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

                                    FORM 10-Q

(Mark One)

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

                For the quarterly period ended December 31, 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 February 13, 1998,  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    .......................... 14
                Impact of Accounting Statements    .......................... 16
                Interim Periods  ............................................ 16

PART II: OTHER INFORMATION

      Item 1.   Legal Proceedings  .......................................... 17
      Item 2.   Changes in Securities     ................................... 17
      Item 3.   Defaults Upon Senior Securities    .......................... 17
      Item 4.   Submission of Matters to a Vote of Security Holders ......... 17
      Item 5.   Other Information  .......................................... 17
      Item 6.   Exhibits  ................................................... 17

SIGNATURES      ............................................................. 18






<PAGE>

<TABLE>
<CAPTION>


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

                                       MEADOWBROOK REHABILITATION GROUP, INC. AND SUBSIDIARIES

                                                     CONSOLIDATED BALANCE SHEETS

                                                                                             June 30,        December 31,
                                                                                               1997              1997
                                                                                          ------------      -------------
                                                                                                              (Unaudited)
<S>                                                                                       <C>               <C>

CURRENT ASSETS:
   Cash and cash equivalents                                                              $  2,928,781      $  3,746,368
   Restricted cash                                                                             278,649           275,865
   Patient accounts receivable, less allowance for doubtful accounts
      of $1,194,000 and $825,000 respectively                                                4,278,756         1,950,884
   Due from intermediaries                                                                        --             616,000
   Other receivables                                                                           293,165           412,505
   Prepaid expenses and other assets                                                           298,970           262,911
                                                                                          ------------      ------------
      Total current assets                                                                   8,078,321         7,264,533
                                                                                          ------------      ------------

PROPERTY AND EQUIPMENT, at cost:
   Furniture and equipment                                                                   2,154,947           891,266
   Leasehold improvements                                                                      686,116           152,188
                                                                                          ------------      ------------
                                                                                             2,841,063         1,043,454
   Less:  accumulated depreciation                                                          (1,708,734)         (521,765)
                                                                                          ------------      ------------
      Net property and equipment                                                             1,132,329           521,689
                                                                                          ------------      ------------

OTHER ASSETS:
   Goodwill and intangible assets                                                              337,734           348,354
                                                                                          ------------      ------------

                    TOTAL ASSETS                                                          $  9,548,384      $  8,134,576
                                                                                          ============      ============

CURRENT LIABILITIES:
   Short-term borrowings and current maturities of notes payable                          $    291,037      $    172.734
   Current maturities of capital lease obligations                                              24,821             9,812
   Accounts payable                                                                            968,027           334,998
   Accrued payroll and employee benefits                                                       755,748           460,964
   Due to intermediaries                                                                       100,780              --  
   Other accrued liabilities                                                                 1,123,124           440,655
                                                                                          ------------      ------------

      Total current liabilities                                                              3,263,537         1,419,163
                                                                                          ------------      ------------

LONG-TERM LIABILITIES:
   Note payable and other long-term liabilities                                                 48,989            35,783
                                                                                          ------------      ------------
      Total long-term liabilities                                                               48,989            35,783
                                                                                          ------------      ------------

                    TOTAL LIABILITIES                                                        3,312,526         1,454,946
                                                                                          ------------      ------------

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 December 31, 1997                                               11,572            11,572
      Class B -- 5,000,000 shares authorized; 773,000 shares issued and outstanding
           At June 30, 1997 and December 31, 1997                                                7,730             7,730
   Paid-in capital                                                                          17,908,122        17,908,122
   Retained deficit                                                                        (11,691,566)      (11,247,794)
                                                                                          ------------      ------------

      Total stockholders' equity                                                             6,235,858         6,679,630
                                                                                          ------------      ------------

                    TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                            $  9,548,384      $  8,134,576
                                                                                          ============      ============

<FN>

-------------------------------------------------------------------------------------------------------------------------

