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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                   ___________

                                    FORM 10-K

                                   (Mark One)


/X/ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
    Act of 1934

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998

/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
    Exchange Act of 1934

             For the Transition Period from           to          .

                         COMMISSION FILE NUMBER 1-12040

                           SUN HEALTHCARE GROUP, INC.
             (Exact name of registrant as specified in its charter)



         DELAWARE                                 85-0410612
(State of Incorporation)                (I.R.S. Employer Identification No.)


                                101 SUN AVENUE NE
                          ALBUQUERQUE, NEW MEXICO 87109
                                 (505) 821-3355
                  (Address and telephone number of Registrant)

           Securities registered pursuant to Section 12(b) of the Act:

    TITLE OF EACH CLASS               NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock, par value $.01
per share, and Preferred                       New York Stock Exchange
Stock Purchase Rights


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

     Indicate  by check mark  whether the  registrant  (1) has filed all reports
required 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 / /

     Indicate by check mark if disclosure of delinquent  filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best  of  the  registrant's   knowledge,   in  the  definitive  proxy  statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /

     On March 30, 1999, Sun Healthcare  Group,  Inc. had 60,669,825  outstanding
shares of Common Stock. Of those, 53,294,347 shares of Common Stock were held by
nonaffiliates.  The  aggregate  market  value  of  such  Common  Stock  held  by
nonaffiliates,  based on the  average  of the high and low sales  prices of such
shares on the New York  Stock  Exchange  on March 30,  1999,  was  approximately
$59,956,140.

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<PAGE>

              

                           SUN HEALTHCARE GROUP, INC.
                                   FORM 10-K
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998

                                      INDEX
<TABLE>
<CAPTION>
                                                                           PAGE
                                                                           ----
<S>          <C>                                                           <C> 
PART I
Item 1.      Business . . . . . . . . . . . . . . . . . . . . . . . . . . .   2
Item 2.      Properties . . . . . . . . . . . . . . . . . . . . . . . . . .  11
Item 3.      Legal Proceedings  . . . . . . . . . . . . . . . . . . . . . .  14
Item 4.      Submission of Matters to a Vote of Security Holders  . . . . .  15
 
PART II
Item 5.      Market for Registrant's Common Equity and Related Stockholder
               Matters. . . . . . . . . . . . . . . . . . . . . . . . . . .  15
Item 6.      Selected Financial Data  . . . . . . . . . . . . . . . . . . .  16
Item 7.      Management's Discussion and Analysis of Financial Condition
               and Results of Operations. . . . . . . . . . . . . . . . . .  16
Item 7A.     Quantitative and Qualitative Disclosure About Market Risk. . .  16
Item 8.       Financial Statements and Supplementary Data   . . . . . . . .  16
Item 9.      Changes in and Disagreements with Accountants on Accounting
              and Financial Disclosures . . . . . . . . . . . . . . . . . .  16

PART III
Item 10.     Directors and Executive Officers of the Registrant . . . . . .  17
Item 11.     Executive Compensation . . . . . . . . . . . . . . . . . . . .  20
Item 12.     Security Ownership of Certain Beneficial Owners and Management  24
Item 13.     Certain Relationships and Related Transactions . . . . . . . .  26

PART IV
Item 14.     Exhibits, Financial Statement Schedules and Reports on Form 8-K 27

             Signatures . . . . . . . . . . . . . . . . . . . . . . . . . .  37
</TABLE>



     SunSolution(R),   SunDance(R),   SunScript(R),   SunRise  Club(R)  and
CareerStaff Unlimited(R) and related names herein are registered  trademarks of
Sun Healthcare Group, Inc. and its subsidiaries.

                                       1
<PAGE>
                                    PART I
 
ITEM 1.  BUSINESS
 
GENERAL
 
     Sun Healthcare Group,  Inc.,  through its direct and indirect  subsidiaries
(collectively  referred  to  herein  as "Sun" or the  "Company"),  is a  leading
provider of high  quality and cost  efficient  long-term,  subacute  and related
specialty  healthcare services in the United States and the United Kingdom.  The
Company  also has  operations  in Spain,  Germany  and  Australia.  The  Company
operates through four principal business segments: (i) inpatient facilities (ii)
rehabilitation  therapy,  (iii)  pharmaceuticals  and medical  supplies and (iv)
international  operations.   The  following  describes  the  Company's  business
segments and other operations.  Financial  information for the business segments
is set forth in the footnotes to the  Company's  financial  statements  included
under Item 8 herein.

     INPATIENT  FACILITIES.  At December 31, 1998, Sun owned,  leased or managed
397  long-term  and subacute care  facilities  with 44,941  licensed beds in the
United  States.  The Company's  long-term and subacute care  facilities  provide
inpatient  skilled  nursing and  custodial  services as well as  rehabilitative,
restorative and  transitional  medical  services.  The Company  provides 24-hour
nursing care in these facilities by registered nurses, licensed practical nurses
and certified nursing aides.

     REHABILITATION AND RESPIRATORY THERAPY. Sun provides rehabilitation therapy
through SunDance Rehabilitation Corporation ("SunDance") and respiratory therapy
through SunCare Respiratory Services,  Inc.  ("SunCare").  At December 31, 1998,
Sun provided therapy  services to 1,715 facilities in 46 states,  1,294 of which
were  operated  by  nonaffiliated  parties  and  421 of  which  were  affiliated
facilities.
 
     PHARMACEUTICALS AND MEDICAL SUPPLIES. The Company provides  pharmaceuticals
through  SunScript  Pharmacy  Corporation  ("SunScript")  and  medical  supplies
through SunChoice Medical Supply, Inc.  ("SunChoice").  Pharmaceutical  services
include dispensing  pharmaceuticals for such purposes as infusion therapy,  pain
management,  antibiotic therapy and parenteral  nutrition.  Additional  services
include  providing  consultant  pharmacists  and  assistance in  preparation  of
billing  documentation.  These services are typically  provided to nonaffiliated
and  affiliated   facilities,   including  subacute  and  skilled  nursing  care
facilities,  assisted living facilities,  group houses, correctional facilities,
mental health facilities and home healthcare companies. As of December 31, 1998,
Sun operated 34 pharmacies and two pharmaceutical  billing and consulting center
in the U.S., which together provided  pharmaceutical  products and services to a
total of 930 long-term and subacute care  facilities in 21 states,  584 of which
were nonaffiliated.
 
     INTERNATIONAL  OPERATIONS.  Sun is the second largest operator of long-term
care  facilities  in the United  Kingdom,  operating 155  facilities  with 8,705
licensed beds as of December 31, 1998. The Company holds a majority  interest in
Eurosar, S.A. ("Eurosar"),  a privately-owned company that operated 10 long-term
care  facilities in Spain with 1,604  licensed beds. Sun holds 38% of the equity
of Alpha Healthcare  Limited  ("Alpha"),  a publicly held acute care provider in
Australia  that as of  December  31,  1998  operated  nine  facilities  with 616
licensed  beds. As of December 31, 1998,  Sun also  operated  five  hospitals in
Australia   with   309   beds.   Sun   holds  a   majority   interest   in  Heim
Plan--Uternehmensgruppe,  an operator of 16 long-term care facilities with 1,135
licensed  beds in  Germany.  Sun also  provides  pharmaceutical  services in the
United Kingdom, Germany and Spain and medical supplies in Australia.

     OTHER  OPERATIONS.  The Company is also a nationwide  provider of temporary
therapy   staffing  through   CareerStaff   Unlimited,   Inc.   ("CareerStaff").
CareerStaff  provides  licensed  therapists  skilled  in the areas of  physical,
occupational  and speech  therapy,  primarily  to  hospitals  and  nursing  home
contract

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<PAGE>

service  providers.  At December 31, 1998, Sun had 31 division offices
providing  temporary therapy staffing services in major  metropolitan  areas and
four  division  offices   specializing  in  placements  of  temporary  traveling
therapists in smaller cities and rural areas.

     Through  SunBridge,  Inc.  ("SunBridge"),  the  Company  also  operated  31
assisted living  facilities with 3,371 beds in the U.S. as of December 31, 1998.
These  facilities  serve the elderly who do not need the full-time  nursing care
provided  by  long-term  or  subacute  care  facilities  but  who do  need  some
assistance with the activities of daily living.

     SunSolution,  Inc.  ("SunSolution") provides ancillary services for a fixed
fee to nonaffiliated facilities.  SunAlliance Healthcare Services, Inc. provides
mobile radiology and laboratory services.


RECENT DEVELOPMENTS

     SIGNIFICANT  ACQUISITIONS.  On June 30, 1998, a wholly-owned  subsidiary of
the Company merged with Retirement Care Associates, Inc. ("RCA"), an operator of
98 skilled  nursing  facilities and assisted  living centers  primarily in eight
states in the southeastern  United States. The Company issued  approximately 7.9
million shares of its common stock in exchange for all of the outstanding shares
of  capital  stock of RCA.  The RCA  merger  was  accounted  for as a pooling of
interests.   RCA  also  owned   approximately  65%  of  Contour  Medical,   Inc.
("Contour"), a national provider of medical/surgical supplies. On June 30, 1998,
the Company  also  acquired the  remaining  35% of Contour.  The Company  issued
approximately  1.9 million shares of its common stock in exchange for all of the
remaining  outstanding  capital stock of Contour.  The Contour  acquisition  was
accounted for as a purchase.

     PPS.  In the  Balanced  Budget  Act of 1997 (the  "BBA"),  Congress  passed
numerous  changes to the  reimbursement  policies  applicable to exempt hospital
services,  skilled  nursing,  therapy  and  other  ancillary  services.  The BBA
provides  for a phase-in of a  prospective  payment  system  ("PPS") for skilled
nursing  facilities  over a four  year  period.  PPS  became  effective  for the
Company's  facilities  acquired  with RCA on July 1, 1998 and for the  Company's
remaining  facilities  on January 1, 1999.  Under  PPS,  Medicare  pays  skilled
nursing  facilities a fixed fee per patient day based on the acuity level of the
patient,  to cover all post-hospital  extended care routine service costs (i.e.,
Medicare Part A patients),  including  ancillary  and capital  related costs for
beneficiaries  receiving  skilled  services.  The  per  diem  rate  also  covers
substantially  all items and services  furnished during a covered stay for which
reimbursement  was  formerly  made  separately  under  Medicare.  Prior  to  the
implementation  of PPS, such services were reimbursed on a "pass through" basis.
During  the  phase-in,  payments  will be  based  on a blend  of the  facility's
historical  costs (based on 1995 cost data) and federally  established  per diem
rates.

     Sun's revenues from its inpatient  facilities have been  significantly  and
adversely  affected by the size of the federally  established per diem rate. The
new per diem  rate  sets  limits  on the  amount  of  certain  types of care the
government will pay for per patient per day. The per diem reimbursement rate has
generally been less than the amount the Company's inpatient  facilities received
on a daily basis under cost based  reimbursement.  Moreover,  since Sun treats a
greater  percentage of higher acuity

                                       3
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patients  than many nursing  homes,  Sun has also been  adversely  impacted
because the federal per diem rates for higher acuity  patients do not adequately
compensate  Sun for the  additional  expenses  and  risks  for  caring  for such
patients.  Although it is unclear  what the  long-term  impact of PPS will be on
Sun, the transition to PPS negatively impacted Sun's earnings for the six months
ended December 31, 1998 and is expected to negatively  impact  earnings at least
through  the  first  six  months of 1999.  There  can be no  assurance  that the
imposition  of PPS will not have a  long-term  material  adverse  effect  on the
results  of  operations  and  financial  condition  of the  Company.  See  "Item
7--Management's  Discussion  and Analysis of Financial  Condition and Results of
Operations."

     In  addition,  the  implementation  of PPS has  resulted in a greater  than
expected  decline  in  demand  for  the  Company's  therapy  and  pharmaceutical
services.  Prior to the implementation of PPS, Sun's ancillary services, such as
rehabilitation and respiratory therapy services and pharmaceutical services, had
significantly  higher operating  margins than the margins  associated with Sun's
long-term and subacute care  facilities and accordingly  such services  provided
most of Suns operating  profits.  See "Footnotes to the Financial  Statements."
Although the Company has taken and continues to take actions to reduce its costs
of providing ancillary services, there can be no assurance that the Company will
be able to maintain its prior profit margins on its ancillary services.

     The Company's response to the  implementation of PPS included,  among other
things,  the  establishment  of  SunSolution.   SunSolution  provides  ancillary
services for a fixed fee to  nonaffiliated  facilities.  As of January 31, 1999,
SunSolution  had secured 85  contracts  with  nonaffiliated  facilities  and the
average  revenue per  contract was  approximately  50% less than the Company had
previously projected.  There can be no assurance that the Company will develop a
market for the SunSolution products and services.  In addition,  there can be no
assurance that the costs of providing the contracted  services will be less than
the fee received by SunSolution for such services.

     INCREASE IN SURVEY, CERTIFICATION AND ENFORCEMENT ACTIVITIES. In the Summer
of 1998 the United States General  Accounting  Office released a report that was
severely  critical of the California  state agency that inspects  nursing homes.
Following the release of that report, President Clinton, Secretary of Health and
Human  Services  Donna  E.  Shalala  and  several   Congressmen  called  for  an
enforcement "crackdown" against nursing home regulatory violations. Although the
crackdown  ostensibly  was  directed  against the state  agencies  that  inspect
nursing  facilities  and enforce  federal  Medicare and  Medicaid  certification
requirements,  the crackdown resulted in a significant increase in the number of
inspections,  citations of regulatory  deficiencies,  and regulatory  sanctions,
including terminations from the Medicare and Medicaid Programs, bans on Medicare
and Medicaid payment for new admissions, and civil monetary penalties.

     If a facility is terminated  from the Medicare and Medicaid  programs,  its
Medicare and Medicaid  reimbursement is interrupted pending  recertification,  a
process that can take several months. In the interim,  the facility may continue
to provide care to its residents without Medicare and Medicaid reimbursement, or
the government may  involuntarily  relocate  Medicare and Medicaid  residents to
other facilities.  Terminations,  bans on admission and civil monetary penalties
can cause  material  adverse  financial  and  operational  effects on individual
facilities.

     The federal  government has proposed to terminate  several of the Company's
facilities  from the  Medicare and  Medicaid  programs,  and has imposed bans on
admissions and civil monetary penalties against several facilities, on the basis
of alleged regulatory  deficiencies.  The Company typically  vigorously contests
such  sanctions,  and in several  cases has sought and  obtained  federal  court
injunctions against proposed terminations. While the Company has been successful
to  date  in  preventing  any  Medicare  and  Medicaid  termination  that it has
contested,   such  cases  require  significant  legal  expenses  and  management
attention.  There  can be no  assurance  that the  federal  government  will not
attempt to

                                       4
<PAGE>

terminate additional  facilities of the Company from the Medicare and
Medicaid programs, or that the Company will continue to be successful contesting
such terminations.

