<PAGE>
 
                                   FORM 10-Q

                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

(Mark One)

[X]       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                 SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended February 28, 1997
                               ----------------------------------------------

                          OR

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

For the transition period from_______________________ to _____________________

Commission file number  1-7008
                       -------------------------------------------------------
--------------------------------------------------------------------------------

                          TRANSITIONAL HOSPITALS CORPORATION
                 ------------------------------------------------------
          (Exact name of registrant as specified in its charter)

            NEVADA                                            94-1599386
-------------------------------------------------   ----------------------------
(State or other jurisdiction of                      (I.R.S. Employer I.D. No.)
 incorporation or organization)
 
      5110 W. Sahara Avenue, Las Vegas, Nevada                  89102
--------------------------------------------------------------------------------
     (Address of principal executive offices)                 (Zip Code)
 
Registrant's telephone number, including area code (702)257-3600
                                                   -------------
                                 Not Applicable
 ------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)

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 and (2) has been subject to such filing requirements for
the past 90 days.

                               Yes  X     No 
                                   ----      ----  

Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date: 38,829,000  as of March 31,
                                                ------------                
1997.

Total number of pages:  10
Exhibit Index at page:   9

                                  Page 1 of 10
<PAGE>
 
PART I.   FINANCIAL INFORMATION

          ITEM 1.  FINANCIAL STATEMENTS

              TRANSITIONAL HOSPITALS CORPORATION AND SUBSIDIARIES
            CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
 
                                            Three Months Ended
                                              February 28/29
                                             1997        1996
                                              (000s omitted
                                              -------------
                                          except per share data)
                                          ----------------------
<S>                                       <C>          <C>
REVENUES:
 
  Net operating revenues                     $74,916    $127,489
  Investment and other income                  2,528         486
                                             -------    --------
                                              77,444     127,975
COSTS AND EXPENSES:
 
  Operating expense                           58,992     101,277
  General and administrative expense           5,309       7,935
  Bad Debt expense                             1,579       4,899
  Depreciation and amortization                3,499       5,643
  Interest expense                               358       1,373
  Non-recurring transactions                      --         843
                                             -------    --------
                                              69,737     121,970
 
INCOME BEFORE TAXES                            7,707       6,005
 
  Income taxes                                 3,006       2,282
                                             -------    --------
 
NET INCOME                                   $ 4,701    $  3,723
                                             =======    ========
 
NET INCOME PER SHARE                         $  0.12    $   0.09
                                             =======    ========
 
WEIGHTED AVERAGE COMMON SHARES                40,697      43,702
                                             =======    ========
 
</TABLE>


See notes to condensed consolidated financial statements.

                                  Page 2 of 10
<PAGE>
 
              TRANSITIONAL HOSPITALS CORPORATION AND SUBSIDIARIES
                     CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
 
                                                           February 28    November 30
                                                               1997          1996
                                                           (Unaudited)     (Audited)
                                                          --------------   ----------
                                                                  (000s omitted)
<S>                                                       <C>              <C>
ASSETS 
------ 

CURRENT:
  Cash and cash equivalents                                    $ 56,423    $ 84,313
  Short-term investments                                         11,810      16,777
  Accounts receivable, less allowances
    for doubtful accounts
    1997 - $21,112/1996 - $21,448                                58,741      55,557
  Prepaid expenses and other current assets                      15,830      14,784
  Property held for sale                                         13,393      13,393
  Refundable and deferred income taxes                           25,216      21,419
                                                               --------    --------
  TOTAL CURRENT ASSETS                                          181,413     206,243
 
PROPERTY, BUILDINGS & EQUIPMENT-at
    cost less allowances for depreciation                       155,524     153,933
 
Investment in affiliate                                          70,368      69,859
Refundable and deferred income taxes                              7,281      15,966
Other assets                                                     23,299      19,946
                                                               --------    --------
                                                               $437,885    $465,947
                                                               ========    ========
 
LIABILITIES & STOCKHOLDERS' EQUITY
----------------------------------
 
CURRENT:
  Accounts payable                                             $  7,708    $  9,136
  Accrued payroll and other expenses                             17,394      15,680
  Payable to third parties under
    reimbursement contracts                                      16,477      13,954
  Due to broker for stock repurchase plan                         7,447          --
  Other accrued liabilities                                       5,260      17,796
  Current maturities on long-term debt                            8,416       8,467
                                                               --------    --------
TOTAL CURRENT LIABILITIES                                        62,702      65,033
LONG-TERM DEBT, EXCLUSIVE OF CURRENT
  MATURITIES                                                     12,706      14,858
DEFERRED INCOME TAXES AND OTHER LIABILITIES                       4,183       3,857
 
