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, 1997

 [      ]              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.)

          2000 Powell Street, Suite 1203, 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, 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    ...........................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,
                                                                                                         1997             1997
                                                                                                      ------------    ------------
                                                                                                                      (Unaudited)
<S>                                                                                                   <C>             <C>

CURRENT ASSETS:
   Cash and cash equivalents                                                                          $  2,928,781    $  4,217,115
   Restricted cash                                                                                         278,649
                                                                                                                           273,726
   Patient accounts receivable, less allowance for doubtful accounts
      of $1,194,000 and $797,000 respectively                                                            4,278,756       2,528,521
   Due from intermediaries                                                                                    --           334,151
   Other receivables                                                                                       293,165         619,606
   Prepaid expenses and other assets                                                                       298,970         265,925
                                                                                                      ------------    ------------
      Total current assets                                                                               8,078,321       8,239,044
                                                                                                      ------------    ------------

PROPERTY AND EQUIPMENT, at cost:
   Furniture and equipment                                                                               2,154,947       1,118,995
   Leasehold improvements                                                                                  686,116         171,974
                                                                                                      ------------    ------------
                                                                                                         2,841,063       1,290,969
   Less:  accumulated depreciation                                                                      (1,708,734)       (726,137)
                                                                                                      ------------    ------------
      Net property and equipment                                                                         1,132,329         564,832
                                                                                                      ------------    ------------

OTHER ASSETS:
   Goodwill and intangible assets                                                                          337,734         333,044
                                                                                                      ------------    ------------

                    TOTAL ASSETS                                                                      $  9,548,384    $  9,136,920
                                                                                                      ============    ============

CURRENT LIABILITIES:
   Short-term borrowings and current maturities of notes payable                                      $    291,037    $    300,487
   Current maturities of capital lease obligations                                                          24,821          17,133
   Accounts payable                                                                                        968,027         725,312
   Accrued payroll and employee benefits                                                                   755,748         501,511
   Due to intermediaries                                                                                   100,780            --
   Other accrued liabilities                                                                             1,123,124         645,190
                                                                                                      ------------    ------------

      Total current liabilities                                                                          3,263,537       2,189,633
                                                                                                      ------------    ------------

LONG-TERM LIABILITIES:
   Note payable and other long-term liabilities                                                             48,989          42,490
                                                                                                      ------------    ------------
      Total long-term liabilities                                                                           48,989          42,490
                                                                                                      ------------    ------------

                    TOTAL LIABILITIES                                                                    3,312,526       2,232,123
                                                                                                      ------------    ------------

STOCKHOLDERS' EQUITY:
   Common stock, $.01 par value:
      Class A -- 15,000,000 shares authorized; 1,157,244 shares issued and outstanding
           At June 30, 1997 and September 30, 1997                                                          11,572          11,572
      Class B -- 5,000,000 shares authorized; 773,000 shares issued and outstanding
           At June 30, 1997 and September 30, 1997                                                           7,730           7,730
   Paid-in capital                                                                                      17,908,122      17,908,122
   Retained deficit                                                                                    (11,691,566)    (11,022,627)
                                                                                                      ------------    ------------

      Total stockholders' equity                                                                         6,235,858       6,904,797
                                                                                                      ------------    ------------

                    TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                        $  9,548,384    $  9,136,920
                                                                                                      ============    ============

<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,
                                                                      1996            1997
                                                                  (Unaudited)     (Unaudited)
                                                                   -----------    -----------
<S>                                                                <C>            <C>
NET OPERATING REVENUES                                             $ 5,976,984    $ 3,060,227

OPERATING EXPENSES:
   Salaries and employee benefits                                    4,152,269      2,410,400
   Professional fees and purchased services                            718,344        290,906
   Provision for doubtful accounts                                     117,895         68,502
   Other operating expenses                                            963,029        516,178
   Depreciation and amortization                                       158,635         88,385
   Rent:
      To unrelated parties                                             386,258        186,368
      To related parties                                                97,452         29,962
   Gain on sale of assets                                                 --       (1,172,364)
                                                                   -----------    -----------