     While the entire  nursing  home  industry  has been subject to the enhanced
enforcement  policy,  the Company  believes that the federal  government  may be
focusing  particular  enforcement  attention on large for-profit  multi-facility
providers such as the Company.  Such companies operate  approximately 30% of the
facilities in the industry.  The federal government has indicated that it may in
the  future  adopt a policy to  subject  multi-facility  providers  to  enhanced
scrutiny and sanctions if any of the provider's  facilities is cited for certain
"repeat" deficiencies.  Given  the  large  number  of  facilities  the  Company
operates,  such a policy  could have a material  adverse  impact on the Company.
Although  the  Company has  participated  in  industry  efforts to dissuade  the
Department  of Health  and  Human  Services  from  adopting  such a  policy,  no
assurance can be given that such policy will not be adopted or, if adopted, that
it will not have a material adverse affect on the Company.

     RESTRUCTURING. The Company commenced a comprehensive restructuring in 1998.
The  restructuring  included the  elimination of 2,700,  or six percent,  of its
inpatient  services  employees,  4,600,  or 36  percent,  of its  rehabilitation
therapy employees,  and 190, or 13 percent,  of its corporate  employees through
attrition,  layoffs and the  elimination  of vacant  positions as of February 1,
1999.  The Company also  restructured  its domestic  operations  to more closely
align the inpatient,  rehabilitation and pharmaceutical  services divisions.  At
the same time, the Company eliminated certain executive  positions and decreased
the layers of the management structure. The Company also restructured all of its
international   operations   under  one   subsidiary,   Sun   Healthcare   Group
International Corporation.

COMPETITION
 
     The long-term and subacute care industry is highly competitive.  The nature
of competition varies by location. The Company's facilities generally operate in
communities that are also served by similar facilities  operated by others. Some
competing facilities are located in buildings that are newer than those operated
by the Company and provide  services  not offered by the  Company,  and some are
operated by entities  having  greater  financial and other  resources and longer
operating histories than the Company. In addition,  some facilities are operated
by nonprofit  organizations  or  government  agencies  supported by  endowments,
charitable contributions,  tax revenues and other resources not available to the
Company.  Some hospitals that either  currently  provide  long-term and subacute
care services or are converting  their under utilized  facilities into long-term
and subacute care  facilities are also a potential  source of competition to the
Company.  The Company  competes with other  facilities  based on key competitive
factors such as its  reputation  for the quality and  comprehensiveness  of care
provided;  the commitment and expertise of its staff; the  innovativeness of its
treatment  programs;  local physician and hospital support;  marketing programs;
charges for services; and the physical appearance, location and condition of its
facilities.  The range of specialized services,  together with the price charged
for services,  are also  competitive  factors in attracting  patients from large
referral sources.
 
     The Company also competes with other companies in providing  rehabilitation
therapy services and pharmaceutical  products and services to the long term care
industry and in employing and retaining  qualified  therapists and other medical
personnel.  Many of these competing  companies have greater  financial and other
resources  than  the  Company.  There  can be no  assurance  that  Sun  will not
encounter  increased  competition in the future that would adversely  affect its
financial condition and results of operations.

                                       5
<PAGE> 

EMPLOYEES
 
     As of February 20, 1998, the Company had approximately 80,720 full-time and
part-time employees. Of this total, there were approximately 53,741 employees at
the long-term and subacute care facilities in the United States, 8,588 employees
at the long-term  care  facilities in the United  Kingdom,  626 employees at the
long-term  care  facilities  in  Spain,  422  employees  involved  in  providing
long-term care services in Germany,  239 employees  involved in providing  acute
care services in Australia, 7,873 employees involved in providing rehabilitation
therapy services in the United States,  168 employees  providing  rehabilitation
therapy services in Canada, 3,264 employees at the pharmaceutical  operations in
the United States,  193 employees in foreign  pharmaceutical  operations,  2,852
employees in the temporary  therapy  staffing  business,  1,158 employees of the
respiratory  therapy  services  business,  1,300  employees at the corporate and
regional  offices in the United  States and 296  employees at the  corporate and
regional offices in the United Kingdom.

     Certain of the  Company's  employees in Alabama,  California,  Connecticut,
Georgia,  Massachusetts,  New  Mexico,  Ohio,  Tennessee,  Washington  and  West
Virginia are covered by collective bargaining contracts. The unions representing
certain of the Company's employees have from time to time gone on strike.  There
can be no assurance  that the unions will not go on strike in the future or that
such strikes will not have a material adverse effect on the Company's results of
operations or financial condition.
 
                        CERTAIN ADDITIONAL BUSINESS RISKS
 
     The Company's  business,  financial  condition and operating results can be
impacted  by a number of factors,  including  but not limited to those set forth
below,  any one of which  could  cause  the  Company's  actual  results  to vary
materially from the Company's past results or anticipated future results.

AVAILABLE LIQUIDITY

     The Company's  available  liquidity,  including cash reserves and borrowing
capacity under its Senior Credit  Facility,  decreased from  approximately  $217
million at December 31, 1997 to approximately $150 million at September 30, 1998
and it has decreased  substantially since September 30, 1998.  Including changes
in working capital,  the Company experienced  positive cash flow from operations
of  approximately  $28.8  million  for the year ended  December  31,  1997 and a
negative  cash flow from  operations  of $56.1 million for the nine months ended
September  30,  1998.  The  Company's  liquidity  position  has been  negatively
affected by, among other things,  the  implementation  of PPS and an increase in
accounts receivable.  See "Recent  Developments--PPS"  and  "--Collectability of
Certain Accounts  Receivable." If the Company's  liquidity position continues to
decline, the Company may need to seek additional sources of financing, and there
can be no assurance  that such financing  will be available.  See  "--Compliance
with Senior Credit  Facility;  Borrowing  Capacity under Senior Credit Facility"
and "Item  7--Management's  Discussion  and Analysis of Financial  Condition and
Results of Operations--Liquidity and Capital Resources."

COMPLIANCE WITH SENIOR CREDIT FACILITY; BORROWING CAPACITY UNDER SENIOR
  CREDIT FACILITY

     Although the Company has not  completed its  financial  statements  for the
year ended December 31,  1998, the Company believes that as of December 31, 1998
it was not in compliance  with certain of the financial  covenants  contained in
its Senior  Credit  Facility.  The Company is seeking from the lenders under the
Senior  Credit  Facility an  amendment to the Senior  Credit  Facility to, among
other things, cure any non-compliance and amend the financial  covenants.  There
can be no  assurance  that the Company  will obtain an  amendment  of the Senior
Credit  Facility.  If the Company is unable to obtain an amendment to its Senior
Credit  Facility,  or if it  obtains  such  amendment  but  fails to  remain  in
compliance with the new financial  covenants,  then the lenders could accelerate
the loans due under the Senior Credit  Facility

                                       6
<PAGE>

which would cause the Company to  cross-default  under certain of its other
indebtedness.  There  can  be  no  assurance  that  in  the  event  of  such  an
acceleration the Company would have the financial resources to repay such loans.
See "--Liquidity; Borrowing Capacity under Senior Credit Facility."

     As a result of the  Company's  expected  noncompliance  with the  financial
covenants,  the  Company  will be unable to borrow  additional  funds  under the
Senior Credit Facility until it has obtained a waiver of the noncompliance or an
amendment of the Senior Credit  Facility.  Until such time, the Company believes
that its  only  sources  of  funds  will be  currently  available  cash and cash
generated from operations. See "--Available Liquidity."

SUBSTANTIAL LEVERAGE; NEED FOR ADDITIONAL FINANCING
 
     Sun has  substantial  indebtedness.  As of September 30, 1998, Sun had on a
consolidated basis approximately $1.7 billion of indebtedness, including capital
lease  obligations  and $790  million of  indebtedness  under the Senior  Credit
Facility.  The Company had approximately  $612.4 million of stockholders' equity
at September 30, 1998. At September 30, 1998,  Sun had  outstanding  commitments
for  construction and development  costs of  approximately  $54.0 million in the
United States and United Kingdom.  In addition,  as of December 31, 1997,  Sun's
existing  lease  agreements  required  aggregate  annual  payments for the years
ending December 31, 1998,  1999,  2000, 2001 and 2002 of $142.8 million,  $142.3
million, $141.2 million, $135.2 million and $132.4 million, respectively.
 
     The degree to which Sun is leveraged  could have important  consequences to
holders of Sun's common stock, including, but not limited to, the following: (i)
a substantial  portion of Sun's cash flow from operations will be required to be
dedicated  to debt  service  and  will  not be  available  for  other  purposes,
including acquisitions; (ii) Sun's ability to obtain additional financing in the
future could be limited; (iii) certain of Sun's borrowings are at variable rates
of  interest,  which  could  result in higher  interest  expense in the event of
increases  in  interest  rates;  and (iv) the  indentures  with  respect  to the
Company's  9-1/2%  Senior   Subordinated   Notes  due  2007  and  9-3/8%  Senior
Subordinated  Notes due 2008 and the Company's Senior Credit Facility  generally
contain  financial and  restrictive  covenants that limit the ability of Sun to,
among  other  things,  borrow  additional  funds,  dispose of assets or pay cash
dividends. Failure by Sun to comply with such covenants could result in an event
of default which, if not cured or waived,  would have a material  adverse effect
on Sun. The Company expects that it may need to raise additional  equity or debt
financing in the future.  There can be no assurance  that Sun will be successful
in  raising  additional  equity  or debt  financing  on terms  favorable  to the
Company,  if at all.  See  "Item  7--Management's  Discussion  and  Analysis  of
Financial Condition and Results of Operations--Liquidity and Capital Resources."

REDUCED REVENUES RESULTING FROM PROSPECTIVE PAYMENT SYSTEM

     For a description of certain risks related to PPS, see "Recent Developments
-- PPS."
 
RISKS ASSOCIATED WITH REIMBURSEMENT PROCESS

     The Company  derives a substantial  percentage  of its total  revenues from
Medicare,   Medicaid  and  private  insurance.  Net  revenues  realizable  under
third-party  payor  agreements  are  subject  to change due to  examination  and
retroactive  adjustment  by payors  during the  settlement  process.  Payors may
disallow in whole or in part requests for reimbursement  based on determinations
that certain costs are not  reimbursable  or  reasonable  or because  additional
supporting  documentation  is necessary.  The Company  recognizes  revenues from
third-party  payors and accrues  estimated  settlement  amounts in the period in
which the related services are provided.  The Company estimates these settlement
balances by making  determinations based on its prior settlement  experience and
its  understanding of the applicable  reimbursement  rules and regulations.  The
majority of third-party  payor balances are settled two to three years following
the  provision  of  services,  although  the  Company  has  from  time  to  time
experienced   delays  in  receiving  final  settlement  and  reimbursement  from
government agencies.

                                       7
<PAGE>

     The Company  has also  experienced  differences  between  the net  amounts
accrued and subsequent settlements, which differences are recorded in operations
at the time of  settlement.  For  example,  in the fourth  quarter of 1997,  the
Company  recorded  negative revenue  adjustments  totaling  approximately  $15.0
million  resulting  from changes in accounting  estimates of amounts  realizable
from third-party payors.  These changes in accounting  estimates primarily arose
out of the settlement in late 1997 of certain facility cost reports for 1994 and
1995 and also include estimated  charges for projected  settlements in 1996. The
Company currently has a number of outstanding cost reports,  and there can be no
assurance  that the settlement of these cost reports will not result in material
negative revenue adjustments to the Company. The Company's results of operations
would be materially and adversely affected if the amounts actually received from
third-party  payors in any reporting period differs  materially from the amounts
accrued in prior periods. See "Item  7--Management's  Discussion and Analysis of
Financial  Condition  and  Results  of   Operations--Effects   from  Changes  in
Reimbursement."

COLLECTABILITY OF CERTAIN ACCOUNTS RECEIVABLE

     The Company's  accounts  receivable  increased  from  approximately  $550.6
million at December 31, 1997 to  approximately  $651.6  million at September 30,
1998. The Company  believes that the increase in accounts  receivable is due to,
among other reasons, delays in the payment of reimbursements by the U.S. federal
government  to  the  Company  and  to  third  parties  to  which  the  Company's
rehabilitation  therapy subsidiary provided services.  The Company believes that
such  delays  have  occurred,  in part,  because  HCFA has  diverted  management
attention  from its  normal  business  operations  to  addressing  its Year 2000
compliance  issues and the  implementation of PPS. See "--Year 2000 Risk." There
can be no  assurance  that such delays in payment  will not continue to occur in
the future. The Company also believes that accounts receivable have increased in
part because the ability of nonaffiliated  facilities to provide timely payments
to the Company for the provision of ancillary  services has been impacted by the
implementation  of PPS and the delay in their  receipt of  payments  from fiscal
intermediaries.  The  collectability of the Company's  accounts  receivable with
non-affiliated  facilities  could be  impacted  by the  rates  these  facilities
receive  under PPS. The Company's  financial  condition and results of operation
could be materially  adversely affected by the inability to collect its accounts
receivable.

RISK OF ADVERSE EFFECT OF FUTURE HEALTHCARE REFORM
 
     In recent years,  an increasing  number of legislative  proposals have been
introduced  or proposed in Congress  and in some state  legislatures  that would
effect major changes in the healthcare system, either nationally or at the state
level.  Among the proposals  that have been  introduced  are further  changes in
reimbursement  by federal and state  payors such as Medicare  and  Medicaid  and
health insurance  reforms.  It is not clear at this time when or whether any new
proposals will be adopted,  or, if adopted,  what effect, if any, such proposals
would have on Sun's business.  There can be no assurance that future  healthcare
legislation  or  other  changes  in  the  administration  or  interpretation  of
governmental  healthcare  programs  will not have a material  adverse  effect on
Sun's financial condition or results of operations.
 
POTENTIAL LIABILITY FOR REIMBURSEMENTS PAID TO FORMER OPERATORS OF ACQUIRED
FACILITIES
 
     Sun's growth  strategy has relied  heavily on the  acquisition of long-term
and subacute care  facilities.  Regardless of the legal form of the acquisition,
the  Medicare  and  Medicaid  programs  often  require  that Sun assume  certain
obligations  relating  to the  reimbursement  paid to the  former  operators  of
facilities  acquired  by Sun.  From  time to  time,  fiscal  intermediaries  and
Medicaid agencies examine cost reports filed by such predecessor operators.  If,
as a result of any such  examination,  it is concluded  that  overpayments  to a
predecessor  operator were made,  the Company,  as the current  operator of such
facilities,  may be held financially responsible for such overpayments.  At this
time the  Company is unable to predict  the  outcome of any  existing  or future
examinations.  See "--Difficulty of Integrating  Acquired

                                       8
<PAGE>

Operations" and "Item 7--Management's  Discussion and Analysis of Financial
Condition and Results of Operations--Effects from Changes in Reimbursement."
 
