<PAGE>
             U. S. SECURITIES AND EXCHANGE COMMISSION
                     Washington, D.C.  20549

                           FORM 10-KSB
       ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                  SECURITIES EXCHANGE ACT OF 1934

             For the Fiscal Year ended:  May 31, 1997

                   Commission File No. 0-22155

                    IN-HOUSE REHAB CORPORATION
-----------------------------------------------------------------
(Exact Name of Small Business Issuer as Specified in its Charter)

           Colorado                                  84-0987697
-------------------------------       ---------------------------------------
(State or Other Jurisdiction of      (I.R.S. Employer Identification Number)
Incorporation or Organization)

  325 West Main Street, Suite 1400B, Louisville, Kentucky 40202
  --------------------------------------------------------------
   (Address of Principal Executive Offices, Including Zip Code)

Issuer's telephone number, including area code:  (502) 568-8923

Securities registered pursuant to Section 12(b) of the Act:  None.

Securities registered pursuant to Section 12(g) of the Act:  Common Stock.

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 [  ]

As of October 21, 1997, 13,344,215 Shares of the Registrant's No Par Value
Common Stock were outstanding.  The aggregate market value of voting stock
held by nonaffiliates of the Registrant on that date was approximately
$7,267,000.

Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained in this form, and no disclosure will be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [   ]

State Issuer's revenues for its most recent fiscal year:  $15,637,853.

Documents incorporated by reference:  None
<PAGE>
                                 PART I

ITEM 1.  DESCRIPTION OF BUSINESS.

GENERAL DEVELOPMENT OF BUSINESS

     In-House Rehab Corporation (the "Company") was formed under the laws of
the State of Colorado in May 1985 under the name of "Perennial Development
Corporation" for the purpose of engaging in real estate activities.  In April
1987, the Company completed an initial public offering of its securities, and
became listed on Nasdaq.

     The Company engaged in commercial land development operations.  However,
due principally to escalating adverse economic conditions in the real estate
markets in which the Company was engaged, management eventually abandoned the
development of all of its projects.  A combination of high leverage and severe
liquidity problems forced management to dispose of the properties during the
period from June 1989 to May 1994.  A land development project in Somerton,
Arizona resulted in the filing of a bankruptcy petition on behalf of a
subsidiary which was settled during the year ended May 31, 1995.

     On September 29, 1995, the Company acquired all of the outstanding stock
of In-House Rehab, Inc. ("IHR"), a Kentucky corporation, in exchange for
10,460,000 shares of the Company's authorized but unissued Common Stock.  Such
shares were issued to the former shareholders of IHR and represent 85% of the
Company's Common Stock outstanding.  As a result of this transaction, there
was a change in control of the Company.  All of the Company's officers and
directors resigned, and new officers and directors selected by IHR were
elected.

     IHR was formed in September 1994, and is engaged in providing, on a
contract basis, physical, speech and occupational therapy personnel to long-
term care providers.

     Effective March 1, 1996, the Company acquired certain assets and
liabilities of Total Rehab South, Inc. ("TRS"), a Tampa, Florida based
provider of rehabilitation, speech and occupational therapists to nursing
homes and long-term care facilities in Florida and Georgia.  Included in the
assets acquired by the Company were $900,000 in accounts receivable and the
rights of TRS under contracts it held to provide therapists to 28 facilities. 
The Company also  assumed up to $75,000 of liabilities of TRS.  The total
price paid by the Company under the asset purchase agreement was $1,010,601
including a non-competition agreement in the amount of $185,601.  In
connection with this acquisition, the therapists employed by TRS became
employees of the Company.  TRS was merged into IHR on May 31, 1996.

     Effective September 1, 1996, the Company acquired all of the stock of
Regal Health Care, Inc. ("RHC") for $1.00.  RHC is a Clearwater, Florida based
provider of psyche/social services to nursing homes and long-term care
facilities in North Carolina.  Upon acquisition, RHC had assets totaling
approximately $30,000 and liabilities totaling approximately $70,000.  This
acquisition allowed the Company to add psych/social services to the
rehabilitation services it currently offers.  Effective September 10, 1997,
RHC changed its name to In-House Medical Resources, Inc.

     In November 1996, the Company's shareholders approved an amendment to
the Company's Articles of Incorporation to change the name of the Company to
"In-House Rehab Corporation," and this became effective on December 9, 1996.
                               -2-
<PAGE>
     Effective December 1, 1996, the Company acquired all of the stock of RT
Group Inc. ("RTG"), in exchange for $150,000 in cash.  RTG is a Indianapolis,
Indiana based provider of respiratory care to nursing homes and long-term care
facilities in Indiana.  Upon acquisition, RTG had assets totaling
approximately $75,000 and liabilities totaling approximately $49,000.  The
Company now offers respiratory therapy services along with rehabilitation and
psych/social services in facilities under contract.

     Effective December 1, 1996, the Company acquired all of the stock of
Daily Rehabilitation Institute, Inc. ("DRI") in exchange for $1.00 and an
option to purchase 30,000 shares of the Company's Common Stock at $2.25 per
share.  DRI is a Jacksonville, Florida based provider of outpatient rehab
services in a clinic setting.  Upon acquisition, DRI had assets totaling
approximately $116,000 and liabilities totaling approximately $124,000.  The
clinic is a Medicare certified facility that the Company now markets in the
Florida based assisted living community.

     Effective January 1, 1997, the Company acquired nine contracts to
provide therapy services to certain long-term care providers from Tri-Therapy
Services, Inc. ("TSI") in exchange for $100,000 in cash which included $10,000
for a noncompete agreement.  TSI is a Madison, Mississippi based provider of
physical, occupational and speech therapy care to nursing homes and long-term
care facilities in Arkansas.

     In July 1997, the Company entered into an agreement with an unrelated
company whereby the Company would provide operational support while the
partner company would provide the marketing support to sell the services
offered by the Company.  This new company is a limited liability company,
Rehab Partners, L.L.C. (RPI).  The Company currently has an 80% interest in
RPI.

     All references to the "Company" herein refers to the Company and its
subsidiaries, unless the context otherwise requires.

     In April 1997, the Company announced that it had entered into a letter
agreement concerning the proposed acquisition of Quality Care and Rehab, Inc.
("QCR"), a privately-held provider of therapy services serving Louisiana,
Mississippi and Arkansas. In August 1997, after conducting its due diligence
review,  the Company announced that it had terminated its negotiations and
that the acquisition of QCR would not occur.

     In August 1997, the Company entered into a letter of intent to acquire
Gateway Rehab, Inc., which provides therapy services in Illinois and Indiana. 
The Company is presently conducting a due diligence review of Gateway Rehab,
Inc.  This proposed acquisition is contingent on the completion of this review
and the negotiation of a definitive agreement. Under the terms of the letter
of intent, the acquisition would be accomplished through a stock for stock
exchange.

     On September 30, 1997, the Company acquired the assets of Rehab &
Therapy Center of Naples, Inc.("RTCN"), an operator of a comprehensive
outpatient rehabilitation facility in southern Florida.  This acquisition was
made in exchange for $20,000 in cash and 2,857 shares of the Company's Common
Stock.

CONTRACT THERAPY SERVICES

     The Company primarily provides rehabilitation therapists to nursing
facilities on a contract basis.  These include physical therapists,
occupational therapists, speech-language pathologists, respiratory therapists
and psych/social services counseling, working together to improve the ability
of patients to perform the activities of daily living. Physical therapy
effects muscular and
                               -3-
<PAGE>
neural responses in an effort to improve patients' physical strength and range
of motion. Occupational therapy is the evaluation and treatment of physical,
cognitive and psychosocial performance deficits in activities of daily living.
Speech-language pathology is the diagnosis and treatment of speech, language,
voice and swallowing disorders.  Respiratory therapy is the evaluation and
treatment of breathing disorders.  Psych/social services is the evaluation and
psychological counseling of patients suffering from severe depression.

     The long-term care industry has typically contracted for therapy
services for the following reasons:

          INSUFFICIENT CASELOAD.  The average nursing facility of
approximately 100 beds has insufficient and/or irregular caseloads, which
makes it uneconomical to operate its own therapy program with the full-time
employment of therapists and the associated costs of administration.

          SUPPLY OF THERAPISTS.  There is an inadequate supply of therapists
and the work force is characterized by high turnover. Consistent staffing
levels are difficult to maintain, which jeopardizes service levels and
quality.

          EXPERTISE.  Therapy revenues represent a relatively small
percentage of a nursing facility's total revenues and operating activities. 
Reimbursement and regulatory complexities concerning appropriate utilization,
documentation, denials management and quality oversight, if inadequately
administered, can seriously erode the profitability of therapy programs
staffed by and managed by employees of the nursing facility. As a result,
nursing facilities frequently choose to contract for specialized expertise.  

     In the current unsettled environment, the Company believes that it is
well-positioned to compete effectively with other contractors due to: (i) a
multi-disciplinary team approach to therapy that is designed to deliver a high
level of quality, (ii) reimbursement and regulatory expertise to assist
nursing facility operators in their dealings with third-party payors,
principally Medicare, and (iii) sophisticated management information systems
to assist operators in analyzing clinical outcomes, therapy utilization, claim
denials, staffing and marketing and educational activities. 

     The supply of therapists is growing at a rate of less than 5% per year,
yet the demand for therapists is growing at 8% to 10% per year. The Bureau of
Labor Statistics estimates that the shortage of therapists will continue into
the first decade of the next century. The principal limitations on the supply
of therapists are the lack of funding to increase the number and size of
educational programs and increasingly stringent accreditation requirements. 
To address these issues, the Company has developed the following programs:

     1.  UNIVERSITY RECRUITMENT PROGRAM.  Utilizing a director of university
and client relations, the Company has developed a comprehensive program to
establish relationships with the pool of therapists coming into the
marketplace.  The strategy includes two levels of involvement depending upon
the target university:

          LEVEL ONE - The Company is in contact with over 100 schools around
the country where students are provided with Company and industry specific
promotional materials.

          LEVEL TWO - The Company coordinates on-site visits to 30 to 50
schools per year and conducts job fairs, receptions and other activities to
establish a presence and build relationships.
                               -4-
<PAGE>
     2.  DIVERSIFIED CAREER PATHS.  Access to long-term care, acute care
hospitals, free-standing clinics, and other work settings, provides the
Company with the ability to offer a therapist exposure and experience in
various clinical settings.

     3.  ON-SITE MANAGEMENT SUPPORT.  The Company is committed to on-site
management in every facility, clinic or other work setting regardless of size. 
Management believes this feature differentiates the Company from the
competition in its ability to attract new business and retain therapists.

     The deficiency in the ratio of therapists supply and demand will
continue to require the utmost attention from the Company's management.  

     Employee turnover in the rehabilitation industry is high relative to
other industries because of the supply/demand imbalance. Also affecting
turnover is the aggressive recruiting that occurs within the industry and the
demographics of the largely young, female and mobile therapist population.
Furthermore, therapist turnover rates in nursing facilities are traditionally
higher than in other therapy settings due to the increased difficulties in
treating geriatric patients. 

SERVICE AGREEMENTS

     The Company enters into Contracts for Therapy Program Services with
operators of long-term care facilities which provide that the Company will
provide rehabilitation services to the facilities' patients based upon medical
necessity, professional recruiting, rehabilitation management, and support to
the facilities for obtaining reimbursement from third-party payors.  The
Company's services include:

     (1)  Recruiting physical therapists, speech therapists, occupational
therapists, rehabilitation case managers, and other personnel as agreed upon,
to provide services at the nursing home to be employed either by the Company,
or, in some instances, by the nursing home;

     (2)  Providing a program enhancement specialist in long-term care and
rehabilitation to support, council, advise and assist in directing the
development of the rehabilitation activity within the facility;

     (3)  Providing a reimbursement specialist to assist with
recommendations on financial matters to the facility's administration;

     (4)  Procuring equipment as needed for the facility to assure that
rehabilitation activities function at a level commensurate with patient
requirements;

     (5)  Reviewing compliance with all state and federal guidelines
relative to therapist credentials; and

     (6)  Providing manuals and other educational materials to enhance the
overall capabilities of the rehabilitation departments of the facility.

     In exchange for the services provided, the Company receives a monthly
management fee, which may be adjusted if the quantity of equipment, therapists
or other services subsequently change; a one-time set up fee; and a monthly
fee based on the number of treatment units of service provided by employees of
the Company.
                               -5-
<PAGE>
     The Contract terms for Therapy Program Services vary from one to five
years.  However, the contracts may be terminated upon either thirty or sixty
days notice, depending upon the specific contract in question.

COMPETITION

     The health care industry in general, and rehabilitation in particular,
is highly competitive and subject to continual changes in methods of service
delivery and provider selection. Rehabilitation is largely a local market
business and competition varies considerably among markets. The primary
competitive factors in such local markets are quality of patient care
services, charges for services and responsiveness to meeting the needs of
patients, customer health care facilities, referral sources and payors.

