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

                                    FORM 10-K

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

For the fiscal year ended December 31, 2003

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, 23rd 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          Name of exchange on which registered:
Section 12(b) of the Act:
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).

     Indicate by check mark whether the Registrant is an  accelerated  filer (as
defined in Rule 12b-2 of the Act).              Yes  X           No

     The  aggregate  market  value of voting  stock  held by  non-affiliates  of
Registrant at June 30, 2003 was  $231,875,029.  At March 8, 2004, the Registrant
had 16,177,479 shares of Common Stock outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

     Part II of this  Annual  Report  on Form  10-K  incorporates  by  reference
information  contained in the Registrant's Annual Report to Stockholders for the
fiscal year ended December 31, 2003.

     Part III of this  Annual  Report on Form  10-K  incorporates  by  reference
information  contained in the  Registrant's  definitive  Proxy Statement for its
Annual    Meeting   of    Stockholders    to   be   held   on   May   4,   2004.
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                                       1
<PAGE>

                                     PART I

     This Annual Report on Form 10-K contains  forward-looking  statements  that
are made  pursuant  to the safe  harbor  provisions  of the  Private  Securities
Litigation  Reform Act of 1995.  Forward-looking  statements  involve  known and
unknown risks and uncertainties  that may cause RehabCare Group's actual results
in future periods to differ materially from forecasted results.  These risks and
uncertainties  may include,  but are not limited to, the ability of RehabCare to
integrate  acquisitions and to implement client partnering  relationships within
the expected timeframes and to achieve the revenue and earnings levels from such
acquisitions and relationships at or above the levels projected;  the timing and
financial effect of the Company's continuing  restructuring efforts with respect
to the Company's current businesses; changes in and compliance with governmental
reimbursement  rates and other  regulations  or policies  affecting  RehabCare's
hospital  rehabilitation  and contract  therapy  lines of business;  RehabCare's
ability  to  attract  new client  relationships  or to retain and grow  existing
client relationships  through expansion of RehabCare's  hospital  rehabilitation
and contract  therapy  service  offerings  and the  development  of  alternative
product  offerings;  the future  operating  performance of InteliStaf  Holdings,
Inc.,  and the rate of return that  RehabCare  will be able to achieve  from its
equity  interest in InteliStaf;  the adequacy and  effectiveness  of RehabCare's
operating and  administrative  systems;  RehabCare's  ability and the additional
costs of attracting  administrative,  operational  and  professional  employees;
significant  increases in health,  workers'  compensation  and  professional and
general  liability  costs;  litigation  risks of  RehabCare's  past  and  future
business,  including  RehabCare's  ability to  predict  the  ultimate  costs and
liabilities  or the  disruption of its  operations;  competitive  and regulatory
effects on pricing and margins,  including efforts by governmental reimbursement
programs, insurers, healthcare providers and others to contain healthcare costs;
and general economic conditions.

ITEM 1.  BUSINESS

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

Overview of Our Company

     RehabCare  Group,  Inc., a Delaware  corporation,  is a leading provider of
therapy  program  management for hospitals and skilled  nursing  facilities.  We
manage hospital-based  inpatient acute rehabilitation and skilled nursing units,
hospital-based  and satellite  outpatient  therapy programs,  as well as therapy
programs in  freestanding  skilled  nursing,  long-term care and assisted living
facilities.

     Established  in  1982,  we have  more  than  20  years  experience  helping
healthcare  providers  increase  revenues and reduce costs while effectively and
compassionately delivering rehabilitation services. We believe our clients place
a high value on our extensive experience in assisting them to implement clinical
best practices, to address competition for patient services, and to navigate the
complexities  inherent in managed care contracting and government  reimbursement
systems.  Over the years, we have diversified our program management services to
include  management  services for  inpatient  rehabilitation  facilities  within
hospitals, skilled nursing units and outpatient rehabilitation programs, as well
as  management  of  rehabilitation  services in  freestanding  skilled  nursing,
long-term care and assisted living facilities.

     On February 2, 2004,  we sold our StarMed  Staffing  division to InteliStaf
Holdings Inc., a privately  held  healthcare  staffing  company.  In return,  we
received  a  25%  equity  ownership  stake  in  InteliStaf.   As  part  of  this
transaction,  the parties  agreed that two of our  directors  would serve on the
InteliStaf  board.  After the  February 2, 2004  consummation  date,  day-to-day
management of the staffing  business is the sole  responsibility  of InteliStaf.
Under  accounting  rules, we will not  consolidate  the financial  condition and
results of  operations  of the  staffing  business  from the  consummation  date
forward,  but will account for our minority  investment in InteliStaf  under the
equity method.
                                       2
<PAGE>

     We  offer  our  portfolio  of  program  management  services  to  a  highly
diversified  customer  base.  In all, we have  relationships  with more than 700
hospitals and skilled nursing  facilities  located in 39 states, the District of
Columbia and Puerto Rico.

     For the  year  ended  December  31,  2003,  we had  consolidated  operating
revenues  of  $539.3  million  and a  consolidated  net loss of  $13.7  million,
including a $30.6 million  after-tax  loss on net assets held for sale. In 2003,
approximately  41% of our third party  operating  revenues were derived from our
now-divested  healthcare  staffing  services business and approximately 59% were
derived from our program management services business.

Industry Overview

     As a provider of program management  services,  our revenues and growth are
affected by trends and  developments  in  healthcare  spending.  The Centers for
Medicare  and  Medicaid  Services   estimated  that  in  2002  total  healthcare
expenditures  in the  United  States  grew by 9.3% to $1.6  trillion,  the sixth
consecutive year in which healthcare  spending grew at an accelerating rate. The
Centers also report that hospital spending  increased 9.5%, to $486.5 billion in
2002, marking the fourth  consecutive year of accelerating  growth and the first
time the hospital spending growth rate outpaced the overall healthcare  spending
growth rate since 1991. However, the Centers anticipate a slight decrease in the
growth rate for hospital spending, which was projected to fall to 6.5% in 2003.

     The Centers further projects that total  healthcare  spending in the United
States will grow an average of 7.3% annually  from 2002 through 2013.  According
to these estimates,  healthcare expenditures will account for approximately $3.4
trillion, or 18.4%, of the United States gross domestic product by 2013.

     Demographic  considerations  also affect long-term  growth  projections for
healthcare   spending.   According  to  the  U.S.  Census  Bureau,   there  were
approximately 35 million  Americans,  comprising  approximately 13% of the total
United States population,  aged 65 or older based on the 2000 census. The number
of Americans aged 65 or older is expected to climb to  approximately  40 million
by 2010 and to  approximately  54  million  by  2020.  By 2030,  the  number  of
Americans 65 and older is estimated to reach  approximately 70 million,  or 20%,
of the total population. Due to the increasing life expectancy of Americans, the
number of people aged 85 years or older is also  expected  to increase  from 4.3
million to 8.9 million by 2030.

     We believe that healthcare  expenditures  and longer life expectancy of the
labor force and general  population will place increased  pressure on healthcare
providers to find innovative, efficient means of delivering healthcare services.
In particular,  many of the health  conditions  associated with aging -- such as
stroke and heart attack, neurological disorders and diseases and injuries to the
muscles,  bones and  joints  -- will  increase  the  demand  for  rehabilitative
therapy. These trends, combined with the need for client hospitals to move their
patients into the  appropriate  level of care on a timely basis,  will encourage
healthcare  providers  to direct  patients to  inpatient  rehabilitation  units,
outpatient therapy and freestanding skilled nursing therapy programs.

     Program  Management  Services.  The growth of managed care and its focus on
cost control has encouraged  healthcare providers to provide quality care at the
lowest cost  possible.  While  generally  less  aggressive  than  managed  care,
Medicare and Medicaid  incentives have also driven declines in average inpatient
days per admission.  In many cases, patients are treated initially in the higher
cost,  acute-care hospital setting.  After their condition has stabilized,  they
are either moved to a lower cost setting, such as a skilled nursing facility, or
are  discharged to their home and treated on a home health or outpatient  basis.
Thus, while hospital inpatient  admissions have continued to grow, the number of
average inpatient days per admission has declined.

                                       3
<PAGE>

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

     By outsourcing therapy services, hospitals may be able to:

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

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

o    Optimize  Utilization of Space.  Inpatient services help hospitals optimize
     physical plant space to treat patients that are within  specific  diagnoses
     of the particular hospitals' targeted service lines.

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

o    Sign  Agreements with Managed Care  Organizations.  We believe managed care
     organizations  prefer  to sign  contracts  covering  acute  rehabilitation,
     skilled  nursing  services  and  outpatient  therapy,  or even  the  entire
     post-acute  continuum  of  services,  with one entity  rather than  several
     separate,  often unrelated  entities.  Program 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 unit through the time of  discharge.  This is an
     important feature to managed care  organizations in controlling their costs
     while  assuring  appropriate  outcomes.  Program  managers  often  have the
     ability  to  improve   clinical  care  by  capturing  and  analyzing   this
     information from a large number of acute rehabilitation and skilled nursing
     units,  which an  individual  hospital  could  not do on its own  without a
     substantial  investment in specialized systems.  Becoming part of a managed
     care network helps the hospital attract  physicians,  and in turn,  attract
     more patients to the hospital.

                                       4
<PAGE>

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

     Of the  approximately  4,900  general  acute-care  hospitals  in the United
States,  an estimated 1,050  hospitals  operate  inpatient acute  rehabilitation
units,  of which we estimate  approximately  15%-20%  currently  outsource acute
rehabilitation  program  management  services.  As of December 31, 2003,  we had
therapy program management  contracts with 111 of those hospitals that outsource
acute rehabilitation unit management services.

     By outsourcing therapy services, skilled nursing facilities may be able to:

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

o    Obtain Clinical Resources and Expertise.  Rehabilitation services providers
     have the ability to develop and  implement  clinical  training  and program
     development that will provide best practices for clients.

o    Ensure  Appropriate  Levels of Staffing for  Rehabilitation  Professionals.
     Therapy  staffing  in  the  skilled  nursing  environment  presents  unique
     challenges  that can be addressed by a national  presence that  facilitates
     recruitment of qualified clinical professionals.  Program managers have the
     ability to manage staffing levels to address the fluctuating clinical needs
     of the host facility.

o    Improve Skilled Nursing  Facility  Profitability.  Rehabilitation  services
     providers are equipped to support the clinical needs of the facility and to
     manage staffing  levels such that the client's  overall  profitability  for
     their patients requiring rehabilitation services is improved.

     Of the total population of skilled nursing facilities in the United States,
there  are an  estimated  5,000  facilities  that are  ideal  prospects  for our
contract  therapy  services.  As of December  31, 2003,  we had therapy  program
management  contracts with 468  facilities  that  outsource  therapy  management
services.  In addition  to skilled  nursing  facilities,  we have  expanded  our
service offerings to deliver therapy management  services in additional settings
such as long-term care and assisted living facilities.

                                       5
<PAGE>


Overview of Our Business Units

     We currently operate in one business segment,  program management services,
which  consists of two  business  units - hospital  rehabilitation  services and
contract  therapy.  The following  table  describes the services we offer within
these business units.

<TABLE>
<CAPTION>
      Business Units        Description of Service     Benefits to Client
      --------------        ----------------------     ------------------
<S>                         <C>                        <C>
Hospital Rehabilitation
Services:
      Inpatient             High acuity                Utilizes formerly idle
        Acute               rehabilitation for         space and affords the
        Rehabilitation      conditions such as         client the ability to
        Units:              strokes, orthopedic        offer specialized
                            conditions and head        clinical rehabilitation
                            injuries.                  services to patients who
        Skilled Nursing                                might otherwise be
        Units:              Lower acuity               discharged to a setting
                            rehabilitation but often   outside the client's
                            more medically complex     facility.
                            than acute rehabilitation
                            units for conditions such
                            as stroke, cancer, heart
                            failure, burns and wounds.

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

Contract Therapy:           Rehabilitation services    Affords the client the
                            in free standing skilled   ability to fulfill the
                            nursing, long term care    continuing need for
                            and assisted living        therapists on a
                            facilities for             full-time or part-time
                            neurological, orthopedic   basis. Offers the client
                            and cardiological          a better opportunity to
                            conditions.                improve the quality of
                                                       the programs.
</TABLE>

     Financial  information about each of our business  segments,  including our
recently divested  staffing  segment,  is contained in Note 15 "Industry Segment
Information" to our consolidated financial statements.

                                       6

<PAGE>


 The following table summarizes by geographic region in the United States our
program management locations as of December 31, 2003.
<TABLE>
<CAPTION>
                                               Acute
                                          Rehabilitation/
                                             Skilled    Outpatient  Contract
                                             Nursing      Therapy    Therapy
Geographic Region                              Units     Programs   Programs
-----------------                              -----     --------   --------
<S>                                          <C>           <C>        <C>
Northeast Region ...................           18/1         6          31
Southeast Region....................           18/4        16          65
North Central Region................           28/3         5         164
Mountain Region.....................            4/1         2           0
South Central Region................           36/3        14         168
Western Region......................            7/0         0          40
                                             ------        --         ---
   Total............................         111/12        43         468
</TABLE>

     Program Management Services

     Inpatient

     RehabCare  has  developed an effective  business  model in the  prospective
payment  environment,  and  is  instrumental  in  helping  its  clients  achieve
favorable outcomes in their inpatient rehabilitation settings.

     Acute  Rehabilitation.  Since 1982,  our  inpatient  division  has been the
market leader in operating acute rehabilitation units in acute-care hospitals on
a  contract  basis.  As  of  December  31,  2003,  we  managed  inpatient  acute
rehabilitation  units in 111  hospitals for patients  with  diagnoses  including
stroke,  orthopedic  conditions,  arthritis,  spinal  cord and  traumatic  brain
injuries.  Of the approximately 4,900 general acute-care hospitals in the United
States,  an estimated 1,050  hospitals  operate  inpatient acute  rehabilitation
units of which we estimate only approximately  15%-20% currently outsource acute
rehabilitation program management services.

     Of the  approximately  3,850  acute-care  hospitals  that do not  currently
operate acute  rehabilitation  units, we estimate that as many as 1,200 meet our
general criteria for support of acute  rehabilitation units in their markets. We
believe that there is an  opportunity  for growth to the extent that many of the
hospitals currently operating their own acute  rehabilitation  units re-evaluate
the efficiency of their operations and consider outsourcing  management services
to companies such as ours.

     We establish acute rehabilitation units in hospitals that have vacant space
and unmet  rehabilitation  needs in their  markets.  We also work with hospitals
that  currently  operate acute  rehabilitation  units to determine the projected
level of cost  savings we can deliver to them by  implementing  our  scheduling,
clinical  protocol and outcome  systems.  In the case of  hospitals  that do not
operate acute  rehabilitation  units  already,  we review their  historical  and
existing  hospital  population,  as well as the  demographics  of the geographic
region, to determine the optimal size of the proposed acute  rehabilitation unit
and the potential of the new unit under our  management  to generate  additional
revenues to cover anticipated expenses.

                                       7
<PAGE>

     We are generally  paid by our clients on the basis of a negotiated  fee per
discharge or per patient day pursuant to contracts  that are typically for terms
of three to five years.  These contracts are generally subject to termination or
renegotiation  in the event the hospital  experiences  a material  change in the
reimbursement it receives from government or other providers.

     An acute  rehabilitation  unit  affords the  hospital  the ability to offer
rehabilitation  services to patients,  retaining patients who might otherwise be
discharged to a setting  outside the hospital.  A unit typically  consists of 20
beds and is staffed with a program director,  a  physician-medical  director and
clinical  staff  which may include a  psychologist,  physical  and  occupational
therapists, a speech/language  pathologist,  a social worker, a case manager and
other appropriate supporting personnel.

     Skilled  Nursing Units.  In 1994, the inpatient  division added the skilled
nursing service line in response to client requests for management  services and
our  strategic  decision to broaden our inpatient  services.  As of December 31,
2003, we managed 12 inpatient skilled nursing units. The hospital-based  skilled
nursing unit enables  patients to remain in a hospital  setting where  emergency
needs can be met  quickly as opposed  to being  sent to a  freestanding  skilled
nursing  facility.  The unit is located  within the  acute-care  hospital and is
separately licensed as a skilled nursing unit.

     We are generally  paid by our clients on the basis of a negotiated  fee per
patient day pursuant to contracts  that are typically for terms of three to five
years.  The hospital  benefits by retaining  patients who would be discharged to
another  setting,  capturing  additional  revenue and  utilizing  idle space.  A
skilled  nursing  unit treats  patients  who require  less  intensive  levels of
rehabilitative  care,  but who have a greater need for nursing  care.  Patients'
diagnoses are typically  long-term and medically complex covering  approximately
60 clinical conditions,  including stroke,  post-surgical conditions,  pulmonary
disease, cancer, congestive heart failure, burns and wounds.

     Outpatient

     In  1993,  we began  managing  outpatient  therapy  programs  that  provide
management of therapy services to patients with work-related and  sports-related
illnesses   and   injuries,   and  as  of  December  31,  2003,  we  managed  43
hospital-based and satellite outpatient therapy programs.  An outpatient therapy
program complements the hospital's  occupational medicine initiatives and allows
therapy to be continued for patients  discharged  from inpatient  rehabilitation
units and  medical/surgical  beds. An outpatient  therapy  program also attracts
patients  into the  hospital and is  conducted  either on the client  hospital's
campus or in satellite locations controlled by the hospital.

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

     Contract Therapy

     In 1997, we added therapy  management  for free  standing  skilled  nursing
facilities  to our  service  offerings.  This  program  affords  the  client the
opportunity  to fulfill its  continuing  need for  therapists  on a full-time or
part-time  basis  without  the need to hire and retain  full-time  staff.  As of
December 31, 2003, we managed 468 contract therapy programs.

                                       8
<PAGE>

     Our typical  contract  therapy  client has 120 beds, a portion of which are
licensed as skilled nursing beds. We manage therapy services, including physical
and occupational  therapy and speech/language  pathology for the skilled nursing
facility and settings that provide services to the senior population.  Our broad
base of staffing service  offerings,  full-time,  part-time and on-call,  can be
adjusted at each location according to the facility's and its patients' needs.

     We are generally  paid by our clients on the basis of a negotiated  patient
per  diem  rate or a  negotiated  fee  schedule  based  on the  type of  service
rendered.  Typically, our contract therapy program is led by a full-time program
coordinator  who is also a  therapist  and two to four  full-time  professionals
trained in physical and occupational therapy or speech/language pathology.

     Strategy

     We believe that there is  significant  growth  opportunity  for our program
management  services business as the marketplace  continues to require hospitals
and skilled nursing facilities to provide high-quality  rehabilitation  services
in a cost-efficient and accountable  manner.  Outpatient therapy programs remain
underdeveloped  at most hospitals,  while the aging  population and pressures to
control  costs in all  healthcare  settings  continue  to drive  demand  for our
management  systems  and  expertise,  especially  within a  prospective  payment
system.

     In 2003, we launched a series of  initiatives  aimed at advancing  both the
profitability  and growth of our  company.  The  strategies  are focused on four
distinct  areas  --  restructuring,   service  offerings,  strengthening  client
relationships and acquisitions.

     In 2003, we restructured our operations  achieving a $3.5 million reduction
in selling,  general and  administrative  expenses in the fourth quarter of 2003
compared to the second quarter of 2003. Half of the savings was realized through
reductions in personnel;  about 30 percent came from renegotiation of our vendor
relationships;   and   another  20  percent   from   withholding   discretionary
expenditures.

     To match the needs of an evolving  healthcare market, we are redefining our
service offerings. We have begun to redefine our expertise to include the entire
continuum  of  post-acute  care.  In  addition  to our  traditional  settings of
acute-care  hospitals and skilled nursing  facilities,  we plan to establish our
presence in rapidly growing segments of the healthcare market -- care management
for post-acute rehabilitation services,  long-term acute-care hospitals (LTACHs)
and home health therapy services.

     A  significant  shift  in our  service  offerings  is the  sale of  StarMed
Staffing  Group  -- our  healthcare  staffing  division  -- to  InteliStaf.  The
transaction  created the nation's largest  privately held integrated  healthcare
staffing  company with  combined  2003 revenue of more than $450  million.  This
transaction allows us to continue to participate in the expected recovery of the
healthcare  staffing industry as an investor while  concentrating our management
resources on improving the growth and  profitability  of our program  management
services business units.

     To bolster  our client  relationships,  we are taking  steps to create true
partnerships,  where  both  parties  share  risk  and  success.  One of our most
valuable  current  assets is our available  capital and lack of debt. We plan to
utilize our available capital to create joint ventures with partners who fit our
plans for establishing our expertise in serving the entire post-acute  continuum
of care.  In  January  2004,  we  announced  plans to  develop  our  first  such
relationships with Signature Healthcare  Foundation and UCLA Medical Center. The
Signature  transaction  provides  us the ability to add  outpatient  clinics and
therapy home health in the St.  Louis market over the next five years.  The UCLA
transaction,  after completion of leasing and licensing steps,  will allow us to
develop a 56 bed acute rehabilitation services facility in conjunction with UCLA
and a capital partner.

                                       9
<PAGE>

     We have begun to utilize our available capital to accomplish our fourth new
strategy -- acquisitions. Specifically, we'll pursue acquisitions that round out
our continuum model of post-acute  care and in target markets.  We have begun to
implement this strategy with two acquisitions completed in early 2004. The first
was CPR Therapies,  Inc., which gives us a significant contract therapy presence
in Colorado and enhanced market share in California in providing skilled nursing
services.  The second,  American  VitalCare,  Inc., adds to our service delivery
capability in California in providing specialized sub-acute services.

