<PAGE>   1
                                    FORM 10-Q

                       SECURITIES AND EXCHANGE COMMISSION
                              Washington D.C 20549

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

     For the quarterly period ended June 30, 1998

                                       OR

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 
     EXCHANGE ACT OF 1934

Commission File Number 333-43549

                        EXTENDICARE HEALTH SERVICES, INC.
             (Exact Name of Registrant as Specified in its Charter)

<TABLE>
<S>                              <C>                            <C>       
       DELAWARE                              8051                    98-0066268
(State or other Jurisdiction of   (Primary Standard Industrial      (I.R.S. Employer
Incorporation or Organization)     Classification Code Number)    Identification Number)
</TABLE>

                            105 WEST MICHIGAN STREET
                               MILWAUKEE, WI 53203
              (Address of Principal Executive Offices and Zip Code)

                                 (414) 271-9696
              (Registrant's telephone number, including area code)
                       SEE TABLE OF ADDITIONAL REGISTRANTS

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  ____

<PAGE>   2

                        EXTENDICARE HEALTH SERVICES, INC.
                                      INDEX






<TABLE>
<CAPTION>
PART I.                   FINANCIAL INFORMATION
     
                                                                                    Page
                                                                                    ----
<S>                      <C>                                                       <C>
Item 1                    Condensed Financial Statements

                          Consolidated Statements of Earnings
                          for the three months ended
                          June 30, 1998 and 1997 and
                          for the six months ended
                          June 30, 1998 and 1997                                       3
                          
                          Consolidated Balance Sheets
                          June 30, 1998 and December 31, 1997                          4
                          
                          Consolidated Statements of Cash Flows
                          for the six months ended
                          June 30, 1998 and 1997                                       5

                          Notes to Consolidated Financial Statements                   7


Item 2                    Management's Discussion and Analysis                        10

Item 3                    Quantitative and Qualitative Disclosures
                          about Market Risk                                           20

PART II.                  OTHER INFORMATION

Item 1                    Legal Proceedings                                           21

Item 2                    Change in Securities                                        21

Item 3                    Defaults Upon Senior Securities                             21

Item 4                    Submission of Matters to a
                          Vote of Security Holders                                    21

Item 5                    Other Information                                           21

Item 6                    Exhibits and Reports on Form 8-k                            22

SIGNATURES                                                                            23
</TABLE>

<PAGE>   3
                                     PART I
                              FINANCIAL INFORMATION

Item 1.  Financial Statements

                        EXTENDICARE HEALTH SERVICES, INC.

                     CONSOLIDATED STATEMENTS OF NET EARNINGS
        FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
                             (Dollars in Thousands)
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                          Three months ended                            Six months ended
                                                               June 30                                       June 30
                                                 ---------------------------------              --------------------------------
                                                    1998                    1997                   1998                   1997
                                                 ---------               ---------              ---------              ---------
REVENUES:
<S>                                            <C>                     <C>                    <C>                    <C>      
  Routine care and assisted living               $ 185,757               $ 137,097              $ 368,157              $ 272,224
  Medical specialty                                103,520                  82,865                211,592                161,583
  Other                                              1,857                   2,249                  3,757                  4,412
                                                 ---------               ---------              ---------              ---------
                                                   291,134                 222,211                583,506                438,219
COSTS AND EXPENSES:
  Operating                                        240,762                 180,536                485,009                355,813
  General and administrative                        11,322                   9,461                 23,498                 18,613
  Lease costs                                        3,726                   2,331                  7,432                  4,572
  Depreciation and amortization                     13,844                   8,414                 27,458                 16,401
  Interest expense                                  15,722                   4,917                 31,054                  9,610
  Interest income                                     (248)                   (495)                  (951)                  (738)
                                                 ---------               ---------              ---------              ---------
                                                   285,128                 205,164                573,500                404,271
                                                 ---------               ---------              ---------              ---------
Earnings from operations                             6,006                  17,047                 10,006                 33,948

PROVISION FOR INCOME TAXES                           3,375                   6,528                  5,255                 13,070
                                                 ---------               ---------              ---------              ---------
  Earnings before minority interests                 2,631                  10,519                  4,751                 20,878

MINORITY INTERESTS                                    (330)                   (211)                  (543)                  (402)
                                                 ---------               ---------              ---------              ---------
    Net earnings                                 $   2,301               $  10,308              $   4,208               $ 20,476
                                                 =========               =========              =========               ========

PER COMMON SHARE:
  Net earnings per common share                  $       2               $      11              $       4                   $ 22
                                                 =========               =========              =========               ========
</TABLE>

   The accompanying notes are an integral part of these financial statements.


<PAGE>   4

                        EXTENDICARE HEALTH SERVICES, INC.

