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

                                   FORM 10-KSB
            (Mark One)
            [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                SECURITIES EXCHANGE ACT OF 1934

                     For the fiscal year ended June 30, 1998

            [ ] 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: 0-19726

                     MEADOWBROOK REHABILITATION GROUP, INC.
                 (Name of small business issuer in its charter)

                   DELAWARE                              94-3022377
         (State or other jurisdiction of             (I.R.S. Employer
         incorporation or organization)               Identification No.)

          2000 Powell Street, Suite 1203, Emeryville, California 94608
               (Address of principal executive offices) (Zip Code)

                    Issuer's telephone number: (510) 420-0900
                              ---------------------
         Securities registered under Section 12(b) of the Exchange Act:
                                      None

         Securities registered under Section 12(g) of the Exchange Act:
                 Class A Common Stock, par value $0.01 per share
                                (Title of Class)

     Indicate  whether the issuer (1) has filed all reports required to be filed
by  Section  13 or 15(d) of the  Exchange  Act during the past 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
_____.

     Check if there is no disclosure  of  delinquent  filers in response to Item
405 of Regulation S-B is not contained in this form,  and no disclosure  will be
contained,  to the  best of  registrant's  knowledge,  in  definitive  proxy  or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB [X].

     The registrant's revenues for its most recent fiscal year were $6,797,000.

     As of September 25, 1998,  the aggregate  market value of the  Registrant's
voting stock held by nonaffiliates of the Registrant, based on the closing price
for the  Registrant's  Class A Common  Stock in The Nasdaq  Stock Market on such
date,  was $729,071.  This  calculation  does not reflect a  determination  that
certain persons are affiliates of the Registrant for any other purposes.

     The number of shares of Class A Common Stock  outstanding  on September 25,
1998 was 3,832,411.  The number of shares of Class B Common Stock outstanding on
September 25, 1998 was 1,159,500.

     Part III of this Form 10-KSB incorporates by reference information from the
Registrant's  proxy  statement  with  respect  to the  1998  Annual  Meeting  of
Stockholders.

     Transitional Small Business Disclosure Format (check one): Yes    No X .


<PAGE>


                                TABLE OF CONTENTS
                                                                            Page

PART I.           ...........................................................  3

         ITEM 1.           DESCRIPTION OF BUSINESS...........................  3

         ITEM 2.           DESCRIPTION OF PROPERTY...........................  7

         ITEM 3.           LEGAL PROCEEDINGS.................................  7

         ITEM 4.           SUBMISSION OF MATTERS TO A VOTE OF SECURITY
                           HOLDERS...........................................  7

PART II.          ...........................................................  7

         ITEM 5            MARKET FOR COMMON EQUITY AND RELATED STOCK
                           MATTERS...........................................  7

         ITEM 6            MANAGEMENT'S DISCUSSION AND ANALYSIS OR
                           PLAN OF OPERATION.................................  8

         ITEM 7.           FINANCIAL STATEMENTS.............................. 14

         ITEM 8.           CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                           ACCOUNTING AND FINANCIAL DISCLOSURE............... 14

PART III.        ............................................................ 14

         ITEM 9.           DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
                           CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a)
                           OF THE EXCHANGE ACT............................... 14

         ITEM 10.          EXECUTIVE COMPENSATION............................ 14

         ITEM 11.          SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
                           AND MANAGEMENT.................................... 14

         ITEM 12.          CERTAIN RELATIONSHIPS AND RELATED
                           TRANSACTIONS...................................... 14

         ITEM 13.          EXHIBITS AND REPORTS ON FORM 8-K.................. 15

SIGNATURES                 .................................................. 17


                                       2


<PAGE>


                                     PART I

ITEM 1.   DESCRIPTION OF BUSINESS

The Company

     Prior to June 30, 1998,  Meadowbrook  Rehabilitation  Group, Inc. (together
with its subsidiaries,  the "Company" or  "Meadowbrook"),  provided  outpatient,
home health,  and  traditional  acute,  sub-acute and  post-acute  comprehensive
rehabilitation  services.  Since the beginning of the fiscal year ended June 30,
1997  ("Fiscal  1997"),  and as a  result  of poor  operating  results  and poor
prospects  for  growth  in their  respective  markets,  the  Company's  Board of
Directors began to sell its healthcare  operating  assets.  As of June 30, 1998,
the Company's assets consisted mainly of cash and accounts receivable.

     On  September  14,  1998,  the  Company  acquired  Cambio  Networks,   Inc.
("Cambio"),  pursuant to an Agreement  and Plan of Merger,  dated as of April 3,
1998,  as amended  by the  Agreement  of  Amendment,  dated as of July 27,  1998
(collectively,  the  "Agreement").  Under the terms of the  Agreement,  Cambio's
shareholders  received an aggregate of 1,238,842 shares of the Company's Class A
Common Stock  representing  approximately  32.3% of the outstanding  Class A and
Class B Common Stock. From the date of the acquisition, the Company's operations
have  consisted  solely of the  operations  of Cambio,  which is a  wholly-owned
subsidiary of the Company.

     The  Company   provides   products  and  services   that  provide   network
documentation,  network inventory and equipment provisioning functions for large
enterprise networks and  telecommunication  enterprise  networks.  The Company's
products and services are  designed to enhance  network  operations  support and
reduce  network-related  costs  associated  with a  variety  of  business  needs
including  network  changes,  relocations,  mergers  and  acquisitions,  network
outsourcing,  backup and disaster recovery planning. Network documentation is an
essential corporate information system that allows network support professionals
to create,  maintain and access a centralized  model of the entire network,  its
components and their  relationships.  The Company also provides a broad range of
network integration,  consulting,  training and implementation services and Year
2000 solutions.

     The Company was incorporated in 1986. The Company's  finance and accounting
office is located at 2000  Powell  Street,  Suite 1203,  Emeryville,  California
94608, and its telephone number is (510) 420-0900.

Strategy

     Building  on its  established  presence as a supplier  of  operational  and
network support systems for telecommunications  service providers and enterprise
networks,  the  Company  seeks to become a leader in the  industry.  The Company
intends to focus upon  specific  market  segments and provide  complete  network
solutions for its customers by continuing its product development, customization
and implementation services.

Products and Services

     The  Company   provides   products  and  services   that  provide   network
documentation, network inventory, and equipment provisioning functions for large
enterprise networks and telecommunication enterprise networks.

     netRunner(TM).  netRunner is the Company's  newest product  offering and is
considered the Company's flagship product. It provides the user with the ability
to create  and  maintain  a data model  that  represents  all of the  equipment,
physical  connections,  and  circuit  connections  used to  implement  a  global
enterprise network.  netRunner provides many different ways to view and maintain
network  physical  equipment  information  both  graphically  and in GUI  forms.


                                       3


<PAGE>


netRunner also models essential relationships such as location and connectivity.
All  information  created and  maintained  by  netRunner  is stored in a central
repository  available to network operations  personnel for planning,  operating,
isolating faults, and repairing large complex networks. The Company jointly owns
the  rights  to source  code for  netRunner  pursuant  to a Source  Code  Rights
Transfer and License  Agreement between the Company and Phifer Consulting Group,
Inc., dated July 1, 1998.

     The  netRunner  product line has four  modules,  three of which are already
operational  in customer  installations.  The netRunner  equipment  provisioning
module provides equipment  inventory and provisioning  functions.  The netRunner
connectivity module provides connectivity functions.  The netRunner fiber, cable
and radio module, of which only the fiber optic management function is currently
operational,   provides  fiber  optic,  cable  and  radio  frequency  management
functions.  The netRunner circuit management and provisioning  module, which the
Company  anticipates  will be available by October  1998,  will provide  circuit
inventory  and  provisioning  functions.  Additional  modules and  extensions of
product functionality are planned for 1998 and 1999 release.

     All netRunner products are Windows NT/98/95 based client  applications that
connect  to Windows or UNIX  based  database  systems  that can scale from small
single site  installations  to multiple site  installations  that can handle the
needs of all networks supporting a global enterprise.

     COMMAND.  COMMAND is the Company's  oldest  product  offering.  COMMAND was
developed as a UNIX based  client and database in the late 1980s.  COMMAND is an
integrated  database with proprietary  graphics  technology to provide graphical
views of a network.  In 1997, the Company  released  COMMAND  Version 5.0, which
added Windows  NT/95 client  products with GUI data forms for ease of data entry
and maintenance.

     The COMMAND  product line has six modules,  all of which are operational in
customer  installations.  COMMAND Server is a Sun or Hewlett  Packard UNIX based
server software  product  providing data access services from a central database
repository  to  the  COMMAND  Administrator,  COMMAND  Technician,  COMMAND  for
Windows,  COMMAND  API  Gateway and  Integration,  and COMMAND  View for Windows
client products.

