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 March 31, 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.)

                   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 May  14,  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,            March 31,
                                                                                                         1996                1997
                                                                                                     -------------     -------------

                                                                                                                         (Unaudited)
CURRENT ASSETS:
<S>                                                                                                  <C>               <C>
   Cash and cash equivalents                                                                         $  3,439,440      $  3,390,993
   Restricted cash                                                                                        311,000           249,000
   Patient accounts receivable, less allowance for doubtful accounts
      of $1,445,000 and $1,351,000 respectively                                                         4,738,957         5,122,109
   Due from intermediaries                                                                                331,918             9,630
   Income tax refund receivable                                                                           140,362            48,945
   Other receivables                                                                                    1,264,444           970,246
   Prepaid expenses and other assets                                                                      376,898           179,145
                                                                                                     -------------     -------------
      Total current assets                                                                             10,603,019         9,970,068
                                                                                                     -------------     -------------

PROPERTY AND EQUIPMENT, at cost:
   Land and buildings                                                                                     683,770                --
   Furniture and equipment                                                                              2,993,965         2,155,797
   Leasehold improvements                                                                                 783,614           648,512
                                                                                                     -------------     -------------
                                                                                                        4,461,349         2,804,309
   Less:  accumulated depreciation                                                                     (2,095,193)       (1,615,640)
                                                                                                     -------------     -------------
      Net property and equipment                                                                        2,366,156         1,188,669
                                                                                                     -------------     -------------

OTHER ASSETS:
  Goodwill and intangible assets                                                                        1,870,555         1,820,472
                                                                                                     -------------     -------------

                            TOTAL ASSETS                                                             $ 14,839,730      $ 12,979,209
                                                                                                     =============     =============

CURRENT LIABILITIES:
   Short-term borrowings and current maturities of notes payable                                     $    657,724      $    420,277
   Current maturities of capital lease obligations                                                         32,803            29,528
   Accounts payable                                                                                     1,226,053         1,422,073
   Accrued payroll and employee benefits                                                                1,101,168         1,052,488
   Other accrued liabilities                                                                            1,065,820           626,506
                                                                                                     -------------     -------------

      Total current liabilities                                                                         4,083,568         3,550,872
                                                                                                     -------------     -------------

LONG-TERM LIABILITIES:
   Capital lease obligations                                                                               21,815             2,981
   Note payable and other long-term liabilities                                                           636,255           377,975
                                                                                                     -------------     -------------
      Total long-term liabilities                                                                         658,070           380,956
                                                                                                     -------------     -------------

                            TOTAL LIABILITIES                                                           4,741,638         3,931,828
                                                                                                     -------------     -------------

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 March 31, 1997                                                             11,572            11,572
      Class B -- 5,000,000 shares authorized; 773,000 shares issued and outstanding
           at June 30, 1996 and March 31, 1997                                                              7,730             7,730
   Paid-in capital                                                                                     17,908,122        17,908,122
   Retained deficit                                                                                    (7,840,997)       (8,880,043)
                                                                                                     -------------     -------------

      Total stockholders' equity                                                                       10,086,427         9,047,381
                                                                                                     -------------     -------------

                            TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                               $ 14,839,730      $ 12,979,209
                                                                                                     =============     =============



<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 March 31,            9-Mths Ended March 31,
                                                                        1996             1997             1996            1997

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

<S>                                                                 <C>              <C>              <C>              <C>
NET OPERATING REVENUES                                              $  6,321,363     $  5,508,323     $ 17,995,272     $ 17,013,035

OPERATING EXPENSES:
   Salaries and employee benefits                                      3,866,016        3,824,664       11,774,074       11,926,130
   Professional fees and purchased services                              706,177          529,770        1,940,085        1,887,597
   Provision for doubtful accounts                                       145,677          129,147          395,532          346,381
   Other operating expenses                                              906,770          882,961        2,411,091        2,658,606
   Depreciation and amortization                                         147,815          139,147          427,308          448,109
   Rent:
      To unrelated parties                                               406,822          303,237        1,222,772        1,038,016
      To related parties                                                 106,399           97,920          310,134          289,708
    Gain on sale of assets                                                    --         (488,240)              --         (530,942)
                                                                   -------------    -------------     -------------    -------------

