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                       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, 1999

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 to Section
12(b) of the Act:                          Name of exchange 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. (x)

      The  aggregate  market  value of voting  stock held by  non-affiliates  of
Registrant at March 10, 2000 was $170,711,590. At March 10, 2000, the Registrant
had 7,154,067 shares of Common Stock outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

      Part III of this  Annual  Report on Form 10-K  incorporates  by  reference
information contained in the Registrant's Proxy Statement for its annual meeting
of stockholders to be held May 10, 2000.

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                                     PART I

ITEM 1.  BUSINESS

General

    RehabCare Group,  Inc. (the "Company" or the  "Registrant"),  is a leader in
outsourcing and management of  comprehensive  medical  rehabilitation,  subacute
(skilled nursing) and outpatient therapy programs on a multi-year contract basis
and contract  therapy  services to hospitals and nursing homes. The Company also
is a leading provider of medical staffing to hospitals, long-term care and other
healthcare facilities on both an interim and permanent basis.

    Therapy  professionals  employed  by the  Company  for  its  rehabilitation,
skilled  nursing,  and  outpatient  therapy  programs and its  contract  therapy
services,  include  licensed  physical  and  occupational  therapists  and their
licensed  assistants,  as well as  speech  language  pathologists.  The  Company
believes  the  locus  of care in the  communities  where  it has  programs  will
continue to be the  acute-care  hospital  and,  thus,  it works  primarily  with
acute-care  hospitals to deliver  these  programs with the goal of enhancing the
overall economic viability of the client facility.  The Company's strategy is to
use its  expertise  and  experience to provide its clients with an efficient and
cost-effective  means to offer physical medicine and rehabilitation  services in
whatever  setting is most  economically  feasible while  establishing  long-term
relationships with its clients.  Each of the product lines the Company offers is
part of a post-acute continuum directed at restoring functional independence and
returning  patients  to a  residential  setting.  On May 20,  1999,  the Company
acquired Salt Lake Physical Therapy  Associates,  Inc. ("Salt Lake"), a provider
of physical,  occupational  and speech therapy  through  hospital  contracts,  a
freestanding clinic and home health agencies.

    Traveling  nurses  and  therapists  are  recruited  and  typically  work  on
assignment for 13 weeks, while supplemental staffing fills vacancies of 1 day to
13 weeks. On July 1, 1999, the Company acquired AllStaff,  Inc. ("AllStaff"),  a
provider of supplemental nurse staffing to healthcare providers. On December 20,
1999,  the Company  acquired  eai  Healthcare  Staffing  Solutions,  Inc.  ("eai
Healthcare   Staffing"),   a  provider  of  temporary  healthcare  personnel  to
hospitals, managed healthcare organizations, laboratories and physician offices.

    Historically,  the Company has sought to broaden its service offerings, both
through  internal  growth  and  acquisition.   The  Company  believes  that  the
acquisition  of  additional   therapy-based   contract   management   companies,
established   outpatient  operators  and  other  therapy  providers  within  the
rehabilitation  industry and staffing  companies is an appropriate  strategy for
growth.  Additional related acquisition  opportunities are regularly reviewed by
the Company.

Industry Overview

    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,  thereby 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  overhead  and  operating  cost
constraints have come into place and manpower has been reduced,  outsourcing has
become more important in order to increase  patient volumes and provide services
at a lower cost without sacrificing quality.

    By  outsourcing  post-acute  services,  healthcare  providers  use specialty
contract managers such as the Company to:

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    Utilize  unused space - Post-acute  services  help  hospitals  utilize empty
wings of their  facilities,  which  allows the  hospital  to recover the cost of
capital investment and overhead associated with the space.

    Increased volumes - Patients needing less intensive  treatment or post-acute
therapies  who would have been  referred to other venues for  treatment  can now
remain in the hospital  setting,  allowing  hospitals to capture  revenues  that
would otherwise be realized by another provider. New patients are also attracted
to the hospital by new services.

    Sign agreements with managed care organizations - Managed care organizations
find it more  advantageous to sign a contract covering both acute and post-acute
services with one entity rather than several separate, often unrelated entities.
Contract  managers may 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  post-acute  program
through the time of  discharge.  This is an  important  feature to managed  care
organizations in controlling  their costs while assuring  appropriate  outcomes.
Contract  managers  may often also have the ability to capture and analyze  this
information  from a large number of acute  rehabilitation  and  subacute  units,
which an  individual  hospital  could  not  otherwise  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, bring more patients
to the hospital.

    Increase cost control - Because of their extensive  experience in post-acute
product lines,  contract managers can offer pricing  structures that effectively
control a healthcare  provider's financial risk related to the service provided.
Contract  managers  also  frequently  share in the  financial  risks  with their
hospital  clients of any losses the hospital  incurs in connection with starting
the unit and reimbursement  from payors.  For hospitals using contract managers,
the result is often lower average costs per discharge than those of self-managed
programs. A hospital is able to increase its revenues without having to increase
its administrative staff or incur other fixed costs.

    Obtain  reimbursement  advice  -  The  contract  managers  may  also  employ
reimbursement  specialists  who are  available  to assist  client  hospitals  in
interpreting   complicated   regulations.   These  specialists  analyze  current
regulations  and assist the  hospital in complying  with them,  a highly  valued
service in the current changing healthcare environment.

    By outsourcing medical staffing, providers are able to:

    Recruit   staff  -  A  shortage   of  medical   professionals   has  created
opportunities  for  traveling  and  supplemental  staffing  services.  The nurse
staffing  business is strong due to providers  continuing  to maintain  variable
nurse  staffing  levels,  an  increase  in the  average  age of  nurses,  and an
insufficient new supply of nursing graduates. Other health professionals such as
radiology and  laboratory  technicians,  transcriptionists,  insurance  billers,
patient account  representatives and medical clerical personnel are also in high
demand.

    Manage  costs - Continued  reimbursement  pressures  have driven  healthcare
providers to manage costs by maintaining  flexible staffing that can increase or
decrease with patient volumes.

Services

    The Company operates in four business  segments for which operating  results
are evaluated regularly by executive management:  inpatient programs, outpatient
programs, contract therapy and staffing.

    Inpatient Programs - Upon inception in 1982, the Company's core business was
the staffing  and  management  of acute  inpatient  rehabilitation  units within
acute-care  hospitals.  The Company  operates these units on a fee basis that is

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computed in most cases  based on patient  days in the unit.  The unit  typically
consists of 20 beds and utilizes formerly idle space in the hospital.  It treats
patients having primarily one of ten required diagnoses  including stroke,  head
injury  or  hip  replacement.   The  Company  typically  provides  staffing  and
management  of the unit  including  a program  director,  a  physician,  and the
clinical  staff  which may include a  psychologist,  physical  and  occupational
therapists,  a speech  pathologist,  a social worker,  a nurse  manager,  a case
manager  and  other  appropriate  supporting  personnel.  The unit  affords  the
hospital  the ability to offer  rehabilitation  services to its  patients,  thus
retaining  those patients who might otherwise be discharged to a setting outside
the hospital.  This service line represented  approximately 34% of the Company's
revenues  in 1999.  The  Company  plans to  continue  growing  this  part of its
business through the signing of new contracts while retaining a large percentage
of its current clients.  Re-signings of expiring acute rehabilitation  contracts
have historically ranged from 80-90 percent.

    In 1994, the Company added the subacute  inpatient  service line in response
to client requests for management  services and the Company's  desire to broaden
its post-acute services. The subacute unit is located in the acute-care hospital
and is separately  licensed as a skilled nursing unit,  utilizing  formerly idle
space in the  hospital.  This unit treats the patients who are at the low end of
need for medical or  rehabilitative  care,  with greater need for nursing  care.
These patients' diagnoses cover  approximately 60 clinical conditions  including
stroke,  post-surgical  conditions,  pulmonary disease, burn, cancer, congestive
heart failure and wound management.  The subacute unit makes it possible for the
patient to remain in a hospital setting where emergency needs can be quickly met
as opposed to being sent to a freestanding skilled nursing facility. The Company
provides administrative and nurse management. The hospital benefits, once again,
by  retaining  patients  who would be  discharged  to another  setting,  thereby
capturing  additional  revenue and  utilizing  idle  space.  This  service  line
represented approximately 3% of the Company's revenues in 1999.

    Outpatient  Programs - The outpatient  division furnishes primarily therapy,
program   development  and  administrative   personnel  to  hospital  outpatient
departments,  satellites  and school  districts.  Pressure  from  payors to move
patients  to lower  cost  settings  has  helped  fuel the  growth in  outpatient
services.  Outpatient programs help bring patients into the hospital through the
referral  development  efforts in the community.  These programs serve a younger
population  reimbursed  by  commercial  and managed care payors and treat mainly
sports  medicine  and workers  compensation  patients.  The  service  line helps
hospitals compete with freestanding  clinics.  The Company's programs are always
conducted on the client hospital's campus or in satellite  locations  controlled
by the hospital. In 1999, this product line represented approximately 10% of the
Company's  revenues.  The  Company  plans to  increase  this line of business by
signing additional contracts with hospitals, as well as acquisitions.

    Contract  Therapy  - In  1997,  the  Company,  through  acquisitions,  added
contract  therapy to its product lines.  Contract  therapy is the management and
delivery  of  services,   including  providing  therapists,  in  long-term  care
settings.  Contract therapy  revenues in 1999 accounted for  approximately 5% of
the Company's  business.  Contract therapy affords the client the opportunity to
fulfill their  recurring  need for  therapists on a part-time  basis without the
need to add full-time staff.  The  introduction of a prospective  payment system
for skilled nursing  facilities and units has created a demand for the Company's
management  systems  and  expertise,   including  utilization  of  services  and
controlling  costs.  The  Company  plans to grow this  service  line by  signing
additional contracts.

    Staffing  - In 1996,  the  Company  added  the  staffing  line by  acquiring
Healthcare Staffing Solutions, Inc. ("HSSI"), located in Lowell,  Massachusetts.
HSSI  originally  recruited  physical,  occupational  and speech  therapists for
hospitals and  long-term  care  facilities  for  typically  13-week  assignments
(traveling  therapists).  The  enactment  of the  Balanced  Budget  Act of  1997
("BBA"),  which  established a prospective  payment  system for skilled  nursing
facilities and units significantly  reduced the demand for traveling therapists.
In response to this decline,  HSSI entered the nurse staffing business, a market
significantly  larger than the  therapist  market.  In August 1998,  the Company
acquired  StarMed  Staffing,  Inc.  ("StarMed"),  a provider  of  traveling  and
supplemental  nurses,  subsequently  merging its traveling  division with HSSI's

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traveling  therapy  division.   The  supplemental   staffing  business  provides
short-term  assignments  ranging  from  1 day  to 13  weeks  to  fill  vacancies
typically  resulting  from  turnover,   vacation,   maternity  and  sick  leave.
Supplemental staffing is a localized market business. Growth of this business is
planned by  increasing  the number of  supplemental  offices,  leveraging  those
offices  to  furnish  both  nurse  staffing  and other  healthcare  professional
services,  and by increasing the number of traveling  nurses on  assignment,  as
well as by acquisitions.  The staffing business  accounted for approximately 48%
of the Company's 1999 revenues.

Expansion Strategy

    The Company's expertise is in the management of quality acute,  subacute and
outpatient  rehabilitation  and therapy programs and contract therapy  services,
and in the staffing of quality  clinical  personnel for  healthcare  facilities.
Drawing on this  expertise,  the  thrust of its  expansion  strategy  will be to
develop and expand contract  relationships with host facilities to establish and
manage  acute,  subacute and  outpatient  physical  medicine and  rehabilitation
programs,  and contract  therapy services as well as increasing its supplemental
staffing offices and traveling nurses.  Acute-care  hospitals have traditionally
been the locus of  healthcare  delivery  in the  community  and,  as such,  have
controlled a substantial amount of the expenditures for healthcare services.  As
healthcare reform evolves,  the Company believes that hospitals will continue to
play a central role in the delivery of healthcare  services,  provided that they
can achieve cost  efficiencies  and offer a complete range of services  required
within  their  communities.  To this end, the Company has  positioned  itself to
assist  hospitals  in  providing  the full  continuum  of physical  medicine and
rehabilitation   services  within  acute,   subacute  and  outpatient   settings
controlled  by the hospital.  The  economies of scale offered by the  hospital's
existing plant and equipment, coupled with the Company's expertise in delivering
these services,  offers the  opportunity  for a community  hospital to be a full
service  provider  in the area of  physical  medicine  and  rehabilitation  on a
cost-effective basis.