Government Regulation

     Overview.  The healthcare  industry is required to comply with many complex
federal and state laws and  regulations and is subject to regulation by a number
of  federal,  state  and  local  governmental  agencies,  including  those  that
administer  the  Medicare  and  Medicaid  programs,  those  responsible  for the
licensure of  healthcare  providers and  facilities  and those  responsible  for
administering  and  approving  health  facility  construction,  new services and
high-cost  equipment  purchasing.  The  healthcare  industry is also affected by
federal,  state and local  policies  developed  to regulate  the manner in which
healthcare is provided, administered and paid for nationally and locally.

     Laws and regulations in the healthcare  industry are extremely complex and,
in many  instances,  the  industry  does  not have the  benefit  of  significant
regulatory or judicial  interpretation.  As a result, the healthcare industry is
sensitive to legislative  and  regulatory  changes and is affected by reductions
and limitations in healthcare spending as well as changing healthcare  policies.
Moreover,  our business is impacted not only by those laws and regulations  that
are directly applicable to us, but also by certain laws and regulations that are
applicable to our hospital, skilled nursing facility and other clients.

     If we fail to comply with the laws and regulations  directly  applicable to
our business,  we could suffer civil  penalties,  criminal  penalties  and/or be
excluded from contracting with providers participating in Medicare, Medicaid and
other federal and state healthcare  programs.  If our hospital,  skilled nursing
facility  and/or  other  clients  fail to comply  with the laws and  regulations
applicable  to their  businesses,  they could suffer civil  penalties,  criminal
penalties and/or be excluded from participating in Medicare,  Medicaid and other
federal and state healthcare programs, which could, indirectly,  have an adverse
impact on our business.

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

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

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

                                       10
<PAGE>

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

     In  some  states,  business  corporations  such as us are  restricted  from
practicing therapy through the direct employment of therapists. In those states,
to comply with the restrictions  imposed, we contract to obtain therapy services
from an entity permitted to employ therapists.

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

     Medicare pays  acute-care  hospitals for most inpatient  hospital  services
under a payment  system known as the  "prospective  payment  system." Under this
system,  acute-care  hospitals are paid a specific amount toward their operating
costs based on the  diagnosis-related  or case-mix  group to which each Medicare
patient is  assigned,  regardless  of the  amount of  services  provided  to the
patient  or  the  length  of  the  patient's   hospital   stay.  The  amount  of
reimbursement   assigned  to  each   diagnosis-related   or  case-mix  group  is
established  prospectively by the Centers for Medicare and Medicaid Services, an
agency of the Department of Health and Human Services.

     For certain  Medicare  beneficiaries  who have  unusually  costly  hospital
stays,  the Centers for Medicare and Medicaid  Services will provide  additional
payments  above those  specified for the  diagnosis-related  or case-mix  group.
Under a prospective  payment system, a hospital may keep the difference  between
its diagnosis-related or case-mix group payment and its operating costs incurred
in furnishing  inpatient  services,  but is at risk for any operating costs that
exceed the  applicable  diagnosis-related  or case-mix  group payment rate. As a
result, hospitals have an incentive to discharge Medicare patients as soon as it
is clinically appropriate.

     The prospective payment system for inpatient  rehabilitation  facilities is
similar  to the  diagnosis-related  group  payment  system  used for  acute-care
hospital  services  but uses a case-mix  group  rather than a  diagnosis-related
group.  Each  patient  is  assigned  to  a  case-mix  group  based  on  clinical
characteristics and expected resource needs as a result of information  reported
on a "patient  assessment  instrument" which is completed upon patient admission
and discharge.  Under the prospective  payment  system,  a hospital may keep the
difference  between its case-mix group payment and its operating  costs incurred
in furnishing  patient services,  but is at risk for operating costs that exceed
the applicable case-mix group payment.

     We believe that the prospective payment system for inpatient rehabilitation
facilities  favors  low-cost,  efficient  providers,  and that our  strategy  of
managing  programs on the premises of our hospital clients positions us well for
the changing reimbursement environment.

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

                                       11
<PAGE>

     The Balanced Budget Act of 1997 also affected  Medicare  reimbursement  for
outpatient  rehabilitation services. Since 1999, reimbursement for such services
is  currently  based on the  lesser of the  provider's  actual  charge  for such
services or the applicable Medicare physician fee schedule amount established by
the Centers for  Medicare  and  Medicaid  Services.  This  reimbursement  system
applies  regardless of whether the therapy  services are furnished in a hospital
outpatient department,  a skilled nursing facility, an assisted living facility,
a physician's  office, or the office of a therapist in private  practice.  Under
current  law, an  outpatient  therapy  program that is not  designated  as being
hospital  provider-based  is subject to annual  limits on  payment  for  therapy
services.  These  annual  therapy caps have,  however,  been  suspended  through
December 31, 2005.

     The Medicare proposed "65 Percent Rule" did not impact operating results in
2003, as the final rule is not expected to be released  until  sometime in 2004.
The Company  typically does not make specific comments on the impact of proposed
rulemaking  or  legislation  prior to final  effectiveness  as the impact  often
changes significantly during the approval process.  However,  given the advanced
stage of this proposed rule and the evaluation of the potential impact, the rule
is expected to result in an  estimated  decline in  discharges  of zero to 3% in
2004 in our hospital  rehabilitation  services  division  due to differing  cost
reporting periods. Mitigation strategies to replace utilization through enhanced
internal  and  external  census  development  would  result  in the  decline  in
discharges being at the lower end of the range. While the rule primarily affects
the hospital  rehabilitation  services  division,  the Company  expects that the
contract therapy division will potentially  benefit,  as patients that cannot be
served in the acute  rehabilitation  setting may receive  therapy in the nursing
home setting.

     The Centers for Medicare and Medicaid  Services  recently  promulgated  new
rules   regarding  the   provider-based   status  of  certain   facilities   and
organizations   furnishing   healthcare  services  to  Medicare   beneficiaries.
Designation as a  provider-based  facility or  organization  can, in some cases,
result in greater  reimbursement  from the Medicare program than would otherwise
be the case. Under the new rules, a designation as provider-based  also mandates
compliance with a specific set of billing and patient notification  requirements
and emergency medical treatment  regulations.  After July 1, 2003, all programs,
facilities  and  organizations,  previously  established  and new,  must  submit
self-attestation  stating that the  provider-based  criteria and obligations are
met.  The Centers for Medicare and Medicaid  Services  have  clarified  that the
provider-based  rules do not apply to outpatient  therapy facilities while under
the therapy cap moratorium.

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

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

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

                                       12
<PAGE>

o    the security of protected health information in electronic form;

o    the transmission and authentication of electronic signatures; and

o    the privacy of individually identifiable health information.

     Final rules setting forth  standards for electronic  transactions  and code
sets, for the privacy of individually  identifiable health information,  and for
the security of protected  health  information in electronic  form,  applying to
health plans,  healthcare  clearinghouses and healthcare  providers who transmit
any  healthcare  information  in  electronic  form in  connection  with  certain
administrative  and billing  transactions have been promulgated.  The electronic
transaction  and code set  standards  and rules with  respect to the  privacy of
individually protected healthcare information are effective. Compliance with the
final rules  concerning  the security of  protected  healthcare  information  in
electronic  form is  required  by April  21,  2005.  Final  rules  that  include
standards for unique health identifiers for employers and healthcare  providers,
as  well  as  standards  related  to  the  security  of  individual   healthcare
information  and the use of electronic  signatures were published on January 23,
2004.  Healthcare providers can begin applying for National Provider Identifiers
on the  effective  date of the final rule,  which is May 23, 2005.  All entities
covered by the Act must use provider  identifiers by the compliance dates of May
23, 2008 for small health plans and May 23, 2007 for all other plans.

     We  have   reviewed  the  final  rules  and  through  the  efforts  of  our
company-based  task force have  instituted  new policies and  procedures to meet
these regulations.  A Company-wide  training effort for all employees on how the
regulations apply to their job role has been implemented. We serve predominantly
as a business  associate  and have been  diligent  in our  pursuit  of  business
associate agreements with all of our clients.

     Fraud and Abuse.  Various  federal  laws  prohibit  the knowing and willful
submission of false or fraudulent  claims,  including  claims to obtain  payment
under Medicare,  Medicaid and other government healthcare programs.  The federal
anti-kickback statute also prohibits individuals and entities from knowingly and
willfully  paying,  offering,  receiving or soliciting money or anything else of
value in order to  induce  the  referral  of  patients  or to induce a person to
purchase,  lease,  order,  arrange for or recommend services or goods covered by
Medicare, Medicaid, or other government healthcare programs.

     The  anti-kickback  statute is extremely broad and potentially  covers many
standard business arrangements.  Violations can lead to significant criminal and
civil penalties,  including fines of up to $25,000 per violation, civil monetary
penalties of up to $50,000 per  violation,  assessments of up to three times the
amount  of  the  prohibited  remuneration,   imprisonment,   or  exclusion  from
participation in Medicare,  Medicaid,  and other government healthcare programs.
The  Office of the  Inspector  General  of the  Department  of Health  and Human
Services has published  regulations  that identify a limited  number of specific
business  practices that fall within safe harbors  guaranteed not to violate the
anti-kickback  statute. While many of our business relationships fall outside of
the published  safe harbors,  conformity  with the safe harbors is not mandatory
and failure to meet all of the  requirements  of an applicable  safe harbor does
not by itself make conduct illegal.

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

                                       13
<PAGE>

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

     Anti-Referral  Laws.  The federal Stark law generally  provides  that, if a
physician  or a  member  of a  physician's  immediate  family  has  a  financial
relationship with a healthcare  entity,  the physician may not make referrals to
that entity for the furnishing of designated  healthcare  services covered under
Medicare,  Medicaid,  or other  government  healthcare  programs,  unless one of
several specific exceptions applies.  For purposes of the Stark law, a financial
relationship  with a  healthcare  entity  includes an  ownership  or  investment
interest  in that  entity  or a  compensation  relationship  with  that  entity.
Designated   healthcare  services  include  physical  and  occupational  therapy
services,  durable medical  equipment,  home health services,  and inpatient and
outpatient hospital services.  Final regulations of the Centers for Medicare and
Medicaid  Services  interpreting  the  Stark  laws  are  effective  and we  have
instituted  policies  to set  standards  so  employees  do not  make  errors  in
violations of the Stark law.

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

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

     Corporate Compliance Program. In recognition of the importance of achieving
and maintaining  regulatory  compliance,  we have a corporate compliance program
that  establishes  general  standards  of conduct and  procedures  that  promote
compliance with business ethics,  regulations,  law and accreditation standards.
We have compliance standards and procedures to be followed by our employees that
are reasonably  capable of reducing the prospect of criminal  conduct,  and have
designed systems for the reporting and auditing of potentially criminal acts.

     A key  element  of our  compliance  program is  ongoing  communication  and
training  of  employees  so that it  becomes a part of our  day-to-day  business
operations.  A compliance  committee  consisting of three independent members of
our board of  directors  has been  established  to  oversee  implementation  and
ongoing operations of our compliance  program, to enforce our compliance program
through  appropriate  disciplinary  mechanisms and to ensure that all reasonable
steps  are  taken to  respond  to an  offense  and to  prevent  further  similar
offenses.

Competition

     Our program management  business competes with companies that may offer one
or more of the same services. The fundamental challenge in this line of business
is convincing our potential  clients,  primarily  hospitals and skilled  nursing
facilities,  that we can provide  rehabilitation  services more efficiently than
they  can  themselves.  Among  our  principal  competitive  advantages  are  our
reputation for quality,  cost effectiveness,  a proprietary  outcomes management
system,  innovation and price,  and the location of programs within our clients'
facilities.

                                       14
<PAGE>

     We rely  significantly  on our  ability  to  attract,  develop  and  retain
therapists and program management personnel.  We compete for these professionals
with other healthcare  companies,  as well as actual and potential clients, some
of whom seek to fill positions with either regular or temporary employees.

Employees

     As  of  December  31,  2003,   we  had   approximately   8,500   employees,
approximately 3,300 of which were full-time employees, in our program management
services business. As of December 31, 2003, we also employed approximately 4,600
travel and  supplemental  staff  employed on a regular or periodic  basis by our
recently divested healthcare staffing services business.  The physicians who are
the  medical  directors  of  our  acute  rehabilitation  units  are  independent
contractors  and not  our  employees.  None of our  employees  is  subject  to a
collective bargaining agreement.


Non-Audit Services Performed by Independent Accountants

     Pursuant to Section  10A(i)(2) of the  Securities  Exchange Act of 1934 and
Section 202 of the Sarbanes-Oxley Act of 2002, we are responsible for disclosing
to  investors  the  non-audit  services  approved by our audit  committee  to be
performed by KPMG LLP, our independent auditors.  Non-audit services are defined
as services other than those provided in connection with an audit or a review of
our financial statements. During the period covered by this Form 10-K, our audit
committee pre-approved non-audit services related to tax compliance,  assistance
with  documenting  controls under  Sarbanes-Oxley  Section 404 and due diligence
assistance  on potential  acquisitions  and the  disposition  of our  healthcare
staffing division.

Web Site Access to Reports

      Our Form 10-K, Form 10-Qs, definitive proxy statements, Form 8-Ks, and any
amendments to those reports are made available free of charge on our web site at
www.rehabcare.com as soon as reasonably practicable after such reports are filed
with the Securities and Exchange Commission.

                                       15
<PAGE>

ITEM 2.  PROPERTIES

     We currently  lease  approximately  71,000 square feet of executive  office
space in Clayton, Missouri under a lease that expires in the year 2012, assuming
all options to renew are  exercised.  In addition to the monthly rental cost, we
are also  responsible for specified  increases in operating  costs. In addition,
our subsidiaries lease approximately  10,000 square feet in Salt Lake City, Utah
under a lease  that  expires  in  2011.  American  VitalCare,  Inc.  leases  its
corporate office located in Anaheim, California. The office has a square footage
of  approximately  8,200  square  feet.  The terms of the lease  provide  for an
expiration date of June 30, 2005.

ITEM 3.  LEGAL PROCEEDINGS

     In May 2002, a lawsuit was filed in the United  States  District  Court for
the Eastern District of Missouri against us and certain of our current directors
and officers.  The plaintiffs allege  violations of the federal  securities laws
and are  seeking to  certify  the suit as a class  action.  The  proposed  class
consists of persons that purchased shares of our common stock between August 10,
2000 and January 21, 2002. The case alleges  weaknesses in the software  systems
selected by our recently sold StarMed Staffing Group, and the purported negative
effects of such systems on our business operations. The Plaintiff filed a second
amended  complaint  in November  2003,  pursuant to the District  Court  Judge's
ruling  that  the  Plaintiff  must  present  its  claims  with  more  focus  and
"sufficient  particularity"  before he could  entertain a motion to dismiss.  On
February 17, 2004, we filed a second motion to dismiss, which is pending.

     In August 2002, a derivative  lawsuit was filed in the Circuit Court of St.
Louis County,  Missouri against us and certain of its directors.  The complaint,
which is based upon  substantially  the same facts as are alleged in the federal
securities  class action,  was filed on behalf of the derivative  plaintiff by a
law firm that had earlier  filed suit in the federal  case. We filed a motion to
dismiss based primarily on the derivative plaintiff's failure to make a pre-suit
demand,  which is pending.  The federal court hearing the  securities  law class
action  has  stayed  discovery  in the  derivative  proceeding  until  discovery
commences in the class action.

      In July, 2003 a civil action, United States of America ex rel. Gregory
                                    ----------------------------------------
Kersulis, M.D. and Jimmie Wilson and Gregory Kersulis, M.D., and Jimmie Wilson
------------------------------------------------------------------------------
v. RehabCare Group, Inc.; and Baxter County Regional Hospital, Inc., was filed
--------------------------------------------------------------------
under  the qui tam  provisions  of the False  Claims  Act in the  United  States
District Court for the Eastern  District of Arkansas,  seeking  treble  damages,
civil penalties, back pay, and special damages. The allegations contained in the
suit,  brought by a former  independent  contractor  of ours and a former Baxter
physical therapist,  relate to the proper clinical diagnoses of patients treated
at the hospital's acute rehabilitation unit for Medicare reimbursement purposes,
in which  Baxter  received  such  reimbursement  in  excess of  $5,000,000.  The
original  action  was  filed on  August  21,  2000,  under  seal,  requiring  an
investigation by the United States Department of Justice, in which we and Baxter
fully  cooperated.  We and Baxter also  initiated an internal and external audit
that  concluded the  allegations  were  unfounded and that we and Baxter were in
compliance with Medicare regulations.  After the Department's investigation,  on
June 3, 2003, the government  declined to intervene and the seal was lifted. The
Plaintiffs  filed an amended  complaint,  and we were served and notified of the
civil  allegations on July 15, 2003. We have agreed to indemnify  Baxter for all
fees and expenses on all counts except one, arising out of the action. The court
recently  denied  both  parties  motions to dismiss and we expect  discovery  to
commence shortly.

                                       16
<PAGE>

     The Wage and Hour  Division  of the United  States  Department  of Labor is
currently  investigating  whether  persons  employed as on-call  coordinators at
certain  staffing  branch  locations  were  properly  compensated  for all hours
worked, and whether the entire time they were on call should be counted as hours
worked.  We have  advised  the Wage and Hour  Division  that we believe  on-call
coordinators  paid a flat fee per shift were properly  compensated in accordance
with applicable federal law. The inquiry is limited to a three-year period prior
to the date any proceeding is filed. No final determination or position has been
taken by the Wage and Hour Division to date with respect to these matters.

     A number of suits  have been filed by certain  on-call  coordinators  based
upon facts similar to those being investigated by the Wage and Hour Division. We
have  filed  motions,  or expect to file  motions,  with the  Judicial  Panel on
MultiDistrict Litigation to consolidate these cases based upon similar or common
claims and issues and to  transfer  these cases to a single  district  court for
resolution. Although our recently sold StarMed subsidiary is the named defendant
in these cases, we will be responsible for any liability,  including  attorney's
fees and expenses incurred in connection with these actions.

     On February 9, 2004, Bond  International  Software  Group,  Inc. filed suit
against our former  StarMed  subsidiary in United States  District Court for the
Eastern District of Virginia  alleging breach of contract for licensed  software
and related development,  configuration,  support and maintenance  services.  We
expect to file a counter  claim  asserting  our right to a refund under the same
contract under the termination and refund provisions therein.

     In addition to above  matters,  we are a party to a number of other  claims
and lawsuits. While these actions are being contested, the outcome of individual
matters is not predictable with assurance. From time to time, and depending upon
the particular  facts and  circumstances,  we may be subject to  indemnification
obligations  under our  contracts  with our  hospital  and  healthcare  facility
clients  relating  to  these  matters.  We do not  believe  that  any  liability
resulting from any of the above  matters,  after taking into  consideration  our
insurance  coverage  and  amounts  already  provided  for,  will have a material
adverse effect on our consolidated financial position,  cash flows or liquidity.
However, such matters could have a material effect on results of operations in a
particular  quarter  or  fiscal  year  as  they  develop  or as new  issues  are
identified.


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

     Not applicable.

                                     PART II

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

     Information  concerning  our Common  Stock is  included  under the  heading
"Stock Data" in our Annual Report to  Stockholders  for the year ended  December
31, 2003 and is incorporated herein by reference.

ITEM 6.  SELECTED FINANCIAL DATA

     Our  Six-Year  Financial  Summary  is  included  in our  Annual  Report  to
Stockholders for the year ended December 31, 2003 and is incorporated  herein by
reference.

                                       17
<PAGE>


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

Overview

     During 2003,  we derived our revenue from two  business  segments:  program
management  services and healthcare  staffing.  Our program management  services
segment includes inpatient programs (including acute  rehabilitation and skilled
nursing units),  outpatient  therapy programs and contract therapy programs.  On
February 2, 2004, we consummated  the sale of our StarMed  Staffing  division to
InteliStaf  Holdings,  Inc.  and  received  approximately  25% of the  equity of
InteliStaf in return.  After the consummation date, the financial  condition and
results of operations of the staffing division will no longer be consolidated in
our financial  statements  and our interest in InteliStaf  will be accounted for
under the equity method.  Summarized information about our revenues and earnings
from operations in each segment is provided below.
<TABLE>
<CAPTION>
                                               Year Ended December 31,
                                           2003        2002        2001
                                          ------      ------      ------
                                                   (in thousands)
Revenues from Unaffiliated Customers:
<S>                                      <C>         <C>         <C>
   Healthcare staffing.................. $223,952    $277,543    $304,574
   Program management:
     Hospital rehabilitation services...  185,831     179,746     173,030
     Contract therapy...................  130,847     105,276      64,661
                                          -------     -------     -------
     Program management total...........  316,678     285,022     237,691
   Less intercompany revenues (1).......   (1,308)         --          --
                                          -------     -------     -------
      Total............................. $539,322    $562,565    $542,265
                                          =======     =======     =======

Operating Earnings (Loss): (2)
   Healthcare staffing (3).............. $(52,503)   $ (1,683)   $  1,496
   Program management:
     Hospital rehabilitation services...   33,557      32,256      32,501
     Contract therapy...................    5,836       9,124       2,970
                                           ------      ------      ------
     Program management total...........   39,393      41,380      35,471
   Restructuring charge.................   (1,286)         --          --
                                           ------      ------      ------
      Total............................. $(14,396)   $ 39,697    $ 36,967
                                          =======     =======     =======
</TABLE>

  (1) Intercompany revenues represent sales at market rates from our former
      healthcare staffing segment to our program management segment.

  (2) Operating earnings for 2001 have been adjusted to reflect the corporate
      expense allocation methodology utilized in 2003 and 2002.