STOCKHOLDERS' EQUITY:
  Preferred stock, par value $1.00, authorized
   2,000 shares; none issued                                         --          --
   Common Stock, par value $1.00, authorized
    100,000 shares; issued 1997 - 46,856
    shares 1996 - 46,856 shares                                  46,856      46,856
  Additional paid-in capital                                     56,661      56,657
  Unrealized gains on investments in debt securities                 75         163
  Retained earnings                                             326,411     321,710
  Less treasury stock-at cost 1997 - 8,028
    shares and 1996 - 4,988 shares                              (71,709)    (43,187)
                                                               --------    --------
                                                                358,294     382,199
                                                               --------     -------
                                                               $437,885    $465,947
                                                               ========    ========
</TABLE>                           

NOTE: The balance sheet at November 30, 1996 has been derived from the audited
      financial statement at that date but does not include all of the
      information and footnotes required by generally accepted accounting
      principles for complete financial statements.

See notes to condensed consolidated financial statements.

                                  Page 3 of 10
<PAGE>
 
              TRANSITIONAL HOSPITALS CORPORATION AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                         Quarter Ended
                                                        February 28/29
                                                    1997 (Unaudited) 1996
                                                    ---------------------
                                                        (000s omitted)
<S>                                                  <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income                                           $  4,701    $  3,723
  Adjustments to reconcile net income to
   cash used for operating activities:
    Depreciation and amortization                       3,499       5,643
    Provision for uncollectible accounts                1,579       4,703
    Nonrecurring transactions                              --         843
    Other                                              (1,197)      1,050
  Changes in assets and liabilities, exclusive
    of business acquisitions and disposals:
    Accounts receivable                                (4,763)    (10,153)
    Receivable from/payable to third parties
      under reimbursement contracts                     2,523        (646)
    Prepaid expenses and other current assets          (2,596)     (4,282)
    Accounts payable and accrued expenses                 417      (6,362)
    Other accrued liabilities                         (12,536)     (2,661)
    Income taxes                                        4,946       7,078
                                                     --------    --------
Net cash used for operations                           (3,427)     (1,064)
 
CASH FLOWS FROM FINANCING ACTIVITIES:
  Purchase of treasury shares                         (21,084)         --
  Net proceeds from exercise of stock options              10         150
  Payments on long-term debt                           (2,204)     (3,568)
                                                     --------    --------
Net cash used for financing activities                (23,278)     (3,418)
 
CASH FLOWS FROM INVESTING ACTIVITIES:
  Proceeds from sales of short-term investments        11,698       5,601
  Purchases of short-term investments                  (6,819)         --
  Payments received on notes                            1,753         341
  Loans made to officers                                   --        (750)
  Purchase of property, buildings and equipment        (3,989)    (10,482)
  Investment in joint venture                          (3,191)         --
  Investment in pre-opening costs                        (637)       (282)
                                                     --------    --------
Net cash used for investing activities                 (1,185)     (5,572)
                                                     --------    --------
 
Net decrease in cash and cash equivalents             (27,890)    (10,054)
Beginning cash and cash equivalents                    84,313      17,263
                                                     --------    --------
 
Ending cash and cash equivalents                     $ 56,423    $  7,209
                                                     ========    ========
 
</TABLE>

See notes to condensed consolidated financial statements.

                                  Page 4 of 10
<PAGE>
 
              TRANSITIONAL HOSPITALS CORPORATION AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                               FEBRUARY 28, 1997



NOTE A:   Basis of Presentation
          ---------------------

               The accompanying unaudited condensed consolidated financial
          statements have been prepared in accordance with generally accepted
          accounting principles for interim financial information and with the
          instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
          Accordingly, they do not include all of the information and footnotes
          required by generally accepted accounting principles for complete
          financial statements.  In the opinion of management, all adjustments
          (consisting of normal recurring accruals) considered necessary for a
          fair presentation have been included.  For further information, refer
          to the consolidated financial statements and footnotes thereto
          included in the registrant's annual report on Form 10-K for the year
          ended November 30, 1996.

NOTE B:   Due to broker for stock repurchase plan
          ---------------------------------------

               The Company purchased .8 million shares of its own stock on the
          open market for $7.4 million from February 26, 1997 through February
          28, 1997.  The payments for the aforementioned purchases were made on
          the applicable settlement dates which spanned from March 3, 1997
          through March 5, 1997.  The $7.4 million was due to the Company's
          broker at February 28, 1997 and is reflected as such on the February
          28, 1997 balance sheet.



