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

                                    FORM 10-Q

(Mark One)

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

                For the quarterly period ended September 30, 1996

     [      ]              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.
             (Exact name of registrant as specified in its charter)

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

           2200 Powell Street, Suite 800, Emeryville, California 94608
              (Address and Zip Code of principal executive offices)

       Registrant's Telephone Number, including Area Code: (510) 420-0900
                                  ------------

     Indicate  by check mark  whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. YES X NO ______

     At November 13, 1996,  the latest  practicable  date,  there were 1,157,244
outstanding  shares  of Class A Common  Stock,  $.01 par value  per  share,  and
773,000 outstanding shares of Class B Common Stock, $.01 par value per share.


<PAGE>


                                TABLE OF CONTENTS


PART I:  FINANCIAL INFORMATION                                              Page

    Item 1.     Financial Statements
                Consolidated Balance Sheets        .........................   3
                Consolidated Statements of Operations ......................   4
                Consolidated Statements of Cash Flows ......................   5
                Consolidated Statements of Stockholders' Equity.............   6

    Item 2.     Management's Discussion and Analysis of Financial
                Condition and Results of Operations
                Trends and Recent Events  ..................................   7
                Results of Operations     ..................................  11
                Liquidity and Capital Resources    .........................  13
                Impact of Accounting Statements    .........................  15
                Interim Periods  ...........................................  15

PART II: OTHER INFORMATION

    Item 1.     Legal Proceedings  .........................................  16
    Item 2.     Changes in Securities     ..................................  16
    Item 3.     Defaults Upon Senior Securities    .........................  16
    Item 4.     Submission of Matters to a Vote of Security Holders  .......  16
    Item 5.     Other Information  .........................................  16
    Item 6.     Exhibits  ..................................................  16

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






<PAGE>
<TABLE>
<CAPTION>

                                         Part I: FINANCIAL INFORMATION (Item 1. - Financial Statements)

                                            MEADOWBROOK REHABILITATION GROUP, INC. AND SUBSIDIARIES

                                                   CONSOLIDATED BALANCE SHEETS

                                                                                            June 30,       September 30
                                                                                              1996             1996 
                                                                                          ------------     ------------
                                                                                                           (Unaudited)
<S>                                                                                        <C>              <C>        
CURRENT ASSETS:
   Cash and cash equivalents                                                               $3,439,440       $2,542,682 
   Restricted cash                                                                            311,000          311,000
   Patient accounts receivable, less allowance for doubtful accounts
      of $1,445,000 and $1,504,000 respectively                                             4,738,957        5,121,491 
   Due from intermediaries                                                                    331,918          344,262 
   Income tax refund receivable                                                               140,362           66,577 
   Other receivables                                                                        1,264,444        1,294,201 
   Prepaid expenses and other assets                                                          376,898          505,533 
                                                                                          ------------     ------------
      Total current assets                                                                 10,603,019       10,185,746 
                                                                                          ------------     ------------

PROPERTY AND EQUIPMENT, at cost:
   Land and buildings                                                                         683,770          683,770 
   Furniture and equipment                                                                  2,993,965        3,053,795 
   Leasehold improvements                                                                     783,614          799,259 
                                                                                          ------------     ------------
                                                                                            4,461,349        4,536,824 
   Less - accumulated depreciation                                                         (2,095,193)      (2,237,064)
                                                                                          ------------     ------------
      Net property and equipment                                                            2,366,156        2,299,760 
                                                                                          ------------     ------------

OTHER ASSETS:
  Goodwill and intangible assets                                                            1,870,555        1,853,793 
                                                                                          ------------     ------------

                            TOTAL ASSETS                                                  $14,839,730      $14,339,299 
                                                                                          ============     ============

CURRENT LIABILITIES:
   Short-term borrowings and current maturities of notes payable                             $657,724         $854,431 
   Current maturities of capital lease obligations                                             32,803           32,133 
   Accounts payable                                                                         1,226,053        1,643,176 
   Accrued payroll and employee benefits                                                    1,101,168        1,107,669 
   Other accrued liabilities                                                                1,065,820          701,255 
                                                                                          ------------     ------------

      Total current liabilities                                                             4,083,568        4,338,664 
                                                                                          ------------     ------------

LONG-TERM LIABILITIES:
   Capital lease obligations                                                                   21,815           15,232 
    Note payable and other long-term liabilities                                              636,255          497,919 
                                                                                          ------------     ------------
      Total long term liabilities                                                             658,070          513,151 
                                                                                          ------------     ------------

