UNITED AMERICAN HEALTHCARE CORP - 10-K Annual Report

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U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________

FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1997
Commission File Number: 000-18839
_______________________________

UNITED AMERICAN HEALTHCARE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
_______________________________

Michigan 38-2526913
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)

1155 Brewery Park Boulevard, Suite 200
Detroit, Michigan 48207
(313) 393-0200
(Address, including zip code, and telephone number,
including area code of registrant's principal executive offices)
________________________________

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

Securities registered pursuant to Section 12(g) of the Act:
Common Shares, No Par Value
(Title of Class)

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 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 registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [ ]

State the aggregate market value of the voting stock held by non-affiliates of
the registrant. The aggregate market value shall be computed by reference to
the price at which the stock was sold, or the average bid and asked prices of
such stock, as of a specified date within 60 days prior to the date of the
filing.

$44,403,903
(Based upon the closing price of the registrant's
common shares on the NYSE on September 19, 1997)

Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date.

As of September 19, 1997, there were
6,578,356 Common Shares outstanding

DOCUMENTS INCORPORATED BY REFERENCE: NOT APPLICABLE

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UNITED AMERICAN HEALTHCARE CORPORATION

FORM 10-K

TABLE OF CONTENTS

PART I 1
Item 1. Business 1
Item 2. Properties 18
Item 3. Legal Proceedings 18
Item 4. Submission Of Matters To A Vote Of Security Holders 19

PART II 19
Item 5. Market For The Registrant's Common Equity And Related
Stockholder Matters 19
Item 6. Selected Financial Data 20
Item 7. Management's Discussion And Analysis Of Financial Condition And Results Of Operations 20
Item 8. Financial Statements 32
Item 9. Changes In And Disagreements With Accountants On Accounting And Financial Disclosure 33

PART III 33
Item 10. Directors And Executive Officers Of The Registrant 33
Item 11. Executive Compensation 37
Item 12. Security Ownership of Certain Beneficial Owners and Management 40
Item 13. Certain Relationships And Related Transactions 41

PART IV 44
Item 14. Exhibits And Reports on Form 8-K 44

FINANCIAL STATEMENTS F-1

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PART I

FORWARD-LOOKING STATEMENTS

In addition to historical information, this report contains
forward-looking statements. The Private Securities Litigation Reform Act of
1995 provides a "safe harbor" for forward-looking statements to encourage
management to provide prospective information about their companies without fear
of litigation so long as those statements are identified as forward-looking and
are accompanied by meaningful cautionary statements identifying important
factors that could cause actual results to differ materially from those
projected in the statements. The Company desires to take advantage of this
"safe harbor" and, accordingly, hereby IDENTIFIES FORWARD-LOOKING STATEMENTS
THROUGH THE BOLD ITALIC TEXT WITHIN THE BODY OF THIS DOCUMENT. Also see "Item
1-Business - Cautionary Statement Regarding Forward-Looking Statements".

THE COMPANY

United American Healthcare Corporation (the "Company") was incorporated in
Michigan on December 1, 1983 and commenced operations in May 1985. Unless the
context otherwise requires, all references to the Company indicated herein
shall mean United American Healthcare Corporation and its consolidated
subsidiaries. The Company's executive offices are located at 1155 Brewery Park
Blvd., Suite 200, Detroit, Michigan 48207 and its telephone number is (313)
393-0200.

ITEM 1. BUSINESS

GENERAL

The Company provides comprehensive management and consulting services to
managed care organizations, some of which are health maintenance organizations
owned by the Company and located in Michigan, Tennessee, Florida, Pennsylvania,
and Louisiana. The Company also arranges for the financing of health care
services and delivery of these services by primary care physicians and
specialists, hospitals, pharmacies and other ancillary providers to commercial
employer groups and government sponsored populations. Management and consulting
services provided by the Company are generally to health maintenance
organizations with a targeted mix of Medicaid and non-Medicaid/commercial
enrollment. As of August 1, 1997, there were approximately 160,000 enrollees
in the managed care organizations either owned and/or managed by the Company.

Management and consulting services provided by the Company include
feasibility studies for licensure, strategic planning, corporate governance,
management information systems, human resources, marketing, precertification,
utilization review programs, individual case management, budgeting, provider
network services, accreditation preparation, enrollment processing, claims
processing, member services and cost containment programs.

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In 1985, the Company became one of the pioneers in arranging for the
financing and delivery of health care services to Medicaid recipients utilizing
managed care programs. Management believes the Company has gained substantial
expertise in understanding and serving the particular needs of the Medicaid
population. As of August 1, 1997, there were approximately 91,000 Medicaid
enrollees in the managed care organizations owned or managed by the Company
(the "Managed Plans"). The Company complements its Medicaid focus by targeting
non-Medicaid/commercial business in the same geographic markets. As of August
1, 1997, there were approximately 69,000 non-Medicaid/commercial enrollees in
the Managed Plans.

The Company has entered into an Agreement of Purchase and Sale of Stock
with CHF Acquisition, Inc., a related party, dated September 12, 1997, pursuant
to which the Company has agreed to sell CHF for $30 million in cash, contingent
upon the buyer securing financing. See "Business - Self Funded Benefit Plans"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources". CHF designs customized,
cost-effective employee welfare plan arrangements for self-funded employers and
provides marketing, management and administrative services to self-funded
employers generally. As of August 1, 1997, CHF's client base included
approximately 300 accounts in 47 states, with an estimated 547,000 covered
lives.

INDUSTRY

In an effort to control costs while assuring the delivery of quality
health care services, the public and private sectors have, in recent years,
increasingly turned to managed care solutions. As a result, the managed care
industry, which includes HMO, POS, PPO and prepaid health service plans, has
grown substantially.

While the trend toward managed care solutions has traditionally been
pursued most aggressively by the private sector, the public sector has recently
embraced the trend in an effort to control the costs of health care provided to
Medicaid recipients. Consequently, many states are promoting managed care
initiatives to contain these rising costs and supporting programs that
encourage or mandate Medicaid beneficiaries to enroll in managed care plans.

STRATEGY

The Company continually evaluates the results of its current products and
opportunities to expand its business. Its ongoing strategy is to strengthen
its position as a multi-state provider of effective and innovative managed care
solutions to the health care industry. The key elements of the Company's
strategy are as follows:

INTERNAL GROWTH IN MANAGED PLANS. The Company intends to achieve internal
growth by increasing non-Medicaid/commercial and Medicaid enrollment in the
Managed Plans through: (i) the development of new managed care products; (ii)
introduction of a Medicare risk product, and (iii) continued testing and
integration of a proprietary client/server information system to manage plan
operations. The Company believes that this client/server information system
will allow it to

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increase efficiency and overall ability to control costs for its clients and
their products. See "Business - Management Information System". As the Company
pursues additional commercial business, the Company believes it will be able to
use its established provider networks, on-site management information systems
and administrative staff to compete more effectively.

