluding these non-recurring  charges,  operating earnings increased
4.0% to $45.9 million. Depreciation and amortization as a percentage of revenues
increased  from  1.5% in 2000 to 1.8%  in  2001 as a  result  of the  change  in
goodwill amortization from 40 years to 25 years on certain regional acquisitions
plus depreciation  expense recorded on $10.6 million of capital  expenditures in
2001. The additional  amortization expense recorded as a result of the change in
goodwill   amortization  lives  was  approximately  $0.7  million  pre-tax.  The
following discussion by division includes the effect of adjusting 2000 operating
earnings to reflect  the current  overhead  allocation  methodology  utilized in
2001.

                                       21

<PAGE>

     Operating earnings in the staffing division decreased by $12.1 million from
$12.0  million  in  2000  to  a  $0.1  million  loss  in  2001,   including  the
aforementioned   $9.0   million  of   non-recurring   charges.   Excluding   the
non-recurring  charges,  operating  earnings  decreased  by $3.1 million to $8.9
million  in  2001,  reflecting  significant  expenses  associated  with  systems
training and a move toward consolidation of the division's branch administrative
functions.  As a result,  general and  administrative  expenses,  excluding  the
non-recurring  charges, as a percentage of revenues increased by 1.0%. Operating
costs  excluding  the  non-recurring  charges  increased  by 0.7% in 2001 due to
increased  salary  related costs.  Depreciation  and  amortization  expense as a
percentage of revenue was comparable for the two periods compared.

     Inpatient  operating earnings increased 10.4% from $21.8 million in 2000 to
$24.1 million in 2001,  reflecting a 3.3%  increase in billable  patient days, a
0.1% increase in gross margin and a 2.0% reduction in general and administrative
costs as a percentage of revenue.  Depreciation and amortization as a percentage
of revenues increased from 2.4% in 2000 to 3.0% in 2001, reflecting current year
depreciation expense on capital expenditures.

     Contract therapy operating  earnings  increased 103.3% from $3.3 million in
2000 to $6.8  million  in  2001,  reflecting  a  115.7%  increase  in  operating
revenues,  offset by a slight  decrease in gross margin as a result of increased
labor costs.  General and  administrative  expenses as a percentage  of revenues
were comparable for the two periods.  Depreciation and amortization expense as a
percentage of revenues  increased from 1.3% in 2000 to 1.7% in 2001,  reflecting
an additional $0.3 million of amortization expense associated with the change in
amortization lives on certain prior acquisitions, plus current year depreciation
expense recorded on capital expenditures.

     Outpatient  operating earnings decreased 12.1% from $7.0 million in 2000 to
$6.2 million in 2001  reflecting a 0.7%  decrease in gross margin as a result of
increased labor expenses and an increase in general and administrative  expenses
as a percentage of revenues from 9.7% in 2000 to 12.1% in 2001. Depreciation and
amortization  expense as a percentage of revenues increased from 1.9% in 2000 to
3.1% in 2001,  reflecting  additional  amortization  expense associated with the
September 15, 2000  acquisition of  DiversiCare,  plus  additional  amortization
expense  recorded in the current year as a result of the change in  amortization
lives on  certain  prior  acquisition  and  current  year  depreciation  expense
recorded on capital expenditures.

     Non-operating Items

     Interest  income  increased by $0.2 million or 65.9% to $0.4 million due to
increased cash balances.

     Interest  expense  decreased  by $3.5  million or 65.2% to $1.9  million in
2001,  primarily  reflecting the repayment of $49.4 million in debt from the net
proceeds  of the sale of  common  stock in a March  2001  publicly  underwritten
equity  offering and the  repayment of $18.9 million of debt as a result of cash
generated from operations.

     Other expense in 2001  primarily  reflects a $0.5 million  write-down of an
investment.

     Earnings  before income  taxes,  including  the  non-recurring  charges and
write-down  of an  investment,  decreased by $4.1  million,  or 10.6% from $39.1
million in 2000 to $35.0 million in 2001. The provision for income taxes in 2001
was $13.9 million compared to $15.6 million in 2000, reflecting effective income
tax rates of 39.8% for each period.  Net earnings,  including the  non-recurring
charges and write-down of an investment, decreased by $2.5 million, or 10.6%, to
$21.0 million from $23.5 million in 2000.  Diluted  earnings per share including
the  non-recurring  charges,  decreased  by 20.0% from $1.45 in 2000 to $1.16 in
2001 on an  11.1%  increase  in the  weighted-average  shares  outstanding.  The
increase in weighted-average shares outstanding is attributable primarily to the
March 2001 publicly  underwritten  equity offering,  and stock option grants and
exercises.

     Diluted  earnings per share  excluding  the $9.0  million in  non-recurring
charges and the $0.5 million  write-down  of an investment  increased  2.1% from
$1.45 in 2000 to $1.48 in 2001.

                                       22

<PAGE>

Twelve Months Ended  December 31, 2000 Compared to Twelve Months Ended  December
31, 1999

     Revenues

     Operating revenues in 2000 increased by $143.0 million, or 46.2%, to $452.4
million  as  compared  to  $309.4   million  in  operating   revenues  in  1999.
Acquisitions  accounted for 19.9% of the net increase.  Excluding the effects of
acquisitions, increases in inpatient, outpatient, contract therapy, nurse travel
and supplemental  staffing revenues were offset by a decline in therapist travel
staffing revenues and a decrease in the number of skilled nursing units.

     Staffing  revenue  increased by 75.5% from $148.2 million in 1999 to $260.1
million in 2000  reflecting  $3.2 million from the June 30, 1999  acquisition of
AllStaff,  Inc.,  $21.5  million from the December 20, 1999  acquisition  of eai
Healthcare Staffing Solutions, Inc. and a 50.7% increase in weeks worked in 2000
at existing and newly opened  travel and  supplemental  staffing  branches  from
126,816 to 191,076.  Total weeks worked  attributable  to the 1999  acquisitions
were 32,875.

     Inpatient  program revenue increased by 3.0% from $116.5 million in 1999 to
$120.0  million in 2000.  A 3.0%  increase  in the average  number of  inpatient
programs  managed  from 131.8 to 135.8,  plus the  additional  revenue  from one
additional day in February 2000,  offset by a 0.7% decrease in the average daily
billable  census  per  inpatient  program  from  14.5 in  1999 to 14.4 in  2000,
resulted in a 2.8% increase in billable patient days to 716,993. The decrease in
billable census per program for inpatient programs is primarily  attributable to
a 0.7%  decrease  in average  billable  length of stay from 14.3 days in 1999 to
14.2 days in 2000.

     Contract therapy revenue  increased by 113.1% from $14.1 million in 1999 to
$30.0  million in 2000  reflecting  a 71.8%  increase in the  average  number of
contract  therapy  locations  managed from 90.8 to 156.0 and a 24.0% increase in
revenue per location.

     Outpatient  revenue  increased by 38.0% from $30.7 million in 1999 to $42.3
million in 2000  reflecting  $1.4 million from the May 20, 1999  acquisition  of
Salt Lake Physical Therapy Associates, Inc., $2.3 million from the September 15,
2000 acquisition of DiversiCare Rehab Services, Inc., an increase in the average
number of outpatient  programs managed from 40.0 to 53.1 and a 14.0% increase in
units of service per program.

     Operating Earnings

     Consolidated  operating  earnings  increased by 47.7% from $29.9 million in
1999 to $44.2  million  in 2000.  Acquisitions  accounted  for  17.8% of the net
increase.

     Operating  earnings in the  staffing  division  increased  129.7% from $5.2
million in 1999 to $12.0  million in 2000.  The 1999  acquisitions  of Allstaff,
Inc. and eai Healthcare Staffing Solutions,  Inc. accounted for 26.1% of the net
increase. The remaining increase is attributable to the increase in weeks worked
at existing branch offices combined with a 2.1% decrease in operating costs as a
percentage of revenues.  General and administrative  expenses as a percentage of
revenues  increased  by 1.2% due to the  expansion  of  systems  and  additional
support staff added to support the growth. Depreciation and amortization expense
as a percentage of revenues was comparable for the respective periods

                                       23

<PAGE>

     Inpatient  operating earnings increased by 20.4% from $18.1 million in 1999
to $21.8 million in 2000,  reflecting a 2.8% increase in billable  patient days,
and a 3.1% increase in gross  margin.  General and  administrative  expenses and
depreciation  and  amortization   expense  as  a  percentage  of  revenues  were
comparable for the respective periods.

     Contract therapy operating earnings increased by $3.0 million from $333,000
in 1999 to $3.3  million in 2000,  reflecting  a 113.1%  increase  in  operating
revenues,  offset by a 2.2%  decrease in gross  margin as a result of  increased
labor  costs.   General  and   administrative   expenses  and  depreciation  and
amortization  expense  as a  percentage  of  revenues  decreased  8.2% and 1.4%,
respectively,  as  efficiencies  were  realized  as a result of the  increase in
revenues.

     Outpatient  operating earnings increased by 12.7% from $6.2 million in 1999
to $7.0 million in 2000.  The 1999  acquisition  of Salt Lake  Physical  Therapy
Associates,  Inc. and the 2000 acquisition of DiversiCare  Rehab Services,  Inc.
accounted for  substantially  all of the net increase,  as a slight  increase in
gross  profit  margin was offset by  increases  in  general  and  administrative
expenses and depreciation and amortization expense as a percentage of revenues.

     Non-operating Items

     Interest  expense  increased  29.1%, or $1.2 million,  from $4.1 million in
1999 to $5.3  million in 2000  reflecting  interest on  additional  debt funding
acquisitions,  borrowings under the revolving line of credit for working capital
purposes and an increase in interest rates.

Earnings  before income taxes increased by $14.1 million,  or 56.2%,  from $25.0
million in 1999 to $39.1  million in 2000.  The  provision  for income taxes for
2000 was $15.6 million  compared to $9.9 million in 1999,  reflecting  effective
income tax rates of 39.8% and 39.7% for these periods. Net earnings increased by
$8.4 million in 2000,  or 55.9%,  to $23.5  million from $15.1  million in 1999.
Diluted  earnings  per share  increased  by 40.8% to $1.45  from $1.03 on a 9.8%
increase in the weighted  average  shares and assumed  conversions  outstanding.
Excluding losses on the write-down of investments in 1999,  diluted net earnings
increased  34.3% from $1.08 in 1999 to $1.45 in 2000.  The  increase in weighted
average shares  outstanding is attributable  primarily to stock option exercises
and the  increase  in the  dilutive  effect of stock  options  as a result of an
increase in the average  market  price of our stock  relative to the  underlying
exercise prices of outstanding options.

Liquidity and Capital Resources

     As of  December  31,  2001,  we had  $19.6  million  in  cash  and  current
marketable  securities and a current ratio, the amount of current assets divided
by current liabilities,  of 2.7 to 1. Working capital increased by $13.3 million
to $77.5  million as of  December  31,  2001,  compared  to $64.2  million as of
December 31,  2000.  The  increase in working  capital is  primarily  due to the
capital  generated from operations,  the March 2001 sale of common stock and the
exercise of stock options.

     Net accounts  receivable were $91.4 million at December 31,  2001, compared
to $84.0 million at December 31, 2000. The number of days average net revenue in
net receivables was 63.8 at both December 31, 2001 and 2000.

                                       24

<PAGE>

     Our operating  cash flows  constitute  our primary  source of liquidity and
historically  have  been  sufficient  to  fund  our  working  capital,   capital
expenditures,  internal  business  expansion and debt service  requirements.  We
expect to meet our future working capital,  capital  expenditures,  internal and
external business expansion and debt service  requirements from a combination of
internal sources and outside financing.  We have a $125.0 million revolving line
of credit with no balance  outstanding as of December 31,  2001. During 2001, we
retired all  outstanding  balances on debt  obligations,  primarily from the net
proceeds of the sale of 1,455,000  shares of common stock in a March 2001 equity
sale of common stock and cash generated from operations.

     In  connection  with  the  development  and  implementation  of  additional
programs,  we may incur capital  expenditures  for equipment and deferred  costs
arising from advances  made to hospitals  for a portion of capital  improvements
needed to begin a program's operation.

Inflation

     Although  inflation has abated during the last several  years,  the rate of
inflation  in  healthcare   related  services   continues  to  exceed  the  rate
experienced  by the  economy  as a whole.  Our  management  contracts  typically
provide for an annual  increase  in the fees paid to us by our clients  based on
increases  in  various  inflation  indices.  These  increases  generally  offset
increases in costs incurred by us.

Effect of Recent Accounting Pronouncements

     In July 2001, the FASB issued Statement No. 141,  "Business  Combinations",
and Statement No. 142, "Goodwill and Other Intangible Assets". Statement No. 141
requires  that the  purchase  method  of  accounting  be used  for all  business
combinations  initiated  after June 30, 2001.  Statement  No. 142 requires  that
goodwill with indefinite useful lives no longer be amortized, but instead tested
for impairment at least annually in accordance  with the provisions of Statement
No. 142.

     The Company adopted the provisions of Statement No. 141 on July 1, 2001 and
the  provisions  of  Statement  No. 142 on January  1,  2002.  Furthermore,  any
goodwill and any intangible  assets determined to have an indefinite useful life
that are acquired in a purchase  business  combination  completed after June 30,
2001 will not be amortized,  but will continue to be evaluated for impairment in
accordance with the  appropriate  pre-Statement  No. 142 accounting  literature.
Goodwill  acquired  in  business  combinations  completed  before  July 1,  2001
continued to be amortized prior to the adoption of Statement No. 142.

     As of  the  date  of  adoption  of  Statement  No.  142,  the  Company  had
unamortized  goodwill in the amount of  approximately  $101.8 million,  which is
subject  to the  transition  provisions  of  Statements  No.  141 and  No.  142.
Amortization expense related to goodwill was approximately $3.6 million and $2.9
million  for  the  years  ended   December  31,  2001  and  December  31,  2000,
respectively.  Because of the  extensive  effort  needed to comply with adopting
Statements  No. 141 and No. 142, it is not  practicable  to reasonably  estimate
whether any transitional  impairment losses will be required to be recognized as
a cumulative effect of a change in accounting principle. We expect Statement No.
142 to result in the  elimination  of  amortization  of goodwill  from  previous
acquisitions in the amount of $3.6 million pre-tax in 2002.

     In October  2001,  the FASB issued  Statement No. 144  "Accounting  for the
Impairment or Disposal of Long-Lived Assets", which supersedes Statement No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of".  Statement No. 144 also supersedes the accounting and reporting
provisions of APB Opinion No. 30 "Reporting the Results of  Operations-Reporting
the Effects of Disposal of a Segment of a Business,  and Extraordinary,  Unusual
and  Infrequently  Occurring  Events  and  Transactions."  Statement  No. 144 is
intended to establish one accounting model for long-lived  assets to be disposed
of by sale and to address significant implementation issues. The Company adopted
Statement No. 144 on January 1, 2002. We do not expect Statement No. 144 to have
a material effect on the consolidated financial statements.

                                       25

<PAGE>

Critical Accounting Policies and Estimates

     The preparation of our consolidated financial statements in conformity with
accounting  principles  generally  accepted  in the  United  States  of  America
requires us to make estimates and assumptions  that affect the reported  amounts
of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial  statements  and the reported  amounts of revenues and
expenses during the reporting period.  Our estimates,  judgments and assumptions
are continually evaluated based on available information and experience. Because
of the use of estimates  inherent in the  financial  reporting  process,  actual
results could differ from those estimates.

     Certain of our accounting  policies require higher degrees of judgment than
others in their application. These include estimating the allowance for doubtful
accounts and impairment of goodwill and other  intangible  assets.  In addition,
Note 1 to the Consolidated  Financial  Statements includes further discussion of
our significant accounting policies.