                            TOTAL LIABILITIES                                               4,741,638        4,851,815
                                                                                          ------------     ------------

MINORITY INTEREST IN EQUITY OF CONSOLIDATED SUBSIDIARIES                                       11,665           11,636 
                                                                                          ------------     ------------

STOCKHOLDERS' EQUITY:
 Common stock, $.01 par value:
  Class A -- 15,000,000 shares authorized; 1,157,244 shares issued and outstanding
    at June 30, 1996 and September 30, 1996                                                    11,572           11,572        
  Class B -- 5,000,000 shares authorized; 773,000 shares issued and outstanding
    at June 30, 1996 and September 30, 1996                                                     7,730            7,730        
 Paid-in capital                                                                           17,908,122       17,908,122   
 Retained deficit                                                                          (7,840,997)      (8,451,576)  
                                                                                          ------------     ------------

      Total stockholders' equity                                                           10,086,427        9,475,848 
                                                                                          ------------     ------------

                            TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                    $14,839,730      $14,339,299 
                                                                                          ============     ============


<FN>
     The  notes  to  consolidated  financial  statements,  as  contained  in the
Company's  Annual Report on Form 10-K,  are an integral part of these  financial
statements.
</FN>
</TABLE>

<PAGE>

<TABLE>
<CAPTION>

         Part I: FINANCIAL INFORMATION (Item 1. - Financial Statements)

             MEADOWBROOK REHABILITATION GROUP, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS



                                                      3-Mths Ended September 30,
                                                       1995            1996

                                                    (Unaudited)     (Unaudited)
                                                   -----------      ------------

<S>                                                <C>              <C>       
 NET OPERATING REVENUES                            $5,578,887       $5,976,984

 OPERATING EXPENSES:
    Salaries and employee benefits                  4,046,452        4,152,269
    Professional fees and purchased services          637,890          718,344
    Provision for doubtful accounts                   125,419          117,895
    Other operating expenses                          722,438          963,029
    Depreciation and amortization                     138,365          158,635
    Rent:
       To unrelated parties                           412,317          386,258
       To related parties                             101,739           97,452
                                                   -----------       -----------
       Total operating expenses                     6,184,620        6,593,882
                                                   -----------       -----------
       Loss from operations                          (605,733)        (616,898)
                                                   -----------       -----------

 OTHER (INCOME) EXPENSE:
    Interest income                                   (66,327)         (36,170)
    Interest expense                                   24,011           16,819
                                                   -----------       -----------
       Net other income                               (42,316)         (19,351)
                                                   -----------       -----------

       Loss before income taxes                      (563,417)        (597,547)

 INCOME TAX  PROVISION                                      0                0
                                                   -----------       -----------
       NET LOSS BEFORE MINORITY INTEREST            ($563,417)       ($597,547)

 MINORITY INTEREST IN EARNINGS OF
 CONSOLIDATED SUBSIDIARIES                             21,153           13,032
                                                   -----------       -----------

       NET LOSS                                     ($584,570)       ($610,579)
                                                   ===========       ===========

 NET LOSS PER SHARE (primary and fully diluted)        ($0.30)          ($0.32)
                                                   ===========       ===========


 WEIGHTED AVERAGE COMMON AND COMMON
    EQUIVALENT SHARES OUTSTANDING                   1,930,661        1,930,244
                                                   ===========       ===========

<FN>

     The  notes  to  consolidated  financial  statements,  as  contained  in the
Company's  Annual Report on Form 10-K,  are an integral part of these  financial
statements.

</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>

                               Part 1: FINANCIAL INFORMATION (Item 1 - Financial Statements)


                                      MEADOWBROOK REHABILITATION GROUP, INC. AND SUBSIDIARIES

                                            CONSOLIDATED STATEMENTS OF CASH FLOWS


                                                                                 3-Mths Ended September 30,
                                                                                  1995             1996
                                                                            -------------     ------------
                                                                              (Unaudited)      (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                           <C>              <C>       
       Net loss                                                               ($584,570)       ($610,579)
       Adjustments to reconcile net loss to cash provided by
        (used for) operating activities -
            Depreciation and amortization                                       138,365          158,635
            Loss on disposal of assets                                              413                0
            Minority interest expense                                            21,153           13,032
            Changes in assets and liabilities -
                 (Increase) in patient accounts receivable, net              (1,123,977)        (382,534)
                 Decrease (increase) in due from intermediaries                 128,050          (12,344)
                 Decrease in income tax refund receivable                             0           73,785
                 (Increase) in other receivables                               (243,943)         (29,757)
                 (Increase) in prepaid expenses and other current assets       (350,363)        (128,635)
                 Increase in accounts payable and accrued liabilities           119,348          182,501
                                                                            ------------     ------------