      Total operating expenses                                         6,285,676        5,418,606       18,480,996       18,063,605
                                                                   -------------    -------------     -------------    -------------

      Income (loss) from operations                                       35,687           89,717         (485,724)      (1,050,570)
                                                                   -------------    -------------     -------------    -------------

OTHER (INCOME) EXPENSE:
   Interest income                                                       (37,529)         (24,021)        (150,664)         (85,564)
   Interest expense                                                       21,928           15,394           71,914           47,380
                                                                   -------------    -------------     -------------    -------------

      Net other income                                                   (15,601)          (8,627)         (78,750)         (38,184)
                                                                   -------------    -------------     -------------    -------------

      Income (loss) before income taxes                                   51,288           98,344         (406,974)      (1,012,386)

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


     NET INCOME (LOSS) BEFORE MINORITY INTEREST                     $     51,288     $     98,344     ($   406,974)    ($ 1,012,386)

MINORITY INTEREST IN EARNINGS OF
CONSOLIDATED SUBSIDIARIES                                                 17,495            9,871           56,052           26,660
                                                                   -------------    -------------     -------------    -------------


      NET INCOME (LOSS)                                             $     33,793     $     88,473     ($   463,026)    ($ 1,039,046)
                                                                   =============    =============     =============    =============

NET INCOME (LOSS) PER SHARE (primary and fully diluted)             $       0.02     $       0.05     ($      0.24)    ($      0.54)
                                                                   =============    =============     =============    =============


WEIGHTED AVERAGE COMMON AND COMMON
   EQUIVALENT SHARES OUTSTANDING                                       1,930,244        1,930,244        1,930,384        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

                                                                                                        9-Mths Ended March 31,
                                                                                                     1996                    1997
                                                                                                -----------             -----------
                                                                                                 (Unaudited)             (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                                             <C>                     <C>         
   Net loss                                                                                     ($  463,026)            ($1,039,046)
   Adjustments to reconcile net income to net cash
        provided by (used for) operations:
     Depreciation and amortization                                                                  427,308                 448,109
     Loss (gain) on sale of assets                                                                      413                (530,942)
     Minority interest expense                                                                       56,052                  26,660
     Changes in assets and liabilities:
     (Increase) in patient receivables                                                           (1,535,816)               (383,152)
     Decrease in amounts due from intermediaries                                                    215,087                 322,288
     Decrease in income tax refund receivable                                                        29,638                  91,417
     (Increase) decrease in other receivables                                                      (975,758)                294,198
     Decrease in prepaid expenses and other current assets                                           18,979                 197,753
     Decrease in accounts payable and accrued liabilities                                          (165,086)               (190,458)
                                                                                                -----------             -----------
     Cash used for operating activities                                                          (2,392,209)               (763,173)
                                                                                                -----------             -----------
CASH FLOWS FROM INVESTMENT ACTIVITIES:
   Additions to property and equipment                                                             (418,510)               (149,246)
   Payments on prior purchase of outpatient clinics                                                (123,432)               (318,224)
   Proceeds from sale of assets                                                                      15,093               1,459,652
                                                                                                -----------             -----------
     Cash provided by (used for) investment activities                                             (526,849)                992,182
                                                                                                -----------             -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
   Short-term notes borrowings                                                                      444,609                 273,002
   Long-term notes borrowings                                                                        34,124                      --
   Payments of capital lease obligations                                                            (97,305)                (22,113)
   Payments of short-term notes payable                                                            (754,571)               (546,599)
   Reduction in restricted cash                                                                     359,000                  62,000
   Payments to minority shareholders                                                                (65,202)                (43,746)
                                                                                                -----------             -----------
     Cash used for financing activities                                                             (79,345)               (277,456)
                                                                                                -----------             -----------
     Net decrease in cash                                                                        (2,998,403)                (48,447)