    The supplemental  staffing business is a localized and fragmented  business.
The Company's  expertise is in recruiting  and  retaining  qualified  healthcare
staff and providing  quality staffing  services to hospitals,  nursing homes and
other  healthcare  providers.  The  staffing  expansion  strategy  is to add new
staffing  offices  and to cross sell  nurse and other  allied  staffing  between
StarMed and eai Healthcare Staffing offices.

Business Development

    The Company's  program  management  sales force  focuses on  generating  new
accounts and making follow-on sales. It has 18 regional development officers who
are responsible for  cultivating  relationships  with  prospective  clients.  In
addition,  the  Company's  officers  play  an  integral  role  in the  Company's
marketing efforts.  With a broad range of services,  the Company has significant
opportunity to expand within its existing  client base.  Further,  cross-selling
more than one product line  strengthens  the  Company's  relationships  with its
clients.

    The  staffing  division's  ability to expand its  supplemental  offices,  by
controlling start-up costs and reaching profitability quickly, facilitates rapid
growth. The ability to cross-sell staff from existing StarMed and eai Healthcare
Staffing offices, and to generate leads for travel nurses, allows more efficient
use of overhead.

Competition

    The Company's program management division has no direct competitors offering
all the same program services  although other companies may offer one or more of
the same  services.  The Company  competes with other  contract  management  and
therapy  companies for agreements  with  acute-care  hospitals and extended care
facilities.  The  Company's  programs in acute-care  hospitals  also compete for

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patients  with  the  programs  of  other  acute-care   hospitals,   freestanding
rehabilitation,  skilled nursing and outpatient facilities.  Among the principal
competitive advantages the Company believes it has are a reputation for quality,
cost effectiveness,  a proprietary  outcomes  management system,  innovation and
price.  The Company  also  competes  with  hospitals,  nursing  homes,  clinics,
physicians' offices and contract therapy companies for the services of physical,
occupational and speech  therapists.  The Company's  staffing  division competes
with a number of  private  and  public  companies  and  believes  its  strategic
advantage is its diversity of staffing solutions,  ranging from single shift, to
a 13-week assignment, to permanent placement, which is attractive to clients and
prospective employees.

Regulation

    The   healthcare   industry  is  regulated  by  Federal,   state  and  local
governmental  agencies.  These  regulations  attempt  to  control  the number of
healthcare   facilities   through   certificate  of  need  laws,   licensure  or
certification  of healthcare  facilities  and the  reimbursement  for healthcare
services.

    In many states,  acute-care hospitals contracting with the Company generally
are not required to obtain a  certificate  of need prior to opening an inpatient
unit. If a certificate of need is required, the process may take up to 12 months
or more  depending upon the state  involved.  The  application  may be denied if
contested by a competitor or the state agency.  Certificates of need are usually
issued for a specified  maximum  expenditure and require  implementation  of the
proposed improvement within a specified period of time.

    Licensure is a state or local requirement, while Medicare certification is a
Federal  requirement.  Generally,  licensure and Medicare  certification  follow
specific  standards and requirements.  Compliance is monitored by annual on-site
inspections  by  representatives  of  relevant  government  agencies.   Loss  of
licensure or Medicare  certification  by a hospital with which the Company has a
management contract would likely result in the termination of that contract.

    Prior to 1983,  Medicare provided for reimbursement of reasonable direct and
indirect costs of the services  furnished by hospitals to patients.  As a result
of the Social Security  Amendments Act of 1983, Congress adopted the Prospective
Payment  System  ("PPS") as a means to control costs of most Medicare  inpatient
hospital services.  Under this system, the Secretary of the Department of Health
and Human  Services  established  fixed payment  amounts per discharge  based on
Diagnosis-Related  Groups ("DRG") In general,  a hospital's payment for Medicare
inpatients  is limited  to the DRG rate,  regardless  of the amount of  services
provided to the patient or the length of the patient's hospital stay. Under PPS,
a hospital  may keep any  difference  between its DRG payment and its  operating
costs  incurred  in  furnishing  inpatient  services,  but is at  risk  for  any
operating  costs that exceed its payment  rate. As a result,  hospitals  have an
incentive to discharge Medicare patients as soon as is clinically appropriate.

    Inpatient   rehabilitation  units,  skilled  nursing  units  and  outpatient
rehabilitation   services  have   historically   been  exempt  from  PPS.  Acute
rehabilitation  units  within  acute-care  hospitals  are  eligible to obtain an
exemption  from  PPS,  generally  after  the  first  year  of  operation,   upon
satisfaction of specified Federal criteria.  Such criteria include the operation
for a full 12  months  under  PPS and the  completion  of an  initial  exemption
survey.   The  exemption  survey  measures   compliance  with  certain  criteria
applicable to exempt units  generally,  including  approval to  participate as a
Medicare provider,  admission standards,  record keeping,  compliance with state
licensure laws,  segregation of beds,  accounting standards and certain specific
standards applicable to rehabilitation units,  including staffing,  medical care
and patient mix. Upon successful completion of the survey, Medicare payments for
rehabilitation   provided  in  inpatient  units  are  made  under  a  cost-based
reimbursement system.

    In 1997,  Congress  enacted the BBA, which includes  numerous changes to the
Medicare system.  These changes include various reductions in payments under the
current  cost-based  reimbursement  system,  the implementation of a prospective

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payment  system for skilled  nursing  facilities and units  ("SNU-PPS")  that is
being phased in starting  July 1998 and a prospective  payment  system for acute
rehabilitation facilities and units ("Rehab-PPS") to be phased in over two years
starting in October 2000. By January 1, 1999, substantially all of the Company's
managed skilled nursing units were fully phased in under SNU-PPS.  Although many
specifics of Rehab-PPS are not yet available,  the Balance Budget Refinement Act
of 1999  directed  the  Secretary  of  Health  and  Human  Services  to design a
prospective   payment  system  on  a  per  case  or  discharge   basis  using  a
classification system called  Functional-Related  Groups.  Rehab-PPS will almost
certainly favor low-cost,  efficient  providers.  The Company  believes that its
strategy of administering  programs on the premises of host facilities positions
it well for the changing reimbursement  environment.  In the event that a client
hospital  experiences a material reduction in reimbursement under Rehab-PPS,  in
most cases, the hospital has the contractual  right to renegotiate the Company's
fees.

    Various Federal and state laws regulate the relationship  between  providers
of healthcare services and physicians.  These laws include the "fraud and abuse"
provisions of the Social Security Act, under which civil and criminal  penalties
can be  imposed  upon  persons  who pay or  receive  remuneration  in return for
referrals of patients who are eligible for  reimbursement  under the Medicare or
Medicaid  programs.  The Company does not believe its business  arrangements are
out of compliance with these provisions.  The provisions are broadly written and
the full extent of their  application  is not  currently  known.  The  Inspector
General of the  Department of Health and Human Services has issued "safe harbor"
regulations  specifying  certain forms of relationships  that will not be deemed
violations  of  these  provisions.   The  Company  believes  that  its  business
arrangements are in compliance with any definitive regulations.

    In  recognition of the  importance of achieving and  maintaining  regulatory
compliance,   the  Company  has  established  a  Corporate   Compliance  Program
("Program")  to  establish  general  standards  of conduct and  procedures  that
promote  compliance with business  ethics,  regulations,  law and  accreditation
standards.  In its design, the Company has established  compliance standards and
procedures to be followed by its employees and other agents that are  reasonably
capable of reducing the prospect of criminal  conduct,  and has designed systems
for the reporting and auditing of  potentially  criminal  acts. A key element of
the Program is the ongoing  communication  and training of employees  and agents
such that it becomes a part of the day-to-day business operations.  A compliance
committee consisting of representatives of both the Company's management and the
Company's Board of Directors has been established to oversee  implementation and
ongoing  operations of the Program,  to enforce the 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.  The Company is
not aware of the  existence of any current  activities on the part of any of its
employees  that would not be materially in compliance  with this Program and has
undertaken  the  Program  in an effort to enhance  the  prospects  of  continued
compliance.

Employees

    As of December 31, 1999, the Company had approximately  3,100 employees plus
approximately 4,000 full-time  equivalent travel and supplemental staff employed
by the staffing  division.  The physicians who are the medical  directors of the
contract  units are  independent  contractors  and not employees of the Company.
None  of  the  Company's  employees  are  subject  to  a  collective  bargaining
agreement. Management considers the relationship with its employees to be good.

ITEM 2.  PROPERTIES

    The Company currently leases 26,000 square feet of executive office space in
Clayton,  Missouri,  under a lease that  expires in the year 2008,  assuming all
options to renew are  exercised.  In addition to the monthly  rental  cost,  the
Company is also  responsible for specified  increases in operating  costs.  Salt

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Lake  leases  10,000  square  feet in Salt Lake City,  Utah,  under a lease that
expires in 2001.  HSSI leases  32,000  square feet of executive  office space in
Lowell, Massachusetts, under a lease that expires in the year 2000, assuming all
options to renew are exercised,  plus leases various  properties  throughout the
country used as temporary housing for traveling  therapists and nurses.  StarMed
leases  10,000  square feet of executive  office space in  Clearwater,  Florida,
under a lease that  expires in 2002,  10,000  square feet in  Phoenix,  Arizona,
under a lease that  expires in 2003,  plus leases  various  office space for its
supplemental staffing businesses throughout the country.

ITEM 3.  LEGAL PROCEEDINGS

    Not applicable.


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  the Common Stock of the  Registrant  is included on
page 40 in this Annual Report of the  Registrant for the year ended December 31,
1999.

ITEM 6.  SELECTED FINANCIAL DATA

    Six-Year  Financial  Summary is included on page 40 in this Annual Report of
the Registrant for the year ended December 31, 1999.

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

    OVERVIEW

    The growth in the Company's  operating  revenue and net earnings during 1999
was primarily the result of an increase in staffing  weeks worked from 52,265 to
131,110. The increase in staffing weeks worked was the result of the acquisition
of  AllStaff,  new staffing  office  openings and  increased  market  demand for
staffing services. Additionally, an increase in the average number of outpatient
clinics from 26 to 40, plus reduced  therapy  costs in managed  inpatient  units
contributed to the growth.  The growth for 1998 was the result of an increase in
the  number  of  acute,   subacute  and  outpatient  clinics,  and  growth  from
acquisitions.  The 1998  results  reflect an increase  in the average  number of
inpatient units from 110 to 128, an increase in the average number of outpatient
clinics  managed by the Company  from 18 to 26, an increase in contract  therapy
locations  from  44 to  67,  and  increased  nursing  weeks  worked  due  to the

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acquisition  of StarMed.  The growth for 1997 was primarily  attributable  to an
increase in acute and subacute  programs plus increased  therapy weeks worked at
HSSI.

    In the normal course of business,  new programs are opened and some existing
programs are closed each year.  During the first year of operation,  a new acute
rehabilitation program will typically be subject to limitations in reimbursement
from  Medicare   considerably   below  the  hospital's   operating  cost.  As  a
consequence,  during this period the Company agrees with the client  hospital to
bear certain costs on the  hospital's  behalf and to waive a portion of its fees
until the program  qualifies  for an exemption  from Medicare  limitations.  The
Company  assists the hospital in qualifying the program for the exemption and in
minimizing the unreimbursed  costs during this non-exempt  period. The Company's
average  operating  losses during the qualifying  period can range to as high as
$150,000 to $200,000  per  program.  If the Company does not obtain an exemption
for  the  program,  the  contract  may  be  terminated  and,  in  the  event  of
termination,  losses would generally not be recoverable.  Upon completion of the
qualifying year and obtaining the exemption,  the hospital is currently eligible
to recover all of its costs related to the  operation of the program,  including
the Company's fees under the management contract. Once a program becomes exempt,
the  program   experiences   accelerated   growth  in  operating   revenues  and
profitability  as the  patient  population  is  expanded in response to the more
favorable  reimbursement terms. There is no current guidance with respect to the
impact of the implementation of Rehab-PPS on this process. Subacute programs and
outpatient  clinics are not subject to the same qualifying  year  limitations in
reimbursement  from Medicare as acute  rehabilitation  programs and,  therefore,
should result in significantly reduced start-up losses per program or clinic.

    On  January  28,  1997,  the  Company  acquired  TeamRehab,  Inc.  and Moore
Rehabilitation Services, Inc. ("Team and Moore"),  providers of contract therapy
services.  On June 12, 1997, the Company acquired Rehab Unlimited,  Inc. and the
assets of Cimarron  Health  Care,  Inc.,  also  providers  of  contract  therapy
services,  and combined them with Team and Moore. The aggregate  purchase prices
for these  acquisitions  paid at closing was $7.0  million,  consisting  of $4.3
million in cash, $1.8 million in subordinated promissory notes and 54,151 shares
of the Company's common stock. In addition, $301,000 of contingent consideration
was paid in 1998 to the former owners of Team and Moore.