                           CONSOLIDATED BALANCE SHEETS
                       JUNE 30, 1998 AND DECEMBER 31, 1997
                             (Dollars in Thousands)


<TABLE>
<CAPTION>
                            ASSETS                                    June 30, 1998     December 31, 1997
                            ------                                    -------------     -----------------
                                                                       (Unaudited)
<S>                                                                    <C>                 <C>     
CURRENT ASSETS:
  Cash and cash equivalents                                               $    6,559            $    1,418
  Accounts receivable, less
    reserves of $19,015 and $18,926                                          228,535               225,105
  Inventories, supplies and prepaid expenses                                  17,814                18,879
  Income taxes receivable                                                      8,012                 8,270
  Deferred state income taxes                                                  3,138                 2,579
  Debt service trust funds                                                       303                   493
  Due from shareholder -
    Federal income taxes receivable                                             --                   2,970
    Deferred federal income taxes                                             16,039                13,636
                                                                          ----------            ----------
    Total current assets                                                     280,400               273,350

PROPERTY AND EQUIPMENT, NET                                                  698,900               688,169
GOODWILL, NET                                                                171,016               170,419
IDENTIFIABLE INTANGIBLE ASSETS, NET                                           66,721                66,855
OTHER ASSETS                                                                  33,013                30,456
                                                                          ----------            ----------
LIABILITIES AND SHAREHOLDER'S EQUITY                                      $1,250,050            $1,229,249
                                                                          ==========            ==========
CURRENT LIABILITIES:
  Bank indebtedness                                                       $     --              $      376
  Accounts payable, accrued liabilities and due to shareholder               157,307               147,748
  Current maturities of long-term debt                                        32,441                30,042
                                                                          ----------            ----------
    Total current liabilities                                                189,748               178,166

LONG-TERM DEBT                                                               684,513               683,282

OTHER LONG-TERM LIABILITIES                                                   15,908                11,877

DUE TO SHAREHOLDER AND AFFILIATES
  Deferred federal income taxes and other                                     60,684                60,883

DEFERRED STATE INCOME TAXES                                                   10,884                10,955

MINORITY INTERESTS                                                             2,535                 2,314

SHAREHOLDER'S EQUITY:
  Common stock, $1 par value, 1,000 shares authorized,
    947 shares issued and outstanding                                              1                     1
  Additional paid-in capital                                                 206,179               206,381
  Retained earnings                                                           79,598                75,390
                                                                          ----------            ----------
    Total shareholder's equity                                               285,778               281,772
                                                                          ----------            ----------
                                                                          $1,250,050            $1,229,249
                                                                          ==========            ==========
</TABLE>

   The accompanying notes are an integral part of these financial statements.



<PAGE>   5
                        EXTENDICARE HEALTH SERVICES, INC.

                    CONSOLIDATED STATEMENTS OF CASH FLOWS
                 FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
                             (Dollars in Thousands)
                                   (Unaudited)
<TABLE>
<CAPTION>


                                                                           Six months ended 
                                                                               June 30
                                                                   --------------------------------  
                                                                        1998               1997
                                                                   -----------           ----------
<S>                                                               <C>                   <C>
OPERATING ACTIVITIES:
  Net earnings                                                       $  4,208             $ 20,476
  Adjustments to reconcile net income to net cash
    provided from operating activities:
    Depreciation and amortization                                      28,921               16,402
    Provision for losses on accounts receivable                         4,932                4,247
    Deferred income taxes                                              (3,231)              (1,773)
    Minority interests                                                    543                  402
                                                                     --------             --------
                                                                       35,373               39,754
  Changes in assets and liabilities:
     Accounts receivable                                               (8,386)             (28,434)
     Inventories, supplies and prepaid expenses                         1,120                  (40)
     Debt service trust funds                                             190                 (202)
     Bank indebtedness                                                   (376)                 238
     Accounts payable and accrued liabilities                          12,296                6,437
     Income taxes receivable                                              257                  519
     Minority Interests                                                  --                     20
     Other long-term liabilities                                        1,911                1,558
                                                                     --------             --------
       Cash provided from operating activities                         42,385               19,850

INVESTING ACTIVITIES:
   Payment for acquisitions                                            (5,276)             (28,227)
   Payments for purchase of property and equipment                    (33,579)             (27,126)
   Proceeds from sale of property and equipment                         6,867                2,225
   Changes in other non-current assets                                 (4,884)              (3,717)
                                                                     --------             --------
       Cash used for investing activities                             (36,872)             (56,845)

FINANCING ACTIVITIES:
   Proceeds from issuance of short-term borrowings                       --                 10,779
   Proceeds from issuance of long-term debt                            19,100               30,676
   Payments of long-term debt                                         (19,150)              (4,151)
   Distribution of minority interest                                     (322)                --
                                                                     --------             --------

       Cash (used for) provided from financing activities                (372)              37,304
                                                                     --------             --------

INCREASE IN CASH AND CASH EQUIVALENTS                                   5,141                  309

CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD                           1,418                  215
                                                                     --------             --------

CASH AND CASH EQUIVALENTS END OF PERIOD                              $  6,559             $    524
                                                                     ========             ========
</TABLE>

   The accompanying notes are an integral part of these financial statements.