CASH, BEGINNING OF PERIOD                                                                         6,307,307               3,439,440
                                                                                                -----------             -----------
CASH, END OF PERIOD                                                                             $ 3,308,904             $ 3,390,993
                                                                                                ===========             ===========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
   Noncash activities:
     Property additions financed with notes payable                                             $    53,024             $        --
     Property additions financed with capital leases                                                 76,020                      --
     Liability resulting from purchase of outpatient clinics                                        120,480                      --

   Payments:
     Interest paid                                                                                   33,128                  51,626
     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 INFORMATION (Item 1. - Financial Statements)

                                       MEADOWBROOK REHABILITATION GROUP, INC. AND SUBSIDIARIES

                                           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY



                                                         Common Stock                                                    Total
                                        ------------------------------------------
                                                Class A               Class B            Paid-in        Retained      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                               ---       ---        ---       ---              ---     (1,039,046)    (1,039,046)
                                        ------------ --------- ----------  --------  ---------------  -------------  -------------

BALANCE, MARCH 31, 1997                   1,157,244   $11,572    773,000    $7,730      $17,908,122    ($8,880,043)    $9,047,381
                                        ============ ========= ==========  ========  ===============  =============  =============


<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,  and the first nine months of fiscal 1997.  The  Company's  future
profitability  is dependent on a number of factors,  including  increased volume
and  revenues at the  Company's  operating  locations,  and a  reduction  in the
Company's expenses as a percentage of its total operating revenues. There can be
no assurance as to the Company's future profitability.

     The  Company's  recent  operating  losses  have  substantially  reduced its
available  working  capital.  For the nine  months  ended  March 31,  1997,  the
Company's operating activities used cash of $763,000,  although,  as a result of
the sale of the Company's Georgia operations for cash, working capital decreased
only slightly to $6,419,000 at March 31, 1997 from  $6,519,000 at June 30, 1996.
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  continued  operating  losses,  the Board of  Directors  has
decided to sell certain  assets.  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.  In addition,
earlier in the current  fiscal year the Company  sold its post acute  program in
Illinois  and its  outpatient  rehabilitation  clinics in  Alaska.  The Board 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.

     Among the  alternatives  under  consideration  is the sale of the Company's
Florida outpatient  rehabilitation clinics. The Company's balance sheet at March
31, 1997 includes net assets of approximately $2,633,000 including $1,469,000 in
goodwill  and  other  intangible  assets  related  to  these  clinics.  Based on
preliminary  discussions  with  potential  purchasers,  the sale  price  for the
Florida  clinics would likely be  significantly  less than the carrying value of
the related net assets.  Accordingly,  in the event of a sale, the Company would
likely record a significant loss.

     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 regardless of how other stockholders
might vote.

o     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 including the related real estate. The sale
price for the Georgia  operations was $1,300,000.  The Company's  agreement with
the  purchaser  provides  that the Company  will  collect  outstanding  accounts
receivables and be responsible for the accounts payable at the closing date. The
increase  in the  Company's  cash  position  as a  result  of this  transaction,
assuming   collection  of  the  accounts   receivable,   will  be  approximately
$2,100,000.  This transaction  resulted in a gain of $517,000 which was recorded
as other operating income as of March 31,1997.

o     Sale of Alaska Operations.

     On January 13,  1997,  the  Company  sold its three  outpatient  clinics in
Alaska.  The  increase  in the  Company's  cash  position  as a  result  of this
transaction,  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.  This transaction resulted in a loss of $29,000, which was recorded as
other operating expense during the third quarter of fiscal 1997.
<PAGE>
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
increase  in the  Company's  cash  position  as a  result  of this  transaction,
assuming collection of the accounts receivable,  will be approximately $360,000.
This  transaction  resulted  in a gain of $63,000,  which was  recorded as other
operating income during the second quarter of fiscal 1997.