CAPITALIZE ON MANAGED CARE MEDICAID EXPERTISE. The Company intends to
capitalize on its substantial Medicaid managed care expertise by entering new
markets in major metropolitan areas with large Medicaid populations,
particularly in states with mandatory enrollment initiatives. The Company
intends to establish strategic alliances with local participants in such
markets in order to enhance the likelihood of successful market penetration.
The Company also intends to acquire or create managed care plans in its
targeted markets. In such new markets, the Company's objective is to enter into
long-term management agreements with, and to realize benefits associated with
equity ownership in, the managed care plans.

The Company believes that its practice of initially focusing on the
Medicaid market segment allows it to more rapidly develop an enrollment base,
accelerate its realization of management fees and generate sufficient cash
flows to fund the managed plan's expansion into commercial markets. Central to
the Company's long-term strategy is the development of managed care plans with
a targeted mix of Medicaid and non-Medicaid/commercial business, which allows
the Company to benefit from the inherent strengths of each market, while
lessening the risks of operating in either market exclusively.

SPIN-OFF OF BUSINESS SEGMENTS. As part of management's reassessment of
its strategic goals, it recently concluded that the Company would be best
served by concentrating on its primary business segment and, as a result of
this assessment, in September 1997 entered into an agreement to sell CHF and
its subsidiaries to CHF Acquisition, Inc., a related party, for $30 million in
cash, contingent upon the buyer securing financing. The Company intends
to use the proceeds from the sale to reduce its long-term debt as well as to
expand the business of its current clients. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources".

Additionally, management assessed that ChoiceOne, the Company's PPO, is
not a core business segment and has decided to sell the operation. A letter of
intent was entered into with a prospective buyer and the sale should be
consummated in the Company's second quarter of fiscal 1998. The Company
expects $240,000 in proceeds from this proposed stock sale. Terms of the sale
are subject to change. There are no assurances that this transaction will be
consummated.

The Company believes that its combined management/equity strategy enhances
its ability to penetrate new markets and diversify its primary business
opportunities. In particular, the Company believes the continued
implementation of this strategy will allow it to: (i) respond rapidly to
multiple state-sponsored Medicaid managed care initiatives, (ii) capitalize on
its Medicaid expertise within the managed care industry, and (iii) increase
its enrollment in non-Medicaid markets.

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MANAGED CARE PRODUCTS AND SERVICES

The Company has an ownership interest in four HMOs: OmniCare Health Plan,
Inc. in Tennessee ("OmniCare-TN"), UltraMedix Healthcare Systems, Inc. in
Florida ("UltraMedix"), PhilCare Health Systems, Inc. in Pennsylvania
("PhilCare") and OmniCare Health Plan, Inc. in Louisiana ("OmniCare-LA"). The
Company has decided not to fully launch OmniCare-LA pending the outcome of the
City of New Orleans' request for proposal, and then to re-evaluate the capital
needs of the Plan. PhilCare, after declining to participate in Pennsylvania's
Medicaid managed care program because of program requirements that would have
made the Company's participation in the program unprofitable, currently has no
membership. However, the Plan is pursuing other business opportunities. The
Company also manages the operations of an HMO in which it has no ownership
interest, Michigan Health Maintenance Organization Plans, Inc., d/b/a OmniCare
Health Plan, in Michigan, ("OmniCare-MI"). The Company previously managed the
operations of Personal Physician Care Inc., in Ohio ("PPC") under a long-term
management agreement that was terminated pursuant to binding arbitration,
effective May 31, 1997, based in part on a dispute between the parties with
respect to the payment of non-emergent transportation costs for enrollees as a
marketing expense to be incurred under the management agreement.

The following table shows the membership in the Managed Plans serviced by
the Company as of August 1, 1997:

Non-
Medicaid/
Medicaid Commercial Total
---------- ---------------- -----
Managed Plans
-------------
Owned :
OmniCare-TN 33,314 9,415* 42,729
UltraMedix 9,816 10,119 19,935
--------- ------ ------
43,130 19,534 62,664
Operated:
OmniCare-MI 47,856 49,620 97,476
----------------------------------------
90,986 69,154 160,140
========================================

- -----------------------------
* Represents Working Uninsured and Uninsurable, categorized as Non-Medicaid.

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The following table sets forth data with respect to the Company's
principal revenue sources in dollar amounts and as a percentage of the
Company's total revenues for the periods indicated. Such data is not indicative
of the relative contributions to the Company's net earnings:

Year ended June 30,
----------------------------------------------------------------
1997 1996 1995
---- ---- ----
(in thousands, except percentages)

MANAGED PLANS
OmniCare-TN............... $56,508 50% $42,717 46% $15,681 26%
OmniCare-MI............... 28,865 26 30,275 33 30,563 51
UltraMedix................ 13,922 12 9,003 10 5,020 8

A substantial portion of the Company's gross revenues are derived through
its management agreement with OmniCare-MI. This management agreement is
long-term in nature, subject to review every five years with either automatic
continuation or elective termination. There can be no assurance that such
agreement will remain in effect or continue substantially under the same terms
and conditions.

MANAGED PLANS

The Company has entered into long-term management agreements with the
Managed Plans, either directly or through its subsidiaries. Pursuant to the
management agreements with the Managed Plans, the Company provides management
and consulting services associated with the financing and delivery of health
care services. The Company seeks to enter into similar arrangements for other
managed care organizations. Table A summarizes the terms of the management
agreements.