     The COMMAND  Administrator client product provides data modeling functions,
data entry and maintenance functions,  and graphical and form based views of all
system data on a Sun or Hewlett Packard based UNIX workstation.  The COMMAND for
Windows client product  provides data entry,  data import,  and data maintenance
functions with an intuitive user interface designed to increase the productivity
of  personnel  performing  data entry and  maintenance.  The COMMAND  Technician
product provides  read-only  graphical and form based viewing functions on a Sun
or Hewlett Packard based UNIX workstation. The COMMAND Viewer for Windows client
product  provides all of the  read-only  functions  of COMMAND for Windows.  The
COMMAND  API Gateway and  Integration  APIs  provide  integration  with  network
management systems such as Hewlett Packard OpenView and Hewlett Packard OEMF and
with work ticket  systems such as Remedy.  A COMMAND  system  integrated  with a
network  management  system and a work ticket  system ties  together  all of the
systems and information needed to diagnose, isolate, and repair network faults.

     Services.  The Company provides software and consulting  services needed to
install,  customize and fully deploy a complete  network  inventory,  operations
systems  support or  network  documentation  system.  Typical  services  include
installation,   customer  specific   enhancements,   customized  development  of
extensions to core products,  data modeling,  and data maintenance.  The Company
also provides technical support programs and training programs for all products.


                                       4


<PAGE>


Marketing and Sales

     The Company's  customers are large  enterprises  operating complex networks
that are mission critical to the customer's core business.  Customers are in two
primary market segments: enterprises operating network communication centers and
telecommunication service providers.

     The   Company's   products  are   primarily   sold   directly  to  end-user
organizations  in North  America  through  the  Company's  direct  sales  force.
Internationally,  the Company has  historically  marketed  and sold its products
through independent  distributors supported by the Company's international sales
and  support  organization.  The  Company  has  realigned  its  organization  to
concentrate  marketing and sales into two global business units that address the
Company's two primary markets.

     The Company will continue to make its products available to markets outside
North America and expects these sales will provide a significant contribution to
total revenue.

Software Development

     The Company's research and development  efforts are focused on the needs of
the Company's  primary  markets:  enterprises  operating  network  communication
centers and  telecommunications  service  providers.  Within these markets,  the
focus is on new application development to meet strategic customer requirements,
enhancement of existing products,  software tools for data entry, conversion and
maintenance, migration from existing systems, and integration with complementary
systems.

     All of the Company's  research and  development  has been  performed in the
United States.  The Company  intends to continue  recruiting and hiring software
developers   and  to  consider   acquisition   and  licensing  of  software  and
technologies that accelerate the development and release of new products.

Competition

     Competition in the markets in which the Company participates is intense and
it expects  the number of  competitors  to  increase.  The  Company's  continued
development of enhanced network management and operational  support systems will
broaden its range of available competing products.  Competitors include hardware
manufacturers  that have  developed  software (or obtained  software  from third
parties) to operate on their hardware.  The Company also encounters  competition
from a large  number  of  small  software  developers  which  sell  software  or
integrated systems either for specific  industries or applications  within those
industries.

     The  telecommunications and enterprise network markets in which the Company
sells its products are  relatively  new, but highly  competitive  markets with a
limited number of competitors  selling products.  Some companies are using their
own  internal   development   resources  to  automate  their   engineering   and
provisioning  processes.  A number of these  companies have  nonetheless  become
major customers due to the Company's broad range of advanced products.

     The Company  believes that in order to maintain and improve its competitive
position,  it must continue to offer comprehensive  services that help customers
effectively  implement a complete,  integrated  software solution by providing a
full range of industry-leading  consulting,  integration,  training and customer
support services. The timely delivery of flexible,  cost effective solutions for
the growing dynamic marketplace will continue to be the competitive focus of the
Company.

     The  principal   competition   currently   faced  by  the  Company  in  the
telecommunications  service  provider  market is the  customer's  development of


                                       5


<PAGE>


in-house  solutions.  In the enterprise network market, the Company's  principal
North American competitors are Architel Corporation,  Visionael,  Inc., customer
care  providers  attempting  to expand  into asset  management  and other  "back
office" functions.  Additional competition in all of the Company's markets comes
from  Europe  and  Japan  where a number  of  companies  have  developed  or are
developing  software and integrated  systems products which may compete with the
Company's products.

Proprietary Rights

     The Company  relies on a  combination  of  copyright,  trademark  and trade
secret laws,  confidentiality procedures and licensing arrangements to establish
and protect its proprietary  rights.  Presently,  the Company has no patents, no
patent  applications on file, and does not intend to file patent applications in
the future.  As part of its  confidentiality  procedures,  the Company generally
enters into  non-disclosure  agreements  with its  employees,  distributors  and
corporate  partners,  and  license  agreements  with  respect  to its  software,
documentation and other proprietary information.  Despite these precautions,  it
may be  possible  for a third  party  to copy or  otherwise  obtain  and use the
Company's  products or technology without  authorization,  or to develop similar
technology independently. Policing unauthorized use of the Company's products is
difficult  and,  although the Company is unable to determine the extent to which
piracy of its software products exists,  software piracy can be expected to be a
persistent problem.  In selling its products,  the Company relies on both signed
license  agreements  and "shrink wrap" licenses that are not signed by licensees
and, therefore, may be unenforceable under the laws of certain jurisdictions. In
addition, effective protection of intellectual property rights is unavailable or
limited  in  certain  foreign  countries.  There  can be no  assurance  that the
Company's  protection of its  proprietary  rights,  will be adequate or that the
Company's   competitors  will  not  independently  develop  similar  technology,
duplicate  the  Company's  products  or  design  around  any  of  the  Company's
intellectual property rights.

     The Company is not aware that any of its products  infringe the proprietary
rights of third parties. There can be no assurance,  however, that third parties
will not claim  such  infringement  by the  Company  with  respect to current or
future  products.  The Company  expects that software  product  developers  will
increasingly be subject to such claims as the number of products and competitors
in the Company's industry segment grows and the functionality of products in the
industry segment overlaps.

     The Company  jointly owns the rights to source code for netRunner  pursuant
to a Source Code Rights Transfer and License  Agreement  between the Company and
Phifer Consulting Group, Inc., dated July 1, 1998.

Employees

     As of  September  25,  1998,  the  Company  had  38  full  time  employees,
consisting of 12 in customer service and engineering, 12 in sales and marketing,
12 in general and  administrative  functions  (4 of which will  terminate  their
employment  with the Company as the  assimilation  of the Cambio  acquisition is
completed),  and  two in  general  and  administrative  functions  pursuing  the
collection of receivables  and monitoring the closing  process of the healthcare
operations.  The Company's future  performance  depends to a significant  degree
upon  the  continued  service  of its  key  members  of  management,  as well as
marketing, sales, consulting and product development personnel, none of whom are
bound by an  employment  contract,  and its ability to attract and retain highly
skilled personnel in these areas. Competition for such personnel is intense, and
there can be no assurance  that the Company can retain its key employees or that
it will be successful in attracting,  assimilating  and retaining such personnel
in the future. None of the Company's employees are represented by a labor union.
The Company has not  experienced  any work stoppages and considers its relations
with its employees to be good.


                                       6


<PAGE>


ITEM 2.    DESCRIPTION OF PROPERTY

     The Company leases all of its properties. The Company maintains its finance
and  accounting  office in Emeryville,  California  and its corporate  office in
Dallas,  Texas.  The Company  has  engineering/development  and  support  groups
located in Bellevue, Washington and El Paso, Texas. In addition, the Company has
sales offices in Parsippany, NJ; in the United Kingdom and in Egypt. The Company
believes that its existing facilities are adequate to meet its current needs and
in the foreseeable  future and that additional  space is available at reasonable
rates.

     As a result of the  closing of its  healthcare  facilities,  the Company is
party to certain  property  leases  expiring at various dates through 2001.  The
Company has been able to negotiate early lease termination  agreements with some
of its landlords.  The associated  costs related to the remaining leases through
their termination were accrued in June 1998.

ITEM 3.   LEGAL PROCEEDINGS

          None.

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

          Not applicable.

                                     PART II

ITEM 5.   MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     The Company's Class A Common Stock is traded in the Nasdaq National Market.
On September  25, 1998,  the closing sales price of the Class A Common Stock was
$.437 per share.

     The table below sets forth the quarterly  high and low closing sales prices
for the Class A Common  Stock in the period from July 1, 1996  through  June 30,
1998 (giving effect to the three-for-two stock split reflected on April 22, 1998
as if it had occurred on July 1, 1996):

                        Fiscal 1997               Fiscal 1998
                        -----------               -----------
      Quarter         High        Low           High        Low
      -------         ----        ---           ----        ---
        1st          $1.83       $0.67         $2.16      $1.50
        2nd          $1.83       $0.92         $1.96      $1.00
        3rd          $1.21       $1.09         $2.83      $1.66
        4th          $1.66       $1.25         $2.50      $0.22

     The Company has not paid cash dividends in the past and does not anticipate
paying cash dividends on its Common Stock in the foreseeable future.