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


<PAGE>

<TABLE>
<CAPTION>


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

                                       MEADOWBROOK REHABILITATION GROUP, INC. AND SUBSIDIARIES

                                                CONSOLIDATED STATEMENTS OF OPERATIONS

                                                                    3-Mths Ended December 31,      6-Mths Ended December 31,
                                                                      1996            1997             1996            1997
                                                                   (Unaudited)    (Unaudited)      (Unaudited)     (Unaudited)
                                                                  ------------    ------------    ------------    ------------
<S>                                                               <C>             <C>             <C>             <C>         
      NET OPERATING REVENUES                                      $  5,527,729    $  1,940,146    $ 11,504,711    $  5,000,374

      OPERATING EXPENSES:
         Salaries and employee benefits                              3,949,203       1,728,517       8,101,472       4,138,917
         Professional fees and purchased services                      639,477         173,664       1,357,824         464,572
         Provision for doubtful accounts                                99,339           7,651         217,234          76,153
         Other operating expenses                                      815,811         407,426       1,778,832         923,602
         Depreciation and amortization                                 150,324          52,932         308,960         141,316
         Rent:
            To unrelated parties                                       348,519         135,074         734,776         321,443
            To related parties                                          94,336            --           191,788          29,962
         Net gain on sale of assets                                    (45,857)       (302,681)        (45,857)     (1,475,044)
                                                                  ------------    ------------    ------------    ------------

            Total operating expenses                                 6,051,152       2,202,583      12,645,029       4,620,920
                                                                  ------------    ------------    ------------    ------------

            Income (loss) from operations                             (523,423)       (262,437)     (1,140,318)        379,454
                                                                  ------------    ------------    ------------    ------------

      OTHER (INCOME) EXPENSE:
         Interest income                                               (25,406)        (41,145)        (61,575)        (81,053)
         Interest expense                                               15,167           3,875          31,987          12,780
                                                                  ------------    ------------    ------------    ------------

            Net other income                                           (10,239)        (37,270)        (29,588)        (68,273)
                                                                  ------------    ------------    ------------    ------------

            Income (loss) before income taxes                         (513,184)       (225,167)     (1,110,730)        447,727

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

           NET INCOME (LOSS) BEFORE MINORITY INTEREST             ($   513,184)   ($   225,167)   ($ 1,110,730)   $    447,727

      MINORITY INTEREST IN EARNINGS OF
            CONSOLIDATED SUBSIDIARIES                                    3,756            --            16,789           3,955
                                                                  ------------    ------------    ------------    ------------

            NET INCOME (LOSS)                                     ($   516,940)   ($   225,167)   ($ 1,127,519)   $    443,772
                                                                  ============    ============    ============    ============

      NET INCOME (LOSS) PER SHARE (basic and diluted)             ($      0.27)   ($      0.12)   ($      0.58)   $       0.23
                                                                  ============    ============    ============    ============

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

                                                                                                    6-Mths Ended December 31,
                                                                                                   1996                  1997
                                                                                              --------------         --------------
                                                                                                (Unaudited)            (Unaudited)
<S>                                                                                            <C>                     <C>    

CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income (loss)                                                                           ($1,127,519)             $   443,772
   Adjustments to reconcile net income (loss) to net
        cash provided by (used for) operations:
      Depreciation and amortization                                                                308,960                  141,316
      Gain on sale of assets                                                                       (45,857)              (1,475,044)
      Minority interest expense                                                                     16,789                    3,955
   Changes in assets and liabilities:
      (Increase) decrease in patient receivables                                                  (284,526)               1,839,122
      (Increase) decrease in due from intermediaries                                               109,074                 (671,605)
      Decrease in income tax refund receivables                                                     91,417                     --
      Decrease in other receivables                                                                410,555                  170,653
      (Increase) decrease in prepaid expenses and
        other current assets                                                                        50,864                  (33,479)
      Increase (decrease) in accounts payable and
        accrued liabilities                                                                         96,884                 (522,402)
                                                                                               -----------              -----------

        Cash used for operating activities                                                        (373,359)                (103,712)
                                                                                               -----------              -----------

CASH FLOWS FROM INVESTMENT ACTIVITIES:
      Additions to property and equipment                                                         (124,442)                 (33,606)
      Payments on prior purchase of outpatient clinics                                            (300,668)                (281,275)
      Purchase of home health agency                                                                  --                    (20,000)
      Proceeds from sale of assets                                                                 130,973                1,407,679
                                                                                               -----------              -----------