  (3) The 2003 operating loss for healthcare staffing contains a $43.6 million
      loss to state net assets and liabilities held for sale at their fair value
      less costs to sell.

                                       18

<PAGE>

Revenues

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

     As a provider of healthcare staffing and program management  services,  our
revenues  and  growth are  affected  by trends and  developments  in  healthcare
spending.  Over the last three years, our revenues and earnings from our program
management  services have been  negatively  impacted by an aggregate  decline in
average  billable  lengths of stay. The decline in average  billable  lengths of
stay reflects the  continued  trend of reduced  rehabilitation  lengths of stay.
Going forward,  we have minimized our exposure to revenue  decreases as a result
of decreased lengths of stay through restructuring our contracting philosophy to
primarily  base  our  payments  on  number  of  discharges  multiplied  by a per
discharge rate. This  methodology is similar to that of our clients who bill the
various payers.

     Material  changes in the rates or methods of government  reimbursements  to
our clients for services  rendered in the programs that we manage could give our
clients the right to  renegotiate  their  existing  contracts with us to include
terms that are less favorable to us. For example,  outpatient  therapy  programs
receive payment from the Medicare program under a fee schedule. During 2003, the
contract  therapy  division was subject to therapy caps from September 1 through
December 8, experiencing  decreases in revenues  and profits as a result.  Under
current  law, an  outpatient  therapy  program that is not  designated  as being
provider-based  is subject to an annual limit on payments  for therapy  services
provided to Medicare  beneficiaries;  however,  these limits have been suspended
through  December 31, 2005. See discussion under "Item 1. Business -- Government
Regulation -- Provider-Based Rules."

     In addition,  changes in the rates or methods of government  reimbursements
or changes to conditions of  participation  resulting  from the "65% Rule" could
negatively  impact the benefits  that we are able to provide to our clients.  We
are unable to predict with  certainty the impact of any future  changes,  and we
may  experience  a decline in our revenue and earnings as a result of any future
changes to the prospective payment system or from any other changes in the rates
or methods of government reimbursements.

                                       19
<PAGE>

Results of Operations

     The following  table sets forth the  percentage  that selected items in the
consolidated  statements  of earnings  bear to operating  revenues for the years
ended December 31, 2003, 2002 and 2001:
<TABLE>
<CAPTION>
                                                    Year Ended December 31,
                                                 2003        2002        2001
                                                 ----        ----        ----

<S>                                             <C>         <C>         <C>
Operating revenues..................            100.0%      100.0%      100.0%
Cost and expenses:
   Operating .......................             75.8        73.4        72.8
   Selling, general and administrative:
      Divisions.....................             12.1        13.3        14.4
      Corporate.....................              4.9         4.7         4.2
   Restructuring charge.............               .2          --          --
   Loss on assets held for sale.....              8.1          --          --
   Depreciation and amortization....              1.6         1.5         1.8
                                                -----       -----       -----
Operating earnings (loss)...........             (2.7)        7.1         6.8
Other expense, net..................              (.1)        (.1)        (.4)
                                                -----       -----       -----
Earnings (loss) before income taxes.             (2.8)        7.0         6.4
Income taxes (benefit)..............              (.3)        2.7         2.5
                                                -----       -----       -----
Net earnings (loss).................             (2.5)%       4.3%        3.9%
                                                =====       =====       =====
</TABLE>


Twelve Months Ended  December 31, 2003 Compared to Twelve Months Ended  December
31, 2002

     Revenues

     Consolidated  operating revenues in 2003 decreased $23.2 million or 4.1% to
$539.3  million as  compared to $562.6  million in 2002.  Revenue  increases  in
contract therapy and hospital  rehabilitation  services were more than offset by
revenue declines in healthcare staffing.

     Hospital rehabilitation services revenues, consisting of hospital inpatient
and outpatient programs, increased by $6.1 million to $185.8 million in 2003, or
3.4% from $179.7 million in 2002.  Inpatient revenues increased $6.1 million, or
4.7% from $130.7 million in 2002 to $136.9 million in 2003.  Revenue per program
increased  5.8%,  offsetting  a 1.1%  decline in the average  number of programs
operated.  Growth in revenue per  program is a result of the  average  number of
discharges per unit increasing 2.6% year-over-year. Outpatient revenues remained
flat  year-over-year,  reflecting  an 11.7%  decrease in the  average  number of
programs operated, offset by a 13.2% increase in revenue per outpatient program.
Growth in outpatient revenue per location is a result of termination of a number
of smaller contracts with limited  long-term  opportunity and a 3.4% increase in
average patient visits per location.

     Contract therapy revenue  increased by 24.3% from $105.3 million in 2002 to
$130.8 million in 2003 despite the negative  revenue impact of the Medicare Part
B therapy  caps that were in effect  from  September  1 through  December 8. The
primary driver of this increase was the success in the division's sales efforts,
which increased the average number of contract therapy  locations  managed 21.6%
from 378.1 in 2002 to 459.9 in 2003. Also  contributing to the revenue  increase
was a 2.2%  increase in the  average  revenue per  location  from  approximately
$278,000 to  approximately  $285,000,  resulting  from same store growth and the
continued focus on opening larger locations.

                                       20
<PAGE>

     Healthcare  staffing  revenues  decreased  19.3%, or $53.6 million in 2003,
from $277.5  million in 2002 to $224.0 million in 2003  (including  $1.3 million
inter-company sales at market rates to the hospital  rehabilitation services and
contract therapy divisions).  Supplemental  staffing revenues decreased by $46.2
million,  or 26.8%,  to $125.9 million in 2003,  reflecting the impact of branch
consolidations  in the first  quarter of 2003  driven by a decline in the demand
for staffing agency services.  The average number of branch locations  decreased
32.5%, from 107.9 in 2002 to 72.8 in 2003. The decrease in supplemental staffing
revenues is  attributable to a 29.2% decrease in weeks worked as a result of the
consolidation  of branch  locations  and a decline in  demand,  offset by a 3.4%
increase in average revenue per week worked. The increase in average revenue per
week worked was a result of placing  more  highly  credentialed  staff,  such as
registered  nurses,  as  compared  to  certified  nurse  assistants,  as well as
increased  bill  rates  for the  certified  nurse  assistants.  Travel  staffing
revenues  decreased by 7.1% from $105.5 million in 2002 to $98.0 million in 2003
primarily  as a result of a 7.3%  decrease  in weeks  worked.  Revenue  per week
worked  improved  slightly by 0.2%.  The decline in weeks worked was driven by a
decrease  in demand for  travelers  while the  increase in revenue per week is a
result of increases in rates within nurse and therapist  placements  offset by a
shift in sales mix to more  radiologists,  which saw a decrease  in revenue  per
week worked.

     Cost and Expenses

     Consolidated  operating  expenses in 2003 decreased by $4.5 million or 1.1%
to $408.6 million  compared to $413.1 million in 2002. As a percentage of sales,
operating  expenses  (excluding  provision for doubtful  accounts)  increased to
75.0% in 2003 versus 72.6% in 2002,  primarily  reflecting  the migration of the
skill mix in the staffing  division to more highly  credentialed  professionals,
lower  productivity  in the contract  therapy  division  due to a now  completed
complex  information  system  conversion  during  the third  quarter of 2003 and
increased labor, benefit and insurance costs in all divisions. The provision for
doubtful accounts as a percentage of operating  revenues  decreased from 0.8% in
2002 to 0.7% in 2003 due primarily to improvement in the aging categories of the
staffing division's  accounts receivable  primarily during the first half of the
year. Division selling,  general and administrative  expenses as a percentage of
operating  revenues  decreased from 13.3% in 2002 to 12.1% in 2003 primarily due
to reductions of costs, as a percent of division  operating revenues in contract
therapy,  the  outpatient  division  of  hospital  rehabilitation  services  and
healthcare staffing,  partially offset by increases in the inpatient division of
hospital rehabilitation services.  Corporate selling, general and administrative
expenses of $26.7 million in 2003 were flat year-over-year compared to 2002, but
increased as a percentage of operating revenues to 4.9% in 2003 compared to 4.7%
in 2002.  The increase as a  percentage  of  operating  revenues  was  primarily
attributable  to increased  costs for the  arrangements  entered into during the
second quarter of 2003 with Phase 2 Consulting, LLC and the former President and
CEO of the Company.  Under the terms of the Phase 2 agreement,  we pay a monthly
fee of $55,000 and reimbursement of business expenses. In addition, Phase 2 will
be entitled to an incentive  fee capped at $1.3 million  based on  predetermined
performance  standards.  The consulting  agreement with the former CEO continues
his  monthly  compensation  and  car  allowance  of  approximately  $45,000.  In
addition,  we incurred  higher legal fees during 2003 to research and comment on
the Centers for  Medicare and Medicaid  Services  proposed 65% rule.  These cost
increases  were offset by cost  decreases  resulting  from tighter cost controls
instituted in the second half of the year combined with the favorable  impact of
restructuring  activities  initiated during the third quarter.  Depreciation and
amortization  expense as a percentage  of operating  revenues  increased to 1.6%
from  1.5%  due  to  depreciation   expense   recorded  on  additional   capital
expenditures.

                                       21
<PAGE>

     On July 30, 2003, we announced a comprehensive,  multifaceted restructuring
program to help return the Company to growth and improved profitability. As part
of the restructuring  program, we eliminated 61 positions in an effort to reduce
corporate  support  functions  and  better  align  corporate  overhead  with the
operating  divisions.  As a result of the  restructuring  plan,  we recognized a
pretax  restructuring  charge of $1.3  million.  Included in this  restructuring
charge is $1.1 million of severance and outplacement  costs and $0.2 million for
exit costs related to the closing of five StarMed  branches.  The  restructuring
charge is reflected as a separate component of costs and expenses for 2003.

     On  December  30,  2003,  we  announced  that we had  entered  into a Stock
Purchase and Sale Agreement with InteliStaf  pursuant to which  InteliStaf would
acquire our healthcare  staffing  division in exchange for  approximately 25% of
the common  stock of  InteliStaf  on a fully  diluted  basis.  This  transaction
subsequently  closed on February 2, 2004. In accordance with the requirements of
Statement  of  Financial  Accounting  Standards  No.  144,  "Accounting  for the
Impairment or Disposal of Long-Lived  Assets," the assets and liabilities of the
healthcare   staffing   operation   were  reported  on  our  December  31,  2003
consolidated  balance  sheet as assets  and  liabilities  held for sale and were
measured at their net fair value less  estimated  costs to sell. We recognized a
pretax impairment loss of $43.6 million to reduce the carrying value of goodwill
associated  with the staffing  division and to accrue  estimated  selling costs.
This impairment loss has been recorded as a separate  component of our costs and
expenses for 2003.

     In the hospital rehabilitation services division, direct operating expenses
(excluding  provision for doubtful accounts) increased by 3.9%, or $4.6 million,
primarily  reflecting  increased  salaries and  salary-related  expenses in both
inpatient and outpatient  divisions as a result of higher workers  compensation,
professional  liability and health  insurance  expenses.  Provision for doubtful
accounts as a percentage of operating  revenues  increased  from 0.4% in 2002 to
0.5% for fiscal year 2003, primarily as a result of the normal evaluation of the
creditworthiness  of  our  clients.  In  the  hospital  rehabilitation  services
division,  divisional  selling,  general,  and administrative  expense fell $0.7
million, or 4.7%, as a result of our third quarter restructuring and combination
of the inpatient and  outpatient  divisions.  We estimate that our third quarter
restructuring  will create a savings of approximately  $1.7 million on an annual
basis in the hospital  rehabilitation  services division.  Corporate general and
administrative  expenses  allocated to the division  increased $0.9 million,  or
12.2%, to $8.4 million in 2003.  Depreciation  and  amortization  expense,  as a
percentage of operating revenues, declined slightly year-over-year.

     Contract  therapy  direct  operating  expenses  (excluding  provisions  for
doubtful accounts)  increased 32.6% from $76.6 million in 2002 to $101.5 million
in 2003,  which was due  primarily to the increased  number of contract  therapy
locations  being managed by the division.  As a percentage of net revenues,  the
division's  direct  operating  expenses  increased from 72.7% of net revenues in
2002 to 77.6% of net revenues in 2003.  Contributing  to this increase in direct
operating expenses was higher wages paid as a result of the tightening therapist
labor market, as well as utilization of higher cost contract labor. In addition,
productivity  was  negatively  affected  in the third  quarter  and early in the
fourth  quarter due to problems  encountered  during the  implementation  of our
proprietary  information  system.  The  provision  for  doubtful  accounts  as a
percentage of operating  revenues  increased from 1.5% of operating  revenues in
2002 to 1.7% in 2003 as a result of our on-going  review of accounts  receivable
risk. Contract therapy's division selling,  general and administrative  expenses
as a percentage of revenues  decreased from 10.0% in 2002 to 9.0% in 2003 as the
division  increased  revenues  at a faster  rate than its  selling,  general and
administrative  expenses.  Corporate general and administrative  expenses, which
represent  allocations of corporate  office  expenses based upon  utilization by
divisions, increased slightly as a percentage of operating revenues from 6.1% to
6.2%.  Depreciation  and  amortization  expense,  as a  percentage  of operating
revenues, remained flat at 1.0% of operating revenues year-over-year.

                                       22
<PAGE>

     In the staffing division,  direct operating expenses  (excluding  provision
for doubtful accounts) decreased 15.1%, or $32.3 million, due to the decrease in
weeks worked,  offset by changes within certain operating expense  categories as
described  below.  Gross profit margins in the  supplemental  staffing  division
decreased from 23.5% in 2002 to 19.1% in 2003, while gross profit margins in the
travel  division  decreased  in 2003 to 18.3%  compared  to  21.7% in 2002.  The
decrease  in gross  profit  margin  in the  supplemental  staffing  division  is
primarily  the result of increases  in workers  compensation,  professional  and
general  liability  and medical  insurance  claims  cost.  The decrease in gross
profit margin within the travel staffing division was a result of changes within
bonuses paid to travelers;  market pricing decreases in radiology bill rates and
increases in workers  compensation and professional and general  liability.  The
provision for doubtful accounts decreased $1.2 million in 2003 compared to 2002,
primarily as a result of the normal  evaluation of the  creditworthiness  of our
clients showing  improvement in accounts  receivable  aging.  Division  selling,
general and  administrative  expenses  decreased by $10.1  million or 21.0% as a
result of branch  consolidations  in the first  quarter of 2003 and decreases in
administrative  personnel.  This resulted in a decrease in  divisional  selling,
general and  administrative  expenses as a percentage of operating revenues from
17.4% in 2002 to 17.0% in 2003.  Corporate general and administrative  expenses,
which represent  allocations of corporate office expenses based upon utilization
by divisions,  decreased for the division as a percentage of operating  revenues
from 4.7% to 4.5%.  Depreciation  and  amortization  expenses as a percentage of
operating  revenues increased from 0.7% in 2002 to 0.8% in 2003 primarily due to
similar expense on less revenue.

     Non-operating Items

     Interest income decreased by $0.2 million from $0.3 million in 2002 to $0.1
million in 2003, primarily due to lower interest rates.

     Interest expense  primarily  represents  commitment fees paid on the unused
portion  of our line of credit  and  letter of credit  fees.  Compared  to 2002,
interest  expense in 2003  increased very slightly as a result of higher amounts
of  letters  of credit to  support  insurance  programs.  We had no  outstanding
balance  against our line of credit as of December  31,  2003 and  December  31,
2002.

     The  provision  for  income  taxes in 2003 was a  benefit  of $1.6  million
compared to an expense of $15.0 million in 2002, reflecting effective income tax
rates  of  10.5%  and  38.0%,  respectively.  The  effective  rate  for 2003 was
significantly  impacted by a  component  of the loss on net assets held for sale
related to goodwill, which is not deductible for tax purposes.

     Diluted loss per share was $0.86 in 2003  compared to diluted  earnings per
share of $1.38 in 2002.  This  decline was  principally  the result of the $30.6
million after tax  impairment  charge related to the net assets held for sale of
our staffing division and the significant  decline in demand for staffing agency
services.

                                       23
<PAGE>

Twelve Months Ended  December 31, 2002 Compared to Twelve Months Ended  December
31, 2001

     Revenues

     Consolidated  operating  revenues in 2002  increased by $20.3  million,  or
3.7%, to $562.6 million as compared to $542.3  million in operating  revenues in
2001. Revenue increases in inpatient,  contract therapy and travel staffing were
offset by revenue declines in supplemental staffing and outpatient.

     Inpatient  program revenue increased by 6.1% from $123.3 million in 2001 to
$130.7 million in 2002. The increase in revenue was primarily a result of a 7.4%
increase in revenue per patient day,  offset by a 1.3%  decrease in patient days
from  746,583 to 737,017.  The  decrease in patient  days was a result of a 1.9%
decrease  in the  average  number of  programs  to 134.6 and a 3.6%  decrease in
average  length of stay to 13.3  days,  offset  by a 4.2%  increase  in  average
admissions  per  program to 410.7.  The  increase  in revenue per patient day is
primarily  due to  renegotiation  of  contracts  to operate  under a payment per
discharge  methodology under the prospective  payment  environment.  The average
length  of  stay  decrease  is  also  attributable  to the  prospective  payment
environment  which  encourages  the  discharge  of a  patient  as  soon as it is
clinically appropriate.

     Outpatient  revenue  decreased by 1.5% from $49.8  million in 2001 to $49.0
million  in  2002,  reflecting  an  11.1%  decrease  in the  average  number  of
outpatient programs managed from 61.5 in 2001 to 54.7 in 2002,  partially offset
by a 10.7 % increase in revenue per program as a result of closing smaller, less
profitable  locations.  The increase in revenue per program is attributable to a
3.1%  increase  in units of service  per  program to 68,519 and  increased  bill
rates.

     Contract  therapy revenue  increased by 62.8% from $64.7 million in 2001 to
$105.3 million in 2002,  which  resulted  primarily from a 51.4% increase in the
average number of contract therapy  locations  managed from 249.8 to 378.1 and a
7.5% increase in revenue per location from $258,902 to $278,427. The increase in
revenue  per  location  is  primarily  the  result of same  store  growth  and a
continued focus on opening larger locations.

     Staffing revenue decreased by $27.1 million, or 8.9% from $304.6 million in
2001 to $277.5 million in 2002, reflecting a 22.0% decrease in weeks worked from
233,898  in 2001 to  182,552  in 2002,  offset by a 16.7%  increase  in  average
revenue  per week  worked  from  $1,302 in 2001 to $1,520 in 2002.  Supplemental
staffing revenues  decreased 23.7% from $225.6 million in 2001 to $172.1 million
in 2002,  reflecting  a 31.8%  decrease in weeks  worked from 188,368 in 2001 to
128,396  in 2002.  The  decrease  in  supplemental  staffing  weeks  worked  was
primarily  a  result  of  the  continued   management   transition  and  systems
implementation  and  training  initiated  during the fourth  quarter of 2001,  a
softening  in demand as a result of clients'  efforts to reduce  utilization  of
agency staff and the impact of the economy on  non-skilled  labor  availability.
The  decrease in  supplemental  weeks  worked was  partially  offset by an 11.9%
increase  in average  revenue  per week  worked from $1,198 in 2001 to $1,340 in
2002 as a result of placing more highly  credentialed  staff such as  registered
nurses and licensed  practical nurses as compared to certified nurse assistants,
as well as increased bill rates.  Travel staffing revenues  increased 33.6% from
$78.9 million in 2001 to $105.5 million in 2002, reflecting an 18.9% increase in
weeks worked to 54,156 and a 12.3%  increase in average  revenue per week worked
to $1,948.

     Operating Earnings

     Consolidated  operating  earnings  increased by 7.4% from $37.0  million in
2001 to $39.7  million in 2002.  Operating  expenses as a percentage of revenues
increased  from  72.8%  in 2001 to  73.4%  in  2002,  primarily  reflecting  the
continued  migration  of the skill mix in the  staffing  division to more highly
credentialed professionals and increased labor costs as a percentage of revenues
in all  divisions.  General  and  administrative  expenses  as a  percentage  of
revenues  decreased from 18.6% in 2001 to 18.0% in 2002.  Excluding $3.9 million
in general and  administrative  expenses  associated with the 2001 non-recurring
charge,  general and  administrative  expenses as a percentage  of revenue would
have  increased  from  17.9%  in  2001  to  18.0%  in  2002.   Depreciation  and
amortization  expense as a percentage of revenue  decreased from 1.8% in 2001 to
1.5% in 2002 reflecting the elimination of goodwill  amortization as a result of
the adoption of Statement of Financial  Accounting  Standards No. 142, "Goodwill
and Other Intangible Assets" on January 1, 2002.

                                       24
<PAGE>

     Inpatient  operating  earnings increased by 1.2% from $28.6 million in 2001
to $28.9 million in 2002,  primarily  resulting from a 6.1% increase in revenues
and a decrease  in general and  administrative  expenses as a percent of revenue
from 11.9% to 11.6%,  partially offset by a decrease in contribution margin from
38.3% to 37.7%. The decrease in contribution  margin was primarily the result of
higher labor costs as a percentage of revenues. Depreciation and amortization as
a  percentage  of  revenues  increased  from  3.0% to 3.5%  as  depreciation  on
increased  capital  expenditures  more that offset the  elimination  of goodwill
amortization expense related to Statement No. 142.