     Management  believes the  following  critical  accounting  policies,  among
others,  affect  its  more  significant  judgments  and  estimates  used  in the
preparation of its consolidated financial statements.

     Allowance   for  Doubtful   Accounts.   We  must  make   estimates  of  the
uncollectability of our accounts receivable  balances.  We specifically  analyze
accounts with historical poor payment  history,  and customer  credit-worthiness
when  evaluating  the  adequacy of the  allowance  for  doubtful  accounts.  Our
accounts  receivable  balance was $91.4  million,  net of allowance for doubtful
accounts of $5.9 million as of December 31, 2001. If the financial condition of
our customers were to  deteriorate,  resulting in an impairment of their ability
to make payments, additional allowances may be required. We continually evaluate
the adequacy of our allowance for doubtful accounts.

     Goodwill and Other Intangibles. The cost of acquired companies is allocated
first  to their  identifiable  assets  based on  estimated  fair  values.  Costs
allocated  to  identifiable  intangible  assets  are  generally  amortized  on a
straight-line basis over the remaining estimated useful lives of the assets. The
excess  of the  purchase  price  over the  fair  value  of  identifiable  assets
acquired, net of liabilities assumed, is recorded as goodwill. Goodwill relating
to  acquisitions   consummated   prior  to  July  1,  2001  is  amortized  on  a
straight-line  basis over its estimated  useful life. The  amortization  periods
differ  depending  on whether  the  acquired  entity was  national in scope or a
regional provider. Goodwill related to the acquisition of a national provider is
amortized  over 40 years,  while  goodwill  related  to a regional  provider  is
amortized over 25 years.

     The Company annually evaluates the carrying amounts of goodwill, as well as
related amortization  periods, to determine whether adjustments to these amounts
or useful  lives are required  based on current  events and  circumstances.  The
evaluation  is based on the  Company's  projection  of the  undiscounted  future
operating cash flows of the acquired  operation over the remaining  useful lives
of the  related  goodwill.  To  the  extent  such  projections  indicate  future
undiscounted  cash flows are not  sufficient to recover the carrying  amounts of
related  goodwill,  the underlying assets are written down by charges to expense
so that the carrying amount is equal to the fair value of the asset.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      Not applicable.

                                       26

<PAGE>

ITEM 8A. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


Independent Auditors' Report                                      28

Consolidated Balance Sheets at December 31, 2001 and 2000         29

Consolidated Statement of Earnings for the years
      ended December 31, 2001, 2000 and 1999                      30

Consolidated Statement of Stockholders' Equity for the years
      ended December 31, 2001, 2000 and 1999                      31

Consolidated Statement of Cash Flows for the years
      ended December 31, 2001, 2000 and 1999                      32

Consolidated Statement of Comprehensive Earnings
      for the years ended December 31, 2001, 2000 and 1999        33

Notes to the Consolidated Financial Statements                    34


                                       27
<PAGE>

                          Independent Auditors' Report


The Board of Directors
RehabCare Group, Inc.:

     We have audited the accompanying  consolidated  balance sheets of RehabCare
Group,  Inc. and subsidiaries  (the "Company") as of December 31, 2001 and 2000,
and the related consolidated statements of earnings,  stockholders' equity, cash
flows and comprehensive  earnings for each of the years in the three-year period
ended  December  31,  2001.  These  consolidated  financial  statements  are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

     We conducted our audits in accordance  with  auditing  standards  generally
accepted in the United States of America.  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 consolidated  financial  statements  referred to above
present fairly, in all material  respects,  the financial  position of RehabCare
Group,  Inc. and  subsidiaries as of December 31, 2001 and 2000, and the results
of their operations and their cash flows for each of the years in the three-year
period  ended  December  31,  2001  in  conformity  with  accounting  principles
generally accepted in the United States of America.



/s/ KPMG LLP


St. Louis, Missouri
February 1, 2002

                                       28

<PAGE>

<TABLE>
                              REHABCARE GROUP, INC.
                           Consolidated Balance Sheets
                  (dollars in thousands, except per share data)

<CAPTION>
                                                              December 31,
                                                              ------------
                                Assets                       2001        2000
                                ------                       ----        ----
<S>                                                      <C>         <C>
Current assets:
    Cash and cash equivalents                             $18,534     $ 7,942
    Marketable securities, available-for-sale               1,025       3,025
    Accounts receivable, net of allowance for doubtful
       accounts of $5,902 and $5,347, respectively         91,384      84,033
    Income taxes receivable                                 2,055       3,672
    Deferred tax assets                                     7,658       4,872
    Prepaid expenses and other current assets               2,390       1,158
                                                          -------     -------
       Total current assets                               123,046     104,702
Marketable securities, trading                              2,870       2,383
Equipment and leasehold improvements, net                  18,373      12,427
Excess of cost over net assets acquired, net              101,785     104,782
Other                                                       4,587       4,799
                                                         --------    --------
       Total assets                                      $250,661    $229,093
                                                         ========    ========

                      Liabilities and Stockholders' Equity
Current liabilities:
    Current portion of long-term debt                    $      -    $  2,868
    Accounts payable                                        3,567       2,790
    Accrued salaries and wages                             27,141      24,846
    Accrued expenses                                       14,814      10,012
                                                           ------      ------
       Total current liabilities                           45,522      40,516
Deferred compensation and other long-term liabilities       3,043       2,679
Deferred tax liabilities                                    3,060       2,504
Long-term debt, less current portion                            -      65,434
                                                          -------     -------
       Total liabilities                                   51,625     111,133
                                                          -------     -------

Stockholders' equity:
    Preferred stock, $.10 par value; authorized
       10,000,000 shares, none issued and outstanding           -           -
    Common stock, $.01 par value; authorized 60,000,000
       shares, issued 19,631,789 shares and 17,409,584
       shares as of December 31, 2001 and 2000,
       respectively                                           196         174
    Additional paid-in capital                            109,522      49,503
    Retained earnings                                     107,057      86,022
    Less common stock held in treasury at cost,
       2,302,898 shares as of
       December 31, 2001 and 2000                         (17,757)    (17,757)
    Accumulated other comprehensive earnings                   18          18
                                                          --------    --------
       Total stockholders' equity                          199,036     117,960
                                                          --------    --------
                                                          $250,661    $229,093
                                                          ========    ========

See accompanying notes to consolidated financial statements.
</TABLE>
                                       29

<PAGE>
<TABLE>

                              REHABCARE GROUP, INC.
                       Consolidated Statements of Earnings
                      (in thousands, except per share data)
<CAPTION>
                                                    Year Ended December 31,
                                                    -----------------------
                                                  2001        2000        1999
                                                  ----        ----        ----
<S>                                           <C>         <C>         <C>
Operating revenues                            $542,265    $452,374    $309,425
Costs and expenses:
    Operating                                  394,651     321,192     221,892
    General and administrative                 101,085      80,120      52,315
    Depreciation and amortization                9,562       6,873       5,296
                                               -------     -------     -------
        Total costs and expenses               505,298     408,185     279,503
                                               -------     -------     -------
        Operating earnings                      36,967      44,189      29,922
Interest income                                    385         232         233
Interest expense                                (1,859)     (5,348)     (4,142)
Other income (expense), net                       (542)         24        (986)
                                              --------    --------    --------
        Earnings before income taxes            34,951      39,097      25,027
Income taxes                                    13,916      15,563       9,929
                                              --------    --------    --------
        Net earnings                          $ 21,035    $ 23,534    $ 15,098
                                              ========    ========    ========

Net earnings per common share:
    Basic                                     $   1.25    $   1.62    $   1.15
                                              ========    ========    ========
    Diluted                                   $   1.16    $   1.45    $   1.03
                                              ========    ========    ========


See accompanying notes to consolidated financial statements.

</TABLE>
                                       30

<PAGE>
<TABLE>

                              REHABCARE GROUP, INC.
                 Consolidated Statements of Stockholders' Equity
                                 (in thousands)

<CAPTION>

                                   Common Stock                                   Accumulated
                              ---------------------Additional                    other compre-   Total
                              Issued Treasury       paid-in  Retained   Treasury    hensive  stockholders'
                              shares  stock  Amount capital  earnings     stock    earnings     equity
<S>                           <C>     <C>     <C>   <C>     <C>       <C>         <C>         <C>
Balance, December 31, 1998    15,314  2,331   $153 $ 30,578  $47,390  $(17,975)     $ 10      $ 60,156

Net earnings                       -      -      -        -    15,098         -        -        15,098

Issuance of common stock in
  connection with acquisitions    96      -      1      840         -         -        -           841

Exercise of stock options
  (including tax benefit)        290      -      3    1,683         -         -        -         1,686

Change in unrealized gain on
  marketable securities,
  net of tax                       -      -      -        -         -         -        2             2
                              ------ ------ ------   ------    ------    ------  -------        ------

Balance, December 31, 1999    15,700  2,331    157   33,101    62,488   (17,975)      12        77,783

Net earnings                       -      -      -        -    23,534         -        -        23,534

Conversion of debt               847      -      8    5,992         -         -        -         6,000

Exercise of stock options
  (including tax benefit)        862    (28)     9   10,410         -       218        -        10,637

Change in unrealized gain on
  marketable securities,
  net of tax                       -      -      -        -         -         -        6             6
                                                                                       -             -
                              ------  -----  -----   ------    ------    ------   ------       -------
Balance, December 31, 2000    17,409  2,303    174   49,503    86,022   (17,757)      18       117,960

Net earnings                       -      -      -        -    21,035         -        -        21,035
Issuance of common stock
  in connection with secondary
  offering                     1,445      -     14   49,429         -         -        -        49,443

Exercise of stock options
  (including tax benefit)        777      -      8   10,590         -         -        -        10,598
                              ------  -----  -----   ------   -------    ------   ------       -------
Balance, December 31, 2001    19,631  2,303  $ 196 $109,522  $107,057  $(17,757)    $ 18      $199,036
                              ======  =====  =====  =======   =======   =======   ======       =======


See accompanying notes to consolidated financial statements.
</TABLE>

                                       31

<PAGE>
<TABLE>

                              REHABCARE GROUP, INC.
                      Consolidated Statements of Cash Flows
                                 (in thousands)
<CAPTION>
                                                             Year Ended December 31,
                                                             -----------------------
                                                            2001       2000      1999
                                                            ----       ----      ----
 <S>                                                      <C>        <C>       <C>
 Cash flows from operating activities:
   Net earnings                                           $21,035    $23,534   $15,098
   Adjustments to reconcile net earnings to net cash
     provided by operating activities:
      Depreciation and amortization                         9,562      6,873     5,296
      Provision for doubtful accounts                       4,594      3,466     2,743
      Write-down of investments                               500          -     1,009
      Income tax benefit realized on employee stock
        option exercises                                    6,386      5,505       630
      Change in assets and liabilities:
         Deferred compensation                                364        178       598
         Accounts receivable, net                         (11,945)   (20,249)  (18,703)
         Prepaid expenses and other current assets         (1,232)       (70)       (3)
         Other assets                                        (235)      (955)      (88)
         Accounts payable and accrued expenses              5,579     (3,458)    3,630
         Accrued salaries and wages                         2,295      7,511     1,507
         Income taxes                                        (613)    (6,197)     (386)
                                                           ------     ------   -------
               Net cash provided by operating activities   36,290     16,138    11,331
                                                           ------     ------   -------

 Cash flows from investing activities:
   Additions to equipment and leasehold improvements, net (10,613)    (7,899)   (3,002)
   Purchase of marketable securities                         (922)      (778)     (671)
   Proceeds from sale/maturities of marketable securities   2,435        166       134
   Cash paid in acquisition of businesses, net of cash
   received                                                     -     (8,949)  (16,273)
   Other, net                                              (1,951)    (1,513)     (913)
                                                          -------    -------   -------
               Net cash used in investing activities      (11,051)   (18,973)  (20,725)
                                                          -------    -------   -------

 Cash flows from financing activities:
   Proceeds from (repayments on) revolving credit
   facility, net                                         (63,800)     51,800    12,000
   Repayments on long-term debt                           (4,502)    (47,893)  (12,740)
   Proceeds from issuance of notes payable                     -       1,000     4,150
   Proceeds from sale of common stock, net                49,443           -         -
   Exercise of stock options                               4,212       5,132     1,056
                                                         -------      ------   -------
               Net cash provided by (used in) financing
               activities                                (14,647)     10,039     4,466
                                                         -------     -------   -------
               Net increase (decrease) in cash and cash
                    equivalents                           10,592       7,204    (4,928)
 Cash and cash equivalents at beginning of year            7,942         738     5,666
                                                         -------     -------   -------
 Cash and cash equivalents at end of year                $18,534     $ 7,942    $  738
                                                         =======     =======   =======

 See accompanying notes to consolidated financial statements.
</TABLE>

                                       32

<PAGE>
<TABLE>

                                    REHABCARE GROUP, INC.
                      Consolidated Statements of Comprehensive Earnings
                                       (in thousands)
<CAPTION>
                                                         Year Ended December 31,
                                                         -----------------------
                                                         2001     2000     1999
                                                         ----     ----     ----

 <S>                                                   <C>      <C>      <C>
 Net earnings                                          $21,035  $23,534  $15,098

 Other comprehensive earnings, net of tax -
   Unrealized gains on securities:

      Unrealized holding gains arising
         during period                                      -        6        2
                                                       ------  -------  -------

 Comprehensive earnings                               $21,035  $23,540  $15,100
                                                      =======  =======  =======

 See accompanying notes to consolidated financial statements.
</TABLE>

                                       33

<PAGE>

                              REHABCARE GROUP, INC.
                   Notes to Consolidated Financial Statements
                        December 31, 2001, 2000 and 1999


(1)  Overview of Company and Summary of Significant Accounting Policies

     Overview of Company

     RehabCare  Group,  Inc.  is a  leading  provider  of  temporary  healthcare
staffing and therapy  program  management  services for  hospitals and long-term
care facilities.

     Principles of Consolidation

     The consolidated  financial  statements include the accounts of the Company
and its wholly owned  subsidiaries.  All significant  intercompany  balances and
transactions have been eliminated in consolidation.

     Common Stock Split

     During May 2000,  the Company's  Board of Directors  approved a two-for-one
split of the Company's  common stock in the form of a stock dividend,  which was
distributed  on June 19,  2000,  to  stockholders  of record as of May 31, 2000.
Share  and per  share  amounts  in the  consolidated  financial  statements  and
accompanying notes have been restated to reflect the split.

     Cash Equivalents and Marketable Securities

     Cash in excess of daily requirements is invested in short-term  investments
with original maturities of three months or less. Such investments are deemed to
be cash equivalents for purposes of the consolidated statements of cash flows.

     The Company  classifies  its debt and equity  securities  into one of three
categories:   held-to-maturity,   trading,  or  available-for-sale.   Management
determines  the  appropriate  classification  of its  investments at the time of
purchase  and  reevaluates  such  determination  at  each  balance  sheet  date.
Investments  at  December  31, 2001  consist of  marketable  equity  securities,
variable  rate  municipal  bonds and money  market  securities.  All  marketable
securities included in current assets are classified as  available-for-sale  and
as such,  the difference  between cost and market,  net of estimated  taxes,  is
recorded as other comprehensive  earnings.  Gain (or loss) on such securities is
not recognized in the  consolidated  statements of earnings until the securities
are sold.  All  marketable  securities in  non-current  assets are classified as
trading,  with all investment  income,  including  unrealized  gains (or losses)
recognized in the consolidated statements of earnings.

     Credit Risk

     The  Company  provides  services  primarily  to  a  geographically  diverse
clientele of healthcare  providers  throughout  the United  States.  The Company
performs  ongoing  credit  evaluations  of its  clientele  and does not  require
collateral.  An allowance  for doubtful  accounts is maintained at a level which
management believes is sufficient to cover anticipated credit losses.

