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, 1998

  [   ]              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)

                                 (510) 420-0900
                         (Registrant's Telephone Number)


         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, 1998,  the latest  practicable  date,  there were  1,735,866
outstanding  shares  of Class A Common  Stock,  $.01 par value  per  share,  and
1,159,500 outstanding shares of Class B Common Stock, $.01 par value per share.




<PAGE>


8


                                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     ...............................12
                     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

                                                                                            March 31,          June 30,
                                                                                              1998              1997
                                                                                          --------------    -------------
                                                                                            (Unaudited)
<S>                                                                                       <C>               <C>
CURRENT ASSETS:
   Cash and cash equivalents                                                              $   3,548,494     $  2,928,781
   Restricted cash                                                                              281,521          278,649
   Patient accounts receivable, less allowance for doubtful accounts
      of $757,000 and $1,194,000 respectively                                                 1,375,373        4,278,756
   Due from intermediaries                                                                      816,462               --
   Other receivables                                                                            334,115          293,165
   Prepaid expenses and other assets                                                            166,382          298,970
                                                                                          --------------    -------------
      Total current assets                                                                    6,522,347        8,078,321
                                                                                          --------------    -------------

PROPERTY AND EQUIPMENT, at cost:
   Furniture and equipment                                                                      903,258        2,154,947
   Leasehold improvements                                                                       151,813          686,116
                                                                                          --------------    -------------
                                                                                              1,055,071        2,841,063
   Less:  accumulated depreciation
                                                                                               (563,422)      (1,708,734)
                                                                                          --------------   --------------
      Net property and equipment                                                                491,649        1,132,329
                                                                                          --------------   --------------

OTHER ASSETS:
   Goodwill and intangible assets                                                               343,663          337,734
                                                                                          --------------   --------------

                    TOTAL ASSETS                                                          $   7,357,659    $   9,548,384
                                                                                          ==============   ==============

CURRENT LIABILITIES:
   Short-term borrowings and current maturities of notes payable                          $     102,836    $     291,037
   Current maturities of capital lease obligations                                                2,491           24,821
   Accounts payable                                                                             307,845          968,027
   Accrued payroll and employee benefits                                                        392,625          755,748
   Due to intermediaries                                                                             --          100,780
   Other accrued liabilities                                                                    883,793        1,123,124
                                                                                          --------------   --------------

      Total current liabilities                                                               1,689,590        3,263,537
                                                                                          --------------   --------------

LONG-TERM LIABILITIES:
   Note payable and other long-term liabilities                                                  21,394           48,989
                                                                                          --------------   --------------
      Total long-term liabilities                                                                21,394           48,989
                                                                                          --------------   --------------

                    TOTAL LIABILITIES                                                         1,710,984        3,312,526
                                                                                          --------------   --------------

STOCKHOLDERS' EQUITY:
   Common stock, $.01 par value:
      Class A - 15,000,000 shares authorized; 1,157,244 shares issued and outstanding
            at March 31, 1998 and  June 30, 1997                                                 11,572           11,572
      Class B - 5,000,000 shares authorized; 773,000 shares issued and outstanding
           at March 31, 1998 and June 30, 1997                                                    7,730            7,730
   Paid-in capital                                                                           17,908,122       17,908,122
   Treasury stock, at cost, Class A - 59,900 shares at March 31, 1998                                --         (231,610)
   Retained deficit                                                                         (12,049,139)     (11,691,566)
                                                                                          --------------   --------------

      Total stockholders' equity                                                              5,646,675        6,235,858
                                                                                          --------------   --------------

                    TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                            $   7,357,659    $   9,548,384
                                                                                          ==============   ==============
<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.