    On January  31,  1997,  the  Company  made a tender  offer to purchase up to
1,387,500  shares of its common stock at a single purchase price,  not less than
$13.33  nor in  excess  of $15.00  per  share.  The  actual  purchase  price was
determined  based on the  lowest  single  purchase  price at which  stockholders
tendered shares that was sufficient to purchase 1,387,500 shares. As of February
28,  1997,  the closing  date,  shares  totaling  greater  than  1,387,500  were
tendered, resulting in the Company's repurchase on March 12, 1997, of a total of
1,499,932  shares  at the  single  per  share  price of $15.00  per  share.  The
repurchase  was  financed  by an  increase  in the bank term loan and  revolving
credit facility.

    On July 31, 1998, the Company  acquired RCSA, Inc.  ("RCSA"),  a provider of
program outpatient therapy,  for consideration  consisting of cash and stock. On
August 17, 1998, the Company  acquired  StarMed and certain related entities for
cash from Medical  Resources,  Inc. On September 9, 1998,  the Company  acquired
Therapeutic  Systems,  Ltd.  ("Therapeutic  Systems"),  a provider  of  contract
therapy,  for  consideration  consisting of cash, stock and notes. The aggregate
purchase  prices  for these  acquisitions  paid at  closing  was $41.2  million,
consisting of $38.0 million in cash, 130,426 shares of stock and $1.0 million in
subordinated  notes.  An additional  $2.0 million in cash  consideration  in the
purchase of StarMed has been deferred until certain  contingencies expire and is
secured  by a bank  letter of credit  held by a  third-party  escrow  agent.  In
January  2000,  the letter of credit was drawn down pursuant to the terms of the
escrow   agreement  and  the  proceeds  have  remained  in  escrow.   Additional
consideration  of $202,000 was paid in 1999 to the former  stockholders of RCSA,
based upon the retention of clients.  The cash  component of the purchase  price
was funded  through  borrowings  made  available by an increase in the Company's
bank credit facility to $90.0 million.

    On May 20, 1999, the Company acquired Salt Lake for consideration consisting
of cash,  stock and subordinated  notes. On July 1, 1999, the Company  purchased
AllStaff for consideration  consisting of cash, stock and subordinated notes. On

                                       9
<PAGE> 10

December  20,  1999,   the  Company   acquired  eai   Healthcare   Staffing  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, 48,433 shares of stock, and $4.2 million in subordinated notes. Additional
consideration  of up to $1.9 million may be paid to the former  stockholders  of
Salt Lake  contingent  upon the attainment of certain  financial  goals over the
next three years. Additional consideration may be paid to the former stockholder
of AllStaff  contingent  upon the attainment of a minimum target growth in gross
profit for the  twelve-month  period ending 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.

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

RESULTS OF OPERATIONS

    The following  table sets forth for 1999, 1998 and 1997, the percentage that
certain  items in the  consolidated  statements  of earnings  bear to  operating
revenues for the years then ended:
<TABLE>
<CAPTION>

                                                                  Year ended December 31,
---------------------------------------------------------------------------------------------

                                                                1999        1998        1997
---------------------------------------------------------------------------------------------
    <S>                                                         <C>         <C>         <C>
    Operating revenues                                          100.0%      100.0%      100.0%
    Costs and expenses:
       Operating expenses                                        71.7        69.5        68.9
       General and administrative                                16.9        17.3        17.0
       Depreciation and amortization                              1.7         1.9         2.3
    Operating earnings                                            9.7        11.3        11.8
    Other expense, net                                           (1.6)        (.7)        (.7)
    Earnings before income taxes and cumulative
          effect of change in accounting principle                8.1        10.6        11.1
    Income taxes                                                  3.2         4.3         4.5
    Earnings before cumulative effect of change in
          accounting principle                                    4.9         6.3         6.6
    Cumulative effect of change in accounting for
          start-up costs, net of tax                               --        (0.4)         --
    Net earnings                                                  4.9%        5.9%        6.6%
----------------------------------------------------------------------------------------------
</TABLE>



Twelve Months Ended December 31, 1999 Compared to Twelve Months Ended
December 31, 1998

    Operating revenues in 1999 increased by $102.0 million,  or 49.2%, to $309.4
million  as  compared  to  1998.  Acquisitions  accounted  for  76.9% of the net
increase.  Excluding  the  effects  of  acquisitions,  increases  in  inpatient,
outpatient  and nurse  travel  staffing  revenues  were  offset by a decline  in
subacute,  therapy travel  staffing,  and contract  therapy  revenue.  Inpatient
program revenue increased by $4.9 million. A 2.8% increase in the average number
of inpatient  programs from 128.2 to 131.8 programs,  and a 3.6% increase in the

                                       10
<PAGE> 11

average daily billable census per inpatient program from 14.0 to 14.5,  resulted
in a 6.3%  increase in billable  patient days to 697,769 and a 4.3%  increase in
revenue  from  inpatient  programs to $116.5  million.  The increase in billable
census per  inpatient  program is primarily  attributable  to a 4.3% increase in
admissions  per  program.  The  average  billable  length  of stay  for 1999 was
comparable to 1998.  The increase in billable  patient days was offset by a 1.8%
decrease in average per diem billing  rates,  reflecting  lower per diem billing
rates for subacute programs subject to the BBA.

    Outpatient  revenue  increased  86.1% to $30.7  million,  reflecting  a $1.9
million increase from the July 1998 acquisition of RCSA, a $2.9 million increase
from the May 1999 acquisition of Salt Lake, an increase in the average number of
outpatient  clinics  managed  from  26.1 to 40.0,  and an  increase  in units of
service per clinic.  Contract  therapy  revenue  increased 1.1% to $14.1 million
reflecting a $3.8 million  increase from the acquisition of Therapeutic  Systems
in September  1998,  offset by a 45.0% decrease in revenue per unit to $154,899,
reflecting lower volumes and reimbursement rates under the BBA.

    Staffing revenue increased 122.6% to $148.2 million, reflecting the addition
of $66.2 million in supplemental  nurse staffing  revenue  achieved  through the
August 1998  acquisition of StarMed,  a $3.0 million increase from the July 1999
acquisition  of  AllStaff,  and a  $681,000  increase  from  the  December  1999
acquisition of eai  Healthcare  Staffing.  An increase in nurse travel  staffing
revenue of $30.3  million  was offset by a similar  decrease  in therapy  travel
staffing  revenues.  Demand for  therapists  in the  long-term  care setting has
declined significantly as a result of the implementation of SNU-PPS.

    Operating expenses for 1999 increased by $77.7 million,  or 53.9%, to $221.9
million  as  compared  to  1998.  Acquisitions  accounted  for  76.7% of the net
increase.  A $41.7 million  increase in operating  expenses  attributable to the
increase  in  patient  days,  units  of  services,  nurse  travel  staffing  and
supplemental  staffing was offset by a $23.6 million  decrease in therapy travel
staffing and contract therapy costs.

    The  aggregate  excess  of  operating   expenses  over  operating   revenues
associated with non-exempt  programs decreased from $637,000 to $260,000,  on an
increase  in the average  number of  non-exempt  units from 3.2 to 4.4.  The per
program average excess of operating  expenses over operating  revenues decreased
from $199,000 to $60,000  reflecting an increase in the average  billable census
per program  from 3.8 to 4.9.  The average  excess of  operating  expenses  over
operating revenues for a program during its non-exempt year can range to as high
as $150,000 to $200,000.

    General and administrative  expenses  increased $16.4 million,  or 45.6%, to
$52.3  million,  reflecting  increases in corporate  office  expenses as well as
marketing, business development, operations and professional services in support
of the increase in programs, growth in the number of supplemental staff offices,
plus the addition of general and administrative expenses of companies acquired.

    Depreciation and amortization  increased $1.3 million reflecting an increase
in goodwill from acquisitions.

    Interest expense increased $761,000  reflecting  interest on additional debt
funding the acquisitions. Other expense in 1999 primarily reflects the write-off
of the Company's  investments in nonconsolidated  subsidiaries.  Other income in
1998  reflects the sale of  approximately  50% of the  Company's  investment  in
Intensiva HealthCare Corporation in the fourth quarter of 1998.

    Earnings  before income taxes and cumulative  effect of change in accounting
principle increased by $3.2 million,  or 14.4%, to $25.0 million.  The provision
for income  taxes for 1999 was $9.9  million  compared to $8.9  million in 1998,
reflecting effective income tax rates of 39.7% and 40.7%, respectively. Earnings
before  cumulative  effect of change in accounting  principle  increased by $2.1
million,  or  16.4%,  to $15.1  million.  The  cumulative  effect  of  change in
accounting principle of $776,000 in 1998 represents the after-tax charge related
to the  adoption,  effective  January 1, 1998, of Statement of Position No. 98-5
Reporting on the Costs of Start-up  Activities.  Net earnings  increased by $2.9
million, or 23.8%, to $15.1 million.  Diluted earnings per share increased 21.1%

                                       11
<PAGE> 12

to $2.07  from  $1.71 on a 2.2%  increase  in the  weighted-average  shares  and
assumed  conversions  outstanding.  The loss on write-off of investments reduced
earnings  per  share  in 1999 by  $.09,  while  the  gain on sale of  marketable
securities  represented  $.12 of the earnings per share in 1998.  The cumulative
effect of change in accounting  principle  reduced earnings per share by $.11 in
1998 with no comparable reduction in 1999. Excluding gains/losses on investments
and the  cumulative  effect  of the  change  in  accounting  principle,  diluted
earnings  per share  increased  26.5% from  $1.70 in 1998 to $2.15 in 1999.  The
increase  in  shares  outstanding  is  attributable  primarily  to stock  option
exercises  and  shares  issued  in  acquisitions,  offset by a  decrease  in the
dilutive effect of stock options resulting from a decrease in the average market
price of the  Company's  stock  relative to the  underlying  exercise  prices of
outstanding options.

Twelve Months Ended December 31, 1998 Compared to Twelve Months Ended
December 31, 1997

    Operating  revenues in 1998 increased by $46.6 million,  or 29.0%, to $207.4
million  as  compared  to  1997.  Acquisitions  accounted  for  89.2% of the net
increase. Inpatient program revenue increased by $14.2 million. A 16.2% increase
in the average number of inpatient programs from 110.3 to 128.2 programs, and an
increase in the average daily billable census per inpatient program of 6.1% from
13.2 to 14.0, generated a 23.3% increase in billable patient days to 656,363 and
a 14.6%  increase in revenue from inpatient  programs.  The increase in billable
census per inpatient  program is primarily  attributable  to a 10.4% increase in
admissions per program,  offset by a 3.8% decline in average  billable length of
stay. The decline in average length of stay reflects both the continued trend of
reduced  rehabilitation  lengths of stay and the  increase in subacute  programs
operational  in  1998,   which  carry  a  shorter  length  of  stay  than  acute
rehabilitation  programs.  The increase in billable patient days was offset by a
7.1%  decrease in average per diem  billing  rates,  reflecting a greater mix of
subacute  programs  which carry lower average per diem rates than acute programs
and lower per diem billing rates for subacute programs subject to the BBA.

    Outpatient  revenue  increased  74.8% to $16.5  million,  reflecting  a $1.2
million increase from the July 1998 acquisition of RCSA, plus an increase in the
average number of outpatient  clinics  managed from 17.9 to 26.1 and an increase
in units of service per clinic.  Contract  therapy  revenue  increased  66.6% to
$13.9 million,  reflecting a $2.6 million increase from the acquisitions of Team
and Moore and Rehab Unlimited,  and a $3.9 million increase from the acquisition
of Therapeutic Systems in September 1998.

    Staffing revenue  increased 43.5% to $66.6 million,  reflecting the addition
of $34.3  million in nurse  staffing  revenue  achieved  through the August 1998
acquisition of StarMed,  offset by a $14.9 million  decrease in therapy staffing
revenues.  Demand  for  therapists  declined  significantly  as a result  of the
implementation of SNU-PPS.

    Operating expenses for the twelve-month  periods compared increased by $33.5
million,  or 30.2%, to $144.2 million.  Acquisitions  accounted for 88.0% of the
net increase. The remaining increase was attributable to the increase in patient
days and units of services, offset by decreased therapy staffing costs.