POTENTIAL ADVERSE EFFECT OF CHANGE IN REVENUE SOURCES
 
     Changes in the mix of patients among the Medicaid, Medicare and private pay
categories,   and  among   different   types  of  private  pay  sources,   could
significantly  affect the revenues and the  profitability  of Sun's  operations.
There can be no assurance  that Sun will continue to attract and retain  private
pay  patients or maintain its current  payor or revenue mix. In addition,  there
can be no assurance  that the  facilities  operated by Sun, or the  provision of
services  and  products by Sun,  now or in the future,  will  initially  meet or
continue to meet the requirements for participation in the Medicare and Medicaid
programs.  A loss of  Medicare or  Medicaid  certification  or a change in Sun's
reimbursement  under  Medicare or Medicaid  could have an adverse  effect on its
financial  condition  and  results  of  operations.   See  "--Risks  Related  to
Investigations  and Legal  Proceedings"  and "--Risk of Adverse Effect of Future
Healthcare Reform."
 
RISKS RELATED TO INVESTIGATIONS AND LEGAL PROCEEDINGS
 
     The Company's  subsidiaries,  including  those which  provide  subacute and
long-term  care,  rehabilitation  and  respiratory  therapy  and  pharmaceutical
services,  are  engaged  in  industries  which are  extensively  regulated.  See
"--Potential Adverse Impact from Extensive Regulation." As such, in the ordinary
course of  business,  the  operations  of these  subsidiaries  are  continuously
subject to state and Federal regulatory scrutiny,  supervision and control. Such
regulatory  scrutiny often  includes  inquiries,  investigations,  examinations,
audits, site visits and surveys, some of which may be non-routine. The Company's
subsidiaries are currently the subject of several such investigations. If any of
the Company's  subsidiaries is ever found to have engaged in improper practices,
it could be subjected to civil, administrative,  or criminal fines, penalties or
restitutionary  relief  and  reimbursement   authorities  could  also  seek  the
suspension or exclusion of the subsidiary or individuals  from  participation in
their program. From time to time, the existence of regulatory investigations has
hindered or prevented the Company from pursuing certain business  opportunities.
There can be no assurance that the existence of any such investigations will not
affect  the  Company's  ability to pursue  future  business  opportunities.  See
"Recent  Developments--Increase  in Survey and Enforcement Activities" and "Item
7--Management's  Discussion  and Analysis of Financial  Condition and Results of
Operations--Regulation."

     For a description of certain risks related to legal proceedings,  see "Item
3--Legal Proceedings."

POTENTIAL ADVERSE IMPACT FROM EXTENSIVE REGULATION
 
     All of the  facilities  operated  or  managed  by Sun  are  required  to be
licensed in accordance with the  requirements of state and local agencies having
jurisdiction over their operations.  Most of Sun's facilities are also certified
as providers under the Medicaid and Medicare programs.  The failure to obtain or
renew any required regulatory approvals or licenses or to comply with applicable
regulations in the future could adversely  affect Sun's financial  condition and
results  of  operations.  See  "--Risks  Related  to  Investigations  and  Legal
Proceedings"  and "Item  7--Management's  Discussion  and  Analysis of Financial
Condition   and   Results  of   Operations--Regulation."   To  the  extent  that
Certificates  of Need  ("CONs") or other  similar  approvals  are  required  for
expansion of Sun's  operations,  either through  acquisitions or additions to or
provision of new services at such facilities,  such expansion could be adversely
affected  by the  failure  to  obtain  such CONs or  approvals.  There can be no
assurance  that Sun's  business in the future will not be  materially  adversely
affected  by  licensing  and  certification  requirements  of state and  Federal
authorities.

                                       9
 <PAGE>

     Medicare and Medicaid  antifraud and abuse laws prohibit  certain  business
practices  and  relationships  that  might  affect  the  provision  and  cost of
healthcare  services   reimbursable  under  Medicare  and  Medicaid.   Expressly
prohibited  are  kickbacks,  bribes and rebates  related to Medicare or Medicaid
referrals.  Federal laws also provide civil and criminal penalties for any false
or  fraudulent  statements,  knowingly  made,  in any claim for payment  under a
Federal or state health care  program as well as any material  omissions in such
claims.  In  addition,  certain  states have  adopted  fraud and abuse and false
claims laws that prohibit specified business practices.  Sanctions for violating
these laws include criminal  penalties and civil sanctions,  including fines and
possible exclusion from the Medicare and Medicaid programs.

DIFFICULTY OF INTEGRATING ACQUIRED OPERATIONS
 
     Sun's growth  strategy has relied  heavily on the  acquisition of long-term
and  subacute  care  facilities.  Significant  acquisitions  since  October 1997
include Regency Health  Services,  Inc., RCA and Contour.  Acquisitions  present
problems of  integrating  the  acquired  operations  with  existing  operations,
including  the loss of key personnel  and  institutional  memory of the acquired
business, difficulty in integrating corporate,  accounting,  financial reporting
and management information systems and strain on existing levels of personnel to
operate such acquired businesses. In addition, certain assumptions regarding the
financial condition of an acquired business may later prove to be incorrect. See
"Item 7--Management's Discussion and Analysis of Financial Condition and Results
of Operation."

RISK OF INTERNATIONAL OPERATIONS; FOREIGN EXCHANGE RISK
 
     Sun currently conducts business in the United Kingdom,  Spain,  Germany and
Australia. Foreign operations accounted for approximately 4%, 9% and 8% of Sun's
total net  revenues  during the years ended  December  31, 1996 and 1997 and the
nine  months  ended  September  30,  1998,   respectively,   and  21%  of  Sun's
consolidated  total assets as of September 30, 1998.  Adverse results from Sun's
international  operations could adversely  effect Sun's financial  condition and
results of  operations.  The success of Sun's  operations in and expansion  into
international  markets depends on numerous factors, many of which are beyond its
control.  Such factors include,  but are not limited to, economic conditions and
healthcare regulatory systems in the foreign countries in which Sun operates. In
addition,  international operations and expansion may increase Sun's exposure to
certain risks  inherent in doing business  outside the United States,  including
slower  payment   cycles,   unexpected   changes  in  regulatory   requirements,
potentially adverse tax consequences, currency fluctuations, restrictions on the
repatriation  of profits and assets,  compliance with foreign laws and standards
and political  risks.  Sun's  financial  condition and results of operations are
also subject to foreign exchange risk.
 
RISKS RELATED TO YEAR 2000 DATE CHANGE
 
     For a  description  of certain  risks related to the Year 2000 date change,
see "Item  7--Management's  Discussion  and Analysis of Financial  Condition and
Results of Operations--Year 2000 Issue."
 
INCREASED LABOR COSTS AND AVAILABILITY OF PERSONNEL
 
     In recent years Sun has experienced  increases in its labor costs primarily
due to higher  wages  and  greater  benefits  required  to  attract  and  retain
qualified  personnel and increased staffing levels in its long-term and subacute
care facilities due to greater patient acuity. Since under PPS and fee schedules
payment is no longer on a "pass-through" basis,  increases in labor costs may no
longer result in increases in payment rates. See "Business--Employees."
 
                                       10
<PAGE>

ANTI-TAKEOVER PROVISIONS; POSSIBLE ISSUANCE OF PREFERRED STOCK
 
     Sun's certificate of incorporation and by-laws contain  provisions that may
make it more difficult for a third party to acquire,  or discourage  acquisition
bids for, Sun. In addition,  approximately 3.2% of the Company's common stock is
owned by a grantor  stock trust (the "Grantor  Trust"),  which holds such shares
for issuance under the company's  stock option plans and employee stock purchase
plan.  Employees and  nonemployee  directors  holding stock options and employee
stock purchase plan  participants  have the right to vote all of the shares held
by the Grantor  Trust.  The voting  control of such shares of stock by employees
and  management may make it more difficult for a third party to acquire (or such
ownership may  discourage  bids for) Sun. The  provisions in the  certificate of
incorporation and by-laws, together with ownership of such shares by the Grantor
Trust,  could limit the price that certain  investors might be willing to pay in
the future for shares of Common Stock.  In addition,  shares of Sun's  preferred
stock may be issued in the future without further stockholder  approval and upon
such terms and conditions and having such rights, voting powers, preferences and
relative,  participating,  optional and other special privileges as the board of
directors  may  determine.  The rights of the  holders  of Common  Stock will be
subject  to, and may be  adversely  affected  by,  the rights of any  holders of
preferred  stock that may be issued in the future.  The  issuance  of  preferred
stock,  while  providing  desirable  flexibility  in  connection  with  possible
acquisitions  and other corporate  purposes,  could have the effect of making it
more difficult for a third party to acquire,  or discouraging a third party from
acquiring, a majority of the outstanding voting stock of Sun. Sun has no present
plans to issue any shares of its preferred stock. In addition, Sun has adopted a
stockholder rights plan that, along with certain provisions of Sun's certificate
of incorporation, have the effect of discouraging certain transactions involving
a change of control of Sun.
 
VOLATILITY OF STOCK PRICE
 
     There has in the past been  significant  volatility,  and more  recently  a
significant  decline, in the market prices of securities of the Company and many
other publicly-owned  long-term care companies. In particular,  the market price
of Sun's  common  stock has in the past been  subject to  heightened  volatility
resulting  from,  among other  things,  announcements  of operating  results and
uncertainties  regarding certain Medicare  reimbursement policies and government
investigations  of Sun. Sun believes  factors such as legislative and regulatory
developments,  continuing uncertainties regarding certain Medicare reimbursement
policies  and  government  investigations  of Sun and  quarterly  variations  in
financial  results  could  cause  the  market  price  of Sun's  common  stock to
fluctuate substantially.  See "Item 5--Market for Registrant's Common Equity and
Related Stockholder Matters."
 
ITEM 2.  PROPERTIES
 
     Facilities.  The  Company  operated an  aggregate  of 614  long-term  care,
subacute  care,  and assisted  living  facilities  world-wide as of December 31,
1998, 504 of which are subject to long-term operating leases or subleases, 20 of
which are subject to long-term management  agreements and 90 of which are owned.
The Company  considers  its  properties  to be in good  operating  condition and
suitable  for the  purposes  for  which  they  are  being  used.  The  Company's
facilities  that are  leased  are  subject  to  long-term  operating  leases  or
subleases, the terms of which range from 5 to 23 years, and require the Company,
among  other  things,  to  fund  all  applicable  capital  expenditures,  taxes,
insurance and  maintenance  costs.  The Company's  rights as lessee or sublessee
could be subject to termination  upon a foreclosure  by the underlying  mortgage
lender or termination  by the lessor.  The annual rent payable under each of the
leases  generally  increases  based on a fixed  percentage  or  increases in the
Consumer Price Index.  Many of the leases contain  renewal options to extend the
term for between 5 to 40 consecutive years.

                                       11
<PAGE>

     The Company's  management  agreements  for  long-term  and  subacute  care
facilities  generally  provide  the  Company  with  management  fees  based on a
percentage of the revenues of the managed  facility and may also include a fixed
fee  component.  At December  31,  1998,  the Company had an  aggregate of $31.9
million of  outstanding  mortgages with  Meditrust  which contain  cross-default
provisions with all of such mortgages and leases also financed by Meditrust.
 
     The Company  believes that the aggregate  occupancy  percentages for all of
its long term care,  subacute care and assisted living  facilities were 91%, 90%
and 90% in the United States and 86%, 78% and 80% in the United  Kingdom for the
years ended December 31, 1996, 1997 and 1998, respectively. However, the Company
believes that occupancy  percentages,  either  individually or in the aggregate,
should not be relied upon alone to determine  the  profitability  of a facility.
Other  factors  include,  among other things,  the sources of payment,  terms of
reimbursement  and the acuity level for each of the patients in such facilities.
The Company also believes there is not a consistent  industry standard as to how
occupancy  is measured  and that the  information  may not be  comparable  among
long-term care providers.  See "Item 7--Management's  Discussion and Analysis of
Financial  Condition  and  Results  of   Operations--Effects   from  Changes  in
Reimbursement."  The Company computes average occupancy  percentages by dividing
the total number of beds occupied by the total number of licensed beds available
for use during the periods indicated.

     FACILITIES IN THE UNITED  STATES.  The  following  table sets forth certain
information  concerning the long-term  care,  subacute care and assisted  living
facilities  owned,  leased or managed by the Company in the United  States as of
December 31, 1998. Unless otherwise  indicated,  all facilities listed below are
leased by the Company.

<TABLE>
<CAPTION>

STATE                               FACILITIES              LICENSED BEDS(1)
-----                               ----------              ----------------
<S>                                <C>                      <C>
                                    NUMBER OF                  NUMBER OF 
California (2)                          95                       9,430
Georgia  (3)                            40                       3,916
Massachusetts (4)                       36                       4,749
Tennessee (4)                           34                       3,661
Washington (5)                          28                       2,557
Texas                                   26                       3,208
Florida (6)                             23                       3,075
North Carolina (5)                      22                       2,613
Arizona                                 15                       2,148
Illinois                                12                       1,340
Connecticut (7)                         11                       1,680
Alabama (3)                             10                       1,069
Idaho (4)                                9                         933
New Hampshire                            9                       1,008
New Mexico                               8                         647
Ohio                                     8                         980
Louisiana                                7                       1,135
West Virginia                            6                         619
Kentucky                                 5                         441
New Jersey (4)                           5                         769
Virginia (8)                             5                         817
Colorado (9)                             4                         453
Maryland                                 2                         353
Oklahoma                                 2                         135

                                       12
<PAGE>

Oregon                                   2                         195
Indiana                                  1                          99
Iowa                                     1                          77
Kansas                                   1                         102
Missouri                                 1                         103

TOTAL                                  428                      48,312
</TABLE>

---------------------
 
(1)     "Licensed  Beds" refers to the number of beds for which a license has
        been issued,  which may vary in some  instances  from  licensed  beds
        available for use.

(2)     Includes eight facilities owned by the Company and one facility managed 
        by the Company.

(3)     Includes two facilities owned by the Company.

(4)     Includes one facility managed by the Company.

(5)     Includes one facility owned by the Company.

(6)     Includes five facilities managed by the Company.

(7)     Includes four facilities owned by the Company and one facility managed 
        by the Company.
 
(8)     Includes three facilities managed by the Company.