     Key competitive factors in the contract therapy services business
include the ability to provide therapy staff to meet the therapy needs at
customer facilities and the ability to provide management and clinical support
to such staff. The Company will compete in local markets with other national
and regional and local contract therapy providers.  The demographics of
potential customers are expected to change as some larger nursing home chains
attempt to take their services in-house.  This may increase the competition
for remaining customers. Although the Company intends to expand its customer
contracts in the nursing home industry, the successful development of such
in-house programs by a large number of customers could adversely affect the
Company's ability to do so.

     The Company believes that its ability to compete is enhanced by the
relationships management has established within the long-term care industry. 
The Company's services are also unique in that the facility administrator has
the option to have the Company manage the rehabilitation department totally,
or to utilize the Company as a traditional provider in selected disciplines.
The flexibility of service approach is different from the larger competitors
which typically offer only contract therapy. The Company also provides a
rehabilitation director to oversee treatment in each facility.  This feature
should appeal to smaller nursing home chains.  The Company is also involved in
the development of sub-acute care units. This particular aspect of service
appeals to mid-size chains that cannot afford to hire management personnel
with this highly specialized expertise.

     At May 31, 1997, the Company had Contracts for Therapy Program Services
with 71 facilities in the southeastern United States; 36 of these facilities
are either owned, operated or managed by Retirement Care Associates,
Inc.("Retirement Care"), a principal shareholder of the Company.  During the
year ended May 31, 1997, contracts with Retirement Care facilities represented
approximately $8,900,000 in revenue to the Company.  The Company intends to
increase the number of contracts it has with long-term care facilities
operated by entities other than Retirement Care.  However, the Company is
currently highly dependent on its contracts with Retirement Care.  If, for any
reason, Retirement Care were to cancel some or all of these contracts (which
could occur on as little as 60-days' notice), there could be a significantly
unfavorable effect on the Company's cash flow from operations.

     In February 1997, Retirement Care announced that it had entered into a
merger agreement with Sun Healthcare Group, Inc. ("Sun Healthcare") pursuant
to which Retirement Care would be merged into a subsidiary of Sun Healthcare. 
Sun Healthcare currently has a subsidiary which provides rehabilitation
services.  The Company is currently working with Sun Healthcare on a
transition schedule for the transition of the Retirement Care facilities that
are serviced by the Company to Sun Healthcare.  The transition period is
tentatively scheduled to begin
                               -6-
<PAGE>
approximately thirty (30) days after the issuance of the proxy relating to the
Retirement Care/Sun Healthcare Merger and will conclude approximately ninety
(90) days thereafter.

REIMBURSEMENT/GOVERNMENT PROGRAMS

     Reimbursement for medical rehabilitation services is available through
Medicare, Medicaid, commercial insurance, managed care programs, veterans
benefits, workers' compensation and other government programs.  Medicare is a
federally funded health program which provides health insurance coverage for
certain disabled persons and persons age 65 or older. Medicaid is a health
insurance program, jointly funded by the federal and state governments, which
provides health insurance coverage for certain financially or medically needy
persons regardless of age.  Medicaid benefits supplement Medicare benefits for
financially needy persons age 65 or older.  Congress has provided, through the
Medicare program, for coverage of contract therapy services.  A substantial
portion of the Company's business, in effect, is reimbursed by Medicare, and a
small portion by Medicaid.  As a result, regulations regarding Medicare and
Medicaid eligibility, certification and reimbursement are important to the
Company's activities and changes in these programs or regulations could
adversely affect the Company's business.

     The Congress has passed, and the President has signed health care reform
in the Balanced Budget Act of 1997.  This legislation is intended to slow the
annual rate of growth of Medicare and Medicaid expenditures.  The legislation
includes a prospective payment system for all Medicare services provided in a
skilled nursing facility, including medical rehabilitation services.  The
skilled nursing facility will receive a fixed reimbursement rate per patient
day, based upon a patient acuity rating system, which includes an added-on
amount for rehab services.  Although the regulations implementing this change
are not yet finalized, the effective date of prospective payment for skilled
nursing facilities is on or after July 1, 1998.  The new legislation also
provides for a $1,500 cap on outpatient therapy charges.  These changes will
not impact the Company's current fiscal year.  However, they will impact
reimbursement for future rehabilitation services.

     Currently, Medicare reimburses the skilled nursing facility for contract
therapy services on a cost basis, and reimbursement levels are determined
based on a reasonable-cost standard.  Specific guidelines exist for evaluating
the reasonable cost of physical therapy and respiratory therapy.  General
guidelines exist for evaluating the reasonable cost of occupational therapy,
speech-language pathology services and psych/social services.  When a nursing
facility contracts with a third party, such as the Company, for physical
therapy or respiratory therapy services, a standard rate system applies.  This
system is called salary-equivalency.  The physical and respiratory therapy
salary-equivalency rates have been adjusted annually based on a 1983 standard,
but do not adequately reflect salary inflation since 1983.  As a result,
physical therapy contract services are essentially a break-even business for
many contractors.

     The Health Care Financing Administration ("HCFA"), the federal agency
responsible for the rules governing Medicare and Medicaid, has issued specific
reimbursement guidelines for physical therapy, occupational therapy and
speech-language pathology services.  The guidelines have been circulated for
public comment, but no effective date has yet been established.

     Until such time as salary-equivalency guidelines are formally
promulgated, contract occupational therapy and speech-language pathology
services are evaluated based upon the reasonableness of costs incurred by the
provider under a "prudent buyer" standard.  During the past two years, HCFA
has issued several
                               -7-
<PAGE>
directives to its fiscal intermediaries instructing them on how to ensure
therapy costs are reasonable.  One such advisory issued in April 1995 was
controversial as it included a series of data tables with incomplete
instructions.  Responding to concerns raised by the nursing home and
rehabilitation sectors, HCFA clarified its guidance in a June 1995 directive
reiterating that fiscal intermediaries must apply the "prudent buyer"
principle when evaluating whether a facility's costs are substantially
out-of-line.  Intermediaries are instructed to consider relevant facts and
circumstances concerning a facility's contracting costs. The attention being
given by HCFA to these instructions has increased scrutiny of contracting
practices.

GOVERNMENT REGULATION

     The health care industry, including rehabilitation services, is subject
to extensive federal, state and local regulation.  The various layers of
regulation affect the Company's business by requiring licensure or
certification of its employees and controlling reimbursements for services
provided.  Government and other third-party payors' health care policies and
programs have been subject to changes in payment and methodologies for a
number of years.

     Various state and federal laws and regulations govern relationships
between providers of health care services and physicians, including employment
or service contracts and investment relationships.  These laws and regulations
include the fraud and abuse provisions of the Medicare and Medicaid statutes,
which prohibit the payment, receipt or offering of any direct or indirect
remuneration for the referral or inducement of a referral of Medicare or
Medicaid patients or for the ordering or providing of Medicare or Medicaid
covered services, items or equipment and the self-referral provisions of
federal and state law which generally prohibit referrals by a physician to
persons with whom the physician has certain types of financial relationships. 
Violations of these provisions may result in civil or criminal penalties for
individuals or entities and/or exclusion from participation in the Medicare
and Medicaid programs.  Management believes it is in compliance with these
laws and regulations and has established a broad-based compliance program to
ensure conformity to these rules as well as to other laws and regulations. 

INSURANCE

     Companies which provide rehabilitation therapy services are subject to
personal injury and other liability claims which are normally covered by
insurance.  The Company maintains liability insurance coverage in amounts
deemed appropriate based on the nature and risks of the business.  There can
be no assurance that a future claim will not exceed insurance coverage or that
such coverage will continue to be available.  In addition, continued
substantial increases in the cost of such insurance could have an adverse
effect on the Company's business.

EMPLOYEES

     As of October 1, 1997, the Company had approximately 363 employees of
which 174 are full-time.  The Company's employees are not represented by any
labor union. Management believes that its relationship with its employees are
favorable.

ITEM 2.  DESCRIPTION OF PROPERTY.

     Effective February 1, 1997, the Company entered into a new five year
lease for approximately 7,400 square feet of office space at Waterfront Plaza,
325 West
                               -8-
<PAGE>
Main Street, Louisville, Kentucky 40202.  The base rent is $7,068 per month
and is fixed for the five year period.

ITEM 3.  LEGAL PROCEEDINGS.

     The Company and its subsidiaries are not currently parties to any
litigation that management believes would have a material adverse effect on
the financial condition or results of operations of the Company.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     There were no matters submitted to a vote of the Company's shareholders
during the fourth quarter of the period covered by this Report.

                                  PART II

ITEM 5.  MARKET PRICE FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.

     The principal market for trading the Company's Common Stock has been the
over-the-counter market.  Since December 1995, prices for the Company's Common
Stock have been quoted on the OTC Bulletin Board.  The trading symbol is
currently "IHRB."

     The range of high and low bid quotations for the Company's Common Stock
provided below were obtained from the OTC Bulletin Board and the National
Quotation Bureau.  The stock is principally owned or controlled by officers
and directors, and the bid prices reported may  not be indicative of the value
of the Common Stock.  The volume of trading in the Company's Common Stock has
been very limited.  The existence of an active trading market may not exist at
any given time and shareholders may have difficulty selling their shares. 
These over-the-counter market quotations reflect inter-dealer prices without
retail markup, markdown or commissions and may not necessarily represent
actual transactions.

                                                     BID
                                               ---------------
    YEAR ENDED MAY 31, 1997                    HIGH        LOW
    -----------------------                    ----       -----
    First Quarter                              $2.25      $1.75
    Second Quarter                             $2.25      $2.25
    Third Quarter                              $2.25      $2.00
    Fourth Quarter                             $4.25      $2.00

    YEAR ENDED MAY 31, 1996
    -----------------------
    Third Quarter                              $1.25      $0.50
    Fourth Quarter                             $1.75      $1.00

     As of October 17, 1997, there were approximately 333 record holders of
the Company's Common Stock.  Based on securities position listings, the
Company believes that there are more than 500 beneficial owners of the
Company's Common Stock.

     The Company has paid no cash dividends on its Common Stock and has no
present intention of paying cash dividends in the foreseeable future.  It is
the present policy of the Board of Directors to retain all earnings to provide
for the growth of the Company.  Payment of cash dividends in the future will
depend, among other things, upon the Company's future earnings, requirements
for capital improvements and financial condition.
                               -9-
<PAGE>
     During the period from March 1996 through August 1996, the Company sold
units  consisting of shares of its Common Stock to 34 accredited investors in
a private offering.  A total of 1,300,000 shares of Common Stock were sold in
this offering for an aggregate of $1,625,000 in cash.  In addition, the
Company issued warrants to purchase an aggregate of 520,000 shares of Common
Stock at $2.50 per share to three investors who invested at least $200,000 in
the offering.  The Company paid the following commissions for its services as
a sales agent in this offering:

            Marion Bass Securities Corp.              $ 20,000
            Stockbridge Associates, Inc.                16,000
            Lawson Financial Corporation                 8,000
            La Jolla Securities Corp.                   65,000
                                                      --------
                                                      $108,000

     In addition, the Company issued options to purchase shares of the
Company's Common Stock at $1.25 per share to Terry Lewis (to purchase 14,000
shares) and to La Jolla Securities, Inc. (to purchase 6,000 shares) as
compensation for their services in connection with this private offering.

     With respect to these sales, the Company relied on Section 4(2) of the
Securities Act of 1933, as amended, and Rule 506 of Regulation D promulgated
thereunder.  Each investor was given a copy of a Private Placement Memorandum
containing complete information concerning the Company, a Form D was filed
with the SEC and the Company complied with the other applicable requirements
of Rule 506.  Each investor signed a subscription agreement in which he
represented that he was purchasing the shares for investment only and not for
the purpose of resale or distribution.  The appropriate restrictive legends
were placed on the certificates and stop transfer instructions were issued to
the transfer agent.

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.

     This Report contains forward-looking statements within the meaning of
the "safe harbor" provisions of the Private Securities Litigation Reform Act
of 1995.  Such statements are based on management's current expectations and
are subject to a number of factors and uncertainties which could cause actual
results to differ materially from those described in the forward-looking
statements.

OVERALL SUMMARY

FISCAL YEAR ENDED MAY 31, 1997 COMPARED TO FISCAL YEAR ENDED MAY 31, 1996

     The Company generated $15,638,000 in gross revenue for the fiscal year
ended May 31, 1997 compared with $6,623,000 in the prior year.  The increase
is due to both the addition of new service contracts and acquisitions made
during the year.  A very small portion of the change resulted from rate
adjustments.

     Operating expenses as a percentage of revenue for the year ended May 31,
1997 were 72.4%.  This compares with 71.6% in the prior year.  The increase is
attributed to the addition of clinical specialists hired to improve the
quality of service and the amortization of goodwill associated with the
acquisition of Total Rehab South.

     Selling, general and administrative expenses for the year ended May 31,
1997 were 14.9% of revenue compared to 17.8% in the prior year.  The
improvement resulted from increasing revenue at a faster rate than the
associated overhead.
                               -10-
<PAGE>
     Interest expense for the year ended May 31, 1997 was $159,000 versus
$66,000 in the prior year.  The increase resulted from expanding the credit
line in order to finance the Company's increase in accounts receivable
reflecting the Company's growth.