                 Cash used for operating activities                          (1,895,524)        (735,896)
                                                                            ------------     ------------

CASH FLOWS FROM INVESTMENT ACTIVITIES:
            Additions to property and equipment                                (118,083)         (75,779)
            Payments on prior purchase of outpatient clinics                    (51,578)        (143,222)
            Proceeds from sale of assets                                          2,472              302
                                                                            ------------     ------------

                 Cash used for investment activities                           (167,189)        (218,699)
                                                                            ------------     ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
            Short-term borrowings                                               432,109          273,002
            Payments of short-term borrowings                                  (202,841)        (194,851)
            Long-term borrowings                                                 14,124                0
            Payments of capital lease obligations                                     0           (7,253)
            Payments to minority shareholders                                    (9,585)         (13,061)
                                                                            ------------     ------------

                 Cash provided by financing activities                          233,807           57,837
                                                                            ------------     ------------

                 Net decrease in cash                                        (1,828,906)        (896,758)

CASH AND CASH EQUIVALENTS, beginning of period                                6,307,307        3,439,440
                                                                            ------------     ------------

CASH AND CASH EQUIVALENTS, end of period                                     $4,478,401       $2,542,682
                                                                            ============     ============


SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                           
 Noncash activities -                                                       
      Property additions financed with notes payable                            $20,524               $0
      Liability resulting from purchase of outpatient facilities                 45,180                0
 Payments -                                                                 
      Interest paid                                                               9,227           31,266
      Income taxes paid                                                               0           20,900

<FN>
     The  notes  to  consolidated  financial  statements,  as  contained  in the
Company's  Annual Report on Form 10-K,  are an integral part of these  financial
statements.
</FN>
</TABLE>


<PAGE>
<TABLE>
<CAPTION>

                                                  Part I: FINANCIAL STATEMENTS (Item 1. - Financial Statements)

                                                       MEADOWBROOK REHABILITATION GROUP, INC. AND SUBSIDIARIES

                                                               CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY



                                               Common Stock                                      
                                 ---------------------------------------
                                      Class A             Class B                       Retained           Total
                                 --------------------  -----------------   Paid-in      Earnings      Stockholders'
                                  Shares      Amount   Shares    Amount    Capital      (Deficit)        Equity
                                 ----------  --------  --------- -------  ------------  ------------  -------------
<S>                              <C>         <C>        <C>      <C>      <C>           <C>            <C>        
BALANCE, JUNE 30, 1995           1,157,662   $11,577    773,000  $7,730   $17,908,117   ($7,250,693)   $10,676,731

         Cancellation of shares       (418)       (5)       ---     ---             5           ---            ---
         Net loss                      ---       ---        ---     ---           ---      (590,304)      (590,304)
                                 ----------  --------  --------- -------  ------------  ------------  -------------

BALANCE, JUNE 30, 1996           1,157,244   $11,572    773,000  $7,730   $17,908,122   ($7,840,997)   $10,086,427

         Net loss                      ---       ---        ---     ---           ---      (610,579)      (610,579)
                                 ----------  --------  --------- -------  ------------  ------------  -------------

BALANCE, SEPTEMBER 30, 1996      1,157,244   $11,572    773,000  $7,730   $17,908,122   ($8,451,576)    $9,475,848
                                 ==========  ========  ========= =======  ============  ============  =============

<FN>
     The  notes  to  consolidated  financial  statements,  as  contained  in the
Company's  Annual Report on Form 10-K,  are an integral part of these  financial
statements.
</FN>
</TABLE>

<PAGE>


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

                            TRENDS AND RECENT EVENTS


     o Loss History; Liquidity Risks

     The  Company  has  incurred  significant  losses in each of the last  three
fiscal  years as well as the first three months of fiscal  1997.  The  Company's
future  profitability  is dependent on a variety of factors,  including  without
limitation, increased patient census, a reduction in expenses as a percentage of
total  operating  revenues and the successful  integration and management of the
Company's outpatient  rehabilitation clinics and home health agencies. There can
be no assurance as to the Company's future profitability.