     As of September 25, 1998,  there were 60 holders of record of the Company's
Class A Common  Stock and one holder of record of the  Company's  Class B Common
Stock. There is no public trading market for the Class B Common Stock.


                                       7


<PAGE>


ITEM  6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

TRENDS AND RECENT EVENTS

Disposition of Healthcare Operations

     Prior to June 30, 1998, the Company provided  outpatient,  home health, and
traditional  acute,  sub-acute  and  post-acute   comprehensive   rehabilitation
services.  Since the beginning of Fiscal 1997, and as a result of poor operating
results and poor prospects for growth in their respective  markets,  the Company
has sold or closed all of its healthcare  operating assets. As of June 30, 1998,
the  Company's  assets  consisted  almost   exclusively  of  cash  and  accounts
receivable.

     The termination of the Company's healthcare operations was completed during
the fourth  quarter of Fiscal  1998 after its Board of  Directors  approved  the
closure or  disposition  of its home health  agencies in Colorado and Kansas and
physical therapy clinics in Colorado. The closing and/or sale of such operations
was substantially completed on June 30, 1998.

     Home health agencies have  traditionally  received Medicare  reimbursements
based on actual reasonable allowable costs subject to per visit limitations.  As
a result of  regulations  adopted by the Health  Care  Financing  Administration
("HCFA"),  effective  July 1,  1998,  such  reimbursements  were  subject to new
aggregate  annual  per-beneficiary   limitations.  The  decision  to  close  its
healthcare  operations  was prompted by the receipt of Medicare's  notice to the
Company of the new per-beneficiary cost limits for each of its locations.  These
reimbursement  amounts fell far below the  Company's  per-beneficiary  operating
expense.  In order for the Company to decrease its operating  losses and be able
to retain as much capital as possible for its acquisition strategy,  the Company
decided to dispose of its healthcare operations.

     The estimated loss on the disposition of these facilities  reflected in the
Company's  statements  of  operations  for the year ended June 30, 1998 ("Fiscal
1998")  includes the writedown of property and  equipment to market  value,  the
writeoff of goodwill,  closedown  expenses and the operating  losses through the
disposition date.

Recent Acquisition of Cambio Networks, Inc.

     On  September  14,  1998,  the  Company  acquired  Cambio,  pursuant  to an
Agreement  and Plan of  Merger,  dated as of April 3,  1998,  as  amended by the
Agreement  of  Amendment,   dated  as  of  July  27,  1998  (collectively,   the
"Agreement").  Under the terms of the Agreement,  Cambio's shareholders received
an  aggregate  1,238,842  of  shares  of the  Company's  Class  A  Common  Stock
representing  approximately  32.3% of the outstanding Class A and Class B Common
Stock. From the date of the acquisition, the Company's operations consist solely
of  the  operations  of  Cambio,  a  wholly-owned  subsidiary  of  the  Company.
Accordingly,  the  Company's  historical  results  of  operations  will  not  be
comparable to its future operating results.

Potential Ineligibility for Continued Listing on Nasdaq

     The  Company's  Class A Common  Stock is  currently  quoted  on the  Nasdaq
National  Market.  On February 23, 1998, the Nasdaq  National Market adopted new
quantitative and qualitative  requirements,  as set forth under NASD Marketplace
Rule  4450,  which  issuers  are  required  to meet in order to  maintain  their
listings.  The Company has been  notified by Nasdaq that it does not comply with
the public float and market value of public float requirements. On June 1, 1998,


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<PAGE>


Nasdaq issued a delisting letter identifying the review procedures  available to
the Company.  The Company has appealed the delisting  decision and a hearing was
held on July 30, 1998. At such hearing, the Company requested that the Company's
Class A Common  Stock be quoted on the Nasdaq  Small Cap Market.  To be eligible
for continued listing on the Nasdaq Small Cap Market,  the Company must meet the
following requirements: (i) a minimum bid price of $1.00 per share, and (ii) net
tangible  assets of at least  $2,000,000,  or (iii) a market  capitalization  of
$35,000,000,  or (iv) net  income  in at least  two of the last  three  years of
$500,000 and a public float of at least 500,000 shares with a market value of at
least $1,000,000. As of the date of this Report, the Company meets the continued
listing  requirements  for the Nasdaq SmallCap Market except for the minimum bid
price.  In addition,  Nasdaq has indicated to the Company that it is considering
whether the Company should be required to meet the initial listing  requirements
for the Nasdaq  SmallCap  Market because the nature of its business has changed.
Such initial  listing  requirements  are  substantially  more stringent than the
requirements  for  continued  listing and the  Company  will not be able to meet
them.  There  can be no  assurance  that  the  Company  will be able to meet the
requirements for continued listing on the Nasdaq SmallCap Market with respect to
the Company's  Class A Common  Stock.  If the Company fails to maintain a Nasdaq
National  Market  listing or fails to obtain a listing  on the Nasdaq  Small Cap
Market,  the  Company's  securities  will  likely be traded on the OTC  Bulletin
Board. As a result, the market value of the Company's Class A Common Stock would
likely decline and  stockholders  likely would find it more difficult to dispose
of, or to obtain  accurate  quotations  as to the market value of, the Company's
Class A Common Stock.

Forward-looking Statements

     In addition  to the  historical  information  contained  herein,  this Form
10-KSB  contains  forward-looking  statements  within  the  meaning of the "safe
harbor"  provisions  of the Private  Securities  Litigation  Reform Act of 1995.
These  forward-looking  statements  are  subject  to  risks  and  uncertainties,
including risks and uncertainties set forth in this Form 10-KSB,  that may cause
actual results to differ materially. These forward-looking statements speak only
as of the date hereof.  The Company disclaims any intent or obligation to update
these forward-looking statements.

RESULTS OF CONTINUING OPERATIONS

For the Years ended June 30, 1998 and June 30, 1997

     General and  administrative  expenses  from  continuing  operations  of the
Company consisted of general corporate administration expenses, costs associated
with the Company's reporting and disclosure obligations as a public company, the
collection of receivables,  the monitoring and closing process of the healthcare
operations,  the search for alternative  business  strategies and similar items.
These expenses were  $1,207,000 and $1,782,000 for the years ended June 30, 1998
("Fiscal 1998") and June 30, 1997 ("Fiscal 1997"), respectively. The decrease in
such expenses from Fiscal 1997 to Fiscal 1998 was  principally due to reductions
in  personnel  and  related  costs as a  result  of the  discontinuation  of the
Company's principal operations.

     Interest income in Fiscal 1998 and Fiscal 1997 was  approximately  $140,000
and $55,000,  respectively.  The increase in interest income in Fiscal 1998 from
Fiscal 1997 is the result of higher cash  balances  attributable  to the sale of
various of the Company's  operating  facilities during the latter part of Fiscal
1997 and the beginning of Fiscal 1998.  Interest  income will likely decrease as
cash is used to fund operating losses.

     As a result of the foregoing  factors,  the Company's loss from  continuing
operations  was  approximately   $1,067,000  in  Fiscal  1998,  as  compared  to
$1,727,000 in Fiscal 1997.


                                       9


<PAGE>


RESULTS OF DISCONTINUED OPERATIONS

Year ended June 30, 1998 compared to the Year ended June 30, 1997

     The Company's net operating revenues from discontinued operations decreased
67.4% to  $6,797,000  for Fiscal 1998, as compared to  $20,834,000  for the same
period in the prior fiscal year.  The decrease was due  primarily to the sale of
the Company's  Georgia,  Alaska,  and Illinois  operations during the second and
third  quarters of Fiscal  1997,  the sale of the  Company's  Kansas and Florida
operations  during  the first  quarter  of Fiscal  1998 and the  closing  of the
Colorado  operations  during the fourth  quarter of Fiscal 1998. See "Trends and
Recent Events."

     Total operating expenses  (excluding the (gain) loss on the sale of assets)
from discontinued  operations for Fiscal 1998 decreased 61.5% to $8,800,000 from
$22,846,000,  during the same  period in the prior  fiscal  year.  Salaries  and
employee  benefits  continued  to be the  primary  component  of  the  Company's
expenses from discontinued operations.  Salaries and employee benefits decreased
56.0% to  $5,813,000  for Fiscal 1998, as compared to  $13,222,000  for the same
period in the prior fiscal year.  Other  expenses from  discontinued  operations
primarily  consisted of professional  fees,  purchased  services,  provision for
doubtful  accounts,  rent  expense  and other  expenses.  For Fiscal  1998,  the
Company's  other  expenses  from  discontinued  operations  decreased  69.0%  to
$2,984,000,  as compared to  $9,624,000  for the same period in the prior fiscal
year. The decrease  resulted  primarily from the sale of the Company's  Georgia,
Alaska,  and Illinois  operations during the second and third quarters of Fiscal
1997, the sale of the Company's Kansas and Florida  operations  during the first
quarter of Fiscal 1998 and the  closing of the  Colorado  operations  during the
fourth quarter of Fiscal 1998.