(9)     Includes two facilities owned by the Company and two facilities managed 
        by the Company.

     FACILITIES IN THE UNITED  KINGDOM.  The following  table sets forth certain
information  concerning  the long-term  care  facilities  owned or leased by the
Company as of December 31, 1998.  Unless  otherwise  indicated,  all  facilities
listed below are leased by the Company.

<TABLE>
<CAPTION>
<S>                             <C>                  <C>
                                NUMBER OF               NUMBER OF
REGION                          FACILITIES           LICENSED BEDS(1)
---------                       ----------           ----------------
England (2)                        128                    7,054
Scotland (3)                         9                      741
Wales (4)                            8                      493
Northern Ireland (4)                10                      417

TOTAL                              155                    8,705
</TABLE>

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

(1)     "Licensed  Beds" refers to the number of beds for which a license has
        been issued,  which may vary in some  instances  from  licensed  beds
        available for use.
 
(2)     Includes 31 facilities owned by the Company.
 
                                       13
<PAGE>

(3)     Includes two facilities owned by the Company.
 
(4)     Includes one facility owned by the Company.
 

     FACILITIES IN GERMANY, SPAIN AND AUSTRALIA.  The following table sets forth
certain information  concerning the long-term care facilities owned or leased by
the Company as of December 31, 1998. Unless otherwise indicated,  all facilities
listed below are leased by the Company.
 
<TABLE>
<CAPTION>

COUNTRY                            FACILITIES          LICENSED BEDS(1)
----------                         ----------          ----------------
<S>                                <C>                 <C>
Spain (2)                              16                   1,135
Germany (3)                            10                   1,604
Australia (4)                           5                     309
                                       --                   -----

TOTAL                                  31                   3,048
</TABLE>

----------------------------
 
(1)   "Licensed  Beds" refers to the number of beds for which a license has
      been issued,  which may vary in some  instances  from  licensed  beds
      available for use.
 
(2)   Includes two facilities owned by the Company.
 
(3)   Includes one facility owned by the Company and one facility managed
      by the Company.
 
(4)   Includes five facilities owned by the Company. Includes five facilities
      owned by the Company.

     PHARMACEUTICAL  SERVICES.  As of December 31, 1998, the Company operated 28
regional pharmacies, 6 in-house long-term care pharmacies,  and 2 pharmaceutical
billing and  consulting  center in the United  States.  Also, as of December 31,
1998, the Company operated 18 pharmacies and 1 supply distribution center in the
United Kingdom.

ITEM 3.  LEGAL PROCEEDINGS
 
     In March 1999, a stockholder of the Company, Bernard L. Beck, filed a class
action  lawsuit  against the  Company  and three  officers of the Company in the
United  States  District  Court for the  District of New Mexico.  Several  other
similar  lawsuits may also have been filed in the same court in March 1999.  The
lawsuits allege,  among other things, that the Company did not disclose material
facts  concerning  the impact  that PPS would have on the  Company's  results of
operations.  The  lawsuits  seek  compensatory  damages  and  other  relief  for
stockholders  who purchased the Company's  common stock during the  class-action
period. Although the Company intends to vigorously defend itself in this matter,
there  can be no  assurance  that the  outcome  of this  matter  will not have a
material adverse effect on the results of operations and financial  condition of
the Company.

     In January 1999, the state of Florida filed criminal charges in the Circuit
Court of the Eighth Judicial  Circuit for Alachua County,  Florida against three
subsidiaries  which were acquired by the Company on June 30, 1998: RCA,  Capitol
Care  Management Co, Inc. and  Gainesville  Health Care Center,  Inc. All of the
allegations of wrongdoing relate to activities prior to June 30, 1998. Florida's

                                       14
<PAGE>

allegations include violations of certain RICO laws, abuse or neglect of elderly
or disabled  persons,  grand theft and Medicaid fraud at a nursing home facility
in Florida.  Also named as defendants were five individuals who were involved in
the  operation of the  facility in their  capacities  as officers,  directors or
employees of the defendant  entities.  If the defendant  entities are convicted,
they could be banned from participating in the Florida Medicaid program.

     Between  August 25, 1997 and October 24, 1997,  ten  putative  class action
lawsuits (the  "Actions") were filed in the United States District Court for the
Northern  District  of  Georgia on behalf of persons  who  purchased  RCA Common
Stock,  naming RCA and certain of its officers and directors as defendants.  The
complaints have  overlapping  defendants and largely  overlapping  (although not
identical) class periods. The complaints allege violations of Federal securities
laws  by  the  defendants  for  disseminating  allegedly  false  and  misleading
financial  statements  for RCA's  fiscal  year ended June 30, 1996 and its first
three  quarters  of fiscal year 1997,  which the  plaintiffs  allege  materially
overstated RCA's profitability. Generally, each of the Actions seeks unspecified
compensatory damages,  pre-judgment and post judgment interest,  attorneys' fees
and costs and other equitable and injunctive relief.

     On  November  25,  1997,  RCA,  the  Company  and  representatives  of  the
plaintiffs in the Actions  entered into a Memorandum of  Understanding  ("MOU").
Pursuant to the MOU, the Company paid $9 million into an interest-bearing escrow
account  maintained by the Company (the "Escrow  Account") to settle the Actions
(the "Settlement").  RCA also agreed to assign coverage under its directors' and
officers' liability   insurance  policy  for  these  specific  claims  to  the
plaintiffs.  All of the parties have signed the Settlement Agreement and it will
become final upon court  approval.  Upon court approval of the  Settlement,  all
claims by the class  that were or could  have been  asserted  by the  plaintiffs
against RCA or any of the other  defendants  in the Actions  will be settled and
released,  and the Actions will be dismissed in their entirety with prejudice in
exchange for the release of all funds from the Escrow Account to the Plaintiffs.
No assurance can be given that the Settlement will become final.

     In 1997,  the  Company  was  notified  by a law firm  representing  several
national  insurance  companies that these companies  believed Sun had engaged in
improper  billing and other practices in connection with the Company's  delivery
of therapy and related  services.  In response,  the Company  began  discussions
directly  with  these  insurers  and  hopes to  resolve  these  matters  without
litigation;  however,  the Company is unable at this time to predict  whether it
will be able to do so,  what the  eventual  outcome  may be or the extent of its
liability, if any, to these insurers.
 
     The Company is a party to various  other legal  actions and  administrative
proceedings  and is subject to various claims arising in the ordinary  course of
business.  The Company does not believe that the ultimate  disposition  of these
other matters will have a material  adverse effect on the financial  position or
results of operations of the Company.
 
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
     No matters were  submitted to a vote of security  holders during the fourth
quarter of fiscal 1998.
 
PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
     The  Company's  common stock is traded on the New York Stock  Exchange (the
"NYSE") under the symbol "SHG." The following table shows the high and low sales
prices for the common stock as reported by the NYSE for the periods indicated:


                                       15
<PAGE>
<TABLE>
<CAPTION>
                                                     HIGH           LOW
                                                   ---------     ---------
<S>                                               <C>            <C>
1997
  First Quarter  . . . . . . . . . . . . . . . .   $  16.25      $  12.75
  Second Quarter . . . . . . . . . . . . . . . .      20.81         13.88
  Third Quarter  . . . . . . . . . . . . . . . .      23.44         19.63
  Fourth Quarter . . . . . . . . . . . . . . . .      22.94         17.25
1998
  First Quarter  . . . . . . . . . . . . . . . .   $  20.13      $  18.13
  Second Quarter . . . . . . . . . . . . . . . .      19.25         14.63
  Third Quarter  . . . . . . . . . . . . . . . .      17.69          6.50
  Fourth Quarter . . . . . . . . . . . . . . . .       7.75          4.88
</TABLE>

     There were  approximately 6,500  holders of record as of March 26, 1999 of
the Company's common stock.
 
     The Company has not paid nor  declared  any  dividends  on its common stock
since its inception and anticipates that its future earnings will be retained to
finance the continuing  development  of its business.  The payment of any future
dividends will be at the discretion of the Company's Board of Directors and will
depend upon, among other things,  future earnings,  the success of the Company's
business activities,  regulatory and capital requirements, the general financial
condition  of the  Company  and  general  business  conditions.  The  Company is
restricted from paying dividends under the Senior Credit Facility.

ITEM 6.  SELECTED FINANCIAL DATA
 
     To be filed by amendment.


ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS
 
     To be filed by amendment.


ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
 
     Not applicable.

 
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
     To be filed by amendment.


ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE
 
     None.

                                       16
<PAGE>

PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
     The directors and executive officers of Sun as of March 31, 1999 were:
<TABLE>
<CAPTION>

NAME                                            POSITION WITH SUN
----                                --------------------------------------------
<S>                                 <C>
Andrew L. Turner . . . . . . . . .  Chairman of the Board of Directors and 
                                     Chief Executive Officer
Mark G. Wimer  . . . . . . . . . .  President, Chief Operating Officer and
                                       Director
Robert  D. Woltil  . . . . . . . .  Chief Financial Officer and Director
Warren C. Schelling  . . . . . . .  President and Chief  Operating  Officer of 
                                       Sun Healthcare Group International
Julie Collins  . . . . . . . . . .  Chief Administrative Officer
Robert F. Murphy . . . . . . . . .  General Counsel, Compliance Officer
                                      and Secretary
Kenneth C. Noonan .  . . . . . . .  President of SunSolution
Andrew P. Masetti  . . . . . . . .  Vice President - Finance
Matthew G. Patrick . . . . . . . .  Vice President and Treasurer
Warren H. McInteer . . . . . . . .  Chief Financial Officer of Sun Healthcare
                                      Group International
William C. Warrick . . . . . . . .  Vice President - Corporate Controller
John E. Bingaman . . . . . . . . .  Director
Zev Karkomi  . . . . . . . . . . .  Director
Martin G. Mand . . . . . . . . . .  Director
Lois E. Silverman  . . . . . . . .  Director
James R. Tolbert, III . . .  . . .  Director
R. James Woolsey . . . . . . . . .  Director
</TABLE>

     Set forth below are the names of the  executive  officers and  directors of
Sun and their ages as of March 31, 1999.  The Board of Directors is divided into
three classes elected for staggered terms.  Each director holds office until the
next annual meeting of  stockholders at which the class of directors of which he
is a member is elected or until his  successor  has been elected and  qualified.
The terms of Messrs.  Karkomi,  Wimer and Schelling and Ms.  Silverman expire in
1999,  the terms of Messrs.  Turner  and Woltil  expire in 2000 and the terms of
Messrs.  Bingaman,  Mand,  Tolbert and  Woolsey  expire in 2001.  The  executive
officers  of Sun are chosen  annually  to serve  until the first  meeting of the
Board of Directors  following the next annual meeting of stockholders  and until
their successors are elected and have qualified, or until death,  resignation or
removal, whichever is sooner.

     Andrew L.  Turner,  age 52, has been the Chairman of the Board of Directors
and Chief  Executive  Officer of the Company  since its  formation and served as
President of the Company from the Company's  formation until September 1997. Mr.
Turner is also the founder of the Company and has  overseen the  development  of
the  Company's  business  since its  inception  in 1989.  Mr.  Turner was also a
founder and previously served as Chief Operating  Officer of Horizon  Healthcare
Corporation,  a healthcare services provider,  from 1986 to 1989. Prior to 1986,
Mr.  Turner  served as a Senior Vice  President of  Operations  of The Hillhaven
Corporation  ("Hillhaven").  Mr.  Turner has over 20 years of  experience in the
long-term care  industry.  Mr. Turner is also a member of the Board of Directors
of Watson  Pharmaceuticals,  Inc., a pharmaceutical products company, and of The
Sports Club Company, Inc., an operator of sports and fitness clubs.

                                       17
<PAGE>

     Mark G. Wimer,  age 45, has been a director  of the Company  since 1993 and
the President and Chief  Operating  Officer of the Company since September 1997.
Mr. Wimer had previously served as Senior Vice President for Inpatient  Services
from 1996 until  September  1997,  and as the  President  of SunRise  Healthcare
Corporation ("SunRise"),  the Company's subsidiary responsible for operations of
the Company's  long-term  care  facilities,  from 1993 until 1995.  From 1988 to
1993,  Mr.  Wimer  was  President  and Chief  Executive  Officer  of  Franciscan
Eldercare  Corporation,  a  non-profit  organization  that  develops and manages
long-term care  facilities.  From 1984 through 1988, Mr. Wimer was Regional Vice
President of Operations for Hillhaven and had  responsibility  for management of
long-term  care  facilities  for  Hillhaven  in  Washington,  Oregon,  Idaho and
Montana.
 
     Robert D. Woltil, age 44, has been a director of the Company since 1996 and
the Chief  Financial  Officer of the Company since 1996.  From 1982 to 1996, Mr.
Woltil served in various capacities for Beverly Enterprises, Inc. ("Beverly"), a
healthcare services provider. From 1995 until 1996, Mr. Woltil was President and
Chief  Executive  Officer of Pharmacy  Corporation  of America,  a subsidiary of
Beverly.  From 1992 to 1995, he was the Chief Financial Officer of Beverly,  and
from 1990 to 1992,  Mr.  Woltil was the Vice  President--Financial  Planning and
Control for Beverly. Mr. Woltil is also a certified public accountant.
 
     Warren C. Schelling, age 45, has been President and Chief Operating Officer
of Sun Healthcare  Group  International  since February  1999.  Previously,  Mr.
Schelling was the Senior Vice President for  Pharmaceuticals of the Company from
1996 to February 1999, a director of the Company from 1996 to 1998 and President
of SunScript from 1994 to 1995. Prior to joining the Company,  Mr. Schelling was
the President and Chief Operating  Officer of HPI Health Care Services,  Inc., a
subsidiary of Diagnostek,  Inc., which provides pharmacy  management services to
hospitals, HMOs, long-term care facilities and health systems, from 1993 to July
1994. From January 1994 to July 1994, Mr. Schelling also served as the Executive
Vice President/Pharmacy  Services Officer at Diagnostek, Inc. From 1985 to 1993,
Mr. Schelling was a manager in HPI Health Care Services, Inc.

     Julie Collins, age 51, has been Chief Administrative Officer of the Company
since  February  1999.  From 1996 to February 1999 she was the Company's  Senior
Vice  President--Administrative  Services  and from  1994 to  1995,  she was the
Company's  Vice President  Human  Resources.  Prior to joining the Company,  Ms.
Collins was the Vice President of Human  Resources and Support  Services for St.
Joseph Health System in Atlanta,  Georgia from 1993 to 1994.  From 1991 to 1993,
Ms.  Collins was the Vice President - Human  Resources of SunRise.  From 1990 to
1991, Ms. Collins was Director of Human  Resources for Shepherd Spinal Center in
Atlanta, Georgia.
 