     The Company's  recent  operating  losses and the funding of initial working
capital  for its  Colorado  outpatient  clinics and home  health  agencies  have
substantially  reduced its available  working  capital.  The  Company's  working
capital has fallen from  $6,519,000  at June 30, 1996 to $5,847,000 on September
30, 1996. For the three months ended September 30, 1996, the Company's operating
activities  used cash of $736,000.  While the Company  believes that its working
capital  will be  sufficient  to  sustain  the  Company's  needs for the next 12
months,  the Company's ability to continue to fund its operations  thereafter is
dependent on the Company  achieving  profitability  and positive cash flows from
operating  activities.  The Company has a $1,000,000 bank  line-of-credit  which
would require a $500,000 bank deposit if drawn. Otherwise, the Company currently
does not have access to additional  capital.  There can be no assurance  that in
the  future  the  Company  will not  experience  a shortage  of  available  cash
necessary to operate its business.

     o Consideration of Strategic Alternatives

     As a result of the Company's continued losses, the Board of Directors is in
the process of evaluating the Company's  strategic  direction and  alternatives.
The alternatives under consideration by the Board include, among other things, a
merger or other business  combination  transaction or sales of assets. There can
be no assurance that any such alternatives will be available on favorable terms,
if at all.

     Harvey Wm. Glasser, M.D., the Company's majority stockholder, has indicated
his view that the  Company's  business  should  not  necessarily  be  limited to
medical  rehabilitation or the healthcare field generally and that, if presented
with an appropriate opportunity,  the Company should consider investing proceeds
from any asset sales in non-healthcare  businesses.  As a result,  the nature of
the Company's business could change significantly.  Dr. Glasser holds a majority
of the combined  voting power of the  Company's  two classes of common stock and
accordingly  has the  ability  to effect a change in  management  or to cause or
prevent a significant corporate transaction.


<PAGE>


     o Reverse Stock Split

     On April 22, 1996, the Restated Certificate of Incorporation of the Company
was amended to effect a one-for-three reverse stock split of the Company's Class
A and Class B Common Stock. The purpose of the reverse stock split was to permit
the Company to remain  listed on The NASDAQ  Stock  Market.  In  February  1996,
NASDAQ notified the Company that it was reviewing the Company's  eligibility for
continued  listing.  The Company was out of compliance at various times prior to
the reverse stock split with NASDAQ's requirement that it maintain a minimum bid
price of $1.00 per share. The Company believes that it is now in compliance with
all of the requirements for continued inclusion on NASDAQ.

     The  Company has  retroactively  reflected  the reverse  stock split in the
financial statements for all periods presented.

     o Colorado Outpatient Clinics and Home Health Agency Acquisition

     On June 30,  1995 the Company  acquired  eleven  outpatient  rehabilitation
clinics in Colorado, three outpatient  rehabilitation clinics in Alaska and home
health agencies with operations in Colorado,  New Mexico and Kansas. The Company
paid  $133,000  and  incurred  liabilities  of $572,000 in  connection  with the
purchase.  The Company  also  agreed to make  additional  payments  based on the
earnings  performance  of the  outpatient  rehabilitation  clinics  and the home
health  agencies  based on the results for the period ended June 30,  1996.  The
Company was not required to make any cash payments. The additional cash payments
would total $825,000 if the operations  collectively achieve the target earnings
thresholds for the twelve months ending June 30, 1997 through 1999.

     In addition,  in connection  with the  acquisition,  the Company  agreed to
deposit  $500,000 to secure a $900,000  bank loan to the  previous  owner of the
acquired businesses. The Company is overseeing the repayment of the loan through
the collection of accounts receivable which are being collected on behalf of the
previous owner. At the time of the acquisition, the Company anticipated that the
loan would be repaid based on the accounts  receivable balance then outstanding.
The loan balance on September 30, 1996 was $251,000. The Company did not acquire
accounts   receivable  in  connection   with  the  acquisition  and  has  funded
approximately  $1,312,000 of working capital for the acquired  operations  since
the date of acquisition.

     In October  1995 the Company  was  notified  by its  intermediary  that its
Medicare  payments for the recently  acquired  home health  agencies  were being
withheld to offset amounts due by the previous owner for final settlement of the
home health  agencies cost reports for the years 1992 through 1995. At September
30, 1996, the intermediary had withheld  $728,000 related to these  settlements.
This amount is included in other receivables on the Company's balance sheet. The
Company and the previous owner have submitted  appeals to these  settlements and
are currently  awaiting  response from the  intermediary.  In the event that the
appeals of the prior owner and the Company are unsuccessful, the Company intends
to offset  the  amounts  withheld  against  any  additional  amounts  due to the
previous owner under the acquisition agreements. The intermediary resumed making
payments to the Company for current charges in January 1996.