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Table A- Summary of Terms of Management Agreements with the Managed Plans

Managed Plans
----------------------------------------------------------------
Terms OmniCare-MI OmniCare-TN UltraMedix
- ----- -------------------- -------------------- --------------------

(1) Duration:
(a) Effective dates:
(i) Commencement May 1, 1985 February 1, 1994 February 1, 1994
(ii) Expiration December 31, 2010 February 1, 1999 February 1, 1999
(b) Extension:
(i) Automatically renewable No Yes - 4 successive Yes - 4 successive
5 year periods 5 year periods
(ii) Terms of renewal/continuation Subject to review 5 years 5 years
every 5 years
(iii) Next review period May 1, 2000 February 1, 1999 February 1, 1999
(c) Termination:
(i) Without cause by the Plan at such
reviews Yes Yes Yes
(ii) Either party with cause Yes Yes Yes
(2) Fees paid to the Company:
(a) Percentage of revenues Yes Yes Yes
(b) Reimbursement of cost incurred to manage
the Plan No No Yes
(3) Expenses incurred by the Company:
(a) All administrative expenses necessary to
carry out and perform the functions of the
Plan, excluding:
(i) Audit Yes No Yes
(ii) Legal No No Yes
(iii) Marketing No No Yes
(iv) Certain other Yes No Yes

Services provided to the Managed Plans include strategic planning;
corporate governance; human resource functions; provider network services;
provider profiling and credentialing; premium rate setting and review;
marketing services (group and individual); accounting and budgeting functions;
deposit, disbursement and investment of funds; enrollment functions; collection
of accounts; claims processing; management information systems; utilization
review; and quality management.

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Managed Plans Owned By the Company

OMNICARE-TN. OmniCare-TN was organized as a Tennessee corporation in
October 1993, and is headquartered in Memphis, Tennessee. The Company was
active in the development of OmniCare-TN and, through its wholly owned
subsidiary, United American Healthcare of Tennessee ("UA-TN"), owns a 75%
equity interest in OmniCare-TN. A local partner owns the remaining 25%.
OmniCare-TN began as a PPO contractor in the TennCare program and operated as
a full-risk prepaid health services plan until it obtained its TennCare HMO
license in March 1996. The Plan's TennCare HMO contract was executed in
October 1996, retroactive to the date of licensure. The Plan's application for
a commercial HMO license is pending. PLAN MANAGEMENT HAS BEEN IN CONSTANT
COMMUNICATION WITH THE STATE TO ELIMINATE ANY FURTHER PROCESSING DELAYS OF THE
APPLICATION AND EXPECTS THE ISSUANCE OF THE LICENSE IN THE SECOND QUARTER OF
FISCAL 1998. However, there can be no assurances that the license will be
issued within this time period.

In November 1993, OmniCare-TN entered into a PPO contract with the State
of Tennessee pursuant to the State's mandatory health care program, TennCare,
to arrange for the financing and delivery of health care services on a
capitated basis to Medicaid eligibles and the Working Uninsured and Uninsurable
("Non-Medicaid") individuals who lack access to private or employer sponsored
health insurance or to another government health plan. The TennCare Bureau
placed an indefinite moratorium on Working Uninsured enrollment in December
1994; however, such action did not affect persons enrolled in a plan prior to
the moratorium. In April 1997, enrollment was expanded to include the children
of the Working Uninsured up to age 18. THIS ANNUALLY RENEWABLE CONTRACT WILL
NEXT BE REVIEWED ON OR BEFORE JULY 1, 1998, AND MANAGEMENT EXPECTS RENEWAL FOR
AN ADDITIONAL 12-MONTH TERM.

OmniCare-TN currently serves Shelby and Davidson counties in Tennessee
(which include the cities of Memphis and Nashville). As of August 1, 1997,
total enrollment was approximately 42,729 members, of which 33,314 (78%) and
9,415 (22%) represent Medicaid and Working Uninsured and Uninsurable enrollees,
respectively. The greatest opportunity for enrollment gains is during the
30-day open enrollment change period for all TennCare eligibles, which occurs
once a year in October. Management projects that there could be an increase in
its TennCare membership during the current change period. ADDITIONALLY,
MANAGEMENT BELIEVES THAT THE RECEIPT OF THE COMMERCIAL LICENSE AND THE PLAN'S
EFFORTS TO EXPAND ITS PROVIDER NETWORK TO THE SOUTHWESTERN AREA OF TENNESSEE
WILL GIVE OMNICARE-TN THE ABILITY TO INCREASE ITS ENROLLMENT BY MARKETING ITS
MANAGED CARE PRODUCTS TO THE VARIOUS EMPLOYER GROUPS IN THE REGIONS SERVED.

ULTRAMEDIX. UltraMedix, a network model HMO headquartered in Tampa,
Florida, was founded as a Florida corporation in May 1992. Through its majority
owned subsidiary, United American Healthcare of Florida ("UA-FL"), the Company
owns 51% of UltraMedix. The remaining 49% of the Plan is owned by local
shareholders. UltraMedix was in the development stage through August 1993, at
which time the Plan entered into a contract with the Florida Agency for Health
Care Administration ("AHCA") to arrange for the financing and delivery of
health care services to the Medicaid population in west-central Florida on a
capitated basis. As

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of July 1997, upon the Agency's renewal of the contract, UltraMedix was
operating in 10 counties located in the central and southwestern area of the
State of Florida. The current AHCA contract provides for the Plan's service
area to include 23 counties located in the central and southeastern areas of the
State of Florida. UltraMedix is proceeding with plans to initiate operations in
additional counties by the end of calendar year 1997. THE CONTRACT WILL NEXT BE
REVIEWED ON OR BEFORE JUNE 30, 1998, AND MANAGEMENT EXPECTS RENEWAL FOR AN
ADDITIONAL 12- MONTH TERM.

UltraMedix's application with the Florida Department of Insurance for a
Certificate of Authority to operate as an HMO was approved in October 1995 and
enables UltraMedix to pursue HMO business in the commercial market. Prior to
this approval, UltraMedix operated as prepaid health plan serving the Medicaid
population exclusively. Additionally, UA-FL received a license to operate as a
Third Party Administrator in October 1995.

The AHCA moratorium on Medicaid enrollment instituted in July 1996 to
assure compliance with regulatory requirements of a 75/25
Medicaid-to-commercial enrollment mix, was removed in October 1996. During the
moratorium, the Plan experienced a decrease in Medicaid membership, primarily
because of attrition. Upon the recommencement of Medicaid marketing,
membership increased approximately 10% between October 1996 and March 1997.

To develop its commercial membership, UltraMedix is aggressively marketing
an individual plan, a small group plan through and independently of the State
of Florida's Community Health Purchasing Alliances ("CHPAs"), and a large group
plan to commercial subscribers in its service areas. To support its commercial
growth objectives, the Plan entered into agreements with broker agencies to
market its commercial products, and with the largest CHPA membership broker in
the State of Florida to market its CHPA products. In October 1996, the Plan
received approval from AHCA to expand its commercial service area to include
the counties of Sarasota, DeSoto, Charlotte, Osceola and Seminole, and expects
to add the five counties in the greater Jacksonville area by the third quarter
of fiscal 1998.