     Outpatient  operating earnings decreased 14.9% from $3.9 million in 2001 to
$3.3 million in 2002,  primarily resulting from an 11.1% decrease in the average
number of programs from 61.5 to 54.7 and a decrease in contribution  margin from
27.8% to 25.7% as a result of higher  labor costs as a  percentage  of revenues.
General and  administrative  expenses as a percentage of revenues increased from
16.7% in 2001 to  16.9% in 2002.  Depreciation  and  amortization  expense  as a
percentage of revenue  decreased  from 3.1% in 2001 to 1.6% in 2002,  reflecting
the  elimination  of goodwill  amortization  expense  related to the adoption of
Statement No. 142.

     Contract therapy operating  earnings  increased 207.2% from $3.0 million in
2001 to $9.1  million  in 2002,  primarily  as a result of a 62.8%  increase  in
operating  revenues,  partially offset by a decrease in contribution margin from
29.3% in 2001 to 27.3% in 2002 due to higher  salary-related  expenses.  General
and administrative  expenses as a percentage of revenues decreased from 21.2% in
2001 to 16.1% in 2002,  primarily due to increased  revenues.  Depreciation  and
amortization  expense as a percentage of revenues decreased from 1.7% in 2001 to
1.0% in 2002,  reflecting  the  elimination  of  goodwill  amortization  expense
related to the adoption of Statement No. 142.

     Operating  earnings in the  staffing  group  decreased by $3.2 million from
$1.5 million in 2001 to a $1.7  million  loss in 2002,  primarily as a result of
decreased revenues in our supplemental staffing division. Gross profit margin in
the staffing  group  decreased  from 23.7% in 2001 to 22.8% due to a lower gross
profit margin in our supplemental staffing division. Supplemental staffing gross
profit margin decreased from 26.6% in 2001 to 23.5% in 2002 due to the continued
migration  of the  skill  mix to  more  highly  credentialed  professionals  who
delivered greater  profitability  but less margin.  Travel staffing gross profit
margin  increased  from 21.4% in 2001 to 21.7% in 2002,  primarily  reflecting a
favorable pricing  environment  combined with a decrease in housing expense as a
percentage  of  revenue.  General  and  administrative  expenses as a percent of
staffing revenue increased from 21.1% in 2001 to 22.0% in 2002, primarily due to
lower revenues in supplemental  staffing.  Depreciation and amortization expense
as a percentage of staffing revenue decreased from 1.1% in 2001 to 0.7% in 2002,
reflecting the elimination of goodwill amortization expense related to Statement
No. 142.

                                       25
<PAGE>

     Non-operating Items

     Interest  income  decreased  by $17.1%  from $0.4  million  in 2001 to $0.3
million in 2002, primarily due to decreased average cash balances as a result of
the stock repurchase and lower interest rates.

     Interest  expense  decreased  by $1.2  million from $1.9 million in 2001 to
$0.7  million in 2002,  due to the  repayment of the line of credit in 2001 from
cash generated from the March 2001 publicly underwritten equity offering and the
repayment of all subordinated debt during the fourth quarter of 2001.

     Earnings  before income taxes increased by 12.6% from $35.0 million in 2001
to $39.3  million in 2002.  The  provision  for  income  taxes in 2002 was $15.0
million compared to $13.9 million in 2001, reflecting effective income tax rates
of 38.0% and 39.8%,  respectively.  Net earnings  increased by $3.4 million,  or
16.0%, from $21.0 million in 2001 to $24.4 million in 2002. Diluted net earnings
per  share  increased  by  19.0%  from  $1.16 in 2001 to $1.38 in 2002 on a 2.4%
decrease  in   weighted-average   shares   outstanding.   The  decrease  in  the
weighted-average shares outstanding was attributable primarily to the repurchase
by  RehabCare of 1.7 million  shares of common  stock  during the third  quarter
2002,  offset by the  effect of  issuing  1.5  million  shares in the March 2001
publicly underwritten equity offering,  and a decrease in the dilutive effect of
stock options resulting from a lower average stock price.

Liquidity and Capital Resources

     As of  December  31,  2003,  we had  $38.4  million  in  cash  and  current
marketable  securities and a current ratio, the amount of current assets divided
by current  liabilities,  of 2.9 to 1. Working capital increased by $9.1 million
to $77.0  million as of December  31,  2003 as  compared to $67.8  million as of
December 31, 2002 due to an increase in current assets of $12.3 million combined
with an increase in current liabilities of $3.2 million. The increase in current
assets was primarily  due to increased  cash and current  marketable  securities
balances  of  $28.8  million  as a result  of cash  generated  from  operations,
partially  offset by the  classification  of certain  StarMed  current assets in
long-term  assets  held for sale.  In  addition,  current  deferred  tax  assets
increased  primarily  due to the deferred  taxes  related to net assets held for
sale as well as increases in accrued  vacation,  accrued  workers  compensation,
professional  liability insurance and health insurance.  Net accounts receivable
were $62.7  million at December 31, 2003,  compared to $87.2 million at December
31, 2002. The StarMed  accounts  receivable  balance  reflected in long-term net
assets held for sale was $25.9 million.  The number of days' average net revenue
in net  receivables  was 63.7  (including the $25.9 million of StarMed  accounts
receivable  shown in net assets held for sale) and 57.7 at December 31, 2003 and
2002, respectively. The increase in current liabilities was primarily the result
of an  increase  in health  insurance  accruals  and  workers  compensation  and
professional   liability   accruals  and  expenses.   The  decrease  in  capital
expenditures  from $8.5  million in 2002 to $5.3 million in 2003 was a result of
the  completion  of major system  enhancements  and  implementations  in 2002 to
support the clinical operations.

     Operating  cash  flows  constitute  our  primary  source of  liquidity  and
historically have been sufficient to fund working capital, capital expenditures,
internal business expansion and debt service requirements. We expect to meet our
future working capital,  capital  expenditures,  internal and external  business
expansion and debt service  requirements  from a combination of internal sources
and outside financing. We have a $125.0 million revolving line of credit with no
balance  outstanding  as of  December  31,  2003.  This line of  credit  was not
impacted by the sale of the StarMed division. We have $6.2 million in letters of
credit issued to our workers compensation and professional and general liability
insurance  carriers as collateral for  reimbursement  of claims.  The letters of
credit reduce the amount we may borrow under the line of credit.  We also have a
$7.6  million  promissory  note  issued to our workers  compensation  carrier as
additional collateral. The promissory note is not recorded as a liability on the
consolidated  balance sheet as it only becomes  payable upon an event of default
as defined in the security agreement with the workers compensation carrier.

                                       26
<PAGE>

     In  connection  with  the  development  and  implementation  of  additional
programs, including developing joint venture relationships, we may incur capital
expenditures for acquisitions of property,  renovations,  equipment and deferred
costs to begin operations. In addition, we expect to expend capital to implement
our acquisition  strategy.  From January 1, 2004, to date, we have expended,  or
committed to expend, approximately $17.9 million in this regard.

Inflation

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

Effect of Recent Accounting Pronouncements

     In June 2002,  the  Financial  Accounting  Standards  Board  (FASB)  issued
Statement  No.  146  "Accounting  for Costs  Associated  with  Exit or  Disposal
Activities."  This statement  nullifies  Emerging Issues Task Force (EITF) Issue
No. 94-3,  "Liability  Recognition for Certain Employee Termination Benefits and
Other  Costs  to  Exit  an  Activity  (including  Certain  Costs  Incurred  in a
Restructuring)."  This statement requires that a liability for a cost associated
with an exit or disposal  activity be recognized  when the liability is incurred
rather than the date of an entity's  commitment to an exit plan. We  implemented
Statement No. 146 on January 1, 2003.  For  information  regarding the impact of
the adoption of  Statement  No. 146 and the impact of the  restructuring  during
2003, refer to Note 13 - Restructuring Costs.

     In November  2002,  the FASB  issued  Interpretation  No. 45,  "Guarantor's
Accounting  and  Disclosure  Requirements  for  Guarantees,  Including  Indirect
Guarantees of Indebtedness of Others, an interpretation of FASB Statement No. 5,
57 and 107 and rescission of FASB  Interpretation  No. 34." This  interpretation
elaborates  on the  disclosures  to be made by a  guarantor  in its  interim and
annual financial  statements about its obligations under certain guarantees that
it has issued.  It also clarifies that a guarantor is required to recognize,  at
the  inception  of a  guarantee,  a liability  for the fair market  value of the
obligation  undertaken in issuing the  guarantee.  The initial  recognition  and
measurement  provisions of this  interpretation  are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002,  irrespective of
the guarantor's  fiscal year end. The disclosure  requirements are effective for
interim or annual  periods ended after  December 15, 2002.  The adoption of this
interpretation  did not have a  material  effect on our  consolidated  financial
position or results of operations.

     In December  2002,  the FASB issued  Statement  No.  148,  "Accounting  for
Stock-Based  Compensation  -  Transition  and  Disclosure - an amendment of FASB
Statement No. 123." Statement No. 148 amends Statement No. 123,  "Accounting for
Stock-Based  Compensation," to provide  alternative  methods of transition for a
voluntary  change to the fair value based method of accounting  for  stock-based
employee  compensation.  In addition,  Statement  No. 148 amends the  disclosure
requirements  of  Statement  No. 123 to require  prominent  disclosures  in both
annual and  interim  financial  statements  about the method of  accounting  for
stock-based employee compensation and the effect on the methods used on reported
results.  The  disclosure  requirements  apply to all companies for fiscal years
ended after December 15, 2002. See Note 7 "Stockholders Equity" for the required
disclosures of Statement No. 148 at December 31, 2002.

                                       27
<PAGE>

     In January 2003, the FASB issued  Interpretation No. 46,  "Consolidation of
Variable  Interest  Entities."  This  interpretation  explains  how to  identify
variable  interest  entities  and how an  enterprise  assesses its interest in a
variable  interest  entity to decide  whether to  consolidate  that  entity.  In
October  2003,  the  FASB  postponed  the  implementation   date  so  that  this
interpretation  is effective  for the first interim or annual period ended after
December 15, 2003 to variable  interest  entities in which the variable interest
was acquired before February 1, 2003. In December 2003, the FASB issued FIN 46R,
"Consolidation  of  Variable  Interest   Entities,"  which  supersedes  FIN  46.
Application  of  the  revised   interpretation  is  required  in  the  financial
statements  of companies  that have  interests in special  purpose  entities for
periods ended after December 15, 2003. The adoption of this  interpretation  did
not have any  effect  on our  consolidated  financial  position  or  results  of
operations.

     In April 2003, the FASB issued  Statement No. 149,  "Amendment of Statement
133 on Derivative  Instruments and Hedging Activities." Statement No. 149 amends
and clarifies the  accounting  for  derivative  instruments,  including  certain
derivative  instruments embedded in other contracts,  and for hedging activities
under  Statement No. 133,  "Accounting  for Derivative  Instruments  and Hedging
Activities." Statement No. 149 is generally effective for contracts entered into
or modified after June 30, 2003 and for hedging  relationships  designated after
June 30, 2003.  The adoption of Statement No. 149 did not have any effect on our
consolidated financial position or results of operations.

     In May 2003,  the FASB issued  Statement No. 150,  "Accounting  for Certain
Financial  Instruments  with  Characteristics  of both  Liabilities and Equity."
Statement  No. 150 requires  that  certain  financial  instruments,  which under
previous guidance were accounted for as equity, be accounted for as liabilities.
The financial instruments affected include mandatorily redeemable stock, certain
financial instruments that require or may require the issuer to buy back some of
its shares in exchange for cash or other assets and certain obligations that can
be  settled  with  shares of  stock.  Statement  No.  150 is  effective  for all
financial  instruments entered into or modified after May 31, 2003. The adoption
of this statement did not have any effect on our consolidated financial position
or results of operations.

Commitments and Contractual Obligations

     The following table summarizes our scheduled contractual  commitments as of
December 31, 2003 (in thousands):

                                  Less than                      More than
                           Total    1 year  2-3 years  4-5 years  5 years  Other
                           -----    ------  ---------  ---------  -------  -----
  Operating leases       $12,950    $4,274   $6,480     $2,196    $   --  $   --
  Purchase obligations     3,674     2,044    1,592         38        --      --
  Other long-term
    liabilities (1)        3,682        --       --         --        --   3,682
                         -------    ------   ------     ------    ------  ------
  Total                  $20,306    $6,318   $8,072     $2,234    $   --  $3,682
                         =======    ======   ======     ======    ======  ======

(1) We maintain a nonqualified deferred compensation plan for certain employees.
Under the plan,  participants  may defer up to 100% of their base  compensation.
The amounts are held in trust in designated  investments and remain our property
until  distribution.  Because  distribution  of funds is at the  election of the
participants,  we are not able to predict  the timing of payments  against  this
obligation.   At  December  31,  2003,  we  owned  trust  assets  with  a  value
approximately equal to the total amount of this obligation.

                                       28
<PAGE>

Critical Accounting Policies and Estimates

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

     Certain of our accounting  policies require higher degrees of judgment than
others in their application. These include estimating the allowance for doubtful
accounts,  impairment of goodwill and other  intangible  assets and establishing
accruals for known and incurred but not reported  health,  workers  compensation
and  professional  liability  claims.  In addition,  Note 1 to the  consolidated
financial  statements includes further discussion of our significant  accounting
policies.

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

     Allowance for Doubtful Accounts. We make estimates of the collectability of
our  accounts  receivable  balances.  We  determine  an  allowance  for doubtful
accounts  based upon an analysis  of the  collectability  of specific  accounts,
historical experience and the aging of the accounts receivable.  We specifically
analyze  customers  with  historical  poor payment  history and customer  credit
worthiness when evaluating the adequacy of the allowance for doubtful  accounts.
Our accounts  receivable balance as of December 31, 2003 was $62.7 million,  net
of allowance for doubtful accounts of $3.4 million.  If the financial  condition
of our  customers  were to  deteriorate,  resulting  in an  impairment  of their
ability to make payments,  additional allowances may be required. We continually
evaluate  the  adequacy  of  our  allowance  for  doubtful   accounts  and  make
adjustments in the periods any excess or shortfall is identified.

     Goodwill and Other Intangibles. The cost of acquired companies is allocated
first to their  identifiable  assets,  both  tangible and  intangible,  based on
estimated fair values.  Costs  allocated to identifiable  intangible  assets are
generally amortized on a straight-line basis over the remaining estimated useful
lives of the  assets.  The excess of the  purchase  price over the fair value of
identifiable  assets  acquired,  net of  liabilities  assumed,  is  recorded  as
goodwill.  Prior to January 1,  2002,  goodwill  relating  to  acquisitions  was
amortized  on  a  straight-line  basis  over  its  estimated  useful  life.  The
amortization  periods  differed  depending  on whether the  acquired  entity was
national in scope or a regional provider. Goodwill related to the acquisition of
a national  provider was amortized over 40 years,  while  goodwill  related to a
regional provider was amortized over 25 years.

     On January 1, 2002,  we adopted the  provisions  of  Statement of Financial
Accounting  Standards  ("Statement")  No.  142  "Goodwill  and Other  Intangible
Assets." Under Statement No. 142, goodwill and intangible assets with indefinite
lives  are no  longer  amortized  and must be  reviewed  at least  annually  for
impairment.  If the  impairment  test  indicates  that the carrying  value of an
intangible  asset  exceeds  its fair  value,  then an  impairment  loss would be
recognized  in the  statement  of  earnings  in an  amount  equal to the  excess
carrying value.

                                       29
<PAGE>

     On  December  30,  2003,  we  announced  that we had  entered  into a Stock
Purchase and Sale Agreement with InteliStaf  pursuant to which  InteliStaf would
acquire our healthcare  staffing division,  in exchange for approximately 25% of
the common  stock of  InteliStaf  on a fully  diluted  basis.  This  transaction
subsequently  closed on February 2, 2004. In accordance with the requirements of
Statement  No. 144,  "Accounting  for the  Impairment  or Disposal of Long-Lived
Assets," the assets and  liabilities  of our healthcare  staffing  operation are
reported on our  December  31,  2003  consolidated  balance  sheet as assets and
liabilities  held for sale and have been  measured  at their net fair value less
estimated  costs to sell. We  recognized an impairment  loss of $43.6 million to
reduce the carrying value of goodwill  associated with the staffing division and
to  accrue  estimated  selling  costs.  This  impairment  loss was  computed  in
accordance  with the  provisions  of Statement No. 142. We engaged a third party
valuation firm to assist us in determining the fair value of consideration given
and received in the contemplated  transaction with InteliStaf.  This value, less
estimated  costs to sell,  was compared to the carrying  value of the healthcare
staffing division to ascertain if any impairment existed.  Because the estimated
fair value less costs to sell was less than the  carrying  value of the staffing
business,  we  performed  the second  step of the  goodwill  impairment  test to
determine  the  amount of the  implied  fair value of  goodwill  and in turn the
amount of  impairment.  The  impairment  loss has been  recorded  as a  separate
component  of costs and expenses in our  consolidated  statement of earnings for
the year ended December 31, 2003.

     As required by Statement  No. 142, we also  conducted an annual  impairment
assessment  of goodwill  related to our  hospital  rehabilitation  services  and
contract  therapy  businesses and determined that goodwill is not impaired.  The
test required  comparison of the estimated fair value of these businesses to our
book  value.  The  estimated  fair  value  was based on a  discounted  cash flow
analysis.  Assumptions  and estimates about future cash flows and discount rates
are often  subjective  and can be affected  by a variety of  factors,  including
external  factors  such as  economic  trends  and  government  regulations,  and
internal factors such as changes in our forecasts or in our business strategies.
We believe the  assumptions  used in our impairment  analysis are reasonable and
appropriate;  however,  different  assumptions  and  estimates  could affect the
results of our impairment  analysis and in turn result in an impairment  charge.
If an  impairment  loss  should  occur in the  future,  it could have a material
adverse impact on our results of operations.  At December 31, 2003,  unamortized
goodwill  related to our hospital  rehabilitation  services and contract therapy
businesses was $35.7 million and $13.0 million, respectively.

     Health, Workers Compensation, and Professional Liability Insurance Accrual.
We maintain an accrual for our health,  workers  compensation  and  professional
liability  claim costs that are  partially  self-insured  and are  classified in
accrued  salaries and wages (health  insurance)  and accrued  expenses  (workers
compensation and professional  liability) in our consolidated balance sheets. At
December 31, 2003, the combined amount of these accruals was approximately $13.2
million. We determine the adequacy of these accruals by periodically  evaluating
our historical  experience and trends related to health,  workers  compensation,
and professional liability claims and payments,  based on actuarial computations
and industry experience and trends. In analyzing the accruals,  we also consider
the nature and severity of the claims,  analyses  provided by third party claims
administrators,  as well as current legal,  economic and regulatory  factors. If
such information  indicates that our accruals are overstated or understated,  we
reduce or provide for additional  accruals as appropriate in the period in which
we make such a  determination.  The ultimate cost of these claims may be greater
than or less than the established  accruals.  While we believe that the recorded
amounts are appropriate, there can be no assurances that changes to management's
estimates will not occur due to limitations inherent in the estimation process.

                                       30
<PAGE>

     We are subject to various  claims and legal actions in the ordinary  course
of our  business.  Some of these  matters  include  professional  liability  and
employee-related matters. Our hospitals and healthcare facility clients may also
become subject to claims,  governmental  inquiries and  investigations and legal
actions to which we may become a party  relating  to  services  provided  by our
professionals.  From time to time, and depending  upon the particular  facts and
circumstances,  we may be  subject  to  indemnification  obligations  under  our
contracts with our hospital and healthcare  facility  clients  relating to these
matters.  Although we are  currently not aware of any such pending or threatened
litigation  that we believe  is  reasonably  likely to have a  material  adverse
effect on us, if we become aware of such claims against us, we will evaluate the
probability of an adverse outcome and provide accruals for such contingencies as
necessary.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      Our borrowing capacity consists of a line of credit with interest rates
that fluctuate based upon market indexes. As of December 31, 2003, we did not
have any outstanding borrowings under this line of credit. As such, risk
relating to interest fluctuation is considered minimal.

                                       31
<PAGE>


ITEM 8A.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Independent Auditors' Report                                      33

Consolidated Balance Sheets as of  December 31, 2003 and 2002     34

Consolidated Statements of Earnings for the years
      ended December 31, 2003, 2002 and 2001                      35

Consolidated Statements of Stockholders' Equity for the years
      ended December 31, 2003, 2002 and 2001                      36

Consolidated Statements of Cash Flows for the years
      ended December 31, 2003, 2002 and 2001                      37

Notes to the Consolidated Financial Statements                    38

                                       32
<PAGE>



                          Independent Auditors' Report


The Board of Directors
RehabCare Group, Inc.:

     We have audited the accompanying  consolidated  balance sheets of RehabCare
Group,  Inc. and subsidiaries  (the "Company") as of December 31, 2003 and 2002,
and the related  consolidated  statements of earnings,  stockholders' equity and
cash flows for each of the years in the  three-year  period  ended  December 31,
2003. These  consolidated  financial  statements are the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
consolidated financial statements based on our audits.

     We conducted our audits in accordance  with  auditing  standards  generally
accepted in the United States of America.  Those standards  require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

     In our opinion,  the consolidated  financial  statements  referred to above
present fairly, in all material  respects,  the financial  position of RehabCare
Group,  Inc. and  subsidiaries as of December 31, 2003 and 2002, and the results
of their operations and their cash flows for each of the years in the three-year
period  ended  December  31,  2003  in  conformity  with  accounting  principles
generally accepted in the United States of America.

     As discussed in Note 5 to the consolidated financial statements,  effective
January 1, 2002, the Company adopted Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets."