<PAGE>   6
SUPPLEMENTAL CASH FLOW INFORMATION:

INCOME TAXES

     The company paid state income taxes of $1,746 and $1,550 during the six
month periods ended June 30, 1998 and June 30, 1997, respectively. The Company
also made payments for Federal income taxes to its U.S. parent of $140 and
$9,825 for the period ended June 30, 1998 and June 30, 1997, respectively.

INTEREST

     The company paid interest of $28,875 and $9,593 during the six month
periods ended June 30, 1998 and June 30, 1997, respectively.
<PAGE>   7




                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                            (Dollars in Thousands)

1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  

ORGANIZATION

         The accompanying financial statements reflect the operations of
Extendicare Health Services, Inc. ("Extendicare" or the "Company"). Extendicare,
a Delaware corporation is a wholly owned subsidiary of Extendicare Inc.

BASIS OF PRESENTATION

         The accompanying financial statements include the accounts of the
Company and its majority-owned subsidiaries. All transactions between
Extendicare and its majority-owned subsidiaries have been eliminated.

         The financial information presented as of any date other than December
31 has been prepared from the books and record without audit. The accompanying
consolidated financial statements have been prepared in accordance with the
instructions to Form 10-Q and do not include all of the information and the
footnotes required by generally accepted accounting principles for complete
statements. In the opinion of management, all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of such
financial statements, have been included.

         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
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

         These consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes thereto for the year ended
December 31, 1997 contained in the Company's 1997 Annual Report.

2-RECENTLY ISSSUED ACCOUNTING STANDARD

         In June, 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 133 "Accounting for
Derivative Instruments and Hedging Activities". SFAS No. 133 is effective for
all fiscal quarters of fiscal years beginning after June 15, 1999. SFAS No. 133
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. SFAS No. 133 is not expected to significantly impact the
Company's reporting and disclosures.

<PAGE>   8

3-COMMITMENTS AND CONTINGENCIES

CAPITAL EXPENDITURES

The Company as of June 30, 1998 had capital expenditure purchase commitments
outstanding of approximately $10,166.

LITIGATION

The Company periodically is a defendant in actions brought against it in
connection with its operations. Management believes, on the basis of information
furnished by legal counsel, that none of these actions will have a material
effect on the financial position or results of operations of the Company.

YEAR 2000

The Company has conducted a review of its computer systems and its third party
systems to identify those systems that could be affected by the "Year 2000"
issue. The Year 2000 issue is the result of computer systems being written using
two digits rather than four to define the applicable year. Any of the Company's
programs or programs of third party providers that have time-sensitive software
may recognize a date using "00" as the year 1900 rather than the year 2000. If
not corrected, Year 2000 issues could result in a major system failure or
modifications and material costs to the Company. As a result of the Company's
review of its proprietary systems, the Company has implemented a plan and begun
the programming necessary to enable such systems to properly recognize the year
2000 in such applications. The Company's results of its reviews of third-party
software has identified those systems with the Year 2000 issue. The Company has
received assurances from such third-party software providers that plans are in
process to achieve compliance with year 2000 processing requirements or, as part
of the continuing evaluation and development of enhanced systems, will be
converting certain of those systems to systems which will be compliant with the
year 2000 requirement. The Company presently believes that, with modifications
to existing software and converting to new software, the Year 2000 issue will
not pose significant operational problems to the Company's computer systems as
so modified and converted, nor will compliance with the Year 2000 issue result
in material cost to the Company. However, if such modifications and conversions
are not completed in a timely manner the Year 2000 issue may have a material
adverse impact on the operations of the Company.

INTEREST RATE SWAP AGREEMENT

The Company entered into five interest rate swap agreements (each $50,000 of
notional principal) with three banks which effectively change the interest 
rates on LIBOR based borrowings under the Credit Facility to fixed rates 
ranging from 5.53% to 5.84% plus applicable margins, for periods over three to
seven years. The Company may be exposed to credit  

<PAGE>   9

loss in the event of non-performance by the banks under the swap agreements but 
does not anticipate such non-performance.

4-SUBSEQUENT EVENT

         On July 30, 1998, the Company announced a definitive agreement to sell
its pharmacy operations to Omnicare, Inc. for $250 million cash, 125,000 common
shares of Omnicare, and warrants to purchase 1.5 million common shares of
Omnicare at $48.00 per share. The transaction is expected to close no later than
September 30, 1998.

         Pharmacy revenues from non-affiliated beds for the six months ended 
June 30, 1998 were $61.8 million, accounting for 10.6% of the Company's total 
revenue.

<PAGE>   10

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND   
RESULTS OF OPERATIONS

         The Company is one of the largest providers of long-term care and
related services in the United States. The Company operated 200 nursing (21,373
operational beds) and 41 assisted living and retirement facilities (1,650 units)
at June 30, 1998. The Company's facilities are located in fifteen states. The
Company also operates an institutional pharmacy business, which at June 30, 1998
serviced approximately 52,000 beds in regional markets throughout the United
States.