        Cash provided by (used for) investment activities                                         (294,137)               1,072,816
                                                                                               -----------              -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
      Short-term notes borrowings                                                                  273,002                  127,221
      Payments of short-term borrowings                                                           (330,756)                (258,729)
      Payments of capital lease obligations                                                        (14,421)                 (15,009)
      Reduction in restricted cash                                                                   2,785                    2,000
      Payments to minority shareholders                                                            (31,664)                  (7,784)
                                                                                               -----------              -----------

        Cash used for financing activities                                                        (101,839)                (151,516)
                                                                                               -----------              -----------

        Net increase (decrease) in cash                                                           (769,335)                 817,588

CASH AND CASH EQUIVALENTS, Beginning of Period                                                   3,439,440                2,928,781
                                                                                               -----------              -----------

CASH, End of Period                                                                            $ 2,670,105              $ 3,746,369
                                                                                               ===========              ===========


SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
      Noncash activities:
        Notes received on sale of Florida operations                                           $      --                $   215,000

      Payments:
        Interest paid                                                                               41,333                   29,882
        Income taxes paid                                                                           20,900
                                                                                                                             10,440
<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 income                    --             --             --             --             --          443,772         443,772
                             ------------   -----------   ------------   ------------   ------------    ------------    ------------

BALANCE, DECEMBER 31, 1997      1,157,244   $    11,572        773,000   $      7,730   $ 17,908,122    ($11,247,794)   $  6,679,630
                             ============   ===========   ============   ============   ============    ============    ============


































<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 February 13, 1998 is $4,807,000. 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, 1997,  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. As
of December 31, 1997, the Company  operated home health agencies with operations
in Colorado and Kansas and four physical therapy clinics in Colorado.

     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. During the second quarter of fiscal 1998 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
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.

     In the second quarter of fiscal 1998, certain  contingencies related to the
Florida sale were  resolved.  The Company  determined  that reserves of $308,000
recorded  at the time of the  sale  are no  longer  needed.  Accordingly,  these
reserves have been  reversed and the  resulting  gain is included in net gain on
sale of assets in the accompanying income statement.

     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.  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 in net gain on
sale of assets 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 December 31, 1997 was $261,000.  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 December 31, 1997,
by Medicare and the previous owner of the Colorado operations exceed the minimum
amounts owed to the previous owner by $237,000.

Healthcare Regulation and Reform

     There is continuing  political debate concerning the need for reform of the
healthcare  industry.  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 (which ended on December 31, 1997) 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               % Net Revenue               % $          % $
                                            3-Months Ended              6-Months Ended            Change       Change
                                        12/31/96      12/31/97      12/31/96      12/31/97       3-Month       6-Month
                                       ----------    ----------    ----------    ----------     ---------    ----------
<S>                                    <C>           <C>           <C>           <C>            <C>          <C>

Net Operating Revenues                     100.0         100.0         100.0         100.0        (64.9)         (56.5)

Non-capital operating expenses:
     Salaries and employee benefits         71.4          89.1          70.4          82.8        (56.2)         (48.9)
     Other non-capital expenses             28.1          30.3          29.2          29.3        (62.1)         (56.3)
     Net gain on sale of assets             (0.8)        (15.6)         (0.4)        (29.5)       560.1        3,116.6
                                       ----------    ----------    ----------    ----------
         Total non-capital expenses         98.7         103.8          99.2          82.6        (63.1)         (63.8)


Capital expenses:
     Depreciation and amortization           2.7           2.7           2.7           2.8        (64.8)         (54.3)
     Rent                                    8.0           7.0           8.1           7.0        (69.5)         (62.1)
     Interest                                0.3           0.2           0.3           0.3        (74.5)         (60.0)
                                       ----------    ----------    ----------    ----------
         Total capital expenses             11.0           9.9          11.0          10.1        (68.5)         (60.1)
                                       ----------    ----------    ----------    ----------
         Total expenses                    109.7         113.7         110.2          92.6        (63.6)         (63.4)

Interest income                              0.5           2.1           0.5           1.6         61.9           31.6
                                       ----------    ----------    ----------    ----------
Income (loss) before income taxes           (9.2)        (11.6)         (9.6)          9.0        (56.1)        (140.3)
Income tax provision                          -             -             -             -            -              -
                                       ----------    ----------    ----------    ----------

