================================================================================

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

(Mark One)

     [X]  Quarterly Report Pursuant to Section 13 or 15(d) of the
          Securities Exchange Act of 1934

     For the quarterly period ended March 31, 1998.

                                       OR

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

     For the transition period from __________ to __________.

                         Commission file number 0-27374

                          UNISON HEALTHCARE CORPORATION
             ------------------------------------------------------
             (Exact name of registrant as specified in its charter)

               Delaware                                     86-0684011
     -------------------------------                   -------------------
     (State or other jurisdiction of                    (I.R.S. Employer
      incorporation or organization)                   Identification No.)

                          15300 N. 90th St., Suite 100
                              Scottsdale, AZ 85260
                    ----------------------------------------
                    (Address of principal executive offices)

                                 (602) 423-1954
              ----------------------------------------------------
              (Registrant's telephone number, including area code)


     Indicate by check mark  whether the  registrant:  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

     Indicate by check mark whether the  registrant  has filed all documents and
reports  required  to be  filed by  Section  12,  13 or 15(d) of the  Securities
Exchange Act of 1934 subsequent to the  distribution of securities  under a plan
confirmed by a court. Yes [ ] No [ ]

     The Company currently is involved in bankruptcy proceedings,  and a plan of
reorganization and disclosure statement was submitted to the court. However, the
plan  has  not  been  confirmed,  and at  this  time  no  securities  have  been
distributed  under the plan. It is  anticipated  that the plan will be confirmed
during the first quarter of 1999.

     As of  December  1, 1998  there were  6,422,096  shares of $0.001 par value
common stock outstanding.

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<PAGE>

                          UNISON HEALTHCARE CORPORATION

                                      INDEX


PART I.   FINANCIAL INFORMATION                                         Page No.
                                                                        --------
ITEM 1.   Financial Statements:

          Consolidated Balance Sheets as of March 31, 1998 and
          December 31, 1997............................................     3

          Consolidated Statements of Operations for the Three Months 
          Ended March 31, 1998 and 1997................................     4

          Consolidated Statements of Cash Flows for the Three Months
          Ended March 31, 1998 and 1997................................     5

          Notes to Consolidated Financial Statements...................     6

ITEM 2.   Management's Discussion and Analysis of Financial Condition
          and Results of Operations....................................     9

PART II.  OTHER INFORMATION

ITEM 1.   Legal Proceedings............................................    17

ITEM 3.   Defaults Upon Senior Securities..............................    19

ITEM 6.   Exhibits and Reports on Form 8-K.............................    20

SIGNATURES.............................................................    22


NOTE:  Items 2, 4 and 5 of Part II are omitted because they are not applicable.



                                       2
<PAGE>

                          UNISON HEALTHCARE CORPORATION
                                AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                      (In thousands, except share amounts)

<TABLE>
<CAPTION>
                                                                     March 31,    December 31,
                                                                       1998           1997    
                                                                   -----------    ------------
                                                                   (unaudited)
                                     ASSETS
<S>                                                                 <C>             <C>      
Current assets:
     Cash and cash equivalents ..................................   $   6,417       $   5,295
     Accounts receivable, net ...................................      34,871          32,855
     Prepaid expenses and other current assets ..................       8,471           7,768
                                                                    ---------       ---------
         Total current assets ...................................      49,759          45,918

Lease operating rights and other intangible assets, net .........      82,825          84,487
Property and equipment, net .....................................      25,450          25,588
Goodwill, net ...................................................      28,077          28,357
Security deposits and other assets ..............................       8,399           7,817
                                                                    ---------       ---------
                                                                    $ 194,510       $ 192,167
                                                                    =========       =========

                       LIABILITIES & STOCKHOLDERS' EQUITY

Current liabilities:
     Accounts payable ...........................................   $   6,867       $   7,592
     Accrued expenses ...........................................      28,622          24,617
     Current portion of notes payable and long-term debt
        due to related parties ..................................      18,087          20,500
     Current portion of other notes payable and long-term debt ..     143,116         144,277
                                                                    ---------       ---------
         Total current liabilities ..............................     196,692         196,986
Liabilities subject to compromise ...............................       7,845              --
Notes payable and long-term debt, less current portion ..........       7,681           8,020
Deferred taxes ..................................................      16,013          16,013
Leasehold liability, net ........................................       4,199           4,246
Other liabilities ...............................................         933             936
                                                                    ---------       ---------
         Total liabilities ......................................     233,363         226,201
Stockholders' equity:
     Common stock, $.001 par value; 25,000,000 shares authorized;
        6,422,096 shares issued and outstanding at March 31, 1998
        and December 31, 1997 ...................................           5               5
     Additional paid-in capital .................................      36,211          36,211
     Accumulated deficit ........................................     (75,069)        (70,250)
                                                                    ---------       ---------
         Net stockholders' equity ...............................     (38,853)        (34,034)
                                                                    ---------       ---------
                                                                    $ 194,510       $ 192,167
                                                                    =========       =========
</TABLE>


  See accompanying Notes to Consolidated Financial Statements and Management's
   Discussion and Analysis of Financial Condition and Results of Operations.


                                       3
<PAGE>

                          UNISON HEALTHCARE CORPORATION
                                AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (Unaudited)
                    (In thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                                 Three Months Ended
                                                                                       March 31,
                                                                              ------------------------
                                                                                 1998          1997
                                                                              ----------    ----------
<S>                                                                           <C>           <C>      
Total revenues ............................................................   $  54,677     $  55,735

Expenses:
    Wages and related .....................................................      27,976        29,578
    Other operating .......................................................      19,483        20,939
    Rent ..................................................................       3,964         4,253
    Interest (excludes contractual interest not accrued on prepetition debt
       of $75 in the three months ended March 31, 1998) ...................       5,800         4,658
    Depreciation and amortization .........................................       2,273         2,369
                                                                              ---------     ---------
       Total expenses .....................................................      59,496        61,797
                                                                              ---------     ---------
Loss before income taxes ..................................................      (4,819)       (6,062)
Income tax benefit ........................................................          --        (1,980)
                                                                              ---------     ---------
Net loss ..................................................................   $  (4,819)    $  (4,082)
                                                                              =========     =========

Net loss per share ........................................................   $   (0.75)    $   (0.66)

Common shares used in per share calculation ...............................       6,422         6,214
</TABLE>


  See accompanying Notes to Consolidated Financial Statements and Management's
    Discussion and Analysis of Financial Condition and Results of Operations.


                                       4
<PAGE>

                          UNISON HEALTHCARE CORPORATION
                                AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                  Three Months Ended
                                                                       March 31,
                                                               ------------------------
                                                                  1998          1997
                                                               ----------    ----------
<S>                                                            <C>           <C>      
Net cash provided by operating activities (including
    changes in all operating assets and liabilities) .......   $   2,049     $      71
                                                               ---------     ---------
Investing activities:
    Purchase of equipment and leasehold improvements .......        (492)         (950)
    Increase in intangible assets ..........................          --          (151)
    Increase in lease deposits and other assets ............        (582)         (482)
    Acquisitions, net of cash acquired .....................          --          (592)
                                                               ---------     ---------
         Net cash used in investing activities .............      (1,074)       (2,175)
                                                               ---------     ---------
Financing activities:
    Net increase (decrease) in borrowings under revolving
       lines of credit .....................................         (93)        6,019
    Debt payments ..........................................      (1,219)      (13,048)
    Checks drawn in excess of bank balances ................       1,515          (494)
    Debt issue costs .......................................         (56)           --
    Other items ............................................          --          (411)
                                                               ---------     ---------
         Net cash provided by (used in) financing activities         147        (7,934)
                                                               ---------     ---------
Net increase (decrease) in cash ............................       1,122       (10,038)
Cash and cash equivalents at beginning of period ...........       5,295        17,409
                                                               ---------     ---------
Cash and cash equivalents at end of period .................   $   6,417     $   7,371
                                                               =========     =========
Supplemental disclosures:
Cash paid for:
    Interest ...............................................   $   1,031     $   2,208
    Income taxes ...........................................          --            40
Acquisition of leased facilities:
    Increase in assets .....................................          --           900
    Liabilities assumed and incurred .......................          --           308
Conversion of debentures into shares of common stock .......          --           800
Equipment purchased under capital leases ...................          --           576
</TABLE>


  See accompanying Notes to Consolidated Financial Statements and Management's
    Discussion and Analysis of Financial Condition and Results of Operations.