    The excess of operating  expenses over operating  revenues  associated  with
non-exempt  programs  decreased from $778,000 to $637,000,  on a decrease in the
average number of non-exempt  programs from 7.7 to 3.2. The per program  average
excess of operating  expenses over operating revenues increased from $102,000 to
$199,000  reflecting  a greater  percentage  of  programs  where the  Company is
obligated to provide  therapy staff.  The average  excess of operating  expenses
over operating revenues for a program during its non-exempt year can range to as
high as $150,000 to $200,000.

    General and  administrative  expenses  increased $8.6 million,  or 31.6%, to
$35.9  million,  reflecting  increases in corporate  office  expenses as well as
administration,  business  development,  operations and professional services in
support  of  the  increase  in  programs,  plus  the  addition  of  general  and
administrative expenses of companies acquired.

                                       12
<PAGE> 13

    Depreciation and amortization increased $186,000 reflecting  amortization of
goodwill  from  acquisitions,  offset  by the  elimination  of  amortization  of
start-up costs in 1998.

    Interest expense increased $622,000  reflecting  interest on additional debt
issued in the acquisitions of StarMed and Therapeutic  Systems.  Gain on sale of
marketable securities reflects the sale of the Company's investment in Intensiva
HealthCare Corporation, approximately 50% of which was sold in the first quarter
of 1997, and the remaining 50% sold in the fourth quarter of 1998.

    Earnings  before income taxes and cumulative  effect of change in accounting
principle increased by $4.0 million,  or 22.3%, to $21.9 million.  The provision
for income  taxes for 1998 was $8.9  million  compared to $7.3  million in 1997,
reflecting effective income tax rates of 40.7% and 40.6%, respectively. Earnings
before cumulative effect of change in accounting  principle increased in 1998 by
$2.4 million,  or 22.2%,  to $13.0 million.  The cumulative  effect of change in
accounting  principle of $776,000 represents the after-tax charge related to the
adoption, effective January 1, 1998, of Statement of Position No. 98-5 Reporting
on the Costs of Start-up Activities.  Net earnings increased by $1.6 million, or
14.9%,  to $12.2 million.  Diluted  earnings per share  increased 16.3% to $1.71
from  $1.47  on a 1.8%  decrease  in the  weighted-average  shares  and  assumed
conversions outstanding.  The gains on sale of marketable securities represented
$.12 of the earnings per share in both 1998 and 1997. The  cumulative  effect of
change in accounting  principle  reduced earnings per share by $.11 in 1998 with
no  comparable  reduction in 1997.  Excluding  the gains on sales of  marketable
securities  and the  cumulative  effect of the change in  accounting  principle,
diluted  earnings per share increased 25.9% from $1.35 in 1997 to $1.70 in 1998.
The  decrease  in  shares  outstanding  is  attributable   primarily  to  shares
repurchased  and a decrease in the dilutive  effect of stock  options  resulting
from a decrease in the average  market price of the Company's  stock relative to
the underlying  exercise prices of outstanding  options,  offset by stock option
exercises and shares issued in the acquisitions of RCSA and Therapeutic Systems.

LIQUIDITY AND CAPITAL RESOURCES

    As of December  31,  1999,  the Company had $3.8 million in cash and current
marketable  securities  and a current  ratio of  1.4:1.  Working  capital  as of
December 31, 1999, increased from December 31, 1998, by $1.5 million, reflecting
working capital from the acquisitions of Salt Lake,  AllStaff and eai Healthcare
Staffing, and working capital generated by operations.

    Net accounts  receivable were $65.8 million at December 31, 1999 compared to
$46.3  million at December 31, 1998.  The number of days average net revenues in
net  receivable was 65.6 days and 63.8 days as of December 31, 1999 and December
31, 1998, respectively.  The increase is primarily the result of acquisitions of
businesses that traditionally carry longer payment terms from clients.

    During the year ended  December  31,  1999,  the  Company  incurred  capital
expenditures  of $3.0  million as  compared  to $2.1  million for the year ended
December 31, 1998. At December 31, 1999, the Company had no material commitments
for capital expenditures.

    In  connection  with  the  development  and   implementation  of  additional
programs,  the Company may incur capital expenditures for equipment and deferred
costs  arising  from  payments  made  to  hospitals  for a  portion  of  capital
improvements needed to begin a program's operation.  For the year ended December
31, 1999,  the Company made  deferred  cost  payments to seven client  hospitals
totaling  $486,000 for capital  improvements,  while for the year ended December
31, 1998,  payments were made to four client  hospitals  totaling  $450,000.  At
December 31, 1999,  the Company had nine  commitments  totaling  $1.3 million to
make additional capital improvement payments to client hospitals.

    The  Company's  operating  cash  flows  constitute  its  primary  source  of
liquidity and  historically  have been  sufficient  to fund its working  capital
requirements.  The Company expects to meet its future working  capital,  capital
expenditure, business expansion and debt service requirements from a combination

                                       13
<PAGE> 14

of internal sources and outside financing.  As part of the acquisitions of RCSA,
StarMed and  Therapeutic  Systems,  the  Company's  bank term loan and revolving
credit  facility were  restructured.  Under the terms of the  restructured  loan
agreement, the Company entered into a five-year bank term loan with a commitment
of up to $60.0 million. The term loan requires quarterly repayments of principal
of  approximately  $3.0  million.  The  amount  that may be  borrowed  under the
revolving credit facility was increased to the lesser of $30.0 million or 85% of
eligible accounts receivable, reduced by amounts outstanding under the Company's
bank letter of credit.  As of December 31, 1999, the Company's  borrowings under
the term loan and  revolving  credit  facility  totaled  $46.0 million and $12.0
million,  respectively,  and a letter of credit was outstanding in the amount of
$2.0 million.

    On January 10, 1997,  the Company sold 165,000  shares of its  investment in
Intensiva  HealthCare  Corporation in a market transaction for $1.5 million. The
remaining 161,287 shares were sold on December 18, 1998 for $1.6 million.

    On March 12, 1997, the Company  repurchased 1.5 million shares of its common
stock.  To finance the  repurchase,  the Company  issued $45.0 million in senior
secured debt, which was restructured in 1998 as described above.

YEAR 2000

    The Company is subject to risks  associated with "Year 2000"  compliance,  a
term which  refers to the  ability  of  various  data  processing  hardware  and
software systems to interpret dates correctly after January 1, 2000.

    The Company  developed  and  presented to the Board of Directors  its action
plan for Year  2000  compliance.  The  major  phases  of the  action  plan  were
awareness, assessment, renovation, validation and implementation.

    The awareness phase included a communication of Year 2000 compliance  issues
and the potential ramifications to the Company,  education and identification of
key systems.  The  assessment  phase included the  inventorying  of systems that
could have been impacted by Year 2000 issues. Systems were then prioritized from
critical to noncritical based upon the potential adverse effect on the financial
condition of the Company in the event of loss or interruption in the use of each
system.

    Most of the Company's systems were purchased from industry-known vendors and
were generally used in their standard configuration. Other systems were replaced
by or converted to Year 2000 compatible  systems.  The Company closely  reviewed
the Year 2000  progress as reported by each  vendor.  The Company was assured by
certain  of  these  vendors  that  new  Year  2000  compliant  systems  had been
installed.  In all other cases,  compliant  systems  were  delivered in time for
installation and testing prior to year-end 1999.

    The final phase of the action plan was the  implementation of remediated and
other systems into the operating environment of the Company. Concurrent with the
development  and execution of the plan was the  evolution of a contingency  plan
that included procedures to be followed if the system failed.

    The Company also  completed an assessment of Year 2000 risks relating to its
lines  of  business  separate  from  its  dependence  on  data  processing.  The
assessment  included  corresponding  with  customers to ascertain  their overall
preparedness  regarding  Year  2000  risks.  The  plan  also  provided  for  the
identification   and   communication   with  significant   non-data   processing
third-party  vendors  regarding  their  preparedness  for Year 2000  risks.  The
failure  of a  customer  to  prepare  adequately  for Year 2000 could have had a
significant  adverse effect on such  customer's  operations  and  profitability,

                                       14
<PAGE> 15

which,  in turn,  could have  inhibited  its  ability  to pay for the  Company's
services in accordance with their terms. Failure of a non-data vendor to prepare
adequately  for Year 2000 could  have had a  significant  adverse  effect on the
vendor's  operations,  which, in turn, could have inhibited the vendor's ability
to deliver  purchased goods and services to the Company in a timely manner.  The
Company also  recognized  the  importance of Year 2000  compliance by customers,
payment sources, and vendors to the Company's customers and vendors. The Company
necessarily relied upon the compliance programs of these third parties.

    The  Company  has not  experienced  and does  not  anticipate  any  material
disruption  in  operations  as the result of any  failure by the  Company or its
subsidiaries.

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.  The  Company's  management  contracts
typically  provide for an annual increase in the fees paid to the Company by its
client  hospitals  based upon  increases  in various  inflation  indices.  These
increases generally offset increases in costs incurred by the Company.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


    Not applicable.

                                       15
<PAGE> 16


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                          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, 1999 and 1998, 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,   1999.   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  generally   accepted  auditing
standards.  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, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the  three-year  period
ended  December  31,  1999 in  conformity  with  generally  accepted  accounting
principles.

As discussed in note 1 to the  consolidated  financial  statements,  the Company
changed its method of accounting for start-up costs on January 1, 1998.

St. Louis, Missouri
February 4, 2000

                                                        /s/KPMG LLP

                                       16
<PAGE> 17

<TABLE>

                             REHABCARE GROUP, INC.

                          Consolidated Balance Sheets
                 (dollars in thousands, except per share data)

<CAPTION>

                                                                                                       December 31,
                                     Assets                                                          1999        1998
                                     ------                                                          ----        ----
<S>                                                                                             <C>           <C>
Current assets:
    Cash and cash equivalents                                                                   $     738       5,666
    Marketable securities, available-for-sale                                                       3,019       3,017
    Accounts receivable, net of allowance for doubtful
       accounts of $4,577 and $3,404, respectively                                                 65,777      46,349
    Deferred tax assets                                                                             4,898       3,382
    Prepaid expenses and other current assets                                                       1,100         938
                                                                                                  -------     -------
          Total current assets                                                                     75,532      59,352
Marketable securities, trading                                                                      1,777       1,240
Equipment and leasehold improvements, net                                                           6,728       4,537
Excess of cost over net assets acquired, net                                                       99,020      86,285
Other                                                                                               4,207       5,456
                                                                                                  -------     -------
                                                                                                $ 187,264     156,870
                                                                                                  =======     =======
                      Liabilities and Stockholders' Equity
                      ------------------------------------
Current liabilities:
    Revolving credit facility                                                                   $   5,000          --
    Current portion of long-term debt                                                              13,345      11,926
    Accounts payable                                                                                3,359       2,179
    Accrued salaries and wages                                                                     16,265      14,049
    Accrued expenses                                                                               12,211       8,601
    Income taxes payable                                                                            3,283       1,991
                                                                                                  -------      ------
          Total current liabilities                                                                53,463      38,746
Deferred compensation and other long-term liabilities                                               3,623       3,084
Deferred tax liabilities                                                                            1,345         955
Long-term debt, less current portion                                                               51,050      53,929
                                                                                                  -------      ------
          Total liabilities                                                                       109,481      96,714
                                                                                                  -------      ------

Stockholders' equity:
    Preferred stock, $.10 par value; authorized 10,000,000 shares,
       none issued and outstanding                                                                     --          --
    Common stock, $.01 par value; authorized 20,000,000 shares,
       issued 7,850,283 shares and 7,657,391 shares as of
       December 31, 1999 and 1998, respectively                                                        79          77
    Additional paid-in capital                                                                     33,179      30,654
    Retained earnings                                                                              62,488      47,390
    Less common stock held in treasury at cost,
       1,165,597 shares as of December 31, 1999 and 1998                                          (17,975)    (17,975)
    Accumulated other comprehensive earnings                                                           12          10
                                                                                                  -------      ------
          Total stockholders' equity                                                               77,783      60,156
                                                                                                  -------     -------
                                                                                                $ 187,264     156,870
                                                                                                  =======     =======


See accompanying notes to consolidated financial statements.
</TABLE>
                                       17

<PAGE> 18

<TABLE>

                             REHABCARE GROUP, INC.