      Total operating expenses                                       6,593,882      2,418,337
                                                                   -----------    -----------

      Income (loss) from operations                                   (616,898)       641,890
                                                                   -----------    -----------

OTHER (INCOME) EXPENSE:
   Interest income                                                     (36,170)       (39,908)
   Interest expense                                                     16,819          8,904
                                                                   -----------    -----------

      Net other income                                                 (19,351)       (31,004)
                                                                   -----------    -----------

      Income (loss) before income taxes                               (597,547)       672,894

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

     NET INCOME (LOSS) BEFORE MINORITY INTEREST                    ($  597,547)   $   672,894

MINORITY INTEREST IN EARNINGS OF
CONSOLIDATED SUBSIDIARIES                                               13,032          3,955
                                                                   -----------    -----------

      NET INCOME (LOSS)                                            ($  610,579)   $   668,939
                                                                   ===========    ===========

NET INCOME (LOSS) PER SHARE (primary and fully diluted)            ($     0.32)   $      0.35
                                                                   ===========    ===========

WEIGHTED AVERAGE COMMON AND COMMON
   EQUIVALENT SHARES OUTSTANDING                                     1,930,244      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 I: FINANCIAL INFORMATION (Item 1. - Financial Statements)

                     MEADOWBROOK REHABILITATION GROUP, INC. AND SUBSIDIARIES

                             CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                                  3-Mths Ended September 30,
                                                                      1997           1997
                                                                  -----------    -----------
                                                                  (Unaudited)    (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                               <C>            <C>
   Net income (loss)                                              ($  610,579)   $   668,939
   Adjustments to reconcile net income (loss) to net cash
        provided by (used for) operations:
      Depreciation and amortization                                   158,635         88,385
      Gain on sale of assets                                             --       (1,172,364)
      Minority interest expense                                        13,032          3,955
   Changes in assets and liabilities:
      (Increase) decrease in patient receivables                     (382,534)     1,261,485
      (Increase) in due from intermediaries                           (12,344)      (389,756)
      Decrease in income tax refund receivables                        73,785           --
      (Increase) in other receivables                                 (29,757)       (38,048)
      (Increase) in prepaid expenses and
        other current assets                                         (128,635)       (36,493)
      Increase (decrease) in accounts payable and
        accrued liabilities                                           182,501       (185,519)
                                                                  -----------    -----------

        Cash provided by (used for) operating activities             (735,896)       200,584
                                                                  -----------    -----------

CASH FLOWS FROM INVESTMENT ACTIVITIES:
      Additions to property and equipment                             (75,779)       (19,204)
      Payments on prior purchase of outpatient clinics               (143,222)      (281,275)
      Proceeds from sale of assets                                        302      1,405,673
                                                                  -----------    -----------

        Cash provided by (used for) investment activities            (218,699)     1,105,194
                                                                  -----------    -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
      Short-term notes borrowings                                     273,002        127,221
      Payments of short-term borrowings                              (194,851)      (124,270)
      Payments of capital lease obligations                            (7,253)        (7,688)
      Reduction in restricted cash                                       --           (4,923)
      Payments to minority shareholders                               (13,061)        (7,784)
                                                                   -----------    -----------

        Cash provided by (used for) financing activities               57,837        (17,444)
                                                                  -----------    -----------

        Net increase (decrease) in cash                              (896,758)     1,288,334

CASH AND CASH EQUIVALENTS, beginning of period                      3,439,440      2,928,781
                                                                  -----------    -----------

CASH, END OF PERIOD                                               $ 2,542,682    $ 4,217,115
                                                                  ===========    ===========


SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
      Noncash activities:
        Notes received on sale of Florida operations              $      --      $   730,000
      Payments:
        Interest paid                                                  31,266         17,102
        Income taxes paid                                              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 INFORMATION (Item 1. - Financial Statements)