         The Company's revenues are derived through the provision of health care
services in its network of facilities, including long-term care services such as
skilled nursing care, assisted living care and related support services and
medical specialty services such as subacute care and rehabilitative therapy,
pharmacy supplies and services and medical equipment, supplies and services. The
percentage of the Company's revenue derived from routine care and assisted
living care has declined from 66.7% in 1995 to 63.1% at June 30, 1998, while the
percentage of revenue derived from medical specialty services has increased from
32.4% to 36.3%, respectively. The increase in the percentage of revenue
attributable to medical specialty services reflects the Company's focus on
expanding its provision of higher revenue specialized subacute care services.

         The Company receives payment for its services and products from Federal
(Medicare) and State (Medicaid) funded cost reimbursement programs, as well as
from private payors. The private pay classification includes payments from
individuals, commercial insurers, health maintenance organizations, and other
fee-based payment sources, including Blue Cross Associations and the Veterans
Administration. The following table sets forth the Company's private pay,
Medicare and Medicaid sources of revenue by percentage of total revenue:

                                 THREE MONTHS                    SIX MONTHS
                                     ENDED                         ENDED
                                    JUNE 30                       JUNE 30
                                --------------               -----------------
                                1998      1997               1998         1997
                                ----      ----               ----         ----
          Private Pay            36%       32%                36%          32%
          Medicare               27        33                 28           32 
          Medicaid               37        35                 36           36

         Funds received by the Company under the Medicare and Medicaid programs
are subject to audit with respect to the application of various payment formulas
and such audits can result in retroactive adjustments to revenues. The Company
is reimbursed under the Medicare program for its direct costs plus an allocation
of indirect costs up to a regional limit. The costs of care for Medicare
patients receiving specialty medical services is often expected to exceed the
regional reimbursement limits. The Company in such cases files for routine cost
limit ("RCL") exceptions in an attempt to recover such additional costs. 

<PAGE>   11

There can be no assurance that the Company will be able to recover such excess
costs under pending or future exception requests. In addition, on-going efforts
by third-party payors to contain healthcare costs by limiting reimbursement
rates, increasing case management reviews and negotiating reduced contract
pricing could affect the Company's future revenues and profitability. Most
recently, the Balanced Budget Act requires the establishment of a prospective
payment system ("PPS") for Medicare residents in skilled nursing facilities
under which facilities will be paid a federal per diem rate for virtually all
covered nursing facility services in lieu of the current cost-based
reimbursement rate. This change will reward efficient providers and penalize
those that are inefficient. The law contains numerous other provisions that will
adversely affect payments to providers.

         The following is a summary of acquisitions and expansion through
construction made by the Company during the six months ended June 30, 1998 and
the year ended December 31, 1997 as part of its growth strategy:

         ACQUISITIONS
         
         -        The Company acquired two nursing facilities (174 operational 
                  beds) for $8.2 million, including the assumption of $2.7
                  million of debt and the assets of two medical specialty
                  services related businesses for $0.7 million during the first
                  six months of 1998. The Company also added one nursing
                  facility (76 beds) through an operating lease in 1998.

         -        The Company, during 1997, acquired all of the outstanding 
                  stock of Arbor Health Care Company ("Arbor"), a company
                  engaged in operating 31 nursing facilities (3,696 operational
                  beds) for $448.8 million, including the assumption of $109.7
                  million of Arbor's debt. Seven of the Arbor facilities (802
                  operational beds) are leased under long-term operating leases.
                  The acquisition of Arbor also included Arbor's institutional
                  pharmacies and outpatient rehabilitation businesses.

         -        The Company also acquired in 1997 nine facilities (890
                  operational beds) at purchase prices totaling $41.7 million
                  which included two previously leased facilities. Five of the
                  facilities were acquired from Medi-Management for a purchase
                  price of approximately $24 million and the assumption of $9.2
                  million of debt. The Company also acquired the assets of seven
                  medical specialty services related businesses for a total of
                  $9.3 million during the year.

         CONSTRUCTION
         

<PAGE>   12

         -        The Company completed construction of two new nursing
                  facilities (196 operational beds), three assisted living
                  facilities (145 units), and two therapy additions through the
                  first six months of 1998.

         -        The Company completed construction of one new nursing facility
                  (74 operational beds), three nursing facility additions (79
                  operational beds), seven assisted living facilities (330
                  units), two assisted living facility additions (18 units) and
                  seven therapy additions during 1997.

         The Company also sold one nursing facility (179 operational beds) for
$2.0 million during 1997. The price for the facility approximated its net
book value.

RESULTS OF OPERATIONS

         The following table sets forth details of revenues and earnings as a
percentage of total revenues:

<TABLE>
<CAPTION>
                                                      THREE MONTHS                   SIX MONTHS
                                                          ENDED                         ENDED
                                                          JUNE 30                      JUNE 30
                                                   ------------------           -------------------                              
                                                    1998        1997             1998         1997
                                                   ------      ------           ------       ------                              
     <S>                                           <C>          <C>             <C>          <C>  
     Revenues
     Routine care and assisted living                63.8%        61.7%           63.1%        62.1%
     Medical specialty services                      35.6         37.3            36.3         36.9
     Other                                            0.6          1.0             0.6          1.0
                                                    -----        -----           -----        -----
                                                    100.0        100.0           100.0        100.0