                      Consolidated Statements of Earnings
                 (dollars in thousands, except per share data)

<CAPTION>

                                                                                       Year Ended December 31,
                                                                                    1999        1998        1997
                                                                                    ----        ----        ----
<S>                                                                             <C>            <C>         <C>
Operating revenues                                                              $  309,425     207,416     160,780
Costs and expenses:
    Operating expenses                                                             221,892     144,187     110,726
    General and administrative                                                      52,315      35,932      27,294
    Depreciation and amortization                                                    5,296       3,966       3,780
                                                                                   -------     -------     -------
        Total costs and expenses                                                   279,503     184,085     141,800
                                                                                   -------     -------     -------
        Operating earnings                                                          29,922      23,331      18,980
Interest income                                                                        233         258         186
Interest expense                                                                    (4,142)     (3,381)     (2,759)
Other income (expense), net                                                           (986)      1,667       1,475
                                                                                    -------    -------     -------
        Earnings before income taxes and cumulative
            effect of change in accounting principle                                25,027      21,875      17,882
Income taxes                                                                         9,929       8,901       7,267
                                                                                   -------     -------     -------
        Earnings before cumulative effect of
            change in accounting principle                                          15,098      12,974      10,615
Cumulative effect of change in accounting for
            start-up costs, net of tax                                                  --        (776)         --
                                                                                   -------     -------     -------
        Net earnings                                                            $   15,098      12,198      10,615
                                                                                   =======     =======     =======

Net earnings per common share:

    Basic

        Earnings before cumulative effect of change in
            accounting principle                                                $     2.30        2.10        1.77
        Cumulative effect of change in accounting for
            start-up costs                                                              --        (.13)         --
                                                                                      ----        ----        ----
        Net earnings                                                            $     2.30        1.97        1.77
                                                                                      ====        ====        ====
    Diluted

        Earnings before cumulative effect of change in
            accounting principle                                                $     2.07        1.82        1.47
        Cumulative effect of change in accounting for
            start-up costs                                                              --        (.11)         --
                                                                                      ----        ----        ----
        Net earnings                                                            $     2.07        1.71        1.47
                                                                                      ====        ====        ====


See accompanying notes to consolidated financial statements.
</TABLE>
                                       18
<PAGE> 19
<TABLE>


                             REHABCARE GROUP, INC.

                Consolidated Statements of Stockholders' Equity
                             (amounts 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, 1996                     7,040      --    $ 70    22,793    24,577        --      2,230       49,670

Net earnings                                      --      --      --        --    10,615        --         --       10,615

Purchase of treasury stock                        --   1,500      --        --        --   (23,131)        --      (23,131)

Issuance of common stock
    in connection with acquisitions               38     (41)      1       639        --       644         --        1,284

Exercise of stock options
    (including tax benefit)                       74    (148)      1       540        --      2,275        --        2,816

Change in unrealized gain on
    marketable securities, net of tax             --      --      --        --        --         --    (1,494)      (1,494)
                                               -----   -----     ---    ------    ------     ------     -----       ------
Balance, December 31, 1997                     7,152   1,311      72    23,972    35,192    (20,212)      736       39,760


Net earnings                                      --     --       --        --    12,198         --        --       12,198

Issuance of common stock
    in connection with acquisitions              130     --        1     2,199        --         --        --        2,200

Exercise of stock options
    (including tax benefit)                      375   (145)       4     4,483        --      2,237        --        6,724

Change in unrealized gain on
    marketable securities, net of tax             --     --       --        --        --         --      (726)        (726)
                                               -----  -----      ---    ------    ------     ------     -----       ------

Balance, December 31, 1998                     7,657  1,166       77    30,654    47,390    (17,975)       10       60,156


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

Issuance of common stock
    in connection with acquisitions               48     --        1       840        --         --        --          841

Exercise of stock options
    (including tax benefit)                      145     --        1     1,685        --         --        --        1,686

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

Balance, December 31, 1999                     7,850  1,166     $ 79    33,179    62,488    (17,975)       12       77,783
                                               =====  =====      ===    ======    ======     ======     =====       ======


See accompanying notes to consolidated financial statements.
</TABLE>
                                       19
<PAGE> 20
<TABLE>

                             REHABCARE GROUP, INC.

                     Consolidated Statements of Cash Flows
                             (dollars in thousands)
<CAPTION>
                                                                                                Year Ended December 31,
                                                                                             1999        1998        1997
                                                                                             ----        ----        ----
 <S>                                                                                       <C>          <C>         <C>
 Cash flows from operating activities:

   Net earnings                                                                            $15,098      12,198      10,615
   Adjustments to reconcile net earnings to net cash
      provided by operating activities:
         Cumulative effect of change in accounting
            for start-up costs                                                                  --         776          --
         Depreciation and amortization                                                       5,296       3,966       3,780
         Provision for losses on accounts receivable                                         2,743       1,093         717
         Gain on sale of marketable securities                                                  --      (1,516)     (1,448)
         Increase (decrease) in deferred compensation                                          598        (598)        545
         Increase in accounts receivable, net                                              (18,703)     (6,666)     (7,755)
         Decrease (increase) in prepaid expenses and
            other current assets                                                                (3)         43        (155)
         Decrease in other assets                                                              921         161          15
         Increase in accounts payable and accrued expenses                                   3,630       1,059       1,759
         Increase in accrued salaries and wages                                              1,507       1,990       2,386
         Increase (decrease) in income taxes payable
            and deferred                                                                      (386)      1,049        (642)
                                                                                            ------      ------      ------
               Net cash provided by operating activities                                    10,701      13,555       9,817
                                                                                            ------      ------      ------
 Cash flows from investing activities:

   Additions to equipment and leasehold improvements, net                                   (3,002)     (1,868)     (1,343)
   Purchase of marketable securities                                                          (671)     (1,838)     (1,473)
   Proceeds from sale/maturities of marketable securities                                      134       4,363       2,080
   Cash paid in acquisition of businesses, net of cash received                            (16,273)    (42,449)     (6,629)
   Deferred contract costs, net                                                               (177)       (450)       (368)
   Other, net                                                                                 (736)     (1,187)     (2,113)
                                                                                            ------      ------      ------
               Net cash used in investing activities                                       (20,725)    (43,429)     (9,846)
                                                                                            ------      ------      ------
 Cash flows from financing activities:

   Proceeds from (payments on) revolving credit facility                                    12,000          --        (500)
   Payments on long-term debt                                                              (12,740)    (10,559)     (3,603)
   Proceeds from issuance of long-term debt                                                     --      36,400      23,500
   Proceeds from issuance of notes payable                                                   4,150       1,000       2,150
   Purchase of treasury stock                                                                   --          --     (23,131)
   Exercise of stock options (including tax benefit)                                         1,686       6,724       2,816
                                                                                            ------      ------      ------
               Net cash provided by financing activities                                     5,096      33,565       1,232
                                                                                            ------      ------      ------
               Net increase (decrease) in cash and cash
                    equivalents                                                             (4,928)      3,691       1,203
 Cash and cash equivalents at beginning of period                                            5,666       1,975         772
                                                                                            ------      ------      ------
 Cash and cash equivalents at end of period                                                $   738       5,666       1,975
                                                                                            ======      ======      ======


 See accompanying notes to consolidated financial statements.
</TABLE>
                                  20
<PAGE> 21
<TABLE>

                                    REHABCARE GROUP, INC.

                      Consolidated Statements of Comprehensive Earnings
                                   (dollars in thousands)
<CAPTION>

                                                       Year Ended December 31,
                                                       1999     1998     1997
                                                       ----     ----     ----
 <S>                                                <C>       <C>      <C>
 Net earnings                                       $15,098   12,198   10,615

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

      Unrealized holding gains (losses)
         arising during period                            2      184     (625)

      Less: reclassification adjustment for
         realized gains included in net earnings         --     (910)    (869)
                                                     ------   ------    -----

 Comprehensive earnings                             $15,100   11,472    9,121
                                                     ======   ======    =====


 See accompanying notes to consolidated financial statements.
</TABLE>
                                       21
<PAGE> 22


                             REHABCARE GROUP, INC.

                   Notes to Consolidated Financial Statements

(1) Summary of Significant Accounting Policies

    Principles of Consolidation

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

    Accounting Change

    The Company  adopted the  provisions of Statement of Position No. 98-5 ("SOP
      98-5"),  Reporting on the Costs of Start-Up Activities on January 1, 1998,
      which requires that costs of start-up  activities be expensed as incurred.
      Start-up  activities are defined in SOP 98-5 as those one-time  activities
      related to opening a new facility, introducing a new territory, conducting
      business  with a new class of customer or  beneficiary,  initiating  a new
      process in an existing facility or commencing a new operation. Previously,
      the Company  capitalized  these costs and amortized  them over the term of
      the  contract.  The change  resulted in a cumulative  after-tax  charge of
      $776,000,  $.11 per diluted share, recorded in the quarter ended March 31,
      1998.

    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, 1999 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  statement of earnings
      until the securities  are sold.  All marketable  securities in non-current
      assets are classified as trading.

    Credit Risk

    The  Company  primarily  provides  services  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 potential  credit
      losses.

    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  - five 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 40
      years.  Accumulated  amortization  of goodwill was $10.0  million and $7.5
      million  as of  December  31,  1999 and 1998,  respectively.  The  Company
      evaluates  the  realizability  of  goodwill  based  upon  expectations  of
      undiscounted cash flows and

                                       22
<PAGE> 23


                              REHABCARE GROUP, INC.

                   Notes to Consolidated Financial Statements

      operating  income.  Based  upon  its most  recent  analysis,  the  Company
      believes that no impairment of goodwill exists at December 31, 1999.

    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.

    Revenues and Costs

    The Company recognizes revenues as services are provided or when the revenue
      is earned. Expenses are recorded as incurred and as services are provided.
      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.

    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.

    Comprehensive Earnings

    On January 1, 1998, the  Company  adopted the  provisions  of  Statement  of
      Financial Accounting  Standards ("SFAS") No. 130, Reporting  Comprehensive
      Income,  which requires  reporting of comprehensive  income (earnings) and
      its   components,   in  the   statement  of  earnings  and   statement  of
      stockholders' equity, including net earnings as a component. Comprehensive
      earnings is the change in equity of a business from transactions and other
      events and circumstances from non-owner sources.

    Segment Disclosures

    On January  1, 1998, the  Company  adopted  the  provisions  of SFAS No. 131
      ("SFAS 131"),  Disclosures  about  Segments of an  Enterprise  and Related
      Information.  SFAS 131  establishes  standards for  reporting  information
      about  operating  segments  and related  disclosures  about  products  and
      services, geographic areas and major customers.

    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.

    Reclassifications

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

                                       23
<PAGE> 24


                             REHABCARE GROUP, INC.

                   Notes to Consolidated Financial Statements

(2) Acquisitions

    On May 20, 1999 the Company acquired Salt Lake Physical Therapy  Associates,
      Inc.  ("Salt  Lake"),  a provider  of  physical,  occupational  and speech
      therapy through hospital contracts,  a freestanding clinic and home health
      agencies for  consideration  consisting  of cash,  stock and  subordinated
      notes. On July 1, 1999, the Company purchased AllStaff, Inc. ("AllStaff"),
      a provider of  supplemental  nurse  staffing to health care  providers for
      consideration  consisting  of  cash,  stock  and  subordinated  notes.  On
      December 20, 1999, the Company acquired eai Healthcare Staffing Solutions,
      Inc., a 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,  48,433  shares of  stock,  and $4.2  million  in
      subordinated notes. Additional  consideration of up to $1.9 million may be
      paid  to  the  former  stockholders  of  Salt  Lake  contingent  upon  the
      attainment  of  certain   financial  goals  over  the  next  three  years.
      Additional consideration may be paid to the former stockholder of AllStaff
      contingent  upon the attainment of a minimum target growth in gross profit
      for  the   twelve-month   period   ending  June  30,  2000.   Goodwill  of
      approximately $15.0 million related to the acquisitions is being amortized
      over 40 years. The cash component of the purchase prices was funded by the
      Company's  working capital plus  additional  borrowings on its bank credit
      facility.

    On July 31,  1998, the  Company  acquired  Rehabilitative  Care  Systems  of
      America,  Inc.  ("RCSA"),  a provider of program outpatient  therapy,  for
      consideration  consisting  of cash and  stock.  On August  17,  1998,  the
      Company acquired StarMed Staffing,  Inc. ("StarMed"),  a provider of nurse
      staffing,  and certain related  entities for cash from Medical  Resources,
      Inc. On September 9, 1998, the Company acquired Therapeutic Systems, Ltd.,
      a provider of contract  therapy,  for  consideration  consisting  of cash,
      stock and notes. The aggregate  purchase prices for these acquisitions was
      $41.2  million,  consisting  of $38.0 million in cash,  130,426  shares of
      stock and $1.0 million in  subordinated  notes. An additional $2.0 million
      in cash  consideration  in the purchase of StarMed has been deferred until
      certain  contingencies  expire and is  secured by a bank  letter of credit
      held by a third-party escrow agent.  Additional  consideration of $202,000
      was  paid in 1999 to the  former  stockholders  of  RCSA,  based  upon the
      retention of clients.  The cash component of the purchase price was funded
      by an increase in the Company's bank credit facility to $90.0 million. See
      note  6.  Goodwill  of   approximately   $33.0  million   related  to  the
      acquisitions is being amortized over 40 years.

