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 December 31, 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 February 13, 1997,  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    ........................ 14
             Interim Periods  .......................................... 14

PART II: OTHER INFORMATION

    Item 1.  Legal Proceedings  ........................................ 15
    Item 2.  Changes in Securities     ................................. 15
    Item 3.  Defaults Upon Senior Securities    ........................ 15
    Item 4.  Submission of Matters to a Vote of Security Holders  ...... 15
    Item 5.  Other Information  ........................................ 15
    Item 6.  Exhibits  ................................................. 15

SIGNATURES        .......................................................16






<PAGE>
<TABLE>
<CAPTION>


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

             MEADOWBROOK REHABILITATION GROUP, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS



                                                                                     June 30,                   December 31,
                                                                                      1996                         1996
                                                                                     ----------------     ------------------------

                                                                                                                (Unaudited)
CURRENT ASSETS:
<S>                                                                                       <C>                          <C>       
   Cash and cash equivalents                                                              $3,439,440                   $2,670,105
   Restricted cash                                                                           311,000                      309,000
   Patient accounts receivable, less allowance for doubtful accounts
      of $1,445,000 and $1,420,000 respectively                                            4,738,957                    5,023,483
   Due from intermediaries                                                                   331,918                      222,844
   Income tax refund receivable                                                              140,362                       48,945
   Other receivables                                                                       1,264,444                      853,889
   Prepaid expenses and other assets                                                         376,898                      326,034
                                                                                     ----------------     ------------------------
      Total current assets                                                                10,603,019                    9,454,300
                                                                                     ----------------     ------------------------

PROPERTY AND EQUIPMENT, at cost:
   Land and buildings                                                                        683,770                      683,770
   Furniture and equipment                                                                 2,993,965                    2,826,154
   Leasehold improvements                                                                    783,614                      723,434
                                                                                     ----------------     ------------------------
                                                                                           4,461,349                    4,233,358
   Less:  accumulated depreciation                                                        (2,095,193)                  (2,103,311)
                                                                                     ----------------     ------------------------
      Net property and equipment                                                           2,366,156                    2,130,047
                                                                                     ----------------     ------------------------

OTHER ASSETS:
  Goodwill and intangible assets                                                           1,870,555                    1,837,029
                                                                                     ----------------     ------------------------

                            TOTAL ASSETS                                                 $14,839,730                  $13,421,376
                                                                                     ================     ========================

CURRENT LIABILITIES:
   Short-term borrowings and current maturities of notes payable                            $657,724                     $587,994
   Current maturities of capital lease obligations                                            32,803                       29,896
   Accounts payable                                                                        1,226,053                    1,625,125
   Accrued payroll and employee benefits                                                   1,101,168                    1,043,844
   Other accrued liabilities                                                               1,065,820                      694,304
                                                                                     ----------------     ------------------------

      Total current liabilities                                                            4,083,568                    3,981,163
                                                                                     ----------------     ------------------------

LONG-TERM LIABILITIES:
   Capital lease obligations                                                                  21,815                       10,301
   Note payable and other long-term liabilities                                              636,255                      471,004
                                                                                     ----------------     ------------------------
      Total long-term liabilities                                                            658,070                      481,305
                                                                                     ----------------     ------------------------

                            TOTAL LIABILITIES                                              4,741,638                    4,462,468
                                                                                     ----------------     ------------------------

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

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 December 31, 1996                                             11,572                       11,572
      Class B -- 5,000,000 shares authorized; 773,000 shares issued and outstanding
           at June 30, 1996 and December 31, 1996                                              7,730                        7,730
   Paid-in capital                                                                        17,908,122                   17,908,122
   Retained deficit                                                                       (7,840,997)                  (8,968,516)
                                                                                     ----------------     ------------------------

      Total stockholders' equity                                                          10,086,427                    8,958,908
                                                                                     ----------------     ------------------------

                            TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                   $14,839,730                  $13,421,376
                                                                                     ================     ========================





====================================================================================================================================
<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 December 31,          6-Mths Ended December 31,
                                                           1995              1996             1995                 1996

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

<S>                                                    <C>               <C>              <C>                 <C>        
NET OPERATING REVENUES                                 $6,095,022        $5,527,729       $11,673,911         $11,504,711