     The Company's results from discontinued  operations for Fiscal 1998 include
a net gain of $1,771,000 on the sales of its Kansas and Florida operations.  The
Company also recorded a charge of $1,563,000 for the disposal of its operations.

     As a result of the foregoing factors,  the Company's loss from discontinued
operations  was  approximately   $1,798,000  in  Fiscal  1998,  as  compared  to
$2,124,000 in Fiscal 1997.

     The Company reported a net loss for Fiscal 1998 of $2,865,000,  as compared
to a net loss of $3,851,000 for the same for the same period in the prior fiscal
year.

     Basic and diluted loss per share was $1.00 for Fiscal 1998 as compared to a
net loss of $1.33 per share for the same period in the prior fiscal year.

LIQUIDITY AND CAPITAL RESOURCES

     At June 30, 1998, the Company had working  capital of $2,176,000,  compared
to working capital of $4,815,000 at June 30, 1997. The Company had cash and cash
equivalents  of  $1,324,000  at June 30, 1998, as compared to $2,929,000 at June
30, 1997.

     During  Fiscal  1998,  the  Company's  operating  activities  used  cash of
$1,155,000,  as compared to cash  provided by operating  activities  of $488,000
during the same period in the prior  fiscal  year.  The cash used for  operating
activities  during Fiscal 1998 is primarily the result of the losses incurred by
the discontinued healthcare operations.

     As of June 30, 1998,  the Company had net operating loss  carryforwards  of
approximately  $8,500,000.  Availability of the Company's net operating loss and
carryforwards  if not  utilized  will expire at various  dates  through the year
2013.

                                       10


<PAGE>


     Net  patient   accounts   receivable,   which  excludes  amounts  due  from
intermediaries, was $954,373 at June 30, 1998, as compared to $4,278,756 at June
30, 1997.  This decrease is primarily due to the sale of the Company's  Georgia,
Alaska,  and Illinois  operations during the second and third quarters of Fiscal
1997, the sale of the Company's Kansas and Florida  operations  during the first
quarter of Fiscal 1998 and the  closing of the  Colorado  operations  during the
fourth quarter of Fiscal 1998.

     The Company's amount due from Medicare  intermediaries  of $860,000 at June
30,  1998  includes  amounts  the Company  anticipates  that it will  receive in
connection  with cost report  settlements  for its Colorado home health agencies
and its final cost report for the Company's  former  Gardner,  Kansas  facility.
Such amount also includes amounts the Company expects to receive upon regulatory
approval of the Company's  annual  application for an exception from the routine
cost  limitation  under the Medicare  program for fiscal years 1992 through 1996
for its former Gardner,  Kansas  facility.  Medicare  reimbursement is generally
based upon reasonable direct and indirect  allowable costs incurred in providing
services.  There can be no  assurance  that the Company will collect in full the
amounts it has  requested or intends to request,  nor can there be any assurance
as to the timing of any such collection.

     On February 21, 1998,  the  Company's  Board of Directors  approved a stock
repurchase  program  under  which it could  purchase up to an  aggregate  of ten
percent (10%) of the outstanding  shares of its Class A Common Stock. As of June
30, 1998, the Company had repurchased 301,797 shares of its Class A Common Stock
for an aggregate price of $296,349.

     As of September 14, 1998, the date of the  acquisition of Cambio  Networks,
Inc.  by the  Company,  the  Company had loaned  Cambio  $1,575,000  to fund its
business  activities  prior to the closing.  Such loans are evidenced by Secured
Bridge Financing Notes bearing interest at 8% per annum.

     The Company has no current material  commitments for capital  expenditures.
The Company also expects to make routine capital  improvements to its facilities
in the normal course of business.

     The Company's current  operations are cash flow negative and as of June 30,
1998,  the  Company had working  capital of  $2,176,000.  The Company has only a
limited amount of working capital.  Although the Company's  management  believes
that its expected funds from  discontinued  operations  and currently  available
working  capital  will be  sufficient  to meet its  forecasted  short-term  cash
commitments, in the future, the Company will need additional capital to fund its
new operations resulting from the Cambio acquisition.  There can be no assurance
that capital will be available,  or that,  if  available,  it can be obtained on
terms  favorable  to the  Company.  If  adequate  funds are not  available,  the
Company's  liquidity  could be  impaired,  which  would have a material  adverse
effect on its business.

     Inflation in recent years has not had a significant effect on the Company's
business  and is not  expected  to  adversely  effect the  Company in the future
unless the current rate of inflation increases significantly.

Other Factors That May Affect Future Operating Results

     Accumulated Deficits;  Uncertain Profitability.  On September 14, 1998, the
Company acquired Cambio.  Subsequent to that date, the Company's operations will
consist solely of the operations of Cambio.  Cambio has incurred significant net
losses since its  inception,  and had an  accumulated  deficit of  approximately
$26,998,000  at June 30,  1998.  Cambio  incurred net losses of  $7,466,000  and
$3,175,000  on net revenues of  $7,232,000  and  $5,515,000  for the years ended
December 31, 1996 and 1997,  respectively.  There can be no  assurance  that the
Company will be profitable  in any future  period.  The Company's  business will


                                       11


<PAGE>


also  subject  to  the  risks  inherent  in  the  operation  of a  new  business
enterprise,  and  there  can be no  assurance  it will  be able to  successfully
address such risks.

     Fluctuating  Operating  Results.  Factors  that may  contribute  to  future
fluctuations in the Company's  quarterly and annual  operating  results include,
but are not  limited  to: (i)  development  and  introduction  of new  operating
systems and new product development  expenses;  (ii) introduction or enhancement
of products by the Company;  (iii) changes in pricing policies of the Company or
its  competitors;  (iv)  increased  competition;  (v)  technological  changes in
computer  systems  and  environments;  (vi) the ability of the Company to timely
develop,  introduce and market new products;  (vii) quality  control of products
sold;  (viii)  market  readiness  to  deploy  systems  management  products  for
distributed computing  environments;  (ix) market acceptance of new products and
product  enhancements;  (x)  customer  order  deferrals in  anticipation  of new
products and product  enhancements;  (xi) the Company's success in expanding its
sales and marketing programs;  (xii) personnel changes;  (xiii) foreign currency
exchange rates;  (xiv) mix of products sold; (xv)  acquisition  costs; and (xvi)
general economic conditions.

     Intense  Competition.  The  markets  in  which  the  Company  competes  are
intensely  competitive,  highly  fragmented  and rapidly  changing.  In order to
compete effectively,  the Company will have to enhance current products, enhance
the  operability  of its products with one another and develop new products in a
timely fashion.

     The  Company   anticipates   continued   growth  in   competition   in  the
telecommunications  industry and  consequently,  the entrance of new competitors
into the  software  systems  market in the future.  To maintain  and improve its
competitive position,  the Company must continue to develop and introduce,  in a
timely and  cost-effective  manner,  new product sets, new product  features and
services and support that keep the Company competitive with its competitors. The
principal competitive factors in the Company's market are quality,  performance,
price,  customer  support  and  training,   business  reputation,   and  product
attributes such as scalability, compatibility,  functionality and acceptance. In
addition,   the  Company   competes  with  a  number  of  companies   that  have
substantially greater financial, technical, sales, marketing and other resources
as well as greater name recognition than the Company. As a result, the Company's
competitors  may be able to adapt more  quickly to new or emerging  technologies
and changes in customer  requirements,  or to devote  greater  resources  to the
promotion and sale of their  products and services  than can the Company.  There
can be no assurance that the Company will be able to compete  successfully  with
its existing competitors or with new competitors.

     Risks Associated With International Operations. Historically, international
revenues  (from sales outside the United States and Canada) have accounted for a
significant  amount of Cambio's total  revenues.  The Company  believes that its
success depends upon continued  expansion of its international  operations.  The
Company currently has sales and service offices in the United Kingdom and Egypt.
International  expansion may require the Company to establish additional foreign
offices,   hire  additional  personnel  and  recruit  additional   international
resellers.  This may require  significant  management  attention  and  financial
resources and could adversely  affect the Company's  operating  margins.  To the
extent the  Company is unable to effect  these  additions  efficiently  and in a
timely manner, its growth, if any, in international  sales will be limited,  and
its  business,  operating  results and financial  condition  could be materially
adversely  affected.  There can be no assurance that the Company will be able to
maintain or increase international market demand for its products.