                                       MEADOWBROOK REHABILITATION GROUP, INC. AND SUBSIDIARIES

                                           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY



                                               Common Stock
                               -------------------------------------------                                      
                                       Class A               Class B                                             Total
                               ---------------------  --------------------      Paid-in        Retained      Stockholders'
                                 Shares      Amount    Shares      Amount       Capital         Deficit         Equity
                               ---------   ---------  --------   ---------   ------------    ------------    ------------
<S>                            <C>         <C>         <C>       <C>         <C>             <C>             <C>         
BALANCE, JUNE 30, 1996         1,157,244   $  11,572   773,000   $   7,730   $ 17,908,122    ($ 7,840,997)   $ 10,086,427

      Net loss                      --          --        --          --             --        (3,850,569)     (3,850,569)
                               ---------   ---------  --------   ---------   ------------    ------------    ------------

BALANCE, JUNE 30, 1997         1,157,244   $  11,572   773,000   $   7,730   $ 17,908,122    ($11,691,566)   $  6,235,858

      Net loss                      --          --        --          --             --           668,939         668,939
                               ---------   ---------  --------   ---------   ------------    ------------    ------------

BALANCE, SEPTEMBER 30, 1997    1,157,244   $  11,572   773,000   $   7,730   $ 17,908,122    ($11,022,627)   $  6,904,797
                               =========   =========   =======   =========   ============    =============   ============



































<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

Potential Ineligibility for Continued Listing on the NASDAQ National Market

     The  NASDAQ   Stock  Market  has  adopted  new   quantitative   maintenance
requirements  for  continued  listing on the  NASDAQ  National  Market.  The new
criteria  become  effective on February 23,  1998.  The Company  currently is in
compliance  with all of the new criteria for continued  NASDAQ  National  Market
listing except for the requirement  that the market value of its public float be
at least $5 million.  The Company  estimates that the market value of its public
float as of November 13, 1997 is $2,877,000. If the Company is not in compliance
with the new maintenance criteria on the effective date, the Company understands
that it would be moved to the NASDAQ SmallCap Market.  Delisting from the NASDAQ
National  Market could have an adverse  effect on the liquidity of the Company's
Class A Common Stock.

Consideration of Strategic Alternatives

     Since  the   beginning  of  fiscal  1997,   the  Company  has  disposed  of
substantially  all of its operating assets. On August 31, 1997, the Company sold
five of its outpatient rehabilitation clinics in Florida and Georgia and certain
other assets. On September 30, the Company sold its remaining Florida outpatient
clinic and two  management  contracts.  On July 31,  1997,  the Company sold its
Kansas  operations.  On March 31,  1997,  the  Company  sold all of its  Georgia
operations, consisting of a neurobehavioral program, a subacute program operated
under a management agreement,  and a post-acute program. Earlier in fiscal 1997,
the  Company  sold  its  post-acute  program  in  Illinois  and  its  outpatient
rehabilitation clinics in Alaska. In addition, the Company closed six outpatient
rehabilitation  clinics in Colorado and Florida during fiscal 1997. The Board of
Directors  of the Company 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  and/or
additional 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 the
proceeds from its 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  regardless of how other
stockholders might vote.


<PAGE>



Recent Asset Dispositions

     Sale of Florida  Operations.  On August 31,  1997,  the  Company  sold five
outpatient  rehabilitation  clinics and certain other assets  located in Florida
and  Georgia.  The  outpatient   rehabilitation  clinics  were  located  in  St.
Augustine,  Palatka,  Palm Coast,  and Ormond  Beach,  Florida and in  Moultrie,
Georgia.  The  Company  sold  the  clinics  in two  separate  transactions.  The
aggregate sale price for the outpatient  rehabilitation clinics and other assets
was $550,000.  The Company received promissory notes from the purchasers for the
aggregate  purchase  price.  The  promissory  notes are secured by the  acquired
assets and the Company also received  personal  guarantees from the stockholders
of the  purchasers.  Subsequent  to  September  30, 1997,  the Company  received
$335,000  as payment in full for one of the  promissory  notes.  The  purchasers
acquired all assets  including  accounts  receivable and are responsible for all
accounts  payable and certain payroll  liabilities.  As part of the transaction,
the Company retained all liabilities for amounts due to the former owners of the
clinics. At closing,  this amount was $197,000.  This transaction  resulted in a
loss  of  $2,046,000,  primarily  as a  result  of the  write-down  of  goodwill
associated with the Company's acquisition of certain of the clinics in 1994. The
loss was  recorded as other  operating  expense in the  Company's  June 30, 1997
financial statements.