     On January 1, 1996, the Company acquired the assets of two physical therapy
clinics  in  Pueblo  and  Colorado  City,  Colorado.   In  connection  with  the
acquisitions, the Company paid $32,500 and became obligated to pay an additional
$32,500. Additionally, the Company assumed liabilities of $75,000.

     On April 1, 1996 the  Company  acquired  the assets of a  contract  therapy
business with operations in Pueblo and Colorado Springs,  Colorado. The business
provides therapy staffing to hospitals,  nursing homes and home health agencies.
In  connection  with the  acquisition,  the  Company  paid  $10,000  and assumed
liabilities for leasehold improvements of $62,000.

     o Florida Outpatient Clinics Acquisitions

     During fiscal 1994, the Company acquired a majority interest in or obtained
management contracts to operate nine outpatient  rehabilitation  clinics located
in Jacksonville,  Jacksonville Beach, Orange Park, St. Augustine,  St. Augustine
Beach, Palm Coast and Palatka, Florida and in Moultrie, Georgia. At closing, the
Company paid $608,000,  agreed to reimburse  certain  selling  shareholders  for
accounts  receivable of the acquired  clinics  collected after the closing,  and
agreed to make additional payments based on the earnings  performance of certain
clinics in each year during the three year period ending March 31, 1997.

     The Company  paid  $123,000  based on the earnings  performance  of certain
clinics and $20,000 in interest on deferred acquisition  payments.  At September
30, 1996,  the Company's  remaining  liability  resulting  from the purchase was
$280,000 plus additional  payments based on the earnings  performance of certain
clinics.  Such payments would total $135,000 if the earnings of such clinics for
the  twelve  months  ending  March 31,  1997 are equal to the  earnings  of such
clinics for the base year, the twelve months ended December 31, 1993.

     On October 1, 1994,  the Company  acquired the minority  interest in two of
the outpatient  clinics referred to above. In connection with such  acquisition,
the Company paid  $600,000 and is  obligated  to pay an  additional  $150,000 by
October 1, 1996. Such amount was paid on October 1, 1996.

     On February  1, 1995,  the Company  acquired an  outpatient  clinic in Palm
Coast,  Florida.  At September  30, 1996,  the Company had paid  $146,000 of the
purchase price and was obligated to pay an additional  $114,000 in equal monthly
installments of $3,300 through February 2000.

     On May 12, 1995,  the new owner of five of the Florida  outpatient  clinics
managed by the Company  advised the Company that its  management  contracts were
terminated.  As a result,  during the fourth  quarter of fiscal 1995 the Company
recorded a charge of $1,030,000 to write-off  intangible assets recorded as part
of the fiscal 1994  acquisition.  The charge is  classified  as a  non-operating
expense.  The Company does not agree that such  contracts may be terminated  and
has filed suit to protect its legal rights.

     The Company opened two outpatient  rehabilitation clinics during the second
quarter of fiscal 1996.  The clinics are located in St.  Augustine  and Daytona,
Florida.  The Company also acquired the assets of an  outpatient  rehabilitation
clinic in Ormond Beach, Florida in June 1996.

     o Sale/Closure of Facilities

     Sale of Park Ridge, Illinois Post Acute Facility.

     On  October  7,  1996  the  Company  sold  the  assets  of its  post  acute
rehabilitation facility located in Park Ridge, Illinois. The Company's agreement
with the purchaser provides that the Company will collect  outstanding  accounts
receivable and be responsible for the accounts  payable at the closing date. The
Company expects that the net cash proceeds to the Company from this transaction,
assuming collection of the accounts receivable,  will be approximately $360,000.
This  transaction  has not been  reflected  in the  financial  statements  as of
September 30, 1996.

     Closure of Psychiatric Partial Hospitalization Program.

     During  fiscal  year 1995 the  Company  internally  developed,  through its
wholly  owned   subsidiary,   Medbrook  of  Indiana,   a   psychiatric   partial
hospitalization  program which provided  psychiatric  services in long-term care
facilities.  In June 1995, the Company decided to close the psychiatric  partial
hospitalization  program and the program was closed on September  22, 1995.  The
Company's decision to close the program was based on difficulties in growing the
business and potential Medicare  reimbursement  issues. As of June 30, 1995, the
Company  recorded a restructuring  charge of $310,000  related to the closure of
the program.