The Plan is also developing a point of service product, for introduction in
the third quarter of fiscal year 1998. As of August 1, 1997, total enrollment
was approximately 19,935 members, of which 9,816 (49%) were Medicaid members
and 10,119 (51%) were commercial members.

In February 1997, UltraMedix was selected to participate in the State of
Florida's initiative to mandate the enrollment of Medicaid eligibles into
managed care plans. The award service area covered 14 counties and would have
capped UltraMedix's Medicaid enrollment, including existing members, at
approximately 48,000 during the contract period. Legal challenges from
unsuccessful bidders to the State's request for proposal have halted the
initiative indefinitely.

THE RECENT RAPID GROWTH IN COMMERCIAL MEMBERSHIP, CONTINUED INTEGRATION OF
THE CLIENT/SERVER SYSTEM TECHNOLOGY, PREPARATION FOR AN ACCREDITATION
DESIGNATION FROM THE NATIONAL COMMITTEE FOR QUALITY ASSURANCE SCHEDULED FOR
DECEMBER 1997, EXPANSION OF THE PROVIDER NETWORK TO SUPPORT COMMERCIAL AND
MEDICAID GROWTH AND RENEGOTIATION OF PROVIDER CONTRACTS TO

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DECREASE MEDICAL LOSS RATIOS ARE ALL FACTORS THAT SUPPORT MANAGEMENT'S BELIEF
THAT THE PLAN WILL BE COMPETITIVE AND SUCCESSFUL IN ITS INITIATIVE TO GROW
MEMBERSHIP AND REDUCE MEDICAL COSTS.

Managed Plan Operated By the Company

OMNICARE-MI. OmniCare-MI is a not-for-profit, tax-exempt corporation
headquartered in Detroit, Michigan, serving the southeastern section of the
state operating in Wayne, Oakland, Macomb, Monroe and Washtenaw counties.

Enrollment is through the 145 companies that offer the Plan to its
employees and their family members, individual enrollment that is open once a
year for a 30-day period, and through the State's Medicaid program, pursuant to
an agreement with the Michigan Department of Community Health, which makes HMO
coverage available to eligibles in certain counties and mandatory in others.
This agreement, which must be renewed annually, was extended by mutual
agreement for an additional six months from July 1, 1997 to December 31, 1997.
MANAGEMENT EXPECTS THAT THE CONTRACT WILL BE RENEWED FOR AN ADDITIONAL 12-MONTH
TERM FOR 1998. As of August 1, 1997, total enrollment in OmniCare-MI was
approximately 97,476, of which 49,620 (51%) represent commercial members,
including approximately 6,757 point of service members and approximately 47,856
(49%) represent Medicaid members.

Among the major employers that offer OmniCare-MI, ranked by enrollment,
are: the City of Detroit, the Federal Government, Ford Motor Company, the State
of Michigan, the Detroit Board of Education, General Motors Corporation,
Chrysler Corporation, Detroit Edison, Wayne County and Comerica Bank, the
largest of which represents approximately 7% of OmniCare-MI's total enrollment.
No other group exceeds 5% of the Plan's total enrollment.

HMO growth in the State of Michigan has remained fairly static over the
last several years. HMO enrollment penetration has remained in the 20% range
during that period. HOWEVER, MANAGEMENT BELIEVES THAT THIS DORMANCY WILL NOT
CONTINUE AS PUBLIC ACCEPTANCE OF HMOS IS GROWING AND EMPLOYER ENCOURAGEMENT IS
INCREASING AS THEY REALIZE THAT HMOS COST LESS AND PROVIDE QUALITY CARE.

OmniCare-MI operates in an extremely competitive environment. As a
result, rate increases are carefully applied, forcing more aggressive
contracting with providers and greater efficiency in operations. OMNICARE-MI
ANTICIPATES THAT IT WILL INCREASE ENROLLMENT BY CONTINUING TO EMPHASIZE QUALITY
OF BOTH CARE AND SERVICE. The Plan also intends to introduce a new point of
service product during the year. MANAGEMENT BELIEVES THAT THIS POINT OF
SERVICE PRODUCT WILL MAKE THE PLAN MORE ATTRACTIVE TO SMALLER AND MID-SIZE
COMPANIES THAT HAVE TRADITIONALLY OBTAINED COVERAGE THROUGH INDEMNITY
COMPANIES. The Plan had expected to roll out its Medicare risk product in
mid-1997 in response to a national trend to enroll Medicare recipients in
managed care. OmniCare-MI is currently in the process of refiling its Medicare
application with the Health Care Financing Administration ("HCFA"), and
management expects to begin marketing the product in early 1999.

The State of Michigan, in an effort to reduce the cost of its Medicaid
program,

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competitively bid its Medicaid contracts, for an effective date of July 1997.
The affected southeastern Michigan counties include a significant portion of the
Plan's Medicaid enrollment. In May 1997, OmniCare-MI was notified that it had
been selected to participate in the State's program. Unsuccessful bidders to the
State's request for proposal legally challenged the initiative and, as a result,
the State did not assign the Medicaid eligibles to plans that were awarded
contracts, but did, however, institute the rate reduction component of the new
program effective July 1997. With the indefinite delay of the assignment of
approximately 90,000 eligible recipients to the selected plans, and the
implementation of the rate reductions of 10% to 15%, the operating revenues of
OmniCare-MI and the resulting management fees to the Company will be affected in
1998. There can be no assurances that OmniCare-MI can control health care costs
at the rate of the premium reductions.

Management believes that the history of OmniCare-MI has been one of
innovation. It was the first network model HMO in the country and the first to
capitate physician services in an IPA model HMO. OmniCare-MI also created and
implemented the first known mental health carve out in 1983. These are but a
few of the ideas that have not only been successful for OmniCare-MI, but have
been adopted by and proven successful for the industry. Such innovation and
creativity are what management believes will continue to make OmniCare-MI
successful.

Other Managed Plan Ventures

UNITED/HEALTHSCOPE, INC. ("UHI"). In March 1993, the Company reached an
agreement with New York-based HealthScope Administrative Services Corporation,
now known as HealthScope/United, Inc. ("HealthScope"), to form a health care
management company to gain access to one of the largest Medicaid eligible
populations in the United States. Pursuant to the agreement, HealthScope
became a wholly owned subsidiary of UHI. UHI was organized to engage in
development, consulting and contract management services for publicly funded
managed care programs in the metropolitan New York area.