                                       34

<PAGE>

                              REHABCARE GROUP, INC.
             Notes to Consolidated Financial Statements (Continued)
                        December 31, 2001, 2000 and 1999


     Equipment and Leasehold Improvements

     Depreciation and  amortization of equipment and leasehold  improvements are
computed on the  straight-line  method over the  estimated  useful  lives of the
related  assets,  principally:  equipment - three to seven  years and  leasehold
improvements - life of lease or life of asset, whichever is less.

     Intangible Assets

     Substantially  all the excess of cost over net assets  acquired  (goodwill)
relates to acquisitions and is amortized on a straight-line  basis over 25 to 40
years.  Goodwill related to acquisitions of national providers is amortized over
40 years,  while  goodwill  related to  acquisitions  of regional  providers  is
amortized over 25 years.  Accumulated amortization of goodwill was $16.4 million
and $12.8 million as of December 31, 2001 and 2000, respectively.

     The Company assesses the recoverability of goodwill by determining  whether
the  amortization  of the  goodwill  balance  over  its  remaining  life  can be
recovered  through  undiscounted  future  operating  cash  flows.  The amount of
goodwill  impairment,  if any, is measured based on projected  discounted future
operating cash flows using a discount rate reflecting the Company's average cost
of funds. The assessment of the  recoverability  of goodwill will be impacted if
estimated  future  operating  cash flows are not  achieved.  Based upon its most
recent  analysis,  the Company believes that no impairment of goodwill exists at
December 31, 2001. See discussion of Financial Accounting Standards Board (FASB)
Statement of Financial Accounting  Standards  (Statement) No. 142, "Goodwill and
Other Intangible Assets" under "New Accounting Pronouncements."

     Disclosure About Fair Value of Financial Instruments

     The  estimated  fair market  value of the  revolving  credit  facility  and
long-term debt (including current portions thereof), approximates carrying value
due to the variable rate features of the instruments. The Company believes it is
not practical to estimate a fair value  different from the carrying value of its
subordinated  debt as the instruments have numerous unique features as discussed
in note 6. During 2001,  the Company  retired all  outstanding  balances on debt
obligations.

     Revenues and Costs

     The Company recognizes revenues and related costs from temporary healthcare
staffing  assignments and therapy program  management  services in the period in
which services are  performed.  Costs related to marketing and  development  are
expensed as incurred.

     Income Taxes

     Deferred  tax  assets  and   liabilities   are   recognized  for  temporary
differences  between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax credit
carryforwards.  Deferred tax assets and  liabilities  are measured using enacted
tax rates in effect for the year in which those  differences  are expected to be
recovered or settled.

                                       35

<PAGE>

                             REHABCARE GROUP, INC.
             Notes to Consolidated Financial Statements (Continued)
                        December 31, 2001, 2000 and 1999

     Treasury Stock

     The  purchase of the  Company's  common  stock is  recorded  at cost.  Upon
subsequent reissuance, the treasury stock account is reduced by the average cost
basis of such stock.

     Use of Estimates

     The  preparation  of financial  statements  in  conformity  with  generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that  affect the  reported  amounts of assets and  liabilities  and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements.  Estimates also affect the reported amounts of revenues and expenses
during the period. Actual results may differ from those estimates.

     New Accounting Pronouncements

     In July 2001, the FASB issued Statement No. 141,  "Business  Combinations",
and Statement No. 142, "Goodwill and Other Intangible Assets". Statement No. 141
requires  that the  purchase  method  of  accounting  be used  for all  business
combinations  initiated  after June 30, 2001.  Statement  No. 142 requires  that
goodwill with indefinite useful lives no longer be amortized, but instead tested
for impairment at least annually in accordance  with the provisions of Statement
No. 142.

     The Company adopted the provisions of Statement No. 141 on July 1, 2001 and
the  provisions  of  Statement  No. 142 on January  1,  2002.  Furthermore,  any
goodwill and any intangible  assets determined to have an indefinite useful life
that are acquired in a purchase  business  combination  completed after June 30,
2001 will not be amortized,  but will continue to be evaluated for impairment in
accordance with the  appropriate  pre-Statement  No. 142 accounting  literature.
Goodwill  acquired  in  business  combinations  completed  before  July 1,  2001
continued to be amortized prior to the adoption of Statement No. 142.

     As of  the  date  of  adoption  of  Statement  No.  142,  the  Company  had
unamortized  goodwill in the amount of  approximately  $101.8 million,  which is
subject  to the  transition  provisions  of  Statements  No.  141 and  No.  142.
Amortization expense related to goodwill was approximately $3.6 million and $2.9
million  for  the  years  ending  December  31,  2001  and  December  31,  2000,
respectively.  Because of the  extensive  effort  needed to comply with adopting
Statements  No. 141 and No. 142, it is not  practicable  to reasonably  estimate
whether any transitional  impairment losses will be required to be recognized as
the cumulative effect of a change in accounting  principle.  Management  expects
Statement No. 142 to result in the  elimination of amortization of goodwill from
previous acquisitions in the amount of $3.6 million pre-tax in 2002.

     In October  2001,  the FASB issued  Statement No. 144  "Accounting  for the
Impairment or Disposal of Long-Lived Assets", which supersedes Statement No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of".  Statement No. 144 also supersedes the accounting and reporting
provisions of APB Opinion No. 30 "Reporting the Results of  Operations-Reporting
the Effects of Disposal of a Segment of a Business,  and Extraordinary,  Unusual
and  Infrequently  Occurring  Events  and  Transaction."  Statement  No.  144 is
intended to establish one accounting model for long-lived  assets to be disposed
of by sale and to address significant implementation issues. The Company adopted
Statement No. 144 on January 1, 2002.  Management does not expect  Statement No.
144 to have a material effect on the consolidated financial statements.

                                       36

<PAGE>

                             REHABCARE GROUP, INC.
             Notes to Consolidated Financial Statements (Continued)
                        December 31, 2001, 2000 and 1999

     Reclassifications

     Certain  prior years'  amounts have been  reclassified  to conform with the
current year presentation.

(2)  Acquisitions

     On September 15, 2000, the Company  acquired  DiversiCare  Rehab  Services,
Inc., a regional provider of outpatient  therapy to physician groups,  hospitals
and school  systems.  The  aggregate  purchase  price  paid at closing  was $8.5
million  consisting  of $7.5  million in cash and $1.0  million in  subordinated
notes.  The cash component of the purchase price was funded by borrowings on the
Company's  revolving  credit facility.  Goodwill of  approximately  $7.8 million
related to the acquisition was capitalized and is being amortized.  The goodwill
was reduced in the current  year to reflect the final  audited  closing  balance
sheet adjustments.

     On  May  20,  1999,  the  Company   acquired  Salt  Lake  Physical  Therapy
Associates, Inc. ("Salt Lake"), a regional provider of physical and occupational
therapy and speech/language pathology through hospital contracts, a freestanding
clinic and home health agencies for consideration  consisting of cash, stock and
subordinated  notes.  On June 30, 1999,  the Company  purchased  AllStaff,  Inc.
("AllStaff"),  a regional provider of supplemental  nurse staffing to healthcare
providers for consideration consisting of cash, stock and subordinated notes. On
December 20, 1999, the Company acquired eai Healthcare Staffing Solutions, Inc.,
a national  provider of temporary  allied  healthcare  personnel  to  hospitals,
managed  healthcare  organizations,  laboratories,  and  physician  offices  for
consideration  consisting of cash and subordinated notes. The aggregate purchase
prices for these acquisitions was $16.9 million,  consisting of $11.9 million in
cash, 96,866 shares of stock, and $4.2 million in subordinated notes. Additional
consideration  of $105,000 was paid to the former  stockholders  of Salt Lake in
August 2000, based upon the attainment of certain  financial  goals.  Additional
consideration of $286,000 was paid to the former  stockholders of AllStaff based
upon  the  attainment  of a  minimum  target  growth  in  gross  profit  for the
twelve-month  period  ended June 30,  2000.  The cash  component of the purchase
prices was funded by the Company's working capital plus additional borrowings on
its bank credit facility. Goodwill of approximately $15.7 million related to the
acquisitions was capitalized and is being amortized.

     Each of the  acquisitions  has been accounted for by the purchase method of
accounting, whereby the operating results of the acquired entity are included in
the Company' results of operations  commencing on the respective  closing dates
of acquisition.

     The  following  unaudited  pro forma  financial  information  assumes  the
acquisitions occurred as of January 1, 2000. This information is not necessarily
indicative of results of  operations  that would have occurred had the purchases
actually been made as of January 1, 2000.

<TABLE>
<CAPTION>
                                                       Year Ended December 31,
                                                       -----------------------
                                                                2000
                                                                ----
                                               (in thousands, except per share data)
         <S>                                                 <C>
         Operating revenues                                  $457,945
         Net earnings                                          23,955
         Net earnings per common and common
           equivalent share:
                Basic                                            1.64
                Diluted                                          1.47
</TABLE>

                                       37

<PAGE>

                             REHABCARE GROUP, INC.
             Notes to Consolidated Financial Statements (Continued)
                        December 31, 2001, 2000 and 1999


(3)  Marketable Securities

     Current  marketable  securities  at December 31, 2001 consist  primarily of
marketable equity and debt securities.  Noncurrent marketable securities consist
primarily of  marketable  equity  securities  ($1.1  million and $1.7 million at
December  31, 2001 and 2000,  respectively)  and money market  securities  ($1.8
million and $0.7  million at December 31, 2001 and 2000,  respectively)  held in
trust under the Company's deferred compensation plan.

(4)  Allowance for Doubtful Accounts

     Activity in the allowance for doubtful accounts is as follows:
<TABLE>
<CAPTION>
                                                    Year Ended December 31,
                                                    -----------------------
                                               2001        2000        1999
                                               ----        ----        ----
                                                      (in thousands)
         <S>                                 <C>         <C>         <C>
         Balance at beginning of year        $5,347      $4,577      $3,404
         Provisions for doubtful accounts     4,594       3,466       2,743
         Allowance related to acquisitions        -         471         111
         Accounts written off                (4,039)     (3,167)     (1,681)
                                             ------      ------      ------
         Balance at end of year              $5,902      $5,347      $4,577
                                             ======      ======      ======
</TABLE>

(5)  Equipment and Leasehold Improvements

Equipment and leasehold improvements, at cost, consist of the following:
<TABLE>
<CAPTION>
                                                            December 31,
                                                            ------------
                                                           2001        2000
                                                           ----        ----
                                                           (in thousands)
         <S>                                             <C>         <C>
         Equipment                                       $29,687     $20,387
         Leasehold improvements                            2,374       1,513
                                                         -------     -------
                                                          32,061      21,900
         Less accumulated depreciation and amortization   13,688       9,473
                                                         -------     -------
                                                         $18,373     $12,427
                                                         =======     =======
</TABLE>

                                       38



<PAGE>
                             REHABCARE GROUP, INC.
             Notes to Consolidated Financial Statements (Continued)
                        December 31, 2001, 2000 and 1999


<TABLE>
<CAPTION>
(6)   Long-Term Debt

      Long-term debt consists of the following:                  December 31,
                                                                 ------------
                                                                2001      2000
                                                                ----      ----
      Bank Debt:                                                (in thousands)
      <S>                                                     <C>      <C>
      Revolving credit facility - repaid in full during 2001
                                                              $    -   $63,800


      Subordinated Debt:
      Notes payable, 7% - repaid in full during 2001               -       250

      Notes payable, 6% - repaid in full during 2001               -        50

      Note payable, 8% - repaid in full during 2001                -       118

      Notes payable, 7% - repaid in full during 2001               -     1,000

      Note payable, 8% - repaid in full during 2001                -     1,450

      Notes payable, 8% - repaid in full during 2001               -     1,000

      Notes payable, 6.5% - repaid in full during 2001             -       634
                                                              ------   -------

                                                                   -    68,302

      Less current portion                                         -     2,868
                                                              ------   -------
      Total long-term debt                                    $    -   $65,434
                                                              ======   =======

</TABLE>
     Effective  August  29,  2000,  the  Company  consummated  a $125.0  million
five-year  revolving credit facility,  replacing its existing $90.0 million term
and revolving credit facility. The interest rates are set based on either a base
rate plus from 0.50% to 1.75% or a Eurodollar rate plus from 1.50% to 2.75%. The
base rate is the higher of the  Federal  Funds Rate plus .50% or the Prime Rate.
The Eurodollar rate is defined as (a) the Interbank  Offered Rate divided by (b)
1 minus the Eurodollar Reserve Requirement. The Company pays a fee on the unused
portion  of the  commitment  from  0.375%  to  0.50%.  The  interest  rates  and
commitment fees vary depending on the ratio of the Company's  indebtedness,  net
of cash and marketable securities,  to cash flow. Borrowings under the agreement
are secured primarily by the Company's assets and future income and profits. The
loan  agreement  requires  the  Company  to  meet  certain  financial  covenants
including  maintaining  minimum net worth and fixed charge coverage ratios.  The
average  outstanding  borrowings under the revolving credit facilities for 2001,
2000  and  1999  were  $12.4   million,   $20.0  million  and  $1.7  million  at
weighted-average interest rates of 8.1%, 8.6% and 7.5% per annum,  respectively.
As of December 31, 2001 there was no balance outstanding on the revolving credit
facility.  Interest paid for 2001, 2000 and 1999 was $2.2 million,  $5.3 million
and $3.8 million, respectively.

     On February  14,  2000,  the $6.0 million  convertible  subordinated  notes
payable to the former shareholders of Healthcare  Staffing Solutions,  Inc. were
converted into Company common stock.  The conversion  price was $7.08 per share,
resulting  in the  issuance  of 847,052  shares of Company  common  stock.  This
transaction had no effect on diluted earnings per share.

                                       39

<PAGE>

                             REHABCARE GROUP, INC.
             Notes to Consolidated Financial Statements (Continued)
                        December 31, 2001, 2000 and 1999


(7)   Stockholders' Equity

     During  March 2001,  the Company  issued and sold  1,455,000  shares of its
common stock in an underwritten  public equity  offering.  The net proceeds from
this transaction of $49.4 million were used to reduce the Company's  outstanding
balance on its revolving credit facility.

     The  Company  has various  long-term  performance  plans for the benefit of
employees and nonemployee  directors.  Under the plans, employees may be granted
incentive stock options or nonqualified stock options and nonemployee  directors
may be granted nonqualified stock options. Certain of the plans also provide for
the granting of stock appreciation rights, restricted stock, performance awards,
or stock units.  Stock  options may be granted for a term not to exceed 10 years
(five years with respect to a person receiving  incentive stock options who owns
more than 10% of the capital stock of the Company) and must be granted within 10
years from the adoption of the respective  plan. The exercise price of all stock
options  must be at least  equal to the fair  market  value (110% of fair market
value for a person receiving an incentive stock option who owns more than 10% of
the capital stock of the Company) of the shares on the date of grant. Except for
options granted to nonemployee  directors which become fully  exercisable  after
six months and  options  granted to  management  that become  exercisable  after
achievement of certain stock prices,  substantially  all remaining stock options
become fully  exercisable  after four years from date of grant.  At December 31,
2001,  2000 and 1999, a total of  1,549,594,  1,841,116  and  2,085,676  shares,
respectively, were available for future issuance under the plans.

     The per share  weighted-average  fair value of stock options granted during
2001, 2000 and 1999 was $24.78, $15.20 and $4.88 on the dates of grant using the
Black  Scholes   option-pricing   model  with  the  following   weighted-average
assumptions:  2001 - expected  dividend  yield 0%,  volatility of 56%, risk free
interest  rate of 4.5% and an  expected  life of 7 to 9 years;  2000 -  expected
dividend  yield 0%,  volatility  of 55%,  risk free interest rate of 5.0% and an
expected life of 4 to 6 years;  1999 - expected dividend yield 0%, volatility of
45%, risk free interest rate of 6.5% and an expected life of 5 to 7 years.