    On January  28,  1997,  the  Company  acquired  TeamRehab,  Inc.  and  Moore
      Rehabilitation  Services,  Inc. ("Team and Moore"),  providers of contract
      therapy services.  On June 12, 1997, the Company acquired Rehab Unlimited,
      Inc.  and the assets of Cimarron  Health  Care,  Inc.,  also  providers of
      contract  therapy  services,  and combined  them with Team and Moore.  The
      aggregate  purchase  prices  for  these  acquisitions  was  $7.0  million,
      consisting  of  $4.3  million  in  cash,   $1.8  million  in  subordinated
      promissory  notes and 54,151  shares of the  Company's  common  stock.  In
      addition,  $301,000 of  contingent  consideration  was paid in 1998 to the
      former  owners of Team and Moore.  Goodwill  related  to the  acquisitions
      totaling $6.3 million is being amortized over 40 years.

    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's  results  of  operations  commencing  on  the
      respective closing dates of acquisition.

                                       24
<PAGE> 25


                             REHABCARE GROUP, INC.

                   Notes to Consolidated Financial Statements

    The  following  unaudited  pro  forma  financial   information  assumes  the
      acquisitions  occurred  as of  January 1, 1998.  This  information  is not
      necessarily  indicative of results of operations  that would have occurred
      had the  purchases  actually  been made at the  beginning  of the  periods
      presented.
      (dollars in thousands, except per share data)
<TABLE>
<CAPTION>
                                                         Year Ended December 31,
                                                                1999        1998
                                                                ----        ----
         <S>                                                <C>          <C>
         Operating revenues                                 $336,044     293,246
         Net earnings                                         15,329      13,906
         Net earnings per common and common
             equivalent share:
                Basic                                           2.32        2.20
                Diluted                                         2.09        1.91
</TABLE>

(3) Marketable Securities

    Current  marketable  securities  at December 31, 1999  consist  primarily of
      variable rate municipal bonds.  Noncurrent  marketable  securities consist
      primarily of marketable  equity  securities  ($1.2 million and $840,000 at
      December  31, 1999 and 1998,  respectively)  and money  market  securities
      ($554,000 and $400,000 at December 31, 1999 and 1998,  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:
    (dollars in thousands)
<TABLE>
<CAPTION>
                                                       Year Ended December 31,
                                                    1999        1998        1997
                                                    ----        ----        ----
         <S>                                     <C>           <C>         <C>
         Balance at beginning of period          $ 3,404       1,338       1,386
         Provisions for doubtful accounts          2,743       1,093         717
         Allowance related to acquisitions           111       1,720          30
         Accounts written off                     (1,681)       (747)       (795)
                                                   -----       -----       -----
         Balance at end of period                $ 4,577       3,404       1,338
                                                   =====       =====       =====
</TABLE>

(5)  Equipment and Leasehold Improvements

     Equipment and leasehold improvements, at cost, consist of the following:
     (dollars in thousands)
<TABLE>
<CAPTION>
                                                                  December 31,
                                                                1999        1998
                                                                ----        ----
         <S>                                                <C>            <C>
         Equipment                                          $ 12,298       8,227
         Leasehold improvements                                  687         384
                                                              ------       -----
                                                              12,985       8,611
         Less accumulated depreciation and amortization        6,257       4,074
                                                              ------       -----
                                                            $  6,728       4,537
                                                              ======       =====

</TABLE>
                                       25
<PAGE> 26


                             REHABCARE GROUP, INC.

                   Notes to Consolidated Financial Statements

 (6)Long-Term Debt
    Long-term debt consists of the following:
    (dollars in thousands)
<TABLE>
<CAPTION>
                                                                                                      December 31,
                                                                                                   1999          1998
                                                                                                   ----          ----
    <S>                                                                                         <C>             <C>
    Bank Debt:
    ---------
    Term facility - LIBOR plus 1.0% to 2.0% or Corporate Base
      Rate ("CBR"), rate dependent on the ratio of indebtedness, net of cash and
      marketable   securities,   to  cash   flow,   maturing   October  1,  2003
      (weighted-average  rates of 7.4% and 6.7% at  December  31, 1999 and 1998,
      respectively)                                                                             $ 45,891        57,364

    Revolving  credit  facility - LIBOR plus 1.0% to 2.0% or CBR, rate dependent
      on the ratio of indebtedness,  net of cash and marketable  securities,  to
      cash  flow,  maturing  October 1, 2003  (weighted-average  rate of 7.8% at
      December 31, 1999)                                                                          12,000            --

    Subordinated Debt:
    -----------------
    Notes payable, 6.25% convertible, maturing March 1, 2006                                       6,000         6,000

    Note payable, 8%                                                                                  --           844

    Note payable, 8%, payable in quarterly installments of $41 thousand
      commencing July 1, 1999, maturing January 1, 2001                                              136           322

    Notes payable, 7%, payable in two installments of $250 thousand
      on June 30, 2000 and June 30, 2001                                                             500            --

    Notes payable, 6%, payable in two installments of $50 thousand
      on July 20, 2000 and July 20, 2001                                                             100            --

    Note payable, 8%, maturing August 15, 2001                                                       118           325

    Note payable, 8%, payable in two installments of $1.45 million
      on December 20, 2000 and December 20, 2001                                                   2,900            --

    Note payable, 8%, maturing September 9, 2002                                                   1,000         1,000

    Notes payable, 6.5%, maturing May 20, 2003                                                       750            --
                                                                                                  ------        ------

                                                                                                  69,395        65,855

    Less current portion                                                                          18,345        11,926
                                                                                                  ------        ------

    Total long-term debt                                                                        $ 51,050        53,929
                                                                                                  ======        ======
</TABLE>

    In 1998 the Company  restructured  and  increased  its bank debt.  Under the
      terms of the  restructured  loan  agreement,  the Company  entered  into a
      five-year,  $60.0  million term loan and a revolving  line of credit which
      allows the  Company to borrow up to the lesser of $30.0  million or 85% of
      eligible  accounts  receivable  as  defined by the  agreement,  reduced by
      amounts  outstanding under bank letters of credit.  The Company pays a fee
      on the unused  portion of the commitment  from .2% to .5% per annum,  with
      such rate being dependent on the ratio of the Company's indebtedness,  net
      of cash and  marketable  securities,  to cash flow.  Borrowings  under the
      agreement,  including the revolving credit facility, are secured primarily
      by the Company's

                                       26
<PAGE> 27


                              REHABCARE GROUP, INC.

                   Notes to Consolidated Financial Statements

      accounts  receivable,  equipment  and leasehold  improvements,  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 loan  agreement  also  restricts  the
      Company's ability to pay dividends to its stockholders. As of December 31,
      1999, the Company had an  outstanding  bank letter of credit in the amount
      of $2.0 million.  The average  outstanding  borrowings under the revolving
      credit  facility for 1999,  1998 and 1997  were $1.7 million, $3.5 million
      and $7.5 million at weighted-average interest rates of 7.5%, 7.0% and 7.4%
      per annum, respectively.

    The $6.0 million  convertible  subordinated notes payable may be redeemed in
      whole or in part by the  Company at any time  after  March 1, 2000 at from
      100% to 104% of the principal balance.  The notes are convertible into the
      Company's  common  stock  prior to  March  1,  2006,  subject  to  earlier
      redemption by the Company, at the option of the former HealthCare Staffing
      Solutions, Inc. shareholders, at a conversion price of $14.17 per share.

    The scheduled  principal payments of long-term debt at December 31, 1999 are
      as follows: $18.4 million in 2000, $20.3 million in 2001, $12.5 million in
      2002,  $12.2  million  in 2003,  $0 in 2004 and $6.0  million  thereafter.
      Interest paid for 1999,  1998 and 1997 was $3.8 million,  $3.6 million and
      $2.6 million, respectively.

(7) Stockholders' Equity

    On January  31,  1997,  the Company  made a tender  offer to  purchase up to
      1,387,500  shares of its common stock at a single purchase price, not less
      than $13.33 nor in excess of $15.00 per share.  The actual  purchase price
      was  determined  based  on the  lowest  single  purchase  price  at  which
      stockholders  tendered  shares  that was  sufficient  to purchase at least
      1,387,500  shares.  As of February  28,  1997,  the closing  date,  shares
      totaling greater than 1,387,500 were tendered,  resulting in the Company's
      repurchase on March 12, 1997, of a total of 1,499,932 shares at the single
      purchase  price of $15.00 per share.  The  repurchase  was  financed by an
      increase in the bank term loan and 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 obtainment of certain stock prices,  all remaining stock
      options  become  fully  exercisable  after  four years from date of grant.
      During 1999, the Company adopted the 1999 Non-Employee Director Stock Plan
      under which 100,000 shares may be granted. Also, the Company increased the
      shares that may be granted employees under the 1996 Long-Term  Performance
      Plan to 2,050,000  shares. At December 31, 1999, 1998 and 1997, a total of
      1,042,838,  276,619 and 840,921 shares,  respectively,  were available for
      future issuance under the plans.

                                       27
<PAGE> 28


                             REHABCARE GROUP, INC.

                   Notes to Consolidated Financial Statements

    The per share  weighted-average  fair value of stock options  granted during
      1999, 1998 and 1997 was $9.76, $8.55 and $7.64 on the dates of grant using
      the Black Scholes option-pricing model with the following weighted-average
      assumptions:  1999 - expected  dividend yield 0%,  volatility of 45%, risk
      free interest  rate of 6.5% and an expected  life of 5 to 7 years;  1998 -
      expected dividend yield 0%, volatility of 40%,  risk-free interest rate of
      4.7% and an expected life of 4 to 7 years;  1997 - expected dividend yield
      0%,  volatility  of 33%,  risk-free  interest rate of 5.6% and an expected
      life of 4 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 SFAS No. 123 ("SFAS
      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:
      (dollars in thousands, except per share data)
<TABLE>
<CAPTION>

                                                                Year Ended December 31,
                                                             1999        1998        1997
                                                             ----        ----        ----
      <S>                                                  <C>          <C>         <C>
      Net earnings                     As reported         $15,098      12,198      10,615
                                       Pro forma            13,407      10,546       9,820

      Basic earnings per share         As reported            2.30        1.97        1.77
                                       Pro forma              2.04        1.71        1.64

      Diluted earnings per share       As reported            2.07        1.71        1.47
                                       Pro forma              1.84        1.49        1.36

</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, 1998 and 1997.

    A summary of the status of the  Company's  stock option plans as of December
      31,  1999,  1998 and 1997,  and  changes  during  the years  then ended is
      presented below:
<TABLE>
<CAPTION>
                                              1999                           1998                             1997
                                              ----                           ----                             ----
                                           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 period          1,770,149      $ 13.26           1,925,809      $ 11.00          1,863,671       $  9.11
Granted                           424,350        18.12             833,696        15.53            335,375         19.43
Exercised                        (144,496)        9.39            (519,848)        8.76           (221,558)         7.78
Forfeited                        (104,654)       13.72            (469,508)       26.16            (51,679)        11.45
                                ---------                        ---------                       ---------
Outstanding at
   end of period                1,945,349        14.60           1,770,149        13.26          1,925,809         11.00
                                =========                        =========                       =========
Options exercisable at
   end of period                  984,205                        1,061,756                       1,247,265
                                =========                        =========                       =========

</TABLE>
                                       28
<PAGE> 29


                             REHABCARE GROUP, INC.

                   Notes to Consolidated Financial Statements

   The following table summarizes information about stock options outstanding at
December 31, 1999:
<TABLE>
<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
  ---------------    -----------     ----------------    --------------         -----------      --------------
<S>                    <C>                  <C>             <C>                 <C>                <C>
$   4.83 - 9.17          557,404            3.7 years       $   8.60              557,404          $   8.60
   10.67 -14.38          410,783            6.7                11.53              259,838             11.33
   16.06 -20.08          713,929            9.1                18.30               99,089             18.29
   20.44 -25.00          263,233            8.2                21.90               67,874             22.99
                       ---------                                                  -------
    4.83 -25.00        1,945,349            6.9                14.60              984,205             11.30
                       =========                                                  =======
</TABLE>

     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  sixty-seventh  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 $35 per one sixty-seventh 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 sixty-seventh
       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.