     International  operations subject the Company to a number of risks inherent
in  developing  products for sale outside of the United  States,  including  the
potential loss of developed  technology,  imposition of  governmental  controls,
export license requirements,  restrictions on the export of critical technology,
political and economic instability, trade restrictions, difficulties in managing


                                       12


<PAGE>


international  operations,  cultural  differences  in the  conduct of  business,
longer  accounts  receivable  payment  cycles,  greater  difficulty  in accounts
receivable collection, unexpected changes in regulatory requirements and royalty
and withholding  taxes that restrict the  repatriation of earnings,  tariffs and
other trade  barriers,  the burden of  complying  with a wide variety of foreign
laws, and the risk of foreign currency  translation gains and losses.  There can
be no  assurance  that  any of the  factors  described  herein  will  not have a
material  adverse  effect  on  the  Company's  future  international  sales  and
operations  and,  consequently,  its business,  operating  results and financial
condition.

     Reliance on  Significant  Customers.  Historically,  Cambio has generated a
significant  portion of its total  revenues from a limited  number of customers,
some of which have exceeded 10% of revenues. This concentration of customers can
cause the Company's  revenues and earnings to fluctuate  from quarter to quarter
based on these customers'  requirements and the timing of their orders. Although
the Company believes it has good  relationships  with its largest  customers and
has in the past  received a  substantial  portion of its  revenues  from  repeat
business with established  customers,  none of the Company's major customers has
any obligation to purchase additional products or services,  and these customers
generally  have  acquired   fully-paid  licenses  to  their  installed  systems.
Therefore,  there can be no assurance that any of the Company's  major customers
will  continue to purchase new  systems,  systems  enhancements  and services in
amounts similar to previous years. A reduction,  delay or cancellation in orders
from any of its major  customers  would  have a material  adverse  effect on the
Company's  results of  operations  and  financial  condition.  In addition,  the
acquisition  by a third  party of one of the  Company's  major  customers  could
result in the loss of that  customer and have a material  adverse  effect on the
Company's results of operations and financial condition.

     Rapid   Technological   Change  and   Requirement   for  Frequent   Product
Transitions.  The market for the  Company's  products is intensely  competitive,
highly  fragmented  and  characterized  by  rapid  technological   developments,
evolving  industry  standards  and rapid changes in customer  requirements.  The
introduction  of products  embodying  new  technologies,  the  emergence  of new
industry  standards  or  changes  in  customer  requirements  could  render  the
Company's  existing  products  obsolete  and  unmarketable.  As  a  result,  the
Company's  success  depends  upon its ability to  continue  to enhance  existing
products, respond to changing customer requirements and develop and introduce in
a timely manner, new products that keep pace with technological developments and
emerging industry standards.  Customer requirements include, but are not limited
to,   product   operability   and  support  across   distributed   and  changing
heterogeneous  hardware platforms,  operating systems,  relational databases and
networks.  There can be no assurance  that the  Company's  products will achieve
market  acceptance  or  will  adequately  address  the  changing  needs  of  the
marketplace  or that the Company will be successful in developing  and marketing
enhancements  to  its  existing  products  or  new  products  incorporating  new
technology on a timely basis. The Company has in the past experienced  delays in
product  development,  and there can be no  assurance  that the Company will not
experience further delays in connection with its current product  development or
future development activities. If the Company is unable to develop and introduce
new  products,  or  enhancements  to existing  products,  in a timely  manner in
response to changing market conditions or customer  requirements,  the Company's
business, operating results and financial condition will be materially adversely
affected.  Because the Company has limited resources,  the Company must restrict
its product  development  efforts and its porting efforts to a relatively  small
number of products and operating  systems.  There can be no assurance that these
efforts will be successful or, even if successful,  that any resulting  products
or operating systems will achieve market acceptance.

     Year 2000  Compliance.  The Company is currently  evaluating  the potential
impact  of the  Year  2000  difficulties  on the  processing  of  date-sensitive
information  by the Company's  computerized  information  system.  The Year 2000
problem  is the  result of  computer  programs  being  written  using two digits
(rather than four) to define the applicable year. Any of the Company's  computer


                                       13


<PAGE>


     programs that have time-sensitive  software may recognize a date using "00"
as  the  year  1900   rather  than  the  year  2000,   which  could   result  in
miscalculations or system failures. Based on preliminary information,  the costs
of  addressing  the  potential  problems  are not  currently  expected to have a
material  adverse  effect on the  Company's  financial  position,  liquidity  or
results of operations in future periods. Although most of the software currently
offered by the Company is either  designed to be Year 2000 complaint or has been
upgraded to be Year 2000 complaint, the Company still offers some software which
is not Year 2000 complaint.  The Company  anticipates these software products to
be Year 2000  complaint  by the end of 1998.  However,  if the  Company,  or its
customers or vendors,  are unable to resolve such processing  issues in a timely
manner, it could pose a material financial risk. Accordingly,  the Company plans
to devote the necessary resources to resolve all significant Year 2000 issues in
a timely manner.

ITEM 7.  FINANCIAL STATEMENTS

     Reference  is  made  to  the  Consolidated   Balance  Sheet,   Consolidated
Statements of Operations,  Consolidated  Statement of  Stockholders'  Equity and
Consolidated   Statements  of  Cash  Flows,  Notes  to  Consolidated   Financial
Statements,  and Report of Independent  Certified Public Accountants attached to
this Form 10-KSB. See page F-1.

ITEM 8.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
          FINANCIAL DISCLOSURE

          None.

                                    PART III

ITEM 9.   DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
          COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

     Information  with  respect to  officers  and  directors  of the  Company is
incorporated by reference from the information under the caption  "Directors and
Executive  Officers  of  the  Registrant"  in  the  Company's  definitive  proxy
statement for its 1998 Annual Meeting of  Stockholders.  Information  concerning
compliance  with Section 16(a) of the Exchange Act is  incorporated by reference
from the  information  under the caption  "Section  16(a)  Beneficial  Ownership
Reporting  Compliance" in the Company's  definitive proxy statement for its 1998
Annual Meeting of Stockholders.

ITEM 10.  EXECUTIVE COMPENSATION

     Incorporated  by reference from  information  under the caption  "Executive
Compensation"  in the Company's  definitive  proxy statement for its 1998 Annual
Meeting of Stockholders.

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     Incorporated by reference from the information  under the caption "Security
Ownership  of  Certain  Beneficial  Owners  and  Management"  in  the  Company's
definitive proxy statement for its 1998 Annual Meeting of Stockholders.

ITEM 12.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Incorporated by reference from the information  under the caption  "Certain
Transactions"  in the Company's  definitive  proxy statement for its 1998 Annual
Meeting of Stockholders.


                                       14


<PAGE>


ITEM 13.   EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits:

     2.1  Agreement  and Plan of  Merger,  dated  April  3,  1998,  between  the
          Registrant,  Cambio's  majority  shareholders  and  Cambio,  filed  as
          Exhibit 2.1 to the Registrant's current report on Form 8-K dated April
          22, 1998 and incorporated herein by reference.

     2.2  Agreement of Amendment,  dated July 27, 1998,  between the Registrant,
          Cambio's  majority  shareholders  and Cambio,  filed as Annex A to the
          Registrant's  Joint  Information/Consent   Solicitation  Statement  on
          Schedule  14C  dated  August  14,  1998  and  incorporated  herein  by
          reference.

     2.3  Secured  Bridge  Financial  Note  dated  April 3,  1998,  between  the
          Registrant  and  Cambio,  filed  as  Exhibit  2.2 to the  Registrant's
          current  report on Form 8-K  dated  April  22,  1998 and  incorporated
          herein by reference.

     3.1  Amended and  Restated  Certificate  of  Incorporation  of the Company,
          filed as Exhibit 3.1 to the Company's  Registration  Statement on Form
          S-1 (Commission File No. 33-44197) (the "Registration  Statement") and
          incorporated herein by reference.

     3.2  Certificate  of Amendment  of Restated  Certificate  of  Incorporation
          filed as Exhibit 3.2 to the  Company's  Annual Report on Form 10-K for
          the  fiscal  year  ended  June 30,  1996 and  incorporated  herein  by
          reference.

     3.3  Amended and Restated  By-Laws of the Company,  filed as Exhibit 3.2 to
          the Registration Statement and incorporated herein by reference.

     10.1 1994 Stock  Incentive Plan of the Company filed as Exhibit 10.1 to the
          Company's  Annual  Report on Form 10-K for the fiscal  year ended June
          30, 1995 and incorporated herein by reference.