     Robert F.  Murphy,  age 45, has been General  Counsel of the Company  since
1995,  Compliance Officer of the Company since 1997 and Secretary of the Company
since 1996.  From 1986 to 1995 Mr.  Murphy  served in several  capacities  as an
officer and legal  counsel to FHP  International  Corporation,  most recently as
Vice President and Associate  General Counsel.  Prior to 1986, Mr. Murphy was in
private practice for several years.
 
     Kenneth C. Noonan,  age 43, has been President of  SunSolution  since 1997.
From 1997 to  February  1999,  Mr.  Noonan  was Senior  Vice  President-Business
Development. Prior to joining Sun, Mr. Noonan was Vice President of Managed Care
and Business  Development for Manor Care, Inc. from 1994 to 1997, Vice President
of Western Operations for Option Care, Inc. from 1992 to 1994 and Western Region
Manager for McGaw, Inc. from 1983 to 1990.

     Andrew P. Masetti, age 41, has been  Vice-President--Finance of the Company
since  October  1997.  From June 1997 to  October  1997,  Mr.  Masetti  was Vice
President  and  Controller of Rehab  Services of Sun.  Prior to joining Sun, Mr.
Masetti was Divisional Chief Financial Officer of Harte-Hanks from

                                       18
<PAGE>

1996 to 1997,  Chief  Financial  Officer of Vista  Healthcare  from 1995 to
1996,  Chief  Financial  Officer  of  Diagnostek  from  1994 to 1995 and he held
various financial  management  positions with Martin  Marietta/General  Electric
from 1979 to 1994.
 
     Warren  H.  McInteer,  age 39,  has been  Chief  Financial  Officer  of Sun
Healthcare  Group  International  since  February  1999.  Mr.  McInteer was Vice
President of Mergers & Acquisitions  from 1995 to February 1999 and Treasurer of
the Company from 1996 to 1998.  Prior to joining the Company,  Mr.  McInteer was
the Vice  President  of  Financial  Planning  for  Continental  Medical  Systems
("Continental")  in  Mechanicsburg,  Pennsylvania,  from  1993  to  1995  and  a
management consultant for Price Waterhouse from 1985 to 1993.
 
     Matthew G.  Patrick,  age 39, has been Vice  President and Treasurer of the
Company since 1998.  From 1993 to 1998,  Mr.  Patrick was Vice  President of the
Dallas Agency of The Sanwa Bank,  Ltd. From 1992 to 1993,  Mr. Patrick served as
financial  consultant  for  Merrill,  Lynch,  Pierce,  Fenner and Smith,  Inc.'s
Private  Client Group in Dallas and from 1985 to 1990 he held various  financial
positions in the International Division of National Westminster Bank, PLC.

     William C. Warrick,  age 36, has been Vice President,  Corporate Controller
of the Company since 1994.  From 1991 to 1994,  Mr. Warrick  directed  financial
reporting  for  Continental.  From  1990 to 1991,  Mr.  Warrick  held a  similar
position with McCrory Stores,  a retail chain store company.  Prior to 1990, Mr.
Warrick was an  accountant  with KPMG Peat Marwick.  Mr.  Warrick is a certified
public accountant.

     William R. Anixter,  age 75, became a director of the Company in April 1998
to fill the vacancy on the Board  created when Robert A. Levin stepped down as a
director.  Mr. Anixter  has  been the  President  of Chama  Resources,  Inc.,  a
privately held real estate management company, since 1990. He was co-founder and
vice chairman of Anixter Bros., Inc., a publicly owned international distributor
of wire, cable, fiber optics and related networking products,  which was sold to
an  investor  group  in  1986.   Mr. Anixter   also  serves  on  the  boards  of
Anicom, Inc., a publicly owned distributor of communications-related  equipment,
the United World College and the Boys Club of Albuquerque.

     John E.  Bingaman,  age 52,  became  a  director  of the  Company  in 1993.
Mr. Bingaman also served as a consultant to the Company from 1994 to 1996. Since
1993, Mr. Bingaman has been Vice President of BKS Properties. From 1991 to 1993,
Mr. Bingaman  was the  President of Four Seasons  Healthcare  Management,  Inc.,
which  was  the  Company's   subsidiary  that  managed  certain  long-term  care
facilities   through   management   contracts.   Between  1984  and   July 1993,
Mr. Bingaman was Chief Executive Officer of Honorcare Corporation ("Honorcare"),
a provider of long-term care services,  responsible  for the overall  management
and  strategic  planning  of  Honorcare.  Mr. Bingaman  has  over  25  years  of
experience in the long-term care industry.

     Zev Karkomi, age 75, became a director of the Company in 1993.  Mr. Karkomi
has over 25 years of  experience  in the real  estate  business,  with a primary
emphasis on properties owned and leased to long-term  healthcare  operators.  He
has served as President of Karell Capital Ventures, Inc., a corporation involved
in the acquisition,  sale,  leasing and management of long-term care facilities,
since 1980. Mr. Karkomi also serves as the President of Zevco  Enterprises, Inc.
and Executive  Vice  President and Chairman of the Board of  Progressive  Health
Group, Inc., real estate investment companies.

     Martin G. Mand,  age 62,  became a director of the  Company in 1996.  Since
1995, Mr. Mand has been Chairman,  President and Chief Executive Officer of Mand
Associates, Limited, a financial consulting, speaking and writing firm. Mr. Mand
was previously  Executive Vice President and Chief Financial Officer of Northern
Telecom, Ltd., a global manufacturer of telecommunications  equipment, from 1990
to 1994. Mr. Mand also previously served as Vice President and Treasurer of E.I.
du Pont de

                                       19
<PAGE>

Nemours & Co., a chemical,  allied  products and energy  company.  Mr. Mand
also serves on the Board of Directors of the Fuji Bank and Trust Company and CAI
Wireless Systems, Inc.

     Lois E.  Silverman,  age 58,  became a  director  of the  Company  in 1995.
Ms. Silverman is a director of CONCENTRA  Managed  Care, Inc.,  a publicly owned
provider of services to reduce the costs of workers'  compensation,  automobile,
disability and health insurance claims.  Ms. Silverman was a co-founder,  served
as the  Chairman of the Board of CRA Managed  Care, Inc.  from 1994 to September
1997 and as its Chief Executive Officer from 1988 to 1995.  Ms. Silverman is the
President  of  the  Commonwealth   Institute,   a  nonprofit   organization  she
established in 1997 for the advancement of women entrepreneurs. Ms. Silverman is
also a director of CareGroup and  Immunetics,  a member of the Dean's Council of
the Harvard School of Public  Health,  an overseer of Tufts  University  Medical
School and a Trustee at Simmous College.

     James R. Tolbert, III, age 63, became a director of the Company in 1995 and
was  appointed  Lead  Independent  Director of the Board of  Directors  in 1998.
Mr. Tolbert has served as the Chairman,  President,  Chief Executive Officer and
Treasurer  of  First  Oklahoma  Corporation,  a  holding  company,  since  1986.
Mr. Tolbert  has over 15 years of  experience in the nursing home  industry.  In
addition,  Mr. Tolbert is a member of the Board of Directors of Bonray  Drilling
Corporation,  a corporation engaged in domestic onshore contract drilling of oil
and gas wells.

     R.  James  Woolsey,  age 57,  became a  director  of the  Company  in 1995.
Mr. Woolsey  has been a partner in the law firm of Shea &  Gardner  since  1995,
where he previously  had been a partner from 1980 to 1989 and from 1991 to 1993.
From 1993 to 1995,  Mr. Woolsey  served as the Director of Central  Intelligence
for the  United  States  government.  From  1989 to  1991,  Mr. Woolsey  was the
Ambassador and U.S.  Representative  to the  Negotiation on  Conventional  Armed
Forces in Europe.
 
Section 16(a) Beneficial Ownership Reporting Compliance

     Section  16(a) of the  Exchange  Act and the rules  promulgated  thereunder
require the Company's  directors and executive officers and persons who own more
than ten percent of the  Company's  Common Stock to report their  ownership  and
changes  in their  ownership  of Common  Stock to the  Securities  and  Exchange
Commission (the  "Commission")  and the New York Stock  Exchange.  Copies of the
reports  must  also be  furnished  to the  Company.  Specific  due dates for the
reports have been  established  by the Commission and the Company is required to
report in this Proxy Statement any failure of its directors,  executive officers
and more than ten percent stockholders to file by these dates.

     Based  solely on a review of the  copies of such forms  received  by it, or
written  representations  from certain reporting  persons,  the Company believes
that  during  1998 all  Section  16(a)  filing  requirements  applicable  to its
directors,  executive  officers and greater than ten percent  beneficial  owners
were met  with the  exception  of Zev  Karkomi,  who  reported  one  transaction
reportable on Form 4 one week late due to an oversight.

ITEM 11.  EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

     The  following  table  provides  information   concerning  the  annual  and
long-term  compensation  for  services  as  employees  of the  Company  and  its
subsidiaries  for the fiscal  years  shown of those  persons  ("Named  Executive
Officers")  who were,  during the year ended  December 31,  1998,  (i) the chief
executive  officer  and (ii) the other four most  highly  compensated  executive
officers of the Company:

                                       20
<PAGE>

<TABLE>
<CAPTION>
                                                          Long-Term Compensation Awards

                                                                               Securities
    Name and                         Annual Compensation    Restricted Stock   Underlying       All Other
Principal Position          Year     Salary($)   Bonus($)     Awards($)(1)     Options(#)    Compensation($)
------------------          ----     ---------   --------   ----------------   ----------    ---------------
<S>                         <C>      <C>         <C>           <C>               <C>             <C>

Andrew L. Turner            1998     $659,634    $   -              -            50,000         $26,873(2)
  Chief Executive Officer   1997      537,312     550,000      $5,409,625          -              5,771
                            1996      500,000     250,000           -              -              3,795         
                                                       
Mark G. Wimer               1998      443,274        -              -            25,000           9,424(3)
  President and Chief       1997      367,387     255,000      2,712,500           -              1,503
  Operating Officer         1996      322,516     125,000           -            15,000           1,770      
                                                                                                     
Robert D. Woltil            1998      418,288        -              -            25,000          10,069(4)
  Chief Financial Officer   1997      374,428     240,000      1,443,750           -                870        
                            1996      296,164(5)  125,000           -            25,000             503

Robert A. Levin             1998      370,587(6)     -              -           100,000           4,223(7)
  Senior Vice President-    1997      341,193     138,000      2,668,750           -              1,503
  Ancillary Services        1996      330,202        -              -            15,000           1,554      
                                                                                             
Robert F. Murphy            1998      280,973        -              -            30,000           5,872(8)
  General Counsel and       1997      267,469     108,000      1,299,625           -                685       
  Secretary                 1996      260,000     100,000           -              -                457
</TABLE>
___________

(1)  Restricted stock awards are valued at the Company's  closing stock price on
     the date of grant. Dividends, if any, would be paid on restricted shares at
     the same rate paid to all stockholders.  The Named Executive  Officers held
     the following shares of restricted  stock valued at December 31,  1998 at a
     closing price of $6.5625 per share and at March 29, 1999 at a closing price
     of $1.06 per share:
<TABLE>
<CAPTION>
                              NUMBER OF      MARKET VALUE       MARKET VALUE
                               SHARES         AT 12/31/98        AT 3/29/99
                              ---------      ------------       ------------
          <S>                  <C>            <C>                  <C>    
                              
          Mr. Turner           200,800        $1,317,750           $212,848
          Mr. Wimer             74,400           488,250             78,864
          Mr. Woltil            39,600           259,875             41,976
          Mr. Levin             73,200           480,375             77,592
          Mr. Murphy            35,400           232,313             37,524
</TABLE>

(2)  Consists of $1,200 of matching  contributions  under the  Company's  401(k)
     Plan,  the  payment of $6,173 of life  insurance  premiums,  the vesting of
     $2,500  of  deferred  compensation  pursuant  to a  Supplemental  Executive
     Retirement  Plan and the payment of  approximately  $17,000 on Mr. Turner's
     behalf for legal representation in connection with the renegotiation of his
     employment agreement in 1998.

(3)  Consists of $1,200 of matching  contributions  under the  Company's  401(k)
     Plan, the payment of $5,724 of life  insurance  premiums and the vesting of
     $2,500  of  deferred  compensation  pursuant  to  a  Supplemental  Employee
     Retirement Plan.

                                       21
<PAGE>

(4)  Consists of $1,200 of matching  contributions  under the  Company's  401(k)
     Plan, the payment of $6,369 of life  insurance  premiums and the vesting of
     $2,500  of  deferred  compensation  pursuant  to  a  Supplemental  Employee
     Retirement Plan.

(5)  Salary for 1996  represents  amounts paid to  Mr. Woltil  in 1996 after the
     commencement   of  his   employment   by  the  Company  in   February 1996.
     Mr. Woltil's annualized salary for 1996 would have been $350,000.

(6)  Mr. Levin's employment with the Company terminated in January 1999.

(7)  Consists of $1,200 of matching  contributions  under the  Company's  401(k)
     Plan and the payment of $3,023 of life insurance premiums.

(8)  Consists of $1,200 of matching  contributions  under the  Company's  401(k)
     Plan and the payment of $4,672 of life insurance premiums.

OPTION GRANTS IN LAST FISCAL YEAR

     The following table sets forth certain  information  concerning  individual
grants of stock options made to each of the Named Executive  Officers during the
year ended December 31, 1998:
<TABLE>
<CAPTION>
                                          INDIVIDUAL GRANTS
                           ------------------------------------------------
                                % OF TOTAL
                                 OPTIONS
                    NUMBER OF   GRANTED TO
                    SECURITIES  EMPLOYEES  EXERCISE OR              GRANT DATE
                    UNDERLYING  IN FISCAL  BASE PRICE  EXPIRATION PRESENT VALUE
    NAME            OPTIONS(1)   YEAR(%)    ($/SH)(2)     DATE        ($)(3)
    ----            ----------   -------    ---------     ----        ------

<S>                  <C>          <C>        <C>        <C>         <C>     
Andrew L. Turner      50,000      2.4%       $19.375    03/06/08     $572,500
Mark G. Wimer         25,000      1.2         19.375    03/06/08      286,250
Robert D. Woltil      25,000      1.2         19.375    03/06/08      286,250
Robert A. Levin      100,000(4)   4.8         19.375    03/06/08    1,145,000
Robert F. Murphy      30,000      1.5         19.375    03/06/08      343,500
</TABLE>
------------------
(1)  All options were granted under the Company's 1997 Incentive Stock Plan.