     The Company applies Accounting  Principles Board Opinion No. 25 and related
Interpretations in accounting for its plans.  Accordingly,  no compensation cost
has been recognized for its long-term  performance  and stock option plans.  Had
compensation  cost  for  the  Company's  stock-based   compensation  plans  been
determined  based on the fair value at the grant  dates for awards  under  those
plans consistent with the method of Statement of Financial  Accounting Standards
("SFAS") No. 123,  Accounting  for Stock Based  Compensation,  the Company's net
earnings and earnings per share would have been reduced to the pro forma amounts
indicated below:

                                       40

<PAGE>

                             REHABCARE GROUP, INC.
             Notes to Consolidated Financial Statements (Continued)
                        December 31, 2001, 2000 and 1999


<TABLE>
<CAPTION>

                                                   Year Ended December 31,
                                                   -----------------------
                                              2001        2000        1999
                                              ----        ----        ----
                                          (in thousands, except per share data)
      <S>                                   <C>        <C>         <C>
      Net earnings:        As reported      $21,035    $23,534     $15,098
                           Pro forma         16,645     21,379      13,407

      Basic earnings per share:
                           As reported        1.25        1.62        1.15
                           Pro forma          0.99        1.47        1.02

      Diluted earnings per share:
                           As reported        1.16        1.45        1.03
                           Pro forma          0.92        1.32         .92
</TABLE>
     In  accordance  with SFAS 123,  the pro forma net  earnings  reflects  only
options granted subsequent to February 1995 and does not reflect the full impact
of calculating  compensation  cost for stock options granted prior to March 1995
that vested in 1999.

     A summary of the status of the Company's  stock option plans as of December
31, 2001,  2000 and 1999,  and changes  during the years then ended is presented
below:
<TABLE>
<CAPTION>
                                2001                      2000                       1999
                                ----                      ----                       ----
                                Weighted-Average            Weighted-Average         Weighted-Average
                        Shares   Exercise Price     Shares   Exercise Price  Shares   Exercise Price
                        ------   --------------     ------   --------------  ------   --------------
<S>                     <C>         <C>          <C>          <C>           <C>          <C>
Outstanding at
   beginning of year    3,262,975   $10.62       3,890,698    $ 7.30        3,540,298    $6.63
Granted                   539,373    39.97         457,600     28.76          848,700     9.06
Exercised                (766,753)    6.12        (869,019)     5.70         (288,992)    4.70
Forfeited                (100,020)   15.08        (216,304)     8.81         (209,308)    6.86
                         --------                 --------                   --------
Outstanding at
   end of year          2,935,575   $16.99       3,262,975    $10.62        3,890,698    $7.30
                        =========                =========                  =========
Options exercisable at
   end of year          1,873,702                2,199,037                  1,968,410
                        =========                =========                  =========

</TABLE>
<TABLE>
     The following table summarizes information about stock options outstanding
at December 31, 2001:
<CAPTION>
                                    Options Outstanding                         Options Exercisable
                         ---------------------------------------------  ---------------------------------
                                      Weighted-Average
     Range of              Number        Remaining      Weighted-Average   Number        Weighted-Average
  Exercise Prices        Outstanding  Contractual Life  Exercise Price  Exercisable       Exercise Price
  ---------------        -----------  ----------------  --------------  -----------       --------------
<C>                    <C>              <C>                <C>          <C>                  <C>
  $ 0.00 - 4.70          207,559        2.5 years           $4.06         207,559             $4.06
    4.70 - 9.40        1,377,868        6.3                  8.01       1,056,245              7.71
    9.40 -14.10          496,425        6.6                 11.54         480,675             11.52
   18.80 -23.50            2,000        8.4                 20.16             500             20.16
   23.50 -28.20           40,000        9.8                 26.44               -                 -
   28.20 -32.90            5,000        8.7                 32.38           1,250             32.38
   32.90 -37.60          302,350        8.6                 34.00          84,850             34.00
   37.60 -42.30          332,166        9.5                 39.67          31,666             39.38
   42.30 -47.00          172,207        9.2                 43.77          10,957             43.41
                       ---------                                        ---------
                       2,935,575        6.9                $16.99       1,873,702            $10.24
                       =========                                        =========
</TABLE>

                                       41

<PAGE>

                             REHABCARE GROUP, INC.
             Notes to Consolidated Financial Statements (Continued)
                        December 31, 2001, 2000 and 1999



     The Board of Directors of the Company  declared a dividend  distribution of
one  preferred  stock  purchase  right  (the  "Rights")  for  each  share of the
Company's  common  stock owned as of October 1, 1992,  and for each share of the
Company's common stock issued until the Rights become  exercisable.  Each Right,
when  exercisable,  will  entitle the  registered  holder to  purchase  from the
Company  one   thirty-third  of  a  share  of  the  Company's  Series  A  junior
participating  preferred stock, $.10 par value (the "Series A preferred stock"),
at a price of  $17.50  per one  thirty-third  of a  share.  The  Rights  are not
exercisable and are transferable  only with the Company's common stock until the
earlier of 10 days  following a public  announcement  that a person has acquired
ownership  of 15% or more of the  Company's  outstanding  common  stock,  or the
commencement  or  announcement  of  a  tender  offer  or  exchange  offer,   the
consummation  of which would result in the  ownership by a person of 15% or more
of the Company's  outstanding common stock. The Series A preferred stock will be
nonredeemable and junior to any other series of preferred stock that the Company
may issue in the future.  Each share of Series A preferred stock, upon issuance,
will have a preferential dividend in an amount equal to the greater of $1.00 per
share or 100 times the  dividend  declared  per  share of the  Company's  common
stock.  In the event of the  liquidation of the Company,  the Series A preferred
stock will receive a preferred  liquidation payment equal to the greater of $100
or 100 times the payment made on each share of the Company's common stock.  Each
one  thirty-third of a share of Series A preferred stock  outstanding  will have
one vote on all matters  submitted to the  stockholders  of the Company and will
vote together as one class with the holders of the Company's common stock.

     In the event that a person acquires beneficial  ownership of 15% or more of
the Company's  common stock,  holders of Rights (other than the acquiring person
or group) may purchase,  at the Rights' then current  purchase price,  shares of
the  Company's  common  stock  having a value at that time  equal to twice  such
exercise price. In the event that the Company merges into or otherwise transfers
50% or more of its  assets or  earnings  power to any  person  after the  Rights
become exercisable, holders of Rights (other than the acquiring person or group)
may purchase,  at the then current exercise price, common stock of the acquiring
entity having a value at that time equal to twice such exercise price.

                                       42

<PAGE>

<TABLE>

                             REHABCARE GROUP, INC.
             Notes to Consolidated Financial Statements (Continued)
                        December 31, 2001, 2000 and 1999

(8)  Earnings per Share

     The  following  table  sets  forth the  computation  of basic  and  diluted
earnings per share:
<CAPTION>
                                                                   Year Ended December 31,
                                                                  -----------------------
      Numerator:                                                2001        2000        1999
                                                                ----        ----        ----
                                                            (in thousands, except per share data)
      <S>                                                    <C>         <C>         <C>
      Numerator for basic earnings per share -
         earnings available to commons stockholders
         (net earnings)                                      $21,035     $23,534     $15,098

      Effect of dilutive securities - after-tax interest on
         convertible subordinated promissory notes                 -          28         225

      Numerator for diluted earnings per share -
         earnings available to common stockholders           -------     -------     -------
         after assumed conversions                           $21,035     $23,562     $15,323
                                                             =======     =======     =======
      Denominator:

      Denominator for basic earnings per share -
         weighted-average shares outstanding                  16,775      14,563      13,144

      Effect of dilutive securities:
         Stock options                                         1,302       1,705         823

         Convertible subordinated promissory notes                 -           -         847
                                                              ------      ------      ------

      Denominator for diluted earnings per share -
         adjusted weighted-average shares and assumed
         conversions                                          18,077      16,268      14,814
                                                              ======      ======     =======

      Basic earnings per share                                $ 1.25      $ 1.62     $  1.15
                                                              ======      ======     =======

      Diluted earnings per share                              $ 1.16      $ 1.45     $  1.03
                                                              ======      ======     =======

</TABLE>
(9)  Employee Benefits

     The Company has an Employee Savings Plan,  which is a defined  contribution
plan  qualified  under  Section  401(k) of the Internal  Revenue  Code,  for the
benefit  of its  eligible  employees.  Employees  who  attain  the age of 21 and
complete twelve  consecutive  months of employment with a minimum of 1,000 hours
worked are eligible to participate in the plan. Each  participant may contribute
from  2% to 20%  of  his or her  annual  compensation  to the  plan  subject  to
limitations  on  the  highly  compensated   employees  to  ensure  the  plan  is
nondiscriminatory.  Contributions  made by the Company to the  Employee  Savings
Plan  were at rates  of up to 50% of the  first  4% of  employee  contributions.
Expense in  connection  with the Employee  Savings Plan for 2001,  2000 and 1999
totaled $1.7 million, $1.1 million and $0.8 million, respectively.

     The Company maintains a nonqualified deferred compensation plan for certain
employees.  Under the plan, participants may defer up to 100% of their base cash
compensation.  The amounts  are held by a trust in  designated  investments  and
remain the property of the Company until distribution.  At December 31, 2001 and
2000,  $2.6  million and $2.2  million,  respectively,  were  payable  under the
nonqualified  deferred compensation plan and approximated the value of the trust
assets owned by the Company.

                                       43

<PAGE>

                             REHABCARE GROUP, INC.
             Notes to Consolidated Financial Statements (Continued)
                        December 31, 2001, 2000 and 1999


(10) Lease Commitments

     The  Company  leases  office  space  and  certain  office  equipment  under
noncancellable   operating   leases.   Future   minimum  lease   payments  under
noncancellable  operating  leases, as of December 31, 2001, that have initial or
remaining lease terms in excess of one year total approximately $3.8 million for
2002,  $3.2 million for 2003,  $3.1 million for 2004,  $2.7 million for 2005 and
$2.4 million for 2006.  Rent expense for 2001,  2000 and 1999 was  approximately
$4.8 million, $3.7 million and $2.3 million, respectively.
<TABLE>
<CAPTION>
(11) Income Taxes

     Income taxes consist of the following:
                                                     Year Ended December 31,
                                                  ----------------------------
                                                  2001        2000        1999
                                                  ----        ----        ----
                                                         (in thousands)
       <S>                                      <C>        <C>          <C>
       Federal - current                       $14,232     $12,675      $9,707
       Federal - deferred                       (1,964)      1,045      (1,026)
       State                                     1,648       1,843       1,248
                                                -------    -------      ------
                                                $13,916    $15,563      $9,929
                                                =======    =======      ======
       Deferred tax liability recorded in
           stockholders' equity                 $     7    $     7      $    5
                                                =======    =======      ======
</TABLE>

     A reconciliation  between  expected income taxes,  computed by applying the
statutory  Federal income tax rate of 35% to earnings  before income taxes,  and
actual income tax is as follows:

 <TABLE>
                                                     Year Ended December 31,
                                                  ----------------------------
                                                  2001        2000        1999
                                                  ----        ----        ----
                                                        (in thousands)
       <S>                                     <C>         <C>          <C>
       Expected income taxes                   $12,233     $13,684      $8,759
       Tax effect of interest income from
           municipal bond obligations
           exempt from Federal taxation            (56)        (47)        (46)
       State income taxes, net of Federal
           income tax benefit                    1,071        1,198        792
       Tax effect of amortization expense
           not deductible for tax purposes         599          398        295
       Other, net                                   69          330        129
                                               -------      -------     ------
                                               $13,916      $15,563     $9,929
                                               =======      =======     ======


                                       44
<PAGE>

                             REHABCARE GROUP, INC.
             Notes to Consolidated Financial Statements (Continued)
                        December 31, 2001, 2000 and 1999


</TABLE>

     The tax effects of temporary differences that give rise to the deferred tax
assets and liabilities are as follows:

<TABLE>
<CAPTION>
                                                              December 31,
                                                           ----------------
                                                           2001       2000
                                                           ----       ----
                                                             (in thousands)
         <S>                                             <C>         <C>
         Deferred tax assets:
            Provision for doubtful accounts              $1,698      $1,305
            Accrued insurance, bonus and
               vacation expense                           4,465       4,555
            Other                                         3,645       1,185
                                                          -----       -----
                                                          9,808       7,045
                                                          -----       -----
         Deferred tax liabilities:
            Goodwill amortization                         4,120       3,314
            Other                                         1,090       1,363
                                                          -----       -----
                                                          5,210       4,677
                                                          -----       -----
            Net deferred tax asset                       $4,598      $2,368
                                                          =====       =====

</TABLE>
     The Company is required to establish a valuation allowance for deferred tax
assets if, based on the weight of available evidence, it is more likely than not
that some portion or all of the  deferred  tax assets will not be realized.  The
ultimate  realization of deferred tax assets is dependent upon the generation of
future  taxable income during the periods in which those  temporary  differences
become deductible.  Management  considers the scheduled reversal of deferred tax
liabilities,  projected  future  taxable  income and tax planning  strategies in
making this  assessment.  Based upon the level of historical  taxable income and
projections  for future  taxable  income in the periods  which the  deferred tax
assets are  deductible,  management  believes that a valuation  allowance is not
required,  as it is more likely  than not that the results of future  operations
will generate sufficient taxable income to realize the deferred tax assets.

     Income taxes paid by the Company for 2001, 2000 and 1999 were $8.5 million,
$13.0 million and $10.5 million, respectively.

(12) Industry Segment Information

     The Company operates in two business  segments that are managed  separately
based on fundamental  differences in operations:  temporary  healthcare staffing
and therapy program  management.  Therapy program management  includes inpatient
programs (including acute rehabilitation and skilled nursing units),  outpatient
therapy programs and contract therapy  programs.  All of the Company's  services
are provided in the United States.  Summarized  information  about the Company's
operations in each industry segment is as follows:

                                       45

<PAGE>

                             REHABCARE GROUP, INC.
             Notes to Consolidated Financial Statements (Continued)
                        December 31, 2001, 2000 and 1999

<TABLE>
                                Revenues from
                            Unaffiliated Customers          Operating Earnings (1)
                         ------------------------------  ---------------------------
                                (in thousands)                  (in thousands)
   <S>                   <C>        <C>       <C>        <C>          <C>     <C>
                             2001       2000      1999     2001       2000      1999
                             ----       ----      ----     ----       ----      ----
   Healthcare staffing   $304,574   $260,100  $148,180   $  (65)(2) $12,011    $5,228
   Therapy program
   management:
     Inpatient            123,276    119,963   116,497   24,081      21,815    18,123
     Contract therapy      64,661     29,979    14,071    6,773       3,331       333
     Outpatient            49,754     42,332    30,677    6,178       7,032     6,238
                         --------   --------  --------  -------     -------   -------
     Therapy program
      management total    237,691    192,274   161,245   37,032      32,178    24,694
                         --------   --------  --------  -------     -------   -------
        Total            $542,265   $452,374  $309,425  $36,967     $44,189   $29,922
                         ========   ========  ========  =======     =======   =======
</TABLE>
<TABLE>
<CAPTION>

                                 Total Assets           Depreciation and Amortization
                           ---------------------------   ---------------------------
                                (in thousands)                 (in thousands)
                              2001      2000      1999     2001      2000      1999
                              ----      ----      ----     ----      ----      ----
   <S>                    <C>       <C>        <C>      <C>        <C>       <C>
   Healthcare staffing    $102,880  $109,911   $92,795  $ 3,280    $2,813    $1,959
   Therapy program
   management:
     Inpatient              91,135    66,194    53,822    3,674     2,861     2,460
     Contract therapy       26,349    22,924    19,752    1,088       390       379
     Outpatient             30,297    30,064    20,895    1,520       809       498
     Therapy program       -------   -------   -------   ------     -----     -----
      management total     147,781   119,182    94,469    6,282     4,060     3,337
                           -------   -------   -------    -----     -----     -----
        Total             $250,661  $229,093  $187,264   $9,562    $6,873    $5,296
                           =======   =======   =======    =====     =====     =====
</TABLE>
<TABLE>
<CAPTION>
                               Capital Expenditures
                           ---------------------------
                                (in thousands)
                              2001      2000      1999
                              ----      ----      ----
   <S>                     <C>        <C>       <C>
   Healthcare staffing      $1,424    $3,703    $1,733
   Therapy program
   management:
     Inpatient               3,864     2,575     1,217
     Contract therapy        3,630       772        42
     Outpatient              1,695       849        51
                            ------     -----     -----
     Therapy program
      management total       9,189     4,196     1,310
                            ------     -----     -----
        Total              $10,613    $7,899    $3,043
                            ======     =====     =====

     (1)  Operating  earnings for prior years have been  adjusted to reflect the
          corporate expense allocation methodology utilized in 2001.
     (2)  Includes $9.0 million in non-recurring charges.