Income (loss) before minority interest      (9.2)        (11.6)         (9.6)          9.0       (56.1)        (140.3)

Minority interest                            0.1            -            0.1           0.1        (100.0)        (76.4)
                                       ----------    ----------    ----------    ----------

Net income (loss)                           (9.3)        (11.6)         (9.7)          8.9        (56.4)       (139.4)
                                       ==========    ==========    ==========    ==========
</TABLE>


     The Company's net  operating  revenues  decreased 65% and 57% to $1,940,000
and $5,000,000 for the three and six months ended December 31, 1997, as compared
to $5,528,000 and $11,505,000 for the same periods 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 and six months
ended December 31, 1996 and 1997, with respect to operations sold by the Company
during fiscal 1997 and the first quarter of fiscal 1998.


                  Net operating revenues               Net operating revenues
               Three months ended December 31,     Six months ended December 31,
                      1996           1997              1996           1997
                 ------------   ------------        ------------   ------------
                  (unaudited)    (unaudited)          (unaudited)    (unaudited)

   Alaska        $   217,000    $     --            $   372,000    $      --
   Georgia         1,583,000          --              3,213,000           --
   Illinois           21,000          --                305,000           --
   Kansas          1,130,000          --              2,461,000        320,000
   Florida           533,000          --              1,127,000        278,000
                ------------   ------------         ------------   ------------
        Total    $ 3,484,000    $     --             $ 7,478,000    $   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 14% to 65,355 for the six months ended
December 31, 1997, from 57,297 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 and six months ended  December 31, 1997  decreased 58% and
51% to $2,317,000 and $5,603,000, respectively, from $5,504,000 and $11,455,000,
respectively,  during the same periods 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  56%  and  49%  to  $1,729,000  and
$4,139,000  for the three and six months ended December 31, 1997, as compared to
$3,949,000  and  $8,101,000  for the same  periods  in the  prior  fiscal  year.
Salaries  and  employee  benefits  as a  percentage  of net  operating  revenues
increased to 89% and 83% for the three and six months  ended  December 31, 1997,
as compared to 71% and 70% for the same periods in the prior  fiscal  year.  The
increase is due to the  Company's  concentration  in home health which is a more
labor intensive business.

     The Company's other  non-capital  operating  expenses  primarily consist of
professional  fees,  purchased  services and other operating  expenses.  For the
three and six months ended  December 31, 1997, the Company's  other  non-capital
operating   expenses   decreased  62%  and  56%  to  $589,000  and   $1,464,000,
respectively,  as compared to $1,555,000 and $3,354,000,  respectively,  for the
same periods 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 $8,000 and $76,000 for
the three and six months ended  December 31,  1997,  from $99,000 and  $217,000,
respectively,  for the same periods in the prior fiscal year.  The provision for
doubtful  accounts as a percentage  of revenues was .4% and 2% for the three and
six months  ended  December 31,  1997,  respectively,  as compared to 2% for the
three and six months ended December 31, 1996.

     Total  capital  expenses  decreased  68% and 60%  during  the three and six
months ended  December 31, 1997,  to $192,000  and  $506,000,  respectively,  as
compared to $608,000  and  $1,268,000  for the same  periods in the prior fiscal
year. Rent expense  decreased 70% and 62% to $135,000 and $351,000 for the three
and six months ended  December 31, 1997,  respectively,  as compared to $443,000
and $927,000  for the same  periods 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 1998 results included 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. In addition, in the second quarter of fiscal 1998, certain
contingencies related to the Florida sale were resolved.  The Company determined
that reserves of $308,000 recorded at the time of the sale are no longer needed.
Accordingly,  these  reserves  have  been  reversed  and the  resulting  gain is
included in net gain of sale of assets in the accompanying income statement.

     Net interest  income for the three and six months  ended  December 31, 1997
increased  to $41,000  and  $81,000,  respectively,  as  compared to $25,000 and
$62,000 for the same periods in the prior fiscal year.  This  increase is due to
higher cash balances during the three and six months ended December 31, 1997.