     The income tax provisions for the year ended May 31, 1997 and 1996 were
39.8% and 38.2%, respectively.

     The factors discussed above have resulted in earnings of $1,100,000 for
the year ended May 31, 1997 compared with $394,000 in the prior year.

FISCAL YEAR ENDED MAY 31, 1996 COMPARED TO PERIOD FROM SEPTEMBER 21, 1994
(INCEPTION) TO MAY 31, 1995

     During the fiscal year ended May 31, 1996, the Company had revenues of
approximately $6,623,000 as compared to $335,000 during the period ended May
31, 1995.  The substantial increase reflects the fact that prior to May 31,
1995, the Company was in a start-up phase and had only limited operations.

     Operating expenses as a percentage of revenues during the year ended May
31, 1996 were approximately 71.6% as compared to approximately 95.8% during
the prior period.  The reduction in the percentage reflects the fact that the
Company was in a start-up phase in the prior period and was not able to
achieve normal operations until the year ended May 31, 1996.

     Selling, general and administrative expenses as a percentage of revenues
during the year ended May 31, 1996, were approximately 17.8% as compared to
approximately 30.4% during the prior period.  The reduced percentage reflects
the Company's start-up of operations in the prior period.

     Interest expense during the year ended May 31, 1996 was approximately
$66,000.  The Company had no interest expense in the prior period.  The
interest expense is a result of borrowings under a line of credit which the
Company obtained in June 1995.

     As a result of the factors described above, the Company had a net income
of approximately $394,000 during the year ended May 31, 1996, as compared to a
loss of $92,000 during the prior period.

LIQUIDITY AND CAPITAL RESOURCES

     As of May 31, 1997, the Company had working capital of approximately
$2,555,000 as compared to working capital of approximately $1,712,000 at
May 31, 1996.  The increase was primarily due to an increase in trade
receivables which were the result of an increase in the number of contracts
being serviced.  As of May 31, 1997, the Company had 82 contracts to provide
rehabilitation, respiratory and/or psych/social services compared with 66
contracts on May 31, 1996.

     Net cash used in operating activities totaled approximately $2,480,000
for the year ended May 31, 1997.  This compares with $1,262,000 for the prior
year.  The increase was primarily due to an increase in accounts receivable
caused by higher service revenue.  The change was partially offset by an
increase in net income.

     The Company used approximately $437,000 toward investing activities
during the year ended May 31, 1997, compared with $573,000 in the prior year. 
The increase resulted from the addition of equipment and two minor
acquisitions: RT Group, Inc. (a respiratory therapy company) and the purchase
of nine Arkansas
                               -11-
<PAGE>
facility contracts.  Other than the potential acquisition of new companies,
the Company does not anticipate any other significant investing activities.

     Net cash provided by financing activities for the year ended May 31,
1997 was approximately $2,917,000 compared with $1,732,000 for the prior year. 
The increase was almost entirely due to the use of short-term borrowing under
the Company's credit line.  The need for financing is a normal result of the
Company's growth, and the Company's management expects it to continue.

     At May 31, 1996 the Company had working capital of approximately
$1,712,000 as compared to approximately $239,000 at May 31, 1995.  The
increase was a result of the sale of common stock during the year ended May
31, 1996 as well as the net income for the year.

     Net cash used in operating activities totaled approximately $1,262,000
for the year ended May 31, 1996 as compared to approximately $222,000 used in
operation activities during the period from September 21, 1994 (inception) to
May 31, 1995.  The increased use of cash was primarily due to an increase in
accounts receivable as a result of increased operations.

     The Company used approximately $573,000 in investing activities during
the year ended May 31, 1996 as compared to approximately $15,000 used in
investing activities during the prior period.  The increase was a result of
the purchase of equipment and the purchase of Total Rehab South, Inc.

     During the year ended May 31, 1996, the Company had cash flows from
financing activities of approximately $1,732,000 as compared to $340,000
provided from financing activities during the prior period.  The increase was
primarily due to a private offering of common stock which provided net
proceeds of approximately $1,292,000.

     As of May 31, 1997, the Company had a $4.5 million line of credit under
which $3,525,000 had been borrowed.  The amount available under the borrowing
base formula at May 31, 1997 was $361,000.   This line of credit together with
cash flows from operations are sufficient to meet the Company's current cash
requirements.  Business expansion may create a need for additional funding
which the Company could attempt to raise through additional borrowing and/or
an offering of debt securities.

     The Company has been increasing the number of contracts it has with
long-term care facilities operated by entities other than Retirement Care. 
However, Retirement Care continues to be a major customer of the Company.  A
delay in regular periodic payments of accounts receivable from Retirement Care
due to the Sun Healthcare/Retirement Care Merger not being consummated, or for
any other reason, could have a significantly unfavorable effect on the
Company's cash flow from operations.

     Retirement Care has issued its financial statements for the year ended
June 30, 1997 which includes an unqualified opinion from its auditors.  In the
footnotes to the aforementioned financial statements, it states that
Retirement Care "has experienced a significant net operating loss and at the
same time a decline in liquidity, resulting from the operating loss and a
heightened level of investment in new facilities."  It also states that
"closing of the Merger of the Company with Sun Healthcare... will provide
access to additional sources of liquidity..." and outlines Retirement Care
management's  plan if the Sun Healthcare Merger does not take place.  In
Retirement Care's June 30, 1997 Form 10-K, it states that Retirement Care and
Sun Healthcare "have filed with the
                               -12-
<PAGE>
Securities and Exchange Commission, on a confidential basis, a preliminary
proxy statement with respect to the Merger..." and it is "anticipated to occur
in the fourth quarter of calendar year 1997."  For further information, see
Retirement Care's Form 10-K and other SEC filings.

NEW ACCOUNTING STANDARDS

     In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-based 
Compensation," which encourages, but does not require, companies to
measure the compensation cost of stock-based compensation plans at the grant
date based on the fair value of the stock-based award.  Companies may continue
accounting for stock-based compensation under APB Opinion 25, "Accounting for
Stock Issued to
Employees," provided the Company discloses the pro forma effects on net income
and earnings per share had the new accounting requirements been applied.  This
statement is effective for the Company's fiscal year ending May 31, 1997
annual financial statements.  The Company intends to continue accounting for
stock-based compensation awards under the provisions of APB 25.

     The Company will adopt Statement of Financial Accounting Standards No.
128 "Earnings Per Share" for the year ended May 31, 1998 including interim
periods.  This accounting pronouncement requires the disclosure of basic and
diluted earnings per share.  The Company believes that, upon adoption, diluted
earnings per share will approximate earnings per share as previously reported. 
Because the concept of basic earnings per share does not include the impact of
common stock equivalents, such as stock options, basic earnings per share will
be higher than diluted earnings per share.

     In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income."  SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements.  The provisions of SFAS No. 130 will
be effective for fiscal years beginning after December 15, 1997, and will not
have a material impact on the Company's financial statements.

ITEM 7.  FINANCIAL STATEMENTS.

     See the consolidated financial statements and the notes thereto
beginning on page F-1.

ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.

     On October 1, 1997, Coopers & Lybrand L.L.P. ("C&L"), which served as
the Company's independent accountants for the fiscal years ended May 31, 1995
and 1996, and had been retained for the Company's fiscal year ended May 31,
1997, resigned as the Company's independent accountants.  The reports of C&L
on the Company's financial statements for the fiscal years ended May 31, 1995
and 1996 did not contain an adverse opinion or disclaimer of an opinion nor
were they qualified or modified as to uncertainty, audit scope or accounting
principles or practices.  The Company filed a report on Form 8-K dated October
1, 1997 reporting the resignation of C&L.

     The Company is not aware of any "disagreement" or "reportable event"
within the meaning of Item 304 of Regulation S-B, with C&L during the fiscal
years ended May 31, 1995 and 1996, and from that date to the date of C&L's
resignation on October 1, 1997, on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure,
except as described below.
                               -13-
<PAGE>
     In its audit of the Company's financial statements for the year ended
May 31, 1997, C&L had completed most of its audit procedures by the end of
July 1997 and had not raised any significant concerns about the Company's
financial statements, other than the following.  On Friday, August 1, 1997,
prior to the  Company's scheduled fourth quarter earnings release on Monday,
August 4, 1997, C&L advised the Company that it had concerns about the 
collectability of certain accounts receivable from Retirement Care, a major 
customer of the Company and a 27.4% shareholder of the Company's outstanding 
Common Stock.  Retirement Care had historically been a slow paying customer, 
but even at this time continues to make payments on the balances due to the 
Company for services rendered.

     C&L also served as the independent accountants for Retirement Care until
August 14, 1997, when C&L resigned as the independent accountants of
Retirement Care.  In a letter filed with the Securities and Exchange
Commission concerning its resignation, C&L stated that it was unable to rely
on representations of Retirement Care's management, and did not intend to be
associated with any filings which may be made by Retirement Care with the
Securities and Exchange Commission.

     During August and September 1997, the Company, Retirement Care and Chris
Brogdon, the President of Retirement Care and a Director of the Company, made
proposals to C&L to alleviate its concerns.  Such proposals included
Retirement Care paying down the balance of the accounts receivable and
providing collateral which the Company's management believed would more than
adequately secure the payment of the remaining accounts receivable of
Retirement Care.  However, C&L took the position that the collateral was
insufficient.  C&L noted that even if such proposals were adopted that it
would still render an opinion with a "going concern" qualification based on
what C&L believed was the uncollectability of the Retirement Care accounts
receivables.  The Company's management offered another proposal to provide a
letter of credit from an unaffiliated third party which would more than
adequately secure the Retirement Care accounts receivable, but C&L would not
provide a written commitment to the Company that this would be sufficient
collateral.

     The Company's management believed that C&L's position with respect to
the Retirement Care accounts receivable was unreasonable and appeared to be a
result of C&L's adverse relationship with Retirement Care.  Based on this
concern, the Company asked C&L to evaluate C&L's relationship with the Company
under applicable independence and conflicts of interest rules.  In response,
C&L denied that any conflicts of interest or independence rules had been
violated, but stated that it was no longer appropriate for it to serve as the
Company's independent accountants because of a deterioration of the client-
auditor relationship.

     The Company's management has fully advised the Audit Committee of the
Board of Directors of all of the above matters, and certain members of the
Board of Directors and the Audit Committee of the Board of Directors discussed
the above matters with C&L.  However, neither the full Board of Directors nor
the full Audit Committee have discussed these matters with C&L.

     The Company provided a copy of its Report on Form 8-K to C&L and
requested that C&L provide the Company with a letter addressed to the
Commission, as required by Item 304(a)(3) of Regulation S-B.

     On October 14, 1997, C&L provided the Company with its response to the
Form 8-K (the "Response Letter"), wherein it disagreed with certain statements
made by the Company therein.  The Company's management continues to stand by 
the statements it made in the Form 8-K.  The Company did not want a change in
                               -14-
<PAGE>
accountants during an audit and continued to work with C&L to satisfy them
with respect to the collectability of the Retirement Care receivables during
August and September, until C&L's resignation on October 1, 1997.

     The Company has authorized C&L to respond fully to the inquiries of the
Company's successor independent accountants.

     On October 10, 1997, the Company engaged the firm of Strothman & Company
PSC ("Strothman") as its independent accountants for its fiscal year ended May
31, 1997, and to reaudit its financial statements for the year ended May 31,
1996.

     Neither the Company nor any person acting on its behalf consulted with
Strothman with regard to the application of accounting principles to a
specific completed or contemplated transaction, or the type of audit opinion
that might be rendered on the Company's financial statements.

     Certain members of the Company's management contacted Strothman prior to
their being engaged as the new auditors for the Company.  The Company's
management sought advice from Strothman to address the implications that the
Company was facing given that C&L had advised the Company that it may want to
consider dismissing them as the Company's auditors prior to the audit being
completed.

     During the conversation between the Company's management and Strothman,
Strothman inquired as to why C&L would make such a suggestion.  The Company's
management advised Strothman that it was management's opinion that it related
to the receivable due from Retirement Care.  Strothman advised the Company to
continue to work with C&L to gain resolution to the Retirement Care receivable
issue and to finalize the audit.  The Company continued to work with C&L
through August and September of 1997 until C&L's resignation on October 1,
1997.

                                  PART III

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.

     The Directors and Officers of the Company are as follows:

     NAME               AGE        POSITIONS AND OFFICES HELD
     ----               ---        --------------------------
David V. Hall           54         President and a Director

Robert J. Babine        53         Chief Financial Officer, Treasurer
                                   and a Director

Chris Brogdon           47         Director

Mark P. Clein           38         Director

Timothy M. Graven       46         Director

Rebecca H. Krueger      41         Chief Operations Officer

Michael J. Kitchen      31         Vice President, Secretary and
                                   General Counsel

Nicole D. Perry         33         Vice President of Finance
                               -15-
<PAGE>
     There is no family relationship between any Director or Executive
Officer of the Company.