     Operating and general and administrative costs  86.6         85.5            87.2         85.4
     Lease costs and depreciation and amortization    6.0          4.8             6.0          4.8
     Interest, net                                    5.3          2.0             5.2          2.0
     Earnings before taxes                            2.1          7.7             1.6          7.8
     Income taxes                                     1.2          2.9             0.9          3.0
     Net Earnings                                     0.8          4.6             0.7          4.7
</TABLE>

THREE MONTHS ENDED JUNE 30, 1998 COMPARED WITH THREE MONTHS ENDED JUNE 30, 1997

         Revenues in the three months ended June 30, 1998 were $291.1 million,
representing an increase of $68.9 million (31.0%) from $222.2 million in the
three months ended June 30, 1997. The majority of the Company's revenue was
derived from routine skilled nursing facility revenues (61.9%). 

<PAGE>   13

The increase in revenues of $68.9 million included increases in routine care and
assisted living revenues of $48.7 million, medical specialty services revenues
of $20.6 million, partially offset by a decrease in other revenues of $0.4
million.

         The increase in routine care and assisted living facility revenues of
$48.7 million included $47.6 million from the opening of newly constructed
facilities, the acquisition of five facilities effective June 1, 1997, two
facilities effective September 1, 1997, Arbor's thirty-one facilities effective
November 26, 1997, one facility effective January 31, 1998, one facility
effective April 1, 1998, and the lease of a facility effective April, 1998,
partially offset by a divestiture. Revenues from facilities which the Company
operated during each of 1998 and 1997 ("same facilities") increased $1.1 million
when comparing periods. Same facility revenues increased between periods due to
rate increases. Partially offsetting the rate increases was a decline in
occupancy between periods. Same facility occupancy, defined as patient days for
nursing facilities and units occupied for assisted living facilities, declined
1.7%. Average percentage occupancy for same facilities, based on beds/ units in
operation, was 87.2% in the second quarter of 1998 compared with 87.9% in the
comparable period of 1997. Revenues also declined due to a $2.9 million decrease
in adjustments related to prior years' estimated settlement amounts when
comparing periods.

          The increase in medical specialty services revenues of $20.6 million
(24.9%) included $28.3 million from acquisitions during 1997 and 1998, net of
divestitures. The remaining decrease of $7.7 million is due to a number of
factors. Restorative therapy revenues decreased approximately $4.9 million due
to a 10.4% decline in Medicare occupancy and $1.2 million due to a 10% decline
in Medicare Part B rates. Restorative therapy also decreased $4.4 million
primarily due to conversion to salary equivalency. Reduction in oxygen rates by
25% resulted in a decrease in medical specialty services revenues of $0.4
million. Other medical specialty services revenues decreased $0.8 million
between periods. These decreases were partially offset by an increase in
pharmacy revenues of approximately $4.0 million due to volume and price
changes.

          Pharmacy operations, on a same store basis, serviced an average of
34,245 nursing facility beds during the three months ended June 30, 1998
compared to 29,967 beds during the comparable period of 1997. Pharmacy
operations were servicing approximately 52,000 beds at June 30, 1998, including
17,300 beds added as a result of the acquisition of Arbor in November 1997.

OPERATING AND GENERAL AND ADMINISTRATIVE COSTS

          Operating and general and administrative costs increased $62.1 million
or 32.7% between periods. The increase included increases in costs relating to
acquisitions and newly constructed facilities, net of divestitures, of
approximately $64.5 million in 1998. The remaining decrease in operating and

<PAGE>   14


general and administrative costs of $2.4 million (1.3%) included an increase in
wage-related costs of $5.9 million to attract and retain qualified personnel.
The remaining decrease, excluding wage-related costs, was decreased medical
specialty services costs of $7.7 million, principally from decreased therapy
activity and a $0.6 million decrease related to other routine care and general
and administrative costs.

LEASE COSTS AND DEPRECIATION AND AMORTIZATION

          Total lease costs and depreciation and amortization increased $6.8
million (63.5%) to $17.6 million in the three months ended June 30, 1998
compared with the three months ended June 30, 1997. The increase includes $5.8
million as a result of the Arbor acquisition. The remaining increase is
principally due to the overall increase in the number of facilities operated by
the Company and the construction of additions to the Company's facilities.

INTEREST

          Net interest expense increased $11.1 million to $15.5 million in the
three months ended June 30, 1998 compared with $4.4 million in the comparable
period in 1997. The increase is due to the effect of an increase in the average
debt level to $721.2 million during the second quarter of 1998 from $254.4
million during the second quarter of 1997 resulting from the Company's
acquisitions and capital expenditures and an increase in the weighted average
interest rate of all long-term debt to approximately 8.72% during the second
quarter of 1998 compared to approximately 7.73% during the second quarter of
1997.

START-UP LOSSES

          The Company has absorbed pre-tax start-up losses associated with newly
constructed facilities in the second quarter of 1998 of $1.4 million compared to
$0.6 million in the second quarter of 1997. The $0.8 million increase when
comparing periods is due to the timing of facility openings and number of
facilities in start-up in 1998 versus 1997.