(2)  All  options  were  granted at an  exercise  price equal to the fair market
     value of Common  Stock on the option grant date.  The closing  price of the
     Company's  stock on March 29, 1999 was $1.06 per share.  All  options  will
     vest and become  exercisable  at a rate of one-third each year beginning on
     the  first  anniversary  of the date of grant.  All  options  become  fully
     exercisable  on the  occurrence  of a change in control as described in the
     plan pursuant to which each option was granted.

(3)  Grant date present  values were  calculated  using the plain  Black-Scholes
     valuation  model.  Assumptions  used in the calculation  include a one-year
     volatility of 36.18%,  an interest rate of 5.68% and an exercise  period of
     10 years.  Actual gains,  if any, on stock option exercise are dependent on
     the  future  performance  of Common  Stock as well as the  option  holder's
     continued  employment  through the vesting period. The amounts reflected in
     this table may not necessarily be achieved.

(4)  These options terminated when Mr. Levin's employment  terminated in January
     1999.

                                       22
<PAGE>

FISCAL YEAR-END OPTION VALUES

     Set forth in the table below is  information  concerning the value of stock
options held as of December 31,  1998 by each of the Named  Executive  Officers.
None of the Named Executive Officers exercised any stock options during the year
ended December 31, 1998.

<TABLE>
<CAPTION>
                          NUMBER OF SECURITIES           VALUE OF UNEXERCISED
                         UNDERLYING UNEXERCISED          IN-THE-MONEY OPTIONS
                         OPTIONS-AT-YEAR-END-(#)           AT-YEAR-END-($)(1)
      NAME             EXERCISABLE  UNEXERCISABLE    EXERCISABLE   UNEXERCISABLE
      ----             -----------  -------------    -----------   -------------

  <S>                    <C>             <C>         <C>           <C>
  Andrew L. Turner       200,000         50,000      $    -0-      $    -0-
  Mark G. Wimer           58,000         30,000           -0-           -0-
  Robert D. Woltil        16,667         33,333           -0-           -0-
  Robert A. Levin         58,000        105,000           -0-           -0-
  Robert F. Murphy        10,000         30,000           -0-           -0-
</TABLE>
-----------
(1)  Based on the closing price of the Common Stock, as reported on the New York
     Stock Exchange, at December 31, 1998, which was $6.5625 per share.

COMPENSATION OF DIRECTORS

     Non-employee directors of the Company are entitled to receive an annual fee
of $24,000, which is payable in four equal quarterly installments.  In addition,
each Chairperson of a committee of the Board of Directors is entitled to receive
an  additional   annual  fee  of  $4,000,   payable  in  four  equal   quarterly
installments.  The  Lead  Independent  Director  of the  Board of  Directors  is
entitled to an additional annual fee of $12,000,  which is payable in four equal
quarterly  installments.  Non-employee directors and Committee Chairpersons have
the  election  of  receiving   (i) the  entire  annual  retainer  and  Committee
Chairpersons fees, if applicable,  in cash, or (ii) one-half of the retainer and
Committee Chairperson fees, if applicable, in cash and the remaining one-half in
the form of  restricted  common stock awards  pursuant to the 1997  Non-Employee
Directors' Stock Plan. If restricted stock is elected,  for every dollar of cash
given up, the recipient will receive restricted stock worth $1.10.

     Non-employee directors are also entitled to receive fees of $1,750 for each
Board of  Directors  meeting  attended in person.  Directors  are entitled to an
additional $500 for each subsequent meeting attended that same day. The fees for
any meetings that are attended by telephone are $500. Non-employee directors are
also reimbursed for out-of-pocket  expenses for attendance at such meetings.  In
addition,   pursuant   to  the  1997   Non-Employee   Directors'   Stock   Plan,
(i) non-employee  directors  already  serving on the Board are awarded  annually
2,000 shares of  restricted  common  stock and  non-qualified  stock  options to
purchase  4,000 shares of common stock and  (ii) non-employee  directors who are
elected to the Board for the first time or after a period of not  serving on the
Board are entitled to one-time awards of 5,000 shares of restricted common stock
and non-qualified stock options to purchase 10,000 shares of common stock.

     Pursuant  to a decision by the Board of  Directors  to reduce the number of
employee-directors, Robert Levin and Warren Schelling resigned from the Board in
April 1998.  On April 30,  1998,  the  Compensation  Committee  granted  each of
Messrs.  Levin and  Schelling  2,000  shares of the  Company's  common  stock in
recognition of the  contributions  they made to the Company while serving on the
Board.

                                       23
<PAGE>

EMPLOYMENT AGREEMENT

     Mr. Turner and the Company entered into a five-year Employment Agreement as
of June 2, 1998.  The  Employment  Agreement  provides  for an annual  salary of
$700,000 which was effective  April 1, 1998.  The Agreement  provides for salary
increases  of $150,000 on each of April 1, 1999 and 2000 and for an annual bonus
determined  pursuant to a formula.  Mr.  Turner has elected to forego his salary
increase  scheduled  for  April 1,  1999.  The  Agreement  contains  a  two-year
noncompetition  covenant and a covenant  prohibiting  Mr. Turner from disclosing
any  confidential  information  of the Company.  The Agreement also contains the
same general severance provisions described below under "Severance Agreements."

SEVERANCE AGREEMENTS

     The  Company  has  entered  into  severance   agreements   (the  "Severance
Agreements")  with certain  executive  officers,  including the Named  Executive
Officers.   Each  Severance   Agreement  provides  that  in  the  event  of  the
"involuntary  termination"  of the  executive,  he or she  will be  entitled  to
receive any accrued but unpaid  salary plus a pro rata portion of annual  bonus.
An  "involuntary  termination"  is defined as a  termination  by the Company for
reasons other than an executive's  disability that do not constitute  "cause" or
an executive's resignation for "good reason." In addition, the executive will be
entitled to a severance  payment equal to two times salary at the rate in effect
at the time of the executive's  involuntary  termination,  or, in the event that
such  termination  occurs within two years  following a change in control of the
Company (as defined below),  a severance  payment equal to three times salary at
the rate then in effect. The executive will continue to receive health and other
benefits for a period of two years following his or her involuntary  termination
(or for a period  of three  years in the  event  that  such  termination  occurs
following a change in control of the  Company).  The Severance  Agreements  also
provide for a gross-up  payment to be made to the  executives,  if  necessary to
eliminate the effects of the  imposition of the excise tax under Section 280G of
the Code on the payments  made  thereunder.  The  Severance  Agreements  contain
noncompetition and nondisclosure covenants.

     For purposes of the Severance Agreements,  "change in control" is generally
defined  as (i) the  acquisition  by a person or group of  beneficial  ownership
representing  33-1/3% of the  Company's  then  outstanding  voting  stock,  (ii)
stockholder  approval of a merger or  consolidation  of the Company other than a
merger  or  consolidation  in  which  the  voting   securities  of  the  Company
outstanding immediately prior thereto continues to represent at least 66-2/3% of
the  combined  voting  power  of  the  surviving  entity's   outstanding  voting
securities,  (iii) under  certain  conditions,  a change in the  majority of the
Board  of  Directors  of  the  Company,  or  (iv)  stockholder   approval  of  a
reorganization  of the Company or a sale of  substantially  all of the Company's
assets.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
     The following table and footnotes set forth certain  information  regarding
the  beneficial  ownership  of  Common  Stock as of March  30,  1999 by (i) each
director,  (ii) the Named  Executive  Officers  (as  defined  below),  (iii) all
directors  and  executive  officers of the  Company as a group,  and each person
believed by the Company to be the beneficial  owner of more than five percent of
Common Stock of the Company:

                                       24
<PAGE>

<TABLE>
<CAPTION>
                                         SHARES                   PERCENT OF
NAME OF BENEFICIAL OWNER          BENEFICIALLY OWNED(1)           CLASS(1)(%)
------------------------          ---------------------           -----------             
<S>                               <C>                             <C>
Andrew L. Turner                        6,937,799(2)(3)              11.4%
  101 Sun Avenue NE
  Albuquerque, NM  87109
William R. Anixter                          7,792(3)                   *
John E. Bingaman                          193,361(3)(4)                *
Zev Karkomi                               191,080(3)(5)                *
Robert A. Levin                            64,167                      *
Martin G. Mand                              9,480(3)(6)                *
Robert F. Murphy                           68,742(3)(7)                *
Lois E. Silverman                          11,211(3)(8)                *
James R. Tolbert, III                      17,148(3)(8)                *
Mark G. Wimer                             170,934(3)(9)                *
Robert D. Woltil                           77,934(3)(10)               *
R. James Woolsey                            8,250(3)(11)               *
All directors and executive officers    7,936,320(12)                13.0%
as a group (18 persons, including
those named above)                         
</TABLE>
__________

*        Less than 1%

(1)  Beneficial  ownership is  determined  in  accordance  with the rules of the
     Commission and generally  includes voting or investment  power with respect
     to  securities.  Options  exercisable  within 60 days of March 30, 1999 are
     deemed to be currently exercisable. Except as indicated in the footnotes to
     this table and pursuant to applicable  community property laws, the persons
     named in the table have sole voting and  investment  power with  respect to
     all shares of Common Stock beneficially owned.

(2)  Includes  353,000  shares of Common  Stock  owned by the Turner  Children's
     Trust,  74,267  shares of Common  Stock held by the Andrew and Nora  Turner
     Trust and  261,065  shares  of  Common  Stock  owned by the  Turner  Family
     Foundation  (Mr. Turner  disclaims  beneficial  ownership of these shares).
     Also includes currently  exercisable  options to purchase 216,667 shares of
     Common Stock.

(3)  Includes restricted shares awarded under the Company's 1997 Stock Incentive
     Plan and 1997  Non-Employee  Directors'  Plan  which  may be  subject  to a
     substantial  risk of forfeiture.  The number of restricted  shares included
     for each person listed above as having restricted shares is as follows: Mr.
     Turner - 150,600;  Mr. Anixter - 5,396; Mr. Bingaman - 3,794; Mr. Karkomi -
     3,729;  Mr. Mand - 3,729;  Mr. Murphy - 23,600;  Ms. Silverman - 3,794; Mr.
     Tolbert - 3,333; Mr. Wimer - 49,600; Mr. Woltil - 26,400; and Mr. Woolsey -
     3,333.

(4)  Includes currently  exercisable options to purchase 44,334 shares of Common
     Stock.

                                       25
<PAGE>

(5)  Includes 200 shares owned by Mr. Karkomi's grandson.  Mr. Karkomi disclaims
     beneficial  ownership of these shares. Also includes currently  exercisable
     options to purchase 44,334 shares of Common Stock.

(6)  Includes currently  exercisable  options to purchase 4,084 shares of Common
     Stock.

(7)  Includes currently  exercisable options to purchase 20,000 shares of Common
     Stock.

(8)  Includes currently  exercisable  options to purchase 4,584 shares of Common
     Stock.

(9)  Includes currently  exercisable options to purchase 66,334 shares of Common
     Stock.

(10) Includes  5,000  shares  owned  by  Mr. Woltil  and his  wife,  as to which
     Mr. Woltil has shared voting and investment power. Also includes  currently
     exercisable options to purchase 33,334 shares of Common Stock.

(11) Includes currently  exercisable  options to purchase 4,250 shares of Common
     Stock.

(12) Includes an aggregate of 560,842  shares of Common Stock  issuable upon the
     exercise  of options  that are  currently  exercisable.  Also  includes  an
     aggregate  of  339,308  restricted  shares  awarded  under  the 1997  Stock
     Incentive Plan and 1997  Non-Employee  Directors' Plan which may be subject
     to a substantial risk of forfeiture.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Mr.  Turner,  the Chief  Executive  Officer of the Company,  guarantees the
Company's  obligations  under a lease for a  nursing  home in  Connecticut.  Mr.
Turner is the  guarantor  of  subleases on three  facilities  in  Illinois,  the
sublessor  of  which is a  company  co-owned  by Mr.  Karkomi,  a member  of the
Company's Board of Directors.  Mr. Karkomi's company,  in turn, is the guarantor
of the master lease. Mr. Turner also guarantees the Company's  obligations under
one facility lease in Washington.

     Kenneth C. Noonan, President - SunSolution,  was indebted to the Company in
1998 in the amount of $197,798.  The Company entered into a short-term loan with
Mr. Noonan  in  connection   with  his  relocation  in  1997  to  the  Company's
headquarters  in  Albuquerque.  Mr.  Noonan  paid off the loan in full in August
1998.

     Mr. Noonan's spouse,  Jennifer Noonan, provided public speaking seminars to
the Company in 1998  through her  wholly-owned  business,  SpeakWrite  Executive
Development. The total amount paid to SpeakWrite in 1998 was $73,438.
 
     Mr. Woolsey,  in his  capacity  as a  partner  in the law  firm  of  Shea &
Gardner,  provided  certain  legal  services to the  Company in 1998.  The total
amount  paid to  Shea & Gardner  in 1998 for  such  services  was  approximately
$101,000.
 
     As of December 31, 1998, the Company's  nursing home  subsidiary,  SunRise,
was a lessee or sublessee of 61 facilities from  partnerships or corporations in
which  Mr. Karkomi  was  a  general  partner,  stockholder  or  director.  These
arrangements  were entered into from  February 1989  to June 1997,  with varying
lease terms.  Approximately  50% of the facilities are under ten-year terms. The
aggregate  lease  payments,  including  base rents,  contingent  rents and other
miscellaneous  payments in connection with these leases,  totaled  approximately
$19.1 million in 1998.

                                       26
<PAGE>

     As of  December 31,  1998,  SunRise  was a  lessee  or  assignee  of  seven
facilities  from  partnerships in which  Mr. Bingaman  had an equity interest of
greater  than ten  percent.  Each of these lease  arrangements  was entered into
prior  to the  closing  of  the  acquisition  of  Honorcare.  All of the  leases
commenced on July 13,  1993 and terminate in 2001. The aggregate lease payments,
including  base  rents,  contingent  rents and other  miscellaneous  payments in
connection with these leases, totaled approximately $2.1 million in 1998.

     The Company believes the terms of all of the foregoing  transactions are as
favorable  to  the  Company  as  those  that  could  have  been   obtained  from
non-affiliated  parties in  arm's-length  transactions.  However,  the Company's
contractual  relationship with entities  affiliated with members of the Board of
Directors creates the potential for conflicts of interest.

 
                                     PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

     (a)      Financial Statements and Financial Statement Schedules

              To be filed by amendment.

     (b)      Reports on Form 8-K

              None.
 
     (c)      Exhibits
 


EXHIBIT NUMBER                      DESCRIPTION OF EXHIBITS
--------------                     ------------------------

  2.1(16)             Agreement and Plan of Merger and Reorganization,  dated
                      as of February  17, 1997 among Sun,  Peach  Acquisition
                      Corporation and Retirement Care Associates, Inc.
 