In 1995, New York City officials announced a four-year initiative to
enroll over 1.7 million Medicaid recipients residing in New York City in
managed care plans. The staggered enrollment aspect of the program was
necessitated by an insufficient capacity to enroll all such recipients. This
mandated initiative began to roll out in early 1997. UHI management anticipates
the phase-in for its service areas in early 1998. Currently, UHI has management
agreements with three health plans, with enrollment of approximately 10,000
members.

In May 1996, UHI initiated a private placement memorandum seeking
potential equity investors to fund future cash flow needs. The delayed rollout
of State's initiative adversely affected UHI financial resources. A private
investment firm expressed an interest in making a significant equity investment
in UHI and, in September 1996, advanced $.4 million of a $1.5 million line of
credit. The balance was drawn in October 1996. In April and May 1997, the
venture capital firm infused an additional $.3 million and $2.2 million,
respectively. The venture capital firm has indicated its commitment to fund
UHI's future short-term capital needs.

Through May 1997, outstanding amounts owed to the Company from UHI totaled

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approximately $4.9 million. In May 1997, UHI's outstanding debt and preferred
stock were restructured to attract other investors. The Company converted its
interest in UHI, including advances, accrued interest and the value of warrants
held by the Company, to one million shares of non-voting preferred stock of the
restructured UHI in the amount of $4 million, and a warrant to purchase 3,310
shares of UHI common stock, exercisable at any time at a nominal price,
representing approximately 3% of UHI's common shares on a fully diluted basis.
At this time the venture capital firm also converted its debt to preferred stock
and warrants to purchase common shares. The Company's ability to recover the
value of its preferred stock is significantly dependent upon additional
financing by third party investors, the phase-in of the Medicaid initiative
and/or the attraction of additional clients. A valuation allowance of
approximately $1.1 million, had been established as of June 30, 1996. The
conversion of the Company's loans to UHI to preferred stock was treated as a
"troubled debt restructuring" and the investment was recorded at its estimated
fair value at the date of the restructuring. This resulted in bad debt expense
of $.7 million for the year ended June 30, 1997.

A valuation allowance of approximately $1.1 million, had been established
as of June 30, 1996. The conversion of the Company's loans to UHI to preferred
stock was treated as a "troubled debt restructuring" and the investment was
recorded at its estimated fair value at the date of the restructuring. This
resulted in bad debt expense of $.7 million for the year ended June 30, 1997.

PHILCARE. PhilCare, a network model HMO headquartered in Philadelphia,
Pennsylvania, was organized as a Pennsylvania corporation in May 1994, and is
49% owned by the Company's wholly owned subsidiary, United American Healthcare
of Pennsylvania ("UA-PA"), with the remaining 51% owned by local participants.
In June 1996, PhilCare obtained its HMO license, with the Company funding
PhilCare's applicable statutory reserve and net worth requirements of $2.1
million through cash deposited at a Pennsylvania bank.

The initial thrust into this market was an intended participation in
Pennsylvania's mandatory Medicaid pilot program, HealthChoices, which required
the mandatory enrollment of approximately 540,000 Medicaid recipients in five
metropolitan Philadelphia counties into HMOs. In October 1996, the Company
announced its decision to withdraw its support of PhilCare's participation in
the HealthChoices program because existing program requirements would have made
the Company's participation in the program unprofitable. However, the Company
continues to explore other potential business opportunities in this market. The
Company cannot provide assurances that PhilCare will enter into a formal
relationship with any interested parties.

OMNICARE-LA. OmniCare-LA, a network model HMO headquartered in New
Orleans, Louisiana, was organized as a Louisiana corporation in November 1994,
and is 100% owned by the Company's wholly owned subsidiary United American of
Louisiana ("UA-LA"). The Plan was granted an HMO license by the Louisiana
Department of Insurance in June 1996. In connection therewith, the Company
funded OmniCare-LA's applicable statutory reserve and net worth requirements
through a $1.0 million letter of credit and $1.0 million in cash deposited in
accounts at state banks in Louisiana. It is anticipated that HMO ownership
will be offered to other investors. The Plan is currently in a pre-operational
phase. UA-LA was also granted a TPA license in 1996.

The Louisiana managed care market is still in its infancy. Overall HMO
penetration is 7% in the State and 14% in metropolitan New Orleans, while
national figures for HMO penetration are higher. Small businesses dominate the
market, and employers are exploring the savings potential of managed care. The
Company's primary intent is to pursue opportunities in New Orleans in the
commercial and Medicaid HMO markets, and to pursue third party administration
business. Although Louisiana does not currently have a mandatory Medicaid
program, a waiver request to HCFA is being considered.

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In August 1997, the Company submitted its response to the City of New
Orleans (the "City")/Transit Management of Southeast Louisiana ("TMSEL")
Cooperative Endeavor (the "Endeavor") request for proposals. The Endeavor
seeks entities to provide utilization review, claim administration services
(medical/prescription drugs, dental and vision) and provider networks (medical,
managed mental health/substance abuse, prescription drugs, dental and vision)
for the 11,200 employees and retirees of the City and TMSEL.

OmniCare-LA is a finalist in the bid process. Selection criteria include
management structure and experience, questionnaire responses, program
administration and cost, geographic penetration/network access, enrollment and
eligibility assistance and others. The Mayor of New Orleans and a selection
committee will make the final determination. The Company anticipates
notification of its status in late 1997. Management cannot provide assurances
that it will be the successful bidder for this contract. Management
anticipates that it will provide proposals for two additional programs in the
New Orleans area, similar to the Endeavor, during fiscal 1998.

OTHER VENTURES. In fiscal 1995, the Company, in anticipation of business
opportunities in several states, incorporated the subsidiaries United American
Healthcare of Georgia, Inc. ("UA-GA") and United American Healthcare of
Illinois, Inc. ("UA-IL"). In October 1996, the Company withdrew its HMO license
application in Georgia and the $4.1 million in funding related to the statutory
reserve requirements. Currently, the Company has ceased activities related to
its UA-IL and UA-GA subsidiaries and has no operational plans related to these
sites in the near future, due primarily to cash flow considerations and delays
in initiating the proposed programs.

SELF-FUNDED BENEFIT PLANS

In 1993, the Company acquired Corporate Health Care Financing, Inc.,
("CHF") for approximately $4.7 million in cash, $3.0 million of the Company's
common stock (310,481 shares), and a $6.6 million contingent promissory note.
The entire balance of the contingent note has been paid or accrued through June
30, 1997. Management believed that its acquisition of CHF represented an
opportunity to expand its traditional business into the self-funded market that
comprises a majority of the private sector employers. A self-funded health
benefits plan is one in which an employer directly assumes the financial risk
for its employees' health care costs by paying for employees' medical claims
out of a separate fund consisting of employee and/or employer contributions.