                                       5
<PAGE>

                          UNISON HEALTHCARE CORPORATION
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.   BASIS OF PRESENTATION

     The unaudited  financial  information  furnished  herein, in the opinion of
management,  reflects all  adjustments  which are  necessary to state fairly the
financial  position,  cash flows and results of operations of Unison  HealthCare
Corporation and its  subsidiaries  ("Unison" or the "Company") as of and for the
periods  indicated.   Unison  presumes  that  users  of  the  interim  financial
information  herein have read or have access to the Company's  audited financial
statements and Management's  Discussion and Analysis of Financial  Condition and
Results of  Operations  for the  preceding  fiscal year and that the adequacy of
additional  disclosures  needed  for a fair  presentation,  except  in regard to
material contingencies, may be determined in that context. Accordingly, footnote
and other  disclosures  which  would  substantially  duplicate  the  disclosures
contained  in  Unison's  most recent  annual  report to  stockholders  have been
omitted.

     The  preparation  of financial  statements  in  conformity  with  generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that  affect the  reported  amounts of assets and  liabilities  and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements  and the  reported  amounts  of  revenues  and  expenses  during  the
reporting  period.  Actual results could differ from those estimates.  Operating
results for the three months ended March 31, 1998 are not necessarily indicative
of the results which may be expected for the year ended December 31, 1998.

     Certain  reclassifications  have been made to the 1997 financial statements
to conform to the current year presentation.

     The  provision  for  doubtful  accounts  receivable  is  included  in other
operating  expenses.  Provisions  totaled  $264,000  and  $249,000 for the three
months ended March 31, 1998 and 1997,  respectively.  The allowance for doubtful
accounts totaled $7.2 million at March 31, 1998 and $7.4 million at December 31,
1997.

2.   PLAN OF REORGANIZATION

     BANKRUPTCY PROCEEDINGS. On January 7, 1998, three of Unison's subsidiaries,
BritWill Investments-I, Inc., BritWill Investments-II, Inc. and BritWill Indiana
Partnership  (the  "BritWill  Debtors"),  with  operations in Texas and Indiana,
filed for protection under Chapter 11 of Title 11 of the United States Code (the
"Bankruptcy  Code") with the United States  Bankruptcy Court for the District of
Arizona (the "Bankruptcy  Court").  The Chapter 11 filings were  necessitated by
actions  taken by Omega  Healthcare  Investors,  Inc.  ("Omega") to terminate or
otherwise  enforce the terms of its lease  agreements with the Company.  Unison,
through its  subsidiaries,  leases 14 long-term care facilities from Omega under
three master lease  agreements.  In addition,  Unison leases six facilities from
BritWill  Investments  Texas, Ltd.  ("BritWill  Texas"),  which are subject to a
mortgage in favor of Omega (the  "BritWill  Texas  Leases").  The BritWill Texas
Leases  contain  cross-default  provisions  with the  Omega  leases.  Unison  is
currently in payment and  covenant  default of the Omega leases and the BritWill
Texas  Leases.  BritWill  Texas is an affiliate of Bruce H.  Whitehead,  a major
stockholder and creditor of Unison and, until May 29, 1998, Chairman of Unison's
board of directors.

     On May 28, 1998, Unison and 29 of its subsidiaries filed for reorganization
under  Chapter  11 of the  Bankruptcy  Code.  Unison  had  previously  initiated
negotiations  to  reach  a  consensual  restructuring  of  its  debt  and  lease
obligations with Omega,  representatives of certain of the holders of its $100.0
million 12 1/4%  Senior  Notes due 2006 (the "12 1/4%  Senior  Notes") and $20.0
million  13%  Senior  Notes  due 1999  (the  "13%  Senior  Notes")  (the "Ad Hoc
Committee"),  and certain  entities  related to Mr.  Whitehead  (the  "Whitehead
Affiliates") and David A. Kremser (the "Kremser  Affiliates").  Mr. Kremser is a

                                       6
<PAGE>

major stockholder and creditor of Unison and, until May 29, 1998, was a director
of Unison.

     On June 15, 1998,  Unison  concluded an agreement in principle with respect
to  a  consensual  restructuring  with  some,  but  not  all,  of  its  creditor
constituencies.  The  agreement  in  principle  formed  the basis of the plan of
reorganization  filed with the  Bankruptcy  Court on August 10, 1998. On October
16, 1998, an amended plan of reorganization  (the "Plan") was filed. In November
1998, the Company  received the requisite  number of Plan  acceptances  from its
creditors and is awaiting  confirmation of the Plan by the Bankruptcy court. The
significant  elements of the Plan are described in "Management's  Discussion and
Analysis of Financial Condition and Results of Operations" and in the Disclosure
Statement and the Plan,  which were attached to the Company's 1997 Annual Report
on Form 10-K as Exhibit 2.1.

     LIABILITIES  SUBJECT TO COMPROMISE.  During the Chapter 11 process,  Unison
and its subsidiaries (the "Debtors") are operating their businesses and managing
their  properties as  debtors-in-possession  under  authority of the  Bankruptcy
Code. Under Chapter 11, certain claims against the Debtors in existence prior to
the filing of the petitions for reorganization under the federal bankruptcy laws
are stayed  while the Debtors are in  bankruptcy.  These claims are set forth in
the March  31,  1998  balance  sheet as  "liabilities  subject  to  compromise".
Additional  claims  may arise  subsequent  to the  filing  date  resulting  from
rejection of executory  contracts,  including leases, and from the determination
by the Bankruptcy  Court (or agreed to by parties in interest) of allowed claims
for  contingencies  and other  disputed  amounts.  Claims  secured  against  the
Company's  assets also are stayed,  although the holders of such claims have the
right to move the Bankruptcy Court for relief from the stay.  Secured claims are
secured primarily by liens on the Debtors' property and equipment. In accordance
with the  American  Institute  of  Certified  Public  Accountants  Statement  of
Position No. 90-7,  "Financial Reporting by Entities in Reorganization under the
Bankruptcy Code" ("SOP 90-7"), interest on unsecured, prepetition obligations of
the Debtors ceased to accrue on the filing date.

     The Company received approval from the Bankruptcy Court to pay or otherwise
honor  certain of its  prepetition  obligations,  including  payables to vendors
deemed  essential to the continued  operation of Unison's  business  ("Essential
Vendor Claims") and employee wages and benefits.

     Liabilities of the BritWill Debtors that are subject to compromise  consist
of the following (in thousands):

          Notes payable and long-term debt ...........      $2,602
          Trade payables..............................       2,053
          Other.......................................       3,190
                                                            ------
                                                            $7,845
                                                            ======

3.   DISPOSITIONS

     As part of the Company's  restructuring  plans,  the Company has identified
long-term  care  facilities  for  disposition,  which the Company  believes will
facilitate the restructuring. As part of these plans, the Company terminated the
leases of 2 long-term care facilities  during the first three months of 1998 and
an additional ten facilities in subsequent  months (the  "Dispositions").  As of
November  30,  1998,  seven  facilities  representing  642 beds  remain held for
disposition (the "Disposition Facilities ). Of the seven Disposition Facilities,
six are leased  from  Omega and,  as part of the Plan,  Omega will  release  the
Company from its obligations  related to these facilities.  Unison also plans to
sell Sunbelt Therapy Management Services, Inc. and its subsidiaries ("Sunbelt").
Sunbelt provides  rehabilitation  therapy  services to Unison  facilities and to
third parties.  There can be no assurance that the Company's disposition plan as
implemented will prove to be successful or that these dispositions have occurred
or will occur on terms favorable to the Company.  See  "Management's  Discussion
and Analysis of Financial Condition and Results of Operations".