OPERATING EXPENSES:
   Salaries and employee benefits                       3,861,601        3,949,203         7,908,057           8,101,472
   Professional fees and purchased services               596,016          639,477         1,233,908           1,357,824
   Provision for doubtful accounts                        124,435           99,339           249,855             217,234
   Other operating expenses                               781,483          815,811         1,503,922           1,778,832
   Depreciation and amortization                          141,128          150,324           279,495             308,960
   Rent:  
      To unrelated parties                                403,633          348,519           815,950             734,776
      To related parties                                  101,996           94,336           203,735             191,788
                                                      ------------    --------------      ------------        ------------


      Total operating expenses                          6,010,292        6,097,009        12,194,922          12,690,886
                                                      ------------    --------------      ------------        ------------

      Income (loss) from operations                        84,730         (569,280)         (521,011)         (1,186,175)
                                                      ------------    --------------      ------------        ------------

OTHER (INCOME) EXPENSE:
   Gain (loss) on sale of assets                              413          (45,857)              413             (45,857)
   Interest income                                        (46,808)         (25,406)         (113,135)            (61,575)
   Interest expense                                        25,970           15,167            49,982              31,987
                                                      ------------    --------------      ------------        ------------
      Net other income                                    (20,425)         (56,096)          (62,740)            (75,445)
                                                      ------------    --------------      ------------        ------------

      Income (loss) before income taxes                   105,155         (513,184)         (458,271)         (1,110,730)
                                                      ------------    --------------      ------------        ------------

INCOME TAX  PROVISION                                          -                 -                -                  -
                                                      ------------    --------------      ------------        ------------

     NET INCOME (LOSS) BEFORE MINORITY INTEREST          $105,155        ($513,184)        ($458,271)        ($1,110,730)

MINORITY INTEREST IN EARNINGS OF
CONSOLIDATED SUBSIDIARIES                                  17,404            3,756            38,557              16,789
                                                      ============    ==============      ============       ============

      NET INCOME (LOSS)                                   $87,751        ($516,940)         $496,828)        ($1,127,519)
                                                      ============    ==============      ============       ============

NET INCOME (LOSS) PER SHARE (primary and fully diluted)     $0.05           ($0.27)           ($0.26)             ($0.58)
                                                      ============    ==============      ============       ============


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

                                        4

<PAGE>
<TABLE>
<CAPTION>

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

                                       MEADOWBROOK REHABILITATION GROUP, INC. AND SUBSIDIARIES

                                                CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                                        6-Mths Ended December 31,
                                                                    1995                1996
                                                               ---------------     ------------

                                                                  (Unnaudited)      (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                 <C>            <C>         
   Net loss                                                         ($496,828)     ($1,127,519)
   Adjustments to reconcile net income to net cash
        provided by (used for) operations:
     Depreciation and amortization                                    279,495          308,960
     Loss (gain) on sale of assets                                        413          (45,857)
     Minority interest expense                                         38,557           16,789
     Changes in assets and liabilities:
     (Increase) in patient receivables                               (869,186)        (284,526)
       Decrease in amounts due from intermediaries                    348,996          109,074
       Decrease in income tax refund receivable                        29,638           91,417
     (Increase) decrease in other receivables                      (1,136,921)         410,555
     (Increase) decrease in prepaid expenses and other
          current assets                                             (168,405)          50,864
     (Decrease) increase in accounts payable and
          accrued liabilities                                        (362,581)          96,884
                                                               ---------------     ------------

     Cash (used for) operating activities                          (2,336,822)        (373,359)
                                                               ---------------     ------------

CASH FLOWS FROM INVESTMENT ACTIVITIES:
   Additions to property and equipment                               (225,854)        (124,442)
   Payments on prior purchase of outpatient clinics                  (213,434)        (300,668)
   Proceeds from sale of assets                                         2,472          130,973
                                                               ---------------     ------------

     Cash (used for) investment activities                           (436,816)        (294,137)
                                                               ---------------     ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Short-term notes borrowings                                        432,109          273,002
   Long-term notes borrowings                                          14,124           -
   Payments of capital lease obligations                              (79,590)         (14,421)
   Payments of short-term notes payable                              (384,054)        (330,756)
   Reduction in restricted cash                                       322,000            2,000
   Payments to minority shareholders                                  (30,136)         (31,664)
                                                               ---------------     ------------

  Cash provided by (used for) financing activities                    274,453         (101,839)
                                                               ---------------     ------------

  Net (decrease) in cash                                           (2,499,185)        (769,335)

CASH, BEGINNING OF PERIOD                                           6,307,307        3,439,440
                                                               ---------------     ------------