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.  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,  and as a
result  NASDAQ had  notified  the Company that it was  reviewing  the  Company's
eligibility for continued listing.  The Company has retroactively  reflected the
reverse stock split in the financial statements for all periods presented.

     NASDAQ has proposed new requirements for maintaining  listing on the NASDAQ
National Market. The proposal would require, among other things, that the market
value of a listed  company's  public float (defined as the number of shares held
by  persons  other  than  officers,   directors  and  ten  percent  stockholders
multiplied  by the bid price for the  listed  company's  shares)  be at least $5
million.  As of May 12, 1997, the market value of the Company's public float was
approximately  $2,262,000.  Accordingly,  if NASDAQ's proposals are adopted, the
Company  could  be  delisted  from  the  NASDAQ  National  Market.  The  Company
understands  that in the event of  delisting  it would be  placed in the  NASDAQ
SmallCap  Market,  subject to compliance with the SmallCap  Markets  maintenance
criteria. The Company would comply with such criteria as of the date hereof.

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 March 31, 1997 was $249,000.

     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 March 31, 1997, by
Medicare and the previous  owner of the Colorado  operations  exceed the minimum
amounts owed to the previous owner by $205,000.

     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.


<PAGE>

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 March 31,  1997,  the  Company's  remaining
liability  resulting from the purchase was $234,000,  plus  additional  payments
based on the earnings  performance of certain clinics.  Such additional payments
would total  $255,000  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 March 31, 1997, the Company had paid $158,000 of the purchase
price and was obligated to pay an additional  $102,000  prior to February  2000.
Subsequent  to quarter  end,  the  Company  made a final  discounted  settlement
payment paying off the remaining liability.

     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.

<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             % Net Revenue
                                                       3-Months Ended            9-Months Ended         % $ Change    % $ Change
                                                    03/31/96    03/31/97      03/31/96     03/31/97        3-Month       9-Month
                                                    ----------  ----------    ----------  ----------    ----------    ----------
                                                                                                                     
<S>                                                    <C>         <C>           <C>          <C>            <C>           <C>  
Net  Operating Revenues                                100.0       100.0         100.0        100.0          (12.9)        (5.5)
                                                                                                                     
Non-capital operating expenses:                                                                                      
          Salaries and employee benefits                61.2        69.4          65.4         70.1           (1.1)         1.3
          Other non-capital expenses                    27.8        28.0          26.4         28.8          (12.3)         3.1
          Gain on sale of assets                         --         (8.9)          --          (3.1)           --           --  
                                                    ----------  ----------    ----------  ----------    ----------    ----------
                                                                                                                     
                   Total non-capital expenses           89.0        88.6          91.8         95.7          (13.3)        (1.4)
                                                                                                                     
Capital expenses:                                                                                                    
          Depreciation and amortization                  2.3         2.5           2.4          2.6           (5.9)         4.9
          Rent                                           8.1         7.3           8.5          7.8          (21.8)       (13.4)
          Interest                                       0.4         0.3           0.4          0.3          (29.8)       (34.1)
                                                    ----------  ----------    ----------  ----------    ----------    ----------
                                                                                                                     
                   Total capital expenses               10.8        10.1          11.3         10.7          (18.6)       (10.3)
                                                    ----------  ----------    ----------  ----------    ----------    ----------
                   Total expenses                       99.8        98.7         103.1        106.4          (13.9)        (2.4)
                                                                                                                           
Interest income                                          0.6         0.4           0.8          0.5          (36.0)       (43.2)
                                                    ----------  ----------    ----------  ----------    ----------    ----------
Income (loss) before income taxes                        0.8         1.8          (2.2)        (5.9)          91.7        148.8
Income tax provision                                     --          --             --           --             --    
                                                    ----------  ----------    ----------  ----------    ----------    ----------
                                                                                                                      