     Closure of San Jose, California Subacute Facility.

     During  the first  quarter  of fiscal  year 1994,  the  Company  closed its
subacute program in San Jose, California. On December 27, 1994, the Company sold
its lease for the San Jose facility to an investment partnership. The investment
partnership's  rent obligation  commenced on February 15, 1995. This partnership
in turn subleases the facility to a third party.  The Company remains  obligated
to make lease payments in the event that the investment  partnership defaults on
its  obligations  under the lease.  Because the investment  partnership has made
substantial improvements to the facility, the Company does not anticipate such a
default.

     o Healthcare Reform.

     President  Clinton and others have expressed an intention to continue their
efforts to reform the nation's healthcare system. The principal goals of many of
the  proposals  are to  reduce  the  rate of  increase  in  national  healthcare
expenditures, particularly by cutting the rate of increase in Medicare spending.
The ability of healthcare  providers such as the Company to compete successfully
in such an  environment  may  depend on its  ability  to obtain  contracts  with
managed  care plans.  In addition to the  national  reform  proposals,  there is
proposed  legislation  in various  states.  There can be no  assurance as to the
ultimate content, timing or effect of any healthcare reform legislation,  nor is
it possible,  at this time, to estimate the impact of potential  legislation  on
the Company, which may be material.


<PAGE>

                              RESULTS OF OPERATIONS

     The  following  table sets forth for the fiscal  periods  indicated (a) the
percentage of net  operating  revenues  represented  by certain  selected  items
reflected in the Company's  consolidated  statements  of operations  and (b) the
percentage  change in the dollar  amount of such items from the same  periods in
the prior fiscal year.



                                                % Net Revenue       % $ Change
                                                3-Months Ended        3-Month
                                              9/30/95    9/30/96        Qtr
                                             --------    -------     ----------

Net  Operating Revenues                        100.0      100.0          7.1

Non-capital operating expenses:
          Salaries and employee benefits        72.5       69.5          2.6
          Other non-capital expenses            26.6       30.1         21.1
                                             --------    -------     
              Total non-capital expenses        99.1       99.6          7.6

Capital expenses:
          Depreciation and amortization          2.5        2.7         14.6
          Rent                                   9.2        8.1         (5.9)
          Interest                               0.4        0.3        (30.0)
                                             --------    -------     
                  Total capital expenses        12.1       11.0         (2.6)
                                             --------    -------     
                  Total expenses               111.2      110.6          6.5

Interest Income                                  1.2        0.6        (45.5)
                                             --------    -------     
Loss before income taxes                       (10.0)     (10.0)         6.1
Income Tax Provision                             0.0        0.0          0.0
                                             --------    -------     

Loss before minority interest                  (10.0)     (10.0)         6.1

Minority Interest                                0.4        0.2        (38.4)
                                             --------    -------     

Net Loss                                       (10.4)     (10.2)         4.4
                                             ========    =======     


     The  Company's net operating  revenues  increased 7% to $5,977,000  for the
three months ended  September 30, 1996,  as compared to $5,579,000  for the same
period in the prior  fiscal  year.  The  increase  was due  primarily  to higher
utilization in the Company's Colorado home health agencies. These increases were
partially   offset  by  the  closure  of  the  Company's   psychiatric   partial
hospitalization  program  during the first quarter of fiscal 1996.  The increase
was also offset by decreased  utilization of the Company's core facilities (i.e.
acute,  subacute and post acute  rehabilitation  units in Georgia,  Illinois and
Kansas).  The number of patient days in the Company's core business decreased 4%
to 6,457 for the three months ended  September 30, 1996, from 6,706 for the same
period in fiscal 1995.



<PAGE>


     In the Company's core business revenue per patient day increased 5% to $552
for the three months ended  September 30, 1996, as compared to $527 for the same
period in the prior fiscal year. The Company's revenues per patient day for both
periods do not include revenue per patient day at the Georgia subacute facility,
which has been operated by the Company under a management  agreement  since June
5, 1995.  Revenue per patient day in the 1997 period  benefited  from changes in
service mix.