</TABLE>
                                       46

<PAGE>

                             REHABCARE GROUP, INC.
             Notes to Consolidated Financial Statements (Continued)
                        December 31, 2001, 2000 and 1999


(13)  Quarterly Financial Information (Unaudited)
<TABLE>
<CAPTION>
                                                   Quarter Ended
             2001                 December 31  September 30   June 30     March 31
             ----                 -----------  ------------   -------     --------
                                       (in thousands, except per share data)
      <S>                         <C>           <C>          <C>         <C>
      Operating revenues          $134,236      $140,434     $136,871     $130,724
      Operating earnings (loss)     (2,787)(1)    13,519       13,193       13,042
      Earnings (loss) before income
        taxes                       (3,356)(2)    13,356       13,024       11,927
      Net earnings (loss)           (2,017)        8,042        7,832        7,178
      Net earnings (loss) per
      common share:
         Basic                        (.12)          .47          .46          .47
         Diluted                      (.12)          .44          .43          .42
</TABLE>
(1)  Includes $9.0 million in  non-recurring  charges.
(2)  Includes the $9.0 million in (1) above plus $0.5 million write-down of an
     investment.

<TABLE>
<CAPTION>
                                                   Quarter Ended
                                                   -------------
             2000                 December 31   September 30    June 30    March 31
             ----                 -----------   ------------    -------    --------
                                       (in thousands, except per share data)
      <S>                         <C>            <C>           <C>          <C>
      Operating revenues          $122,900       $115,820      $107,721     $105,933
      Operating earnings            12,014         11,150        10,438       10,587
      Earnings before income taxes  10,586         10,002         9,189        9,320
      Net earnings                   6,372          6,007         5,544        5,611
      Net earnings per common share:
         Basic                         .42            .41           .38          .41
         Diluted                       .38            .36           .35          .37
</TABLE>

                                       47

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


      Not applicable.

                                          PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT


     Certain  information  regarding our  directors  and  executive  officers is
included  in our Proxy  Statement  for the 2002 Annual  Meeting of  Stockholders
under the captions "Item 1 - Election of Directors" and "Compliance with Section
16(a) of the  Securities  Exchange  Act of 1934" and is  incorporated  herein by
reference.

     The  following  table sets forth the name,  age and position of each of our
executive officers. There is no family relationship between any of the following
individuals.
<TABLE>
Name                      Age                      Position
----                      ---   -----------------------------------------------
<C>                       <C>   <C>
Alan C. Henderson.......  56    President, Chief Executive Officer and Director
Gregory F. Bellomy......  45    President, StarMed Staffing Group
Tom E. Davis............  52    President, Inpatient Division
James M. Douthitt.......  39    Senior Vice President and Chief Accounting Officer
Gregory J. Eisenhauer...  43    Senior Vice President, Chief Financial Officer and Secretary
Patricia M. Henry.......  49    President, Contract Therapy Division
Alfred J. Howard........  49    President, Outpatient Division
</TABLE>

     The  following  paragraphs  contain  biographical   information  about  our
directors and executive officers.

     Alan C.  Henderson  has been  President and Chief  Executive  Officer and a
director  of our  company  since 1998.  Prior to  becoming  President  and Chief
Executive Officer,  Mr. Henderson was Executive Vice President,  Chief Financial
Officer and Secretary of our company from 1991 through May 1998.  Mr.  Henderson
also  serves  as  a  director  of  General  American   Capital  Corp,   Angelica
Corporation, Reinsurance Group of America, Inc. and is a member of the St. Louis
Corporate Board of US Bancorp.

     Gregory F.  Bellomy  has been  President  of our  staffing  division  since
November 2001 and was President of our contract  therapy division from September
1998 to November  2001.  Prior to joining our  company,  Mr.  Bellomy  served in
various capacities,  including Division  President,  Division Vice President and
Area General  Manager at TheraTx  Incorporated  from 1992 to 1997, at which time
TheraTx  Incorporated  was  acquired  by Vencor  Incorporated.  Mr. Bellomy  was
National Director of Vencare Ancillary Services for Vencor Incorporated until he
joined our company.

     Tom E. Davis has been  President of our  inpatient  division  since January
1998.  Mr. Davis  joined our company in January  1997 as Senior Vice  President,
Operations. Prior to joining our company, Mr. Davis was Group Vice President for
Quorum Health Resources, LLC from January 1990 to January 1997.

                                       48

<PAGE>
     James M. Douthitt has been Senior Vice President,  Chief Accounting Officer
and  Treasurer of our company since July 2000.  Prior to his current  role,  Mr.
Douthitt  served as Vice  President  of Finance for our staffing  division  from
January through June 2000 and Vice President of Finance for our contract therapy
division from October 1998 through  December 1999.  Prior to joining our company
Mr.  Douthitt  was  Director of Finance for  Vencare,  Inc.  from August 1997 to
September  1998 and Manager of Finance for  Vencare,  Inc.  from January 1996 to
July 1997.

     Gregory J.  Eisenhauer  has been Senior  Vice  President,  Chief  Financial
Officer and Secretary of our company since August 2000.  Mr.  Eisenhauer  joined
our  company  in 1993 and has served in various  management  positions  with our
company,   including  Vice  President,   Finance;  Vice  President,   Outpatient
Operations;  Senior Vice  President,  Acquisitions;  and Senior Vice  President,
Finance.

     Patricia M. Henry has been President of our contract therapy division since
November  2001.  Ms.  Henry  joined the company in October  1998 and served most
recently as Senior Vice  President of  Operations,  Contract  Therapy  Services.
Prior to joining our company, Ms. Henry was Director of Ancillary Operations for
Vencare, Inc. Prior to Vencor's acquisition of TheraTx, Ms. Henry was a Regional
Vice  President of Operations  from  September  1994 to September  1998.  Before
joining TheraTx, Ms. Henry was Area Vice President for NovaCare, Inc., Southwest
Division from July 1990 to September 1994.

     Alfred J. Howard has been President of our outpatient division since August
1996.  Prior to joining  our  company,  he served as  President  of the  Eastern
Operations for Pacific  Rehabilitation  and Sports Medicine from October 1993 to
August 1996.


ITEM 11. EXECUTIVE COMPENSATION


     Information  regarding  executive  compensation  is  included  in our Proxy
Statement  for the 2002  Annual  Meeting  of  Stockholders  under  the  captions
"Compensation of Executive  Officers",  and "Section 16(a) Beneficial  Ownership
Reporting Compliance" and is incorporated herein by reference.


 ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
         MANAGEMENT


     Information  regarding  security ownership of certain beneficial owners and
management  is included in our Proxy  Statement  for the 2002 Annual  Meeting of
Stockholders  under  the  captions  "Voting  Securities  and  Principal  Holders
Thereof" and "Security  Ownership by Management" and is  incorporated  herein by
reference.


 ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS


      Not applicable.


                                       49

<PAGE>

                                     PART IV


 ITEM 14.EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
         FORM 8-K


     (a) The following documents are filed as part of this Annual Report on Form
         10-K:

          (1)Financial Statements
                 Independent Auditors' Report
                 Consolidated Balance Sheets as of December 31, 2001 and 2000
                 Consolidated Statements of Earnings for the years ended
                      December 31, 2001, 2000 and 1999
                 Consolidated Statements of Stockholders' Equity for the years
                      ended December 31, 2001, 2000 and 1999
                 Consolidated Statements of Cash Flows for the years ended
                      December 31, 2001, 2000 and 1999
                 Consolidated Statements of Comprehensive Earnings for the years
                      ended December 31, 2001, 2000 and 1999
                 Notes to Consolidated Financial Statements

          (2)Financial Statement Schedules:
                None

          (3)Exhibits:
                See Exhibit Index on page 52 of this Annual Report on Form 10-K.

      b)  Reports on Form 8-K


     No reports on Form 8-K were filed by the Registrant during the three months
ended December 31, 2001.

                                       50


<PAGE>
                                   SIGNATURES


     Pursuant to the  requirements of Section 13 of the Securities  Exchange Act
of 1934,  the  Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.

 Dated: March 15, 2002
                                   REHABCARE GROUP, INC.
                                   (Registrant)

                                   By: /s/ Alan C. Henderson
                                     ------------------------------------------
                                          Alan C. Henderson
                                          President and Chief Executive Officer

     Pursuant to the  requirements of 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 date indicated.

 Signature                        Title                          Dated
 ---------                        -----                          -----

 /s/ Alan C. Henderson            President, Chief Executive    March 15, 2002
 -----------------------------    Officer and Director
 Alan C. Henderson
 (Principal Executive Officer)

 /s/ Gregory J. Eisenhauer        Senior Vice President,        March 15, 2002
 -----------------------------    Chief Financial Officer and
 Gregory J. Eisenhauer            Secretary
 (Principal Financial Officer)

 /s/ James M. Douthitt            Senior Vice President and     March 15, 2002
 -----------------------------    Chief Accounting Officer
 James M. Douthitt
 (Principal Accounting Officer)

 /s/ William G. Anderson          Director                      March 15, 2002
 -----------------------------
 William G. Anderson

 /s/ Richard E. Ragsdale          Director                      March 15, 2002
 -----------------------------
 Richard E. Ragsdale

 /s/ John H. Short                Director                      March 15, 2002
 -----------------------------
 John H. Short

 /s/ H. Edwin Trusheim            Director                      March 15, 2002
 -----------------------------
 H. Edwin Trusheim

 /s/ Colleen Conway-Welch         Director                      March 15, 2002
 -----------------------------
 Colleen Conway-Welch

 /s/ Theodore M. Wight            Director                      March 15, 2002
 -----------------------------
 Theodore M. Wight

                                       51

<PAGE>
                                  EXHIBIT INDEX


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

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

3.3  Bylaws (filed as Exhibit 3.2 to the Registrant's  Registration Statement on
     Form S-1, dated May 9, 1991  [Registration No. 33-40467],  and incorporated
     herein by reference)

4.1  Rights  Agreement,  dated September 21, 1992, by and between the Registrant
     and  Boatmen's  Trust  Company  (filed  as  Exhibit  1 to the  Registrant's
     Registration   Statement  on  Form  8-A  filed   September   24,  1992  and
     incorporated herein by reference)

10.1 1987 Incentive Stock Option and 1987 Nonstatutory Stock Option Plans (filed
     as Exhibit  10.1 to the  Registrant's  Registration  Statement on Form S-1,
     dated May 9, 1991 [Registration No. 33-40467],  and incorporated  herein by
     reference) *

10.2 Form of Stock Option  Agreement  (filed as Exhibit 10.2 to the Registrant's
     Registration  Statement on Form S-1,  dated May 9, 1991  [Registration  No.
     33-40467], and incorporated herein by reference) *

10.3 Employment  Agreement with Alan C.  Henderson,  dated May 1, 1991 (filed as
     Exhibit 10.4 to Amendment No. 1 to the Registrant's  Registration Statement
     on  Form  S-1,  dated  June  19,  1991  [Registration  No.  33-40467],  and
     incorporated herein by reference) *

10.4 Form of Termination  Compensation Agreement for Alan C. Henderson (filed as
     Exhibit 10.6 to the Registrant's  Registration Statement on Form S-1, dated
     February 18, 1993 [Registration No. 33-58490],  and incorporated  herein by
     reference) *

10.5 Form of Termination Compensation Agreement for other executive officers *

10.6 Supplemental  Bonus  Plan  (filed  as  Exhibit  10.8  to  the  Registrant's
     Registration  Statement on Form S-1, dated February 18, 1993  [Registration
     No. 33-58490], and incorporated herein by reference) *

10.7 Deferred  Profit  Sharing Plan (filed as Exhibit 10.15 to the  Registrant's
     Registration  Statement on Form S-1, dated February 18, 1993  [Registration
     No. 33-58490], and incorporated herein by reference) *

10.8 RehabCare  Executive Deferred  Compensation Plan (filed as Exhibit 10.12 to
     the Registrant's  Report on Form 10-K, dated May 27, 1994, and incorporated
     herein by reference) *

                                       52

<PAGE>

                             EXHIBIT INDEX (CONT'D)


10.9 RehabCare Directors' Stock Option Plan (filed as Appendix A to Registrant's
     definitive  Proxy Statement for the 1994 Annual Meeting of Stockholders and
     incorporated herein by reference) *

10.10Amended and Restated 1996 Long-Term  Performance  Plan (filed as Appendix A
     to Registrant's  definitive  Proxy Statement for the 1999 Annual Meeting of
     Stockholders and incorporated herein by reference) *

10.11RehabCare  Group,  Inc.  1999  Non-Employee  Director  Stock Plan (filed as
     Appendix B to Registrant's  definitive  Proxy Statement for the 1999 Annual
     Meeting of Stockholders and incorporated herein by reference) *

10.12Credit  Agreement,  dated as of August  29,  2000,  by and among  RehabCare
     Group,  Inc.,  as borrower,  certain  subsidiaries  and  affiliates  of the
     borrower, as guarantors,  and First National Bank, Firstar Bank, N.A., Bank
     of  America,  N.A.,  First  Union  Securities,  Inc.,  and Banc of  America
     Securities,  LLC (filed as Exhibit 10.1 to Registrant's Quarterly Report on
     Form 10-Q for the quarter ended September 30, 2000 and incorporated  herein
     by reference)

10.13Pledge  Agreement,  dated as of August  29,  2000,  by and among  RehabCare
     Group, Inc. and Subsidiaries,  as pledgors,  and Bank of America,  N.A., as
     collateral  agent,  for the  holders of the Secured  Obligations  (filed as
     Exhibit 10.1 to Registrant's  Quarterly Report on Form 10-Q for the quarter
     ended September 30, 2000 and incorporated herein by reference)

10.14Security  Agreement,  dated as of August 29, 2000,  by and among  RehabCare
     Group, Inc. and Subsidiaries,  as grantors,  and Bank of America,  N.A., as
     collateral  agent,  for the  holders of the Secured  Obligations  (filed as
     Exhibit 10.1 to Registrant's  Quarterly Report on Form 10-Q for the quarter
     ended September 30, 2000 and incorporated herein by reference)

13.1 Those portions of the  Registrant's  Annual Report to Stockholders  for the
     year ended  December 31, 2001 included in response to Items 5 and 6 of this
     Annual Report on Form 10-K

21.1 Subsidiaries of the Registrant

23.1 Consent of KPMG LLP

_________________________
*   Management contract or compensatory plan or arrangement.

                                       53


<PAGE>
                                                                    EXHIBIT 10.5

                              REHABCARE GROUP, INC.
                       TERMINATION COMPENSATION AGREEMENT


     This  agreement  ("Agreement")  has been  entered into this 3rd day of May,
2001,  by and  between  RehabCare  Group,  Inc.,  a  Delaware  corporation  (the
"Company"), and ___________, an individual (the "Executive").