In September 1997, the Company entered into an agreement to sell CHF
and its subsidiaries to CHF Acquisition, Inc., a related party, for $30 million
in cash, contingent upon the buyer securing financing. The agreement requires
that certain contingencies and conditions be satisfied prior to closing
including a condition that the buyer must have a financing commitment on or
before December 11, 1997, and that the closing must occur on or before January
10, 1998. CHF Acquisition, Inc. is owned by certain principal employees of
CHF. The transaction requires, as a condition prior to the Company's
obligation to close the sale that Keith Sullivan and Louis Nicholas each
terminate their employment agreements with CHF and the Company, respectively.
There can be no assurances that the sale will be consummated. As of August 1,
1997, CHF's client base included approximately 300 accounts in 47 states, with
an estimated 547,000 covered lives.

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OTHER VENTURE AND PRODUCT

CHOICEONE. ChoiceOne, a national PPO and wholly owned subsidiary of the
Company, was created in 1993. ChoiceOne directly contracts in 16 states and
leases access to existing provider networks in 32 states. The national network
consists of approximately 3,000 hospitals, and 230,000 physicians and ancillary
providers. ChoiceOne is compensated by receiving either a per member access fee
or a percentage of the savings realized from accessing the ChoiceOne network.
As of August 1, 1997, ChoiceOne had approximately 228,000 members representing
154 payors. After re-evaluating its strategic objectives, the Company has
assessed that ChoiceOne is not a core business segment and has decided to sell
the operation. A letter of intent was entered into with a prospective buyer
and the sale should be consummated in the Company's second quarter of fiscal
1998. The Company expects $.2 million in proceeds from this proposed stock
sale. Terms of the sale are subject to change. There are no assurances that
this transaction will be consummated.

GOVERNMENT REGULATION

The Company is subject to extensive federal and state health care and
insurance regulations designed primarily to protect enrollees in the Managed
Plans, particularly with respect to government sponsored enrollees. Such
regulations govern many aspects of the Company's business affairs and typically
empower state agencies to review management agreements with health care plans
for, among other things, reasonableness of charges. Among the other areas
regulated by federal and state law are licensure requirements, premium rate
increases, new product offerings, procedures for quality assurance, enrollment
requirements, covered benefits, service area expansion, provider relationships
and the financial condition of the owned/managed plans, including cash reserve
requirements and dividend restrictions. There can be no assurances that the
Company or its Managed Plans will be granted the necessary approvals for new
products or will maintain federal qualifications or state licensure.

The licensing and operation of OmniCare-MI, OmniCare-TN, UltraMedix,
PhilCare and OmniCare-LA are governed by the respective states' statutes and
regulations applicable to health maintenance organizations. The Managed Plans'
licenses are subject to denial, limitation, suspension or revocation if there
is a determination that the plans are operating out of compliance with the
states' HMO statutes, failing to provide quality health services, establishing
rates that are unfair or unreasonable, failing to fulfill obligations under
outstanding agreements or operating on an unsound fiscal basis. Except for
OmniCare-MI, the plans are not federally-qualified HMOs and, therefore, are
not subject to the federal HMO Act.

Federal and state regulation of health care plans and managed care
products is subject to frequent change, varies from jurisdiction to
jurisdiction and generally gives responsible administrative agencies broad
discretion. Laws and regulations relating to the Company's business are subject
to amendment and/or interpretation in each jurisdiction. In particular,
legislation mandating managed care for Medicaid recipients is often subject to
change and may not initially be accompanied by administrative rules and
guidelines. Changes in federal or state governmental regulation could affect
the Company's operations, profitability and business

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prospects. While the Company is unable to predict what additional government
regulations, if any, affecting its business may be enacted in the future or how
existing or future regulations may be interpreted, regulatory revisions may have
a material adverse effect on the Company.

INSURANCE

The Company presently carries comprehensive general liability, directors
and officers liability, property, business automobile, and workers'
compensation insurance. Management believes that coverage levels under these
policies are adequate in view of the risks associated with the Company's
business. The management agreements with OmniCare-MI, OmniCare-TN and
UltraMedix each require the respective Managed Plan to maintain general
liability insurance, naming the Company as an additional insured. The Company
or the Managed Plan is required to pay the insurance premiums under the terms
of the respective management agreements. In addition, the Managed Plans have
professional liability insurance that may cover liability claims arising from
medical malpractice, with the Company named as an additional insured. No
assurance can be given, however, as to the future availability or cost of such
insurance, or that the Company's business risks will be maintained within the
limits of such insurance coverage.

COMPETITION

The managed care industry is highly competitive. The Company directly
competes with other entities that provide health care plan management services,
some of which are nonprofit corporations and others which have significantly
greater financial and administrative resources. The Company primarily competes
on the basis of fee arrangements, cost effectiveness and the range and quality
of services offered to prospective health care clients. While the Company
believes that its experience gives it certain competitive advantages over
existing and potential new competitors, there can be no assurance that the
Company will be able to compete effectively in the future.

The Company competes with other HMOs, PPOs and insurance companies. The
level of this competition may affect, among other things, the operating
revenues of the Managed Plans, and therefore, the revenues of the Company. The
predominant competitors in southeastern Michigan are Blue Cross/Blue Shield of
Michigan, The Wellness Plan, Total Health Plan and Health Alliance Plan. The
predominant competitors in central and southwestern Tennessee are Access-Med
Plus and Blue Cross/Blue Shield. The predominant competitors in central and
southeastern Florida are PCA Century Medical, CAC Ramsay, Physician's Care Plan
and Stay Well. The Company's Managed Plans primarily compete on the basis of
enrollee premiums, covered benefits, provider networks, utilization
limitations, enrollee co-payments and other related plan features and criteria.
Management believes that the Company's existing clients are able to compete
effectively with their primary market competitors in these areas.

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EMPLOYEES

The Company's ability to maintain its competitive position and expand its
business into new markets depends, in significant part, upon the maintenance of
its relationships with various existing senior officers, as well as its ability
to attract and retain qualified health care management professionals. Although
the Company has employment agreements with several senior executives, it does
not have, nor does it intend to pursue, employment agreements with all of its
key personnel. Accordingly, there is no assurance that the Company will be able
to maintain such relationships or attract such professionals.

As of August 1, 1997, the Company had 427 full and part-time employees.
The Company's employees do not belong to a collective bargaining unit and
management considers its relations with employees to be good.