/s/ KPMG LLP


St. Louis, Missouri
February 2, 2004, except
as to Note 19, which is
as of March 2, 2004

                                       33

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

                                                                 December 31,
                                                                 ------------
                                                              2003        2002
                                                              ----        ----
                                     Assets
                                     ------
Current assets:
<S>                                                        <C>         <C>
    Cash and cash equivalents                              $ 28,320    $  9,580
    Marketable securities, available-for-sale                10,065           4
    Accounts receivable, net of allowance for doubtful
       accounts of $3,422 and $5,181, respectively           62,744      87,221
    Income taxes receivable                                      --       2,497
    Deferred tax assets                                      14,706       2,529
    Other current assets                                      1,912       3,625
                                                            -------     -------
       Total current assets                                 117,747     105,456
Marketable securities, trading                                3,665       4,252
Equipment and leasehold improvements, net                    14,063      19,844
Excess of cost over net assets acquired , net                48,729     101,685
Assets held for sale                                         46,171          --
Other                                                         3,251       4,293
                                                            -------     -------
       Total assets                                        $233,626    $235,530
                                                            =======     =======

                      Liabilities and Stockholders' Equity
                      ------------------------------------
Current liabilities:
    Accounts payable                                       $    763    $  1,959
    Accrued salaries and wages                               24,035      28,579
    Income taxes payable                                      1,197          --
    Accrued expenses                                         14,800       7,072
                                                            -------     -------
       Total current liabilities                             40,795      37,610
Deferred compensation                                         3,682       4,266
Deferred tax liabilities                                      1,423       5,040
Liabilities held for sale                                     9,771          --
                                                            -------     -------
       Total liabilities                                     55,671      46,916
                                                            -------     -------

Stockholders' equity:
    Preferred stock, $.10 par value;
       authorized 10,000,000 shares,
       none issued and outstanding                               --          --
    Common stock, $.01 par value;
       authorized 60,000,000 shares,
       issued 20,144,577 shares and
       19,846,416 shares as of
       December 31, 2003 and 2002, respectively                 201         198
    Additional paid-in capital                              114,704     111,671
    Retained earnings                                       117,753     131,452
    Less common stock held in treasury at cost,
       4,002,898 shares as of December 31, 2003
       and 2002                                             (54,704)    (54,704)
    Accumulated other comprehensive earnings (loss)               1          (3)
                                                            -------     -------
       Total stockholders' equity                           177,955     188,614
                                                            -------     -------
       Total liabilities and stockholders' equity          $233,626    $235,530
                                                            =======     =======
</TABLE>

See accompanying notes to consolidated financial statements.

                                       34
<PAGE>

<TABLE>
<CAPTION>
                              REHABCARE GROUP, INC.
                       Consolidated Statements of Earnings
                      (in thousands, except per share data)

                                                    Year Ended December 31,
                                               -------------------------------
                                                  2003        2002        2001
                                                  ----        ----        ----
<S>                                            <C>         <C>         <C>
Operating revenues                             $539,322    $562,565    $542,265
Costs and expenses:
    Operating                                   408,559     413,081     394,651
    Selling, general and administrative:
        Divisions                                65,055      74,621      78,468
        Corporate                                26,680      26,832      22,617
    Restructuring charge                          1,286          --          --
    Loss on assets held for sale                 43,579          --          --
    Depreciation and amortization                 8,559       8,334       9,562
                                                -------     -------     -------
        Total costs and expenses                553,718     522,868     505,298
                                                -------     -------     -------
        Operating earnings (loss)               (14,396)     39,697      36,967
Interest income                                     140         319         385
Interest expense                                   (714)       (676)     (1,859)
Other income (expense), net                        (338)          9        (542)
                                                -------     -------     -------
        Earnings (loss) before income taxes     (15,308)     39,349      34,951
Income taxes (benefit)                           (1,609)     14,954      13,916
                                                -------     -------     -------
        Net earnings (loss)                    $(13,699)   $ 24,395    $ 21,035
                                                =======     =======     =======
Net earnings (loss) per common share:
    Basic                                      $  (0.86)   $   1.45    $   1.25
                                                =======     =======     =======
    Diluted                                    $  (0.86)   $   1.38    $   1.16
                                                =======     =======     =======

</TABLE>

See accompanying notes to consolidated financial statements.

                                       35
<PAGE>
                              REHABCARE GROUP, INC.
                 Consolidated Statements of Stockholders' Equity
                                 (in thousands)
<TABLE>
<CAPTION>
                                                              Accumulated
                                                                other
                Common Stock                                    compre-   Total
                ------------  Additional          Treasury      hensive   stock-
                Issued         Paid-in Retained -------------  earnings holders'
                shares Amount  capital earnings Shares  Amount  (loss)   equity
                ------ ------  ------- -------- ------  ------  ------   ------
<S>             <C>     <C>   <C>      <C>      <C>    <C>        <C>  <C>
Balance,
  December 31,
  2000          17,409  $174  $49,503  $86,022  2,303  $(17,757)  $18  $117,960
Components of
  comprehensive
  earnings:
  Net earnings      --    --       --   21,035     --        --    --    21,035
                                                                        -------
Total compre-
  hensive earnings                                                       21,035
                                                                        -------
Issuance of
  common stock
  in connection
  with secondary
  offering       1,455    14   49,429       --     --        --    --    49,443

Exercise of
  stock options
  (including tax
  benefit)         767     8   10,590       --     --        --    --    10,598
                ------  ----  -------  -------  -----  --------   ---  --------
Balance,
  December 31,
  2001          19,631   196  109,522  107,057  2,303   (17,757)   18   199,036
Components of
  comprehensive
  earnings:
  Net earnings     --     --       --   24,395     --        --    --    24,395
  Change in
   unrealized gain
   (loss) on market-
   able securities,
   net of tax      --     --       --       --     --        --   (21)      (21)
                                                                       --------
   Total compre-
    hensive earnings                                                     24,374
                                                                       --------
Purchase of
  treasury stock   --     --       --       --  1,700   (36,947)   --   (36,947)

Exercise of
  stock options
  (including tax
  benefit)         215     2    2,149       --     --        --    --     2,151
                ------  ----  -------  -------  -----  --------   ---  ---------
Balance,
  December 31,
  2002          19,846   198  111,671  131,452  4,003   (54,704)   (3)  188,614
Components of
  comprehensive
  earnings (loss):
  Net loss          --    --       --  (13,699)    --        --    --   (13,699)
Change in
  unrealized gain
  (loss) on
  marketable
  securities,
  net of tax        --    --       --       --     --        --     4         4
                                                                       --------
  Total compre-
  hensive loss                                                          (13,695)
                                                                       --------
Exercise of
  stock options
  (including tax
  benefit)         299     3    3,033       --     --        --    --     3,036
                ------  ----  -------  -------  -----  --------   ---  --------
Balance,
  December 31,
  2003          20,145  $201  $114,704 $117,753 4,003  $(54,704)  $ 1  $177,955
                ======  ====  ======== ======== =====  ========   ===  ========
</TABLE>
See accompanying notes to consolidated financial statements.

                                       36
<PAGE>

<TABLE>
<CAPTION>
                              REHABCARE GROUP, INC.
                      Consolidated Statements of Cash Flows
                                 (in thousands)


                                                        Year Ended December 31,
                                                        2003     2002     2001
                                                        ----     ----     ----
 Cash flows from operating activities:
<S>                                                  <C>       <C>      <C>
   Net earnings (loss)                               $(13,699) $24,395  $21,035
   Adjustments to reconcile net earnings (loss)
     to net cash provided by operating activities:
      Depreciation and amortization                     8,559    8,334    9,562
      Provision for doubtful accounts                   4,036    4,511    4,594
      Write-down of investments                            50       --      500
      Loss on assets held for sale                     43,579       --       --
      Income tax benefit realized on exercise of
         employee stock options                           903      770    6,386
      Change in assets and liabilities:
         Deferred compensation                           (448)     407      364
         Accounts receivable, net                      (5,480)     (98) (12,195)
         Prepaid expenses and other current assets         32   (1,485)    (982)
         Other assets                                      73      464     (235)
         Accounts payable and accrued expenses          7,370   (9,350)   5,579
         Accrued salaries and wages                       944    1,438    2,295
         Income taxes                                 (12,100)   6,667     (613)
                                                       ------   ------   ------
           Net cash provided by operating activities   33,819   36,053   36,290
                                                       ------   ------   ------

 Cash flows from investing activities:
   Additions to equipment and leasehold
     improvements, net                                 (5,337)  (8,546) (10,613)
   Purchase of marketable securities                  (10,735)    (596)    (922)
   Proceeds from sale/maturities of marketable
     securities                                         1,121    1,030    2,435
   Cash in net assets held for sale                    (1,550)      --       --
   Other, net                                            (711)  (1,329)  (1,951)
                                                       ------   ------   ------
           Net cash used in investing activities      (17,212)  (9,441) (11,051)
                                                       ------   ------   ------

 Cash flows from financing activities:
   Repayments on revolving credit facility, net            --       --  (63,800)
   Repayments on long-term debt                            --       --   (4,502)
   Purchase of treasury stock                              --  (36,947)      --
   Proceeds from sale of common stock, net                 --       --   49,443
   Exercise of stock options                            2,133    1,381    4,212
                                                       ------   ------   ------
           Net cash provided by (used in)
                    financing activities                2,133  (35,566) (14,647)
                                                       ------   ------   ------
           Net increase (decrease) in cash
                    and cash equivalents               18,740   (8,954)  10,592
 Cash and cash equivalents at beginning of year         9,580   18,534    7,942
                                                       ------   ------   ------
 Cash and cash equivalents at end of year            $ 28,320  $ 9,580  $18,534
                                                       ======   ======   ======
</TABLE>

 See accompanying notes to consolidated financial statements.

                                       37
<PAGE>


                              REHABCARE GROUP, INC.
                   Notes to Consolidated Financial Statements
                        December 31, 2003, 2002 and 2001


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

     Overview of Company

     RehabCare  Group,  Inc.  ("the  Company") is a leading  provider of program
management  services for inpatient  rehabilitation  and skilled  nursing  units,
outpatient  therapy  programs and contract  therapy services in conjunction with
over 700 hospitals and skilled nursing facilities throughout the United States.

     On December 30, 2003,  the Company  entered into a Stock  Purchase and Sale
Agreement  with  InteliStaf  Holdings,  Inc.  ("InteliStaf")  pursuant  to which
InteliStaf  would  acquire all of the  outstanding  common stock of our staffing
division,  StarMed Health Personnel, Inc. ("StarMed").  Subsequently,  this sale
closed on February 2, 2004. See Notes 5 and 12 for further discussion.

     Principles of Consolidation

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

     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, 2003 and 2002 consist of marketable  equity and debt
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 taxes, is recorded as other accumulated  comprehensive  earnings.  Unrealized
gains or  losses  on such  securities  are not  recognized  in the  consolidated
statements of earnings until the securities are sold. All marketable  securities
in  non-current  assets are classified as trading,  with all investment  income,
including  unrealized gains or losses recognized in the consolidated  statements
of earnings.

     Credit Risk

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

                                       38
<PAGE>

                              REHABCARE GROUP, INC.
             Notes to Consolidated Financial Statements (Continued)
                        December 31, 2003, 2002 and 2001


     Equipment and Leasehold Improvements

     Depreciation and  amortization of equipment and leasehold  improvements are
computed using the  straight-line  method over the estimated useful lives of the
related  assets,  principally:  equipment - three to seven  years and  leasehold
improvements  - life  of  lease  or life  of  asset,  whichever  is  less.  Upon
retirement or disposition,  the cost and related  accumulated  depreciation  are
removed  from the  accounts  and any gain or loss is  included in the results of
operations. Repairs and maintenance are expensed as incurred.

     Goodwill and Other Identifiable Intangible Assets

     Goodwill,  which  represents  the excess of cost over net assets  acquired,
relates to acquisitions.  Prior to January 1, 2002,  goodwill was amortized on a
straight-line basis over 25 to 40 years.  Effective January 1, 2002, the Company
adopted  Statement  No.  142,  "Goodwill  and Other  Intangible  Assets."  Under
Statement No. 142,  goodwill and intangible  assets with indefinite lives are no
longer amortized to expense, but instead tested for impairment at least annually
and any related  losses  recognized  in earnings  when  identified.  See Note 5,
"Goodwill and Other  Identifiable  Intangible  Assets" and Note 12, "Assets Held
for Sale."

     Long-Lived Assets

     The Company has adopted  Statement No. 144,  "Accounting for the Impairment
or Disposal of Long-Lived Assets," effective January 1, 2002.  Statement No. 144
addresses  financial  accounting  and reporting for the impairment of long-lived
assets to be disposed of, and supersedes  Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and
Accounting  Principles  Board ("APB") Opinion No. 30,  "Reporting the Results of
Operations - Reporting  the Effects of Disposal of a Segment of a Business,  and
Extraordinary,  Unusual and Infrequently Occurring Events and Transactions." The
Company reviews identified intangible and other long-lived assets for impairment
whenever events or changes in circumstances  indicate that the carrying value of
the asset may not be recoverable. If such events or changes in circumstances are
present,  an  impairment  loss would be  recognized  if the sum of the  expected
future net cash flows was less than the carrying  amount of the asset.  See Note
12, "Assets Held for Sale."

     Disclosure About Fair Value of Financial Instruments

     The carrying  amounts of cash and cash  equivalents,  receivables,  prepaid
expenses and other current assets, accounts payable,  accrued salaries and wages
and accrued  expenses  approximate  fair value because of the short  maturity of
these items.

     Revenues and Costs

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

                                       39
<PAGE>

                              REHABCARE GROUP, INC.
             Notes to Consolidated Financial Statements (Continued)
                        December 31, 2003, 2002 and 2001


     Stock-Based Compensation

     The Company accounts for stock-based employee  compensation plans using the
intrinsic value method under APB Opinion No. 25, "Accounting for Stock Issued to
Employees"  and related  Interpretations  as  permitted  by  Statement  No. 123,
"Accounting for Stock-Based  Compensation."  Accordingly,  stock-based  employee
compensation cost is not reflected in net earnings, as all stock options granted
under the Company's stock compensation plans have an exercise price equal to the
market  value  of  the  underlying  common  stock  on the  date  of  grant.  Had
compensation  cost  for  the  Company's  stock-based   compensation  plans  been
determined  based on the fair value at the grant  dates for awards  under  those
plans  consistent  with the method of  Statement  No.  123,  the  Company's  net
earnings and earnings per share would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
                                                     Year Ended December 31,
                                                  2003        2002        2001
                                                  ----        ----        ----
                                           (in thousands, except per share data)
<S>                                            <C>          <C>         <C>
      Net earnings (loss), as reported         $(13,699)    $24,395     $21,035
      Deduct: Total stock-based employee
        compensation expense determined under
        fair value based method for all awards,
        net of related tax effects               (3,657)     (5,130)     (4,390)
                                                -------      ------      ------

      Pro forma net earnings                   $(17,356)    $19,265     $16,645
                                                =======      ======      ======

      Basic earnings (loss) per share:
                                As reported      $(0.86)      $1.45       $1.25
                                                =======      ======      ======
                                Pro forma        $(1.08)      $1.15       $0.99
                                                =======      ======      ======

      Diluted earnings (loss) per share:
                                As reported      $(0.86)      $1.38       $1.16
                                                =======      ======      ======
                                Pro forma        $(1.08)      $1.09       $0.92
                                                =======      ======      ======
</TABLE>


     The per share  weighted-average  fair value of stock options granted during
2003,  2002 and 2001 was  $11.19,  $13.49 and $24.78 on the dates of grant using
the Black  Scholes  option-pricing  model  with the  following  weighted-average
assumptions: 2003 - expected dividend yield 0%, volatility of 55%-58%, risk free
interest rate of 2.3%-3.5% and an expected life of 6 to 9 years; 2002 - expected
dividend  yield 0%,  volatility  of 55%,  risk free interest rate of 3.8% and an
expected life of 6 to 8 years;  2001 - expected dividend yield 0%, volatility of
56%, risk free interest rate of 4.5% and an expected life of 7 to 9 years.

     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.

                                       40
<PAGE>
                              REHABCARE GROUP, INC.
             Notes to Consolidated Financial Statements (Continued)
                        December 31, 2003, 2002 and 2001

     Use of Estimates

     The  preparation  of financial  statements  in conformity  with  accounting
principles  generally  accepted  in  the  United  States  of  America,  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  consolidated  financial  statements.  Estimates also affect the
reported amounts of revenues and expenses during the period.  Actual results may
differ from those estimates.

(2)  Marketable Securities

     Current  marketable  securities  at December 31, 2003  consist  entirely of
variable rate demand notes. At December 31, 2002, current marketable  securities
consisted  primarily  of a marketable  equity  security.  Noncurrent  marketable
securities  consist  primarily of marketable equity securities ($1.4 million and
$2.2  million at December  31,  2003 and 2002,  respectively)  and money  market
securities  ($2.3  million  and $2.1  million  at  December  31,  2003 and 2002,
respectively) held in trust under the Company's deferred compensation plan.

(3)   Allowance for Doubtful Accounts

      Activity in the allowance for doubtful accounts is as follows:
<TABLE>
<CAPTION>
                                                     Year Ended December 31,
                                                 ------------------------------
                                                  2003        2002        2001
                                                  ----        ----        ----
                                                        (in thousands)
<S>                                             <C>         <C>         <C>
         Balance at beginning of year           $ 5,181     $ 5,902     $ 5,347
         Provisions for doubtful accounts         4,036       4,511       4,594
         Allowance transferred to assets
            held for sale                        (2,134)         --          --
         Accounts written off                    (3,661)     (5,232)     (4,039)
                                                 ------      ------      ------
         Balance at end of year                 $ 3,422     $ 5,181     $ 5,902
                                                 ======      ======      =======
</TABLE>

(4)   Equipment and Leasehold Improvements
<TABLE>
<CAPTION>

      Equipment and leasehold improvements, at cost, consist of the following:

                                                                 December 31,
                                                                 ------------
                                                              2003        2002
                                                              ----        ----
                                                               (in thousands)
<S>                                                         <C>         <C>
         Equipment                                          $25,886     $35,064
         Leasehold improvements                               3,188       3,881
                                                            -------     -------
                                                             29,074      38,945
         Less accumulated depreciation and amortization      15,011      19,101
                                                            -------     -------
                                                            $14,063     $19,844
                                                            =======     =======

</TABLE>
                                       41
<PAGE>

                              REHABCARE GROUP, INC.
             Notes to Consolidated Financial Statements (Continued)
                        December 31, 2003, 2002 and 2001

(5)   Goodwill and Other Identifiable Intangible Assets

     Under the provisions of Statement No. 142,  "Goodwill and Other  Intangible
Assets," the Company  completed the  transitional  impairment  tests of goodwill
during the first quarter of 2002 to assess whether  goodwill was impaired at the
date of adoption,  January 1, 2002. To perform the impairment tests, the Company
determined the fair value of each reporting unit and compared it to the carrying
amount of the reporting unit at that date. The fair value of the reporting units
was calculated  based upon the present value of expected future cash flows.  The
results of these tests  indicated that there was no impairment of goodwill as of
the date of  adoption  of  Statement  No.  142.  As of the date of  adoption  of
Statement No. 142, the Company had unamortized  goodwill in the amount of $101.7
million and unamortized  intangible assets in the amount of $0.1 million, all of
which are subject to the transition provisions of Statement No. 142.

     Statement  No. 142 also requires  that  goodwill and  intangible  assets be
tested for impairment annually,  or sooner if events or changes in circumstances
indicate that the carrying amount may exceed fair value. The Company performed a
test for impairment of long-lived assets related to its hospital  rehabilitation
services and contract therapy businesses as of December 31, 2003. Based upon the
tests performed,  the Company has determined that long-lived  assets  (including
goodwill)  related to its program  management  division  are not  impaired as of
December 31, 2003.

     On December 30, 2003, a Stock  Purchase and Sale agreement was entered into
with  InteliStaf   pursuant  to  which  InteliStaf  would  acquire  all  of  the
outstanding common stock of StarMed. Subsequently,  this sale closed on February
2, 2004. The Company was performing  impairment  tests on the long-lived  assets
(including  goodwill)  related to this division on a quarterly basis, as current
market  conditions  for this  division  were  leading to revenue  and  operating
performance  declines. At December 31, 2003, the Company has reported the assets
and liabilities of StarMed as assets and  liabilities  held for sale. The assets
and  liabilities  held for sale have been measured at their estimated fair value
less costs to sell,  resulting in a pretax charge of $43.6 million. The carrying
amount of  goodwill  related to StarMed is $12.9  million at  December  31, 2003
compared to $53.0  million prior to the charge.  See further  discussion in Note
12, "Assets Held for Sale."