INCOME TAXES

          Income taxes in the three months ended June 30, 1998 decreased to $3.4
million from $6.5 million in the comparable period in 1997 as a result of
decreased pre-tax earnings. The Company's effective tax rates were 56.2% in the
three months ended June 30, 1998 and 38.3% in the three months ended June 30,
1997. The increase in the Company's effective tax rate between periods is
primarily due to non-deductible goodwill amortization associated with the Arbor
acquisition. 
<PAGE>   15

NET EARNINGS

         Net earnings in the three months ended June 30, 1998 were $2.3 million,
a decrease of $8.0 million (77.7%) over net earnings of $10.3 million in the
comparable period in 1997.

SIX MONTHS ENDED JUNE 30, 1998 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1997

         Revenues in the six months ended June 30, 1998 were $583.5 million,
representing an increase of $145.3 million (33.2%) from $438.2 million in the
six months ended June 30, 1997. The majority of the Company's revenue was
derived from routine skilled nursing facility revenues (61.2%). The increase in
revenues of $145.3 million included increases in routine care and assisted
living revenues of $95.9 million and medical specialty services revenues of
$50.0 million partially offset by a decrease in other revenues of $0.6 million.

         The increase in routine care and assisted living facility revenues of
$95.9 million included $95.2 million from the opening of newly constructed
facilities, the acquisition of facilities in 1997 and 1998  and the lease of a
facility effective April, 1998, partially offset by a divestiture. Revenues
from same facilities  increased $0.7 million when comparing periods. Same
facility revenues increased between periods due to rate increases. Partially
offsetting the rate increases was a decline in occupancy between periods. Same
facility occupancy, defined as patient days for nursing facilities and units
occupied for assisted living facilities, declined 1.5%. Average percentage
occupancy for same facilities, based on beds/units in operation, was 87.5% in
the first six months of 1998 compared with 88.2% in the comparable period of
1997. Revenues also declined due to a $5.5 million decrease in adjustments
related to prior years' estimated settlement amounts when comparing periods.

          The increase in medical specialty services revenues of $50.0 million
(31.0%) included $55.8 million from acquisitions during 1997 and 1998, net of
divestitures. The remaining decrease of $5.8 million is due to a number of
factors. Restoration therapy revenue decreased approximately $8.3 million due to
a 9.1% decline in Medicare occupancy, $1.8 million due to a 10% decline in
Medicare Part B rates and $4.4 million due to a conversion to salary
equivalency. Reduction in oxygen rates by 25% resulted in a decrease in medical
specialty revenues of $0.8 million. These decreases were offset by a
$9.5 million increase primarily attributable to an increase in pharmacy 
revenues due to volume and price increases.

          Pharmacy operations, on a same store basis, serviced an average of
33,351 nursing facility beds 



<PAGE>   16

during the six months ended June 30, 1998 compared to 30,449 beds during the
comparable period of 1997. Pharmacy operations were servicing approximately
52,000 beds at June 30, 1998, including 17,300 beds added as a result of the
acquisition of Arbor in November 1997.

OPERATING AND GENERAL AND ADMINISTRATIVE COSTS

          Operating and general and administrative costs increased $134.1
million or 35.8% between periods. The increase included increases in costs
relating to acquisitions and newly constructed facilities, net of divestitures,
of approximately $128.7 million in 1998. The remaining increase in operating and
general and administrative costs of $5.4 million (1.5%) included wage-related
increased costs of $13.1 million to attract and retain qualified personnel. This
increase was partially offset by decreased medical specialty services costs of
$6.8 million, principally due to decreased therapy activity and a $0.8 million
decrease related to other routine care and general and administrative costs.

LEASE COSTS AND DEPRECIATION AND AMORTIZATION

         Total lease costs and depreciation and amortization increased $13.9
million (66.4%) to $34.9 million in the six months ended June 30, 1998 compared
with the six months ended June 30, 1997. The increase includes $11.7 million as
a result of the Arbor acquisition. The remaining increase is principally due to
the overall increase in the number of facilities operated by the Company and the
construction of additions to the Company's facilities.

INTEREST

          Net interest expense increased $21.2 million to $30.1 million in the
six months ended June 30, 1998 compared with $8.9 million in the comparable
period in 1997. The increase is due to the effect of an increase in the average
debt level to $719.3 million during the first six months of 1998 from $244.6
million during the first six months of 1997 resulting from the Company's
acquisitions and capital expenditures and an increase in the weighted average
interest rate of all long-term debt to approximately 8.63% in the first six
months of 1998 compared to approximately 7.86% in the first six months of 1997.
The increase was partially offset by favorable investment earnings in the first
six months of 1998 compared to the first six months of 1997.

START-UP LOSSES

          The Company has absorbed pre-tax start-up losses associated with newly
constructed facilities in the first six months of 1998 of $3.3 million
compared to $1.1 million in the first six months of 1997. The $2.2 million
increase when comparing periods is due to the timing of facility openings and
number of facilities in start-up in 1998 versus 1997.