     Effective in August 1997, the Company established a compensation
committee and an audit committee.  The members of both of these committees are
Mark P.  Clein and Timothy M. Graven.  The Company has no nominating
committee.

     Set forth below are the names of all Directors and Executive Officers of
the Company, all positions and offices with the Company held by each such
person, the period during which he has served as such, and the principal
occupations and employment of such persons during at least the last five
years:

     DAVID V. HALL - PRESIDENT AND DIRECTOR.  Mr. Hall has been President and
Director of the Company since September 1995, and has held these same
positions with In-House Rehab, Inc. ("IHR"), the Company's wholly-owned
subsidiary, since September 1994.  From 1986 to 1993, he was President of The
Cardinal Group, a nursing home operator which he founded, which grew to 26
nursing homes.  Mr. Hall sold this company in 1993, and he was actively
involved in winding up this sale until the Summer of 1994.  During this period
of time and until September 1994, he also worked on plans for starting In-
House Rehab, Inc.  Since 1994, Mr. Hall has also served as Chairman of the
Board of Hallmark Communications, a company engaged in selling long distance 
telephone service, primarily to businesses.  From 1980 to 1985, he was 
President, founder and sole owner of Cardinal Medical Corporation which 
operated six full service nursing homes in Kentucky, which were sold to 
Hillhaven Corp. in 1985 due to a change in Kentucky's Medicaid reimbursement 
regulations.  From 1977 to 1980, he was President, founder and sole owner of 
Clinical Management Associates, a contract respiratory and cardiopulmonary 
company which provided professionals and equipment to acute care hospitals.  
At the time that Mr. Hall sold this company, it provided services to 22 
hospitals in five states, had annual revenues of $6 million and had 
approximately 220 employees.  He received a B.A. Degree from the University 
of Louisville in 1964. 

     ROBERT J. BABINE - CHIEF FINANCIAL OFFICER, TREASURER AND DIRECTOR.  Mr.
Babine has been Chief Financial Officer, Secretary, Treasurer and a Director
of the Company since September 1995, and has held these same positions with
IHR, the Company's wholly-owned subsidiary, since September 1994.   From 1993
to 1994, he was Vice President of Management Alternatives, Inc., a financial
consulting firm specializing in mergers and acquisitions.  Since 1990, Mr.
Babine has also been owner of RJB Holdings, Inc., which has investments in
real estate and service related businesses.  From 1989 to 1990, Mr. Babine was
Vice President and CFO for Burris Foods, Inc., a wholesale food distributor. 
From 1984 to 1989, he was controller for KFC International which handled
international operations for the Kentucky Fried Chicken restaurant chain. 
Prior to that time he was Director of Accounting for KFC International from
1982 to 1984.  Mr. Babine also has experience as an auditor with Arthur Young
International accounting firm from 1974 to 1978.  He received a B.S. Degree in
1972 and a MSBA Degree in Finance/Accounting in 1974 from the University of
Massachusetts.  Mr. Babine became a CPA in Connecticut in 1976.

     CHRIS BROGDON - DIRECTOR.  Mr. Brogdon has been a Director of the
Company since September 1995.  He has served as President and a Director of
Retirement Care Associates, Inc. ("Retirement Care"), a New York Stock
Exchange listed company, since October 1991.  He also served as Treasurer of
Retirement Care from October 1991 to November 1993.  He served as Secretary of
Capitol Care from July 1990 until it was merged into Retirement Care in
November 1992, and now serves in these same capacities with Capitol Care.  Mr.
Brogdon has been involved in financing and operating nursing homes and
retirement communities since 1982.  From 1969 until 1982, Mr. Brogdon was
employed in the securities business as a
                               -16-
<PAGE>
retail salesman.  Mr. Brogdon attended Georgia State University in Atlanta,
Georgia.  Since March 1987, Mr. Brogdon has been Secretary/Treasurer of Winter
Haven Homes, Inc. ("WHH") and since August 1990, he has been
Secretary/Treasurer of National Assistance Bureau, Inc. ("NAB").  Both WHH and
NAB are engaged in the business of owning and operating nursing homes and
retirement communities.  Mr. Brogdon also serves as Chairman of the Board of
Contour Medical, Inc., a publicly-held company, which is a manufacturer and
distributor of orthopedic care and rehabilitation products and disposable
medical products.

     MARK P. CLEIN - DIRECTOR.  Mr. Clein has been a Director of the Company
since August 1997.  Since 1996 he has been Chief Financial Officer of PMR
Corporation, a NASDAQ National Market System-listed company which develops,
manages and markets psychiatric partial hospitalization programs.  From 1982
to 1996, Mr. Clein was employed by several New York based investment banking
firms, including Jefferies & Co., where he held the position of managing
director of investment banking (specializing in the health care industry),
Sprout Group, an affiliate of Donaldson, Lufkin and Jenrette, Inc., and
Merrill Lynch Venture Capital, Inc., where he focuses on early stage investing
in the healthcare industry.  Mr. Clein received a Masters of Business
Administration Degree from Columbia University in 1983 and a Bachelor's Degree
from the University of North Carolina in 1981.  He is also a Director of 
Children's Discovery Centers of America, Inc., which is publicly held.

     TIMOTHY M. GRAVEN - DIRECTOR.  Mr. Graven has been a Director of the
Company since August 1997, and is the Managing Partner and co-founder of Triad
Investment Company, LLC, a private investment firm founded in 1995.  Mr.
Graven previously served as President and Chief Operating Officer of Steel
Technologies, Inc., of Louisville, Kentucky, a steel processing company, from
March 1990 to November 1994, as Chief Financial Officer from May 1985 to March
1990, and as Director from 1982 to 1994.  Mr. Graven is currently also a
Director of Performance Food Group Company, a publicly-held company listed on
the Nasdaq Stock Market.  Mr. Graven received a B.S. Degree in Accounting from
Murray State University in 1973.

     REBECCA H. KRUEGER - CHIEF OPERATIONS OFFICER.  Mrs. Krueger became
employed by the Company in June 1996, and became Chief Operations Officer in
September 1996.  From September 1990 to December 1995, she was employed by
Transitional Health Services ("THS") which was acquired by WelCare
International Management Corporation, Atlanta, Georgia ("WelCare") in December
1995, and continued to be employed by WelCare until June 1996.  THS and
WelCare operate and manage a large number of nursing home facilities. 
Initially, Mrs. Krueger was Director of Nursing of a facility owned by THS
where she supervised a nursing staff of approximately 160 persons, and
directed a rehabilitation program.  Beginning in May 1992, she became a
Regional Nurse Consultant/Quality Assurance Specialist for THS, and was
responsible for eight facilities in evaluating staff performance and
compliance with federal and state regulations.  In January 1994, Mrs. Krueger
became a Regional Director of Operations for THS where she was responsible for
the total operations of three to six long-term care facilities in Indiana,
Kentucky and Arkansas.  Finally, from March 1996 to June 1996, she was
National Director of Subacute Services for WelCare, where she was responsible
for the development of all subacute and postacute programs for up to 78
facilities.  Mrs. Krueger graduated from the University of the State of New
York in 1989 with an Associate Science and Nursing Degree.

     MICHAEL J. KITCHEN - VICE PRESIDENT, SECRETARY AND GENERAL COUNSEL.  Mr.
Kitchen has been Secretary of the Company since July 1997, and has been the
general counsel and a Vice President since October 1996.  From May 1994 to
October 1996, he was an attorney with the J. Bruce Miller Law Group in
Louisville, Kentucky, where he concentrated his practice in commercial
                               -17-
<PAGE>
litigation, business law and employment relations.  From August 1992 to May
1994, Mr. Kitchen was an attorney with the firm of Segal and Shanks in
Louisville, Kentucky, where his practice was concentrated in the area of
insurance law.  From 1991 to 1992, he was an attorney with the firm of Chauvin
& White in Louisville, Kentucky, where he practiced civil litigation/personal 
injury law.  Mr. Kitchen received a B.A. Degree in Marketing from the 
University of Kentucky in 1988 and a J.D. Degree in law from the University 
of Louisville in 1991.  He is licensed to practice law in Kentucky and Indiana.

     NICOLE D. PERRY - VICE PRESIDENT OF FINANCE.  Ms. Perry has been Vice
President of Finance of the Company since June 1997.  From February 1994 to
June 1996, she was a Manager for Coopers & Lybrand L.L.P. in Louisville,
Kentucky, where she managed audit engagements for a number of companies.  
From March 1993 to February 1994, Ms. Perry was Controller for Atelier 
International and Assistant Controller for Vecta, which are subsidiaries of 
Steelcase, Inc. in Grand Prairie, Texas.  From October 1990 to March 1993, 
she was a Senior Accountant with Price Waterhouse L.L.P. in Dallas, Texas, 
where she was responsible for planning, performing and supervising financial 
audits.  From October 1987 to October 1990, she was a Senior Accountant with 
Deloitte & Touche, L.L.P. in Dallas, Texas, where she also planned, performed
and supervised financial audits of various private and public entities.  Ms. 
Perry received an AA Degree in Liberal Arts from Bakersfield (California) 
College in 1984, and a BBA Degree in Accounting from the University of 
Oklahoma in 1987.  She became licensed as a Certified Public Accountant in 
1989.

     The Company's executive officers hold office until the next annual
meeting of directors of the Company.  There are no known arrangements or
understandings between any director or executive officer and any other person
pursuant to which any of the above-named executive officers or directors was
selected as an officer or director of the Company. 

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

     Based solely on a review of the Forms 3 and 4 and amendments thereto
furnished to the Company during its most recent fiscal year, and Forms 5 and
amendments thereto furnished to the Company with respect to its most recent
fiscal year and certain written representations, no persons who were either a
director, officer or beneficial owner of more than 10% of the Company's common
stock, failed to file on a timely basis reports required by Section 16(a) of
the Exchange Act during the most recent fiscal year, except that David V. Hall
filed one Form 4 reporting two transactions late.

ITEM 10.  EXECUTIVE COMPENSATION.

     The following table sets forth information regarding the executive
compensation for the Company's President and each other Executive Officer who
received total salary and bonus in excess of $100,000 for the fiscal years
ended May 31, 1997 and 1996, and the period of September 21, 1994 through May
31, 1995.
<TABLE>
                                   -18-
<PAGE>
                                  SUMMARY COMPENSATION TABLE
<CAPTION>
                                                          LONG-TERM COMPENSATION
                                                       ---------------------------      
                                                            AWARDS         PAYOUTS
                                                       ------------------  -------
                           ANNUAL COMPENSATION                   SECURI-   
                     --------------------------------            TIES UN-
                                              OTHER    RE-       DERLYING          ALL
                                              ANNUAL   STRICTED  OPTIONS/          OTHER
NAME AND PRINCIPAL                            COMPEN-  STOCK     SARs      LTIP    COMPEN-
     POSITION       YEAR  SALARY    BONUS     SATION   AWARD(S)  (NUMBER)  PAYOUTS SATION
------------------  ----  -------  --------  -------  --------  --------  ------- ------
<S>                <C>   <C>      <C>        <C>      <C>       <C>       <C>     <C>
David V. Hall,      1997  $192,308  $ 28,803  $11,271    -0-     200,000     -0-  $12,215
 President                                    <FN1>                               <FN2>
                    1996  $ 69,200  $100,522  $14,654    -0-       -0-       -0-  $ 3,881
                                              <FN3>                               <FN2>
                    1995  $  -0-    $  -0-    $ 1,946    -0-       -0-       -0-
                                              <FN4>
Robert J. Babine,   1997  $110,000  $ 15,568  $ 8,347    -0-       -0-       -0-  $ 1,515
 Chief Financial                              <FN5>                               <FN6>
 Officer
---------------
<FN>
<FN1>
Represents $11,271 paid for expenses of an automobile provided for Mr. Hall's
use.
<FN2>
Represents the premium paid for a term life insurance policy provided for Mr.
Hall's benefit.
<FN3>
Represents $4,974 paid for medical insurance benefits above those provided to
other full-time employees of the Company, and $9,680 paid for expenses of an
automobile provided for Mr. Hall's use.
<FN4>
Represents $1,181 paid for medical insurance benefits above those provided to
other full-time employees of the Company, and $765 paid for expenses of an
automobile provided for Mr.Hall's use.
<FN5>
Represents compensation paid to Mr. Babine for the use of an automobile.
<FN6>
Represents the premium paid for a term life insurance policy provided for Mr.
Babine's benefit.
</FN>
</TABLE>
                        OPTION GRANTS IN LAST FISCAL YEAR

     The following table sets forth certain information concerning individual
grants of stock options made to each of the Executive Officers named above
during the fiscal year ended May 31, 1997.
                               -19-
<PAGE>
                                          INDIVIDUAL GRANTS
                   ----------------------------------------------------------
                   NUMBER OF     PERCENT OF TOTAL
                   SECURITIES      OPTIONS/SARs
                   UNDERLYING       GRANTED TO       EXERCISE
                   OPTION/SARs     EMPLOYEES IN      OR BASE      EXPIRATION
                   GRANTED (#)     FISCAL YEAR     PRICE ($/SH)      DATE
                   -----------   ----------------  ------------   ----------
David V. Hall       200,000*           30.5%          $2.00        12/26/99
Robert J. Babine      -0-               --              --            --

* These options were immediately transferred to two adult children of Mr. Hall
who are also employees of the Company.