                                    RECITALS

     The Board of Directors of the Company has determined that it is in the best
interests of the Company and its  stockholders  to reinforce  and  encourage the
continued  attention and  dedication of the Executive to the Company as a member
of the  Company's  management  and to  assure  that the  Company  will  have the
continued  dedication  of the  Executive,  notwithstanding  the  possibility  or
occurrence  of a Change in Control  (as  defined  below).  The Board  desires to
provide for the continued  employment of the Executive on terms competitive with
those of other corporations,  and the Executive is willing to rededicate himself
and  continue  to serve the  Company.  Additionally,  the Board  believes  it is
imperative to diminish the inevitable  distraction of the Executive by virtue of
the personal uncertainties and risks created by a potential or pending Change in
Control and to encourage the  Executive's  full  attention and dedication to the
Company  currently  and in the  event of any  potential  or  pending  Change  in
Control,   and  to  provide  the  Executive  with   compensation   and  benefits
arrangements upon certain  terminations of employment either prior to or after a
Change in Control which ensure that the compensation  and benefits  expectations
of the Executive  will be  satisfied.  Therefore,  in order to accomplish  these
objectives, the Board has caused the Company to enter into this Agreement.

                            IT IS AGREED AS FOLLOWS:

Section 1: Definitions and Construction.

     1.1  Definitions.  For purposes of this Agreement,  the following words and
phrases,  whether or not capitalized,  shall have the meanings  specified below,
unless the context plainly requires a different meaning.

          1.1(a)  "Accrued  Obligations"  has the  meaning  set forth in Section
               4.1(a) of this Agreement.

          1.1(b) "Annual  Base  Salary"  has the  meaning  set forth in  Section
               2.4(a) of this Agreement.

          1.1(c) "Board" means the Board of Directors of the Company.

          1.1(d)  "Cause"  has the  meaning  set  forth in  Section  3.3 of this
               Agreement.

                                       54


<PAGE>


          1.1(e) "Change in Control" means:

               (i) The  acquisition  by any  individual,  entity or group,  or a
               Person (within the meaning of Section 13(d)(3) or 14(d)(2) of the
               Exchange Act) of ownership of  twenty-five  percent (25%) or more
               of either (a) the then outstanding  shares of common stock of the
               Company  (the  "Outstanding  Company  Common  Stock")  or (b) the
               combined voting power of the then outstanding  voting  securities
               of the Company  entitled  to vote  generally  in the  election of
               directors (the "Outstanding Company Voting Securities"); or

               (ii)  Individuals  who, as the date hereof,  constitute the Board
               (the  "Incumbent  Board")  cease for any reason to  constitute at
               least a  majority  of the  Board;  provided,  however,  that  any
               individual  becoming a  director  subsequent  to the date  hereof
               whose  election,  or nomination  for  election,  by the Company's
               stockholders was approved by a vote of at least a majority of the
               directors then comprising the Incumbent Board shall be considered
               as though such individual  were a member of the Incumbent  Board,
               but  excluding,  as a member  of the  Incumbent  Board,  any such
               individual whose initial  assumption of office occurs as a result
               of either an actual or threatened election contest (as such terms
               are used in Rule l4a-11 of Regulation l4A  promulgated  under the
               Exchange  Act) or other  actual  or  threatened  solicitation  of
               proxies or  consents  by or on behalf of a Person  other than the
               Board; or

               (iii)Approval   by  the   stockholders   of  the   Company  of  a
               reorganization,  merger or consolidation,  in each case,  unless,
               following such reorganization,  merger or consolidation, (a) more
               than fifty percent (50%) of,  respectively,  the then outstanding
               shares of common  stock of the  corporation  resulting  from such
               reorganization,  merger or consolidation  and the combined voting
               power  of  the  then  outstanding   voting   securities  of  such
               corporation  entitled  to  vote  generally  in  the  election  of
               directors is then beneficially owned, directly or indirectly,  by
               all or substantially all of the individuals and entities who were
               the beneficial owners,  respectively,  of the Outstanding Company
               Common   Stock  and   Outstanding   Company   Voting   Securities
               immediately prior to such reorganization, merger or consolidation
               in  substantially   the  same  proportions  as  their  ownership,
               immediately   prior   to   such    reorganization,    merger   or
               consolidation,  of  the  Outstanding  Company  Common  Stock  and
               Outstanding Company Voting Securities, as the case may be, (b) no
               Person  beneficially  owns,  directly or indirectly,  twenty-five
               percent  (25%) or more  of,  respectively,  the then  outstanding
               shares of common  stock of the  corporation  resulting  from such
               reorganization,  merger or  consolidation  or the combined voting
               power  of  the  then  outstanding   voting   securities  of  such
               corporation,  entitled  to  vote  generally  in the  election  of
               directors and (c) at least a majority of the members of the board
               of   directors   of   the   corporation   resulting   from   such
               reorganization,  merger  or  consolidation  were  members  of the
               Incumbent  Board  at the  time of the  execution  of the  initial
               agreement   providing   for  such   reorganization,   merger   or
               consolidation;

                                       55

<PAGE>
               (iv)  Approval  by  the  stockholders  of  the  Company  of (a) a
               complete  liquidation  or  dissolution  of the Company or (b) the
               sale or  other  disposition  of all or  substantially  all of the
               assets of the Company, other than to a corporation,  with respect
               to which following such sale or other disposition,  (1) more than
               fifty percent (50%) of, respectively, the then outstanding shares
               of common stock of such corporation and the combined voting power
               of the then  outstanding  voting  securities of such  corporation
               entitled to vote  generally  in the election of directors is then
               beneficially   owned,   directly   or   indirectly,   by  all  or
               substantially  all of the  individuals  and entities who were the
               beneficial  owners,  respectively,  of  the  Outstanding  Company
               Common   Stock  and   Outstanding   Company   Voting   Securities
               immediately   prior  to  such  sale  or  other   disposition   in
               substantially the same proportion as their ownership, immediately
               prior  to such  sale or  other  disposition,  of the  Outstanding
               Company Common Stock and Outstanding  Company Voting  Securities,
               as the case may be, (2) no Person  beneficially owns, directly or
               indirectly,  twenty-five percent (25%) or more of,  respectively,
               the then  outstanding  shares of common stock of such corporation
               and the  combined  voting  power of the then  outstanding  voting
               securities of such corporation  entitled to vote generally in the
               election of directors  and (3) at least a majority of the members
               of the board of directors of such corporation were members of the
               Incumbent  Board  at the  time of the  execution  of the  initial
               agreement or action of the Board providing for such sale or other
               disposition of assets of the Company; or

               (v) the sale or other  disposition of all or substantially all of
               the  stock or  assets  of the  Division,  other  than to  another
               subsidiary  of the  Company,  if at the time of the sale or other
               disposition,  the  Executive  is  serving  as  President  of such
               Division.

          1.1(f)  "Change  in  Control  Date"  means the date that the Change in
     Control first occurs.

          1.1(g)  "Company" has the meaning set forth in the first  paragraph of
     this  Agreement  and,  with  regard to  successors,  in Section 5.2 of this
     Agreement.

          1.1(h)  "Code"  shall  mean the  Internal  Revenue  Code of  1986,  as
     amended.

          1.1(i) "Date of Termination"  has the meaning set forth in Section 3.7
     of this Agreement.

          1.1(j) "Division" means the __________ Division or such other division
     of the Company for which the  Executive may from time to time in the future
     perform the most significant portion of his duties and  responsibilities as
     an employee of the Company.

          1.1(k)  "Disability"  has the meaning set forth in Section 3.2 of this
     Agreement.

                                       56

<PAGE>

          1.1(l)  "Disability  Effective  Date"  has the  meaning  set  forth in
     Section 3.2 of this Agreement.

          1.1(m) "Effective Date" means the date of this Agreement.

          1.1(n) "Employment Period" means the period beginning on the Effective
     Date  and  ending  on the  later of (i) May 3,  2002,  or (ii) May 3 of any
     succeeding  year during which notice is given by either party (as described
     in Section 2.1 of this  Agreement) of such party's intent not to renew this
     Agreement.

          1.1(o)  "Exchange Act" means the  Securities  Exchange Act of 1934, as
     amended.

          1.1(p) "Excise Tax" has the meaning set forth in Section  4.2(e)(i) of
     this Agreement.

          1.1(q) "Good  Reason" has the meaning set forth in Section 3.4 of this
     Agreement.

          1.1(r) "Gross-Up  Payment" has the meaning set forth in Section 4.2(i)
     of this Agreement.

          1.1(s)  "Incentive  Bonus" has the meaning set forth in Section 2.4(b)
     of this Agreement.

          1.1(t)  "Incumbent  Board"  has  the  meaning  set  forth  in  Section
     1.1(e)(ii) of this Agreement.

          1.1(u)  "Notice of  Termination"  has the meaning set forth in Section
     3.6 of this Agreement.

          1.1(v) "Other Benefits" has the meaning set forth in Section 4.1(e) of
     this Agreement.

          1.1(w) "Outstanding Company Common Stock" has the meaning set forth in
     Section 1.1(e)(i) of this Agreement.

          1.1(x)  "Outstanding  Company Voting  Securities"  has the meaning set
     forth in Section 1.1(e)(i) of this Agreement.

          1.1(y)  "Payment"  has the meaning set forth in Section  4.2(e)(i)  of
     this Agreement.

          1.1(z)  "Person"  means any  "person"  within the  meaning of Sections
     13(d) and 14(d) of the Exchange Act.

          1.1(aa)"Prorated  Target  Bonus" has the  meaning set forth in Section
     4.1(b) of this Agreement.

          1.1(bb)"Severance  Bonus  Amount" has the meaning set forth in Section
     4.2(b) of this Agreement.


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<PAGE>

          1.1(cc)"Term"  means the period that begins on the Effective  Date and
     ends on the earlier of: (i) the Date of  Termination,  or (ii) the close of
     business on the later of May 3, 2002 or May 3 of any renewal term.

     1.2 Gender and Number. When appropriate, pronouns in this Agreement used in
the masculine gender include the feminine gender,  words in the singular include
the plural, and words in the plural include the singular.

     1.3 Headings.  All headings in this Agreement are included  solely for ease
of reference and do not bear on the interpretation of the text. Accordingly,  as
used in this  Agreement,  the terms  "Article" and "Section"  mean the text that
accompanies the specified Article or Section of the Agreement.

     1.4 Applicable  Law. This  Agreement  shall be governed by and construed in
accordance  with the laws of the State of  Missouri,  without  reference  to its
conflict of law principles.

Section 2: Terms and Conditions of Employment.

     2.1 Period of Employment.  The Executive  shall remain in the employ of the
Company  throughout the Term of this Agreement in accordance  with the terms and
provisions of this Agreement. This Agreement will automatically renew for annual
one-year periods unless either party gives the other written notice, by February
3, 2002, or February 3 of any  succeeding  year,  of such party's  intent not to
renew this Agreement.

          2.2 Positions and Duties.

          2.2(a)  Throughout  the Term of this  Agreement,  the Executive  shall
          serve as _________,  subject to the reasonable directions of the Board
          or the  President  and Chief  Executive  Officer of the  Company.  The
          Executive  shall have such  authority and shall perform such duties as
          are  specified  by the  Board or the  President  and  Chief  Executive
          Officer of the Company  for the office to which he has been  appointed
          hereunder and shall so serve,  subject to the control exercised by the
          Board and the President and Chief Executive Officer from time to time.

          2.2(b)  Throughout  the  Term of this  Agreement  (but  excluding  any
          periods  of  vacation  and  sick  leave  to  which  the  Executive  is
          entitled),  the Executive shall devote  reasonable  attention and time
          during  normal  business  hours to the  business  and  affairs  of the
          Company  and  shall  use  his  reasonable   best  efforts  to  perform
          faithfully and efficiently  such  responsibilities  as are assigned to
          him under or in  accordance  with this  Agreement;  provided  that, it
          shall not be a violation of this Section  2.2(b) for the  Executive to
          (i) serve on  corporate,  civic or  charitable  boards or  committees,
          (ii) deliver lectures or fulfill speaking engagements, or (iii) manage
          personal investments,  so long as such activities do not significantly
          interfere with the performance of the Executive's  responsibilities as
          an  employee  of the  Company in  accordance  with this  Agreement  or
          violate  the  Company's  conflict  of  interest  policy  as in  effect
          immediately prior to the Effective Date.

     2.3  Situs  of  Employment.  Throughout  the  Term of this  Agreement,  the
Executive's  services shall be performed at the location where the Executive was
employed  immediately  prior to the Effective Date or at any other office of the
Company which is located in the greater St. Louis, Missouri metropolitan area.

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<PAGE>

          2.4 Compensation.

          2.4(a)  Annual Base  Salary.  At the  Effective  Date,  the  Executive
          receives an annual base salary ("Annual Base Salary") of _____________
          Dollars  ($_______).  The Executive's Annual Base Salary shall be paid
          in equal or substantially equal semi-monthly installments.  During the
          Term  of  this  Agreement,  the  Annual  Base  Salary  payable  to the
          Executive  shall be reviewed at least  annually and shall be increased
          at the  discretion of the Board or the  Compensation  Committee of the
          Board but shall not be reduced.

          2.4(b)  Incentive  Bonuses.  In addition to Annual  Base  Salary,  the
          Executive  shall be awarded the opportunity to earn an incentive bonus
          on  an  annual  basis   ("Incentive   Bonus")   under  any   incentive
          compensation  plan  which  are  generally   available  to  other  peer
          executives  of the  Company.  During the Term of this  Agreement,  the
          annual  target  Incentive  Bonus  which  the  Executive  will have the
          opportunity  to earn  shall  be  reviewed  at  least  annually  and be
          increased at the discretion of the Board or the Compensation Committee
          of the Board.

          2.4(c) Incentive, Savings and Retirement Plans. Throughout the Term of
          this Agreement,  the Executive shall be entitled to participate in all
          incentive,  savings and retirement plans generally  available to other
          peer executives of the Company.

          2.4(d) Welfare  Benefit  Plans.  Throughout the Term of this Agreement
          (and  thereafter,  subject to Section  4.1(d)  hereof),  the Executive
          and/or the Executive's  family,  as the case may be, shall be eligible
          for  participation  in and shall  receive all benefits  under  welfare
          benefit  plans,  practices,  policies  and  programs  provided  by the
          Company (including, without limitation, medical, prescription, dental,
          disability, salary continuance,  employee life, group life, accidental
          death and travel accident  insurance plans and programs) to the extent
          generally available to other peer executives of the Company.

          2.4(e) Expenses.  Throughout the Term of this Agreement, the Executive
          shall be entitled to receive prompt  reimbursement  for all reasonable
          business  expenses  incurred by the Executive in  accordance  with the
          policies,  practices and procedures generally applicable to other peer
          executives of the Company.

          2.4(f) Fringe  Benefits.  Throughout the Term of this  Agreement,  the
          Executive  shall be entitled to such fringe  benefits as generally are
          provided to other peer executives of the Company.

          2.4(g)  Office  and  Support  Staff.   Throughout  the  Term  of  this
          Agreement,  the Executive shall be entitled to an office or offices of
          a size and with  furnishings and other  appointments,  and to personal
          secretarial and other assistance,  as are generally  provided to other
          peer executives of the Company.