          Forward Looking Information:

               The discussion in this document contains forward looking
          statements pertaining to development plans and future cash flows.
          Actual results could differ materially from those projected and there
          can be no assurance that these future results will be achieved.
          Readers are cautioned that a number of factors could adversely affect
          the Company's ability to obtain these results including: (a) changes
          in the regulatory environment, including changes in Medicare and
          Medicaid reimbursement programs, (b) the availability of suitable
          acquisition candidates and the Company's success in negotiating
          favorable terms to complete acquisitions, and (c) difficulties in
          obtaining government approvals necessary for licensure of new
          facilities.


                                        

                                  Page 5 of 10
<PAGE>
 
PART I.   FINANCIAL INFORMATION

          ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
                   AND FINANCIAL CONDITION

              TRANSITIONAL HOSPITALS CORPORATION AND SUBSIDIARIES

Results of Operations

THREE MONTHS ENDED FEBRUARY 28, 1997

     Net operating revenues for the quarter ended February 28, 1997 were $74.9
million compared to $127.5 million for the first quarter of the prior year.  The
decrease in net operating revenues was the result of the sale of the Company's
United Kingdom and U.S. psychiatric operations in June 1996 and November 1996,
respectively.

     Net operating revenues from the Company's long-term acute care hospitals
increased 23.2% from $60.0 million in the first quarter of 1996 to $73.9 million
in the first quarter of 1997.  THC's admissions and patient days increased 29.6%
and 13.9%, respectively.  Net revenue per patient day increased 7.6% as a result
of more favorable prior period Medicare settlements in the current period
compared to the first quarter of 1996.  Net operating revenue from respiratory
therapy services increased from $4.9 million in the first quarter of 1996 to
$6.4 million in the first quarter of 1997 due to an approximate 35% increase in
the number of contracts in effect during the applicable periods.

     Investment and other income increased $2.0 million from $.5 million in the
first quarter of 1996 to $2.5 million in the first quarter of 1997.  Interest
income increased $1.5 million due to higher cash and short-term investment
balances that resulted from the sales of the United Kingdom and U.S. psychiatric
operations during 1996.  Also contributing to the increase was $.8 million of
equity earnings from the Company's unconsolidated affiliate, Behavioral
Healthcare Corporation ("BHC").  The Company acquired an approximate 44.2%
common equity interest in BHC as partial consideration for the sale of
substantially all of its psychiatric operations to BHC on November 30, 1996.

     Operating expenses as a percentage of net operating revenues were 78.7% for
the quarter ended February 28, 1997 compared to 79.4% for the comparable prior
year quarter.  The decrease in operating expenses as a percentage of net
operating revenues is due to the sale of the U.S. psychiatric operations at the
close of fiscal 1996, which have historically incurred higher operating expenses
as a percentage of net operating revenue than the Company's long-term acute care
hospitals.

     General and administrative expense decreased $2.6 million for the first
quarter of 1997 compared to the first quarter of 1996.  Reductions in corporate
overhead were implemented with the sales of the U.S. and U.K. psychiatric
divisions in June 1996 and November 1996, respectively.

     Bad debt expense decreased from 3.8% of net operating revenues in 1996 to
2.1% of net operating revenues in the first quarter of 1997.  The decrease is
primarily due to the sale of U.S. psychiatric operations at the close of fiscal
1996, which have historically incurred higher bad debt expense as a percentage
of net operating revenues than the Company's long-term acute care hospitals.

     Depreciation and amortization decreased $2.1 million from $5.6 million in
the first quarter of 1996 to $3.5 million in the first quarter of 1997.  The
decrease is due to the sale of the Company's United Kingdom and U.S. psychiatric
operations during 1996.  Depreciation and amortization as a percentage of net
operating revenues was 4.7% and 4.4% for the first quarters of 1997 and 1996,
respectively.

     Interest expense decreased by $1.0 million in the first quarter of 1997
compared to the first quarter of 1996 as the Company repaid $80.3 million of
long-term debt during fiscal year 1996.

                                  Page 6 of 10
<PAGE>
 
PART I.   FINANCIAL INFORMATION

          ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
                    OPERATIONS AND FINANCIAL CONDITION

Results of Operations (continued)

THREE MONTHS ENDED FEBRUARY 28, 1997 (continued)

     Non-recurring transaction costs totaling $.8 million for termination 
benefits and other exit costs were incurred during the first quarter of 1996 in
connection with the decision to close one psychiatric hospital in January 1996.
There were no non-recurring transactions during the first quarter of fiscal
1997.