                 AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
                            AND FY-END OPTION/SAR VALUES

                                            SECURITIES       VALUE OF
                                            UNDERLYING       EXERCISED
                                            UNEXERCISED     IN-THE-MONEY
                     SHARES                 OPTION/SARs     OPTION/SARs
                   ACQUIRED ON               AT FY-END       AT FY-END
                    EXERCISE                EXERCISABLE/    EXERCISABLE/
                    (NUMBER)     REALIZED   UNEXERCISABLE   UNEXERCISABLE
                   -----------   --------   -------------   -------------
David V. Hall         -0-           -0-         0 / 0          0 / 0
Robert J. Babine      -0-           -0-         0 / 0          0 / 0

     Effective February 1, 1996, the Company entered into three year
employment agreements with David V. Hall, President of the Company, and Robert
J. Babine, Chief Financial Officer, Secretary and Treasurer of the Company. 
The Employment Agreements provide that each will devote a substantial portion
of their time to the Company, and that Mr. Hall will receive a base salary of
$200,000 per year and Mr. Babine will receive a base salary of $100,000 per
year.  Mr. Hall and Mr. Babine will also receive bonuses at the discretion of
the Board of Directors and the use of an automobile at a maximum cost of 
$10,000 per year for Mr. Hall and $6,000 per year for Mr. Babine.  In 
addition, the employment agreements provide that the Company will pay for 
term life insurance policies in the amount of $2,000,000 for Mr. Hall and 
$500,000 for Mr. Babine.  The proceeds of these policies will be payable to 
the respective estates of Mr. Hall and Mr. Babine.

     Effective February 1, 1997, Mr. Babine entered into a  new three year
employment agreement replacing his earlier agreement.  The new agreement has
substantially the same terms as his prior agreement except that his salary was
increased to $120,000 per year and his automobile allowance was increased to
$7,500 per year.

     In the event that the Company terminates either of these employment
agreements without cause, or as a result of a change in control, the Company
will be required to pay the base salary for the remaining initial term of the
agreement, or twelve (12) months, whichever is greater.  In addition, the
Company may be required to repurchase up to 50% of the stock held by the
Officers and provide for family medical insurance until the age of 65.

     Effective January 1, 1997, the Company entered into an employment
agreement with Rebecca Krueger, who is Chief Operating Officer of the Company,
pursuant to which Ms. Krueger has agreed to devote a substantial portion of
her time to the business of the Company.  The initial term of the agreement is
for one year, but
                               -20-
<PAGE>
is automatically renewed for one year on a monthly basis.  Ms. Krueger's base
salary was $103,500 per year, and her base salary will be increased each year
by at least the increase in the cost of living index.  She will also receive
bonuses at the discretion of the Company and an automobile allowance of $400
per month.  In the event that the Company terminates this employment agreement
without cause or as a result of a change in control, the Company will be
required to pay her base salary for twelve (12) months.  Effective August 1,
1997, Ms. Krueger's base salary was increased to $112,500 per year.

     Effective January 1, 1997, the Company entered into an employment
agreement with Michael J. Kitchen, who is Vice President, Secretary and
General Counsel to the Company, pursuant to which Mr. Kitchen has agreed to
devote a substantial portion of his time to the business of the Company.  The
initial term of the agreement is for one year, is automatically renewed for
one year on a monthly basis.  Mr. Kitchen's base salary is $93,375 per year,
and his base salary will be increased each year by at least the increase in
the cost of living index.  He will also receive bonuses at the discretion of
the Company and an automobile allowance of $400 per month.  In the event that
the Company terminates this employment agreement without cause or as a result
of a change in control, the Company will be required to pay his base salary
for twelve (12) months.

     Effective June 9, 1997, the Company entered into an employment agreement
with Nicole Perry, who is Vice President of Finance to the Company, pursuant
to which Ms. Perry has agreed to devote a substantial portion of her time to
the business of the Company.  The initial term of the agreement is for one
year.  Ms. Perry's base salary is $72,500 per year, and her base salary will
be increased each year by at least the increase in the cost of living index. 
She will also receive bonuses at the discretion of the Company and an
automobile allowance of $350 per month.  In the event that the Company
terminates this employment agreement without cause or as a result of a change
in control, the Company will be required to pay her base salary for twelve
(12) months.

DIRECTOR COMPENSATION

     Effective in August 1997, outside Directors of the Company receive a fee
of $500 per month and will receive stock options to purchase 2,500 shares of
Common Stock each year for their services in such capacity.  Directors are
also reimbursed for all reasonable and necessary costs and expenses incurred
as a result of being a Director of the Company.

STOCK OPTION PLAN

     In October 1996, the Company's Board of Directors adopted the Company's
1996 Stock Option Plan (the "1996 Plan"). The 1996 Plan allows the Board to
grant stock options from time to time to employees, officers and directors of
the Company and consultants to the Company. The Board has the power to
determine at the time the option is granted whether the option will be an
Incentive Stock Option (an option which qualifies under Section 422 of the
Internal Revenue Code of 1986) or an option which is not an Incentive Stock
Option. However, Incentive Stock Options will only be granted to persons who
are key employees of the Company. Vesting provisions are determined by the
Board at the time options are granted. As originally adopted, the total number
of shares of Common Stock sub- ject to options under the 1996 Plan was not to
exceed 1,000,000, subject to adjustment in the event of certain recapitali-
zations, reorganizations and similar transactions. The option price cannot be
less than the fair market value of a share on the date the option is granted
and it must be satisfied by the payment of cash.
                               -21-
<PAGE>
     The Board of Directors may amend the 1996 Plan at any time, provided
that the Board may not amend the 1996 Plan to materially increase the number
of shares available under the 1996 Plan, materially increase the benefits
accruing to Participants under the 1996 Plan, or materially change the
eligible class of employees without shareholder approval.

OUTSTANDING OPTIONS UNDER THE PLAN

     On December 26, 1996, the Company's Board of Directors granted options
to purchase an aggregate of 112,000 shares of Common Stock at $2.00 per share
under the 1996 Plan. The options are fully vested and expire three years after
the date of grant. Included in these options are non-qualified options to
purchase 100,000 shares granted to Rebecca Krueger, Chief Operations Officer
of the Company.

     On March 4, 1997, the Company issued non-qualified options, under the
1996 Plan, to purchase 50,000 shares of Common Stock to an outside consultant
at $2.25 per share which was equal to the fair market value on the date of
grant.  The options are exercisable for three years from the date of grant.

     On May 19, 1997, the Company's Board of Directors granted options to
purchase an aggregate of 158,000 shares of Common Stock at $3.00 per share
under the 1996 Plan.  The options vest over various periods up to three years
and expire three years after the date of grant.  Included in these options are
options granted to the following officers of the Company:  Rebecca Krueger to
purchase 10,000 shares of Common Stock; Michael Kitchen to purchase 15,000
shares of Common Stock; and Nicole Perry to purchase 25,000 shares of Common
Stock.

     On June 9, 1997, the Company's Board of Directors granted options to an
employee to purchase 20,000 shares of Common Stock at $3.31 per share under
the 1996 plan.  The options are fully vested and expire three years after the
date of grant.

     On June 12, 1997, the Company's Board of Directors granted options to an
employee to purchase 8,000 shares of Common Stock at $3.56 per share under the
1996 Plan.  The options vest over a period of one year and expire seven years
after the date of grant.

     On August 27, 1997, the Company's Board of Directors granted options to
purchase an aggregate of 42,500 shares of Common Stock at $2.875 per share to
four employees.  These options vest immediately and expire three years after
the date of grant.  Included in these options are options granted to Rebecca
Krueger, an Officer, to purchase 12,500 shares of Common Stock.

OTHER OUTSTANDING OPTIONS NOT UNDER THE PLAN

     On June 1, 1996, the Company granted a non-plan option to an employee to
purchase 50,000 shares of Common Stock at $1.25 per share which was equal to
the fair market value on the date of grant.  The option is exercisable for
three years from the date of grant.

     On June 21, 1996, the Company granted non-plan options to two stock
brokers to purchase 20,000 shares of Common Stock at $1.25 per share which was
equal to the fair market value on the date of grant.  The options are
exercisable for three years from the date of grant.

     On August 1, 1996, the Company granted non-plan options to ten employees
to purchase an aggregate of 95,000 shares of Common Stock at $1.75 per share
which was equal to the fair market value on the date of grant.  These options
are exercisable for three years from the date of grant.
                               -22-
<PAGE>
     On October 24, 1996, the Company granted non-plan options to two
employees to purchase an aggregate of 40,000 shares of Common Stock at $2.25
per share which was equal to the fair market value on the date of grant. 
These options are exercisable for three years from the date of grant.

     On December 5, 1996, the Company issued non-plan options to two
shareholders of Daily Rehabilitation Institute, Inc. in connection with the
acquisition of that company.  The options are to purchase an aggregate of
30,000 shares of Common Stock at $2.25 per share which was equal to the fair
market value on the date of grant.  Of the 30,000 options, 15,000 options
expire on December 15, 1999 and 15,000 expire on December 31, 2000.

     On December 26, 1996, the Company issued non-plan options to purchase
200,000 shares of Common Stock to David V. Hall at $2.00 per share which was
equal to the fair market value on the date of grant.  Mr. Hall then
transferred these options to his two adult children who are also employees of
the Company.  The options are exercisable for three years from the date of
grant.

401(k) PLAN

     The Company maintains a 401(k) employee retirement and savings program
(the "401(k) Plan") for its employees. Under the 401(k) Plan, an employee may
con- tribute up to 15% of his or her gross annual earnings, subject to a
statutory  maximum, for investment in one or more funds identified under the
Plan. The Com- pany may in the future, with the approval of the Board of
Directors, make matching contributions to participants in the 401(k) Plan. 
During the year ended May 31, 1996, the Company made no matching contributions
to the 401(k) Plan.

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

     The following table sets forth, as of October 17, 1997, each person
known by the Company to be the beneficial owner of five percent or more of the
Company's Common Stock, all Directors and Executive Officers individually and
all Directors and Executive Officers of the Company as a group. Except as
noted, each person has sole voting and investment power with respect to the
shares shown.
<TABLE>
<CAPTION>
                                  AMOUNT OF BENEFICIAL           PERCENTAGE
NAME AND ADDRESS                       OWNERSHIP                  OF CLASS
----------------                  --------------------           ----------
<S>                               <C>                            <C>
David V. Hall                          4,413,150<FN1>              33.1%
Suite 1400B
325 West Main Street
Louisville, Kentucky  40202

Robert J. Babine                         978,000<FN2>               7.3%
Suite 1400B
325 West Main Street
Louisville, Kentucky  40202

Chris Brogdon                            130,000<FN3>               1.0%
c/o Retirement Care Associates,
  Inc.
6000 Lake Forrest Drive, Suite 200
Atlanta, Georgia  30328
                               -23-
<PAGE>
Mark P. Clein                              -0-                       --
3990 Old Town Avenue
San Diego, CA 92110

Timothy M. Graven                          -0-                       --
168 Totem Road
Louisville, KY  40207

Rebecca H. Krueger                       126,500<FN4>               0.9%
Suite 1400B
325 West Main Street
Louisville, Kentucky  40202

Michael J. Kitchen                        70,420<FN5>               0.5%
Suite 1400B
325 West Main Street
Louisville, Kentucky  40202

Nicole D. Perry                           12,500<FN6>               0.1%
Suite 1400B
325 West Main Street
Louisville, Kentucky  40202

Retirement Care Associates, Inc.       3,661,000<FN7>              27.4%
6000 Lake Forrest Drive, Suite 200
Atlanta, Georgia  30328

All Executive Officers and             5,730,570                   42.3%
Directors as a Group
(8 Persons)
_________________
<FN>
<FN1>
Includes 4,403,150 shares held directly by Mr. Hall and 10,000 shares held by
his wife as custodian for two minor children.
<FN2>
Includes 962,000 shares held directly by Mr. Babine and 16,000 shares held by
two of his children who share his home.
<FN3>
Includes 85,000 shares held directly by Mr. Brogdon, 25,000 shares held by his
wife, and 20,000 shares held by a daughter.  Does not include the shares held
by Retirement Care Associates, Inc., of which Mr. Brogdon is President,
Director and a principal shareholder.
<FN4>
Includes 4,000 shares held directly by Mrs. Krueger and 122,500 shares
underlying stock options held by her which are exercisable within 60 days.
<FN5>
Includes 5,420 shares held directly by Mr. Kitchen and 65,000 shares
underlying stock options held by him which are exercisable within 60 days.
<FN6>
Represents 12,500 shares underlying stock options held by Ms. Perry which are
exercisable within 60 days.
<FN7>
Retirement Care Associates, Inc. ("Retirement Care") is a publicly-held
corporation of which Chris Brogdon is President, Director and a principal
shareholder; Edward E. Lane is Secretary, Director and a principal
shareholder; Darrell C. Tucker is a Director and a President of a subsidiary;
and Michael P.
                               -24-
<PAGE>
Traba and Julian S. Daley are Directors.  In addition, Connie Brogdon, the
wife of Chris Brogdon, is a principal shareholder of Retirement Care.  The
following sets forth the approximate percentage ownership beneficially held by
such persons in Retirement Care:
                           Chris Brogdon          19.4%
                           Edward E. Lane         17.6%
                           Darrell C. Tucker       4.5%
                           Julian S. Daley         0.3%
                           Harlan Mathews          0.1%
                           Connie Brogdon         19.4%
</FN>
</TABLE>
ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     In connection with the acquisition of In-House Rehab, Inc. in September
1995, certain persons who were then Officers and Directors of the Company
agreed to the cancellation of indebtedness owed to them by the Company as
follows:

              NAME                      AMOUNT OF DEBT CANCELED
        ----------------                -----------------------
        Albert L. Blum                          $226,655
        Theodore Jackson                         176,915
        Fred B. Blum                              18,367
        Mark Jackson                             177,315
                                                --------
           Total                                $599,252

The indebtedness to these persons was a result of advances made for working
capital and for debt service payments made for which the person was a personal
guarantor, including interest accrued thereon.