  2.2(16)             Agreement and Plan of Merger and Reorganization,  dated
                      as  of   February   17,   1997  among  Sun,   Nectarine
                      Acquisition Corporation and Contour Medical, Inc.
 
  2.3(21)             Amendment  No. 1 to the  Agreement  and Plan of  Merger
                      and  Reorganization  dated as of February 17,1997 among
                      Sun,   Retirement  Care  Associates,   Inc.  and  Peach
                      Acquisition Corporation dated May 27, 1997

  2.4(22)             Amendment  No. 2 to the  Agreement  and Plan of  Merger
                      and  Reorganization  dated as of February 17,1997 among
                      Sun,   Retirement  Care  Associates,   Inc.  and  Peach
                      Acquisition Corporation dated August 21, 1997

                                       27
<PAGE>
 
  2.5(22)             Amendment  No. 1 to the  Agreement  and Plan of  Merger
                      and Reorganization  dated as of February 17, 1997 among
                      Sun,  Contour Medical,  Inc. and Nectarine  Acquisition
                      Corporation dated August 21, 1997

  2.6(23)             Amendment  No. 3 to the  Agreement  and Plan of  Merger
                      and Reorganization  dated as of February 17, 1997 among
                      Sun,   Retirement  Care  Associates,   Inc.  and  Peach
                      Acquisition Corporation dated November 25, 1997
 
  2.7(23)             Amendment  No. 2 to the  Agreement  and Plan of  Merger
                      and Reorganization  dated as of February 17, 1997 among
                      Sun,  Contour Medical,  Inc. and Nectarine  Acquisition
                      Corporation dated November 25, 1997

  2.8(20)             Agreement  and  Plan of  Merger,  dated  as of July 26,
                      1997, among Sun, Sunreg  Acquisition  Corp. and Regency
                      Health Services, Inc.

  2.9(28)             Amendment  No. 4 to the  Agreement  and Plan of  Merger
                      and Reorganization  dated as of February 17, 1997 among
                      Sun,   Retirement  Care  Associates,   Inc.  and  Peach
                      Acquisition Corporation, dated April 3, 1998.

  2.10(28)            Amendment  No. 3 to the  Agreement  and Plan of  Merger
                      and Reorganization  dated as of February 17, 1997 among
                      Sun,  Contour Medical,  Inc. and Nectarine  Acquisition
                      Corporation dated April 3, 1998.

  3.1(26)             Certificate of Incorporation of Sun, as amended
 
  3.2(1)(8)           Bylaws of Sun, as amended
 
  4.1(2)              Fiscal  Agency  Agreement  dated as of  March  1,  1994
                      between Sun and  NationsBank of Texas,  N.A., as Fiscal
                      Agent
 
  4.2(10)             Form of  Rights  Agreement,  dated as of June 2,  1995,
                      between  Sun  and  Boatmen's   Trust   Company,   which
                      includes the form of  Certificate of  Designations  for
                      the Series A Preferred  Stock as Exhibit A, the form of
                      Right  Certificate as Exhibit B and the form of Summary
                      of Preferred Stock Purchase Rights as Exhibit C

  4.3(11)             First  Amendment  to  Rights  Agreement,  dated  as  of
                      August 11, 1995,  amending the Rights Agreement,  dated
                      as of June 2, 1995,  between  Sun and  Boatmen's  Trust
                      Company

  4.4*                Removal of Rights Agent,  Appointment and Acceptance of
                      Successor  Rights Agent and  Amendment  No. 2 to Rights
                      Agreement among Sun, ChaseMellon  Shareholder Services,
                      LLC and American Stock Transfer & Trust Company

  4.5(26)             Certificate of Designations of Series A Preferred Stock
                      of the Company

  4.6(25)             Amended  and  Restated  Declaration  of  Trust  of  Sun
                      Financing I among the  Company,  as sponsor,  Robert F.
                      Murphy,  Robert  D.  Woltil  and  William  Warrick,  as
                      trustees, the Bank of New York (Delaware),  as trustee,
                      and the Bank of New York, dated as of May 4, 1998

                                       28
<PAGE>

  4.7(25)             Preferred  Securities  Guarantee  among the Company and
                      the Bank of New York,  as  trustee,  dated as of May 4,
                      1998

  4.8(25)             Registration   Rights   Agreement  among  the  Company,
                      certain  guarantors  and  Bear,  Stearns  & Co.,  Inc.,
                      Donaldson,  Lufkin & Jenrette  Securities  Corporation,
                      J.P. Morgan Securities,  Inc.,  NationsBanc  Montgomery
                      Securities  LLC and Schroder & Co.,  Inc.,  dated as of
                      May 4,  1998 (7%  Convertible  Trust  Issued  Preferred
                      Securities)

  4.9(25)             Registration  Rights  Agreement  among Sun Financing I,
                      the Company and Bear,  Stearns & Co., Inc.,  Donaldson,
                      Lufkin & Jenrette Securities  Corporation,  J.P. Morgan
                      Securities,  Inc.,  NationsBanc  Montgomery  Securities
                      LLC and Schroder & Co.,  Inc.,  dated as of May 4, 1998
                      (9-3/8% Senior Subordinated Debentures due 2008)

  10.1(3)             Lease  Agreement  dated as of August 31,  1986,  by and
                      between Karan Associates  (Lessee) and Campbell Care of
                      Wylie,  Inc.,  Assignment  of Lease dated  November 20,
                      1989 by and between  Campbell  Care of Wylie,  Inc. and
                      Honorcare  Corporation   (Lessee),   with  First  Lease
                      Addendum dated August 31, 1986,  Second  Addendum dated
                      January 9, 1987,  Third  Addendum  dated  November  30,
                      1989 and  Fourth  Addendum  dated  July 12,  1993,  and
                      Assignment  Agreement dated as of July 13, 1993, by and
                      between  Honorcare   Corporation   (Assignor)  and  Sun
                      Healthcare   Corporation  (Assignee)  (Hillcrest  Manor
                      Nursing Center)

  10.2(13)            Lease  Agreement for West Magic Care Center dated as of
                      August 1, 1987,  between  Skyview  Associates  (Lessor)
                      and Don Bybee and A. Keith Holloway (Lessee)

  10.3(1)             Lease  Agreement  for East Mesa Care Center dated as of
                      September  30,  1990,   between  East  Mesa  Associates
                      Limited Partnership (Lessor) and SunRise (Lessee)
 
  10.4(1)             Assignment  and  Assumption  of Lease  with  Consent of
                      Lessor for Torrington  Extend-A-Care Center dated as of
                      November   1,   1990,   between   Beverly   Enterprises
                      Connecticut,     Inc.     (Assignor/Lessee),     Turner
                      Enterprises,  Inc.  (Assignee),  Andrew L.  Turner  and
                      Nora  Turner  (Guarantors),  Harvey J.  Angell  and Zev
                      Karkomi  (Special  Guarantors)  and Beverly  Investment
                      Properties, Inc. (Lessor) (Lease attached)

  10.5(1)             Lease  Agreement for Mercer Island Care Center dated as
                      of July, 1991, among Mercer View  Convalescent  Center,
                      Tenants-in-Common   (Lessor),   SunRise   (Lessee)  and
                      Andrew L.  Turner  and Nora  Turner,  husband  and wife
                      (Guarantor)

  10.6(1)             Lease  Agreement for Bayside Health and  Rehabilitation
                      Center  dated as of July 26, 1991,  between  Bellingham
                      Associates  Limited  Partnership  (Lessor)  and SunRise
                      (Lessee)

  10.7(1)             Lease Agreement for Menlo Park Healthcare  Center dated
                      as of  November  1,  1991,  between  Oregon  Associates
                      Limited Partnership (Lessor) and SunRise (Lessee)

                                       29
<PAGE>

  10.8(1)             Sublease  Agreement  for Hillside  Living  Center d/b/a
                      Hillside  Healthcare  Center dated as of March 1, 1992,
                      between Elite Care  Corporation  (Sublessor) and Turner
                      Enterprises,   Inc.   (Sublessee)  (Lease  attached  as
                      Exhibit)
 
  10.9(1)             Sublease  Agreement for Crown Manor Living Center d/b/a
                      Crown  Manor  Healthcare  Center  dated  as of March 1,
                      1992,  between Elite Care  Corporation  (Sublessor) and
                      Turner  Enterprises,  Inc.  (Sublessee) (Lease attached
                      as Exhibit)
 
  10.10(1)            Sublease  Agreement  for Colonial  Manor Living  Center
                      d/b/a  Colonial  Manor  Healthcare  Center  dated as of
                      March  1,  1992,   between   Elite   Care   Corporation
                      (Sublessor) and Turner  Enterprises,  Inc.  (Sublessee)
                      (Lease attached as Exhibit)
 
  10.11(1)            Sublease  Agreement  for Douglas  Living  Center  d/b/a
                      Douglas  Healthcare  Center  dated as of March 1, 1992,
                      between Elite Care  Corporation  (Sublessor) and Turner
                      Enterprises,   Inc.   (Sublessee)  (Lease  attached  as
                      Exhibit)

  10.12(1)            Lease  Agreement  for Columbia  View Nursing Home dated
                      as  of  June  30,  1992,  between  Columbia  Associates
                      Limited  Partnership  (Lessor) and Turner  Enterprises,
                      Inc. (Lessee)

  10.13(1)            Lease  Agreement  for  Adams  House  Healthcare  Center
                      dated as of October 1, 1992,  between Adams Connecticut
                      Associates  Limited  Partnership  (Lessor)  and  Turner
                      Enterprises, Inc. (Lessee)

  10.14(1)            Lease  Agreement  for San Juan Care  Center  and Burton
                      Care  Center  dated  as of  October  31,  1992,  by and
                      between Zev Karkomi  and Jerold  Ruskin  (collectively,
                      the Lessors) and SunRise (Lessee)
 
  10.15(3)            Lease  Agreement  dated  as of July  13,  1993,  by and
                      between  Angelina  Associates  (Lessor)  and  Honorcare
                      Corporation  (Lessee),  with Assignment Agreement dated
                      as  of  July  13,   1993  by  and   between   Honorcare
                      Corporation  (Assignor) and Sun Healthcare  Corporation
                      (Assignee) (Angelina Facility)
 
  10.16(3)            Lease  Agreement  dated  as of July  13,  1993,  by and
                      between  July  Associates  IV  (Lessor)  and  Honorcare
                      Corporation  (Lessee),  with Assignment Agreement dated
                      as  of  July  13,  1993,   by  and  between   Honorcare
                      Corporation  (Assignor) and Sun Healthcare  Corporation
                      (Assignee) (Park Plaza)

  10.17(3)            Lease  Agreement  dated  as of July  13,  1993,  by and
                      between  Angelina  Associates  (Lessor)  and  Honorcare
                      Corporation  (Lessee),  with Assignment Agreement dated
                      as  of  July  13,  1993,   by  and  between   Honorcare
                      Corporation  (Assignor) and Sun Healthcare  Corporation
                      (Assignee) (Wells)

  10.18(3)            Lease  Agreement  dated  as of July  13,  1993,  by and
                      between  Angelina  Associates  (Lessor)  and  Honorcare
                      Corporation  (Lessee),  with Assignment Agreement dated
                      as  of  July  13,  1993,   by  and  between   Honorcare
                      Corporation  (Assignor) and Sun Healthcare  Corporation
                      (Assignee) (Pineywood)

  10.19(3)            Lease  Agreement  dated  as of July  13,  1993,  by and
                      between  Golden Age  Associates  (Lessor) and Honorcare
                      Corporation (Lessee) (Golden Age)

                                       30
<PAGE>
 
  10.20(3)            Lease  Agreement  dated  as of July  13,  1993,  by and
                      between July  Associates  III  (Lessor)  and  Honorcare
                      Corporation (Lessee) (High Plains)

  10.21(7)            Lease  Agreement  dated as of July 30, 1993 between Zev
                      Karkomi,  Thunderbird  Associated  Limited  Partnership
                      and SunRise Healthcare Corporation

  10.22(7)            Lease  Agreement  dated as of September  22,  1993,  as
                      amended,  between  Carlinville  Associates  and SunRise
                      Healthcare Corporation
 
  10.23(4)            Lease  Agreement  dated  October  1993,  by and between
                      Salem  Associates,  Ltd.  (Lessor) and SunRise (Lessee)
                      (Doctors Nursing Home)

  10.24(4)            Lease  Agreement  dated as of December 6, 1993,  by and
                      between    Massachusetts    Nursing    Homes    Limited
                      Partnership (Lessor) and SunRise (Lessee)

  10.25(3)            Lease  Assignment and Transfer of Operations  Agreement
                      dated as of December  30,  1993,  by and between HEA of
                      New Mexico,  Inc. and SunRise (Lease attached) (Country
                      Life Manor)

  10.26(3)            Lease  Agreement  dated as of January  1, 1994,  by and
                      between   October   Associates   (Lessor)  and  SunRise
                      (Lessee) (Stanton Nursing Home)

  10.27(3)            Lease  Agreement  dated as of January  1, 1994,  by and
                      between  Whitewright  Associates  (Lessor)  and SunRise
                      (Lessee) (Campbell Care of Whitewright)

  10.28(3)            Lease  Agreement  dated as of January  1, 1994,  by and
                      between   October   Associates   (Lessor)  and  SunRise
                      (Lessee) (Valley Mills Care Center)

  10.29(3)            Lease  Agreement  dated as of January  1, 1994,  by and
                      between   October   Associates   (Lessor)  and  SunRise
                      (Lessee) (Moody Care Center)

  10.30(6)            Lease  Agreement  dated as of April  26,  1994,  by and
                      between Sumner Nursing Home, L.L.C. and SunRise
 
  10.31(5)            Lease   Agreement   by  and   between   Bellingham   II
                      Associates  Limited  Partnership and SunRise Healthcare
                      Corporation, dated May 31, 1994
 
  10.32(12)           Lease  Agreement  for Wheeler Care Center,  dated as of
                      July  24,  1995,  by  and  between  Wheeler  Healthcare
                      Associates,  L.L.C., a Texas limited  liability company
                      (Lessor) and SunRise Healthcare Corporation (Lessee).

  10.33(12)           Agreement  with  Respect  to and  Second  Amendment  of
                      Lease Agreement,  dated as of September 1, 1995, by and
                      between    Massachusetts    Nursing    Homes    Limited
                      Partnership    (Lessor)    and    SunRise    Healthcare
                      Corporation (Lessee).

  10.34(12)           Third  Amendment  of  Lease  Agreement,   dated  as  of
                      September  1,  1995,   by  and  between   Massachusetts
                      Nursing Homes Limited Partnership  (Lessor) and SunRise
                      Healthcare Corporation (Lessee).
 