CASH, END OF PERIOD                                                $3,808,122       $2,670,105
                                                               ===============     ============


SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
   Noncash activities:
     Property additions financed with notes payable                   $20,524       $     -
     Property additions financed with capital leases                     -                -
     Liability resulting from purchase of outpatient clinics           90,360             -

   Payments:
     Interest paid                                                     19,129           41,333
     Income taxes paid                                                 17,700           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                        ---       ---        ---      ---           ---    (1,127,519)   (1,127,519)
                                  -----------  -------- ----------  -------  ------------  ------------  ------------

BALANCE, DECEMBER 31, 1996         1,157,244   $11,572    773,000   $7,730   $17,908,122   ($8,968,516)   $8,958,908
                                  ===========  ======== ==========  =======  ============  ============  ============
<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 six months of fiscal  1997.  The  Company's
future  profitability is dependent on a number of factors,  including  increased
patient census and revenues  particularly in its traditional acute, subacute and
post acute businesses,  a reduction in the Company's expenses as a percentage of
its total  operating  revenues and successful  integration and management of the
outpatient  rehabilitation  clinics and home health business lines. 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  agency  have
substantially  reduced its available  working  capital.  The  Company's  working
capital has fallen from  $6,519,000  at June 30, 1996 to  $5,473,000 on December
31, 1996. For the six months ended  December 31, 1996,  the Company's  operating
activities  used cash of $373,000.  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  withdrawn.  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
continuing to evaluate 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.



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 twelve month periods  ending June
30, 1996,  through  1999.  The Company was not required to make any cash payment
based on results as of June 30, 1996. If the operations collectively achieve the
target earnings  thresholds for the twelve months ending June 30, 1997,  through
1999, the Company's maximum liability would be $825,000.

     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 December 31, 1996, was $249,000. The Company did not acquire
accounts   receivable  in  connection   with  the  acquisition  and  has  funded
approximately  $1,332,000 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.
During the second quarter,  the Company received  $425,000 in payment of amounts
withheld.  The Company has  submitted  appeals on behalf of the  previous  owner
requesting payment of the remaining balance.  In the event that such appeals are
unsuccessful,  the Company intends to pursue  collection from the previous owner
and offset the  amounts  withheld  against  any  additional  amounts  due to the
previous owner under the acquisition agreements. On a net basis, amounts owed to
Meadowbrook  as of December 31, 1996, by Medicare and the previous  owner of the
Colorado  operations  exceed the minimum  amounts owed to the previous  owner by
$140,000.  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.

     To date, the Company has paid $678,000  based on fixed payment  obligations
and the earnings performance of the acquired clinics and $152,000 in interest on
deferred  acquisition  payments.  At December 31, 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 additional 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 $750,000.

     On February  1, 1995,  the Company  acquired an  outpatient  clinic in Palm
Coast,  Florida.  At December  31,  1996,  the Company had paid  $153,000 of the
purchase price and was obligated to pay an additional $107,000 prior to 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 in St. Augustine
and Daytona,  Florida during the second quarter of fiscal 1996. The Company also
acquired  the assets of an  outpatient  rehabilitation  clinic in Ormond  Beach,
Florida in June 1996. In December 1996, the Company closed its Daytona,  Florida
clinic.

o        Sale of Alaska Operations.

     On January 13, 1997, the Company announced the sale of its three outpatient
clinics in Alaska.  The Company  expects that the net cash  proceeds  from these
transactions, assuming the collection of the accounts receivable retained by the
Company in connection with the sale of one of the clinics, will be approximately
$230,000.

o        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's net cash proceeds from this  transaction,  assuming  collection of the
accounts receivable,  will be approximately  $360,000. This transaction resulted
in a gain of $63,000, which is recorded as other operating income as of December
31, 1996.

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.


<TABLE>

                                                       % Net Revenue           % Net Revenue
                                                       3-Months Ended          6-Months Ended           % $ Change     % $ Change
                                                   12/31/95     12/31/96     12/31/95     12/31/96        3-Month        6-Month
                                                  ---------    ---------   -----------   ----------      ----------     ---------
                                                                                                       

<S>                                                 <C>          <C>           <C>          <C>             <C>            <C>  
Net  Operating Revenues                             100.0        100.0         100.0        100.0           (9.3)          (1.4)

Non-capital operating expenses:
          Salaries and employee benefits             63.4         71.4          67.7         70.4            2.3            2.4
          Other non-capital expenses                 24.6         28.1          25.6         29.2            3.5           12.3
                                                  ---------    ---------   -----------   ----------
                   Total non-capital expenses        88.0         99.6          93.3         99.6            2.6            5.1