     At May 31, 1997, the Company had contracts to provide physical, speech
and occupational therapists to approximately 71 nursing homes of which 36 are
either owned, operated or managed by Retirement Care Associates,
Inc.("Retirement Care"), a principal shareholder of the Company.  During the
year ended May 31, 1996, the Company billed approximately $5,129,000 in fees
under agreements with Retirement Care.  During the year ended May 31, 1997,
the Company billed approximately $8,900,000 in fees under these agreements. 
As of May 31, 1997, there were approximately $4,513,000 in accounts receivable
relating to such services outstanding.

     As of May 31, 1997, Retirement Care owed the Company approximately
$58,600 in connection with its original purchase during the fiscal year ended
May 31, 1995, of shares of stock of In-House Rehab, Inc. which shares were
subsequently exchanged for shares of the Company's Common Stock.  This stock
subscription receivable was paid in full on September 9, 1997.
 
     In February 1997, Retirement Care announced that it had entered into a
merger agreement with Sun Healthcare.  See ITEM 1 - DESCRIPTION OF BUSINESS,
for additional information concerning this matter.     

     David V. Hall and Robert J. Babine, Officers, Directors and principal
shareholders of the Company personally guaranteed a $1,207,000 line of credit
to the Company.  As of May 31, 1996, $600,000 had been borrowed under this
line of credit.  Subsequently, the bank released these persons from their
guarantees.
                               -25-
<PAGE>
     As of May 31, 1997, David V. Hall, an Officer, Director and principal
shareholder of  the Company, owed the Company $18,000 for advances made to
him.  In addition, as of May 31, 1997, Hallmark Communications, a company of
which Mr. Hall is the majority owner, owed the Company $11,000 for advances 
made to it by the Company.  

     On December 26, 1996, the Company's Board of Directors granted non-
qualified options to purchase 100,000 shares of Common Stock at $2.00 per
share to Rebecca Krueger, the Company's Chief Operating Officer, under the
Company's 1996 Stock Option Plan.  The options are fully vested and expire
three years after the date of grant.  On May 19, 1997, the Company's Board of
Directors granted incentive stock options to purchase 10,000 shares of Common
Stock at $3.00 per share to Rebecca Krueger and on August 27, 1997, she was
granted additional options to purchase 12,500 shares at $2.875 per share. 
These options are fully vested and expire three years after the date of grant.

     On March 1, 1996 and October 24, 1996, the Company's Board of Directors
granted non-qualified options to purchase 20,000 and 30,000 respectively,
shares of Common Stock at $1.75 and $2.25 per share, respectively, to Michael
Kitchen, the Company's Vice President, Secretary and General Counsel.  The
options are fully vested and expire three years after the date of grant.  On
May 19, 1997, the Company's Board of Directors granted incentive stock options
to purchase 15,000 shares of Common Stock at $3.00 per share to Michael
Kitchen under the Company's 1996 Stock Option Plan.  The options are fully
vested and expire three years after the date of grant.

     On May 19, 1997, the Company's Board of Directors granted incentive
stock options to purchase 25,000 shares of common stock at $3.00 per share to
Nicole Perry, the Company's Vice President of Finance.  The options vest over
one year and expire three years after the date of grant.

                             PART IV

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K.

    (a)  Exhibits.  The following exhibits are filed as part of this Report:

EXHIBIT
NUMBER      DESCRIPTION                     LOCATION
-------     -----------                     --------
  3.1       Articles of Incorporation,      Incorporated by reference to
            as amended                      Exhibit 3.1 to Registrant's
                                            Registration Statement on
                                            Form 10SB

  3.2       Bylaws                          Incorporated by reference to
                                            Exhibit 3.2 to Registrant's
                                            Registration Statement on
                                            Form 10SB

 10.1       1996 Stock Option Plan          Incorporated by reference to
                                            Exhibit 10.1 to Registrant's
                                            Registration Statement on
                                            Form 10SB

 10.2       Employment Agreement with       Incorporated by reference to
            David V. Hall                   Exhibit 10.2 to Registrant's
                                            Registration Statement on
                                            Form 10SB
                               -26-
<PAGE>
 10.3       Employment Agreement with       Filed herewith electronically
            Robert J. Babine

 10.4       Lease Agreement on Office       Incorporated by reference to
            Space                           Exhibit 10.4 to Registrant's
                                            Registration Statement on
                                            Form 10SB

 10.5       Contracts for Therapy           Filed herewith electronically
            Program Services with
            Affiliates

 10.6       Loan Agreement with Great       Incorporated by reference to
            Financial Bank and related      Exhibit 10.6 to Registrant's
            Security Agreement and          Registration Statement on
            Promissory Note                 Form 10SB
          
 10.7       Credit Facility Agreement with  Filed herewith electronically
            Great Financial Bank and 
            related Security Agreement and
            Promissory Note

 10.8       Employment Agreement with       Filed herewith electronically
            Rebecca Krueger

 10.9       Employment Agreement with       Filed herewith electronically
            Michael Kitchen

 10.10      Employment Agreement with       Filed herewith electronically
            Nicole Perry

 10.11      Promissory Note from            Filed herewith electronically
            Retirement Care Associates, 
            Inc. and related Guaranty
            Agreement and Security
            Agreement

 21         Subsidiaries of the             Filed herewith electronically
            Registrant

 27         Financial Data Schedule         Filed herewith electronically

    (b)  Reports on Form 8-K.  No Reports on Form 8-K were filed during the
last quarter of the period covered by this Report.
                               -27-
<PAGE>
                Report of Independent Accountants

Board of Directors and Stockholders
In-House Rehab Corporation and Subsidiaries 

We have audited the accompanying consolidated balance sheets of In-House Rehab
Corporation and Subsidiaries as of May 31, 1997 and 1996 and the related
consolidated statements of income, stockholders' equity, and cash flows for
the years then ended.  These financial statements are the responsibility of
the Company's management.  Our responsibility is to express an opinion on
these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards.  Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement.  An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements.  An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.  We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of In-House Rehab Corporation and Subsidiaries as of May 31, 1997 and 1996 and
the consolidated results of their operations and their cash flows for the
years then ended in conformity with generally accepted accounting principles.

/s/ Strothman & Company PSC
STROTHMAN & COMPANY PSC

Louisville, Kentucky
October 28, 1997
                               F-1
<PAGE>
IN-HOUSE REHAB CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS                                      
May 31, 1997 and 1996    
                                                  
                    ASSETS                           1997              1996
Current assets:                                                  
     Accounts receivable - trade, less allowance
       for doubtful accounts of $75,000
       and $50,000 in 1997 and 1996,
       respectively                               $ 2,736,132     $ 1,459,333
     Accounts receivable - trade - related party    4,548,493       1,629,722
     Due from private placement trustee                    --         225,000
     Other current assets                              15,057          20,067

     Total current assets                           7,299,682       3,334,122
                                                  
     Equipment, at cost                               265,556          77,389 
         Less accumulated depreciation                 48,660          13,867 
                                                      216,896          63,522 
     Intangible assets, net of accumulated
       amortization of $209,600 and $46,400            
       in 1997 and 1996, respectively                 353,974         139,201 
     Deferred tax asset                               123,402          31,986
     Other assets                                       3,375           1,321 
                                                  
                                                  $ 7,997,329     $ 3,570,152 
                                                  
               LIABILITIES AND STOCKHOLDERS' EQUITY
                                                  
Current liabilities:                                                  
     Short-term borrowings                        $ 3,542,102     $   725,000 
     Accounts payable                                 553,564         314,557 
     Accrued expenses                                 502,046         276,329 
     Checks issued in excess of cash on deposit       121,900         207,589 
     Income taxes                                      30,169          89,100 
     Deferred tax liability                            19,630           9,298
          Total current liabilities                 4,769,411       1,621,873 
                                                  
Stockholders' equity:                                                 
     Preferred stock, $10 par value; 
      10,000,000 shares
     authorized; no shares issued                           -             -

     Common stock, no par value;
     20,000,000 shares authorized;
     13,344,215 and 13,405,715 shares
     issued and outstanding                                     
     at May 31, 1997 and 1996, respectively         1,886,584       1,700,585 
     Subordinated convertible common stock,
     no par value; 1,200,000 shares authorized;
     no shares issued                                       -               -
     Common stock subscriptions receivable            (58,577)        (54,785)
     Retained earnings                              1,399,911         302,479
                                                    3,227,918       1,948,279
                                                  $ 7,997,329     $ 3,570,152 
          
   See accompanying notes to consolidated financial statements.
                               F-2
<PAGE>
IN-HOUSE REHAB CORPORATION                 
CONSOLIDATED STATEMENTS OF INCOME
For the years ended May 31, 1997 and 1996
                                                     1997             1996
                                                ------------      -----------
Revenues:   
     Contract services                          $  6,705,634      $ 1,493,563
     Contract services - related party             8,932,219        5,129,847
                                                ------------      -----------
                                                  15,637,853        6,623,410
Operating costs:
     Salaries, wages and benefits                  8,020,135        3,312,682
     Contract therapists                           2,777,537        1,229,340
     Rental expense                                  210,133           86,544
     Provision for doubtful accounts                  30,621           50,000
     Depreciation                                     33,826            9,930
     Amortization                                    163,175           52,800
     Other expense                                    88,402                -
                                                ------------      -----------
                                                  11,323,829        4,741,296
                                                ------------      -----------
          Gross profit                             4,314,024        1,882,114

Selling, general and administrative expenses       2,330,255        1,179,206

          Income from operations                   1,983,769          702,908

Interest expense                                     159,292           65,533

          Income before income taxes               1,824,477          637,375

Provision for income taxes                           727,045          243,112

          Net income                             $ 1,097,432          394,263

Net income per common share                      $       .08      $       .04
                                                 -----------      -----------
Weighted average number of 
common shares outstanding                         13,668,829       11,196,429

See accompanying notes to consolidated financial statements.
                               F-3
<PAGE>
IN-HOUSE REHAB CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
for the years ended May 31, 1997 and 1996
                                                                Subordinated
                                                                 Convertible
                       Preferred Stock      Common Stock         Common Stock
                        Shares Amount     Shares      Amount    Shares  Amount
                       ------- -------  ----------  ----------  ------  ------
Balance at 
May 31, 1995                 -      -   10,460,000  $  408,875       -       -

Acquisition of the
Company                                  1,845,715     (29,364)

Issuance of stock in    
conjunction with the
Private Placement                        1,100,000   1,321,074

Deferred compensation 
amortization

Receipt of stock
subscription payments

Accrued interest

Net income
                       ------- -------  ----------  ----------  ------  ------
Balances at
May 31, 1996                 -      -   13,405,715   1,700,585       -       -

Issuance of stock in 
conjunction with the
Private Placement                          200,000     185,999

Stock received in
connection with
termination of
employee                                  (261,500)
                
Accrued interest

Net Income
                       ------- -------  ----------  ----------  ------  ------
Balances at
May 31, 1997                 -       -  13,344,215  $1,886,584       -       -
                       ------- -------  ----------  ----------  ------  ------

See accompanying notes to consolidated financial statements.
                               F-4
<PAGE>
IN-HOUSE REHAB CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
for the years ended May 31, 1997 and 1996
(Continued)
                             Common    
                              Stock        Deferred     Retained
                          Subscriptions  Compensation   Earnings
                            Receivable      Costs      (Deficit)     Total
                          -------------  ------------  ---------  -----------
Balance at 
May 31, 1995              $  (59,035)     $ (6,400)    $(91,784)  $   251,656