                                                                  3
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>



                                       MEADOWBROOK REHABILITATION GROUP, INC. AND SUBSIDIARIES

                                                CONSOLIDATED STATEMENTS OF OPERATIONS
                                                             (Unaudited)

                                                                   Three Months Ended                 Nine Months Ended
                                                                       March 31,                          March 31,
                                                               ---------------------------       ----------------------------
                                                                   1998           1997               1998            1997
                                                               ------------   ------------       ------------    ------------
<S>                                                            <C>            <C>                <C>             <C>

      NET OPERATING REVENUES                                   $ 1,286,115    $ 5,508,323        $ 6,286,489     $17,013,035

      OPERATING EXPENSES:
         Salaries and employee benefits                          1,476,604      3,824,664          5,615,519      11,926,130
         Professional fees and purchased services                  136,022        529,770            600,592       1,887,597
         Provision for doubtful accounts                             4,953        129,147             81,106         346,381
         Other operating expenses                                  336,823        882,961          1,261,534       2,658,606
         Depreciation and amortization                              48,715        139,147            190,032         448,109
         Rent:
            To unrelated parties                                   122,642        303,237            444,085       1,038,016
            To related parties                                          --         97,920             29,962         289,708
         (Gain) loss on sale of assets                               3,045       (488,240)        (1,471,999)       (530,942)
                                                               ------------   ------------       ------------    ------------

            Total operating expenses                             2,128,804      5,418,606          6,750,831      18,063,605
                                                               ------------   ------------       ------------    ------------

            Income (loss) from operations                         (842,689)        89,717           (464,342)     (1,050,570)
                                                               ------------   ------------       ------------    ------------

      OTHER (INCOME) EXPENSE:
         Interest income                                           (44,776)       (24,021)          (126,936)        (85,564)
         Interest expense                                            3,432         15,394             16,212          47,380
                                                               ------------   ------------       ------------    ------------

            Net other income                                       (41,344)        (8,627)          (110,724)        (38,184)
                                                               ------------   ------------       ------------    ------------

            Income (loss) before income taxes                     (801,345)        98,344           (353,618)     (1,012,386)

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

           NET INCOME (LOSS) BEFORE MINORITY INTEREST             (801,345)        98,344           (353,618)     (1,012,386)

      MINORITY INTEREST IN EARNINGS OF
            CONSOLIDATED SUBSIDIARIES                                   --          9,871              3,955          26,660
                                                               ------------   ------------       ------------    ------------

            NET INCOME (LOSS)                                  $  (801,345)   $    88,473        $  (357,573)    $(1,039,046)
                                                               ============   ============       ============    ============

      NET INCOME (LOSS) PER SHARE (basic and diluted)          $     (0.42)   $      0.05        $     (0.18)    $     (0.54)
                                                               ============   ============       ============    ============

      WEIGHTED AVERAGE COMMON AND COMMON
         EQUIVALENT SHARES OUTSTANDING                           1,906,844      1,930,244          1,922,558       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.
 
                                                                4
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>



                                       MEADOWBROOK REHABILITATION GROUP, INC. AND SUBSIDIARIES

                                                CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                             (Unaudited)

                                                                                                Nine Months Ended
                                                                                                     March 31,
                                                                                          -------------------------------
                                                                                               1998             1997
                                                                                          --------------   --------------
<S>                                                                                       <C>              <C>

CASH FLOWS FROM OPERATING ACTIVITIES:
   Net (loss)                                                                             $    (357,573)   $  (1,039,046)
   Adjustments to  reconcile  net  (loss)  to net cash  
        provided  by (used  for) operations:
      Depreciation and amortization                                                             190,032          448,109
      Gain on sale of assets                                                                 (1,471,999)        (530,942)
      Minority interest expense                                                                   3,955           26,660
   Changes in assets and liabilities:
      (Increase) decrease in patient receivables                                              2,414,633         (383,152)
      (Increase) decrease in due from intermediaries                                           (872,067)         322,288
      Decrease in income tax refund receivables                                                      --           91,417
      Decrease in other receivables                                                             249,043          294,198
      Decrease in prepaid expenses and
        other current assets                                                                     47,613          197,753
      (Decrease) in accounts payable and
        accrued liabilities                                                                    (158,943)        (190,458)
                                                                                          --------------   --------------

        Cash (used) provided for operating activities                                            44,694         (763,173)
                                                                                          --------------   --------------