Income (loss) before minority interest                   0.8         1.8          (2.2)        (5.9)          91.7        148.8
                                                                                                                      
Minority Interest                                        0.3         0.2           0.3          0.2          (43.6)       (52.4)
                                                    ----------  ----------    ----------  ----------    ----------    ----------
                                                                                                                      
Net Income (Loss)                                        0.5         1.6          (2.5)        (6.1)         161.8        124.4
                                                    =========   ==========    ==========  ==========    ==========    ==========
                                                                                                                                 
</TABLE> 
                                                                             

     The Company's net operating revenues decreased 13% and 6% to $5,508,000 and
$17,013,000 for the three and nine months ended March 31, 1997, respectively, as
compared to $6,321,000 and  $17,995,000 for the same periods in the prior fiscal
year.  The decrease was due to decreased  utilization  at 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
$1,345,000 for the nine months ended March 31, 1996, as compared to $305,000 for
the nine  months  ended  March  31,  1997.  The  number of  patient  days in the
Company's  core business  decreased 9% to 18,680 for the nine months ended March
31, 1997, from 20,536 for the same period in the prior fiscal year. 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 8% and 10%
to  $529  and  $534  for the  three  and  nine  months  ended  March  31,  1997,
respectively,  as  compared  to $574 and $591 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.

     Revenues from the Company's Georgia operations for the three and nine month
periods ended March 31, 1997,  were  $1,643,000  and  $4,856,000,  respectively,
representing 30% and 29% of the Company's total revenues for such periods.

     In the following discussion,  the Company distinguishes between capital and
non-capital operating expenses.  This distinction is made to clarify those costs
that are controllable from those costs that are not  controllable,  in the short
term.  Capital operating  expenses such as rent are generally fixed in the short
term.  Non-capital  operating  expenses  such as  employee  costs are  generally
variable  in the short  term and are  therefore  subject  to  faster  management
intervention as business conditions change.
<PAGE>

     Total  non-capital  expenses  decreased  13% and 1% for the  three and nine
months  ended March 31,  1997,  to  $4,878,000  and  $16,288,000  as compared to
$5,625,000  and  $16,521,000  for the same periods in the prior fiscal year. The
decrease relates  primarily to the gain of $517,000  recorded on the sale of the
Company's  Georgia  operations.  The gain on sale was  included  in  non-capital
expenses. Salaries and employee benefits continue to be the primary component of
the Company's  non-capital  operating  expenses.  Salaries and employee benefits
decreased  1% to  $3,825,000  for the three  months  ended  March 31,  1997,  as
compared to  $3,866,000  for the same period in the prior fiscal  year.  For the
nine months ended March 31, 1997, salaries and employee benefits increased 1% to
$11,926,000,  as compared to $11,774,000 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 March 31, 1997,  the Company's  other  non-capital  operating
expenses  decreased 12% to  $1,542,000,  as compared to $1,759,000  for the same
period  in the  prior  fiscal  year.  The  decrease  is  primarily  due to lower
purchased  services  and  professional  fees  as a  result  of the  sale  of the
Company's Illinois operations in October,  1996. For the nine months ended March
31, 1997, other non-capital  operating expenses  increased 3% to $4,893,000,  as
compared  to  $4,747,000  for the same  period 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,  partially offset by lower purchased services and professional fees as
a result of the sale of the Company's Illinois operations in October,  1996. The
provision for doubtful accounts decreased to $129,000 and $346,000 for the three
and nine months ended March 31, 1997,  respectively,  from $146,000 and $396,000
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 nine month periods
in fiscal 1996 and 1997.