          2.4(h) Vacation.  Throughout the Term of this Agreement, the Executive
          shall be  entitled  to paid  vacation  in  accordance  with the plans,
          policies,  programs and practices as are  generally  provided to other
          peer executives of the Company.

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<PAGE>

Section 3:    Termination of Employment.

     3.1 Death. The Executive's  employment shall terminate  automatically  upon
the Executive's death during the Employment Period.

     3.2 Disability. If the Company determines in good faith that the Disability
of the  Executive has occurred  during the  Employment  Period  (pursuant to the
definition of Disability set forth below), the Company may give to the Executive
written notice in accordance  with Section 6.2 of its intention to terminate the
Executive's  employment.  In such event,  the  Executive's  employment  with the
Company shall terminate  effective on the thirtieth  (30th) day after receipt of
such notice by the Executive (the "Disability  Effective Date"),  provided that,
within the thirty (30) days after such  receipt,  the  Executive  shall not have
returned to full-time  performance of the  Executive's  duties.  For purposes of
this  Agreement,  "Disability"  shall mean that the Executive has been unable to
perform the services  required of the Executive  hereunder on a full-time  basis
for a period of one hundred eighty (180) consecutive  business days by reason of
a physical and/or mental condition.  "Disability"  shall be deemed to exist when
certified by a physician selected by the Company and acceptable to the Executive
or the Executive's legal  representative (such agreement as to acceptability not
to be withheld  unreasonably).  The  Executive  will  submit to such  medical or
psychiatric examinations and tests as such physician deems necessary to make any
such Disability determination.

     3.3  Termination  for Cause.  The Company  may  terminate  the  Executive's
employment   during  the  Employment   Period  for  "Cause,"  which  shall  mean
termination  based upon:  (i) the  Executive's  willful and continued failure to
substantially  perform his duties  with the  Company  (other than as a result of
incapacity  due to physical  or mental  condition),  after a written  demand for
substantial  performance  is  delivered to the  Executive by the Company,  which
specifically  identifies the manner in which the Executive has not substantially
performed his duties,  (ii) the Executive's  commission of an act constituting a
criminal  offense  that would be  classified  as a felony  under the  applicable
criminal code or involving moral turpitude,  dishonesty,  or breach of trust, or
(iii) the Executive's  material  breach of any provision of this Agreement.  For
purposes of this Section, no act or failure to act on the Executive's part shall
be considered  "willful" unless done, or omitted to be done,  without good faith
and without  reasonable belief that the act or omission was in the best interest
of the Company. Notwithstanding the foregoing, the Executive shall not be deemed
to have been  terminated  for Cause unless and until (i) he receives a Notice of
Termination from the Company, (ii) he is given the opportunity, with counsel, to
be heard before the Board, and (iii) the Board finds, in its good faith opinion,
that the  Executive  was  guilty  of the  conduct  set  forth in the  Notice  of
Termination.

     3.4  Termination  for Good Reason after a Change in Control.  The Executive
may terminate his  employment  with the Company for "Good Reason" after a Change
in Control which shall mean:

          3.4(a) the assignment to the Executive of any duties  inconsistent  in
          any respect with the Executive's position (including status,  offices,
          titles   and   reporting   requirements),    authority,    duties   or
          responsibilities as contemplated by Section 2.2(a) or any other action
          by  the  Company  which  results  in a  material  diminution  in  such
          position, authority, duties or responsibilities;

          3.4(b) (i) the  failure by the  Company to  continue in effect for the
          Executive any benefit or compensation plan, stock ownership plan, life
          insurance  plan,  health and accident plan or disability plan that are
          generally available to other peer executives of the Company,  (ii) the
          taking of any action by the Company which would  adversely  affect the
          Executive's  participation  in or  materially  reduce the  Executive's
          benefits  under any such plans as compared with the  participation  or
          benefits  generally  provided to other peer executives of the Company,
          or (iii) the failure by the Company to provide the Executive with paid
          vacation  equivalent to that paid vacation generally provided to other
          peer executive of the Company.

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<PAGE>

          3.4(c) the Company's requiring the Executive to be based at any office
          or location other than that described in Section 2.3;

          3.4(d) a  material  breach by the  Company  of any  provision  of this
          Agreement;

          3.4(e) any  purported  termination  by the Company of the  Executive's
          employment otherwise than as expressly permitted by this Agreement; or

          3.4(f) within a period ending at the close of business on the date two
          (2) years after the Change in Control  Date, if the Company has failed
          to comply  with and  satisfy  Section 5.2  on or after such  Change in
          Control Date.

     For purposes of this Section, any termination of the Executive's employment
based upon a good faith  determination  of "Good  Reason" made by the  Executive
shall be subject to a delivery of a Notice of  Termination  by the  Executive to
the Company in the manner  prescribed in Section 3.6 and subject  further to the
ability of the Company to remedy  promptly  any action not taken in bad faith by
the Company may otherwise constitute Good Reason under this Section 3.4.

     3.5 Voluntary  Termination by the Executive.  The Executive may voluntarily
terminate his employment with the Company for any reason or for no reason at any
time during the Employment Period.

     3.6 Notice of  Termination.  Any  termination  by the  Company for Cause or
Disability, or by the Executive for Good Reason, shall be communicated by Notice
of  Termination  to the other party,  given in accordance  with Section 6.2. For
purposes of this  Agreement,  a "Notice of  Termination"  means a written notice
which (i) indicates the specific termination  provision in this Agreement relied
upon, (ii) to the extent  applicable,  sets forth in reasonable detail the facts
and circumstances  claimed to provide a basis for termination of the Executive's
employment  under  the  provision  so  indicated,   and  (iii) if  the  Date  of
Termination (as defined in Section 3.7 hereof) is other than the date of receipt
of such notice,  specifies  the  termination  date (which date shall be not more
than  fifteen  (15) days after the giving of such  notice).  The  failure by the
Executive or the Company to set forth in the Notice of  Termination  any fact or
circumstance  which  contributes  to a showing of Good Reason or Cause shall not
waive any right of the  Executive  or the  Company  hereunder  or  preclude  the
Executive or the Company from asserting such fact or  circumstance  in enforcing
the Executive's or the Company's rights hereunder.

     3.7 Date of Termination. "Date of Termination" means (i) if the Executive's
employment is terminated by the Company for Cause, the Date of Termination shall
be the date of receipt by the  Executive  of the  Notice of  Termination  or any
later  date  specified  therein,  as the case may be,  (ii) if  the  Executive's
employment  is  terminated  by  reason  of  death  or  Disability,  the  Date of
Termination  shall  be the  date of death  of the  Executive  or the  Disability
Effective  Date, as the case may be, or (iii) if the  Executive's  employment is
terminated by the Executive for Good Reason,  the Date of Termination shall be a
date specified in the Notice of Termination,  with such specified date being not
less than ten (10) days after the date of  receipt by the  Company of the Notice
of Termination,  (iv) if the Executive's employment is terminated by the Company
other than for Cause, death, or Disability, the Date of Termination shall be the
date of receipt by the Executive of the Notice of Termination;  provided that if
within  thirty  (30) days after any Notice of  Termination  is given,  the party
receiving  such Notice of  Termination  notifies  the other party that a dispute
exists concerning the termination,  the Date of Termination shall be the date on
which the dispute is finally  determined,  either by mutual written agreement of
the  parties,  or by a final  judgment,  order or decree of a court of competent
jurisdiction  (the time for appeal therefrom having expired and no appeal having
been perfected).


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<PAGE>

Section 4: Certain Benefits Upon Termination.

     4.1 Termination Without Cause Prior to a Change in Control.  If, prior to a
Change in Control  during the  Employment  Period,  the Company  terminates  the
Executive's  employment  without Cause,  the Executive  shall be entitled to the
payment of the benefits provided below:

          4.1(a) Accrued Obligations.  Within thirty (30) days after the Date of
          Termination, the Company shall pay to the Executive the sum of (1) the
          Executive's  accrued salary through the Date of  Termination,  (2) the
          accrued   benefit   payable  to  the  Executive   under  any  deferred
          compensation  plan, program or arrangement in which the Executive is a
          participant  subject to the computation of benefits provisions of such
          plan,  program or  arrangement,  and (3) any accrued  vacation pay; in
          each  case  to  the  extent   not   previously   paid  (the   "Accrued
          Obligations").

          4.1(b) Annual Base Salary and Target Bonus Continuation.  For a period
          of  twelve  (12)  months  beginning  in the  month  after  the Date of
          Termination, the Company shall pay to the Executive on a monthly basis
          one-twelfth  of an amount equal the  Executive's  then-current  Annual
          Base Salary and Prorated Target Bonus. For purposes of this Agreement,
          the term  "Prorated  Target  Bonus"  means  an  amount  determined  by
          multiplying the actual  percentage of the Executive's base salary paid
          to the  Executive as an Incentive  Bonus in the year prior to the year
          in  which  the  Date  of   Termination   occurs  by  the   Executive's
          then-current  Annual  Base  Salary as of the Date of  Termination  and
          prorating this amount by  multiplying it by a fraction,  the numerator
          of which is the number of days during the  then-current  calendar year
          that the Executive was employed by the Company up to and including the
          Date of Termination  and the  denominator of which is 365. The Company
          at any  time  may  elect  to pay the  balance  of such  payments  then
          remaining in a lump sum.

          4.1(c)  Stock-Based  Awards. To the extent not otherwise  provided for
          under  the terms of the  Company's  stock-based  benefit  plans or the
          Executive's  grant  agreement,  all  stock-based  awards  held  by the
          Executive  that have not  expired  and are  scheduled  to vest  and/or
          become exercisable within six (6) months after the Date of Termination
          in accordance with their  respective  terms,  shall vest and/or become
          exercisable as of the Date of Termination and shall remain exercisable
          after the Date of Termination in accordance with the original terms of
          their respective grant agreements.

          4.1(d) Medical and Health Benefit Continuation. For a period of twelve
          (12) months beginning in the month the Date of Termination occurs, the
          Company  shall pay the costs of  medical  and health  benefits  to the
          Executive and/or the Executive's  family at least equal to those which
          would have been  provided  to them in  accordance  with the  Company's
          plans, programs,  practices and policies if the Executive's employment
          had not been  terminated;  provided,  however,  that if the  Executive
          becomes  reemployed  with another  employer and is eligible to receive
          medical  or health  benefits  under  another  employer-provided  plan,
          program,  practice or policy the medical and health benefits described
          herein  shall  be  immediately  terminated  upon the  commencement  of
          coverage under the new employer's plan, program, practice or policy.


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<PAGE>

          4.1(e) Other Benefits.  To the extent not previously paid or provided,
          the Company  shall timely pay or provide to the  Executive  and/or the
          Executive's  family any other amounts or benefits  required to be paid
          or provided for which the Executive  and/or the Executive's  family is
          eligible  to receive  pursuant to this  Agreement  and under any plan,
          program, policy or practice or contract or agreement of the Company as
          those provided  generally to other peer  executives and their families
          ("Other Benefits").

     4.2 Benefits Upon a Change in Control. If a Change in Control occurs during
the  Employment  Period and within  three years after the Change in Control Date
(a) the Company terminates the Executive's  employment without Cause, or (b) the
Executive  terminates  employment  with the  Company for Good  Reason,  then the
Executive  shall  become  entitled  to the  payment of the  benefits as provided
below:

          4.2(a) Accrued Obligations.  Within thirty (30) days after the Date of
     Termination, the Company shall pay to the Executive the Accrued Obligations
     and the Prorated Target Bonus.

          4.2(b)  Severance  Amount.  Within  thirty (30) days after the Date of
     Termination,  the Company  shall pay to the Executive as severance pay in a
     lump sum, in cash, an amount equal to 1.5 times the sum of the  Executive's
     then-current Annual Base Salary and Severance Bonus Amount. For purposes of
     this  Agreement,   the  term  "Severance  Bonus  Amount"  means  an  amount
     determined by averaging the percentages of the Executive's base salary that
     were actually  paid to the Executive as an Incentive  Bonus during the five
     most  recently  completed  years  prior to the  year in  which  the Date of
     Termination   occurs  and  multiplying  such  average   percentage  by  the
     Executive's then-current Annual Base Salary.

          4.2(c)  Stock-Based  Awards. To the extent not otherwise  provided for
     under  the  terms  of  the  Company's  stock-based  benefit  plans  or  the
     Executive's grant agreements,  all stock-based awards held by the Executive
     that have not expired in accordance with their  respective terms shall vest
     and/or become fully  exercisable as of the Change in Control Date and shall
     remain  exercisable after the Change in Control Date in accordance with the
     original terms of the respective grant agreements.

          4.2(d) Other Benefits.  To the extent not previously paid or provided,
     the  Company  shall  timely  pay or  provide  to the  Executive  and/or the
     Executive's family any Other Benefits.

          4.2(e) Gross-up Payments.

               (i) Anything in this  Agreement to the contrary  notwithstanding,
               in the event that it shall be determined  that any payment by the
               Company to or for the benefit of the  Executive  (whether paid or
               payable or distributed or distributable  pursuant to the terms of
               this Agreement or otherwise but determined  without regard to any
               additional  payments  required  under  this  Section  4.2(e))  (a
               "Payment")  would be subject  to the  excise tax  imposed by Code
               Section  4999 (or any  successor  provision)  or any  interest or
               penalties  are  incurred by the  Executive  with  respect to such
               excise tax (such excise tax,  together with any such interest and
               penalties,  are  hereinafter  collectively  referred  to  as  the
               "Excise Tax"), then the Executive shall be entitled to receive an
               additional payment (a "Gross-Up  Payment") in an amount such that
               after  payment  by the  Executive  of all  taxes  (including  any
               interest  or  penalties  imposed  with  respect  to such  taxes),
               including, without limitation, any income taxes (and any interest
               or penalties imposed with respect thereto) and Excise Tax imposed
               upon the Gross-Up Payment, the Executive retains an amount of the
               Gross-Up  Payment on an  after-tax  basis equal to the Excise Tax
               imposed upon the  Payment.  The intent of the parties is that the
               Company shall be  responsible in full for, and shall pay, any and
               all Excise Tax on any Payments and  Gross-up  Payment(s)  and any
               income and all excise and employment  taxes  (including,  without
               limitation,  penalties  and  interest)  imposed  on any  Gross-up
               Payment(s) as well as any loss of deduction  caused by or related
               to the Gross-up Payment(s).