                                       7
<PAGE>

4.   CONTINGENCIES

     Unison is a defendant  in seven  consolidated  purported  securities  class
action lawsuits pending in the United States District Court in Phoenix,  Arizona
(the "Federal Action"),  and a purported securities class action lawsuit pending
in California Superior Court (the "State Action") (collectively, the "Actions").
The  Actions  arise from the  Company's  announcement  on March 11, 1997 that it
would be  restating  its  financial  results  for the  nine-month  period  ended
September 30, 1996. The Federal  Action seeks damages for alleged  violations of
federal and Arizona  securities laws; the State Action seeks damages for alleged
violations of the California  securities laws. The broadest class period is that
alleged in the Federal  Action from December 18, 1995 (the date of the Company's
initial public offering) to May 30, 1997.

     The parties in the Federal  Action have reached a  settlement  in principle
that is  expected  to  resolve  both the  Federal  and  State  Actions  in their
entirety,  assuming  appropriate court approval and acceptance by members of the
class.  The  settlement  in principle  calls for a cash payment by the Company's
primary  insurer  and  newly  issued  shares  of  Unison  common  stock  or  the
post-bankruptcy  equivalent value of such shares (i.e., under the Plan, existing
equity holders will have their  interests  converted  into  warrants;  under the
proposed  settlement,  class members who receive  Unison shares will receive the
same prorated treatment).  The parties have executed a Stipulation of Settlement
that  must be  presented  to the  Bankruptcy  Court and the  District  Court for
approval. If the warrants do not meet certain Bankruptcy Court or Securities and
Exchange  Commission  ("SEC") criteria,  then all equity interest claims will be
cancelled and terminated.

     The  Company  also  is a  party  to  several  other  lawsuits.  See  "Legal
Proceedings".


                                       8
<PAGE>

           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS

     Certain  statements  contained in this Quarterly Report,  including without
limitation statements containing the words "believes", "anticipates", "intends",
"expects" and words of similar import, are forward-looking statements within the
meaning  of  Section  27A of  the  Securities  Act  of  1933,  as  amended  (the
"Securities  Act") and Section 21E of the  Securities  Exchange Act of 1934,  as
amended (the "Exchange  Act").  While the Company  believes that the assumptions
underlying  these  statements are  reasonable,  such  assumptions  (and thus the
statements  based upon them) could  prove to be  inaccurate.  Important  factors
which could cause results to vary include,  among others: delays in or inability
to conclude  transactions,  including the  contemplated  restructuring;  adverse
actions  which may be taken by  creditors;  the  outcome of  various  bankruptcy
proceedings;  general  economic and business  conditions;  competition;  loss of
customers; changes in applicable laws and regulations;  availability,  terms and
deployment  of  capital  in light of recent  losses  and cash  flow  shortfalls;
cancellation  of leases or contracts;  demand  fluctuations;  adverse  uninsured
determinations in any existing or future  litigation or regulatory  proceedings;
health care  statutory or regulatory  changes  which  disfavor the types of care
delivered by the Company;  reversal of the current  limitations in the supply of
long-term care facilities;  and Year 2000 issues.  Important factors which could
cause  results to vary also  include the factors  discussed  in Unison's  Annual
Report on Form 10-K for the year ended  December 31, 1997 in "Item 1 - Business"
and "Item 7 - Management's  Discussion  and Analysis of Financial  Condition and
Results of Operations - Risks and  Uncertainties",  as well as factors discussed
elsewhere in this report or in any document incorporated herein by reference.

     The following  material should be read in conjunction with the Consolidated
Financial  Statements  of  the  Company  and  the  related  notes  thereto.  All
references in this  discussion  and analysis to years are to fiscal years of the
Company ended December 31 of such year.

PLAN OF REORGANIZATION

     As  described  in the  Company's  1997  Annual  Report  on Form  10-K,  the
operating  results and financial  condition of the Company have been  negatively
impacted by a number of factors,  including  cash flow  difficulties,  increased
costs due to recent  acquisitions,  and rising  litigation  costs. The Company's
cash flows from operations and its available  capital have been  insufficient to
meet  its  current  operating  expenses,  lease  obligations  and  debt  service
requirements. Consequently, the Company currently is in breach and in default of
the material terms of operating leases and debt instruments. It is expected that
the Company will be unable to remedy the existing  breaches  and  defaults.  The
Company's  operating  leases are subject to termination in the event of default,
and the Company's  indebtedness  may be  accelerated  in the event of continuing
default. Certain leases may be terminated and certain lenders currently have the
right to foreclose on Company assets  securing their  indebtedness,  which would
include  substantially  all of the  Company's  operating  assets.  However,  the
exercise of these rights has been stayed as a result of the Company's bankruptcy
filing.  The Company is attempting to implement a plan of  reorganization  in an
attempt to deal with these issues. See Note 2 of Notes to Consolidated Financial
Statements.

     In June 1998,  Unison  reached an agreement in principle (the "Term Sheet")
with respect to a restructuring  of the Company's debt and equity with Omega and
the Ad Hoc Committee.  The Company also obtained a continuation  of its accounts
receivable-backed  line of credit with HealthCare Financial Partners ("HCFP") in
the amount of $11.0  million  (the "HCFP DIP Loan") that is  available to Unison
for working capital needs during the Chapter 11 process.  Unison did not at that
time reach an agreement  with Messrs.  Kremser and Whitehead,  shareholders  and
former  directors  to whom the Company has various  debt  obligations.  The Term
Sheet formed the basis for the Company's Plan of Reorganization, which was filed
with the  Bankruptcy  Court on  August  10,  1998.  The Term  Sheet  expired  on
September  30,  1998.  On October  16,  1998,  Unison  filed an amended  Plan of
Reorganization  (the  "Plan")  with the  Bankruptcy  Court,  which  includes  an
agreement with Messrs. Kremser and Whitehead.  The significant provisions of the
Plan (as  modified  on  November  17,  1998)  are as  follows.  As used  herein,


                                       9
<PAGE>

"Reorganized  Unison"  means the  Company,  as  reorganized  and  reconstituted,
pursuant to the Plan on the effective date of the Plan (the "Effective Date").

     *    Omega has agreed to purchase  seven  facilities  owned and operated by
          Unison for a purchase price of $38.2  million.  Proceeds from the sale
          will be used to: (i) repay the  mortgage  note related to six of these
          facilities  amounting  to  approximately  $19 million  (the  "Mortgage
          Note");  (ii) pay off the balance of the HCFP DIP Loan; (iii) exercise
          the  Company's  option to  purchase  The Arbors  Health Care Center in
          Arizona  for  approximately  $3.2  million;  and (iv)  settle  certain
          bankruptcy claims as provided for in the Plan and described below. The
          facilities  will then be leased  back to Unison (the  "Signature  Sale
          Leaseback").  Omega will receive  closing  costs,  financing  fees and
          reimbursement  of  expenses  in the  amount  of  $1.0  million.  These
          facilities and ten other  facilities  currently  leased from Omega and
          BritWill  Texas  will be  combined  into a single  master  lease  (the
          "Master Lease").  Six leased  facilities will be returned to Omega and
          three  facilities that Unison disposed of in March 1997 via a sublease
          agreement  will be excluded  from the Master Lease.  In  consideration
          thereof,  Omega will receive $2.0 million in cash, a seven-year,  $3.0
          million promissory note bearing interest at 7.0% and a guarantee to be
          executed by Unison and BritWill Investments-II,  Inc. to supersede and
          replace all existing guarantees of BritWill Texas obligations.  Unison
          will pay, in cash, all  prepetition  rent payments due to Omega in the
          amount of approximately $1.5 million.