Acquisition of the
Company                                                               (29,364)

Issuance of stock in    
conjunction with the
Private Placement                                                   1,321,074

Deferred compensation 
amortization                                  6,400                     6,400 

Receipt of stock
subscription payments            7,500                                  7,500

Accrued interest                (3,250)                                (3,250)

Net income                                                394,263     394,263
                           -------------  ------------  ---------  ----------
Balances at
May 31, 1996                   (54,785)            -      302,479   1,948,279

Issuance of stock in 
conjunction with the
Private Placement                                                     185,999

Stock received in
connection with 
termination of
employee                                                                   -

Accrued Interest                (3,792)                                (3,792)

Net Income                                              1,097,432   1,097,432
                           -------------  ------------  ---------  ----------
Balances at
May 31, 1997                  $ (58,577)             - $1,399,911  $3,227,918
                           -------------  ------------ ----------  ---------- 

See accompanying notes to consolidated financial statements.
                               F-5
<PAGE>
IN-HOUSE REHAB CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended May 31, 1997 and 1996

                                                    1997        1996
Cash flows from operating activities:           ----------- ------------
     Net income                                $ 1,097,432 $    394,263
     Adjustments to reconcile net income to
     net cash used in operating activities:
          Depreciation                              33,826           9,930
          Amortization                             163,175          52,800
          Allowance for doubtful accounts           25,000       50,000
          Deferred income taxes                    (81,084)     (23,988)
          Change in assets and liabilities,
          net of effects from acquisitions:
               Accounts receivable              (3,995,570)  (2,145,881)
               Interest receivable                  (3,792)      (3,250)
               Other current assets                  5,010       (5,194)
               Other assets                       (130,002)      366
               Accounts payable                    239,007      142,376
               Accrued expenses                    225,717      179,838
               Income taxes                        (58,931)      86,600
                                               ----------- ------------
          Net cash used in operating
          activities                            (2,480,212)  (1,262,140)
                                                ----------- ------------
Cash flows from investing activities:
     Purchase of equipment                        (187,200)     (62,745)
     Acquisition of businesses                    (250,000)           -
     Purchase of Total Rehab South, Inc.                 -     (510,601)
                                                ----------- ------------
          Net cash used in investing
          activities                              (437,200)    (573,346)
                                                ----------- ------------
Cash flows from financing activities:
     Issuance of common stock                       185,999   1,291,710
     Proceeds from stock subscriptions receivable         -       7,500
     Issuance of short-term borrowings            6,633,770   1,625,000
     Repayments of short-term borrowings         (3,816,668) (1,400,000)
     Checks issued in excess of cash on deposit     (85,689)    207,589
                                                ----------- -----------
          Net cash provided by financing
          activities                            $ 2,917,412 $ 1,731,799
                                                ----------- ------------
Decrease in cash and equivalents                      -        (103,687)

Beginning cash balance                                -     $   103,687
                                                ----------- ------------
Ending cash balance                              -                -
                                                ----------- ------------

See accompanying notes to consolidated financial statements.
                               F-6
<PAGE>
IN-HOUSE REHAB CORPORATION 
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
for the years ended May 31, 1997 and 1996

                                                    1997        1996
Supplemental disclosures:                       -----------  ----------

     Cash paid for interest                    $   129,522  $   65,414
                                                -----------  ---------- 
     Cash paid for income taxes                $   867,060  $  180,500
                                                -----------  ----------
Supplemental schedule of noncash investing
and financing activities:

     Assumption of short-term borrowings
     in connection with acquisitions            $  144,228  $        -
                                                -----------  ----------
     Issuance of short-term borrowings         $         -  $  500,000
                                                -----------  ----------
     Issuance of common stock                  $         -  $  225,000
                                                -----------  ----------
See accompanying notes to consolidated financial statements.
                               F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.   ORGANIZATION AND NATURE OF OPERATIONS 
     
Perennial Development Corporation (PDC or the Company) was formed under the
laws of the State of Colorado in May 1985.  Effective December 9, 1996,  PDC
changed its name to In-House Rehab Corporation.  The Company is engaged in
providing, on a contract basis, physical, speech and occupational therapy
personnel to long-term care providers.

On September 29, 1995, the Company acquired all of the outstanding stock of
In-House Rehab, Inc. (IHR), incorporated in Kentucky on September 21, 1994, in
exchange for 10,460,000 shares of the Company's authorized, but unissued,
common stock which represents 85% of the Company's common stock outstanding. 
Such shares were issued to the former stockholders of IHR.  The stock exchange
between IHR and the Company was accounted for as a capital transaction similar
to a reverse acquisition except that no goodwill was recorded.  As a result,
IHR is deemed to be the acquirer for accounting purposes and is the accounting
survivor and reporting successor.  Also, there was a change in control of the
Company, whereby all of the Company's officers and directors resigned, and new
officers and directors selected by IHR were elected.  The historical results
of operations presented for the period May 31, 1995 through September 29, 1995
reflect the activities of IHR using IHR's historical cost basis.  The capital
structure of IHR has been retroactively restated in the accompanying
consolidated financial statements and notes thereto to reflect the number of
shares received from the Company.  Pro forma information is not presented
since the transaction is not a business combination.
     
2.   ACQUISITIONS 

On March 1, 1996, IHR acquired substantially all of the assets and liabilities
of Total Rehab South, Inc. (TRS), a Georgia corporation, in a transaction
accounted for as a purchase.  TRS is based in Tampa, Florida and engaged in a
business similar to IHR.  IHR purchased TRS's net assets of $1,237,442,
including a noncompete agreement in the amount of $412,442, for $1,010,601
(including acquisition costs of $10,601).  The purchase price comprised
$510,601 in cash and a note payable in the amount of $500,000 due in four
monthly installments of $125,000.  The excess of the fair value of the net
assets acquired over the purchase price referred to as "negative goodwill,"
aggregated $237,442.  In accordance with the provisions of APB Opinion No. 16,
Business Combinations, the negative goodwill has been offset against the
noncompete agreement.  The following is a summary of the allocation of the
purchase price:

               Accounts receivable           $  900,000
               Noncompete agreement             185,601
               Less liabilities assumed         (75,000)
                                             ----------
               Purchase price                $1,010,601

The results of operations of TRS have been included in the consolidated
results of operations of the Company from the date of acquisition.  TRS was
merged into IHR on May 31, 1996.

The following table presents unaudited pro forma results of operations data as
if the acquisition of TRS described above had occurred on June 1, 1995.

          Revenue                       $9,325,553
          Net income                       220,622
          Net income per share                 .02
                               F-8
<PAGE>
The pro forma information includes adjustments for amortization of the
noncompete agreement and interest expense that would have been incurred to
finance the purchase with related income tax effects.  The pro forma financial
information is not necessarily indicative of the results of operations as they
would have been had the transactions been effected on the assumed dates.

Effective September 1, 1996, the Company acquired all of the stock of Regal
Health Care, Inc. (RHC) for $1.00.  RHC is a Clearwater, Florida based
provider of psych/social services to nursing homes and long-term care
facilities in North Carolina.  Upon acquisition, RHC had assets totaling
approximately $30,000 and liabilities totaling approximately $70,000.  This
new area of service is now being offered in addition to the core group of
rehabilitation services offered by the Company.
     
Effective December 1, 1996, the Company acquired all of the stock of RT Group
Inc. (RTG)  in exchange for $150,000 in cash.  RTG is an Indianapolis, Indiana
based provider of respiratory care to nursing homes and long-term care
facilities in Indiana.  Upon acquisition, RTG had assets totaling
approximately $75,000 and liabilities totaling approximately $49,000.  The
Company is now offering respiratory therapy services along with rehabilitation
and psych/social services in facilities under contract.

Effective December 1, 1996, the Company acquired all of the stock of Daily
Rehabilitation Institute, Inc. (DRI) in exchange for $1.00 and an option to
purchase 30,000 shares of the Company's Common Stock at $2.25 per share.  DRI
is a Jacksonville, Florida based provider of outpatient rehab services in a
clinic setting.  Upon acquisition, DRI had assets totaling approximately
$116,000 and liabilities totaling approximately $124,000.  

Effective January 1, 1997, the Company acquired nine contracts to provide
therapy services to certain long-term care providers from Tri-Therapy
Services, Inc. (TSI) in exchange for $100,000 in cash which included $10,000
for a noncompete agreement.  TSI is a Madison, Mississippi based provider of
physical, occupational and speech therapy care to nursing homes and long-term
care facilities in Arkansas.  

In August 1997, the Company entered into a letter of intent to acquire Gateway
Rehab, Inc. (GRI).  GRI provides therapy services in Illinois and Indiana. 
The Company is presently conducting a due diligence review of GRI.  The
proposed acquisition is contingent on the completion of this review and the
negotiation of a definitive agreement.  Under the terms of the letter of
intent, the acquisition would be accomplished through a stock for stock
exchange.

On September 30, 1997, the Company acquired the assets of Rehab & Therapy
Center of Naples, Inc. (RTCN), an operator of a comprehensive outpatient
rehabilitation facility in southern Florida.  This acquisition was made in
exchange for $20,000 in cash and 2,857 shares of the Company's common stock.

3.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 

PRINCIPLES OF CONSOLIDATION:  The consolidated 1997 financial statements
include the accounts of the Company, its wholly owned subsidiary, IHR, and
IHR s wholly owned subsidiaries, RHC, RTG and DRI.  The consolidated 1996
financial statements include the accounts of the Company, its wholly-owned
subsidiary, IHR, and IHR s wholly-owned subsidiaries, IHS and TRS.  All
significant intercompany accounts and transactions have been eliminated.
                               F-9
<PAGE>
RECLASSIFICATIONS:  Certain amounts in the fiscal 1996 consolidated financial
statements have been reclassified to conform with the fiscal 1997
presentation.

CASH AND EQUIVALENTS:  Cash and equivalents includes highly liquid investments
with an original maturity of three months or less.  The cash management system
provides for daily investment of available balances and the funding of
outstanding checks when presented for payment.  Outstanding but unpresented
checks totaled $121,900 and $207,589 at May 31, 1997 and 1996, respectively. 
Upon presentation for payment, they will be funded through available cash
balances or the revolving credit/demand loan agreement.

DEPRECIATION:  Depreciation is computed using the straight-line method over
the estimated useful lives of the assets.

EXCESS COST OF NET ASSETS ACQUIRED:  Assets and liabilities acquired in
connection with business combinations accounted for under the purchase method 
are recorded at their respective fair values.  Deferred taxes have been
recorded to the extent of the difference between the fair value and the tax
basis of the assets acquired and liabilities assumed.  The excess of the
purchase price over the fair value of the net assets acquired, including the
recognition of applicable deferred taxes, is amortized on a straight line
basis over a period of 20 to 40 years.  The Company performs an annual
assessment of the recoverability of goodwill based on estimated future cash
flows.

AMORTIZATION OF NONCOMPETE AGREEMENTS:  The noncompete agreements are
amortized over a period of one to two years on a straight-line basis.

NET INCOME PER COMMON SHARE:  Net income per common share have been computed
by dividing net income by the weighted average number of common shares
outstanding during the year, giving effect to stock options and warrants.

STOCK-BASED COMPENSATION:  The Company adopted Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation"
during fiscal year 1997, electing to continue accounting for its employee
stock options under the provisions of Accounting Principles Board Opinion
(APB) No. 25, "Accounting for Stock Issued to Employees," accompanied by a
disclosure, if considered material, of the pro forma effects on net income and
net income per share had the expense provisions of the new accounting
principle been applied.

RECENTLY ISSUED ACCOUNTING STANDARDS:  The Company will adopt SFAS No. 128,
"Earnings Per Share" for the year ended May 31, 1998 including interim
periods.  This accounting pronouncement requires the disclosure of basic and
diluted earnings per share.  The Company believes that, upon adoption, diluted
earnings per share will approximate earnings per share as previously reported. 
Because the concept of basic earnings per share does not include the impact of
common stock equivalents, such as stock options, basic earnings per share will
be higher than diluted earnings per share.

In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements.  The provisions of SFAS No. 130 will
be effective for fiscal years beginning after December 15, 1997 and will not
have a material impact on the Company's financial statements.
     
ESTIMATES:  The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
                               F-10
<PAGE>
statements, and the reported amounts of revenues and expenses during the
reporting period.  Actual results could differ from those estimates.
           
4.   MAJOR CUSTOMER

Approximately $8,932,000 and $5,129,800 or 57% and 77% of all revenue for the
year ended May 31, 1997 and 1996, respectively, and approximately $4,519,000
and $1,528,000 or 61% and 49% of the balance of accounts receivable at May 31,
1997 and 1996, respectively, related to one customer who is a stockholder and
related party of the Company, Retirement Care Associates, Inc. (RCA).  The
Company had Contracts for Therapy Program Services with 38 and 26 facilities
either owned, operated or managed by RCA at May 31, 1997 and 1996,
respectively.