     On September 30, 1997 the Company sold its remaining  outpatient  clinic in
located in  Jacksonville,  Florida and its two management  contracts  located in
Jacksonville and St.  Augustine,  Florida.  The sale price was $115,000 in cash.
The purchaser acquired all assets,  including accounts receivable.  There was no
gain or loss resulting from this transaction.

     Sale of Kansas  Operations.  On July 31, 1997,  the Company sold its Kansas
operations,   consisting  of  acute,  subacute  and  post-acute   rehabilitation
programs.  The sale price for the Kansas  operations was $1,500,000 in cash. The
Company's  agreement  with the purchaser  provides that the Company shall retain
outstanding  accounts  receivable and be responsible for the accounts payable at
the closing date. Assuming collection of such accounts receivable,  the increase
in the  Company's  cash  position  as a  result  of  this  transaction  will  be
approximately  $2,500,000.  This transaction resulted in a gain of approximately
$1,178,000.  This  gain is  reflected  in the  Company's  results  for the first
quarter of fiscal 1998.

     Sale of Georgia Operations. On March 31, 1997, the Company sold its Georgia
operations, consisting of a neurobehavioral program, a subacute program operated
under a management agreement,  and a post-acute program and related real estate.
The sale price for the Georgia  operations was $1,300,000 in cash. The Company's
agreement with the purchaser  provides that the Company shall retain outstanding
accounts  receivable and be responsible for the accounts  payable at the closing
date.  This  transaction  resulted in a gain of $517,000,  which was recorded as
other operating income in fiscal 1997.

     Sale of Alaska Operations.  On January 13, 1997, the Company sold its three
outpatient  rehabilitation clinics in Alaska. The sale price was $200,000.  This
transaction resulted in a loss of $29,000, which was recorded as other operating
expense during fiscal 1997.

     Sale of  Illinois  Operations.  On October 7, 1996,  the  Company  sold the
assets  of its  post-acute  rehabilitation  operations  located  in Park  Ridge,
Illinois  for  $100,000 in cash.  The  Company's  agreement  with the  purchaser
provides that the Company shall retain  outstanding  accounts  receivable and be
responsible  for the  accounts  payable at the closing  date.  This  transaction
resulted in a gain of $63,000,  which was  recorded  as other  operating  income
during fiscal 1997.

     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 or 1997. If the  operations  collectively  achieve the target  earnings
thresholds  for the twelve months  ending June 30, 1998 and 1999,  the Company's
maximum liability would be $550,000.  During fiscal 1997, the Company closed its
home health agency in New Mexico.

     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.
However,  accounts receivable  collections have not been sufficient to repay the
loan, and the loan balance on September 30, 1997 was $259,000. This loan balance
is collateralized by personal assets of the debtor.

     In October  1995,  the Company was  notified by its  intermediary  that its
Medicare  payments for the 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.  While the  intermediary
resumed making  payments for current  charges in January 1996, the  intermediary
had withheld $728,000 related to these settlements. During the second quarter of
fiscal 1997, 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.  Amounts owed to the Company as of  September  30,
1997, by Medicare and the previous owner of the Colorado  operations  exceed the
minimum amounts owed to the previous owner by $237,000.

     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 $45,000 and became obligated to pay an additional
$20,000. 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.