     21.1 Subsidiaries of the Company.

     23.1 Consent of Grant Thornton LLP (see page 18 of this Form 10-KSB).

     23.2 Consent of Arthur Andersen LLP (see page 19 of this Form 10-KSB).

     24.1 Power of Attorney (see Page 17 of this Form 10-KSB).

     27.1 Financial Data Schedule.

(b)  Reports on Form 8-K:

          On April 22, 1998, the Company filed a current report on Form 8-K with
     the Securities and Exchange Commission reporting under item 5 that on April
     3, 1998 it executed an Agreement and Plan of Merger for the  acquisition of
     Cambio Networks, Inc.


                                       15


<PAGE>


          On June 5, 1998,  the Company filed a current  report on Form 8-K with
     the Securities and Exchange  Commission  reporting under item 5 that on May
     26, 1998 its Board of  Directors  approved  the  disposition  of all of its
     remaining operating healthcare businesses.

          On August 10,  1998,  the Company  filed a current  report on Form 8-K
     with the Securities and Exchange Commission  reporting under item 4 that on
     August 6, 1998 its Board of Directors  changed  form using Arthur  Andersen
     LLP as its principal  independent  accountant and appointed  Grant Thornton
     LLP as its new independent accountant.


                                       16


<PAGE>


                                   SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

DATE:    September 25, 1998               MEADOWBROOK REHABILITATION GROUP, INC.

                                          By       /s/ HARVEY WM. GLASSER, M.D.
                                                   Harvey Wm. Glasser, M.D.
                                                   Chief Executive Officer

                                POWER OF ATTORNEY

     KNOW ALL  PERSONS  BY THESE  PRESENTS,  that each  person  whose  signature
appears  below   constitutes  and  appoints   HARVEY  WM.   GLASSER,   M.D.  his
attorney-in-fact,  with  full  power  of  substitution,  for  him in any and all
capacities, to sign any amendments to this Report on Form 10-KSB and to file the
same, with exhibits  thereto and other documents in connection  therewith,  with
the Securities and Exchange Commission, hereby ratifying and confirming all that
said attorney-in-fact,  or his substitute or substitutes,  may do or cause to be
done by virtue hereof..

     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 dates indicated.

         Signature                    Title                          Date

/s/ HARVEY WM.GLASSER, M.D.   Chairman of the Board, Chief    September 25, 1998
---------------------------   Executive Officer (Principal
Harvey Wm. Glasser, M.D.      Executive Officer)


/s/ ALI AL-DAHWI              President and Chief Operating   September 25, 1998
--------------------------    Officer
Ali Al-Dahwi

/s/ WM. SAMUEL VEAZEY         Vice President of Finance,      September 25, 1998
--------------------------    Chief Financial Officer,
Wm. Samuel Veazey             Treasurer and Secretary
                              (Principal Accounting and
                              Principal Financial Officer)

/s/ ROBERT RUSH               Director                        September 25, 1998
-------------------------
Robert Rush

/s/ JOHN MCCRACKEN            Director                        September 25, 1998
-------------------------
John McCracken

/s/ PHILIP CHAPMAN            Director                        September 25, 1998
-------------------------
Philip Chapman

/s/ GARI GRIMM                Director                        September 25, 1998
-------------------------
Gari Grimm


                                       17


<PAGE>


               CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS


     We hereby consent to the  incorporation by reference of our report included
in this Form 10-KSB into the Company's  previously filed Registration  Statement
on Form S-8 (File No. 33-50772).


GRANT THORNTON LLP

San Jose, California
September 4, 1998


                                       18


<PAGE>


                    CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS


     As independent public  accountants,  we hereby consent to the incorporation
of our report included in this Form 10-KSB into the Company's  previously  filed
Registration Statement File No. 33-50772.


                                                             ARTHUR ANDERSEN LLP

San Francisco, California
September 25, 1998


                                       19


<PAGE>


                                 C O N T E N T S


                                                                            Page

Reports of Independent Certified Public Accountants.........................F-2

Consolidated Balance Sheet..................................................F-4

Consolidated Statements of Operations.......................................F-5

Consolidated Statement of Stockholders' Equity..............................F-6

Consolidated Statements of Cash Flows.......................................F-7

Notes to Consolidated Financial Statements..................................F-8


                                      F-1


<PAGE>


               Report of Independent Certified Public Accountants



To the Stockholders of
Meadowbrook Rehabilitation Group, Inc.

We have  audited the  accompanying  consolidated  balance  sheet of  Meadowbrook
Rehabilitation  Group, Inc. (a Delaware corporation) and subsidiaries as of June
30, 1998, and the related  consolidated  statement of operations,  stockholders'
equity  and cash flows for the year then  ended.  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 audit.

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

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all  material  respects,  the  consolidated  financial  position  of
Meadowbrook Rehabilitation Group, Inc. and subsidiaries as of June 30, 1998, and
the  consolidated  results of their operations and their cash flows for the year
then ended, in conformity with generally accepted accounting principles.


GRANT THORNTON LLP

San Jose, California
September 4, 1998, except for Note 7 as to which
     the date is September 14, 1998


                                      F-2


<PAGE>


               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS



To the Stockholders of
Meadowbrook Rehabilitation Group, Inc.:

We have audited the consolidated statements of operations,  stockholders' equity
and  cash  flows  of  Meadowbrook   Rehabilitation   Group,   Inc.  (a  Delaware
corporation)   and  subsidiaries  for  the  year  ended  June  30,  1997.  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 audit.

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

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all material  respects,  the results of operations and cash flows of
Meadowbrook  Rehabilitation Group, Inc. and subsidiaries as of June 30, 1997, in
conformity with generally accepted accounting principles.


                                                             ARTHUR ANDERSEN LLP

San Francisco, California
September 5, 1997 (except with respect to the presentation
     of discontinued operations as discussed in Note 1, as
     to which the date is September 4, 1998)


                                      F-3


<PAGE>


             Meadowbrook Rehabilitation Group, Inc. and Subsidiaries

                           CONSOLIDATED BALANCE SHEET

                                  June 30, 1998



                                     ASSETS

Current assets
    Cash and cash equivalents ..................................   $  1,324,000
    Restricted cash ............................................        302,000
    Net assets of discontinued operations (net receivables
          and other assets of $2,319,000 less liabilities
          and estimated accrued disposal costs of $1,517,000) ..        802,000
                                                                   ------------
                 Total current assets ..........................      2,428,000

Property and equipment, net ....................................         23,000

Other receivables ..............................................        875,000
                                                                   ------------

                 Total assets ..................................   $  3,326,000
                                                                   ============

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities
    Short-term borrowings and notes payable ....................   $    163,000
    Accounts payable and accrued liabilities ...................         89,000
                                                                   ------------
                 Total current liabilities .....................        252,000

Stockholders' equity
    Common stock, $.01 par value -
       Class A; 22,500,000 shares authorized; 1,434,069
          shares issued and outstanding ........................         14,000
       Class B; 7,500,000 shares authorized; 1,159,500
          shares issued and outstanding ........................         12,000
    Paid-in capital ............................................     17,605,000
    Accumulated deficit ........................................    (14,557,000)
                                                                   ------------
                 Total stockholders' equity ....................      3,074,000
                                                                   ------------

                 Total liabilities and stockholders' equity ....   $  3,326,000
                                                                   ============


                                      F-4


<PAGE>


             Meadowbrook Rehabilitation Group, Inc. and Subsidiaries

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                           For the years ended June 30


<TABLE>
<CAPTION>

                                                                            1998           1997
                                                                        -----------    -----------

<S>                                                                     <C>            <C>
Continuing operations
    General and administrative expense ..............................   $(1,207,000)   $(1,782,000)
    Interest income .................................................       140,000         55,000
                                                                        -----------    -----------

                 Loss from continuing operations ....................    (1,067,000)    (1,727,000)

Discontinued operations
    Loss on disposal of discontinued businesses .....................    (1,563,000)          --
    Loss from operations of discontinued businesses .................      (235,000)    (2,124,000)
                                                                        -----------    -----------

                 Loss from discontinued operations ..................    (1,798,000)    (2,124,000)
                                                                        -----------    -----------

                 NET LOSS ...........................................   $(2,865,000)   $(3,851,000)
                                                                        ===========    ===========

Basic and diluted net loss per common share - continuing operations .   $     (0.37)   $     (0.60)
Basic and diluted net loss per common share - discontinued operations   $     (0.63)   $     (0.73)
                                                                        -----------    -----------
Basic and diluted net loss per common share .........................   $     (1.00)   $     (1.33)
                                                                        ===========    ===========

Weighted average shares outstanding .................................     2,851,893      2,895,366
                                                                        ===========    ===========