     *    In  settlement of  approximately  $15.0  million of  obligations,  the
          Whitehead  Affiliates  will  receive  $541,000 in cash,  an  unsecured
          promissory   note   amounting  to   approximately   $1.5  million  and
          approximately  9.1% of the newly  issued  shares  of  common  stock in
          Reorganized Unison (the "New Common Stock").  The promissory note will
          bear interest at 9.0%,  payable  quarterly,  and the principal  amount
          will be due and payable at the end of four years.  This  treatment was
          contingent  upon the Whitehead  Affiliates  voting to accept the Plan,
          which they did.

     *    In  settlement  of  approximately  $5.6  million of  obligations,  the
          Kremser Affiliates will receive $541,000 in cash and a promissory note
          amounting to approximately $1.4 million. The promissory note will bear
          interest at 9.0%, payable quarterly,  and the principal amount will be
          due  and  payable  at the  end  of  five  years.  This  treatment  was
          contingent  upon the  Kremser  Affiliates  voting to accept  the Plan,
          which they did.

     *    Convenience  Claims,  defined in the Plan as  payables  due to general
          unsecured  creditors  amounting  to $1,000 or less (or  $2,000 or less
          whose holders elect to reduce their claims to $1,000), will be paid in
          cash. The Company  estimates that the aggregate  amount of Convenience
          Claims  is  approximately  $692,000  and the  Company  will  pay up to
          $600,000 to satisfy these claims.  Essential Vendor Claims, defined in
          the Plan as payable  to  vendors  deemed  essential  to the  continued
          operation of Unison's business, will be paid in cash the lesser amount
          of the  allowed  claim  or a pro rata  portion  of $4.4  million.  The
          Company  estimates  that there will be  approximately  $1.0 million of
          Essential  Vendor  Claims  on the  effective  date  of the  Plan  (the
          "Effective  Date").  Trade  Unsecured  Claims,  defined in the Plan as
          payables  to other  trade  vendors  (with  certain  exclusions),  will
          receive (a) in cash the lesser of (i) 35% of the allowed amount of the
          claim  and  (ii)  a  pro  rata  portion  of  $1.4  million,  plus  (b)
          approximately  0.11% of the shares of New Common  Stock.  The  Company
          estimates  that Trade  Unsecured  Claims will amount to  approximately
          $3.4 million.  All other general  unsecured  creditors,  including the
          holders of the 12 1/4%  Senior  Notes and the 13% Senior  Notes,  will
          share PRO RATA in (i) approximately  90.8% of the shares of New Common
          Stock;  and (ii) a new senior debt security (the "New Senior Note") in
          the amount of  approximately  $25.2 million.  The New Senior Note will
          bear  interest at 11.0% and will mature four years from the  Effective
          Date.  As a result of a  subordination  agreement  related  to the 13%
          Senior  Notes,  the  distribution  of New Senior  Notes and New Common
          Stock will be  reallocated  as amongst  the  holders of the 13% Senior
          Notes and those  holders of the 12 1/4% Senior Notes who had consented


                                       10
<PAGE>

          to the subordination  agreement (the "Consenting  Noteholders").  As a
          result of this  reallocation:  (a) the holders of the 13% Senior Notes
          will  receive New Senior Notes equal to 100% of their  allowed  claims
          ($22.1 million);  (b) the Consenting Noteholders will receive only New
          Common Stock;  and (c)  distributions  to all other holders of general
          unsecured claims will be unaffected by this reallocation.  The Company
          estimates that the aggregate amount of general unsecured claims, other
          than  Convenience  Claims,  Essential  Vendor Claims.  Trade Unsecured
          Claims and claims of the Whitehead Affiliates, is approximately $137.5
          million.

     *    Secured  claims,  which include the Mortgage  Note, the HCFP DIP Loan,
          claims of Omega,  property tax  liabilities  and other secured  loans,
          will  receive one of the  following  treatments:  (i) the claim may be
          paid in cash on the Effective  Date;  (ii)  liabilities not in default
          may  continue  in  accordance   with  their  original   terms;   (iii)
          liabilities in default may continue in accordance  with their original
          terms upon the reinstatement or cure of the default (as defined);  and
          (iv) the  collateral  securing  such  liability may be returned to the
          creditor in full satisfaction of the claim. The Company estimates that
          the aggregate amount of secured claims is approximately $26.5 million.

     *    Subject to certain  conditions,  Unison's  stockholders will share pro
          rata in the  issuance of warrants  to purchase  approximately  378,000
          shares  of New  Common  Stock  which,  if  exercised,  will  represent
          approximately  5% of the  equity  of  Reorganized  Unison  on a  fully
          diluted basis. Within three months of the Effective Date, the board of
          Reorganized  Unison will grant to the Company's five senior executives
          options to  purchase  New  Common  Stock or  otherwise  issue to these
          individuals,  in the  aggregate,  up to 5% of the New Common  Stock on
          fully diluted basis.

     *    Prior to the Effective  Date,  Unison must obtain a new line of credit
          that is ready to fund.  Unison  has  negotiated  the  terms of a $12.0
          million new line of credit with HCFP.

     For the Plan to be confirmed by the Bankruptcy Court, it must meet a number
of tests including,  among other things:  (i) that the Plan has been accepted by
the requisite  number of votes of creditors;  (ii) that the Plan is feasible and
confirmation  of the Plan is not likely to be followed by the liquidation or the
need for further reorganization of the Company; and (iii) that the Plan provides
all creditors and  stockholders  with  distributions  in an amount not less than
such parties  would  receive if Unison were  liquidated  under  Chapter 7 of the
Bankruptcy  Code.  The  Company  believes  that the Plan meets these  tests.  In
November 1998,  the Company  received the requisite  number of Plan  acceptances
from its creditors and is awaiting  confirmation  of the Plan by the  Bankruptcy
Court.


                                       11
<PAGE>

RESULTS OF OPERATIONS

     The following table summarizes selected operating statistics.

                                                             At March 31,
                                                            --------------
                                                            1998      1997
                                                            ----      ----
Leased and Owned Facilities:
   Number of facilities ................................      52        54
   Number of licensed beds:
     Long-term care ....................................   4,595     4,780
     Assisted and independent living ...................     325       325

Managed Facilities:
   Number of facilities ................................       1         2
   Number of licensed beds .............................      71       160

Institutional Pharmacies:
   Number of outlets ...................................       2         2
   Nonaffiliated facilities served .....................      61        53

Laboratory Services:
   Number of laboratories ..............................       3         3
   Nonaffiliated entities served .......................     260       275

Therapy Services:
   Nonaffiliated entities served .......................     117        59


     The  following  table  identifies  the  Company's  sources of net operating
revenues.

                                                          Three Months Ended
                                                               March 31,
                                                          ------------------
                                                            1998      1997
                                                            ----      ----
Percentage of total revenues:
     Long term care ....................................    74.9%     76.8%
     Therapy services ..................................    15.3      14.5
     Pharmacy services .................................     6.5       4.9
     Laboratory services ...............................     2.7       3.0
     Medicare Part B billing and
       supply ..........................................     0.6       0.8
                                                           -----     -----
         Total .........................................   100.0%    100.0%
                                                           =====     =====

     Unison's  revenues  fluctuate  from  facility to facility  based on various
factors, including total capacity,  occupancy rates, reimbursement methodologies
and rates among the payor categories, payor mix and the scope and utilization of
the Company's ancillary services. Medicare patients generate the highest revenue
per patient  day,  although  profitability  is not always  increased  due to the
additional  costs  associated  with the higher  level of care  required  by such
patients.  In general,  the Company  believes  that private pay sources are more
profitable  to the  Company  than  governmental  reimbursement  sources.  Unison
generally derives a higher profit margin from ancillary services than from basic
nursing services.


                                       12
<PAGE>

     Data for nursing center  operations  with respect to sources of net patient
revenues  and  patient  mix by payor type are set forth  below  (long-term  care
only).