     Total non-capital  operating  expenses for the three months ended September
30, 1996 increased 8% to $5,952,000  from  $5,532,000  during the same period in
the prior  fiscal  year.  The  increase  resulted  from  increased  salaries and
expenses  related to the increased  utilization  of the Company's  Colorado home
health  agencies.  Salaries  and  employee  benefits  continue to be the primary
component of the Company's non-capital operating expenses. Salaries and employee
benefits  increased 3% to $4,152,000  for the three months ending  September 30,
1996,  as compared to  $4,046,000  for the same period in the prior fiscal year.
Salaries  and  employee  benefits  as a  percentage  of net  operating  revenues
decreased to 70% for the three months ended  September  30, 1996, as compared to
73% for the same period in the prior fiscal year.

     The Company's other  non-capital  operating  expenses  primarily consist of
professional  fees,  purchased  services and other operating  expenses.  For the
three months ended September 30, 1996, the Company's other non-capital operating
expenses  increased 21% to  $1,799,000  as compared to  $1,486,000  for the same
period in the prior  fiscal year.  The  increase is  primarily  due to increased
mileage reimbursement and purchased services related to increased utilization of
the Company's Colorado home health agencies. The provision for doubtful accounts
decreased  to $118,000  for the three months  ended  September  30,  1996,  from
$125,000  for the same  period in the  prior  fiscal  year.  The  provision  for
doubtful  accounts as a percentage of revenues was 2% for the three months ended
September 30, 1996, and September 30, 1995.

     Total capital expenses decreased 3% during the three months ended September
30, 1996 to  $659,000,  as compared to $676,000 for the same period in the prior
fiscal year.  Rent  expense  decreased 6% to $484,000 for the three months ended
September  30,  1996,  as compared to $514,000  for the same period in the prior
fiscal year.  The decrease in rent expense is primarily  due to lower rents paid
under leases  requiring  payments on the basis of net revenue and patient volume
at certain facilities.

     Net interest income for the three months ended September 30, 1996 decreased
to $19,000, as compared to $42,000 for the same period in the prior fiscal year.
This  decrease  is due to lower  cash  balances  during the three  months  ended
September 30, 1996.

     The Company  reported a net loss for the three months ended  September  30,
1996 of  $611,000,  as compared to a net loss of $585,000 for the same period in
the prior  fiscal  year.  The Company did not record a tax benefit for the three
months ended  September 30, 1995 and 1996 because  carrybacks of current  losses
against previous taxable earnings are no longer available.



<PAGE>



                         LIQUIDITY AND CAPITAL RESOURCES

     At  September  30,  1996,  the Company had  working  capital of  $5,847,000
compared to working capital of $6,963,000 at September 30, 1995. The Company had
cash and cash  equivalents  of  $2,543,000 at September 30, 1996, as compared to
$4,478,000 at September 30, 1995.

     During the three months ended  September 30, 1996, the Company's  operating
activities used $736,000 of available cash resources,  as compared to $1,896,000
during the same period in the prior  fiscal  year.  The cash used for  operating
activities  during the three months ended September 30, 1996 primarily  reflects
amounts  necessary to fund the  Company's net  operating  losses.  Cash used for
investment  activities  during the three  months  ended  September  30, 1996 was
$219,000,  as compared to cash used for investment activities of $167,000 during
the same period in the prior fiscal year.

     Net  patient   accounts   receivable,   which  excludes  amounts  due  from
intermediaries,  was $5,121,000 at September 30, 1996, as compared to $5,188,000
at September 30, 1995.  At September 30, 1996,  the Company had an allowance for
doubtful  accounts of  $1,504,000,  as compared to  $2,057,000  at September 30,
1995. The number of average days of revenue outstanding,  excluding the revenues
and  receivables  related to litigation  patients,  was 81 days at September 30,
1996, as compared to 71 days at September 30, 1995.

     It has been the  Company's  practice  to admit  selected  patients  who are
seeking  monetary  recovery  in pending  litigation  with third  parties.  These
patients  are  directly  obligated  to pay the  Company for  services  rendered,
although the timing of  collection  is  determined  by the  settlement  of their
litigation and is beyond the control of the Company.  For this reason, liens are
generally placed against pending insurance settlements.  Prior to admitting such
patients, the Company and its counsel evaluate the merits of the patient's case,
the  anticipated  cost of  services  to be provided  and the  likelihood  of the
patient's  successful  recovery  of damages in  litigation.  Once the patient is
admitted,  the  Company and its  counsel  monitor the status of the  litigation.
There  can be no  assurance,  however,  that  the  Company  will  ultimately  be
reimbursed for all the services it provides to such  patients.  At September 30,
1996, accounts receivable related to these litigation patients totaled $444,000,
as compared to  $1,303,000  at September  30,  1995.  These  litigation  patient
receivables   accounted  for  an  additional  8  and  23  average  days  revenue
outstanding at September 30, 1996 and September 30, 1995, respectively.