CASH FLOWS FROM INVESTMENT ACTIVITIES:
      Additions to property and equipment                                                       (51,121)        (149,246)
      Payments on prior purchase of outpatient clinics                                         (281,275)        (318,244)
      Purchase of home health agency                                                            (20,000)              --
      Proceeds from sale of assets                                                            1,407,807        1,459,652
                                                                                          --------------   --------------

        Cash provided by investment activities                                                1,055,411          992,182
                                                                                          --------------   --------------

CASH FLOWS FROM FINANCING ACTIVITIES:
      Short-term notes borrowings                                                               127,221          273,002
      Payments of short-term borrowings                                                        (343,017)        (546,599)
      Payments of capital lease obligations                                                     (22,330)         (22,113)
      (Increase) decrease in restricted cash                                                     (2,872)          62,000
      Payments to minority shareholders                                                          (7,784)         (43,746)
      Purchase of Treasury stock                                                               (231,610)              --
                                                                                          --------------   --------------

        Cash (used for) financing activities                                                     (480,392)        (277,456)
                                                                                          --------------   --------------

        Net increase (decrease) in cash                                                         619,713          (48,477)
                                                                                         
CASH AND CASH EQUIVALENTS, Beginning of Period                                                2,928,781        3,439,440
                                                                                          --------------   --------------

CASH, End of Period                                                                       $   3,548,494    $   3,390,993
                                                                                          ==============   ==============


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

      Payments:
        Interest paid                                                                           16,212            51,626
        Income taxes paid                                                                       11,600            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.

                                                                 5
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>



                                       MEADOWBROOK REHABILITATION GROUP, INC. AND SUBSIDIARIES

                                           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY



                                          Common Stock                                 Retained                       Total
                            -----------------------------------------
                                  Class A              Class B           Paid-in       Earnings       Treasury     Stockholders'
                            --------------------  -------------------
                             Shares     Amount     Shares    Amount      Capital      (Deficit)         Stock        Equity
                            ---------- ---------  ---------  --------  ------------  -------------    ----------   ------------
<S>                         <C>        <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

   Purchase of shares
    for treasury                    --        --         --        --            --            --       (231,610)     (231,610)

   Net (loss)                       --        --         --        --            --      (357,573)                    (357,573)
                            ---------- ---------  ---------  --------  ------------  -------------    -----------  ------------

BALANCE, MARCH 31, 1998      1,157,244 $  11,572    773,000  $  7,730  $ 17,908,122  $(12,049,139)    $ (231,610)  $ 5,646,675
                            ========== =========  =========  ========  ============  =============    ==========   ============





































<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.

                                                                 6
</FN>
</TABLE>


<PAGE>


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

                            TRENDS AND RECENT EVENTS

Consideration of Strategic Alternatives

         As a result of poor operating  results and poor prospects for growth in
their respective  markets,  the Company's Board of Directors decided to sell its
acute,  subacute and  post-acute  operations as well as certain of the Company's
Florida and  Georgia  outpatient  rehabilitation  clinic  operations.  Since the
beginning of the fiscal year ended June 30, 1997  ("Fiscal  1997"),  the Company
has disposed of substantially all of its operating assets. Early in Fiscal 1997,
the  Company  sold  its  post-acute  program  in  Illinois  and  its  outpatient
rehabilitation clinics in Alaska. 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.  On July 31,
1997,  the Company sold its Kansas  operations.  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. In addition, the Company
closed six  outpatient  rehabilitation  clinics in Colorado  and Florida  during
Fiscal 1997. As of March 31, 1998,  the Company  operated  home health  agencies
with  operations  in Colorado and Kansas and four  physical  therapy  clinics in
Colorado.

         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.