<PAGE>   17

INCOME TAXES

          Income taxes in the six months ended June 30, 1998 decreased to $5.3
million from $13.1 million in the comparable period in 1997 as a result of
decreased pre-tax earnings. The Company's effective tax rates were 52.5% in the
first six months of 1998 and 38.5% in the first six months of 1997. The increase
in the Company's effective tax rate between periods is primarily due to
non-deductible goodwill amortization associated with the Arbor acquisition.

NET EARNINGS

         Net earnings in the six months ended June 30, 1998 were $4.2 million, a
decrease of $16.3 million (79.4%) over net earnings of $20.5 million in the
comparable period in 1997.

LIQUIDITY AND CAPITAL RESOURCES OF THE COMPANY

          The Company's acquisition of Arbor in November 1997 resulted in a
substantial increase in its indebtedness and interest expense. The Company
arranged for new credit facilities totaling $800 million to finance the
acquisition and to refinance existing indebtedness of both Arbor and the
Company. The new credit facilities consisted of a $200 million Revolving Credit
Facility, a $200 million Tranche A Term Loan Facility, a $200 million Tranche B
Term Loan Facility and a $200 million Tranche C Loan Facility. The Revolving
Credit Facility and the Tranche A Term Loan Facility have a term of six years.
The Tranche B Term Loan Facility has a term of seven years. The Tranche C Loan
Facility was utilized to complete the acquisition of Arbor and was repaid upon
the subsequent completion of an offering of 9.35% Senior Subordinated Notes.
Extendicare Inc., at the time of closing the acquisition, contributed an 
additional $44.6 million of equity to the Company.

          The Company had cash and cash equivalents of $6.6 million at June 30,
1998 and $1.4 million at December 31, 1997.

          Cash flow generated from operations before working capital changes was
$35.4 million for the six months ended June 30, 1998 compared with $40.0 million
in the comparable period of 1997. The decrease in cash flow from operations
before working capital changes is the result of decreased operating earnings.

          The Company experienced a decrease in working capital at June 30,
1998, excluding cash and borrowings included in current liabilities, of $7.6
million. The decrease in working capital requirements 

<PAGE>   18

includes a decrease of $6.0 as a result of the increase in accounts payable and
accrued liabilities and a decrease of $4.3 as a result of the current year
Federal tax provision. These decreases were partially offset by growth of
accounts receivable. Accounts receivable at June 30, 1998, were $228.5 million
compared with $225.1 million at December 31, 1997, representing an increase of
$3.4 million. The increase in accounts receivable includes no change within the
nursing facility operations, an increase within the Company's UPC Health Network
medical specialty services operations of $5.8 million and a decrease in prior
policy year workers' compensation receivables of $2.4 million due to
collections. Billed patient care and other receivables increased $15.0 million
while third-party payor settlement receivables decreased $15.0 million within
the nursing facility operations. The increase in billed patient care receivables
of $15.0 million included a decrease of $0.6 million due to a decrease in
revenues for medical specialty services due to volume decreases and changes in
the Federal reimbursement policies, partially offset by increases in other
billed services due to rate increases and growth resulting from acquisitions
during the period. The remaining increase in billed patient care receivables of
$15.6 million includes increases due to the timing of the receipt of remittances
between periods and increased Federally mandated medical reviews. The decrease
in settlement receivables of $15.0 million between periods includes $15.5
million due to higher levels of interim reimbursements received for 1997 versus
current year estimated Medicare cost accruals and $2.1 million from the
collection of Medicaid program settlements, partially offset by an increase of
$2.6 million due to an increase in Medicare RCL exception approvals expected.
The increase in UPC Health Network receivables of $5.8 million between periods
includes $4.7 million due to growth, billing delays and the timing of the
receipt of remittances with the remaining increase of $1.1 million due to delays
in obtaining a state issued provider number related to an acquisition in 1997.

          Property and equipment increased $10.7 million from December 31, 1997
to a total of $698.9 million at June 30, 1998. The increase is the result of
acquisitions of $8.5 million and capital expenditures and asset transfers of
$33.1 million, partially offset by depreciation expense of $22.8 million and
asset disposals of $8.1 million. Property and equipment capital expenditures
during the six months ended June 30, 1998 included approximately $18.0 million
related to the construction of new facilities and bed and therapy unit additions
to existing facilities. The Company had under construction at June 30, 1998
three nursing facilities, one nursing facility addition and four assisted living
facilities at a total cost of $33.7 million, of which $21.8 million was incurred
prior to June 30, 1998.

         The Company financed a portion of its acquisitions in the first six
months of 1998 through its bank credit financing and the issuance of a $1.0
million promissory note as well as the assumption of existing debt in connection
with acquisitions. Existing debt assumed in connection with acquisitions totaled
$2.7 million.
<PAGE>   19

          Total borrowings, including bank indebtedness, notes payable and both
current and long-term maturities of debt, totaled $717.0 million at June 30,
1998 for an increase of $3.3 million from December 31, 1997. The increase is
attributable to the growth in property and equipment due to acquisitions and
capital expenditures. The weighted average interest rate of all long-term debt
was 7.92% at June 30, 1998 and such debt had maturities ranging from 1998 to
2015.