MANAGEMENT INFORMATION SYSTEM

Management believes that timely and relevant information is critical to a
managed care operation and utilizes its management information system to
process claims; analyze health care utilization; support provider, member and
employer requirements; and control administrative costs.

The Company has initiated a systems implementation plan to enhance its
operations, reduce costs, and improve customer service with the development of
a proprietary client/server information system, along with a select set of
complementary automation products that include claims scanning, claims imaging,
electronic data interchange and various select technologies for enterprise-wide
installation. Functional enhancements from the existing system include premium
invoicing, claims review and processing, case management, provider
credentialing, financial reporting, and process re-engineering. The emphasis
has been the migration to open architectures that facilitate the exchange of
information with clients and vendors, flexibility to meet and introduce
industry trends, shortened staff training cycles, and increased overall
operational efficiencies. Management believes that its proprietary management
information system, when fully developed, will enable the Company to have
highly efficient claims processing and information retrieval capabilities.

In January and November 1996, this proprietary system and the Company's
client/server financial system were rolled out for extensive testing at
OmniCare-TN and UltraMedix, respectively. Testing of new modules,
enhancements, upgrades and integration with other software applications are
ongoing at both locations. Management expects to leverage the knowledge and
resources gained from the installation of this product in Tennessee and Florida
when it installs this product at OmniCare-MI in early 1998 and at future sites
to maximize synergy among its operations.

The development of this client/server information technology has created
an opportunity to explore its commercial appeal. However, until the system is
completely functional at all of the Company's current client sites, management
does not intend to sell this product externally. The

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Company's management information system operation was relocated to a separate
site in early 1997 to facilitate a company-wide disaster recovery plan and
establishment of a technical education facility.

CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS

The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements to encourage management to provide
prospective information about their companies without fear of litigation so
long as those statements are identified as forward-looking and are accompanied
by meaningful cautionary statements identifying important factors that could
cause actual results to differ materially from those projected in the
statements. The Company desires to take advantage of this "safe harbor" and,
accordingly, hereby identifies the following important factors which could
cause the Company's actual financial and enrollment results to differ
materially from any such results that might be projected, forecasted, estimated
or budgeted by the Company in forward-looking statements.

1. Inability to increase premiums and prospective or retroactive
reductions in premium rates commensurate with increases in medical
costs due to utilization, government regulation, or other factors.

2. Discontinaution of, limitations upon or restructuring of
government-funded programs.

3. Increases in medical costs, including increases in
utilization and costs of medical services and the effects of actions
by competitors or groups of providers.

4. Adverse state and federal legislation and initiatives,
including limitations upon or reductions in premium payments;
prohibition or limitation of capitated arrangements or financial
incentives to providers; federal and state benefit mandates
(including mandatory length of stay and emergency room coverage);
limitations on the ability to manage care and utilization; and any
willing provider or pharmacy laws.

5. The shift of employers from insured to self-funded coverage,
resulting in reduced margins to the Company.

6. Failure to obtain new customer bases, retain existing
customer bases or reductions in work force by existing customers;
failure to sustain commercial enrollment to maintain an enrollment
mix required by government programs.

7. Termination of management agreements by the Managed Plans.

8. Increased competition between current organizations and the
entrance of new competitors and the introduction of new products by
new and existing competitors.

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9. Adverse publicity and media coverage.

10. Inability to carry out marketing and sales plans.

11. Loss or retirement of key executives.

12. Governmental financial assessments or taxes to subsidize
uncompensated care, other insurance carriers, or academic medical
institutions.

13. Termination of provider contracts or renegotiations at less
cost-effective rates or terms of payment.

14. The selection by employers and individuals of higher
co-payment/deductible/coinsurance plans with relatively lower
premiums or margins.

15. The impact upon the Company's medical loss ratio of greater
net enrollment in higher medical loss ratio lines of business such
as Medicare and Medicaid.

16. Adverse regulatory determinations resulting in loss or
limitations of licensure, certification or contracts with
governmental payors.

17. Higher sales, administrative or general expenses occasioned
by the need for additional advertising, marketing, administrative,
or management information systems expenditures.

18. Increases by regulatory authorities of minimum capital,
reserve and other financial solvency requirements.

19. Denial of accreditation by quality accrediting agencies,
e.g., the National Committee for Quality Assurance (NCQA).

20. Adverse results from significant litigation matters.

21. Interest rates causing a reduction of investment income, or
in the market value of interest rate sensitive investments.

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ITEM 2. PROPERTIES

The Company has leased an aggregate of approximately 167,000 square feet
from which it conducts its principal operations. The Company has leased space
in Michigan, Tennessee, Florida, Pennsylvania, and Louisiana. The principal
offices of the Company are located at 1155 Brewery Park Boulevard, Suite 200,
Detroit, Michigan, where it has leased approximately 64,000 square feet of
office space. The Company has also leased 16,000 square feet of leased office
space in the Renaissance Center, Detroit, Michigan, to house its management
information system operations. The Company has subleased approximately 44,000
of the 67,000 square feet it leased in Philadelphia, Pennsylvania in
anticipation of its participation in the HealthChoices program to third
parties, and expects the facility to be fully subleased in the next fiscal
year. The Company intends to retain a portion of leased space to pursue
business opportunities. There can be no assurances that the Company will be
successful in subleasing that portion of the facility it does not intend to use.

The Company believes that its current facilities provide sufficient space
suitable for all of the Company's planned activities and that sufficient
additional space will be available on reasonable terms, if needed.

ITEM 3. LEGAL PROCEEDINGS

As previously reported by the Company, certain senior officers and the
Company were named defendants in two shareholder lawsuits filed in the United
States District Court for the Eastern District of Michigan (the "Court") on
August 23 and August 24, 1995. In September 1996, these lawsuits were
consolidated by the Court into a single cause of action. The consolidated
action alleged that certain senior officers and the Company issued reports and
statements that violated federal securities laws. The Company and the officers
contend that all material facts were disclosed during the period in question
and that certain material facts alleged not to have been disclosed were already
available in the financial marketplace.

Nevertheless, management concluded that continued defense of the
litigation was depleting the available insurance pool and that an unfavorable
outcome in excess of insurance policy limits potentially could have an adverse
impact on the Company's financial position. Continuation of this litigation
would have also diverted management's focus from operations. Based on these
facts, management pursued settlement with the plaintiff. In September 1997, the
parties agreed to a proposed settlement requiring the release of all claims and
damages sought by the plaintiff and payment by the Company of $3.25 million,
of which the Company anticipates $2.1 million to be paid by the insurance
carrier. The pending settlement is subject to federal court approval. The
Company has agreed to indemnify the named officers from monetary exposure in
connection with the lawsuit, subject to reimbursement by any named officer, in
the event he is found not to be entitled to such indemnification.