Healthcare Regulation and Reform

     Continuing  political  debate is  subjecting  the  healthcare  industry  to
significant  reform.  Healthcare  reform  proposals have been  formulated by the
current   administration,   members  of  Congress,   and,  periodically,   state
legislators.  These proposals include the current administration's  announcement
of a "crack down on fraud in the home  healthcare  industry" and the related six
month moratorium on the admission of new home health providers into the Medicare
program.  Government  officials can be expected to continue to review and assess
alternative  healthcare delivery systems and payment  methodologies.  Changes in
the law or new  interpretations  of existing laws may have a dramatic  effect on
the definition of permissible or impermissible activities,  the relative cost of
doing business, and the methods and amounts of payments for medical care by both
governmental and other payors.  Legislative  changes to "balance the budget" and
slow the annual rate of growth of  Medicare  and  Medicaid  are  expected.  Such
changes may adversely impact reimbursement for the Company's services.

Forward-looking Statements

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



<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>
<CAPTION>

                                                    % Net Revenue
                                                    3-Months Ended    % $ Change
                                               09/30/96     09/30/97     3-Month
                                               --------     --------  ----------
<S>                                             <C>           <C>        <C>
Net Operating Revenues                          100.0         100.0      (48.8)

Non-capital operating expenses:
     Salaries and employee benefits              69.5          78.8      (41.9)
     Other non-capital expenses                  30.1          28.6      (51.3)
     Gain on sale of assets                      --           (38.3)      --
                                                ------        -----
          Total non-capital expenses             99.6          69.1      (64.5)

Capital expenses:
     Depreciation and amortization                2.7           2.9      (44.3)
     Rent                                         8.1           7.0      (55.3)
     Interest                                     0.3           0.3      (47.1)
                                                ------        -----
          Total capital expenses                 11.0          10.2      (52.4)
                                                ------        -----
          Total expenses                        110.6          79.3      (63.3)

Interest income                                   0.6           1.3       10.3
                                                ------        -----
Income (loss) before income taxes               (10.0)         22.0     (212.6)

Income tax provision                             --            --         --
                                                ------        -----

Income (loss) before minority interest          (10.0)         22.0     (212.6)

Minority interest                                 0.2           0.1      (69.7)
                                                ------        -----

Net income (loss)                               (10.2)         21.9     (209.6)
                                                ======        =====
</TABLE>


     The Company's net operating  revenues  decreased 49% to $3,060,000  for the
three months ended  September 30, 1997,  as compared to $5,977,000  for the same
period in the prior fiscal year.  The decrease was due  primarily to the sale of
the Company's  Georgia,  Alaska,  and Illinois  operations during the second and
third  quarters of fiscal 1997 and the sale of the Company's  Kansas and Florida
operations  during the first  quarter of fiscal  1998.  See  "Trends  and Recent
Events".



<PAGE>



     Below is a summary of net  operating  revenues  for the three  months ended
September  30, 1996 and 1997,  with  respect to  operations  sold by the Company
during fiscal 1997 and the first quarter of fiscal 1998.

                               Net operating revenues
                          --------------------------------
                          Three months ended September 30,
                          --------------------------------
                               1996             1997
                          -------------     -------------
                           (unaudited)       (unaudited)

        Alaska            $    155,000      $          --
        Georgia              1,630,000                 --
        Illinois               284,000                 --
        Kansas               1,331,000            320,000
        Florida                594,000            278,000
                          ------------      -------------
                  Total   $  3,994,000      $     598,000
                          ============      =============


     These decreases were partially  offset by increased net operating  revenues
in the  Company's  home  health  business.  The number of patient  visits in the
Company's  home health  business  increased 32% to 37,421 patient visits for the
three months ended  September 30, 1997,  from 28,442 patient visits for the same
period in the prior fiscal year.