                                                          Three Months Ended
                                                               March 31,
                                                          ------------------
                                                            1998      1997
                                                            ----      ----

Medicare................................................    31.7%     31.9%
Private and other.......................................    16.5      16.3
                                                           -----     -----
Quality mix.............................................    48.2      48.2
Medicaid................................................    51.8      51.8
                                                           -----     -----
     Total..............................................   100.0%    100.0%
                                                           =====     =====


THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997

     In the first quarter of 1998,  Unison  recorded a net loss of $4.8 million,
or $0.75 per share,  compared to a net loss of $4.1 million, or $0.66 per share,
in the prior year quarter.  Loss before income taxes amounted to $4.8 million in
the 1998 first quarter compared to $6.1 million in the same period in 1997.

     Total revenues  decreased $1.1 million,  or 19.0%,  to $54.7 million in the
1998 first  quarter  from $55.7  million in the  comparable  1997  quarter.  The
decrease is due to a decrease in  management  fees from $1.7 million in the 1997
first  quarter to  $185,000 in the  current  quarter,  net of an increase in net
patient  service  revenues.  Net patient service  revenues  increased from $53.7
million in the 1997 first quarter to $54.1 million in the current  period.  This
increase  is due to  the  growth  in the  ancillary  companies,  which  recorded
aggregate  net  patient  revenues  of $13.4  million in the 1998  first  quarter
compared to $11.3  million in the 1997  period.  The  Company's  long-term  care
facilities  recorded net patient  service  revenues of $40.8 million in the 1998
first quarter compared to $42.4 million in the 1997 period. This decrease is due
primarily to the  Dispositions.  Patient days decreased from 388,407 in the 1997
period to 361,992 in the current period.  Average occupancy decreased from 80.8%
in the 1997 first  quarter  to 79.8% in the  current  period.  The  decrease  in
occupancy is due  primarily to the negative  perception of Unison as a result of
the bankruptcy filings. Management believes that Unison's average occupancy will
improve as it  implements  the Plan.  Quality  mix is 48.2% in both the 1997 and
1998 periods.

     Wages and related  expenses  decreased  $1.6 million,  or 5.4%,  from $29.6
million in the 1997 first quarter to $28.0 million in the current  quarter.  The
decrease is due primarily  to: (i) a decrease in corporate  and regional  office
expense of approximately $1.0 million;  (ii) the disposition of three facilities
on March 1, 1997 and two  facilities  on February 28, 1998,  which  accounts for
approximately $991,000 of the decrease; and (iii) cost controls in the Company's
long-term  care  facilities,  net of an increase of  approximately  $1.6 million
related to the ancillary  companies.  Wages and related expenses as a percentage
of revenues amounted to 51.2% in 1998 and 53.1% in 1997.

     Other  operating  expenses  decreased  $1.5  million,  or 7.0%,  from $20.9
million in the 1997 first quarter to $19.5 million in the 1998 first quarter. Of
this decrease,  approximately  $500,000 is due to the  disposition of facilities
and  approximately  $1.0 million is the result of  reductions  in corporate  and
regional office expenses.  Other operating  expenses as a percentage of revenues
amounted to 35.6% in the 1998 first quarter and 37.6% in the 1997 period.

     Rent expense  decreased from $4.3 million in the 1997 first quarter to $4.0
million in the 1998 period.  The decrease is due primarily to the disposition of
facilities.  Rent expense as a percentage of revenues was 7.6% in the 1997 first
quarter and 7.3% in the current quarter.

     Interest  expense  amounted  to $5.8  million  in the  1998  first  quarter
compared to $4.7 million in the 1997 first quarter.  The increase is due to debt


                                       13
<PAGE>

incurred  throughout  1997,  including the 13% Senior Notes and  borrowings  for
working  capital.  Interest expense as a percentage of revenues was 10.6% in the
1998 first quarter compared to 8.4% in the prior year period.

     Depreciation  and amortization  expense  decreased from $2.4 million in the
1997 first  quarter to $2.3 million in the 1998 first  quarter.  The decrease is
due to the  disposition  of  facilities,  net of  depreciation  on 1998  capital
expenditures. Depreciation and amortization as a percentage of revenues amounted
to 4.2% in the 1998 first quarter compared to 4.3% in the prior year period.

     Unison  did not  record an income  tax  benefit  related  to the 1998 first
quarter loss. The Company  anticipates that, as a result of the restructuring of
its debt  obligations,  its net operating losses will be eliminated.  Therefore,
the Company has established a valuation allowance against its net operating loss
carryforward benefits. For the 1997 first quarter, Unison recorded an income tax
benefit of $2.0 million. The effective rate of 32.7% is lower than the statutory
federal income tax rate due primarily to (i)  amortization of intangible  assets
and other  expenses  that are not  deductible  for tax;  (ii) taxable  income of
certain  subsidiaries that are not consolidated for tax purposes;  and (iii) the
valuation allowance established against deferred tax assets.

RECENT ACCOUNTING PRONOUNCEMENTS

     Statement   of  Financial   Accounting   Standards   No.  130,   "Reporting
Comprehensive  Income" ("SFAS No. 130"), was issued in June 1997. This statement
establishes standards for reporting and displaying  comprehensive income and its
components in financial statements.

     Statement of Financial  Accounting  Standards No. 131,  "Disclosures  about
Segments of an Enterprise and Related  Information"  ("SFAS No. 131"),  was also
issued in June 1997. This statement  requires that public  business  enterprises
report certain  information  about  operating  segments and related  disclosures
about products and services, geographic areas and major customers.

     Statement  of  Financial   Accounting   Standards   No.  132,   "Employers'
Disclosures about Pensions and Other Postretirement  Benefits" ("SFAS No. 132"),
was issued in February 1998. This statement standardizes disclosure requirements
for pension and other post retirement benefits,  requires additional information
on changes in benefit obligations and fair values of plan assets, and eliminates
certain existing disclosure requirements.

     SFAS Nos.  130,  131 and 132 will be  effective  for  Unison's  fiscal year
ending  December 31, 1998.  The adoption of these  statements is not expected to
have an impact on the Company's  consolidated  results of operations,  financial
position or cash flows and should not require any significant changes in current
disclosures.


LIQUIDITY AND CASH FLOWS

LIQUIDITY

     At March  31,  1998,  Unison  had cash and  equivalents  amounting  to $6.4
million compared to $5.3 million at December 31, 1997.

     Unison  traditionally  has  financed its working  capital  needs out of its
operating cash flows and under an accounts  receivable-backed  revolving  credit
facility. As approved by the Bankruptcy Court, this credit facility was replaced
in 1998 with the $11.0 million HCFP DIP Loan,  which bears interest at the prime
rate plus 4.0% (11% at November  30,  1998).  As of March 31,  1998,  borrowings


                                       14
<PAGE>

under the HCFP DIP Loan amounted to $7.0 million,  which was the maximum  amount
available based on the level of collateral on that date.

     Unison's  cash flows from  operations  and draws under its existing line of
credit will not be sufficient to meet its  short-term and long-term debt service
and capital  requirements,  absent a substantial  restructuring  of its debt and
lease  obligations.  Unison did not make the  scheduled  payments of interest in
1998 on the 12 1/4% Senior Notes and the 13% Senior  Notes,  as well as payments
on many other debt  obligations.  See Part II,  Item 3,  "Defaults  Upon  Senior
Securities".  If the Company is successful in  implementing  the Plan,  Unison's
leverage will be substantially  reduced and management believes that the Company
will have sufficient cash flow to meet its near future debt service  obligations
and working capital requirements. If the Plan is not confirmed, the alternatives
include the  liquidation of Unison under Chapter 7 of the Bankruptcy Code or the
confirmation of an alternative  Chapter 11 plan of  reorganization.  The Company
believes  that the Plan  will  result  in a more  timely  and  greater  ultimate
recovery to its creditors and stockholders  than would be the case under Chapter
7.  Based  on a  liquidation  analysis  provided  to the  Bankruptcy  Court  and
creditors,  the Company  believes  that in a Chapter 7  proceeding,  its general
unsecured creditors would receive, at best, a minimal distribution. Unison could
attempt to formulate a different plan of  reorganization.  The Company believes,
however,  that significant  additional costs, risks and delays would be incurred
in connection with an alternative plan. While there can be no assurance that the
current Plan will be  confirmed,  the Company  believes that it is unlikely that
any  alternative  plan could be developed  which would provide  greater value or
certainty of closure.