         On April 7, 1998,  the Company  announced  that it had entered  into an
agreement  to acquire  Cambio  Networks,  Inc.  ("Cambio").  Based in  Bellevue,
Washington,  Cambio is a network management inventory software company providing
services to financial,  telephony, medical, and Y2K Markets in both the U.S. and
Common Market.  Cambio's COMMAND Network Inventory  Management System provides a
comprehensive  solution for network inventory  management that enables customers
to optimize the  management of a  corporation's  network  infrastructure  - both
physical and logical.  The agreement  provides for a merger in which the Company
will acquire each issued and outstanding  share of common and preferred stock of
Cambio  through the merger of a wholly owned  subsidiary of the Company with and
into Cambio.  Under the terms of the agreement,  Cambio's  current  shareholders
will receive in the aggregate a number of shares of the Company's Class A Common
Stock  representing 32.5% of the outstanding Class A and Class B Common Stock of
the Company at the time of the closing.  The closing of the merger is subject to

                                       7
<PAGE>



several  conditions,  including the approval of the  stockholders of the Company
and Cambio.  If these and certain other  conditions are met, the  transaction is
anticipated to be completed by the end of June 1998.

         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,  acquisitions or other
business  combinations  and/or  additional  sales  of  assets.  There  can be no
assurance that any such alternatives will be available on favorable terms, if at
all. Acquisitions entail numerous risks,  including difficulties or an inability
to  successfully  assimilate  acquired  operations  and  products,  diversion of
management's attention and loss of key employees of acquired businesses,  all of
which  the  Company  has   encountered   with  previous   acquisitions.   Future
acquisitions by the Company may require dilutive issuances of equity securities,
the  incurrence  of  additional  debt,  and the  creation  of  goodwill or other
intangible assets that could result in amortization expense. These factors could
have a material adverse effect on the Company's business,  operating results and
financial condition.

Potential Ineligibility for Continued Listing on the NASDAQ National Market

         On February 23, 1998, the Nasdaq Stock Market adopted new  quantitative
maintenance  requirements  for continued  listing on the Nasdaq National Market.
During  February  1998, the Company was notified by the Nasdaq Stock Market that
it was not in  compliance  with the  requirement  that listed  companies  have a
minimum public float of at least 750,000 shares and that the market value of its
public float be at least  $5,000,000.  On April 22, 1998, the Company effected a
three-for-two  stock  split  which  increased  the  Company's  public  float  to
approximately  954,485 shares. The Company,  however,  is not in compliance with
the market value of its public float requirement. The Company estimates that the
market value of its public float as of May 13, 1998 is  $1,431,728.  The Company
has until  May 28,  1998,  to  comply  with  such  requirement  or to  request a
temporary  exception  from it,  which  would stay the  delisting  process  until
further review.  In the event the Company is unable to meet the requirements for
continued  listing  on the  Nasdaq  National  Market,  it  intends  to apply for
inclusion of its Class A Common Stock on 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.

Three-for-Two Stock Split of the Company's Common Stock

         On  March 8,  1998,  the  Company's  Board of  Directors  authorized  a
three-for-two  stock split of the Company's Common Stock,  which was effected in
the form of a stock  dividend  on April  22,  1998.  Except  for the  disclosure
regarding  the shares  outstanding  as of May 14, 1998,  the latest  practicable
date, all share  information  and per share data  throughout this report has not
been adjusted to reflect such stock split.

                                       8
<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 three  months ended  December 31, 1997  ("Second
Quarter 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 were  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 Fiscal 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.

         During Second Quarter Fiscal 1998, certain contingencies related to the
Florida sale were resolved and the Company  determined that reserves of $308,000
recorded  at the time of the sale  were no  longer  needed.  Accordingly,  these
reserves have been reversed and the resulting gain is included in (gain) loss 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  provided  for the  Company  to 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 three months
ended September 30, 1997 ("First Quarter 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  provided  for the  Company  to 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.

                                       9
<PAGE>



         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 (gain)
loss 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
provided  for the  Company  to 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 in net gain (loss) on sale of
assets 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 March 31, 1998 was  approximately  $267,000.  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 three months
ended  September 30, 1996 ("First  Quarter 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,  1998,  by Medicare and the previous
owner of the Colorado operations exceed the minimum amounts owed to the previous
owner by $237,000.