LIQUIDITY AND CAPITAL RESOURCES AT FEBRUARY 28, 1997

     Cash flows used for operations were $3.4 million and $1.1 million for the
quarters ended February 28, 1997 and February 29, 1996, respectively.  Amounts
paid in the first quarter of 1997 for severance and other exit costs related to
the sale of the U.S. psychiatric division exceeded by $9.9 million amounts paid
for similar costs in the first quarter of 1996 related to the closure of six
U.S. psychiatric hospitals, three regional offices and corporate severance.  The
$9.9 million increase in payments for these costs was partially offset by a $7.6
million increase in cash flows from operating activities.

     In 1996, the Company's Board of Directors authorized spending up to $75
million to buy back company stock from time to time on the open market.  In
accordance with this authorization, the Company purchased 4.2 million shares for
$35.8 million during the third and fourth quarters of 1996.  During the first
quarter of 1997, an additional 3.0 million shares were purchased for $28.5
million. Of the $28.5 million, $21.1 million was paid by the Company during the
quarter ended February 28, 1997 and $7.4 million was paid in March 1997 for
purchases made on the last three days of February 1997.

     Purchases of fixed assets totaled $4.0 million during the first quarter of
1997 compared to $10.5 million during the first quarter of 1996. Capital
expenditures for the remainder of fiscal year 1997 are estimated to be $22
million for renovation and expansion of existing facilities and equipment
additions.  In addition, the Company will pay approximately $5 million over the
remainder of fiscal 1997 for a new computer system.

     The Company's development focus is primarily on expanding and enhancing the
long-term acute care business as well as, to a lesser extent, on developing new
business in Puerto Rico, Latin America and Europe where the Company believes
that it has the experience and opportunities to provide cost effective
healthcare services.  In the first quarter of 1997, the Company opened two new
THC facilities.  In addition, the Company made an investment of $3.2 million in
a joint venture whereby the Company and its joint venture partner will build and
operate a drug and alcohol treatment facility on the island of Antigua.  The
Company's investment in the joint venture is included in other assets at
February 28, 1997.

     The Company believes that its current cash and cash equivalent balances
along with its operating cash flow will be sufficient to fund the Company's
normal operating requirements through the end of fiscal 1997.

                                  Page 7 of 10
<PAGE>
 
              TRANSITIONAL HOSPITALS CORPORATION AND SUBSIDIARIES

                               FEBRUARY 28, 1997


PART II.  OTHER INFORMATION

     ITEM 1.  LEGAL PROCEEDINGS
              -----------------

          In July 1995, the Government served a whistleblower suit against the
     Company's Subsidiary, CPC Oklahoma, Inc., under the Federal False Claims
     Act.  CPC Oklahoma, Inc. operated Southwind Hospital, a psychiatric
     hospital located in Oklahoma City, Oklahoma.  The suit was originally filed
     by a former employee and a relative of another employee under the qui tam
     provisions of the Act.  Invoking its rights under the Act, the United
     States took over the case.  In November 1996, Southwind and the Government
     reached an agreement in principle under which Southwind would pay $750,000
     to the Government in exchange for a release of the Government's civil and
     administrative claims.  The settlement was paid in February 1997.  In a
     related action, on August 4, 1995, federal and state authorities executed a
     search warrant at Southwind and seized various records.  In December 1996,
     the Government notified Southwind that it had decided to discontinue any
     further criminal investigation of this matter.

          The Company is subject to ordinary and routine litigation incidental
to its business, including those arising from patient treatment, injuries or
death for which it is covered by liability insurance, and those arising from
actions involving employees. Management believes that the ultimate resolution of
such proceedings will not have a material adverse effect on the Company.


     ITEM 6:  EXHIBITS AND REPORTS ON FORM 8-K:
              -------------------------------- 

     A)   The following exhibits are included herein:

          Exhibit 11: Computation of Earnings per Share

          Exhibit 27: Financial Data Schedule

          The registrant was not required to file a Form 8-K during the three
          months ended February 28, 1997.



                                   SIGNATURES
                                   ----------



Pursuant to the requirements 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.



                          TRANSITIONAL HOSPITALS CORPORATION
                                  (Registrant)



Dated:  April 11, 1997          /s/ WENDY SIMPSON
                                ------------------------------
                                Wendy Simpson
                                Chief Financial Officer

                                  Page 8 of 10
<PAGE>
 
                                 EXHIBIT INDEX



Exhibit                                                    Page No.
-------                                                    --------



 11       Computation of Earnings Per Share                 10

 27       Financial Data Schedule  

                                                                    Page 9 of 10