     If the Plan is confirmed,  there remain risks that are inherent in any plan
of  reorganization.  Some events will develop in ways that were not foreseen and
many or all of the assumptions  used in the Plan will not be realized exactly as
assumed.  Some or all of the  variations  may be  material.  Delays in achieving
confirmation  and  effectiveness  of the Plan could  adversely  impact  Unison's
results of operations due to, among other things, continuing declines in census,
difficulty  in hiring  skilled  employees,  decreased  confidence  of vendors or
regulators,  and  continued  fees and  expenses  related to the  bankruptcy  and
reorganization.  There can be no assurance that Reorganized  Unison will be able
to continue to generate  sufficient  funds to meet its obligations and necessary
capital expenditures. Although the Company projects that Reorganized Unison will
generate  sufficient funds to meet its working capital needs for the foreseeable
future, its ability to gain access to additional capital,  if needed,  cannot be
assured,  particularly  in view of possible  competitive  factors  and  industry
conditions.

CASH FLOWS

     Cash provided by  operations  amounted to $2.1 million for the three months
ended March 31, 1998, in spite of the Company's  operating  losses.  This is due
primarily  to an increase in accounts  payable and accrued  expenses,  including
those subject to compromise, in excess of an increase in accounts receivable and
other current assets.

     Net accounts receivable increased $2.0 million, or 6.1%, from $32.9 million
at December  31, 1997 to $34.9  million at March 31,  1998.  The  allowance  for
doubtful  accounts  amounted to  approximately  $7.4 million and $7.2 million at
December 31, 1997 and March 31, 1998, respectively. The Company anticipates that
its  allowance  for  doubtful  accounts  will  fluctuate  in the future and will
depend, in large part, on the mix of revenues, as well as the timing of payments
by private, third-party and governmental payors. While the Company believes that
the allowance  for doubtful  accounts is adequate at March 31, 1998, an increase
in days  outstanding  in accounts  receivable  will result in an increase in the
provision for doubtful accounts in future periods.


                                       15
<PAGE>

     Net cash used in investing activities amounted to $1.1 million in the three
months ended March 31, 1998. Routine capital  expenditures  amounted to $492,000
and cash used for lease deposits and other assets amounted to $582,000.

     Net cash provided by financing activities amounted to $147,000 in the three
months ended March 31, 1998 as the result of an increase in the amount of checks
drawn in excess  of bank  balances,  net of debt  payments.  At March 31,  1998,
Unison had $171.5 million in total debt, including amounts subject to compromise
(129.3% of total  capitalization),  compared to $172.8  million at December  31,
1997 (124.5% of total capitalization).

CONTINGENCIES

     Unison and certain of its current and former  directors  and  officers  are
named as  defendants  in several  class action  complaints  seeking  unspecified
damages following Unison's  announcement in March 1997 that the Company expected
to restate its financial  statements for the nine-month  period ended  September
30, 1996.  The automatic  stay  provision of the  Bankruptcy  Code prohibits the
continuation of the class actions against  Unison.  In October 1998,  Unison and
the  plaintiffs  in the  Federal  Action  and the State  Action  entered  into a
Settlement Agreement. The Settlement Agreement is subject to the approval of the
Bankruptcy   Court  and  the  District  Court.  See  Part  II,  Item  1,  "Legal
Proceedings."

IMPACT OF THE YEAR 2000 ISSUE

     The year 2000 issue is the result of computer  programs being written using
two digits rather than four to define the applicable  year. Any computer  system
that has  time-sensitive  software  may  recognize a date using "00" as the year
1900  rather  than the year  2000.  This  could  result  in  system  failure  or
miscalculations  causing  disruptions  of  operations,  including,  among  other
things, a temporary inability to process transactions,  send invoices, or engage
in similar normal business activities.

     Some of Unison's information systems have time-sensitive software that will
not  properly  recognize  the year 2000.  Based on an on-going  assessment,  the
Company has determined that it will be required to modify or replace significant
portions of its hardware and software so that its computer systems will function
properly with respect to dates in the year 2000 and thereafter.  The Company has
formed a task force to guide its year 2000 readiness  efforts to ensure that its
computer  software,  hardware  and  embedded  systems are capable of  accurately
processing,  providing,  and  receiving  date  data  from the 20th into the 21st
century.  Unison  believes  that with  modifications  to existing  hardware  and
software and conversions to new hardware and software,  the Company will be year
2000 ready by the end of 1999 and the year 2000 issue will not pose  significant
operational problems for its computer systems.

     Unison is in the process of completing a detailed inventory and analysis of
computer hardware, software and operating systems. The Company will utilize both
internal and external resources to reprogram,  or replace, and test the hardware
and  software for year 2000  readiness.  The scope of the year 2000 project also
encompasses  consideration  of  potential  impacts  on  the  Company's  business
operations.   The  Company  is  reviewing   internal  business   operations  and
relationships  with  external  business  partners to assess the current level of
compliance.  The next step is to perform testing and develop  contingency  plans
with the goal of achieving year 2000 readiness by June 1999.

     Unison has initiated formal  communications with significant  suppliers and
payors to determine the extent to which the Company's systems and operations are
vulnerable  to those third  parties'  failure to  remediate  their own year 2000
issues.  Examples of such  issues  include,  but are not limited to,  electronic
interfaces with external agents such as payors, suppliers and banks, in addition
to patient service equipment that has  microprocessors  with date functionality.
The ability of third parties with which Unison transacts  business to adequately


                                       16
<PAGE>

address their year 2000 issues is outside the Company's control. Although Unison
will seek to replace  any of its  current  vendors who are unable to become year
2000 ready in a timely  manner,  there can be no  assurance  that the  Company's
operations  will not be  adversely  affected  by the  ability of third  parties,
including the federal and state  governments on which Unison's  operations rely,
to also manage the year 2000 issue.

     The Company will continue to assess each of its systems and their year 2000
readiness. At this time, the Company believes that appropriate actions are being
taken and expects to complete  its overall  year 2000  remediation  prior to any
anticipated  impact on its operations.  However,  there can be no assurance that
these  assumptions will be achieved,  and actual results could differ materially
from  those  anticipated.  Specific  factors  that  might  cause  such  material
differences  include,  but are not  limited  to,  the  availability  and cost of
personnel  trained in this area,  the ability to locate and correct all relevant
computer codes, third party modification plans and similar uncertainties.



                           PART II. OTHER INFORMATION

ITEM 1.   LEGAL PROCEEDINGS

     Unison is, and may in the future  be,  party to  litigation  arising in the
ordinary  course of its business.  It is also  routinely  subject to surveys and
investigations by regulators and payors. There can be no assurance that Unison's
insurance coverage will be adequate to cover all liabilities occurring by reason
of such claims or  investigations  or that any such matters that are not covered
by insurance will not have an adverse effect on Unison's business.