                                       10
<PAGE>



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.  The Health Care  Financing  Administration  ("HCFA")  has recently
adopted  regulations  that will affect  Medicare  cost  reimbursements  based on
actual reasonable  allowable costs subject to per visit  limitations.  Effective
July 1, 1998, such  reimbursements  will also be subject to an aggregate  annual
per beneficiary limitation.  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.

                                       11
<PAGE>



                              RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>

                                        % of Net Revenue           % of Net Revenue            
                                       Three Months Ended         Nine Months Ended            % $          % $
                                            March 31,                  March 31,             Change       Change
                                      ---------------------     -----------------------      Three         Nine
                                        1998         1997         1998           1997        Months       Months
                                      --------     --------     --------       --------     --------     --------
<S>                                   <C>          <C>          <C>            <C>          <C>          <C>

Net Operating Revenues                  100.0        100.0        100.0          100.0        (76.7)       (62.5)

Non-capital operating expenses:
   Salaries and employee benefits       114.8         69.4         89.3           70.1        (61.4)       (52.9)
   Other non-capital expenses            37.2         28.0         30.9           28.8        (69.0)       (60.3)
   (Gain) loss on sale of assets          0.2         (8.9)       (23.4)          (3.1)      (100.6)       177.2
                                      --------     --------     --------       --------
        Total non-capital expenses      152.2         88.5         96.8           95.7        (59.9)       (62.6)

Capital expenses:
   Depreciation and amortization          3.8          2.5          3.0            2.6        (65.0)       (57.6)
   Rent                                   9.5          7.3          7.5            7.8        (69.4)       (64.3)
   Interest                               0.3          0.3          0.3            0.3        (77.7)       (65.8)
                                                                               --------
                                      --------     --------     --------
        Total capital expenses           13.6         10.1         10.8           10.7        (68.5)       (62.7)
                                      --------     --------     --------       --------
        Total expenses                  165.8         98.6        107.6          106.4        (60.8)       (62.6)

Interest income                           3.5          0.4          2.0            0.5         86.4         48.4
                                      --------     --------     --------       --------
Income (loss) before income taxes       (62.3)         1.8         (5.6)          (5.9)      (914.8)       (74.9)
Income tax provision                       --           --           --             --           --           --
                                      --------     --------     --------       --------

Income (loss) before minority 
  interest                              (62.3)         1.8         (5.6)          (5.9)      (914.8)       (74.9)

Minority interest                          --          0.2          0.1            0.2       (100.0)       (85.2)
                                      --------     --------     --------       --------

Net income (loss)                       (62.3)         1.6         (5.7)          (6.1)    (1,005.8)       (75.2)
                                      ========     ========     ========       ========

</TABLE>

         The  Company's  net  operating  revenues  decreased  76.7% and 62.5% to
$1,286,115  and  $6,286,489  for the three  months  ended March 31, 1998 ("Third
Quarter  Fiscal 1998") and nine months ended March 31, 1998 ("Nine Months Fiscal
1998"),  as compared to $5,508,323 and  $17,013,035  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
Fiscal 1997 and the sale of the Company's Kansas and Florida  operations  during
the First Quarter Fiscal 1998. See "Trends and Recent Events".

         Due to  increased  pressures  on home health  referrals  by  physicians
stemming from healthcare reform initiatives,  the Company's home health business
is experiencing  decreasing net operating revenues. The number of patient visits
in the Company's  home health  business  decreased 33.1 % and 2.6% to 20,878 and
86,233 for the Third Quarter and Nine Months Fiscal 1998, from 31,220 and 88,514
for the same  periods  in the  prior  fiscal  year.  In  addition,  the  Company
anticipates that as a result of the new  per-beneficiary  annual  limitations on
home health  agency costs,  which will be in effect as of July 1,1998,  the home
health business will be subject to lower Medicare cost reimbursements thereby

                                       12
<PAGE>



further decreasing  operating revenues.  The Company is currently  restructuring
its home health operations to address these industry trends.