</TABLE>


                                      F-5


<PAGE>


             Meadowbrook Rehabilitation Group, Inc. and Subsidiaries

                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

                   For the years ended June 30, 1997 and 1998


<TABLE>
<CAPTION>
                                                                                                                            Total
                                      Class A                       Class B               Paid-in        Accumulated   Stockholders'
                               Shares         Amount         Shares         Amount        Capital          Deficit         Equity
                           ------------    ------------   ------------   ------------  -------------    ------------   ------------

<S>                           <C>          <C>               <C>         <C>            <C>             <C>            <C>         
Balance, July 1, 1996 ..      1,735,866    $     17,000      1,159,500   $     12,000   $ 17,898,000    $ (7,841,000)  $ 10,086,000

    Net loss ...........           --              --             --             --             --        (3,851,000)    (3,851,000)
                           ------------    ------------   ------------   ------------   ------------    ------------   ------------

Balance, June 30, 1997 .      1,735,866          17,000      1,159,500         12,000     17,898,000     (11,692,000)     6,235,000

    Net loss ...........           --              --             --             --             --        (2,865,000)    (2,865,000)

    Redemption of shares       (301,797)         (3,000)          --             --         (293,000)           --         (296,000)
                           ------------    ------------   ------------   ------------   ------------    ------------   ------------

Balance, June 30, 1998 .      1,434,069    $     14,000      1,159,500   $     12,000   $ 17,605,000    $(14,557,000)  $  3,074,000
                           ============    ============   ============   ============   ============    ============   ============

</TABLE>


                                      F-6


<PAGE>


             Meadowbrook Rehabilitation Group, Inc. and Subsidiaries

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                          For the years ended June 30,


<TABLE>
<CAPTION>
                                                                          1998           1997
                                                                      ------------  -------------
<S>                                                                   <C>            <C>
Cash flows from operating activities:
    Net loss ......................................................   $(2,865,000)   $(3,851,000)
       Adjustments to reconcile net loss to cash provided (used) by
        operations:
         Loss from discontinued operations ........................     1,798,000      2,124,000
         Changes in assets and liabilities:
           Net assets of discontinued operations ..................    (1,397,000)       958,000
           Accounts payable and accrued liabilities ...............       (43,000)       133,000
                                                                      -----------    -----------
              Net cash provided (used) by operations ..............    (2,507,000)      (636,000)

Cash flows from investing activities:
    Additions to property and equipment ...........................          --         (231,000)
    Discontinued operations, net ..................................     1,352,000      1,124,000
                                                                      -----------    -----------
              Net cash provided by investing activities ...........     1,352,000        893,000

Cash flows from financing activities:
    Short-term borrowings .........................................          --          517,000
    Payments of short-term borrowings .............................      (143,000)    (1,263,000)
    Payments of long-term borrowings ..............................       (35,000)          --
    Decrease in cash deposited to secure a loan ...................        24,000         32,000
    Payments to minority shareholders .............................          --          (53,000)
    Common stock redemptions ......................................      (296,000)          --
                                                                      -----------    -----------
              Net cash used by financing activities ...............      (450,000)      (767,000)
                                                                      -----------    -----------

              Net decrease in cash and cash equivalents ...........    (1,605,000)      (510,000)

Cash and cash equivalents, beginning of year ......................     2,929,000      3,439,000
                                                                      -----------    -----------

Cash and cash equivalents, end of year ............................   $ 1,324,000    $ 2,929,000
                                                                      ===========    ===========

Supplemental disclosure of cash flow information:
    Interest paid .................................................   $    19,000    $    59,000
    Income taxes paid .............................................        10,000         21,000

</TABLE>


                                      F-7


<PAGE>


             Meadowbrook Rehabilitation Group, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                             June 30, 1997 and 1998



NOTE 1 - ORGANIZATION AND OPERATIONS

     Meadowbrook Rehabilitation Group, Inc. ("Meadowbrook") and its subsidiaries
     (collectively,  the "Company") have undergone significant operating changes
     in fiscal years 1997 and 1998. As of June 30, 1998,  the Company has closed
     or is in the  process  of  closing  all of its  operating  facilities.  The
     Company previously  provided outpatient  rehabilitation  services and acute
     and sub-acute care in several states.

     After  considering  continued  losses  and a  diminishing  market  for  the
     Company's services,  the Company's Board of Directors decided in the fourth
     quarter  of  fiscal  1998 to  close  the  Company's  remaining  operations.
     Previously,  several of the Company's  service locations and units had been
     sold or otherwise disposed.  All operations had substantially  ceased as of
     June 30, 1998.  The Company's  administrative  operations are continuing to
     pursue the collection of receivables,  monitor the closing process and seek
     alternative business strategies.

     In  connection  with the decision to close,  the Company  recorded a charge
     relating to the disposal of the discontinued operations of $1,563,000. This
     charge includes the estimated losses on disposal, write-off of tangible and
     intangible assets,  and accrual for termination  benefits and other closing
     costs.  Prior  to the  decision  to  discontinue  the  operations,  several
     facilities  were sold,  resulting in a net gain of $1,771,000  for the year
     ended  June 30,  1998.  These  facilities  were  sold  for  cash and  notes
     amounting to $2,126,000. Prior years' consolidated financial statements and
     notes have been restated to reflect the discontinued operations.

     At June 30,  1998,  net assets of  discontinued  operations  consist of the
     following:

       Receivables............................................. $   2,166,000
       Other current assets....................................       153,000
       Trade Payables and accrued liabilities..................      (379,000)
       Estimated accrued disposal costs........................    (1,138,000)
                                                                -------------

                                                                $     802,000
                                                                =============

     Results of discontinued operations for 1998 and 1997 are as follows:

                                                   1998                1997
                                               ------------        ------------
     Net revenues ...........................  $  6,797,000        $ 20,834,000
     Net expenses ...........................    (7,032,000)        (22,958,000)
                                               ------------        ------------
     Net loss from operations of
          discontinued businesses ............ $   (235,000)       $ (2,124,000)
                                               ============        ============

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Consolidation
     -------------
     The consolidated  financial  statements include the accounts of Meadowbrook
     and  its   subsidiaries.   All   significant   intercompany   accounts  and
     transactions have been eliminated.

     Cash, Cash Equivalents and Restricted Cash
     ------------------------------------------
     The Company  considers all highly liquid debt  instruments with an original
     maturity of three months or less to be cash  equivalents.  Restricted  cash
     represents  amounts held by the  financial  institution  as security on the
     Company's  credit  facility and third party debt guaranteed by the Company.
     The Company  retains a security  interest in certain real property for this
     guarantee.


                                      F-8


<PAGE>


             Meadowbrook Rehabilitation Group, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                             June 30, 1997 and 1998



NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

     Revenue Recognition and Receivables
     -----------------------------------
     Payments for services  rendered to private  payors and patients  covered by
     commercial  insurance  were  generally  negotiated  at  amounts  lower than
     standard  rates.  Payments  for  services  rendered to patients  covered by
     Medicare  and  Medicaid  were  generally  at  lower  than  standard  rates.
     Allowances were recorded to reflect the difference  between  standard rates
     and  expected  reimbursement,  so that  patient  accounts  receivable  were
     recorded net of estimated discounts.

     The Company recorded  additional  allowances for uncollectible  receivables
     that  reflected  the  best  judgment  of  management  as  to  the  ultimate
     collectibility of accounts  receivable.  As of June 30, 1998, the allowance
     for uncollectible accounts amounted to $843,000. However, the nature of the
     reimbursement  process,  as well as the sale and  closure of the  Company's
     facilities,  makes these judgments difficult and actual reimbursement could
     vary significantly from these estimates.

     Final determination of amounts receivable or payable under the Medicare and
     Medicaid  programs  is  subject  to  audit  or  review  by  the  respective
     administrative  agencies.  Provisions  have  been  recorded  for  estimated
     adjustments.

     Furniture and Equipment and Depreciation
     ----------------------------------------
     Furniture and equipment are recorded at cost. Depreciation and amortization
     are computed using the straight-line method based on estimated useful lives
     that range from 3 to 15 years. All leasehold  improvements were written off
     in connection with discontinued operations.

     Goodwill and Other Intangible Assets
     ------------------------------------
     Goodwill  and other  intangible  assets were  recorded in  connection  with
     acquisitions  made in  prior  years.  These  amounts  were  written  off in
     connection with discontinued operations.

     Fair Value of Financial Instruments
     -----------------------------------
     The fair value of cash, accounts receivable and trade payables  approximate
     carrying value due to the short term nature of such  instruments.  The fair
     value of obligations to financial institutions  approximates carrying value
     based on terms available for similar instruments.  The fair  value of notes
     payable to individuals is not determinable.