                                       29
<PAGE> 30


                             REHABCARE GROUP, INC.

                   Notes to Consolidated Financial Statements

 (8) Earnings per Share
     The  following  table  sets  forth  the computation  of basic  and  diluted
     earnings per share:
     (dollars in thousands, except per share data)
<TABLE>
<CAPTION>

                                                                                Year Ended December 31,
                                                                            1999        1998        1997
                                                                            ----        ----        ----
      <S>                                                              <C>            <C>         <C>
      Numerator:
      Numerator for basic earnings per share -
         earnings available to common stockholders
         (net earnings)                                                $  15,098      12,198      10,615
      Effect of dilutive securities - after-tax interest on
         convertible subordinated promissory notes                           225         225         225
                                                                          ------      ------      ------
      Numerator for diluted earnings per share -
         earnings available to common stockholders
         after assumed conversions                                     $  15,323      12,423      10,840
                                                                          ======      ======      ======
      Denominator:
      Denominator for basic earnings per share -
         weighted-average shares outstanding                               6,572       6,184       5,999

      Effect of dilutive securities:
         Stock options                                                       412         585         809
         Convertible subordinated promissory notes                           423         423         423
         Contingently issuable shares                                         --          53         144
                                                                          ------      ------      ------
      Denominator for diluted earnings per share -
         adjusted weighted-average shares and assumed
         conversions                                                       7,407       7,245       7,375
                                                                          ======      ======      ======

      Basic earnings per share                                         $    2.30        1.97        1.77
                                                                            ====        ====        ====

      Diluted earnings per share                                       $    2.07        1.71        1.47
                                                                            ====        ====        ====
</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 1999,  1998 and 1997 totaled  $817,000,  $681,000 and  $439,000,
       respectively.

    The Company maintains a nonqualified  deferred compensation plan for certain
       employees.  Under  the plan,  participants  may defer up to 100% of their
       annual  compensation.  The amounts  deferred are held in trust but remain
       the property of the Company.

                                       30
<PAGE> 31


                             REHABCARE GROUP, INC.

                   Notes to Consolidated Financial Statements

    At December 31, 1999 and 1998, $1.8 million and $1.2 million,  respectively,
       were  payable  under  the  nonqualified  deferred  compensation  plan and
       approximated the value of the trust assets owned by the Company.

(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,  1999,  that have
       initial  or   remaining   lease   terms  in  excess  of  one  year  total
       approximately  $2.3 million for 2000, $1.8 million for 2001, $1.5 million
       for 2002,  $617,000  for 2003 and  $8,000 for 2004 and  thereafter.  Rent
       expense for 1999,  1998 and 1997 was  approximately  $2.3  million,  $1.2
       million and $766,000, respectively.

(11) Income Taxes
     Income taxes consist of the following:
     (dollars in thousands)
<TABLE>
<CAPTION>

                                                                               Year Ended December 31,
                                                                            1999        1998        1997
                                                                            ----        ----        ----
       <S>                                                              <C>            <C>         <C>
       Federal - current                                                $  9,707       7,922       6,298
       Federal - deferred                                                 (1,026)         42        (122)
       State                                                               1,248         937       1,091
                                                                           -----       -----       -----
                                                                        $  9,929       8,901       7,267
                                                                           =====       =====       =====
       Deferred tax liability recorded in
           stockholders' equity                                         $      5           4         520
                                                                           =====       =====       =====
</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:
       (dollars in thousands)
<TABLE>
<CAPTION>

                                                                               Year Ended December 31,
                                                                            1999        1998        1997
                                                                            ----        ----        ----
       <S>                                                              <C>             <C>       <C>
       Expected income taxes                                            $  8,759       7,656       6,259
       Tax effect of interest income from municipal
           bond obligations exempt from Federal taxation                     (46)        (65)        (54)
       State income taxes, net of Federal
           income tax benefit                                                792         609         709
       Tax effect of amortization expense
           not deductible for tax purposes                                   295         261         261
       Other, net                                                            129         440          92
                                                                           -----       -----       -----
                                                                        $  9,929       8,901       7,267
                                                                           =====       =====       =====
</TABLE>
                                       31
<PAGE> 32

                             REHABCARE GROUP, INC.

                   Notes to Consolidated Financial Statements

     The tax effects of temporary differences that give rise to the deferred tax
       assets and liabilities are as follows:
       (dollars in thousands)
<TABLE>
<CAPTION>
                                                                  December 31,
                                                                1999        1998
                                                                ----        ----
         <S>                                               <C>             <C>
         Deferred tax assets:
            Net operating loss                             $      --          95
            Provision for doubtful accounts                      926       1,112
            Accrued insurance, bonus and
               vacation expense                                4,503       2,776
            Other                                              1,395         740
                                                               -----       -----
                                                               6,824       4,723
         Deferred tax liabilities:                             -----       -----
            Unrealized gains on marketable
               securities                                          5           4
            Goodwill amortization                              2,453       1,494
            Other                                                813         798
                                                               -----       -----
                                                               3,271       2,296
                                                               -----       -----
         Net deferred tax asset                            $   3,553       2,427
                                                               =====       =====
</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 1999,  1998 and 1997 were $10.5,  $6.5
       million and $6.4 million, respectively.

                                       32
<PAGE> 33


                             REHABCARE GROUP, INC.

                   Notes to Consolidated Financial Statements

 (12)Industry Segment Information

     The Company operates in four business segments that are managed  separately
       based  on  fundamental  differences  in  operations:  inpatient  programs
       (including acute  rehabilitation  and skilled nursing units),  outpatient
       programs,  contract therapy  services and staffing.  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:
       (dollars in thousands)

<TABLE>
<CAPTION>
                                              Revenues from
                                          Unaffiliated Customers                        Operating Earnings
                                          ----------------------                        ------------------
                                      1999         1998         1997               1999         1998      1997
                                      ----         ----         ----               ----         ----      ----

<S>                             <C>             <C>           <C>             <C>             <C>       <C>
Inpatient                       $  116,497      111,645       97,420          $  18,123       16,763    12,602
Outpatient                          30,677       16,484        9,430              6,238        1,833       582
Contract Therapy                    14,071       13,922        8,359                333        2,629     1,382
Staffing                           148,180       65,365       45,571              5,228        2,106     4,414
                                   -------      -------      -------             ------       ------    ------
Total                           $  309,425      207,416      160,780          $  29,922       23,331    18,980
                                   =======      =======      =======             ======       ======    ======
</TABLE>
<TABLE>
<CAPTION>

                                             Total Assets                        Depreciation and Amortization
                                             ------------                        -----------------------------
                                     1999          1998        1997                1999         1998      1997
                                     ----          ----        ----                ----         ----      ----

<S>                             <C>              <C>         <C>              <C>              <C>       <C>
Inpatient                       $  53,822        56,781      51,210           $   2,460        2,279     2,537
Outpatient                         20,895        11,842       7,442                 498          251       195
Contract Therapy                   19,752        20,763       8,909                 379          228       142
Staffing                           92,659        67,484      29,680               1,959        1,208       906
                                  -------       -------      ------               -----        -----     -----
Total                           $ 187,128       156,870      97,241           $   5,296        3,966     3,780
                                  =======       =======      ======               =====        =====     =====
</TABLE>
<TABLE>
<CAPTION>

                                         Capital Expenditures
                                         --------------------
                                     1999         1998        1997
                                     ----         ----        ----
<S>                             <C>              <C>         <C>
Inpatient                       $   1,217        1,398       1,118
Outpatient                             51           73           5
Contract Therapy                       42           20          --
Staffing                            1,733          612         249
                                    -----        -----       -----
Total                           $   3,043        2,103       1,372
                                    =====        =====       =====

</TABLE>
                                       33
<PAGE> 34


                             REHABCARE GROUP, INC.

                   Notes to Consolidated Financial Statements

  (13)Quarterly Financial Information (Unaudited)
      -------------------------------------------
      (dollars in thousands, except per share data)
<TABLE>
<CAPTION>
                                                                                Quarter Ended

             1999                                       Dec. 31         Sep. 30         June 30         Mar. 31
             ----                                       -------         -------         -------         -------

      <S>                                              <C>               <C>             <C>             <C>
      Operating revenues                               $ 86,902          79,663          73,675          69,185
      Operating earnings                                  8,139           7,991           7,104           6,688
      Earnings before income taxes                        6,132           7,021           6,188           5,686
      Net earnings                                        3,710           4,233           3,725           3,430
      Net earnings per common share:
         Basic                                              .56             .64             .57             .53
         Diluted                                            .50             .57             .51             .47
</TABLE>
<TABLE>
<CAPTION>

                                                                                Quarter Ended

             1998                                       Dec. 31         Sep. 30         June 30         Mar. 31
             ----                                       -------         -------         -------         -------

      <S>                                              <C>               <C>             <C>             <C>
      Operating revenues                               $ 66,835          54,050          42,967          43,564
      Operating earnings                                  6,712           5,935           5,345           5,339
      Earnings before income taxes and cumulative
        effect of change in accounting principle          7,178           5,147           4,808           4,742
      Net earnings                                        4,227           3,072           2,883           2,016
      Net earnings per common share:
         Basic
            Earnings before cumulative effect of
               change in accounting principle               .65             .49             .48             .47
            Net earnings                                    .65             .49             .48             .35
         Diluted
            Earnings before cumulative effect of
               change in accounting principle               .59             .43             .41             .40
            Net earnings                                    .59             .43             .41             .29
</TABLE>

         The sum of the  quarterly  earnings  per common share may not equal the
         full year  earnings per common share due to rounding and  computational
         differences.

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  directors  and  executive  officers  of the
Company is  contained  under the caption  "Item 1 - Election of  Directors"  and
"Compliance with Section 16(a) of the Securities  Exchange Act of 1934" included
in the Proxy  Statement  for the 2000  Annual  Meeting  of  Stockholders,  which
information is incorporated herein by reference.

                                       34
<PAGE> 35


    The  following is a list as of March 10, 2000,  of the names and ages of the
executive officers of the Company and positions with the Company. The employment
history of each of the  executive  officers for the past five years  follows the
list. There is no family relationship between any of the named persons.
<TABLE>
<CAPTION>

      Name              Age       Position

<S>                     <C>  <C>
Alan C. Henderson       54   President and Chief Executive Officer
Maurice Arbelaez        43   President, Staffing Division
Gregory F. Bellomy      43   President, Contract Therapy Division
Tom E. Davis            50   President, Inpatient Division
Keith L. Goding         49   Executive Vice President and Chief Development Officer
Alfred J. Howard        47   President, Outpatient Division
Hickley M. Waguespack   56   Executive Vice President,  Customer  Service and Retention
John R. Finkenkeller    47   Senior Vice President, Chief Financial Officer and Secretary
</TABLE>

    ALAN C.  HENDERSON  has been  President  and Chief  Executive  Officer and a
director of the Company since May 1998 and was Executive Vice  President,  Chief
Financial Officer and Secretary from 1991 through May 1998.

    MAURICE  ARBELAEZ has been  President of the Staffing  Division  since April
1999 and was Senior Vice President Operations from August 1994 to April 1999.

    GREGORY F. BELLOMY has been  President  of the  Company's  Contract  Therapy
Division since September 1998. Prior to joining the Company,  Mr. Bellomy served
in various capacities, including Division President, Division Vice President and
Area General Manager, at TheraTex  Incorporated from 1992 to 1997, at which time
TheraTex was acquired by Vencor Incorporated.  Mr. Bellomy was National Director
of Vencare Ancillary Services for Vencor until he joined the Company.

    TOM E. DAVIS has been  President  of the  Inpatient  Division of the Company
since  January  1998 and joined  the  Company  in  January  1997 as Senior  Vice
President of Operations.  Prior to joining the Company, Mr. Davis was Group Vice
President for Quorum Health Resources from January 1990 to January 1997.

    KEITH L. GODING  has been  Executive  Vice  President and Chief  Development
Officer of the Company since February 1995.

    ALFRED J.  HOWARD  has been  President  of the  Outpatient  Division  of the
Company since August 1996.  Prior to joining the Company he was President of the
Eastern  Operations for Pacific  Rehabilitation and Sports Medicine from October
1993 to August 1996.

    HICKLEY M.  WAGUESPACK has been Executive Vice President,  Customer  Service
and Retention of the Company since January 1998, was Chief Operating  Officer of
the Company from March 1995 through December 1997, and was Senior Vice President
- Operations from June 1991 until February 1995.

    JOHN R.  FINKENKELLER  has been Senior Vice  President  and Chief  Financial
Officer of the Company since June 1998, was elected Secretary in August 1998 and
was Senior Vice President and Treasurer since October 1991.