     The Company  reported a net loss for the three  months  ended  December 31,
1997 of  $225,000,  as compared to a net loss of $517,000 for the same period in
the prior  fiscal year.  For the six months ended  December 31, 1997 the Company
reported net income of $444,000,  as compared to a net loss  $1,128,000  for the
six months  ended  December  31,  1996.  The net income for the six months ended
December  31,  1997  includes  the  gain  on the  sale of the  Company's  Kansas
operations. The Company's net income for the six months ended December 31, 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 $515,000
for the six months ended  December  31,  1997.  The Company did not record a tax
provision  for  the  six  months  ended  December  31,  1997  because  tax  loss
carryforwards  are available to offset earnings in the quarter.  The Company did
not record a tax  benefit for the six months  ended  December  31, 1996  because
carrybacks of current losses  against  previous  taxable  earnings are no longer
available.


                         LIQUIDITY AND CAPITAL RESOURCES

     At December  31,  1997,  the Company  had  working  capital of  $5,845,000,
compared to working  capital of $5,473,000 at December 31, 1996. The Company had
cash and cash  equivalents  of  $3,746,000  at December 31, 1997, as compared to
$2,670,000 at December 31, 1996.

     During the six months  ended  December 31, 1997,  the  Company's  operating
activities used $104,000 of available cash  resources,  as compared to cash used
by operations of $373,000  during the same period in the prior fiscal year.  The
cash used by operating  activities during the six months ended December 31, 1997
primarily reflects  collections of accounts  receivable from the facilities sold
by  the  Company  offset  by a  decrease  in  accounts  payable  related  to the
facilities sold and the increased receivables from intermediaries related to the
Company's home health operations.  Cash provided by investment activities during
the six months ended December 31, 1997 was $1,073,000,  as compared to cash used
for investment activities of $294,000 during the same period in the prior fiscal
year.  The cash  provided  by  investment  activities  for the six months  ended
December 31, 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  $1,951,000 at December 31, 1997, as compared to $5,023,000
at December 31, 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  $730,000 of the net patient accounts receivable balance
at December 31, 1997 as compared to $3,942,000 at December 31, 1996. At December
31, 1997,  the Company had an allowance  for doubtful  accounts of $825,000,  as
compared to  $1,420,000  at December  31,  1996.  The number of average  days of
revenue   outstanding,   excluding  the  revenues  and  receivables  related  to
litigation patients, was 59 days at December 31, 1997, as compared to 74 days at
December 31, 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
December 31, 1997,  accounts  receivable  related to these  litigation  patients
totaled $370,000, as compared to $593,000 at December 31, 1996. These litigation
patient  receivables  accounted for an additional 14 and 10 average days revenue
outstanding at December 31, 1997 and December 31, 1996, respectively.

     The  Company's  amount due from  Medicare  intermediaries  of  $616,000  at
December 31, 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.  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.



<PAGE>



                         IMPACT OF ACCOUNTING STATEMENTS

     The Financial  Accounting Standards Board has issued Statement of Financial
Accounting  Standards  ("SFAS") No. 128,  "Earning  per Share",  the adoption of
which 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  December 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

     At the Annual Meeting of  Stockholders  of the Company held on November 20,
1997, the Company's  stockholders  voted in favor of : (I) the election of three
directors to the Company's  Board of  Directors,  and (ii) the  ratification  of
Arthur Andersen LLP as the Company's independent  auditors.  The number of votes
for,  withheld  and  against,  as well as the number of  abstentions  and broker
non-votes as to each matter approved at the Annual Meeting of Stockholders  were
as follows:

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

Harvey Wm. Glasser, M.D.     1,363,854      0        N/A       N/A         0
Robert Rush                  1,361,858      0        N/A       N/A         0
John McCracken               1,361,858      0        N/A       N/A         0

Arthur Andersen LLP:         1,382,530     N/A     11,817     5,399        0

Item 5.           Other Information - None.

Item 6.           Exhibits
                  27.1 Financial Data Schedule



<PAGE>




                                   SIGNATURES

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



                                          MEADOWBROOK REHABILITATION GROUP, INC.

DATE:  February 13, 1998                By /s/  Harvey Wm. Glasser, M.D.
                                           ------------------------------------
                                           Harvey Wm. Glasser, M.D.
                                           President and Chief Executive Officer