                                       42
<PAGE>

                              REHABCARE GROUP, INC.
             Notes to Consolidated Financial Statements (Continued)
                        December 31, 2003, 2002 and 2001


     The  following  table  indicates the effect on net earnings and diluted net
earnings  per share if  Statement  No.  142 had been in  effect  for each of the
periods presented in the consolidated statements of earnings:
<TABLE>
<CAPTION>
                                                      Year Ended December 31,
                                                    2003       2002       2001
                                                    ----       ----       ----
                                           (in thousands, except per share data)

<S>                                              <C>         <C>        <C>
Reported net earnings (loss)                     $(13,699)   $24,395    $21,035
 Add back: goodwill amortization,
    net of taxes                                      --         --       2,844
                                                 --------    -------    -------
Adjusted net earnings (loss)                     $(13,699)   $24,395    $23,879
                                                 ========    =======    =======

Basic net earnings (loss) per share:
As reported                                      $  (0.86)   $ 1. 45    $  1.25
Add back: goodwill amortization,
   net of taxes                                        --         --       0.17
                                                 --------    -------    -------
Adjusted basic net earnings (loss) per share     $  (0.86)   $  1.45    $  1.42
                                                 ========    =======    =======

Diluted net earnings (loss) per share:
As reported                                      $  (0.86)   $  1.38    $  1.16
Add back: goodwill amortization,
   net of taxes                                        --         --       0.16
                                                 --------    -------    -------
Adjusted diluted net earnings (loss) per share   $  (0.86)   $  1.38    $  1.32
                                                 ========    =======    =======
</TABLE>

(6)  Long-Term Debt

     Since  August,  2000,  the  Company  has had a  $125.0  million  five-year
revolving  credit  facility.  The interest  rates are set based on either a base
rate plus 0.50% to 1.75% or a Eurodollar rate plus 1.50% to 2.75%. The base rate
is the  higher of the  Federal  Funds  Rate plus  .50% or the  prime  rate.  The
Eurodollar  rate is defined as (a) the  Interbank  Offered Rate divided by (b) 1
minus the Eurodollar Reserve  Requirement.  The Company pays a fee on the unused
portion  of the  commitment  from  0.375%  to  0.50%.  The  interest  rates  and
commitment fees vary depending on the ratio of the Company's  indebtedness,  net
of cash and marketable  securities,  to cash flow.  Borrowings  under the credit
facility are secured  primarily by the  Company's  assets and future  income and
profits.  The credit  facility  requires the Company to meet  certain  financial
covenants  including  maintaining  minimum net worth and fixed  charge  coverage
ratios. The average outstanding borrowings under the revolving credit facilities
for  2003,  2002  and  2001  were  $0,  $0.2  million  and  $12.4  million.  The
weighted-average  interest rates for the debt  outstanding in 2002 and 2001 were
5.4% and 8.1% per annum,  respectively.  As of  December  31,  2003 there was no
balance  outstanding on the revolving credit  facility.  This line of credit was
not impacted by the sale of StarMed.  Interest paid for 2003,  2002 and 2001 was
$0.5  million,  $0.8  million and $2.2  million,  respectively.  Included in the
interest paid amounts are commitment fees on the unused portion of the revolving
credit  facility of $0.5 million,  $0.6 million and $0.3 million for 2003,  2002
and 2001, respectively.

                                       43
<PAGE>
                              REHABCARE GROUP, INC.
             Notes to Consolidated Financial Statements (Continued)
                        December 31, 2003, 2002 and 2001


     The  Company  has a $3.2  million  letter  of  credit  and a  $7.6  million
promissory  note issued to its worker's  compensation  carrier as collateral for
reimbursement  of claims.  The Company also has a $3.0 million  letter of credit
issued  to  its  professional  and  general  liability   insurance  carrier  for
collateral for reimbursement of claims.  The letters of credit reduce the amount
the  Company may borrow  under the line of credit.  The  promissory  note is not
recorded as a liability  on the  consolidated  balance  sheet as it only becomes
payable upon an event of default as defined in the security  agreement  with the
workers compensation carrier.

(7)  Stockholders' Equity

     During the third quarter of 2002, the Company repurchased  1,700,000 shares
of its common stock at a cost of $36.9  million.  These shares are  presented as
treasury stock in the Company's consolidated balance sheet.

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

     The  Company  has various  long-term  performance  plans for the benefit of
employees and nonemployee  directors.  Under the plans, employees may be granted
incentive stock options or nonqualified stock options and nonemployee  directors
may be granted nonqualified stock options. Certain of the plans also provide for
the granting of stock appreciation rights, restricted stock, performance awards,
or stock units.  Stock  options may be granted for a term not to exceed 10 years
(five years with respect to a person receiving  incentive stock options who owns
more than 10% of the capital stock of the Company) and must be granted within 10
years from the adoption of the respective  plan. The exercise price of all stock
options  must be at least  equal to the fair  market  value (110% of fair market
value for a person receiving an incentive stock option who owns more than 10% of
the capital stock of the Company) of the shares on the date of grant. Except for
options granted to nonemployee directors that become fully exercisable after six
months, substantially all remaining stock options become fully exercisable after
four years from date of grant.  At December 31, 2003,  2002 and 2001, a total of
1,137,646,  1,058,270 and 1,549,594  shares,  respectively,  were  available for
future issuance under the plans.

     A summary of the status of the Company's  stock option plans as of December
31, 2003,  2002 and 2001,  and changes  during the years then ended is presented
below:
<TABLE>
<CAPTION>
                             2003                2002               2001
                             ----                ----               ----
                                Weighted-           Weighted-          Weighted-
                                 Average             Average            Average
                       Shares   Exercise   Shares   Exercise   Shares  Exercise
                                 Price               Price              Price
                       ------   --------   ------   --------   ------  --------
<S>                   <C>        <C>     <C>         <C>      <C>        <C>
Outstanding at
   beginning of year  3,167,834  $18.31  2,935,575   $16.99   3,262,975  $10.62
Granted                 203,300   18.98    664,700    22.66     539,373   39.97
Exercised              (306,554)   7.36   (214,565)    6.49    (766,753)   6.12
Forfeited              (282,676)  24.68   (217,876)   25.66    (100,020)  15.08
                      ---------          ---------            ---------
Outstanding at
   end of year        2,781,904  $18.92  3,167,834   $18.31   2,935,575  $16.99
                      =========          =========            =========
Options exercisable
   at end of year     1,990,029          2,011,184            1,873,702
                      =========          =========            =========
</TABLE>

                                       44
<PAGE>

                              REHABCARE GROUP, INC.
             Notes to Consolidated Financial Statements (Continued)
                        December 31, 2003, 2002 and 2001

      The following table summarizes information about stock options outstanding
at December 31, 2003:
<TABLE>
<CAPTION>
                 Options Outstanding              Options Exercisable
                            Weighted-Average
  Range of                     Remaining    Weighted-                  Weighted-
Exercise Prices     Number    Contractual    Average        Number      Average
 Exercisable     Outstanding     Life     Exercise Price  Exercisable    Price
 -----------     -----------  ----------  --------------  -----------    -----

<C>     <C>         <C>         <C>            <C>           <C>          <C>
$0.00 - 4.70        77,387      0.8 years     $ 4.32         77,387      $ 4.32
 4.70 - 9.40       929,244      4.3             8.05        929,244        8.05
 9.40 -14.10       463,800      4.2            11.60        453,800       11.50
14.10 -18.80        26,500      9.7            17.29          4,000       17.37
18.80 -23.50       590,500      8.5            21.49        149,875       21.39
23.50 -28.20        59,000      7.1            25.09         47,750       25.12
28.20 -32.90        10,000      8.1            29.63          2,500       29.63
32.90 -37.60       170,600      6.5            34.00        129,850       34.00
37.60 -42.30       287,666      7.1            39.61        147,166       39.74
42.30 -47.00       167,207      7.0            43.69         48,457       43.80
                 ---------                                ---------
                 2,781,904      5.8           $18.92      1,990,029      $15.08
                 =========                                =========
</TABLE>


     The Company has a stockholder rights plan pursuant to which preferred stock
purchase  rights were  distributed  as a dividend on each share of the Company's
outstanding common stock. Each right, when exercisable, will entitle the holders
to  purchase  one  one-hundredth  of a share of  series  B junior  participating
preferred  stock of the Company at an initial  exercise price of $150.00 per one
one-hundredth of a share.

     The rights are not exercisable or transferable until a person or affiliated
group acquires beneficial ownership of 20% or more of the Company's common stock
or  commences a tender or exchange  offer for 20% or more of the stock,  without
the  approval  of the board of  directors.  In the event  that a person or group
acquires 20% or more of the  Company's  stock or if the Company or a substantial
portion of the Company's  assets or earning power is acquired by another entity,
each right will  convert into the right to purchase  shares of the  Company's or
the acquiring  entity's stock, at the then-current  exercise price of the right,
having a value at the time equal to twice the exercise price.

     The  series B  preferred  stock is  non-redeemable  and junior of any other
series of preferred  stock that the Company may issue in the future.  Each share
of series B preferred stock, upon issuance, will have a preferential dividend in
the amount  equal to the  greater  of $1.00 per share or 100 times the  dividend
declared per share on the Company's  common stock. In the event of a liquidation
of  the  Company,  the  series  B  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  one-hundredth of a share
of series B preferred  stock will have one vote on all matters  submitted to the
stockholders  and will vote together as a single class with the Company's common
stock.

                                       45
<PAGE>

                              REHABCARE GROUP, INC.
             Notes to Consolidated Financial Statements (Continued)
                        December 31, 2003, 2002 and 2001


 (8)  Earnings per Share

      The following table sets forth the computation of basic and diluted
earnings (loss) per share:
<TABLE>
<CAPTION>
                                                      Year Ended December 31,
                                                      -----------------------
                                                  2003        2002        2001
                                                  ----        ----        ----
                                                      (in thousands, except
                                                         per share data)
Numerator:
<S>                                            <C>         <C>         <C>
Numerator for basic and diluted earnings
  per share - earnings (loss) available to
  common stockholders (net earnings (loss))    $(13,699)   $ 24,395    $ 21,035
                                               ========    ========    ========
Denominator:

Denominator for basic earnings (loss)
  per share - weighted-average shares
  outstanding                                    16,000     16,833       16,775

Effect of dilutive securities:
  Stock options                                      --        809        1,302
                                               --------    -------     --------

Denominator for diluted earnings (loss)
  per share - adjusted weighted-average
  shares and assumed conversions                 16,000     17,642       18,077
                                               ========    =======     ========

Basic earnings (loss) per share                $  (0.86)   $  1.45     $   1.25
                                               ========    =======     ========

Diluted earnings (loss) per share              $  (0.86)   $  1.38     $   1.16
                                               ========    =======     ========
</TABLE>

In 2003, the effect of stock options was  antidilutive  because of the Company's
net loss position.

(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  12  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  are at  rates  of up to 50% of the  first  4% of  employee  contributions.
Expense in  connection  with the Employee  Savings Plan for 2003,  2002 and 2001
totaled $1.7 million, $1.9 million and $1.7 million, respectively.

     The Company maintains a nonqualified deferred compensation plan for certain
employees.  Under the plan, participants may defer up to 100% of their base cash
compensation.  The amounts  are held by a trust in  designated  investments  and
remain the property of the Company until distribution.  At December 31, 2003 and
2002,  $3.7  million and $4.3  million,  respectively,  were  payable  under the
nonqualified  deferred compensation plan and approximated the value of the trust
assets owned by the Company.

                                       46
<PAGE>

                              REHABCARE GROUP, INC.
             Notes to Consolidated Financial Statements (Continued)
                        December 31, 2003, 2002 and 2001


(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, 2003, was as follows:
<TABLE>
<CAPTION>
                     Program Management
                     Services and Other StarMed     Total
                     ------------------ -------     -----
               <S>         <C>         <C>         <C>
               2004        $2,485      $1,789     $ 4,274
               2005         2,260       1,301       3,561
               2006         2,004         915       2,919
               2007         1,440         711       2,151
               2008            --          45          45
                           ------      ------     -------
               Total       $8,189      $4,761     $12,950
                           ======      ======     =======
</TABLE>

      Rent expense for 2003, 2002 and 2001 was approximately $5.1 million, $5.5
million and $4.8 million, respectively.

(11)  Income Taxes
<TABLE>
<CAPTION>
      Income taxes consist of the following:
                                                     Year Ended December 31,
                                                     -----------------------
                                                  2003        2002        2001
                                                  ----        ----        ----
                                                         (in thousands)
      <S>                                       <C>         <C>         <C>
      Federal - current                         $12,556     $ 6,918     $14,232
      Federal - deferred                        (13,980)      6,265      (1,964)
      State                                        (185)      1,771       1,648
                                                -------     -------     -------
                                                $(1,609)    $14,954     $13,916
                                                =======     =======     =======
</TABLE>

      A reconciliation between expected income taxes, computed by applying the
statutory Federal income tax rate of 35% to earnings before income taxes, and
actual income tax is as follows:
<TABLE>
<CAPTION>
                                                      Year Ended December 31,
                                                      -----------------------
                                                  2003        2002        2001
                                                  ----        ----        ----
                                                        (in thousands)
       <S>                                      <C>         <C>         <C>
       Expected income taxes (benefit)          $(5,358)    $13,773     $12,233
       Tax effect of interest income from
           municipal bond obligations exempt
           from Federal taxation                    (18)        (29)        (56)
       State income taxes, net of Federal
           income tax benefit                      (120)        790       1,071
       Nondeductible goodwill related to net
           assets held for sale                   3,406          --          --
       Tax effect of goodwill amortization expense
           not deductible for tax purposes           --          --         599
       Other, net                                   481         420          69
                                                -------     -------     -------
                                                $(1,609)    $14,954     $13,916
                                                =======     =======     =======
</TABLE>

                                       47
<PAGE>

                              REHABCARE GROUP, INC.
             Notes to Consolidated Financial Statements (Continued)
                        December 31, 2003, 2002 and 2001


      The tax effects of temporary differences that give rise to the deferred
tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
                                                             December 31,
                                                             ------------
                                                          2003        2002
                                                          ----        ----
                                                            (in thousands)
         <S>                                             <C>         <C>
         Deferred tax assets:
            Provision for doubtful accounts             $ 1,890     $ 1,476
            Accrued insurance, bonus and
               vacation expense                           5,792       3,311
            Deferred loss on assets held for sale        12,947          --
            Other                                         2,815       1,069
                                                        -------     -------
                                                         23,444       5,856
                                                        -------     -------
         Deferred tax liabilities:
            Goodwill amortization                         7,145       5,596
            Other                                         3,016       2,771
                                                        -------     -------
                                                         10,161       8,367
                                                        -------     -------
            Net deferred tax asset (liability)          $13,283     $(2,511)
                                                        =======     =======
</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 2003, 2002 and 2001 were $9.6 million,
$7.5 million and $8.5 million, respectively.

(12) Assets Held for Sale

     On December  30,  2003,  the Company  announced  that it had entered into a
Stock Purchase and Sale Agreement with InteliStaf  pursuant to which  InteliStaf
would  acquire all of the  outstanding  common  stock of StarMed in exchange for
approximately  25% of the common stock of InteliStaf  on a fully diluted  basis.
This transaction subsequently closed on February 2, 2004.

     In accordance with the  requirements of Statement No. 144,  "Accounting for
the Impairment or Disposal of Long-Lived  Assets," the assets and liabilities of
StarMed are  reported on the  December 31, 2003  consolidated  balance  sheet as
assets and  liabilities  held for sale and have been  measured at their net fair
value less estimated costs to sell. To state the assets and liabilities held for
sale at their  estimated  net  fair  value  less  costs  to  sell,  the  Company
recognized an impairment  loss of $43.6 million to reduce the carrying  value of
goodwill  associated with StarMed and to accrue  estimated  selling costs.  This
impairment loss was computed in accordance with the provisions of Statements No.
142 and No. 144. The Company  engaged a third party  valuation firm to assist it
in  determining  the fair  value of  consideration  given  and  received  in the
contemplated  transaction with InteliStaf.  This value,  less estimated costs to
sell, was compared to the carrying value of the healthcare  staffing division to
ascertain if any impairment existed. Because the estimated fair value less costs
to sell was less than the carrying value of the staffing  business,  the Company
performed  the second step of the  goodwill  impairment  test to  determine  the
amount  of the  implied  fair  value  of  goodwill  and in turn  the  amount  of
impairment.  The  impairment  loss has been recorded as a separate  component of
operating earnings in the consolidated  statement of earnings for the year ended
December 31, 2003.

                                       48
<PAGE>

                              REHABCARE GROUP, INC.
             Notes to Consolidated Financial Statements (Continued)
                        December 31, 2003, 2002 and 2001


     The  assets  and  liabilities  of  the  healthcare  staffing  division  are
presented in the  consolidated  balance  sheet as of December 31, 2003 under the
captions:  "Assets held for sale" and "Liabilities  held for sale." The carrying
amounts of the major  classes of these  assets and  liabilities  at December 31,
2003 were:
<TABLE>
<CAPTION>
                                                    (in thousands)
      Assets:
        <S>                                            <C>
         Cash and cash equivalents                     $ 1,550
         Marketable securities, available for sale           8
         Accounts receivable, net                       25,921
         Prepaid and other current assets                1,680
         Equipment and leasehold improvements, net       3,765
         Excess of cost over net assets acquired        12,891
         Other long-term assets                            356
                                                       -------
              Total assets held for sale               $46,171
                                                       =======
      Liabilities:
         Accounts payable                              $    85
         Accrued salaries and wages                      5,488
         Accrued expenses                                4,198
                                                       -------
              Total liabilities held for sale          $ 9,771
                                                       =======
</TABLE>

(13)  Restructuring Costs

     On July 30,  2003,  the  Company  announced a  comprehensive,  multifaceted
restructuring program to help return it to growth and improved profitability. As
part of the  restructuring  program,  the Company  eliminated 61 positions in an
effort to reduce corporate support functions and better align corporate overhead
with the operating divisions. As a result of the restructuring plan, the Company
recognized a pre-tax  restructuring  expense of $1.3  million.  Included in this
restructuring  charge is $1.1 million of severance  and  outplacement  costs and
$0.2 million for exit costs related to the closing of five StarMed branches. The
Company  accounts for  restructuring  costs in accordance with Statement No. 146
"Accounting  for  Costs  Associated  with  Exit  or  Disposal   Activities."  In
accordance  with Statement No. 146,  management  committed to the  restructuring
plan and  identified  the number of employees to be terminated  and the benefits
that those employees would receive upon termination. Employees were not required
to render service in order to receive their  benefits,  and thus a liability was
recorded at the date the  termination  was  communicated  to the  employee.  The
severance  payments  and exit costs will  continue  beyond 2003  since,  in many
instances,  the terminated  employees will receive their severance payments over
an  extended  period  of time and  long-term  lease  payments  will be paid over
periods after 2003. These charges are reflected in the restructuring charge line
on the accompanying consolidated statement of earnings.

                                       49
<PAGE>

                              REHABCARE GROUP, INC.
             Notes to Consolidated Financial Statements (Continued)
                        December 31, 2003, 2002 and 2001


      The following table summarizes the activity with respect to severance and
exit costs recorded during fiscal year 2003:
<TABLE>
<CAPTION>
                                              (in thousands)
                                   Severance     Exit Costs      Total
                                   ---------     ----------     ------
      <S>                           <C>            <C>          <C>
      Restructuring charge          $1,094         $  192       $1,286
      Cash payments                    743             47          790
                                    ------         ------       ------
      Balance at December 31, 2003  $  351         $  145       $  496
                                    ======         ======       ======
</TABLE>

(14)  Related Party Transactions

     During 2003,  the  Company's  Board of  Directors  approved and the Company
entered into a contract with a software  vendor to develop a new public  website
for the Company.  John H. Short,  Ph.D.,  interim  President and Chief Executive
Officer and a director of the Company and  Theodore M. Wight,  a director of the
Company, are also directors of the software company. Messrs. Wight and Short and
their affiliated entities own 27.3% and 5.5% of the fully diluted capitalization
of the software  company,  respectively.  The original  contract  amount was for
$320,000 and has since been modified for expected  additional  costs of $34,500.
The work is anticipated to be completed by the second quarter of 2004.

     During the first quarter of 2004,  the Company  entered into an addendum to
the  aforementioned  contract  with the same  software  vendor to  identify  and
document  the actual  costs and  timeline  required  to complete  the  Company's
employee  portal/HR  center  project.  The  addendum to the  contract is for the
amount of $47,000  and the work is  anticipated  to be  completed  by the second
quarter of 2004.

     During 2003, the Company entered into an agreement with Phase 2 Consulting,
LLC  ("Phase  2").  Per the terms of the  agreement,  Phase 2 will  provide  the
Company with management, consulting and advisory services, including having John
H. Short,  Ph.D., the managing director of Phase 2 and a member of the Company's
Board of Directors,  serve as interim  President and Chief Executive  Officer of
the Company.  A monthly consulting fee of $55,000 will be paid to Phase 2 during
the term of the agreement plus reimbursement of business expenses.  In addition,
Phase 2 will be entitled to an incentive  fee capped at $1.3 million  payable in
cash or  shares  of the  Company's  stock  based  on  predetermined  performance
standards.  During 2003, the Company recorded  approximately $680,000 of expense
under this agreement and made payments to Phase 2 of approximately $556,000.