     On May  28,  1998,  Unison,  together  with 29 of its  subsidiaries,  filed
petitions for relief under Chapter 11 of the Bankruptcy Code with the Bankruptcy
Court for the  District of Arizona.  On January 7, 1998,  the  BritWill  Debtors
filed voluntary  petitions for relief under Chapter 11 with the Bankruptcy Court
in the  District of Arizona.  All 33 cases were  procedurally  consolidated  for
administrative  purposes  and have  been  jointly  administered  under  Case No.
98-06583-PHX-GBN.  On August 10, 1998,  Debtors filed with the Bankruptcy  Court
"Debtors'  Joint  Plan  of  Reorganization   Dated  August  10,  1998"  and  the
"Supplement  to Debtors'  Joint Plan of  Reorganization  Dated August 10, 1998".
Unison  subsequently  filed "Debtors' First Amended Joint Plan of Reorganization
Dated  October  15,  1998".  The  Plan  provides  for  the   restructuring   and
reconstitution of Unison and all of its subsidiaries. Unison also filed with the
Bankruptcy Court its "Disclosure  Statement in Support of Debtors' Joint Plan of
Reorganization  Dated August 10, 1998" and  "Disclosure  Statement In Support of
Debtors' First Amended Joint Plan of Reorganization Dated October 15, 1998" (the
"Disclosure Statement").  On October 21, 1998, the Bankruptcy Court approved the
Disclosure  Statement and the Plan. In November 1998,  the Company  received the
requisite  number  of  Plan  acceptances  from  its  creditors  and is  awaiting
confirmation of the Plan by the Bankruptcy Court. During the Chapter 11 process,
Debtors  have  operated   their   business  and  managed  their   properties  as
debtors-in-possession  under the  authority of the  Bankruptcy  Code. No motions
seeking the appointment of a trustee have been filed.

     On July 31,  1998,  Unison and certain of its  subsidiaries  filed with the
Bankruptcy  Court  for  the  District  of  Arizona  a  "Complaint  to Set  Aside
Preferential Transfers".  The defendants in this action are David A. Kremser and
Bruce H. Whitehead and certain of their affiliated entities. This action relates
to working  capital loans  advanced to Unison in 1997 by the Kremser  Affiliates
and  Whitehead  Affiliates  (the "1997  Loans")  and the  granting  of  security
interests in accounts  receivable  and stock of certain Unison  subsidiaries  to
secure  the 1997 Loans and other  obligations  arising  in  connection  with the
Signature  Acquisition  and  the  BritWill  Acquisition.  This  action  will  be
withdrawn if the Plan is confirmed.



                                       17
<PAGE>

     Unison is a defendant  in seven  consolidated  purported  securities  class
action lawsuits pending in the United States District Court in Phoenix,  Arizona
(the "Federal Action"),  and a purported securities class action lawsuit pending
in California Superior Court (the "State Action")(collectively,  the "Actions").
The  Actions  arise from the  Company's  announcement  on March 11, 1996 that it
would be  restating  its  financial  results  for the  nine-month  period  ended
September 30, 1996. A consolidated amended class action complaint in the Federal
Action was filed on January 6, 1998 under the caption MARTIN GROSSMAN, ET AL. V.
UNISON HEALTHCARE  CORPORATION,  ET AL., USDC No. CIV 97-0583 PHX SMM. The State
Action is captioned  JEFFREY D. VANDYKE V. CRUTTENDEN  ROTH,  INC.,  WHEAT FIRST
BUTCHER SINGER,  INDIVIDUALLY AND AS REPRESENTATIVES OF A DEFENDANT  UNDERWRITER
CLASS, AND BRUCE H. WHITEHEAD,  UNISON  HEALTHCARE  CORP.,  JOHN T. LYNCH,  JR.,
TROUVER CAPITAL PARTNERS,  L.P., JERRY M. WALKER,  PHILLIP R. ROLLINS,  CRAIG R.
CLARK, AND PAUL J. CONTRIS,  Case No. 779111 (Orange County Sup. Ct.) (filed May
13, 1997).  The Federal  Action seeks damages for alleged  violations of federal
and  Arizona  securities  laws;  the State  Action  seeks  damages  for  alleged
violations of the California  securities laws. The broadest class period is that
alleged in the Federal  Action from December 18, 1995 (the date of the Company's
initial public offering) to May 30, 1997.

     The parties in the Federal  Action have reached a  settlement  in principle
that is  expected  to  resolve  both the  Federal  and  State  Actions  in their
entirety,  assuming  appropriate court approval and acceptance by members of the
class.  The  settlement  in principle  calls for a cash payment by the Company's
primary  insurer  and  newly  issued  shares  of  Unison  common  stock  or  the
post-bankruptcy  equivalent value of such shares (i.e., under the Plan, existing
equity holders will have their  interests  converted  into  warrants;  under the
proposed  settlement,  class members who receive  Unison shares will receive the
same prorated treatment).  The parties have executed a Stipulation of Settlement
that  must be  presented  to the  Bankruptcy  Court and the  District  Court for
approval.  If the warrants do not meet certain Bankruptcy Court or SEC criteria,
then all equity interest claims will be cancelled and terminated.

     The Company and certain of its current and former officers and/or directors
were named as defendants in an action styled JOHN D. FILKOSKI,  ET AL. V. UNISON
HEALTHCARE CORPORATION, ET AL., filed in Colorado Superior Court on May 27, 1998
(the  "Colorado  Action").  The Colorado  Action  alleges causes of action under
Colorado common and statutory law in connection with the Signature  Acquisition.
The plaintiffs are four former  shareholders of Signature whose Signature shares
were acquired in exchange for cash, notes and Unison common stock on October 31,
1996.

     On June 18,  1998,  plaintiffs  in the  Colorado  Action  filed an  Amended
Complaint, naming the Company, current and former officers and/or directors, and
Ernst  &  Young,  LLP  (the  Company's  auditor)  as  defendants.   Essentially,
plaintiffs  allege that the Company's  financial  statements  for the second and
third  quarters  of  1996  contained   false  and  misleading   statements  that
fraudulently  induced  plaintiffs into entering into a merger agreement with the
Company. Plaintiffs further allege that the Company failed to perform on certain
promissory notes made in connection with the Signature  Acquisition.  Plaintiffs
seek damages of  approximately  $3.2 million in purported actual damages as well
as punitive  damages,  interest  and costs.  Plaintiffs  were  advised  that all
proceedings against the Company, including the Colorado Action, were stayed as a
result of the  Chapter  11  filing.  On June 24,  1998,  plaintiffs  voluntarily
dismissed the Company from the Colorado  Action.  Plaintiffs  also  purported to
dismiss the individual  defendants,  but purportedly only in their capacities as
current or former  officers  and/or  directors of the Company,  and not in their
capacities  as  individuals.  The Company may be  required to  indemnify  and/or
advance defense costs to the individual defendants, although it is possible that
these obligations may be discharged by the Bankruptcy Court.

     On April 24, 1998, an action styled FRANCISCAN ELDERCARE CORPORATION,  INC.
V. SUNQUEST SPC, INC., UNISON HEALTHCARE CORPORATION,  INC. [SIC], JERRY WALKER,
PHILLIP  ROLLINS AND PAUL CONTRIS was filed in the Circuit Court of the State of
Oregon (County of Multnomah) (Case No. 9801-00050).  This action relates to four
nursing facilities that the Company previously leased from Franciscan  Eldercare


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<PAGE>

Corporation ("FEC"). These leases have been rejected by Unison in the Bankruptcy
Court.  The  action  alleges  breach  of  contract,  conversion  and  breach  of
promissory note against Unison and Sunquest SPC, Inc., a Unison subsidiary,  and
breach of guaranty against Messrs.  Walker,  Rollins and Contris. FEC is seeking
damages from the Company in the amount of at least $1.2 million plus  attorney's
fees,  interest  and  costs.  These  proceedings  are  stayed as a result of the
Chapter 11 filing.

     On  May  4,  1998,  an  action  styled  HEALTHPRIME,   INC.,  HP/HEALTHCARE
ACQUIRORS,   INC.,  MARKLEYSBURG  HEALTHCARE  INVESTORS,  L.P.,  MARSHALL  MANOR
HEALTHCARE  SERVICES,  INC.,  AND  LAKE  CITY  NURSING  HOMES,  INC.  V.  UNISON
HEALTHCARE  CORPORATION  AND SUNQUEST SPC., INC. was filed in the Superior Court
of Fulton  County,  Georgia (Case No.  E.68081).  The action  alleges  breach of
contract related to a nursing facility that the Company  previously  leased from
Markleysburg  Healthcare  Investors,  Inc. and four nursing  facilities that the
Company  previously  managed on behalf of the plaintiff.  The facility lease has
been  rejected  by Unison in the  Bankruptcy  Court.  Plaintiffs  are  seeking a
judgment  holding that the Company is entitled to no additional  management fees
relating  to the  managed  facilities  and  other  unspecified  damages.  Unison
believes  that it is owed  approximately  $1.6 million in  management  fees from
plaintiffs. These proceedings are stayed as a result of the Chapter 11 filing.