          The Company had a $200 million revolving credit agreement at June 30,
1998. Borrowing availability under this line of credit totaled $94.7 million at
June 30, 1998.

          The principal source of liquidity for the Company is cash flow from
operations and approximately $94.7 million (net of letters of credit in the
amount of $35.3 million) in additional borrowing availability under the
Revolving Credit Facility. The Company contemplates incurring capital
expenditures (excluding any acquisitions) of approximately $34.0 million for the
last six months of 1998. Plans are to complete and open four assisted living
facilities (198 units), three nursing facilities (308 beds), and one nursing
facility additional (47 beds) during the last six months of 1998, or early 1999.
The Company believes that internally generated cash flow, together with
borrowings under the Revolving Credit Facility, will be sufficient to meet the
Company's current operational cash requirements to fund its capital expenditure
program and to meet current debt obligations.

RECENT DEVELOPMENTS

          On July 30, 1998, the Company announced a definitive agreement to sell
its pharmacy operations to Omnicare, Inc. for $250 million cash, 125,000 common
shares of Omnicare and warrants to purchase 1.5 million common shares of
Omnicare at $48.00 per share. The transaction is expected to close no later than
September 30, 1998.

          The Company intends to apply the net after-tax proceeds of the sale to
debt reduction. As a result, the company will lower its debt by approximately
$165 million.

         Pharmacy revenues from non-affiliated beds for the six months ending 
June 30, 1998 were $61.8 million accounting for 10.6% of the Company's total 
revenue.

          The divesture follows a late 1997 management decision that the
pharmacy operations were non-strategic assets. The continuing consolidation of
pharmaceutical services companies would have required the Company to make a
major investment in the pharmacy business. With this transaction, the fair value
of the Company's pharmacy operations is realized and the Company achieves its
goal of sharply reducing its debt-to-equity ratio and significantly lowering
interest expense.
<PAGE>   20

FORWARD LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, and other information provided by the
Company from time to time, contains certain "forward-looking" statements as that
term is defined by the Private Securities Litigation Reform Act of 1995. All
statements regarding the Company's expected future financial position, results
of operations, cash flows, continued performance improvements, ability to
service its debt obligations, finance growth opportunities, respond to changes
in government regulations, and similar statements including, without limitaion,
those containing words such as "believes," "anticipates," "expects," "intends,"
"estimates," "plans," and other similar expressions are forward-looking
statements. Forward-looking statements involve known and unknown risks and
uncertainties that may cause the Company's actual results in future periods to
differ materially from those projected or contemplated in the forward-looking
statements as a result of, but not limited to, the following factors: national
and local economic conditions; the effect of government regulation and changes
in regulations governing the healthcare industry, including the Company's
compliance with such regulations; changes in Medicare and Medicaid payment
levels; liabilities and other claims asserted against the Company; the ability
to attract and retain qualified personnel; the availability and terms of capital
to fund acquisitions; the competitive environment in which the Company operates;
demographic changes; the ability to timely locate and correct all relevant
computer codes prior to the year 2000; and the availability and cost of labor 
and materials. Given these risks and uncertainties, the Company can give no
assurances that these forward-looking statements will, in fact, transpire and ,
therefore, cautions investors not to place undue reliance on them.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

     Not applicable.


<PAGE>   21




                                     PART II
                                OTHER INFORMATION

Item 1.    Legal Proceedings

           There are no material pending legal proceedings other than litigation
           arising in the ordinary course of business. Management believes, on
           the basis of information furnished by legal counsel, that none of
           these actions will have a material effect on the financial position
           or results of operations of the Company.

Item 2.    Change in Securities

           None

Item 3.    Defaults Upon Senior Securities

           None

Item 4.    Submission of Matters to a Vote of Security Holders

           None

Item 5.    Other Information

           None

Item 6. Exhibits and Reports on Form 8-K 
(a) List of Exhibits:

       10.0     Asset Purchase Agreement
       11.0     Computation of earnings per share for the three months and six 
                months ended June 30, 1998
       27.0     Financial Data Schedule

(b) Reports on Form 8-K

      There were no reports on Form 8-K filed during the three months or six
      months ended June 30, 1998.
<PAGE>   22
                        EXTENDICARE HEALTH SERVICES, INC.

                                  EXHIBIT INDEX

Exhibit No.                   Description

   10             Asset Purchase Agreement 

   11             Computation of earnings per share for the three months and 
                  six months ended June 30, 1998

   27             Financial Data Schedule


<PAGE>   23

                                   SIGNATURES

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

EXTENDICARE HEALTH SERVICES, INC.

Date:    August 10, 1998            By:  /s/  Wesley Carter
                                    J. Wesley Carter
                                    President, Chief Executive Officer
                                    and Director (principal executive officer)

Date:    August 10, 1998            By:  /s/  Stephen F. Dineley
                                    Stephen F. Dineley
                                    Vice President, Chief Financial Officer,
                                    Treasurer and Director (principal
                                    financial officer and principal
                                    accounting officer)