(15)  Industry Segment Information

     During the three year period ended December 31, 2003, the Company  operated
in two  business  segments  that are  managed  separately  based on  fundamental
differences in operations:  healthcare staffing and program management services.
Program management includes inpatient programs  (including acute  rehabilitation
and skilled nursing units),  outpatient  therapy  programs and contract  therapy
programs.  All of the  Company's  services  are  provided in the United  States.
Summarized  information about the Company's  operations in each industry segment
is as follows:

                                       50
<PAGE>

                              REHABCARE GROUP, INC.
             Notes to Consolidated Financial Statements (Continued)
                        December 31, 2003, 2002 and 2001

<TABLE>
<CAPTION>
                               Revenues from
                           Unaffiliated Customers      Operating Earnings (loss)
                      -----------------------------    -------------------------
                               (in thousands)                (in thousands)
                         2003      2002     2001      2003      2002     2001(1)
                         ----      ----     ----      ----      ----     ----
<S>                   <C>       <C>       <C>       <C>       <C>      <C>
Healthcare staffing   $223,952  $277,543  $304,574  $(52,503) $ (1,683)$  1,496
Program management:
  Hospital
  rehabilitation
  services             185,831   179,746   173,030    33,557    32,256   32,501
  Contract therapy     130,847   105,276    64,661     5,836     9,124    2,970
                      --------  --------  --------  --------  -------- --------
  Program
     management total  316,678   285,022   237,691    39,393    41,380   35,471
   Less intercompany
        revenues(2)     (1,308)       --        --       N/A       N/A      N/A
   Restructuring charge    N/A       N/A       N/A    (1,286)       --       --
                      --------  --------  --------  --------  -------- --------
        Total         $539,322  $562,565  $542,265  $(14,396) $ 39,697 $ 36,967
                      ========  ========  ========  ========  ======== ========

                      Depreciation and Amortization      Capital Expenditures
                      -----------------------------    -------------------------
                               (in thousands)                (in thousands)
                         2003      2002     2001      2003      2002      2001
                         ----      ----     ----      ----      ----      ----
Healthcare staffing   $  1,896  $  1,808  $  3,280  $  1,511  $    567 $  1,424
Program management:
  Hospital
  rehabilitation
  services               5,328     5,436     5,194     2,212     4,784    5,559
  Contract therapy       1,335     1,090     1,088     1,614     3,195    3,630
                      --------  --------  --------  --------  --------  -------
  Program
     management total    6,663     6,526     6,282     3,826     7,979    9,189
                      --------  --------  --------  --------  --------  -------
        Total         $  8,559  $  8,334  $  9,562  $  5,337  $  8,546 $ 10,613
                      ========  ========  ========  ========  ========  =======


                              Total Assets               Unamortized Goodwill
                      -----------------------------    -------------------------
                               (in thousands)                (in thousands)
                             as of December 31,            as of December 31,
                         2003      2002     2001      2003      2002      2001
                         ----      ----     ----      ----      ----      ----
Healthcare staffing(3)$ 46,171  $ 92,551  $102,880  $ 12,891  $ 52,956 $ 52,956
Program management:
  Hospital
  rehabilitation
  services             146,016   110,354   121,432    35,739    35,739   35,739
  Contract therapy      41,439    32,625    26,349    12,990    12,990   12,990
                      --------  --------  --------  --------  --------  -------
  Program
     management total  187,455   142,979   147,781    48,729    48,729   48,729
                      --------  --------  --------  --------  --------  -------
        Total         $233,626  $235,530  $250,661  $ 61,620  $101,685 $101,685
                      ========  ========  ========  ========  ======== ========
</TABLE>

(1)  Operating  earnings  for 2001 have been  adjusted to reflect the  corporate
     expense allocation methodology utilized in 2003 and 2002.

(2)  Intercompany  revenues  represent  sales at market rates from the Company's
     healthcare staffing segment to the Company's program management segment.

(3)  At December 31, 2003, the total assets,  including unamortized goodwill, of
     the  healthcare  staffing  business are reported as assets held for sale in
     the  balance  sheet.  See  Note 12  "Assets  Held  for  Sale"  for  further
     discussion.

                                       51
<PAGE>

                              REHABCARE GROUP, INC.
             Notes to Consolidated Financial Statements (Continued)
                        December 31, 2003, 2002 and 2001

(16)  Quarterly Financial Information (Unaudited)
<TABLE>
<CAPTION>
                                                   Quarter Ended
             2003                December 31  September 30  June 30   March 31
             ----                -----------  ------------  -------   --------
                                      (in thousands, except per share data)

      <S>                         <C>          <C>         <C>        <C>
      Operating revenues          $129,475     $134,962    $136,043   $138,842
      Operating earnings (loss)    (34,541)       5,672       7,646      6,827
      Earnings (loss) before
       income taxes                (34,941)       5,538       7,439      6,656
      Net earnings (loss)          (25,523)       3,323       4,457      4,044
      Net earnings (loss) per
       common share:
         Basic                       (1.58)         .21        .28        .26
         Diluted                     (1.58)         .20        .27        .25


                                                   Quarter Ended
             2002                December 31  September 30  June 30   March 31
             ----                -----------  ------------  -------   --------
                                      (in thousands, except per share data)

      Operating revenues          $140,810     $142,690    $140,836   $138,229
      Operating earnings            12,024       11,595       9,526      6,552
      Earnings before
       income taxes                 11,870       11,511       9,472      6,496
      Net earnings                   7,358        7,137       5,872      4,028
      Net earnings per
       common share:
         Basic                         .46          .43         .34        .23
         Diluted                       .45          .41         .32        .22

</TABLE>

(17) Recently Issued Accounting Pronouncements

     In June 2002,  the  Financial  Accounting  Standards  Board  (FASB)  issued
Statement  No.  146  "Accounting  for Costs  Associated  with  Exit or  Disposal
Activities."  This statement  nullifies  Emerging Issues Task Force (EITF) Issue
No. 94-3,  "Liability  Recognition for Certain Employee Termination Benefits and
Other  Costs  to  Exit  an  Activity  (including  Certain  Costs  Incurred  in a
Restructuring)."  This statement requires that a liability for a cost associated
with an exit or disposal  activity be recognized  when the liability is incurred
rather  than the date of an  entity's  commitment  to an exit plan.  The Company
implemented  Statement No. 146 on January 1, 2003. For information regarding the
impact of the adoption of Statement No. 146 and the impact of the  restructuring
during 2003, refer to Note 13 - Restructuring Costs.

     In November  2002,  the FASB  issued  Interpretation  No. 45,  "Guarantor's
Accounting  and  Disclosure  Requirements  for  Guarantees,  Including  Indirect
Guarantees of Indebtedness of Others, an interpretation of FASB Statement No. 5,
57 and 107 and rescission of FASB  Interpretation  No. 34." This  interpretation
elaborates  on the  disclosures  to be made by a  guarantor  in its  interim and
annual financial  statements about its obligations under certain guarantees that
it has issued.  It also clarifies that a guarantor is required to recognize,  at
the  inception  of a  guarantee,  a liability  for the fair market  value of the
obligation  undertaken in issuing the  guarantee.  The initial  recognition  and
measurement  provisions of this  interpretation  are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002,  irrespective of
the guarantor's  fiscal year end. The disclosure  requirements are effective for
interim or annual  periods ended after  December 15, 2002.  The adoption of this
interpretation  did not have a  material  effect on the  Company's  consolidated
financial position or results of operations.

                                       52
<PAGE>

                              REHABCARE GROUP, INC.
             Notes to Consolidated Financial Statements (Continued)
                        December 31, 2003, 2002 and 2001

     In December  2002,  the FASB issued  Statement  No.  148,  "Accounting  for
Stock-Based  Compensation  -  Transition  and  Disclosure - an amendment of FASB
Statement No. 123." Statement No. 148 amends Statement No. 123,  "Accounting for
Stock-Based  Compensation," to provide  alternative  methods of transition for a
voluntary  change to the fair value based method of accounting  for  stock-based
employee  compensation.  In addition,  Statement  No. 148 amends the  disclosure
requirements  of  Statement  No. 123 to require  prominent  disclosures  in both
annual and  interim  financial  statements  about the method of  accounting  for
stock-based employee compensation and the effect on the methods used on reported
results.  The  disclosure  requirements  apply to all companies for fiscal years
ended after December 15, 2002. See Note 7 "Stockholders Equity" for the required
disclosures of Statement No. 148 at December 31, 2002.

     In January 2003, the FASB issued  Interpretation No. 46,  "Consolidation of
Variable  Interest  Entities."  This  interpretation  explains  how to  identify
variable  interest  entities  and how an  enterprise  assesses its interest in a
variable  interest  entity to decide  whether to  consolidate  that  entity.  In
October  2003,  the  FASB  postponed  the  implementation   date  so  that  this
interpretation  is effective  for the first interim or annual period ended after
December 15, 2003 to variable  interest  entities in which the variable interest
was acquired before February 1, 2003. In December 2003, the FASB issued FIN 46R,
"Consolidation  of  Variable  Interest   Entities,"  which  supersedes  FIN  46.
Application  of  the  revised   interpretation  is  required  in  the  financial
statements  of companies  that have  interests in special  purpose  entities for
periods ending after December 15, 2003. The adoption of this  interpretation did
not  have  any  effect  on  the  Company's  financial  position  or  results  of
operations.

     In April 2003, the FASB issued  Statement No. 149,  "Amendment of Statement
133 on Derivative  Instruments and Hedging Activities." Statement No. 149 amends
and clarifies the  accounting  for  derivative  instruments,  including  certain
derivative  instruments embedded in other contracts,  and for hedging activities
under  Statement No. 133,  "Accounting  for Derivative  Instruments  and Hedging
Activities." Statement No. 149 is generally effective for contracts entered into
or modified after June 30, 2003 and for hedging  relationships  designated after
June 30, 2003.  The adoption of Statement No. 149 did not have any effect on the
Company's consolidated financial position or results of operations.

     In May 2003,  the FASB issues  Statement No. 150,  "Accounting  for Certain
Financial  Instruments  with  Characteristics  of both  Liabilities and Equity."
Statement  No. 150 requires  that  certain  financial  instruments,  which under
previous guidance were accounted for as equity, be accounted for as liabilities.
The financial instruments affected include mandatorily redeemable stock, certain
financial instruments that require or may require the issuer to buy back some of
its shares in exchange for cash or other assets and certain obligations that can
be  settled  with  shares of  stock.  Statement  No.  150 is  effective  for all
financial  instruments  entered into or modified  after May 31, 2003 and must be
applied to the Company's existing financial  instruments effective July 1, 2003,
the  beginning  of the first  fiscal  period  after June 15,  2003.  The Company
adopted  Statement No. 150 on June 1, 2003.  The adoption of this  statement did
not have any effect on the Company's  consolidated financial position or results
of operations.

                                       53
<PAGE>


                              REHABCARE GROUP, INC.
             Notes to Consolidated Financial Statements (Continued)
                        December 31, 2003, 2002 and 2001


(18)  Contingencies


     In May 2002, a lawsuit was filed in the United  States  District  Court for
the Eastern  District of Missouri against the Company and certain of its current
directors  and  officers.  The  plaintiffs  allege  violations  of  the  federal
securities  laws and are  seeking to  certify  the suit as a class  action.  The
proposed class consists of persons that purchased shares of the Company's common
stock between August 10, 2000 and January 21, 2002. The case alleges  weaknesses
in the software  systems  selected by its recently sold StarMed  Staffing Group,
and the purported  negative effects of such systems on its business  operations.
The Plaintiff filed a second amended complaint in November 2003, pursuant to the
District  Court Judge's  ruling that the Plaintiff  must present its claims with
more focus and "sufficient  particularity" before he could entertain a motion to
dismiss.  On February 17, 2004,  the Company  filed a second  motion to dismiss,
which is pending.

     In August 2002, a derivative  lawsuit was filed in the Circuit Court of St.
Louis County,  Missouri  against the Company and certain of its  directors.  The
complaint,  which is based upon  substantially  the same facts as are alleged in
the  federal  securities  class  action,  was filed on behalf of the  derivative
plaintiff  by a law firm that had earlier  filed suit in the federal  case.  The
Company filed a motion to dismiss based primarily on the derivative  plaintiff's
failure to make a pre-suit demand,  which is pending.  The federal court hearing
the  securities  law  class  action  has  stayed  discovery  in  the  derivative
proceeding until discovery commences in the class action.

     In July,  2003 a civil  action,  United  States of America ex rel.  Gregory
                                      ------------------------------------------
Kersulis,  M.D. and Jimmie Wilson and Gregory Kersulis,  M.D., and Jimmie Wilson
--------------------------------------------------------------------------------
v. RehabCare Group, Inc.; and Baxter County Regional  Hospital,  Inc., was filed
-----------------------------------------------------------------------
under  the qui tam  provisions  of the False  Claims  Act in the  United  States
District Court for the Eastern  District of Arkansas,  seeking  treble  damages,
civil penalties, back pay, and special damages. The allegations contained in the
suit,  brought by a former  Company  independent  contractor and a former Baxter
physical therapist,  relate to the proper clinical diagnoses of patients treated
at the hospital's acute rehabilitation unit for Medicare reimbursement purposes,
in which  Baxter  received  such  reimbursement  in  excess of  $5,000,000.  The
original  action  was  filed on  August  21,  2000,  under  seal,  requiring  an
investigation by the United States  Department of Justice,  in which the Company
and Baxter fully  cooperated.  The Company and Baxter also initiated an internal
and external  audit that concluded the  allegations  were unfounded and that the
Company and Baxter  were in  compliance  with  Medicare  regulations.  After the
Department's  investigation,  on  June  3,  2003,  the  government  declined  to
intervene and the seal was lifted.  The Plaintiffs  filed an amended  complaint,
and the Company was served and  notified  of the civil  allegations  on July 15,
2003.  The Company has agreed to  indemnify  Baxter for all fees and expenses on
all counts except one, arising out of the action. The court recently denied both
parties motions to dismiss and we expect discovery to commence shortly.

     The Wage and Hour  Division  of the United  States  Department  of Labor is
currently  investigating  whether  persons  employed as on-call  coordinators at
certain  staffing  branch  locations  were  properly  compensated  for all hours
worked, and whether the entire time they were on call should be counted as hours
worked.  The Company has  advised  the Wage and Hour  Division  that it believes
on-call  coordinators  paid a flat fee per shift were  properly  compensated  in
accordance with  applicable  federal law. The inquiry is limited to a three-year
period prior to the date any  proceeding  is filed.  No final  determination  or
position  has been taken by the Wage and Hour  Division to date with  respect to
these matters.

                                       54
<PAGE>

                              REHABCARE GROUP, INC.
             Notes to Consolidated Financial Statements (Continued)
                        December 31, 2003, 2002 and 2001

     A number of suits  have been filed by certain  on-call  coordinators  based
upon facts similar to those being  investigated  by the Wage and Hour  Division.
The Company has filed  motions,  or expect to file  motions,  with the  Judicial
Panel on MultiDistrict  Litigation to consolidate these cases based upon similar
or common  claims and issues and to transfer  these  cases to a single  district
court for resolution. Although the recently sold StarMed subsidiary is the named
defendant in these cases,  the Company will be  responsible  for any  liability,
including  attorney's  fees and  expenses  incurred  in  connection  with  these
actions.

     On February 9, 2004, Bond  International  Software  Group,  Inc. filed suit
against the Company's former StarMed  subsidiary in United States District Court
for the Eastern  District of Virginia  alleging  breach of contract for licensed
software  and  related  development,   configuration,  support  and  maintenance
services.  The Company  expects to file a counter claim asserting its right to a
refund  under the same  contract  under the  termination  and refund  provisions
therein.

     In addition to the above  matters,  the  Company and its  subsidiaries  are
parties to a number of other claims and lawsuits.  While these actions are being
contested,  the outcome of individual matters is not predictable with assurance.
From time to time, and depending upon the  particular  facts and  circumstances,
the Company may be subject to  indemnification  obligations  under its contracts
with its hospital and healthcare facility clients relating to these matters. The
Company  does not believe  that any  liability  resulting  from any of the above
matters,  after taking into  consideration  its  insurance  coverage and amounts
already  provided for, will have a material  adverse effect on its  consolidated
financial position, cash flows or liquidity.  However, such matters could have a
material effect on results of operations in a particular  quarter or fiscal year
as they develop or as new issues are identified.


(19) Subsequent Events

     Subsequent  to  December  31,  2003,  but  prior to the  issuance  of these
consolidated  financial  statements,  the  Company  entered  into the  following
transactions:

o    On March 2, 2004,  the Company  purchased  from Health Net, Inc. all of the
     outstanding  common  stock  of  American  VitalCare,  Inc.  and its  sister
     company,  Managed  Alternative  Care, Inc.  (collectively  "VitalCare") for
     approximately  $14  million  of cash and notes.  VitalCare  is a manager of
     hospital based  specialty care units in the state of California  generating
     annual operating revenues of approximately $14 million.

o    On February 2, 2004,  the Company  purchased  the assets of CPR  Therapies,
     Inc.  ("CPR")  for  approximately  $3.9  million  of cash and  notes.  CPR,
     headquartered in Denver,  Colorado,  is a contract therapy services company
     for physical rehabilitation services in skilled nursing and assisted living
     facilities  with a significant  market presence in Colorado and California.
     CPR's annual operating revenues are approximately $9 million.


                                       55
<PAGE>




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

      Not applicable.

ITEM 9A. CONTROLS AND PROCEDURES

     The Company  carried out an evaluation,  under the supervision and with the
participation of the Company's management, including the Chief Executive Officer
and Chief Financial  Officer,  of the effectiveness of the Company's  disclosure
controls and  procedures,  as defined in Rules  13a-15(e)  and  15d-15(e) of the
Securities  and  Exchange  Act of 1934.  Based  on that  evaluation,  the  Chief
Executive  Officer and Chief Financial Officer have concluded that the Company's
disclosure  controls and  procedures  as of December 31, 2003 were  effective to
ensure that information  required to be disclosed by the Company in reports that
it files or  submits  under the  Securities  Exchange  Act of 1934 is  recorded,
processed,  summarized  and  reported  within  the  time  periods  specified  in
Securities and Exchange Commission's rules and forms.

     There were no changes in the  Company's  internal  control  over  financial
reporting  that occurred  during the quarter  ended  December 31, 2003 that have
materially  affected,  or  are  reasonably  likely  to  materially  affect,  the
Company's internal control over financial reporting.


                                       56
<PAGE>


                                    PART III

 ITEM 10.DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     Certain  information  regarding our  directors  and  executive  officers is
included  in our Proxy  Statement  for the 2004 Annual  Meeting of  Stockholders
under the captions "Item 1 - Election of Directors" and "Compliance with Section
16(a) of the  Securities  Exchange  Act of 1934" and is  incorporated  herein by
reference.

     The  following  table sets forth the name,  age and position of each of our
executive officers. There is no family relationship between any of the following
individuals.
<TABLE>
<CAPTION>
Name                        Age                      Position
                                  -------------------------------------------
<S>                         <C>
John H. Short, Ph.D.....    59    Interim President and Chief Executive Officer
Mark A. Bogovich........    34    Vice President, Chief Accounting Officer
Tom E. Davis............    54    President,  Hospital  Rehabilitation  Services
                                  (Inpatient & Outpatient)
Vincent L. Germanese....    52    Senior Vice President, Chief Financial Officer
                                  and Secretary
Patricia M. Henry.......    51    President, Contract Therapy Division
</TABLE>

     The  following  paragraphs  contain  biographical   information  about  our
executive officers.

     John H. Short, Ph.D. has been Interim President and Chief Executive Officer
since June 2003 and a director of the company since 1991.  Dr. Short also serves
as  Managing  Partner of Phase 2  Consulting,  LLC, a  management  and  economic
consulting firm for the healthcare industry.  Dr. Short has been involved in the
healthcare  industry for more than 35 years,  serving as CEO and board  chairman
for numerous healthcare  organizations,  and has been the principal lead on more
than 300  consulting  and  research  projects.  Dr.  Short  received a Ph.D.  in
Economics from the University of Utah.

     Mark A. Bogovich has been Vice  President and Chief  Accounting  Officer of
the Company since  September  2003. Mr.  Bogovich joined the Company in March of
2000 and served  most  recently  as Vice  President  Finance,  contract  therapy
division. Prior to joining the Company, Mr. Bogovich was Chief Financial Officer
for Miller  Orthopaedic  Clinic,  Inc. from January of 1998 to March 2000.  From
1995 to 1997,  Mr.  Bogovich was  Controller  and Director of Accounting for the
RehabWorks,  Inc. subsidiary of Horizon/CMS Healthcare Corporation  ("Horizon").
Prior to that, he held various positions in the corporate finance  department of
Horizon.

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

     Vincent L. Germanese, CPA, has been Senior Vice President,  Chief Financial
Officer and Secretary of the Company since November  2002.  Prior to joining the
Company,  Mr.  Germanese  was Vice  President  of Cap  Gemini  Ernst & Young and
partner at Ernst & Young.  Mr. Germanese was named a partner at Ernst & Young in
1984 and held various  management  positions  during his tenure at Ernst & Young
and Cap Gemini Ernst & Young.

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

                                       57
<PAGE>

     The  Company has  adopted a Code of Ethics  that  applies to its  principal
executive officer,  principal financial officer, principal accounting officer or
controller,  or  persons  performing  similar  functions.  The Code of Ethics is
available through the Company's web site at www.rehabcare.com.


ITEM 11. EXECUTIVE COMPENSATION

     Information  regarding  executive  compensation  is  included  in our Proxy
Statement  for the 2004  Annual  Meeting  of  Stockholders  under  the  captions
"Compensation of Executive  Officers",  and "Section 16(a) Beneficial  Ownership
Reporting Compliance" and is incorporated herein by reference.


 ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
         MANAGEMENT AND RELATED STOCKHOLDER MATTERS

     Information  regarding  security ownership of certain beneficial owners and
management  is included in our Proxy  Statement  for the 2004 Annual  Meeting of
Stockholders  under  the  captions  "Voting  Securities  and  Principal  Holders
Thereof" and "Security  Ownership by Management" and is  incorporated  herein by
reference.

     The following  table provides  information as of fiscal year ended December
31, 2003 with respect to the shares of common stock that may be issued under our
existing equity compensation plans:
<TABLE>
<CAPTION>

=================================================================================
     Plan category           Number of        Weighted-   Number of securities
                             securities        average    remaining available
                            to be issued      exercise   for future issuance
                            upon exercise     price of       under equity
                            of outstanding   outstanding   compensation plans
                              options,         options,   (excluding securities
                            warrants and    warrants and     reflected in
                               rights          rights         column (a))
                                (a)             (b)               (c)
================================================================================
================================================================================
<S>                          <C>              <C>              <C>
Equity  compensation
 plans approved by
 security holders            2,781,904        $18.92           1,137,646
================================================================================
================================================================================
 Equity  compensation            -               -                 -
 plans not approved
 by security holders
================================================================================
================================================================================
       Total                 2,781,904        $18.92           1,137,646
================================================================================
</TABLE>

                                       58
<PAGE>


 ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     During 2003,  the  Company's  Board of  Directors  approved and the Company
entered into a contract with a software  vendor to develop a new public  website
for the Company.  John H. Short,  Ph.D.,  interim  President and Chief Executive
Officer and a director of our Company and  Theodore M. Wight,  a director of our
Company, are also directors of the software company. Messrs. Wight and Short and
their affiliated entities own 27.3% and 5.5% of the fully diluted capitalization
of the software  company,  respectively.  The original  contract  amount was for
$320,000 and has since been modified for expected  additional  costs of $34,500.
The work is anticipated to be completed by the second quarter of 2004.