     On September 11, 1998, the Bankruptcy  Court entered an order appointing an
examiner in the bankruptcy cases and limiting the scope of the examiner's duties
to an  examination  of the claims of related  party  creditors  in these  cases.
Subsequently,  the United States Trustee appointed Keith J. Shapiro, an attorney
with the firm of Holleb & Coff in Chicago,  as the  examiner.  As of the date of
this Report, no official report has been issued by the examiner.

     During the course of the Debtors' Chapter 11 cases,  with the assistance of
their  court-approved  professionals,  Debtors continue to investigate causes of
action available to them under the Bankruptcy Code and applicable state law. The
Plan  preserves  all  causes of  action  available  to  Debtors,  including  all
objections to Claims and all other causes of action arising under the Bankruptcy
Code, unless the Plan specifically provides otherwise. Specifically reserved and
preserved in the Plan are all claims,  rights or causes of action arising out of
or related to: (1) the BritWill Acquisition;  (2) the Signature Acquisition; (3)
such  further  related  transactions  to (1) and (2) above,  including,  but not
limited  to, the 1997 Loans by Elk  Meadows and  BritWill  Investments;  (4) the
business  operation  of  Debtors  for the period  July 1, 1992 to May 28,  1998,
including as related to the  foregoing but not limited to, any claims for breach
of contract, fraud, misrepresentation,  negligence, misappropriation of business
opportunities  or  trade  secrets,   corporate  waste,   fraudulent  conveyance,
constructive  trust,  breach of fiduciary  duty,  self-dealing or any claims for
indemnity,  or any  claims  arising  from an  employment  relationship  with any
Debtors; (5) the Related Party Avoidance Actions; (6) the Avoidance Actions; (7)
the  Related  Party  Creditor  Defenses;  and (8) all  other  Litigation  Claims
(collectively, the "Preserved Claims") (all as defined in the Plan). Each Debtor
specifically  reserves the Preserved  Claims as to: (a) each and every member of
Kremser and Affiliates and Whitehead and Affiliates; (b) any officer or director
of any Debtor for the period July 1, 1992 to May 28, 1998;  or (c) any entity or
individual who is determined to be (i) the alter-ego of the foregoing;  (ii) any
entity the  aforementioned  might  successfully  claim are necessary parties for
purposes of joinder  under the Federal  Rules of Civil  Procedure;  or (iii) any
entity in whose hands the proceeds and benefit of any impermissable  conduct has
flowed.

ITEM 3.   DEFAULTS UPON SENIOR SECURITIES

     Unison is in default on its $100.0  million 12 1/4% Senior  Notes due 2006.
The  Company  did not make  semiannual  interest  payments  due May 1,  1998 and
November 1, 1998 in the amounts of $6.9 million and $7.1 million, respectively.



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<PAGE>

     Unison is in default on its $20.0  million 13% Senior  Notes due 1999.  The
Company did not make  quarterly  interest  payments  due March 1, 1998,  June 1,
1998,  September  1, 1998 and December 1, 1998 in the  aggregate  amount of $2.8
million.

     Unison is in default on loans obtained for working capital purposes, in the
aggregate  principal  amount of $3.95  million,  from Elk Meadows  and  BritWill
Investments.  Of these loans,  $1.0 million was due on October 7, 1997 and $2.95
million  was due on November 1, 1997.  Interest  payable on these loans  through
November 30, 1998 amounts to  approximately  $714,000.  The loan documents state
that all other  obligations  which may be due to these  individuals and entities
which they control are in default due to cross default  provisions in those loan
and security documents. These obligations are as follows.

     A portion of the purchase  consideration  for  Signature  was  comprised of
promissory notes (the "Escrow Notes")  amounting to approximately  $1.1 million.
Of  these  notes,  $500,000  was  due to be paid to Mr.  Kremser  and the  other
Signature  shareholders  on October  31, 1997 and the balance was due on October
31, 1998. The Escrow Notes,  plus accrued interest of approximately  $191,000 at
November 30, 1998, have not been paid.

     The  Company  is in arrears in the  amount of  approximately  $1.6  million
(including  interest) on the remaining  purchase  consideration (the "Additional
Payment Obligation") to the former shareholders of BritWill.  The balance of the
Additional Payment Obligation at November 30, 1998 was $9.6 million.

     The Company is obligated under  subordinated  notes payable to an affiliate
of Mr.  Whitehead in the aggregate  amount of  approximately  $2.4 million.  The
Company is in arrears of principal and interest  payments  through  November 30,
1998 in the aggregate amount of $423,000.

     The terms of certain of Unison's  indebtedness  require the Company to meet
certain financial and reporting  covenants including current ratio and cash flow
and maintenance of specified levels of net worth. As of the date of this report,
Unison  was not in  compliance  with many of these  covenants.  The terms of the
Mortgage  Note incurred in connection  with the  Signature  Acquisition  require
Unison to maintain,  among other things,  a  consolidated  net worth of at least
$39.0 million.  As of November 30, 1998,  Unison was not in compliance with this
covenant and did not receive a waiver from the lender.  Unison is current on its
payments on the Mortgage  Note and the lender has not  indicated an intention to
declare a default. As of November 30, 1998, the balance of the Mortgage Note was
$18.3 million. In connection with the implementation of the Plan, Unison intends
to enter into the Signature Sale Leaseback transaction related to the properties
securing  the  Mortgage  Note.  See  "Management's  Discussion  and  Analysis of
Financial Condition and Results of Operations - Plan of Reorganization".


ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K

     (a) Exhibits:

          2    Disclosure  Statement  in  Support  of  Debtors'  Joint  Plan  of
               Reorganization  Dated August 10, 1998 and Debtors'  Joint Plan of
               Reorganization  Dated  August 10  (incorporated  by  reference to
               Exhibit 99.1 to Form 8-K filed on August 13, 1998)

          2.1  Disclosure  Statement in Support of Debtors'  First Amended Joint
               Plan of Reorganization  Dated October 15, 1998 and Debtors' First
               Amended  Joint Plan of  Reorganization  Dated  October  15,  1998
               (incorporated  by reference to Exhibit 2.1 to the Company's  1997
               Annual Report on Form 10-K)

          11   Statement Re: Computation of Per Share Earnings

          27   Financial Data Schedule (included only in the EDGAR filing)


                                       20
<PAGE>

     (b)  Reports filed on Form 8-K:

          Unison filed the following reports on Form 8-K during the three months
ended March 31, 1998:

          (1)  Report dated January 7, 1998 including a news release  announcing
               that  three  of  Unison's   operating   subsidiaries   filed  for
               protection from creditors under Chapter 11.

          (2)  Report dated February 3, 1998 including a news release announcing
               that the financial difficulties  previously disclosed in Unison's
               Form 10-Q for the quarter  ended  September  30, 1997 continue to
               persist  despite the  placement  of $20 million of its 13% Senior
               Notes in December 1997.

Items 2, 4 and 5 are not applicable.


                                       21
<PAGE>

                                   SIGNATURES

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


                                 UNISON HEALTHCARE CORPORATION
                                          (Registrant)



Date: December 30, 1998          /s/ Jimmy L. Fields
      -----------------          ------------------------------
                                 Jimmy L. Fields
                                 Executive Vice President and Chief
                                 Financial Officer (Principal Financial Officer)

                                 /s/ Warren K. Jerrems
                                 ------------------------------
                                 Warren K. Jerrems
                                 Vice President and Chief Accounting
                                 Officer (Principal Accounting Officer)


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