The paper describes an on-going research aimed at creating the low cost virtual reality based system for physical rehabilitation of upper limb. The system is designed to assist in rehabilitation involving various kinds of limb movement, including precise hand movements and movement of the whole extremity. It can be used at patient’s home as a telerehabilitation device. It was decided to use the system with a motion tracking (Razer Hydra) and two alternative display devices: head mounted displays (Sony HMZ-T1) and a LCD display with stereovision glasses (nVidia 3DVision). The custom software was developed to create the virtual reality environment and perform rehabilitation exercises. Three sample rehabilitation games were created to perform assessment of the rehabilitation system. In the preliminary research the usability of the system was assessed by one patient. He was able to use the system for rehabilitation exercises, however some problems with Sony HMZ-T1 usability were spotted. During the next stages of the research extended assessment of the system’s usability and assessment of system’s efficiency are planned.