                                       35
<PAGE> 36


ITEM 11. EXECUTIVE COMPENSATION

    Information regarding executive  compensation is contained under the caption
"Compensation  of Executive  Officers",  included in the Proxy Statement for the
2000 Annual Meeting of Stockholders, which 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 contained  under the captions  "Voting  Securities  and Principal
Holders Thereof" and "Security  Ownership by Management",  included in the Proxy
Statement for the 2000 Annual  Meeting of  Stockholders,  which is  incorporated
herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

    Not applicable.

                                     PART IV

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

     (a)  The following documents are filed as part of this report:

           (1)Financial Statements
                  Independent Auditors' Report
                  Consolidated  Balance  Sheets as of December 31, 1999 and 1998
                  Consolidated  Statements  of  Earnings  for  the  years  ended
                       December 31, 1999, 1998 and 1997
                  Consolidated  Statements of Stockholders' Equity for the years
                       ended December 31, 1999, 1998 and 1997
                  Consolidated  Statements  of  Cash  Flows  for the years ended
                       December  31,1999, 1998 and 1997
                  Consolidated  Statements  of  Comprehensive  Earnings  for the
                       years ended December 31, 1999, 1998 and 1997
                  Notes to Consolidated Financial Statements

           (2)Financial Statement Schedules:
                  None

           (3)Exhibits:
                  See Exhibit Index on page 38 of this Report.

     (b)  Reports on Form 8-K

     No reports on Form 8-K were filed by the Registrant during the three months
ended December 31, 1999.

                                       36
<PAGE> 37


                                   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 10, 2000
                                   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 10, 2000
 ---------------------------      Officer and Director
 (Alan C. Henderson)
 Principal Executive Officer

 /s/ JOHN R. FINKENKELLER         Senior Vice President           March 10, 2000
 ----------------------------     and Chief Financial Officer
 (John R. Finkenkeller)
 Principal Financial Officer

 /s/ WILLIAM G. ANDERSON          Director                        March 10, 2000
 ----------------------------
 (William G. Anderson)

 /s/ RICHARD E. RAGSDALE          Director                        March 10, 2000
 ----------------------------
 (Richard E. Ragsdale)

 /s/ JOHN H. SHORT                Director                        March 10, 2000
 ----------------------------
 (John H. Short)

 /s/ H. EDWIN TRUSHEIM            Director                        March 10, 2000
 ----------------------------
 (H. Edwin Trusheim)

 /s/ THEODORE M. WIGHT            Director                        March 10, 2000
 ----------------------------
 (Theodore M. Wight)

                                       37
<PAGE> 38


                                  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  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 Company and
      Boatmen's Trust Company (filed as Exhibit 1 to the Company'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  incor-
      porated  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
      (filed as Exhibit 10.7 to the Registrant's  Registration Statement on Form
      S-1, dated February 18, 1993  [Registration No. 33-58490] and incorporated
      herein by reference)

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)

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

                                       38
<PAGE> 39


                             EXHIBIT INDEX (CONT'D)

10.10 Form of Subordinated  Convertible  Promissory Note of Registrant issued to
      stockholders  of Healthcare  Staffing  Solutions,  Inc.  d/b/a Health Tour
      (filed as  Exhibit  2.4 to the  Registrant's  Current  Report on Form 8-K,
      dated March 1, 1996 and incorporated herein by reference)

10.11 Stock  Purchase  Agreement,  dated  July  8, 1998  by  and  among  Medical
      Resources, Inc.,  HealthCare Staffing Solutions, Inc. and RehabCare Group,
      Inc. (filed  as Exhibit 2.1 to  Registrant's  Current  Report on Form 8-K,
      dated August 14, 1998 and incorporated herein by reference)

10.12 Escrow  Agreement,  dated  as of  August  14,  1998 by and  among  Medical
      Resources  Inc.,  RehabCare  Group,  Inc.  and IBJ  Schroder  Bank & Trust
      Company (filed as Exhibit 2.2 to Registrant's  Current Report on Form 8-K,
      dated August 14, 1998 and incorporated herein by reference)

10.13 L/C Procedures Agreement,  dated as of July 8, 1998 by and between Medical
      Resources,  Inc.  and  RehabCare  Group,  Inc.  (filed as  Exhibit  2.3 to
      Registrant's  Current  Report  on Form  8-K,  dated  August  14,  1998 and
      incorporated herein by reference)

10.14 Stock Purchase Agreement dated as of August 5, 1998 by and among RehabCare
      Group Inc.,  Therapeutic  Systems,  Ltd. and  Ronald C. Stauber (filed  as
      Exhibit 2.1 to Registrant's Current Report on Form 8-K, dated September 9,
      1998 and incorporated herein by reference)

10.15 Amendment No. 1 to Stock Purchase  Agreement dated as of September 9, 1998
      by and  among  RehabCare Group, Inc., Therapeutic Systems, Ltd. and Ronald
      C. Stauber (filed as Exhibit 2.2 to Registrant's  Current  Report on  Form
      8-K, dated September 9, 1998 and incorporated herein by reference)

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

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

13.1  Those  portions of the Annual Report for the year ended  December 31, 1999
      of the Registrant included in response to Items 5 and 6 of Form 10-K    40

21.1  Subsidiaries of the Registrant                                          41

23    Consent of KPMG LLP                                                     42

27    Financial Data Schedule                                                 43

                                       39
<PAGE> 40
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
SIX-YEAR FINANCIAL SUMMARY
Dollars in thousands, except per share data
------------------------------------------------------------------------------------------------------------------
<S>                                                  <C>        <C>        <C>        <C>        <C>       <C>
(Year ended December 31, unless noted)                   1999       1998       1997     1996(1)   1996(2)   1995(2)
------------------------------------------------------------------------------------------------------------------
Statement of earnings data:
 Operating revenues                                  $309,425   $207,416   $160,780   $119,856   $89,377   $83,210
 Operating earnings                                    29,922     23,331     18,980     12,717    10,276     8,531
 Net earnings (3)                                      15,098     12,198     10,615      6,992     5,878     4,735
 Net earnings per share (EPS):(3)(4)
      Basic                                          $   2.30   $   1.97   $   1.77   $   1.01   $   .87   $   .71
      Diluted                                        $   2.07   $   1.71   $   1.47   $    .93   $   .84   $   .70
 Weighted average shares outstanding (000s):(4)
      Basic                                             6,572      6,184      5,999      6,955     6,725     6,614
      Diluted                                           7,407      7,245      7,375      7,711     6,975     6,783
------------------------------------------------------------------------------------------------------------------
Balance sheet data:
 Working capital                                     $22,069     $20,606    $12,793    $ 9,254   $11,818    $5,460
 Total assets                                        187,264     156,870     97,241     80,802    57,066    52,833
 Total debt                                           69,395      65,855     39,014     17,467     7,125    10,200
 Stockholders' equity                                 77,783      60,156     39,760     49,670    38,897    32,431
------------------------------------------------------------------------------------------------------------------
Financial statistics:
 Operating margin                                       9.7%       11.3%      11.8%      10.6%     11.5%     10.2%
 Net margin(5)                                          5.1%        5.8%       6.1%       5.8%      6.6%      5.7%
 Current ratio                                         1.4:1       1.5:1      1.6:1      1.6:1     2.0:1     1.4:1
 Diluted EPS growth rate (5)                           26.5%       25.9%      45.2%      14.8%     20.0%     18.6%
 Return on equity(5) (6)                               22.8%       24.1%      21.8%      16.1%     16.5%     16.7%
------------------------------------------------------------------------------------------------------------------
Operating statistics:
 Inpatient (acute rehab and skilled nursing):
      Average number of programs                       131.8       128.2      110.3       91.3      84.7      84.1
      Average admissions per program                     369         354        321        294       279       261
      Average length of stay (billable)                 14.3        14.5       15.0       15.9      17.3      18.4
      Patient days (billable)                        697,769     656,363    532,195    426,995   408,385   403,784
 Outpatient:
      Average number of locations                       40.0        26.1       17.9       19.6      21.2      13.6
      Patient visits                                 785,943     378,108    231,256    223,904   278,970   135,064
 Therapy staffing - Number of weeks worked           131,110      52,265     29,652     21,908        --        --
 Contract therapy - Average number of locations         90.8        49.5       35.6         --        --        --
 -----------------------------------------------------------------------------------------------------------------
(1)     For  comparability  purposes,  reflects the twelve  months  ended  December 31, 1996.
(2)     Twelve month period ended last day of February.
(3)     1999  includes a pre-tax loss of $1.0 million ($0.6 million after tax or $0.09 per share) on write-down of
        investments.  1998 and 1997 include  pre-tax gains of $1.5 million ($0.9  million  after  tax or $0.12 per
        share) and  $1.4  million  ($0.9  million  after  tax or $0.12 per  share),  respectively,  from  sales of
        marketable  securities.  1998  includes  an  $0.8 million  ($0.11  per  share)  after-tax  charge for  the
        cumulative effect of change in accounting for start-up costs.
(4)     Share data adjusted for 3-for-2 stock split in October 1997.
(5)     Excludes write-down of investments, gains from sale of marketable securities and charge for the cumulative
        effect of change in  accounting  principle  described in (3).
(6)     Average of beginning and ending equity.
-------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
STOCK DATA
The Company's common  stock is listed and traded on     years and has not declared any dividends during the current
the New York Stock Exchange under the symbol "RHB".     fiscal year.  The  Company does not  anticipate paying cash
The  stock  prices  below are the high and low sale     dividends in the foreseeable future.  The number of holders
prices.                                                 of  the  Company's  common  stock  as of March 14, 2000 was
<S>                     <C>    <C>    <C>    <C>
Calendar Quarter          1st    2nd    3rd    4th      approximately  3,503  including  138 shareholders of record
---------------------------------------------------     and an  estimated 3,365 persons or entities  holding common
1999: High              $22.69 $22.13 $21.63 $21.38     stock  in  nominee  name.
      Low                15.06  13.81  17.50  15.00
---------------------------------------------------     Shareholders  may  receive earnings  news  releases,  which
1998: High               27.50  31.75  25.13  21.00     provide  timely  financial  information,  by  notifying our
      Low                20.63  21.75  11.88  11.00     investor  relations department or by visiting  our website.
                                                        http://www.rehabcare.com
The Company  has  not  paid dividends on its common
stock during the two most recently completed fiscal
</TABLE>
                                       40
<PAGE> 41


                                                                    Exhibit 21.1

                          Subsidiaries of Registrant

Healthcare Staffing Solutions, Inc.         Incorporated in the Commonwealth
    d/b/a Health Tour                             of Massachusetts

Health Tour Management, Inc.               Incorporated in the Commonwealth
                                                  of Massachusetts

RehabCare Group Therapy Services, Inc.     Incorporated in the State of Delaware

RehabCare Group East, Inc.                 Incorporated in the State of Delaware

RehabCare Group Management Services, Inc.  Incorporated in the State of Delaware

RehabCare Group of California, Inc.        Incorporated in the State of Delaware

RehabCare Group of Texas Holdings, Inc.    Incorporated in the State of Delaware

RehabCare Group of Texas, L.P.             Organized in the State of Texas

StarMed Management, L.L.C.                 Incorporated in the State of Delaware

StarMed Health Personnel, Inc.             Incorporated in the State of Delaware

Wesley Medical Resources, Inc.             Incorporated in the State of Delaware

eai Healthcare Staffing Solutions, Inc.    Incorporated in the State of Delaware

Salt Lake Physical Therapy Associates, Inc Incorporated in the State of Utah

AllStaff, Inc.                             Incorporated in the State of Iowa

                                       41
<PAGE> 42



                                                                      Exhibit 23

                         Independent Auditors' Consent

The Board of Directors
RehabCare Group, Inc.:

We consent to the incorporation by reference in the 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 as amended, and  registration
statement No. 333-86679 on Form S-8 of RehabCare Group, Inc. of our report dated
February 4, 2000,  with  respect to the consolidated balance sheets of RehabCare
Group, Inc. and subsidiaries as of December 31, 1999 and  1998,  and the related
consolidated  statements  of  earnings,  stockholders' equity,  cash  flows  and
comprehensive  earnings  for each o f the years in the three-year  period  ended
December 31, 1999, which  report is  included  in  the  December 31, 1999 annual
report on Form 10-K of RehabCare Group, Inc.

As discussed in note 1 to the consolidated  financial  statements,  the Company
changed its method of accounting for start-up costs on January 1, 1998.

                                                        /s/KPMG LLP

 St. Louis, Missouri
 March 27, 2000

                                       42