                                      31
<PAGE>

  10.35(12)           Lease  Agreement  for Clifton Care Center,  dated as of
                      September  13,  1995,   between   Missouri   Associates
                      (Lessor) and SunRise Healthcare Corporation (Lessee).

  10.36(17)           Lease Agreement for Heritage  Heights dated as of March
                      1, 1996,  by and between Tor  Associates  (Lessor)  and
                      SunRise Healthcare Corporation (Lessee).

  10.37(15)           Second  Amendment  to Lease,  dated as of June 1, 1996,
                      by   and   between   East   Mesa   Associates   Limited
                      Partnership    (Lesser)    and    SunRise    Healthcare
                      Corporation (Lessee).
 
  10.38(14)           Lease Agreement  dated July 1, 1996 between  Oak/Jones,
                      Inc.  and  SunRise  Healthcare   Corporation  for  Oaks
                      Health & Rehabilitation Center.

  10.39(14)           Lease Agreement  dated July 1, 1996 between  Oak/Jones,
                      Inc.  and  SunRise  Healthcare  Corporation  for  Jones
                      Health & Rehabilitation Center.
 
  10.40(15)           Sub-Sublease  Agreement,  dated as of August 22,  1996,
                      by and between Yuba Nursing  Homes,  Inc.  (Lessor) and
                      SunRise Healthcare Corporation (Lessee).
 
  10.41(17)           Lease  Agreement for Casa del Sol Nursing Home dated as
                      of November 26,  1996,  by and between  Raton  Property
                      Limited   Company   (Lessor)  and  SunRise   Healthcare
                      Corporation (Lessee).

  10.42(17)           Lease Agreement for Blue Mountain  Convalescent  Center
                      dated  as  of  November  30,   1996,   by  and  between
                      Washington  Associates  (Lessor) and SunRise Healthcare
                      Corporation (Lessee).

  10.43(17)           Lease  Agreement for Payette Lakes Care Center dated as
                      of November 30, 1996, by and between  Idaho  Associates
                      L.L.C.  (Lessor)  and  SunRise  Healthcare  Corporation
                      (Lessee).

  10.44(17)           Lease  Agreement for Valley  Rehabilitation  and Living
                      Center dated as of November  30,  1996,  by and between
                      Idaho   Associates   L.L.C.    (Lessor)   and   SunRise
                      Healthcare Corporation (Lessee).
 
  10.45(17)           Unconditional  Guaranty  of Lease  dated as of November
                      30,   1996  given  by  Sun   Healthcare   Group,   Inc.
                      (Guarantor)  to  Idaho  Associates,   L.L.C.   (Lessor)
                      relating to Magic Valley Manor.
 
  10.46(17)           Unconditional  Guaranty  of Lease  dated as of November
                      30,   1996  given  by  Sun   Healthcare   Group,   Inc.
                      (Guarantor)  to  Idaho  Associates,   L.L.C.   (Lessor)
                      relating to Valley Rehabilitation and Living Center.

  10.47(3)            Form of Management Agreement between GF/Massachusetts,
                      Inc. and SunRise
 
  10.48(5)            Amendment   and    Restatement    of   Loan   Agreement
                      [Brookline] by and between  Mediplex of  Massachusetts,
                      Inc. and Meditrust  Mortgage  Investments,  Inc., dated
                      June 23, 1994

                                       32
<PAGE>
 
  10.49(5)            Amendment and Restatement of Loan Agreement  [Columbus]
                      by   and    between    Mediplex    Rehabilitation    of
                      Massachusetts,     Inc.    and    Meditrust    Mortgage
                      Investments, Inc., dated June 23, 1994
 
  10.50(5)            Loan  Agreement  [Denver]  by and  between  Mediplex of
                      Colorado,  Inc. and Valley View  Psychiatric  Services,
                      Inc. and Meditrust  Mortgage  Investments,  Inc., dated
                      June 23, 1994

  10.51(13)           Omnibus  Amendment  to  Loan  Agreements,  dated  as of
                      March 28, 1996, by and between certain  subsidiaries of
                      The Mediplex  Group,  Inc. and certain  subsidiaries of
                      Sun
 
  10.52(19)           Credit Agreement among Sun,  certain  lenders,  certain
                      co-agents,   and   NationsBank   of  Texas,   N.A.,  as
                      Administrative Lender, dated October 8, 1997
 
  10.53(19)           Form of  First  Amendment  to  Credit  Agreement  dated
                      October  8, 1997 among Sun,  certain  lenders,  certain
                      co-agents,   and   NationsBank   of  Texas,   N.A.,  as
                      Administrative  Lender,  to be dated as of November 12,
                      1997
 
  10.54(9)            First Amendment to Sun 1992 Director Stock Option Plan
 
  10.55(1)            Sun 1993 Combined Incentive and Nonqualified Stock Option
                      Plan
 
  10.56(1)            Sun 1993 Directors Stock Option Plan
 
  10.57(9)            Amendments   to  Sun  1993   Combined   Incentive   and
                      Nonqualified Stock Option Plan

  10.58(13)           Sun 1995 Non-Employee Directors' Stock Option Plan
 
  10.59(13)           Sun Employee Stock Purchase Plan
 
  10.60(13)           1996 Combined Incentive and Nonqualified Stock Option Plan

  10.61(1)            Tax   Indemnity   Agreement   between   Sun,   SunDance
                      Rehabilitation  Corporation,  Turner Enterprises,  Inc.
                      and Andrew L. Turner and Nora L. Turner

  10.62(1)            Form of  Indemnity  Agreement  between  Sun and each of
                      Sun's Directors before July 3, 1996

  10.63(25)           Form of  Indemnity  Agreement  between  Sun and each of
                      Sun's Directors from and after July 3, 1996

  10.64(1)            Agreement   as  of  May  5,  1993,   between   SunDance
                      Rehabilitation Corporation and Andrew L. Turner
 
  10.65(17)           Form of  Severance  Agreement  entered into between Sun
                      and its President,  Chief Financial  Officer and Senior
                      Vice Presidents

  10.66(18)           Sun 1997 Non-Employee Directors' Stock Plan

                                       33
<PAGE>
 
  10.67(18)           Sun 1997 Stock Incentive Plan
 
  10.68(18)           Lease  Agreement  for  Casa  Loma  Convalescent  Center
                      dated as of  February  24,  1997 by and  between  Idaho
                      Associates,   LLC  (Lessor)   and  SunRise   Healthcare
                      Corporation (Lessee)

  10.69(19)           Lease Agreement for Evergreen  Nursing and Convalescent
                      Centre  dated  as of June 5,  1997,  between  Effingham
                      Associates,  L.L.C.  (Lessor)  and  SunRise  Healthcare
                      Corporation (Lessee)

  10.70(25)           Second  Amendment to Credit  Agreement dated October 8,
                      1997  among  the  Company,   certain  lenders,  certain
                      co-agents,   and   NationsBank   of  Texas,   N.A.,  as
                      Administrative Lender, dated as of March 27, 1998

  10.71(27)           Fourth  Amendment to Credit  Agreement dated October 8,
                      1997  among  the  Company,   certain  lenders,  certain
                      co-agents,   and   NationsBank   of  Texas,   N.A.,  as
                      Administrative Lender, dated as of October 30, 1998

  10.72(27)           Employment  Agreement dated June 2, 1998 between Andrew
                      L. Turner and the Company.

  10.73(24)           Indenture  dated July 8, 1997 by and between  Sun,  the
                      Guarantors  named  therein,  and First  Trust  National
                      Association (9 1/2% Senior Subordinated Notes due 2007)

  10.74(5)            Amended and Restated Indenture,  dated October 1, 1994,
                      among Sun, The Mediplex  Group,  Inc. and Fleet Bank of
                      Massachusetts,   N.A.   as  Trustee   (6%   Convertible
                      Subordinated Debentures due 2004)
 
  10.75(5)            Amended and Restated  First  Supplemental  Indenture to
                      Amended and Restated Indenture,  dated October 1, 1994,
                      among Sun, The Mediplex  Group,  Inc. and Fleet Bank of
                      Massachusetts,  N.A.  as  Trustee  (6 1/2%  Convertible
                      Subordinated Debentures due 2003)
 
  10.76(25)           Indenture  dated May 4, 1998  among  the  Company,  the
                      Bank of New York,  as trustee  (7%  Convertible  Junior
                      Subordinated Debentures due 2028)

  10.77(25)           Indenture  dated May 4, 1998  among the  Company,  U.S.
                      Bank  Trust  National  Association,   as  trustee,  and
                      certain guarantors  (9-3/8% Senior Subordinated Notes
                      due 2008)

  21*                 Subsidiaries of the Registrant
 
  23*                 Consent of Arthur Andersen LLP

  27**                Financial Data Schedule

---------------------------
 
*       Filed herewith.
**      To be filed by amendment.
                                       34
<PAGE>
 
(1)     Incorporated   by   reference   from   exhibits   to  the   Company's
        Registration Statement (No. 33-62670) on Form S-1.

(2)     Incorporated  by reference  from exhibits to the  Company's  Form 8-K
        dated March 11, 1994.

(3)     Incorporated  by  reference  from  exhibits to the  Company's  Annual
        Report on Form 10-K for the fiscal year ended December 31, 1993.

(4)     Incorporated  by  reference  from  exhibits  to  the  Company's  Form
        10-Q/A-1 for the quarter ended September 30, 1993.
 
(5)     Incorporated  by reference  from exhibits to the Company's  Form 10-Q
        for the quarter ended September 30, 1994.

(6)     Incorporated   by   reference   from   exhibits   to  the   Company's
        Registration Statement (No. 33-77522) on Form S-1.

(7)     Incorporated   by   reference   from   exhibits   to  the   Company's
        Registration Statement (No. 33-77272) on Form S-4.

(8)     Incorporated   by   reference   from   exhibits   to  the   Company's
        Registration Statement (No. 33-77870) on Form S-1.

(9)     Incorporated  by  reference  from  exhibits to the  Company's  Annual
        Report on Form 10-K for the fiscal year ended December 31, 1994.

(10)    Incorporated  by reference  from exhibits to the  Company's  Form 8-A
        filed June 6, 1995.
 
(11)    Incorporated  by  reference  from  exhibits  to  the  Company's  Form
        8-A/A-1 filed August 17, 1995.
 
(12)    Incorporated  by  reference  from  exhibits to the  Company's  Annual
        Report on Form 10-K for the fiscal year ended December 31, 1995.
 
(13)    Incorporated  by reference  from exhibits to the Company's  Form 10-Q
        for the quarter ended March 31, 1996.

(14)    Incorporated  by reference  from exhibits to the Company's  Form 10-Q
        for the quarter ended June 30, 1996.

(15)    Incorporated  by reference  from exhibits to the Company's  Form 10-Q
        for the quarter ended September 30, 1996.

(16)    Incorporated  by reference  from exhibits to the  Company's  Form 8-K
        dated February 17, 1997.

(17)    Incorporated  by  reference  from  exhibits to the  Company's  Annual
        Report on Form 10-K for the fiscal year ended December 31, 1996.

(18)    Incorporated  by reference  from exhibits to the Company's  Form 10-Q
        for the quarter ended  March 31, 1997.

                                       35
<PAGE>
 
(19)    +Incorporated  by reference  from exhibits to the Company's  Form 10-Q
        for the quarter ended September 30, 1997

(20)    Incorporated  by reference  from exhibits to the  Company's  Form 8-K
        dated October 8, 1997.
 
(21)    Incorporated  by reference  from exhibits to the  Company's  Form 8-K
        dated May 27, 1997.
 
(22)    Incorporated  by reference  from exhibits to the  Company's  Form 8-K
        dated August 21, 1997.
 
(23)    Incorporated  by reference  from exhibits to the  Company's  Form 8-K
        dated November 25, 1997.

(24)    Incorporated  by reference  from exhibits to the Company's  Form 10-Q
        for the quarter ended
        June 30, 1997.

(25)    Incorporated  by reference  from exhibits to the Company's  Form 10-Q
        for the quarter ended March 31, 1998.

(26)    Incorporated  by reference  from exhibits to the Company's  Form 10-Q
        for the quarter ended June 30, 1998.

(27)    Incorporated  by reference  from exhibits to the Company's  Form 10-Q
        for the quarter ended September 30, 1998.
 
(28)    Incorporated  by reference  from exhibits to the  Company's  Form 8-K
        dated April 3, 1998.




                                       36
<PAGE>



                                   SIGNATURES
 
     Pursuant  to the  requirements  of  Section  13 or 15(d) 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.
 

                                          SUN HEALTHCARE GROUP, INC.
 

                                          By:  /s/ ANDREW L. TURNER
                                          ---------------------------------
                                               Andrew L. Turner
                                               CHIEF EXECUTIVE OFFICER
 
March 31, 1999

                                POWER OF ATTORNEY

     Each person whose signature appears below hereby appoints each of Robert D.
Woltil and Robert F. Murphy, as his  attorney-in-fact to sign this Report on his
behalf individually and in the capacity stated below and to file all supplements
and amendments to this Report and any and all  instruments or documents filed as
a part of or in  connection  with this  Report or any  amendment  or  supplement
thereto,  and any such  attorney-in-fact  may make such changes and additions to
this Report as such attorney-in-fact may deem necessary or appropriate.

     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
registrant on March 31, 1999 in the capacities indicated.

<TABLE>
<CAPTION>

     Signatures                                               Title
   --------------                                             ------
<S>                                          <C>

   /s/ ANDREW L. TURNER                      Chairman of the Board of Directors and Chief
-------------------------------                Executive Officer (Principal Executive Officer)
      Andrew L. Turner
 
 
  /s/ ROBERT D. WOLTIL                       Chief Financial Officer and Director (Principal
-------------------------------                Financial Officer)
      Robert D. Woltil

 
  /s/ ANDREW P. MASETTI                      Vice President-Finance (Principal Accounting
-------------------------------                Officer)
      Andrew P. Masetti

 
 
-------------------------------              Director
      William R. Anixter


                                       37
<PAGE>



  /s/ JOHN E. BINGAMAN
-------------------------------              Director
      John E. Bingaman


  /s/ ZEV KARKOMI
-------------------------------              Director
      Zev Karkomi


  /s/ MARTIN G. MAND
-------------------------------              Director
      Martin G. Mand


  /s/ LOIS SILVERMAN
-------------------------------              Director
      Lois Silverman


 
-------------------------------              Director
      James R. Tolbert


  /s/ MARK G. WIMER
-------------------------------              Director
      Mark G. Wimer


  /s/ R. JAMES WOOLSEY
-------------------------------              Director
      R. James Woolsey

</TABLE>





                                       38