Capital expenses:
          Depreciation and amortization               2.3          2.7           2.4          2.7            6.5           10.5
          Rent                                        8.3          8.0           8.7          8.0          (12.4)          (9.1)
          Interest                                    0.4          0.3           0.4          0.3          (41.6)         (36.0)
                                                  ---------    ---------   -----------   ----------
                   Total capital expenses            11.0         11.0          11.6         11.0           (9.6)          (6.1)
                                                  ---------    ---------   -----------   ----------
                   Total expenses                    99.0        110.6         104.9        110.5            1.3            3.9

Gain (loss) on sale of assets                         0.0          0.8           0.0          0.4            0.0            0.0
Interest income                                       0.8          0.5           1.0          0.5          (45.7)         (45.6)
                                                  ---------    ---------   -----------   ----------
Income (loss) before income taxes                     1.8         (9.2)         (3.9)        (9.6)        (588.0)         142.4
Income tax provision                                  0.0          0.0           0.0          0.0            0.0            0.0
                                                  ---------    ---------   -----------   ----------

Income (loss) before minority interest                1.8         (9.2)         (3.9)        (9.6)        (588.0)         142.4

Minority Interest                                     0.3          0.1           0.3          0.1          (78.4)         (56.5)
                                                  ---------    ---------   -----------   ----------

Net Income (Loss)                                     1.5         (9.3)         (4.3)        (9.7)        (689.1)         126.9
                                                  =========    =========   ===========   ==========
</TABLE>


     The Company's net operating  revenues decreased 9% and 1% to $5,528,000 and
$11,505,000 for the three and six months ended December 31, 1996,  respectively,
as compared to  $6,095,000  and  $11,674,000  for the same  periods in the prior
fiscal year.  The decrease was due to  decreased  utilization  of the  Company's
Kansas  facility,  as well as the sale of the Company's  Illinois  operations in
October 1996. Net operating revenues from the Company's Illinois operations were
$915,000 for the six months ended December 31, 1995, as compared to $305,000 for
the six months  ended  December  31,  1996.  The  number of patient  days in the
Company's core business decreased 4% to 12,545 for the six months ended December
31,  1996,  from 13,059 for the same period in fiscal  1996.  The  decrease  was
primarily due to lower census levels at the  Company's  Kansas  facility and the
sale of the Company's Illinois operations in October 1996.

     In the Company's core business  revenue per patient day decreased 9% and 1%
to $518  and  $536  for the  three  and six  months  ended  December  31,  1996,
respectively,  as  compared  to $567 and $540 for the same  periods in the prior
fiscal  year.  Revenue  per  patient  day was  adversely  affected by changes in
service mix and competitive  pressures to reduce healthcare costs which resulted
in lower per diem rates.

     Total  non-capital  operating  expenses  for the three and six months ended
December  31,  1996,  increased  3%  and  5%,  to  $5,504,000  and  $11,455,000,
respectively,  from  $5,364,000 and  $10,896,000  during the same periods in the
prior fiscal year.  Salaries  and employee  benefits  continue to be the primary
component of the Company's non-capital operating expenses. Salaries and employee
benefits  increased 2% to $3,949,000 and $8,101,000 for the three and six months
ended  December 31, 1996, as compared to $3,862,000  and $7,908,000 for the same
periods in the prior fiscal year. The increase resulted primarily from increased
salaries and expenses  related to the  increased  utilization  of the  Company's
Colorado home health agencies. Salaries and employee benefits as a percentage of
net  operating  revenues  were 71% and 70% for the  three and six  months  ended
December 31, 1996, respectively, as compared to 63% and 68% for the same periods
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 and six months ended  December 31, 1996, the Company's  other  non-capital
operating   expenses  increased  4%  and  12%,  to  $1,555,000  and  $3,354,000,
respectively,  as compared to $1,502,000  and $2,988,000 for the same periods in
the prior  fiscal year.  This  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 $99,000 and  $217,000  for the three and six months ended  December
31, 1996,  respectively,  from $124,000 and $250,000 for the same periods in the
prior fiscal  year.  The  provision  for  doubtful  accounts as a percentage  of
revenues was 2% for the three and six months periods in fiscal 1996 and 1997.