     Total  non-capital  operating  expenses  excluding  the gain on the sale of
assets  for  the  three  months  ended  September  30,  1997  decreased  45%  to
$3,286,000, from $5,952,000 during the same period in the prior fiscal year. The
decrease resulted primarily from the sale of the Company's Georgia,  Alaska, and
Illinois  operations during the second and third quarters of fiscal 1997 and the
sale of the Company's Kansas and Florida  operations during the first quarter of
fiscal 1998.  See "Trends and Recent  Events".  Salaries  and employee  benefits
continue to be the primary  component  of the  Company's  non-capital  operating
expenses.  Salaries and employee  benefits  decreased 42% to $2,410,000  for the
three months ended  September 30, 1997,  as compared to $4,152,000  for the same
period in the prior fiscal year.  Salaries and employee benefits as a percentage
of net operating  revenues increased to 79% for the three months ended September
30, 1997, as compared to 69% 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, 1997, the Company's other non-capital operating
expenses  decreased  51% to  $876,000,  as compared to  $1,799,000  for the same
period in the prior  fiscal year.  The decrease is primarily  due to the sale of
the Company's  Georgia,  Alaska,  and Illinois  operations during the second and
third  quarters of fiscal 1997 and the sale of the Company's  Kansas and Florida
operations  during the first  quarter of fiscal  1998.  See  "Trends  and Recent
Events".  The provision for doubtful accounts decreased to $69,000 for the three
months ended  September 30, 1997, from $118,000 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, 1997 and September 30, 1996.

     Total  capital  expenses  decreased  52%  during  the  three  months  ended
September  30, 1997 to $314,000,  as compared to $659,000 for the same period in
the prior fiscal  year.  Rent  expense  decreased  55% to $216,000 for the three
months ended  September 30, 1997, as compared to $484,000 for the same period in
the  prior  fiscal  year.  The  decrease  is  primarily  due to the  sale of the
Company's Georgia,  Alaska, and Illinois  operations during the second and third
quarters  of  fiscal  1997  and the sale of the  Company's  Kansas  and  Florida
operations  during the first  quarter of fiscal  1998.  See  "Trends  and Recent
Events".

     The Company's  first  quarter 1998 results  include a gain of $1,178,000 on
the sale of its Kansas  operations.  This amount is offset by losses incurred on
the sale of certain other assets.  A net gain of $1,172,000 is recorded as other
operating  income on the  Company's  income  statement.  See  "Trends and Recent
Events".

     Net interest income for the three months ended September 30, 1997 increased
to $40,000, as compared to $36,000 for the same period in the prior fiscal year.
This  increase  is due to higher cash  balances  during the three  months  ended
September 30, 1997.

     The Company  reported net income for the three months ended  September  30,
1997 of  $669,000,  as compared to a net loss of $611,000 for the same period in
the prior fiscal year.  The net income for the three months ended  September 30,
1997  includes  the gain on the sale of the  Company's  Kansas  operations.  The
Company's net income for the three months ended September 30, 1997 also includes
net  losses of  approximately  $219,000  incurred  by the  Company's  Kansas and
Florida  operations,  which were sold during the first  quarter of fiscal  1998.
Adjusting  for these  amounts,  the Company  had a net loss of $290,000  for the
three  months  ended  September  30,  1997.  The  Company  did not  record a tax
provision  for the three  months  ended  September  30,  1997  because  tax loss
carryforwards  are available to offset earnings in the quarter.  The Company did
not record a tax benefit for the three months ended  September  30, 1996 because
carrybacks of current losses  against  previous  taxable  earnings are no longer
available.


                         LIQUIDITY AND CAPITAL RESOURCES

     At  September  30,  1997,  the Company had working  capital of  $6,049,000,
compared to working capital of $5,847,000 at September 30, 1996. The Company had
cash and cash  equivalents  of  $4,217,000 at September 30, 1997, as compared to
$2,543,000 at September 30, 1996.

     During the three months ended  September 30, 1997, the Company's  operating
activities  provided  $201,000 of available cash resources,  as compared to cash
used in operations of $736,000  during the same period in the prior fiscal year.
The cash  provided  by  operating  activities  during  the  three  months  ended
September 30, 1997 primarily  reflects  collections of accounts  receivable from
the Company's sold facilities.  Cash provided for investment  activities  during
the three months ended  September 30, 1997 was  $1,105,000,  as compared to cash
used for investment  activities of $219,000  during the same period in the prior
fiscal year. The cash provided from  investment  activities for the three months
ended  September 30, 1997  primarily  reflects the proceeds from the sale of the
Company's Kansas operations.