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<PAGE>

               (ii)  Subject  to the  provisions  of  Section  4.2(e)(iii),  all
               determinations  required  to be made under this  Section  4.2(e),
               including whether and when a Gross-up Payment is required and the
               amount  of  such  Gross-Up  Payment  and  the  assumptions  to be
               utilized  in arriving  at such  determinations,  shall be made by
               KPMG LLP (the  "Accounting  Firm"),  which shall provide detailed
               supporting  calculations both to the Company and to the Executive
               within  fifteen (15)  business days of receipt of notice from the
               Company  or the  Executive  that  there  has  been  or  will be a
               Payment.  In the event that the Accounting Firm is serving as the
               accountant  or  auditor  for the Person  effecting  the Change in
               Control,   the  Executive   shall  appoint   another   nationally
               recognized  accounting firm to make the  determinations  required
               hereunder (which accounting firm shall then be referred to as the
               "Accounting  Firm"  hereunder).  All  fees  and  expenses  of the
               Accounting Firm shall be paid solely by the Company. Any Gross-Up
               Payment, as determined pursuant to this Section 4.2(e),  shall be
               paid by the Company to the  Executive  within five (5) days after
               the  receipt  of  the  Accounting  Firm's  determination.  If the
               Accounting  Firm  determines that no Excise Tax is payable by the
               Executive,  it shall furnish the Executive with a written opinion
               that  failure  to  report  the  Excise  Tax  on  the  Executive's
               applicable  federal  income  tax  return  would not result in the
               imposition of a negligence or similar penalty.  Any determination
               by the Accounting  Firm shall be binding upon the Company and the
               Executive  in the  absence  of a material  mathematical  or legal
               error.  As a result  of the  uncertainty  in the  application  of
               Section 4999 of the Code at the time of the initial determination
               by  the  Accounting  Firm  hereunder,  it is  possible  that  the
               Gross-Up  Payments  will not have been made by the  Company  that
               should  have been made or that the  Gross-Up  Payments  will have
               been made that should not have been made, in each case consistent
               with the calculations required to be made hereunder. In the event
               that the  Company  exhausts  its  remedies  pursuant  to  Section
               4.2(e)(iii)  below and the  Executive is  thereafter  required to
               make a payment  of any  Excise  Tax or any  interest,  penalty or
               addition  to tax  related  thereto,  the  Accounting  Firm  shall
               determine the amount of the underpayment of Excise Taxes that has
               occurred and such underpayment and interest,  penalty or addition
               to tax shall be promptly  paid by the  Company to the  Executive,
               along  with  such   additional   amounts   described  in  Section
               4.2(e)(i).  In the event that the Accounting Firm determines that
               an  overpayment  of Gross-Up  Payment(s)  has occurred,  any such
               overpayment  shall be treated  for all  purposes as a loan to the
               Executive with interest at the  applicable  federal rate provided
               for in Section  7872(f)(2)  of the Code,  due and payable  within
               ninety (90) days after  written  demand to the  Executive  by the
               Company; provided, however, that the Executive shall have no duty
               or obligation whatsoever to repay such overpayment if Executive's
               receipt of the overpayment,  or any portion thereof,  is included
               in the Executive's  income and the  Executive's  repayment of the
               same is not  deductible  by the  Executive  for  federal or state
               income tax purposes.

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<PAGE>

               (iii) The  Executive  shall  notify the Company in writing of any
               claim by the Internal Revenue Service that, if successful,  would
               require the payment by the Company of the Gross-Up Payment.  Such
               notification  shall be given as soon as practicable  but no later
               than ten (10)  business  days after the  Executive is informed in
               writing of such claim by the  Internal  Revenue  Service  and the
               notification shall apprise the Company of the nature of the claim
               and the date on which  such  claim is  required  to be paid.  The
               Executive  shall not pay such claim prior to the  expiration of a
               30-day period following the date on which the Executive has given
               such  notification  to the Company (or such shorter period ending
               on the date that any payment of taxes with  respect to such claim
               is  required).  If the Company  notifies the Executive in writing
               prior to the expiration of such period that it desires to contest
               such claim, the Executive shall:

                    (A) give the Company any information reasonably requested by
                    the Company relating to such claim;

                    (B) take such  action in  connection  with  contesting  such
                    claim as the  Company  shall  reasonably  request in writing
                    from time to time,  including without limitation,  accepting
                    legal  representation  with  respect  to  such  claim  by an
                    attorney reasonably selected by the Company;

                    (C)  cooperate  with the  Company  in good faith in order to
                    effectively contest such claim; and

                    (D) permit the  Company to  participate  in any  proceedings
                    relating to such claim;

                    provided,  however,  that the Company shall bear and pay all
                    costs  and  expenses  (including   additional  interest  and
                    penalties)  incurred in connection  with such  contest,  and
                    shall  indemnify  and hold  the  Executive  harmless,  on an
                    after-tax  basis to the  Executive,  for any  Excise  Tax or
                    income tax  (including  interest and penalties  with respect
                    thereto)  imposed  as a  result  of  such  contest.  Without
                    limitation  on the  foregoing  provisions  of  this  Section
                    4.2(e),  the Company shall control all proceedings  taken in
                    connection  with such contest  and, at its sole option,  may
                    pursue  or  forgo  any  and  all   administrative   appeals,
                    proceedings,   hearings  and  conferences  with  the  taxing
                    authority  in  respect  of such  claim and may,  at its sole
                    option,  either  direct the Executive to pay the tax claimed
                    and sue for a refund or contest the claim in any permissible
                    manner,  and the Executive  agrees to prosecute such contest
                    to a determination before any administrative  tribunal, in a
                    court of initial  jurisdiction  or in one or more  appellate
                    courts, as the Company shall determine;  provided,  however,
                    that if the Company  directs the Executive to pay such claim
                    and sue for a refund,  the Company  shall advance the amount
                    of such payment to the Executive, on an interest-free basis,
                    and shall indemnify and hold the Executive  harmless,  on an
                    after-tax   basis,   from  any  Excise  Tax  or  income  tax
                    (including  interest  or  penalties  with  respect  thereto)
                    imposed with respect to such advance;  and provided  further
                    that any extension of the statute of limitations relating to
                    payment of taxes for the taxable year of the Executive  with
                    respect to which such contested  amount is claimed to be due
                    is limited solely to such contested amount. Furthermore, the
                    Company's  control of the contest shall be limited to issues
                    with  respect to which a Gross-Up  Payment  would be payable
                    hereunder and the  Executive  shall be entitled to settle or
                    contest,  as the case may be, any other issue  raised by the
                    Internal Revenue Service or any other taxing authority.


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<PAGE>

                         (iv) If after the receipt by the Executive of an amount
                    advanced by the Company pursuant to Section 4.2(e)(iii), the
                    Executive  becomes  entitled  to  receive  any  refund  with
                    respect to such claim,  the Executive  shall (subject to the
                    Company's   complying  with  the   requirements  of  Section
                    4.2(e)(iii))  promptly pay to the Company the amount of such
                    refund  (together with any interest paid or credited thereon
                    after taxes  applicable  thereto).  If, after the receipt by
                    the Executive of an amount advanced by the Company  pursuant
                    to Section  4.2(e)(iii),  a  determination  is made that the
                    Executive  shall not be entitled to a refund with respect to
                    such claim and the Company does not notify the  Executive in
                    writing of its intent to contest such denial or refund prior
                    to  the   expiration   of  thirty   (30)  days   after  such
                    determination, then such advance shall be forgiven and shall
                    not be required to be repaid and the amount of such  advance
                    shall  offset,  to the  extent  thereof,  the  amount of the
                    Gross-Up  Payment  required to be paid by the Company to the
                    Executive.

     4.3 Death.  If the  Executive's  employment  is terminated by reason of the
Executive's  death during the Employment Period (either prior or subsequent to a
Change in Control),  this Agreement shall terminate without further  obligations
to the Executive's legal  representatives  under this Agreement,  other than for
(i) payment of Accrued  Obligations  (as defined in Section 4.1(a)) (which shall
be paid to the Executive's estate or beneficiary,  as applicable,  in a lump sum
in cash within thirty (30) days of the Date of Termination)  and (ii) the timely
payment or provision of Other Benefits (as defined in Section 4.1(e)), including
death benefits pursuant to the terms of any plan,  policy, or arrangement of the
Company.

     4.4 Disability.  If the  Executive's  employment is terminated by reason of
the  Executive's  Disability  during  the  Employment  Period  (either  prior or
subsequent  to a Change in Control),  this  Agreement  shall  terminate  without
further  obligations  to the  Executive,  other than for  (i) payment of Accrued
Obligations (as defined in Section 4.1(a)) (which shall be paid to the Executive
in a lump sum in cash within  thirty (30) days of the Date of  Termination)  and
(ii) the timely  payment or provision  of Other  Benefits (as defined in Section
4.1(e)) including  Disability benefits pursuant to the terms of any plan, policy
or arrangement of the Company.

     4.5  Termination  by the Company  for Cause,  by the  Executive  Prior to a
Change in Control  for any  Reason or by the  Executive  Other Than Good  Reason
After a Change in Control. If the Executive's  employment shall be terminated by
the Company for Cause during the  Employment  Period (either prior or subsequent
to a Change in Control) or by the  Executive for any reason prior to a Change in
Control or by the  Executive  for a reason other than Good Reason after a Change
in Control,  this Agreement shall terminate  without further  obligations to the
Executive, other than for (i) payment of the Executive's Accrued Obligations (as
defined in Section  4.1(a))  (which shall be paid to the Executive in a lump sum
in cash within thirty (30) days of the Date of Termination), and (ii) the timely
payment or  provision  of Other  Benefits  (as  defined in Section  4.1(e)),  as
applicable for such termination.


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<PAGE>

     4.6  Non-Exclusivity  of Rights.  Except as  provided  in  Section  4.1(d),
nothing in this Agreement shall prevent or limit the  Executive's  continuing or
future  participation in any plan,  program,  policy or practice provided by the
Company and for which the Executive may qualify, nor shall anything herein limit
or  otherwise  affect  such  rights as the  Executive  may have  under any other
contract or agreement  with the Company.  Amounts  which are vested  benefits of
which the  Executive is otherwise  entitled to receive  under any plan,  policy,
practice or program of, or any other contract or agreement  with, the Company at
or subsequent to the Date of  Termination,  shall be payable in accordance  with
such plan, policy, practice or program or contract or agreement.

     4.7 Full Settlement. The Company's obligation to make the payments provided
for in this Agreement and otherwise to perform its  obligations  hereunder shall
not be  affected  by any  set-off,  counterclaim,  recoupment,  defense or other
claim,  right or action  which the Company may have  against  the  Executive  or
others. In no event shall the Executive be obligated to seek other employment or
take any  other  action  by way of  mitigation  of the  amounts  payable  to the
Executive  under any of the provisions of this Agreement and, except as provided
in  Section  4.1(d),  such  amounts  shall  not be  reduced  whether  or not the
Executive  obtains  other  employment.  The  Company  agrees to pay  promptly as
incurred, to the full extent permitted by law, all legal fees and expenses which
the Executive may reasonably incur as a result of any contest (regardless of the
outcome  thereof) by the  Company,  the  Executive  or others of the validity or
enforceability  of, or liability  under,  any provision of this Agreement or any
guarantee of  performance  thereof  (including as a result of any contest by the
Executive regarding the amount of any payment pursuant to this Agreement),  plus
in each case  interest on any delayed  payment at the  applicable  Federal  rate
provided for in Code Section 7872(f)(2)(A).

Section 5:    Successors.

     5.1  Successors of Executive.  This  Agreement is personal to the Executive
and,  without the prior written consent of the Company,  the rights (but not the
obligations) shall not be assignable by the Executive  otherwise than by will or
the laws of descent and distribution.  This Agreement shall inure to the benefit
of and be enforceable by the Executive's legal representatives.

     5.2 Successors of Company.  The Company will require any successor (whether
direct or indirect, by purchase,  merger,  consolidation or otherwise) to all or
substantially  all of the business  and/or assets of the Company or the division
in which the Executive is employed,  as the case may be, to assume expressly and
agree to perform  this  Agreement in the same manner and to the same extent that
the  Company  would be required  to perform it if no such  succession  had taken
place.   Failure  of  the  Company  to  obtain  such  agreement   prior  to  the
effectiveness  of any such  succession  shall be a breach of this  Agreement and
shall entitle the Executive to terminate the Agreement at his option on or after
the Change in Control Date for Good Reason. As used in this Agreement, "Company"
shall mean the Company as hereinbefore defined and any successor to its business
or the business of the Division  and/or its assets or the assets of the Division
which  assumes and agrees to perform  this  Agreement  by  operation  of law, or
otherwise.


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<PAGE>

Section 6:    Miscellaneous.

     6.1 Other Agreements. This Agreement supersedes all prior dated agreements,
letters  and  understandings   concerning  severance  benefits  payable  to  the
Executive,  either before or after a Change in Control. The Board may, from time
to time in the future,  provide other incentive  programs and bonus arrangements
to the Executive with respect to the occurrence of a Change in Control that will
be  in  addition  to  the  benefits  required  to  be  paid  in  the  designated
circumstances  in connection  with the  occurrence of a Change in Control.  Such
additional  incentive programs and/or bonus arrangements will affect or abrogate
the  benefits  to be paid  under  this  Agreement  only in the manner and to the
extent explicitly  agreed to by the Executive in any such subsequent  program or
arrangement.

     6.2  Notice.  For  purposes  of  this  Agreement,  notices  and  all  other
communications  provided for in the  Agreement  shall be in writing and shall be
deemed  to have been duly  given  when  delivered  or  mailed  by  certified  or
registered mail,  return receipt  requested,  postage prepaid,  addressed to the
respective  addresses  as set forth  below;  provided  that all  notices  to the
Company shall be directed to the attention of the President and Chief  Executive
Officer,  or to such other address as one party may have  furnished to the other
in writing in accordance herewith, except that notice of change of address shall
be effective only upon receipt.

              Notice to Executive:
              --------------------

              ____________________
              c/o RehabCare Group, Inc.
              7733 Forsyth Boulevard
              Suite 1700
              St. Louis, Missouri 63105

              Notice to Company:
              ------------------

              RehabCare Group, Inc.
              7733 Forsyth Boulevard
              Suite 1700
              St. Louis, Missouri 63105

     6.3 Validity.  The invalidity or  unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement.

     6.4  Withholding.  The Company may withhold from any amounts  payable under
this  Agreement  such  Federal,  state or local taxes as shall be required to be
withheld pursuant to any applicable law or regulation.

     6.5 Waiver.  The Executive's or the Company's failure to insist upon strict
compliance with any provision hereof or any other provision of this Agreement or
the failure to assert any right the Executive or the Company may have hereunder,
including,   without  limitation,  the  right  of  the  Executive  to  terminate
employment  for Good Reason  pursuant to Section 3.4 shall not be deemed to be a
waiver  of such  provision  or right  or any  other  provision  or right of this
Agreement.


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<PAGE>


     IN  WITNESS  WHEREOF,  the  Executive  and  the  Company,  pursuant  to the
authorization  from its Board,  have caused this Agreement to be executed in its
name on its behalf, all as of the day and year first above written.



                                   Name: _______________________________________


                                   REHABCARE GROUP, INC.


                                   By: /s/ ALAN C. HENDERSON
                                   ---------------------------------------------
                                   Name: Alan C. Henderson
                                   Title:  President and Chief Executive Officer



                                       69

<PAGE>

                                                                    EXHIBIT 21.1



                           Subsidiaries of Registrant


      Subsidiary                            Jurisdiction of Organization
      ----------                            ----------------------------


StarMed Management, Inc.                        State of Delaware

RehabCare Group East, Inc.                      State of Delaware

RehabCare Group Management Services, Inc.       State of Delaware

RehabCare Group of California, Inc.             State of Delaware

RehabCare Texas Holdings, Inc.                  State of Delaware

RehabCare Group of Texas, L.P.                  State of Texas

StarMed Health Personnel, Inc.                  State of Delaware

Salt Lake Physical Therapy Associates, Inc.     State of Utah



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<PAGE>



                                                                    EXHIBIT 23.1




                          Independent Auditors' Consent

The Board of Directors
RehabCare Group, Inc.:

We consent to the  incorporation by reference in the registration  statement No.
33-43236  on  Form  S-8,  registration  statement  No.  33-67944  on  Form  S-8,
registration  statement  No.  33-82106 on Form S-8,  registration  statement No.
33-82048 on Form S-8,  registration  statement  No.  333-11311  on Form S-8, and
registration statement No. 333-86679 on Form S-8 of RehabCare Group, Inc. of our
report dated February 1, 2002, with respect to the  consolidated  balance sheets
of RehabCare Group,  Inc. and subsidiaries as of December 31, 2001 and 2000, and
the related  consolidated  statements of earnings,  stockholders'  equity,  cash
flows, and  comprehensive  earnings for the three-year period ended December 31,
2001,  which report is included in the  December 31, 2001 annual  report on Form
10-K of RehabCare Group, Inc.



/s/ KPMG LLP


St. Louis, Missouri
March 15, 2002



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