         Below is a summary of net operating  revenues for the Third Quarter and
Nine Months Fiscal 1997 and 1998, with respect to operations sold by the Company
during Fiscal 1997 and the First Quarter Fiscal 1998.

                Net operating revenues               Net operating revenues
              Three months ended March 31,         Nine months ended March 31,
            -------------------------------     -------------------------------
                 1998              1997             1998               1997
            --------------    -------------     -------------     -------------
             (unaudited)       (unaudited)       (unaudited)       (unaudited)

Alaska      $          --     $          --     $          --     $     372,036
Georgia                --         1,642,764                --         4,856,216
Illinois               --                --                --           307,086
Kansas                 --         1,277,771           319,728         3,738,745
Florida                --           486,001           277,788         1,613,276
            -------------     -------------     -------------     -------------
    Total   $          --     $   3,406,536     $     597,516     $  10,887,359
            =============     =============     =============     =============


         Total non-capital  operating expenses (excluding the (gain) loss on the
sale of assets)  for the Third  Quarter and Nine  Months  Fiscal 1998  decreased
63.6% and 55.1% to $1,954,402 and $7,558,751,  respectively, from $5,366,542 and
$16,818,714,  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 Fiscal 1997 and the sale of the
Company's  Kansas and Florida  operations  during the First Quarter 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 61.4% and 52.9% to $1,476,604 and $5,615,519 for
the Third Quarter and Nine Months  Fiscal 1998,  as compared to  $3,824,664  and
$11,926,130 for the same periods in the prior fiscal year. Salaries and employee
benefits as a percentage of net operating revenues increased to 114.8% and 89.3%
for the Third  Quarter and Nine  Months  Fiscal  1998,  as compared to 69.4% and
70.1% for the same periods in the prior fiscal year.  The increase is due to the
Company's  concentration in home health,  which is more  labor-intensive and has
suffered from decreasing revenues as discussed above.

         The Company's other non-capital operating expenses primarily consist of
professional fees, purchased services, provision for doubtful accounts and other
operating  expenses.  For the Third  Quarter and Nine Months  Fiscal  1998,  the
Company's  other  non-capital  operating  expenses  decreased 69.0% and 60.3% to
$477,798 and $1,943,232, respectively, as compared to $1,541,878 and $4,892,584,
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  Fiscal 1997 and the sale of the Company's  Kansas and
Florida  operations during the First Quarter Fiscal 1998. See "Trends and Recent
Events".

                                       13
<PAGE>



         Total  capital  expenses  decreased  68.5% and 62.7%  during  the Third
Quarter and Nine Months Fiscal 1998, to $174,789 and $680,291,  respectively, as
compared to $555,698  and  $1,823,213  for the same  periods in the prior fiscal
year.  Rent expense  decreased  69.4% and 64.3% to $122,642 and $474,047 for the
Third Quarter and Nine Months Fiscal 1998, respectively, as compared to $401,157
and  $1,327,724  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 Fiscal 1997 and the sale of the
Company's  Kansas and Florida  operations  during the First Quarter Fiscal 1998.
See "Trends and Recent Events".

         The  Company's  results for its Nine Months  Fiscal 1998  include a net
gain of $1,471,999 on the sale of its Kansas and Florida operations. This amount
is offset by losses incurred on the sale of certain other assets.

         Net interest  income for the Third  Quarter and Nine Months Fiscal 1998
increased  to $44,776  and  $126,936,  respectively,  as compared to $24,021 and
$85,564 for the same periods in the prior fiscal year.  This  increase is due to
higher cash balances during the Third Quarter and Nine Months Fiscal 1998.

         The Company  reported a net loss for the Third  Quarter  Fiscal 1998 of
$801,345,  as compared to net income of $88,473 for the same period in the prior
fiscal year. For the Nine Months Fiscal 1998,  the Company  reported net loss of
$357,573,  as compared to a net loss of  $1,039,046  for the Nine Months  Fiscal
1997. The net loss for the Nine Months Fiscal 1998 includes the gain on the sale
of the Company's Kansas and Florida operations. The Company did not record a tax
provision  for the Nine Months Fiscal 1997 because tax loss  carryforwards  were
available to offset earnings in the period.