     Total  capital  expenses  decreased  19% and 10%  during the three and nine
months  ended March 31,  1997,  to $556,000  and  $1,823,000,  respectively,  as
compared to $683,000  and  $2,032,000  for the same  periods in the prior fiscal
year.  Rent expense  decreased  22% and 13% to $401,000 and  $1,328,000  for the
three and nine  months  ended  March 31,  1997,  respectively,  as  compared  to
$513,000 and  $1,533,000  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 nine months  ended March 31,  1997,
decreased  to $24,000  and  $86,000,  respectively,  as  compared to $38,000 and
$151,000 for the same periods in the prior fiscal year.  This decrease is due to
lower cash  balances  available for  investment  during the first nine months of
fiscal 1997.

     The Company reported net income of $88,000 for the three months ended March
31, 1997,  as compared to net income of $34,000 for the same period in the prior
fiscal year.  For the nine months ended March 31, 1997,  the Company  reported a
net loss of $1,039,000 as compared to a net loss of $463,000 for the same period
in the prior fiscal year.  Both the three and nine month  periods in fiscal 1997
include the $517,000 gain on the sale of the Georgia operations. 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.

<PAGE>
                         LIQUIDITY AND CAPITAL RESOURCES

     At March 31, 1997, the Company had working  capital of $6,419,000  compared
to working capital of $6,519,000 at June 30, 1996. The Company had cash and cash
equivalents  of  $3,391,000 at March 31, 1997, as compared to $3,439,000 at June
30, 1996.

     During the nine  months  ended  March 31,  1997,  the  Company's  operating
activities used $763,000 of available cash  resources,  as compared to cash used
for  operating  activities  of  $2,392,000  during the same  period in the prior
fiscal year. The cash used for operating activities during the nine months ended
March 31, 1997,  primarily  reflects amounts necessary to fund the Company's net
operating losses. The cash used for operating  activities during the nine months
ended March 31,  1996,  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 provided from investment  activities during
the nine months ended March 31, 1997, was $992,000, as compared to cash used for
investment  activities  of $527,000  during the same period in the prior  fiscal
year.  The cash provided from  investment  activities  for the nine months ended
March  31,  1997,  primarily  relates  to the  proceeds  from  the  sales of the
Company's  Georgia,  Alaska  and  Chicago  operations.  See  "Trends  and Recent
Events."

     Net  patient   accounts   receivable,   which  excludes  amounts  due  from
intermediaries, was $5,122,000 at March 31, 1997, compared to $4,739,000 at June
30, 1996. At March 31, 1997, the Company had an allowance for doubtful  accounts
of $1,351,000, 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 76 days at March 31, 1997.

     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 March 31, 1997,
accounts  receivable related to these litigation  patients totaled $550,000,  as
compared to $444,000,  at June 30, 1996.  These litigation  patient  receivables
accounted  for an additional  10 average days revenue  outstanding  at March 31,
1997.

     The Company's amount due from Medicare  intermediaries  of $10,000 at March
31, 1997 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 nine
months  ended  March  31,  1997,  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.  The Company will need to obtain access to additional capital,  through
bank  loans  or  otherwise,   in  order  to  fund  any  significant  acquisition
opportunities. The Company believes that its existing cash, credit line and cash
flows from  operations,  will be sufficient  to satisfy the Company's  estimated
operating  cash  requirements  for its existing  facilities  for the next twelve
months.

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

<PAGE>
                         IMPACT OF ACCOUNTING STATEMENTS

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

                                 INTERIM PERIODS

     The Company believes that all the necessary  adjustments have been included
in  the  amounts  shown  in  the  unaudited  consolidated  financial  statements
contained  in Item 1 above,  for the three and nine months  ended March 31, 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

                  (a)      27.1 Financial Data Schedule

                  (b)      On  April  14,  1997,  the  Company  filed a Form 8-K
                           pursuant to items 2 and 7 of such Form and  including
                           pro forma financial  information giving effect to the
                           sale of the Company's Georgia operations.


<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:  May 14, 1997                    By  /s/ Harvey Wm. Glasser, M.D.
                                          -----------------------------------
                                          Harvey Wm. Glasser, M.D.
                                          President and Chief Executive Officer