     Recent Accounting Pronouncements
     --------------------------------
     The Financial  Accounting  Standards Board ("FASB") has issued Statement of
     Financial  Accounting  Standard ("SFAS") No. 130,  Reporting  Comprehensive
     Income.  SFAS No. 130  establishes  standards for  reporting  comprehensive
     income and its components in a financial statement. Comprehensive income as
     defined  includes all changes in equity (net  assets)  during a period from
     non-owner  sources.  Examples  of items  to be  included  in  comprehensive
     income,  which are  excluded  from net  income,  include  foreign  currency
     translation  adjustments and unrealized  gains/losses on available-for-sale
     securities.  The  disclosure  prescribed  by  SFAS  No.  130  must  be made
     beginning  with the first quarter of 1999. The Company does not expect this
     pronouncement to have any effect on its financial reporting.


                                      F-9


<PAGE>


             Meadowbrook Rehabilitation Group, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                             June 30, 1997 and 1998



NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

     The FASB also has issued SFAS No.  131,  Disclosures  about  Segments of an
     Enterprise and Related Information.  This statement  establishes  standards
     for the way  companies  report  information  about  operating  segments  in
     financial statements. It also establishes standards for related disclosures
     about products and services,  geographic  areas, and major  customers.  The
     Company has not yet  determined  the effect,  if any, of adopting  this new
     standard.  The disclosures prescribed by SFAS No. 131 will be effective for
     the year ending June 30, 1999.

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


NOTE 3 - SHORT-TERM BORROWINGS AND NOTES PAYABLE

     The Company  has notes  payable of  $163,000  of which  $30,000  relates to
     borrowings from a bank under a credit facility.  These notes are payable in
     varying installments at an average interest rate of 8.6%.

NOTE 4 - STOCKHOLDERS' EQUITY

     Common Stock
     ------------
     The  Company  has Class A and Class B Common  Stock.  Class A Common  Stock
     includes the same rights as Class B Common Stock in all respects except for
     the following:

          Class B Common  Stock has ten votes per share and Class A Common Stock
          has one vote per share.

          Class B Common Stock is  convertible 1 for 1 into Class A Common Stock
          at any time at the option of the holder.

          Class B Common  Stock  automatically  converts to Class A Common Stock
          when  Class B Common  Stock  represents  less than  12.5% of the total
          number of votes entitled to be cast in the election of directors.

          No  additional  shares of Class B Common Stock will be issued  without
          prior  approval  of the Class A Common  stockholders  except for stock
          dividends and stock splits.


                                      F-10


<PAGE>


             Meadowbrook Rehabilitation Group, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                             June 30, 1997 and 1998


NOTE 4 - STOCKHOLDERS' EQUITY (continued)

     Stock Dividend
     --------------

     In April 1998,  the Company  effected a three for two stock split paid as a
     dividend  in the form of  shares  at the rate of one  share  for  every two
     shares of stock owned at the date of reward.  The Company has retroactively
     reflected the stock  dividend in the financial  statements  for all periods
     presented.

     Stock Plan
     ----------
     The 1994  Stock  Incentive  Plan  (the  "Plan")  provided  for the grant of
     incentive  stock  options.  Options  granted under the Plan  generally vest
     within three years and terminate ten years from the date of grant.

     Stock option activity is summarized as follows:

                                                             Weighted
                                                             Average
                                                             Exercise
                                                              Price
                                               Shares       Per Share
                                            -----------    -----------
          Balance at June 30, 1996 ........     230,000    $      4.31
              Granted......................      10,000           1.25
              Exercised....................           -              -
              Cancelled ...................    (100,000)          3.32
                                            -----------    -----------

          Balance at June 30, 1997.........     140,000           5.02
              Granted......................       5,000           1.96
              Exercised....................           -              -
              Cancelled ...................    (115,000)          3.87
                                            ------------   -----------

          Balance at June 30, 1998.........      30,000    $      2.73
                                            ===========    ===========

     The following table summarizes  information about stock options outstanding
     as of June 30, 1998:

                                              Weighted
                                 Weighted     Average                   Weighted
    Range of                      Average     Remaining                  Average
    Exercise         Number       Exercise   Contractual     Number     Exercise
     Price        Outstanding      Price         Term      Exercisable    Price
     -----        -----------      -----         ----      -----------    -----
  $1.33 - $4.25      30,000        $2.73          8          22,500       $3.04


                                      F-11


<PAGE>


             Meadowbrook Rehabilitation Group, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                             June 30, 1997 and 1998


NOTE 4 - STOCKHOLDERS' EQUITY (continued)

     The   following   table   depicts  the  Company's  pro  forma  results  had
     compensation  expense for employee stock options been  determined  based on
     the fair value at the grant dates as prescribed in SFAS No. 123:

                                                       1998             1997
                                                  --------------   -------------
     Net loss applicable to common shareholders
         As reported............................  $ (2,865,000)    $ (3,851,000)
         Pro forma .............................    (2,875,000)      (3,863,000)
     Basic and diluted net loss per share
         As reported............................  $      (1.00)    $      (1.33)
         Pro forma .............................         (1.01)           (1.33)

     The fair value of each option grant was determined using the  Black-Scholes
     model.  The weighted average fair value of options granted to employees was
     $1.83 and $2.88 for 1997 and 1998,  respectively.  The  following  weighted
     average assumptions were used to perform the calculations: expected life of
     5 years;  interest rate of 6%;  volatility of 200%; and no dividend  yield.
     The pro  forma  disclosures  above may not be  representative  of pro forma
     effects on reported financial results for future years.


NOTE 5 - INCOME TAXES

     The  Company  provides  for  income  taxes  under the  liability  method in
     accordance with SFAS No. 109,  Accounting for Income Taxes.  Under SFAS No.
     109 deferred taxes are provided  using an asset and liability  method using
     current tax rates.  A valuation  allowance is recorded when, in the opinion
     of management,  realization  of the net asset is not probable.  The Company
     increased  the valuation  allowance by $1,203,000  and $928,000 in 1998 and
     1997.  No provision for taxes was made in 1997 or 1998 due to the losses in
     each year.

     The following table  reconciles the  differences  between the effective tax
     rate and the federal statutory rate:

                                                           1998          1997
                                                       ----------     ---------
       Federal statutory rate.........................    (34.0)%        (34.0)%
       State taxes, net of federal effects............     (5.0)          (3.0)
       Permanent differences..........................      -             16.0
       Net operating losses...........................     39.0           24.0
       Other..........................................      -             (3.0)
                                                      ----------      ---------

                                                            -   %         -    %
                                                      ==========     ==========


                                      F-12


<PAGE>



             Meadowbrook Rehabilitation Group, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                             June 30, 1997 and 1998


NOTE 5 - INCOME TAXES (continued)

     Deferred income taxes are comprised of the following at June 30, 1998:

       Accruals not currently deductible.................... $  676,000
       Tax loss carry forwards..............................  3,322,000
                                                             ----------
       Net deferred income tax assets.......................  3,998,000
       Less valuation allowance............................. (3,998,000)
                                                             ----------
          Net deferred income tax asset..................... $       --
                                                             ==========

     At June  30,  1998,  the  Company  has  net  tax  loss  carry  forwards  of
     approximately $8,500,000 available to offset future federal taxable income.
     These losses expire on various dates through June 2013.


NOTE 6 - RELATED PARTY TRANSACTIONS

     In prior years, the Company entered into certain  transactions with parties
     that are related by common ownership or control.  The Company has leased in
     the past certain  facilities from the majority  stockholder of the Company.
     Rental  expense on these leases was $30,000 and $382,000 for 1998 and 1997.
     As of June 30, 1998, no related party leases exist.


NOTE 7 - BUSINESS ACQUISITIONS

     On September 14, 1998, the Company  acquired all of the outstanding  shares
     of stock of Cambio,  Inc.  ("Cambio"),  a software  development  company in
     exchange for 32.3% of the outstanding  Meadowbrook shares. This acquisition
     will be accounted for as a purchase.

     Cambio provides  products and services that provide network  documentation,
     network inventory and equipment provisioning functions for large enterprise
     networks and telecommunication  enterprise networks.  Cambio's products and
     services  are  designed to enhance  network  operations  support and reduce
     network-related costs associated with a variety of business needs including
     network   changes,   relocations,   mergers   and   acquisitions,   network
     outsourcing,  backup and disaster recovery planning.  Network documentation
     is an essential  corporate  information  system that allows network support
     professionals  to create,  maintain and access a  centralized  model of the
     entire  network,  its  components  and  their  relationships.  Cambio  also
     provides a broad range of network  integration,  consulting,  training  and
     implementation services and Year 2000 solutions.

     At June 30, 1998,  the Company had advanced to Cambio  $875,000 for working
     capital  purposes.  This  amount  is  shown in the  balance  sheet as Other
     Receivables.


                                      F-13