     During the first quarter of 2004,  the Company  entered into an addendum to
the  aforementioned  contract  with the same  software  vendor to  identify  and
document  the actual  costs and  timeline  required  to complete  the  Company's
employee  portal/HR  center  project.  The  addendum to the  contract is for the
amount of $47,000  and the work is  anticipated  to be  completed  by the second
quarter of 2004.

     During 2003, the Company entered into an agreement with Phase 2 Consulting,
LLC  ("Phase  2").  Per the terms of the  agreement,  Phase 2 will  provide  the
Company with management, consulting and advisory services, including having John
H. Short,  Ph.D., the managing director of Phase 2 and a member of the Company's
Board of Directors,  serve as interim  President and Chief Executive  Officer of
the Company.  A monthly consulting fee of $55,000 will be paid to Phase 2 during
the term of the agreement plus reimbursement of business expenses.  In addition,
Phase 2 will be entitled to an incentive  fee capped at $1.3 million  payable in
cash or  shares  of the  Company's  stock  based  on  predetermined  performance
standards.  During 2003, the Company recorded  approximately $680,000 of expense
under this agreement and made payments to Phase 2 of approximately $556,000.


 ITEM 14.PRINCIPAL ACCOUNTANT FEES AND SERVICES

     Information regarding principal accountant fees and services is included in
our Proxy  Statement  for the 2004  Annual  Meeting of  Stockholder's  under the
caption "Information  Regarding the Independence of Independent Auditors" and is
incorporated herein by reference.



                                       59
<PAGE>


                                     PART IV

 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

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

        (1)Financial Statements
             Independent Auditors' Report
             Consolidated Balance Sheets as of December 31, 2003 and 2002
             Consolidated Statements of Earnings for the years ended
                  December 31, 2003, 2002 and 2001
             Consolidated Statements of Stockholders' Equity for the years ended
                  December 31, 2003, 2002 and 2001
             Consolidated Statements of Cash Flows for the years ended
                  December 31, 2003, 2002 and 2001
             Notes to Consolidated Financial Statements

        (2)Financial Statement Schedules:
             None
        (3)Exhibits:
             See Exhibit Index on page 62 of this Annual Report on Form 10-K.

    (b) Reports on Form 8-K

           The Registrant filed or furnished the following reports on Form
        8-K during the three months ended December 31, 2003:

             October 30, 2003
                  Item 12 Results of Operations and Financial Condition
                  Press release dated October 30, 2003 announcing the
                  Registrant's earnings for the 3rd quarter of 2003

             December 31, 2003
                  Item 5 Stock Purchase and Sale Agreement dated December 30,
                  2003 with InteliStaf Holdings, Inc.



                                       60
<PAGE>


 SIGNATURES


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

 Dated: March 12, 2004
                              REHABCARE GROUP, INC.
                                   (Registrant)

                              By: /s/ JOHN H. SHORT
                                  John H. Short
                                  Interim 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.
<TABLE>
<CAPTION>
 Signature                        Title                           Dated
<S>                               <C>                             <C>
 /s/ JOHN H. SHORT                Interim President, Chief        March 12, 2004
 ----------------------------     Executive Officer and
 John H. Short                    Director
 (Principal Executive Officer)

 /s/ VINCENT L. GERMANESE         Senior Vice President,          March 12, 2004
 ----------------------------     Chief Financial Officer
 Vincent L. Germanese             and Secretary
 (Principal Financial Officer)

 /s/ MARK A. BOGOVICH             Vice President and              March 12, 2004
 ----------------------------     Chief Accounting Officer
 Mark A. Bogovich
 (Principal Accounting Officer)

 /s/ WILLIAM G. ANDERSON          Director                        March 12, 2004
 ----------------------------
 William G. Anderson

 /s/ C. R.  HOLMAN                Director                        March 12, 2004
 ----------------------------
 C. R. Holman

 /s/ H. EDWIN TRUSHEIM            Director                        March 12, 2004
 ----------------------------
 H. Edwin Trusheim

 /s/ COLLEEN CONWAY-WELCH         Director                        March 12, 2004
 ----------------------------
 Colleen Conway-Welch

 /s/ THEODORE M. WIGHT            Director                        March 12, 2004
 ----------------------------
 Theodore M. Wight
</TABLE>

                                       61
<PAGE>


                                  EXHIBIT INDEX


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

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

3.3   Amended and Restated Bylaws (filed as Exhibit 3.3 to the Registrant's
      Quarterly Report on Form 10-Q for the quarter ended September 30, 2002 and
      incorporated herein by reference)

4.1   Rights Agreement, dated August 28, 2002, by and between the Registrant and
      Computershare Trust Company, Inc. (filed as Exhibit 1 to the Registrant's
      Registration Statement on Form 8-A filed September 5, 2002 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  Consulting Arrangement with Phase II Consulting, LLC *

10.4  Consulting Arrangement with Alan C. Henderson *

10.5  Form of Termination Compensation Agreement for other executive officers
      (filed as Exhibit 10.5 to the Registrant's Report on Form 10-K, dated
      March 15, 2002, 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) *

                                       62
<PAGE>

                             EXHIBIT INDEX (CONT'D)

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 definitive Proxy Statement for the 1994 Annual Meeting of
      Stockholders and incorporated herein by reference) *

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

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

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

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

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

13.1  Those portions of the Registrant's Annual Report to Stockholders for the
      year ended December 31, 2003 included in response to Items 5 and 6 of this
      Annual Report on Form 10-K

21.1  Subsidiaries of the Registrant

23.1  Consent of KPMG LLP

31.1  Certification by Interim Chief Executive Officer pursuant to Rule
      13a-14(a) under the Securities Exchange Act of 1934, as amended.

31.2  Certification by Chief Financial Officer pursuant to Rule 13a-14(a) under
      the Securities Exchange Act of 1934, as amended.

                                       63
<PAGE>

                                EXHIBIT INDEX (CONT'D)

32.1  Interim Chief Executive Officer certification of periodic financial report
      pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002. U.S.C. Section
      1350.

32.2  Chief Financial Officer certification of periodic financial report
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. U.S.C.
      Section 1350.


-------------------------
* Management contract or compensatory plan or arrangement.

                                       64
<PAGE>
                                                                    EXHIBIT 13.1
<TABLE>
<CAPTION>
SIX-YEAR FINANCIAL SUMMARY
Dollars in thousands, except per share data
--------------------------------------------------------------------------------
(Year ended December 31,) 2003      2002      2001      2000     1999      1998
--------------------------------------------------------------------------------
Consolidated statement of earnings data:
<S>                   <C>       <C>       <C>      <C>       <C>       <C>
Operating revenues    $539,322  $562,565  $542,265  $452,374 $309,425  $207,416
Operating earnings
 (loss)(1)(2)(8)       (14,396)   39,697    36,967    44,189   29,922    23,331
Net earnings (loss)
 (1)(2)(3)(8)          (13,699)   24,395    21,035    23,534   15,098    12,198
Net earnings (loss)
 per share (EPS):
 (1)(2)(3)(4)(8)
      Basic           $  (0.86) $   1.45  $   1.25  $   1.62 $   1.15  $   0.99
      Diluted         $  (0.86) $   1.38  $   1.16  $   1.45 $   1.03  $   0.86
Weighted average
 shares outstanding
 (000s):(4)
      Basic             16,000    16,833    16,775    14,563   13,144    12,368
      Diluted           16,000    17,642    18,077    16,268   14,814    14,490
--------------------------------------------------------------------------------
Consolidated balance sheet data:
Working capital       $ 76,952  $ 67,846  $ 77,524  $ 64,186 $ 27,069  $ 20,606
Total assets           233,626   235,530   250,661   229,093  187,264   156,870
Total liabilities       55,671    46,916    51,625   111,133  109,481    96,714
Stockholders' equity   177,955   188,614   199,036   117,960   77,783    60,156
--------------------------------------------------------------------------------
Financial statistics:
Operating margin (2)(8)   (2.7)%     7.1%      6.8%      9.8%     9.7%     11.3%
Net margin(1)(2)(3)(8)    (2.5)%     4.3%      3.9%      5.2%     4.9%      5.9%
Current ratio              2.9:1    2.8:1     2.7:1     2.6:1    1.6:1     1.5:1
Diluted EPS growth rate
 (1)(2)(3)(5)(8)        (162.3)%    19.0%   (20.0)%     40.8%    19.8%     17.8%
Return on equity
  (1)(2)(3)(5)(8)         (7.5)%    12.6%     13.3%     24.0%    21.9%     24.4%
--------------------------------------------------------------------------------
Operating statistics:
Healthcare staffing:
  Average number of
    branch offices(6)       73       108       108        89       55        16
  Number of weeks
    worked(7)          141,114   182,552   233,898   223,951  131,110    52,265
Program management:
Inpatient units
 (acute rehabilitation
 and skilled nursing):
  Average number of
    programs               133       135       137       136      132       128
  Average admissions
    per program            422       411       394       373      369       354
  Average length of stay
    (days/discharge)      12.9      13.3      13.8      14.3     14.5      14.7
  Patient days         721,570   737,017   746,583   725,497  706,822   665,403
Outpatient programs:
  Average number
    of locations            48        55        61        53       40        26
  Patient visits     1,247,534 1,366,439 1,439,169 1,173,324  785,943   378,108
Contract therapy:
  Average number
    of locations           460       378       250       156       91        50
</TABLE>
--------------------------------------------------------------------------------
(1)  The  results for 2002  reflect  the  adoption  of  Statement  of  Financial
     Accounting  Standards  No. 142 "Goodwill  and Other  Intangible  Assets" on
     January 1, 2002.
(2)  The results for 2001 include $9.0 million in non-recurring  charges related
     to our supplemental staffing division.
(3)  The results for 2001  include a pretax loss of $0.5 million  ($0.3  million
     after tax or $0.02 per share) on write-down of an  investment.  The results
     for 1999 include a pretax loss of $1.0 million  ($0.6  million after tax or
     $0.05 per share) on write-down of investments. The results for 1998 include
     pretax gains of $1.5 million  ($0.9  million  after tax or $0.06 per share)
     and $1.4 million ($0.9 million after tax or $0.06 per share), respectively,
     from sales of  marketable  securities.  In  addition,  the results for 1998
     include  a  $0.8  million  ($0.05  per  share)  after-tax  charge  for  the
     cumulative effect of change in accounting for start-up costs.
(4)  Share data adjusted for 2-for-1 stock split in June 2000.
(5)  Average of beginning and ending equity.
(6)  We entered the supplemental  staffing business in August 1998 following the
     acquisition of StarMed Staffing, Inc.
(7)  Includes both supplemental and travel weeks worked.
(8)  The results for 2003 include a pretax  restructuring charge of $1.3 million
     ($0.8  million  after tax or $0.05 per diluted  share) and a pretax loss on
     net assets held for sale of $43.6 million ($30.6 million after tax or $1.90
     per diluted share).               65
<PAGE>

                                                                    EXHIBIT 13.1

Stock Data

The Company's  common stock is listed and traded on the New York Stock  Exchange
under the symbol "RHB". The stock prices below are the high and low closing sale
prices  per  share of our  common  stock,  as  reported  on the New  York  Stock
Exchange, for the periods indicated.
<TABLE>
<CAPTION>
CALENDAR QUARTER   1st          2nd         3rd         4th
-----------------------------------------------------------
<S>              <C>         <C>         <C>          <C>
2003   High      $20.70      $18.45      $18.56       $23.01
------------------------------------------------------------
       Low        16.55       13.53       14.25        14.88
------------------------------------------------------------
2002   High       30.00       29.51       24.97        23.64
------------------------------------------------------------
       Low        20.25       23.30       16.30        18.85
------------------------------------------------------------
</TABLE>

The  Company  has not paid  dividends  on its common  stock  during the two most
recently  completed  fiscal years and has not declared any dividends  during the
current fiscal year.  The Company does not  anticipate  paying cash dividends in
the foreseeable future.

The number of holders of the  Company's  common  stock as of March 8, 2004,  was
approximately  10,500,  including  557  shareholders  of record and an estimated
9,900 persons or entities holding common stock in nominee name.

Shareholders may receive earnings news releases,  which provide timely financial
information,  by notifying our investor relations  department or by visiting our
website: http://www.rehabcare.com

                                       66
<PAGE>


                                                                    EXHIBIT 21.1

                           Subsidiaries of Registrant


      Subsidiary                            Jurisdiction of Organization


American VitalCare, Inc.                        State of California

Managed Alternative Care, Inc.                  State of California

StarMed Management, Inc.                        State of Delaware

RehabCare Group East, Inc.                      State of Delaware

RehabCare Group Management Services, Inc.       State of Delaware

RehabCare Group of California, Inc.             State of Delaware

RehabCare Texas Holdings, Inc.                  State of Delaware

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

Salt Lake Physical Therapy Associates, Inc.     State of Utah



                                       67
<PAGE>





                                                                    EXHIBIT 23.1


                          Independent Auditors' Consent

The Board of Directors
RehabCare Group, Inc.:

We consent to the  incorporation by reference in the registration  statement No.
33-43236  on  Form  S-8,  registration  statement  No.  33-67944  on  Form  S-8,
registration  statement  No.  33-82106 on Form S-8,  registration  statement No.
33-82048 on Form S-8,  registration  statement  No.  333-11311  on Form S-8, and
registration statement No. 333-86679 on Form S-8 of RehabCare Group, Inc. of our
report  dated  February 2, 2004,  except as to Note 19,  which is as of March 2,
2004, with respect to the consolidated  balance sheets of RehabCare Group,  Inc.
and subsidiaries as of December 31, 2003 and 2002, and the related  consolidated
statements of earnings,  stockholders'  equity and cash flows for the three-year
period ended  December 31, 2003,  which report  appears in the December 31, 2003
annual  report on Form 10-K of RehabCare  Group,  Inc. Our report  refers to the
adoption of Statement of Financial  Accounting  Standards No. 142, "Goodwill and
Other Intangibles."


/s/ KPMG LLP


St. Louis, Missouri
March 12, 2004


                                       68
<PAGE>


                                                                    EXHIBIT 31.1
                                  CERTIFICATION

I, John H. Short, certify that:

1.   I have reviewed this annual  report on Form 10-K of RehabCare  Group,  Inc.
     (the "Registrant"):

2.   Based on my  knowledge,  this  annual  report  does not  contain any untrue
     statement of a material fact or omit to state a material fact  necessary to
     make the statements  made, in light of the  circumstances  under which such
     statements  were made, not misleading with respect to the period covered by
     this annual report;

3.   Based on my  knowledge,  the  financial  statements,  and  other  financial
     information included in this annual report,  fairly present in all material
     respects the financial  condition,  results of operations and cash flows of
     the Registrant as of, and for, the periods presented in this annual report;

4.   The  Registrant's  other  certifying  officer  and  I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules  13a-15(e) and  15d-15(e))  for the Registrant and we
     have:

     a)   designed  such  disclosure  controls  and  procedures,  or caused such
          disclosure   controls  and   procedures  to  be  designed   under  our
          supervision,  to ensure  that  material  information  relating  to the
          Registrant,  including its consolidated subsidiaries, is made known to
          us by others within those entities,  particularly during the period in
          which this annual report is being prepared;

     b)   evaluated the  effectiveness of the Registrant's  disclosure  controls
          and procedures and presented in this report our conclusions  about the
          effectiveness of the disclosure controls and procedures, as of the end
          of the period covered by this annual report based on such  evaluation;
          and

     c)   disclosed  in this  report  any  change in the  Registrant's  internal
          control over financial reporting that occurred during the Registrant's
          most recent fiscal quarter (the Registrant's  fourth fiscal quarter in
          the case of an annual  report)  that has  materially  affected,  or is
          reasonably  likely to materially  affect,  the  Registrant's  internal
          control over financial reporting; and

5.   The Registrant's  other certifying  officer and I have disclosed,  based on
     our most recent evaluation of internal control over financial reporting, to
     the Registrant's  auditors and the audit committee of Registrant's board of
     directors (or persons performing the equivalent function):

     a)   all significant  deficiencies and material weaknesses in the design or
          operation  of internal  control  over  financial  reporting  which are
          reasonably  likely to  adversely  affect the  Registrant's  ability to
          record, process, summarize and report financial information; and

     b)   any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  Registrant's  internal
          control over financial reporting.


          Date: March 12, 2004                            By: /s/ John H. Short
                                                              -----------------
                                                                 John H. Short,
                                                          Interim President and
                                                        Chief Executive Officer

                                       69
<PAGE>


                                                                    EXHIBIT 31.2
                                  CERTIFICATION

I, Vincent L. Germanese, certify that:

1.   I have reviewed this annual  report on Form 10-K of RehabCare  Group,  Inc.
     (the "Registrant"):

2.   Based on my  knowledge,  this  annual  report  does not  contain any untrue
     statement of a material fact or omit to state a material fact  necessary to
     make the statements  made, in light of the  circumstances  under which such
     statements  were made, not misleading with respect to the period covered by
     this annual report;

3.   Based on my  knowledge,  the  financial  statements,  and  other  financial
     information included in this annual report,  fairly present in all material
     respects the financial  condition,  results of operations and cash flows of
     the Registrant as of, and for, the periods presented in this annual report;

4.   The  Registrant's  other  certifying  officer  and  I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules  13a-15(e) and  15d-15(e))  for the Registrant and we
     have:

     a)   designed  such  disclosure  controls  and  procedures,  or caused such
          disclosure   controls  and   procedures  to  be  designed   under  our
          supervision,  to ensure  that  material  information  relating  to the
          Registrant,  including its consolidated subsidiaries, is made known to
          us by others within those entities,  particularly during the period in
          which this annual report is being prepared;

     b)   evaluated the  effectiveness of the Registrant's  disclosure  controls
          and procedures and presented in this report our conclusions  about the
          effectiveness of the disclosure controls and procedures, as of the end
          of the period covered by this annual report based on such  evaluation;
          and

     c)   disclosed  in this  report  any  change in the  Registrant's  internal
          control over financial reporting that occurred during the Registrant's
          most recent fiscal quarter (the Registrant's  fourth fiscal quarter in
          the case of an annual  report)  that has  materially  affected,  or is
          reasonably  likely to materially  affect,  the  Registrant's  internal
          control over financial reporting; and

5.   The Registrant's  other certifying  officer and I have disclosed,  based on
     our most recent evaluation of internal control over financial reporting, to
     the Registrant's  auditors and the audit committee of Registrant's board of
     directors (or persons performing the equivalent function):

     a)   all significant  deficiencies and material weaknesses in the design or
          operation  of internal  control  over  financial  reporting  which are
          reasonably  likely to  adversely  affect the  Registrant's  ability to
          record, process, summarize and report financial information; and

     b)   any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  Registrant's  internal
          control over financial reporting.

          Date:  March 12, 2004                 By: /s/    Vincent L. Germanese
                                                    ---------------------------
                                                           Vincent L. Germanese
                                                          Senior Vice President,
                                           Chief Financial Officer and Secretary

                                       70
<PAGE>


                                                                    EXHIBIT 32.1
                            CERTIFICATION PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of RehabCare Group, Inc. (the "Company") on
Form 10-K for the period ending  December 31, 2003 as filed with the  Securities
and  Exchange  Commission  on the date hereof (the  "Report"),  I John H. Short,
Interim President and Chief Executive Officer of the Company,  certify, pursuant
to  18  U.S.C.  section  1350,  as  adopted  pursuant  to  section  906  of  the
Sarbanes-Oxley Act of 2002, that:

(1)  The Report fully complies with the  requirements  of section 13(a) or 15(d)
     of the Securities Exchange Act of 1934; and

(2)  The information  contained in the Report fairly  presents,  in all material
     respects, the financial condition and results of operations of the Company.


                                               By:/s/   John H. Short
                                                      -------------------------
                                                        John H. Short
                                                        Interim President and
                                                        Chief Executive Officer
                                                        RehabCare Group, Inc.
                                                        March 12, 2004


A signed  original  of the  written  statement  required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.

                                       71
<PAGE>

                                                                    EXHIBIT 32.2
                            CERTIFICATION PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of RehabCare Group, Inc. (the "Company") on
Form 10-K for the period ending  December 31, 2003 as filed with the  Securities
and  Exchange  Commission  on the date  hereof  (the  "Report"),  I  Vincent  L.
Germanese,  Senior Vice President,  Chief Financial Officer and Secretary of the
Company,  certify,  pursuant to 18 U.S.C.  section 1350, as adopted  pursuant to
section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)  The Report fully complies with the  requirements  of section 13(a) or 15(d)
     of the Securities Exchange Act of 1934; and

(2)  The information  contained in the Report fairly  presents,  in all material
     respects, the financial condition and results of operations of the Company.


                                               By:/s/   Vincent L. Germanese
                                                      -------------------------
                                                        Vincent L. Germanese
                                                        Senior Vice President,
                                                        Chief Financial Officer
                                                        and Secretary
                                                        RehabCare Group, Inc.
                                                        March 12, 2004


A signed  original  of the  written  statement  required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.

                                       72