     Total capital expenses decreased 10% and 6% during the three and six months
ended December 31, 1996, to $608,000 and $1,268,000,  respectively,  as compared
to $673,000 and $1,349,000  for the same periods in the prior fiscal year.  Rent
expense  decreased  12% and 9% to $443,000  and  $927,000  for the three and six
months  ended  December  31,  1996,  respectively,  as compared to $506,000  and
$1,020,000  for the same periods 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,  as well as
the sale of the Company's Illinois operations in October 1996.

     Net interest  income for the three and six months ended  December 31, 1996,
decreased  to $10,000  and  $30,000,  respectively,  as  compared to $21,000 and
$63,000 for the same periods in the prior fiscal year.  This  decrease is due to
lower cash  balances  available  for  investment  during the first six months of
fiscal 1997.

     The Company reported a net loss for the three and six months ended December
31, 1996, of $517,000 and $1,128,000,  respectively, as compared to a net income
of $88,000 for the three  months  ended  December  31,  1995,  and a net loss of
$497,000 for the six months ended  December 31, 1995. The Company did not record
a tax benefit  for any of the periods  reported  because  carrybacks  of current
losses against previous taxable earnings are no longer available.




                         LIQUIDITY AND CAPITAL RESOURCES

     At  December  31,  1996,  the Company  had  working  capital of  $5,473,000
compared to working capital of $6,519,000 at June 30, 1996. The Company had cash
and cash  equivalents  of  $2,670,000  at  December  31,  1996,  as  compared to
$3,439,000 at June 30, 1996.

     During the six months  ended  December 31, 1996,  the  Company's  operating
activities used $373,000 of available cash  resources,  as compared to cash used
for  operating  activities  of  $2,337,000  during the same  period in the prior
fiscal year. The cash used for operating  activities during the six months ended
December 31, 1996,  primarily  reflects amounts  necessary to fund the Company's
net  operating  losses.  The cash used for operating  activities  during the six
months ended December 31, 1995,  primarily  reflects  funding of working capital
for the Company's Colorado  outpatient  facilities and amounts necessary to fund
the Company's net operating losses.  Cash used for investment  activities during
the six months ended December 31, 1996,  was $294,000,  as compared to cash used
for investment activities of $437,000 during the same period in the prior fiscal
year.

     Net  patient   accounts   receivable,   which  excludes  amounts  due  from
intermediaries,  was $5,023,000 at December 31, 1996,  compared to $4,739,000 at
June 30, 1996.  At December 31, 1996,  the Company had an allowance for doubtful
accounts of  $1,420,000,  as compared to $1,445,000 at June 30, 1996. The number
of average days of revenue  outstanding,  excluding the revenues and receivables
related to litigation patients, was 74 days at December 31, 1996.

     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 December 31,
1996, accounts receivable related to these litigation patients totaled $593,000,
as compared to $444,000 at June 30, 1996. These litigation  patient  receivables
accounted for an additional 10 average days revenue  outstanding at December 31,
1996.

     The  Company's  amount due from  Medicare  intermediaries  of  $223,000  at
December 31, 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
six months ended December 31, 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.  Requests  have been  submitted  for fiscal
years 1992 through 1994 for the Gardner, Kansas facility. The Company intends to
file such a request for its Kansas  facility for fiscal years 1995 and 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 for the Company's
Kansas facility expired June 1990.

     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 business line. 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. The draws on the  line-of-credit  are secured by a cash
deposit.  At December 31, 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.

                         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 and six months ended December 31, 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

At the Annual Meeting of  Stockholders of the Company held on November 21, 1996,
the  Company's  stockholders  voted  in  favor  of:  (i) the  election  of three
directors to the Company's  Board of  Directors,  and (ii) the  ratification  of
Arthur Andersen LLP as the Company's independent  auditors.  The number of votes
for,  withheld  and  against,  as well as the number of  abstentions  and broker
non-votes as to each matter approved at the Annual Meeting of Stockholders  were
as follows:

                                                                 Broker
Matter                       For    Withheld  Against  Abstain   Non-Votes
Election  of Directors:

Harvey Wm. Glasser, M.D.  8,236,182     0      N/A       N/A        0
Robert Rush               8,236,614     0      N/A       N/A        0
Edward Stolman            8,234,948     0      N/A       N/A        0

Arthur Andersen LLP:      6,632,244    N/A   26,680      N/A        0

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:  February  13, 1997                 By        /s/ Harvey Wm. Glasser, M.D.
                                             -----------------------------------
                                                   Harvey Wm. Glasser, M.D.
                                           President and Chief Executive Officer