RCA has announced that it has entered into a Merger Agreement (Merger) with
Sun Healthcare Group, Inc. (Sun) pursuant to which RCA would be merged into a
subsidiary of Sun.  Sun currently has a subsidiary which provides
rehabilitation services similar to those services offered by the Company.  The
Company is currently working with Sun on a transition schedule for the
transition of the RCA facilities that are serviced by IHR to Sun.  The
transition period is tentatively scheduled to begin approximately thirty (30)
days after the issuance of the proxy relating to the Merger and will conclude
approximately ninety (90) days thereafter.  Contingent upon the completion of
the Merger, Sun has agreed to pay IHR each respective facility's accounts
receivable balance in full on the date of each facility's transition to Sun.

RCA has issued its financial statements for the year ended June 30, 1997 which
includes an unqualified opinion from its auditors.  In the footnotes to the
aforementioned financial statements, it states that RCA "has experienced a
significant net operating loss and at the same time a decline in liquidity,
resulting from the operating loss and a heightened level of investment in new
facilities."  It also states that "closing of the Merger of the Company with
Sun...will provide access to additional sources of liquidity..." and outlines
RCA management's plan if the Sun Merger does not take place.  In RCA's June
30, 1997 Form 10-K, it states that RCA and Sun "have filed with the Securities
and Exchange Commission, on a confidential basis, a preliminary proxy
statement with respect to the Merger..." and it is "anticipated to occur in
the fourth quarter of calendar year 1997."  For further information, see RCA's
Form 10-K and other SEC filings.

RCA continues to be a major customer of the Company.  A delay in regular
periodic payments of accounts receivable from RCA, for any reason, could have
a significantly unfavorable effect on the Company's cash flow from operations. 
The Company has been increasing the number of contracts it has with long-term
care facilities operated by entities other than RCA and does not anticipate
that a loss of the RCA service contract revenues will have a significantly
unfavorable effect on the Company's operations.

In addition to the above, the Company had stock subscriptions receivable of
$58,577 and $54,785 at May 31, 1997 and 1996, respectively, from RCA.  Such
subscriptions receivable bore interest at 6.5-8.5% per annum and were paid in
full on September 9, 1997.

5.   SHORT-TERM BORROWINGS

On June 23, 1995, the Company entered into a revolving line of credit
agreement with a bank which provided for advances up to $500,000, subject to a
borrowing base formula.  On February 20, 1996 and March 15, 1996, the
agreement was amended
                               F-11
<PAGE>
to increase the line by $500,000 for a total line of credit of $1,500,000.  As
of May 31, 1996, advances up to $900,000 were available.  Borrowings bore
interest at the prime rate plus 0.50% to 2.50% payable monthly, based upon the
Company's leverage ratio.  The revolving line of credit was collateralized by
substantially all of the Company's assets.  At May 31, 1996, approximately
$1,207,000 of the revolving credit line was guaranteed by certain of the
stockholders.  All borrowings were due on demand.  Borrowings as of May 31,
1996 were $600,000.  Additionally, the final installment of $125,000 on the
note payable to TRS (see Note 2) was outstanding as of May 31, 1996.
     
On October 29, 1996, the Company terminated its existing $1,500,000 revolving
line of credit agreement and established a new revolving line of credit
agreement with another banking institution. The new revolving line of credit
agreement provided for advances up to $2,500,000, subject to a borrowing base
formula.  Borrowings bear interest at the prime rate plus .25% payable
monthly, based upon the Company's leverage ratio.  On March 3, 1997, this new
facility was amended to increase the line by $2,000,000 for a total line of
credit of $4,500,000.  The evolving line of credit is collateralized by
substantially all of the Company's assets and is due on demand.  This
revolving line of credit terminated on October 2, 1997, at which time the
Company obtained an extension to January 2, 1998.  Borrowings as of May 31,
1997 are $3,525,000.  The amount available under the borrowing base formula at
May 31, 1997 was $361,000.  The interest rate at May 31, 1997 was 8.75%.

6.   ACCRUED EXPENSES

     Accrued expenses at May 31 consist of the following:

                                             1997        1996
                                          ---------   ---------
Compensation                              $ 446,336   $ 187,094
Taxes (other than taxes on income)           26,423      24,155
Other                                        29,285      65,080
                                          ---------   ---------
                                          $ 502,046   $ 276,329
                                          ---------   ---------
7.   INCOME TAXES 

The provision for income taxes on earnings at May 31 consists of the
following:

                                             1997       1996
Current payable:                          ---------   ---------
     Federal                              $ 643,541   $ 231,296
     State                                  164,588      35,804
                                          ---------   ---------
               Total currently payable      808,129     267,100
Deferred:
     Federal                                (64,570)    (20,754)
     State                                  (16,514)     (3,234)
                                          ---------   ---------
               Total deferred               (81,084)    (23,988)
                                          ---------   ---------
                    Total provision       $ 727,045   $ 243,112
                                          ---------   ---------

Deferred taxes are recognized for the future tax consequences of temporary
differences between the amounts reported in the Company's financial statements
and the tax basis of its assets and liabilities.  Primary differences giving
rise to the Company's deferred tax assets and liabilities are as follows:
                               F-12
<PAGE>
                                       1997                    1996
                              ---------------------   ---------------------
                                Assets  Liabilities     Assets  Liabilities
                              --------- -----------   --------- -----------
Noncompete agreements         $  81,162               $  16,889
Accrued vacation                 40,531                  15,097
Depreciation                             $ 18,551                 $ 9,298
Amortization                      1,709     1,079       
                              ---------  --------     ---------   -------
     Total deferred taxes     $ 123,402  $ 19,630     $  31,986   $ 9,298
                              ---------   --------    ---------   -------

Based on the Company's prior earnings and the sufficiency of income available
to be utilized in the carryback years, it is more likely than not that the net
deferred tax assets for 1997 and 1996 will be realized.  Therefore, no
valuation allowance has been established to reduce deferred tax assets for
1997 and 1996.

Reconciliation of the federal statutory rate and the effective income tax rate
at May 31 follows:
                                                1997        1996
                                                -----       -----
Federal statutory rate                          34.0%        34.0%
State income taxes,
     net of federal income tax benefit           5.2          3.3
Other                                            0.6          0.9
                                                ----         ----
     Effective income tax rate                 39.8%        38.2%

8.   COMMITMENTS AND CONTINGENCIES

The Company rents office space, certain office equipment and vehicles under
operating leases expiring at various dates through January 2002.  These leases
generally include one or more renewal options.  Approximate future minimum
rentals on all noncancelable operating leases in effect at May 31, 1997 are as
follows:
                    1998      $163,937
                    1999       125,869
                    2000        94,431
                    2001        91,228
                    2002        57,996

Lease expense was approximately $107,000 and  $69,000 for the years ended May
31, 1997 and 1996, respectively.

The Company is subject to litigation and claims in the ordinary course of
business.  Management believes none of these matters would have a material
adverse effect on the financial condition or results of operations of the
Company.

9.   COMMON STOCK AND STOCK WARRANTS

On March 12, 1996, the Company offered 2,000,000 shares of no par value common
stock in a Private Placement.  As of May 31, 1996, the Company had issued
1,100,000 shares of the no par value common stock for net proceeds of
approximately $1,321,000.  The net proceeds included a stock receivable from
the Private Placement Trustee at May 31, 1996 of $225,000 which was collected in
June 1996.  As of May 31, 1997, the Company had issued an additional 200,000
shares
                               F-13
<PAGE>
of the no par value common stock for net proceeds of approximately $186,000. 
Proceeds from the Private Placement continue to be used for future expansion.

Investors who purchased at least eight units (each unit consists of 20,000
shares costing $25,000) also received warrants to purchase 20,000 shares of
common stock for each unit purchased.  The warrants are exercisable at $2.50
per share and will expire three years from the date of the Private Placement,
March 12, 1999.  In conjunction with the Private Placement 520,000 warrants
have been issued as of May 31, 1997.

10.  STOCK OPTIONS

In October 1996, the Company's Board of Directors adopted the Company's 1996
Stock Option Plan (the 1996 Plan).  The 1996 Plan allows the Board to grant
stock options from time to time to employees, officers and directors of the
Company and consultants to the Company.  The Board has the power to determine
at the time the option is granted whether the option will be an Incentive
Stock Option  (an option which qualifies under Section 422 of the Internal
Revenue Code of 1986) or an option which is not an Incentive Stock Option. 
However, Incentive Stock Options will only be granted to persons who are key
employees of the Company. 

Vesting provisions are determined by the Board at the time options are
granted.  The total number of shares of Common Stock subject to options under
the 1996 Plan
is not to exceed 1,000,000.  During the year ended May 31, 1997, the Company
granted 320,000 1996 Plan options and 439,000 non-plan options as follows:

                                                  Weighted
                              1996      Non-1996  Average
                              Plan      Plan      Exercise
                              Shares    Shares    Price
                              -------   --------  --------
Outstanding at May 31, 1996         -          -         -
     Granted                  320,000   439,000   $   1.84
     Exercised                      -        -          -
     Canceled                       -   (29,000)      1.75
                              -------   -------   --------
Outstanding at May 31, 1997   320,000   410,000   $   1.84
                              -------  -------   --------
          
These options are exercisable for a period of three to five years from the
date of grant.  The option price equaled the market price of a share at the
date the options were granted.  As of May 31, 1997, no options have been
exercised and the weighted average remaining contractual life for the
outstanding options is 2.5 years.  There were 679,500 options which were
exercisable at May 31, 1997, with a weighted average exercise price of $2.11.

The Company's common stock has been quoted on the OTC Bulletin Board since
December 1995 and the Company's Board of Directors have based their
determination of the fair market value of the common stock on the closing bid
quotations on the OTC Bulletin Board.

As permitted by SFAS No. 123, the Company follows the provisions of APB
Opinion No. 25 and related Interpretations in accounting for its stock option
grants.  Compensation  cost has not been recognized for options issued under
the plan.  If compensation cost had been determined based on the fair value of
the awards at the grant date, net income and earnings per common share would
have been $941,963 and $.07, respectively.
                               F-14
<PAGE>
The weighted average fair value of options was $.42 as of May 31, 1997.  Fair
value estimates were determined using the Black-Scholes valuation method,
using an expected term ranging from one and one half years to two and one half
years, a risk-free interest rate ranging from 5.60%   6.08%, and stock price
volatility of 32.85%.  The expected turnover was not considered as forfeitures
will be considered in future calculations as they occur.

11.  MULTI-EMPLOYER 401(k) PLAN

IHR is one of four companies that participate in a multi-employer 401(k) plan
which was created in 1996.  All employees are eligible to participate on the
first day of the month following their date of hire.  The Company made no
contributions to the plan during 1997 or 1996.

12.  RELATED PARTY TRANSACTIONS

The Company provides services to a major customer who is a stockholder and a
related party.  See Note 4 for further discussion.

Two stockholders, who are also employees of the Company, owe approximately
$18,000 and $50,000 in total to the Company for advances as of May 31, 1997
and 1996, respectively.  Additionally, a company owned by a stockholder of the
Company owed approximately $11,000 and $51,000 for advances as of May 31, 1997
and 1996, respectively.

13.  SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
                              Quarter Ended,
                  -----------------------------------------------------------
                      Aug.31        Nov.30          Feb.28        May 31         Year
        1997      -----------------------------------------------------------
<S>                <C>           <C>             <C>            <C>            <C>
Net revenue         $3,434,882     $3,595,669     $4,130,999     $4,476,303     $15,637,853
Gross profit         1,074,816        990,592      1,161,324      1,087,292       4,314,024
Net income             319,010        256,689        334,788        186,945       1,097,432
Net income
     per share            0.02           0.02           0.02           0.02            0.08

                              Quarter Ended,
                  -----------------------------------------------------------
                       Aug.31        Nov.30          Feb.28        May 31        Year
       1996      -----------------------------------------------------------
Net revenue         $1,051,806     $1,194,837     $1,255,310     $3,121,457     $ 6,623,410
Gross profit           314,714        313,229        491,535        762,636       1,882,114
Net income              94,582         58,890        113,915        126,876         394,263
Net income
     per share            0.01           0.01           0.01           0.01            0.04
                              F-15
<PAGE>
                                SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                    IN-HOUSE REHAB CORPORATION

Dated:  October 28, 1997             By:/s/ David V. Hall                    
                                        David V. Hall, President

     Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
company and in the capacities and on the dates indicated.
 
    SIGNATURE                    CAPACITY                  DATE
    ---------                    --------                  ----

/s/ David V. Hall           President (Principal        October 28, 1997
David V. Hall               Executive Officer)
                            and Director

/s/ Robert J. Babine        Chief Financial Officer,    October 28, 1997
Robert J. Babine            Treasurer (Principal
                            Financial and Accounting
                            Officer) and Director

/s/ Chris Brogdon           Director                    October 28, 1997
Chris Brogdon

/s/ Mark P. Clein           Director                    October 28, 1997
Mark P. Clein

/s/ Timothy M. Graven       Director                    October 28, 1997
Timothy M. Graven

</TABLE>