         Basic  and  diluted  loss per  share  was $0.42 and $0.18 for the Third
Quarter and Nine Months Fiscal 1998,  respectively,  as compared to a net income
of $0.05  and a net loss of $0.54  per  share  for the same  period in the prior
fiscal year.

                        LIQUIDITY AND CAPITAL RESOURCES

         At March 31,  1998,  the  Company had  working  capital of  $4,832,757,
compared to working capital of $4,814,784 at June 30, 1997. The Company had cash
and cash  equivalents of $3,548,494 at March 31, 1998, as compared to $2,928,781
at June 30, 1997.

         During the Nine Months Fiscal 1998, the Company's operating  activities
provided $44,694, as compared to cash used for operating  activities of $763,173
during the same period in the prior fiscal year.  The cash provided by operating
activities  during  the Nine  Months  Fiscal  1998 are  primarily  the result of
collections  of accounts  receivable  from the  facilities  sold by the Company,
offset by a decrease  in accounts  payable  related to the  facilities  sold and
increased  receivables from intermediaries  related to the Company's home health
operations. Cash provided by investment activities during the Nine Months Fiscal
1998 was  $1,055,411,  as compared to cash provided of $992,182  during the same
period in the prior fiscal year. The cash provided by investment  activities for
the Nine Months Fiscal 1998 and Fiscal 1997 primarily reflects the proceeds from
the sale of the Company's assets.

                                       14
<PAGE>



         On February 21, 1998, the Company's Board of Directors approved a stock
repurchase  program  under  which it could  purchase up to an  aggregate  of ten
percent (10%) of the outstanding shares of its Class A Common Stock. As of March
31, 1998, the Company had repurchased  59,900 shares of its Class A Common Stock
for an aggregate price of $231,610.

         Net  patient  accounts  receivable,  which  excludes  amounts  due from
intermediaries,  was  $1,375,373 at March 31, 1998, as compared to $4,278,756 at
June 30, 1997. This decrease is primarily due to the sale of Company's  Georgia,
Alaska, and Illinois operations during the Second and Third Quarters Fiscal 1997
and the sale of the  Company's  Kansas and Florida  operations  during the First
Quarter  Fiscal 1998.  See "Trends and Recent  Events".  At March 31, 1998,  the
Company had an  allowance  for  doubtful  accounts of  $757,000,  as compared to
$1,194,000 at June 30, 1997.

          The Company's amount due from Medicare  intermediaries  of $816,462 at
March 31, 1998 includes amounts the Company  anticipates that it will receive in
connection  with 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 1997 for such facility. 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.

         On April 3, 1998,  the  Company  and Cambio  executed a Secured  Bridge
Financing Note (the "Note") pursuant to which the Company provided Cambio with a
loan  of five  hundred  thousand  dollars  ($500,000)  to  finance  its  ongoing
operations.  The Note bears  interest at 8% per annum and is due the earliest of
(i) July 31, 1998; (ii) upon the closing of the acquisition of Cambio;  or (iii)
the occurrence of certain events as defined in the Note.

         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  its
ongoing home health business  operations.  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

                                       15
<PAGE>



flows from  operations,  will be sufficient  to satisfy the Company's  estimated
operating  cash  requirements  for its existing  facilities  for the next twelve
months.

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

                         IMPACT OF ACCOUNTING STATEMENTS

         The  Financial  Accounting  Standards  Board has  issued  Statement  of
Financial  Accounting  Standards  ("SFAS")  No. 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 Third Quarter Fiscal 1997 and 1998, 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.

                                       16
<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 and Reports on Form 8-K

                  A.  Exhibits

                      27.1 - Financial Data Schedule

                  B.  Reports on Form 8-K

                      None

                                       17
<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 15, 1998                     By /s/  Harvey Wm. Glasser, M.D.
                                           ------------------------------------
                                           Harvey Wm. Glasser, M.D.
                                           President and Chief Executive Officer

                                       18