     Net  patient   accounts   receivable,   which  excludes  amounts  due  from
intermediaries,  was $2,529,000 at September 30, 1997, as compared to $5,121,000
at September  30, 1996.  This decrease is primarily due to the sale of Company's
Georgia, Alaska, and Illinois operations during the second and third quarters of
fiscal 1997 and the sale of the Company's Kansas and Florida  operations  during
the first  quarter of fiscal  1998.  See "Trends and Recent  Events".  Such sold
businesses represented $4,091,000 of the net patient accounts receivable balance
at  September  30, 1996 as compared to  $1,136,000  at September  30,  1997.  At
September  30,  1997,  the Company had an  allowance  for  doubtful  accounts of
$797,000, as compared to $1,504,000 at September 30, 1996. The number of average
days of revenue  outstanding,  excluding the revenues and receivables related to
litigation  patients,  was 65 days at September 30, 1997, as compared to 81 days
at September 30, 1996.

     It was the  Company's  practice  in its  acute,  subacute,  and  post-acute
businesses  to admit  selected  patients who were 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 were  generally  placed  against  pending
insurance  settlements.  Prior to admitting such  patients,  the Company and its
counsel  evaluated 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 was  admitted,  the Company and its
counsel  monitored  the  status of the  litigation.  The  Company  retained  the
accounts  receivable related to such patients in connection with the sale of its
Kansas  operations.  There can be no assurance,  however,  that the Company will
ultimately be reimbursed for all the services it provided to such  patients.  At
September 30, 1997,  accounts  receivable  related to these litigation  patients
totaled  $370,000,  as  compared  to  $444,000  at  September  30,  1996.  These
litigation patient receivables accounted for an additional 11 and 8 average days
revenue outstanding at September 30, 1997 and September 30, 1996, respectively.

     The  Company's  amount due from  Medicare  intermediaries  of  $334,000  at
September 30, 1997 includes  amounts the Company  anticipates to receive on cost
report  settlements  for its  Colorado  home health  agencies and its final cost
report for the  Company's  former  Gardner,  Kansas  facility.  Such amount also
includes amounts the Company expects to receive upon regulatory  approval of the
Company's  annual  application for an exception from the routine cost limitation
("RCL")  under the  Medicare  program for fiscal years 1992 through 1996 for its
former Gardner, Kansas facility.  Medicare reimbursement is generally based upon
reasonable direct and indirect  allowable costs incurred in providing  services.
At the Company's former Gardner, Kansas facility these costs were subject to the
RCL. Requests for an exception from the RCL have been submitted for fiscal years
1992 through 1995 for such facility.  In connection  with the sale of its Kansas
operation,  the Company  retained  the  accounts  receivable  at the closing and
accordingly  it intends to file such a request  for  fiscal  1996 and 1997.  The
requests are based upon atypical  costs  incurred at the Kansas  facility in the
treatment of patients who received  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 any assurance as to the timing of any such
collection.

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

     The  Company  may use a portion of its cash  balance  to  finance  internal
development of its home health  business line. 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, 1997, the Company had $30,000  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  effect 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.   123,   "Accounting   for  Stock  Based
Compensation",  and SFAS No. 128,  "Earning per Share" which,  in the opinion of
management,  will have no  effect on the  Company's  financial  statements.  The
Company has not applied the provisions of SFAS No. 123 as stock options  granted
in 1996 and 1997 were immaterial. Similarly, the adoption of SFAS No. 128 is not
expected to significantly impact the Company's earnings per share calculation.

                                 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, 1996 and
1997, 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, 1997             By    /s/  Harvey Wm. Glasser, M.D.
                                           ------------------------------------
                                           Harvey Wm. Glasser, M.D.
                                           President and Chief Executive Officer