<PAGE>



     The  Company's  amount due from  Medicare  intermediaries  of  $344,000  at
September 30, 1996 includes  amounts the Company  anticipates it will receive on
cost report settlements for its Colorado home health agencies.  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
("RCL")  under the  Medicare  program for fiscal years 1992 through 1996 and the
three months ended September 30, 1996 for its Gardner, Kansas facility. Medicare
reimbursement is generally based upon reasonable  direct and indirect  allowable
costs  incurred in providing  services.  At the Company's  inpatient  facilities
these costs are subject to the RCL.  An  exception  from the RCL has been sought
and granted for fiscal years 1990 through 1994 for the Company's former San Jose
facility.  Requests  have been  submitted for fiscal years 1992 and 1993 for the
Gardner,  Kansas  facility.  The Company  intends to file such a request for its
Kansas  facility for fiscal years 1994 through 1996. The requests are based upon
atypical costs incurred at the Kansas facility, in the treatment of patients who
receive  substantially  more intensive services than those generally received in
Skilled  Nursing  Facilities.  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 an assurance as to the timing of any such collection.  An initial three
year  "exemption" from the RCL expired in June 1989 at the San Jose facility and
in June 1990 at the Gardner, Kansas facility.

     The Company has no current material  commitments for capital  expenditures,
except for those in  connection  with the  Company's  acquisitions  as described
above.  The Company  also expects to make routine  capital  improvements  to its
facilities in the normal course of business.

     The  Company  intends  to use a  portion  of its cash  balance  to  finance
internal  development of its outpatient  rehabilitation and home health business
lines.  The Company will also expand its existing  facilities  and programs when
such  expansion  meets the  Company's  investment  criteria.  The  Company has a
line-of-credit of $1,000,000 from a bank. Any draws on the line-of-credit  would
be secured by a cash  deposit.  At September  30, 1996,  the Company had $60,000
outstanding under the line-of-credit.  The Company will need to obtain access to
additional  capital,  through  bank  loans  or  otherwise,  in order to fund any
significant  acquisition  opportunities.  The Company believes that its existing
cash, credit line and cash flows from operations,  will be sufficient to satisfy
the Company's  estimated operating cash requirements for its existing facilities
for the next twelve months.

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


<PAGE>


                         IMPACT OF ACCOUNTING STATEMENTS

     The Financial  Accounting Standards Board has issued Statement of Financial
Accounting Standards ("SFAS") No. 106, "Employers Accounting for Post-Retirement
Benefits  Other Than  Pension",  and SFAS No.  112,  "Employers  Accounting  for
Post-Employment  Benefits"  which,  in the opinion of  management,  will have no
effect on the Company's financial  statements.  The Company already provides for
income  taxes  under the  liability  method  in  accordance  with SFAS No.  109,
"Accounting For Income Taxes."

                                 INTERIM PERIODS

     The Company believes that all the necessary  adjustments have been included
in  the  amounts  shown  in  the  unaudited  consolidated  financial  statements
contained in Item 1. above,  for the three months ended  September  30, 1995 and
1996, to state fairly and consistently the results of such interim periods. This
includes all normal recurring  adjustments that the Company considers  necessary
for a fair statement thereof,  in accordance with generally accepted  accounting
principles  applied  in a  consistent  manner.  This  report  should  be read in
conjunction with the Company's Annual Report on Form 10-K.


<PAGE>


                           PART II: OTHER INFORMATION


Item 1.           Legal Proceedings - None.

Item 2.           Changes in Securities - None.

Item 3.           Defaults Upon Senior Securities - None.

Item 4.           Submission of Matters to a Vote of Security Holders - None.

Item 5.           Other Information - None.

Item 6.           Exhibits 27.1 Financial Data Schedule



<PAGE>




                                   SIGNATURES

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



                                      MEADOWBROOK REHABILITATION GROUP, INC.

DATE:  November 13, 1996            By        /s/ Harvey Wm. Glasser, M.D.
                                               --------------------------------
                                                  Harvey Wm. Glasser, M.D.
                                          President and Chief Executive Officer