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

There were no matters submitted to a vote of the Company's holders of
common shares (the Company's only voting securities) during the fourth quarter
of the fiscal year ended June 30, 1997.

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

The Common Shares are traded on the NYSE under the symbol "UAH". The
following table sets forth, for the periods indicated, the high and low closing
prices for the Common Shares on the NYSE, as reported by the NYSE for each
quarter since July 1, 1995:

HIGH LOW
---- ---
FISCAL YEAR 1996
----------------
First Quarter 18 7/8 11 1/8
Second Quarter 11 5/8 9 1/4
Third Quarter 14 7/8 9 3/4
Fourth Quarter 15 1/8 10

FISCAL YEAR 1997
----------------
First Quarter 11 5/8 8 1/4
Second Quarter 7 5/8 5 7/8
Third Quarter 6 1/8 4 1/4
Fourth Quarter 6 3/8 4

As of September 19, 1997, the closing price of the Common Shares on the
NYSE was $6 3/4 per share and there were approximately 196 record holders of
the Common Shares.

The Company has not paid any cash dividends since its initial public
offering in the fourth quarter of fiscal 1991, retaining all earnings to
support its growth strategy. The Company currently anticipates that it will
retain all of its earnings for use in the operation and expansion of its
business for the foreseeable future.

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ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth selected consolidated financial data for
the periods indicated:

1997 1996 1995 1994 1993
--------- --------- -------- -------- --------
(in thousands, except per share data)

OPERATING DATA (YEAR ENDED JUNE 30):
Operating revenues $112,549 $92,379 $59,790 $38,435 $28,286
(Loss) earnings from continuing operations $ (5,260) $(3,657) $ 6,229 $ 6,470 $ 4,588
Discontinued operations, net of income taxes $ 1,845 $ 909 $ 367 $ 912 $ 71
Net (loss) earnings $ (3,415) $(2,748) $ 6,596 $ 7,382 $ 4,659
(Loss) earnings per common share from continuing
operations $ (0.80) $ (0.56) $ 0.95 $ 0.99 $ 0.72
Net (loss) earnings Per Common Share $ (0.52) $ (0.42) $ 1.01 $ 1.13 $ 0.73
Weighted average Common Shares outstanding 6,553 6,561 6,561 6,561 6,363

BALANCE SHEET DATA (JUNE 30):
Cash and investments $ 17,442 $30,930 $17,537 $20,136 $18,097
Intangible assets, net 10,557 11,546 - - -
Net assets of discontinued operations 19,746 14,703 10,542 9,150 8,297
Total assets 79,662 93,239 57,614 44,778 32,798
Medical claims and benefits payable 8,735 25,678 - - -
Debt 23,868 21,654 10,474 5,833 2,500
Shareholders' equity 34,406 37,822 40,508 34,189 26,806

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

OVERVIEW

In fiscal 1996, the Company acquired additional ownership in previously
unconsolidated affiliates that affect the year-to-date comparability of its
consolidated results of operations. In late January 1996, the Company
purchased an additional 20.6% and 25% of the voting common stock of UltraMedix
and OmniCare-TN, respectively. This increased the Company's ownership in
UltraMedix to 51% and in OmniCare-TN to 75%. Accordingly, these majority-owned
affiliates are included in the Company's consolidated financial results
effective February 1996. In September 1997, the Company announced its plans to
sell the stock of its subsidiary, CHF. The sale is expected to be completed in
January 1998, but is contingent upon the buyer obtaining financing. In
accordance with accounting literature, CHF results are reported as discontinued
operations in the consolidated financial statements for all periods presented.
Also, see Note 3 to the Consolidated Financial Statements. The proposed sale
for $30 million in cash will result in an

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estimated gain to the Company in 1998 of approximately $6.5 million or $1.00
earnings per share after closing costs and income taxes, and will provide cash
flow to reduce debt and support enhancements in existing operations. There can
be no assurances that this sale will be consummated.

Consolidated losses from continuing operations totaled $5.3 million in
1997, compared to losses of $3.7 million in 1996 and earnings of $6.2 million
in 1995, or losses per share of $.80 in 1997 and $.56 in 1996 and earnings per
share of $.95 in 1995. Including discontinued operations, consolidated losses
totaled $3.4 million in 1997 and $2.7 million in 1996 and earnings of $6.6
million in 1995, or losses per share of $.52 in 1997 and $.42 in 1996 and
earnings per share of $1.01 in 1995.

Results for 1997 include the pending settlement of the consolidated class
action shareholder lawsuit for $3.25 million, of which $1.15 million
approximates the Company's expense, net of insurance coverage limits. The
pending settlement is subject to federal court approval. The Company also
established a bad debt expense in the amount of $1.1 million related to the
valuation of an account receivable of OmniCare-TN from a third party
administrator and $.7 million for its investment in HealthScope. Valuation
reserves of $1.0 million and $.1 million related to this investment were also
established in 1996 and 1995, respectively. Management intends to vigorously
pursue the collection of the account receivable and, based on the rollout of
the State of New York's mandatory Medicaid enrollment initiative, hopes to
recover the HealthScope investment. Additionally, in 1997 a $.3 million rent
expense estimate was established for the difference between the Company's
lease obligation and the expected sub-lease rental income for the remaining
life of the Company's lease in Pennsylvania. The fiscal 1997 after-tax effect
of these non-recurring items totaled a $.39 loss per share.

Net losses in the Company's Florida operations also impacted the 1997
results in the amount of $.50 per share. The constantly changing governmental
environment in Florida has required the Company to change its marketing
strategy to a commercial market focus. WITH THE REALIGNMENT OF THE MEMBERSHIP
MIX, CONTINUED INCREASED ENROLLMENT AND OPERATIONAL IMPROVEMENTS, PARTICULARLY
RELATED TO THE COMPLETE INTEGRATION AND TESTING OF THE CLIENT/SERVER
INFORMATION SYSTEM, PROVIDER CONTRACTING AND UTILIZATION AND CASE MANAGEMENT
PRACTICES, MANAGEMENT BELIEVES IT CAN REVERSE THE CURRENT LOSS TREND
EXPERIENCED BY THE FLORIDA HMO. The Company's fiscal 1998 results will greatly
depend on its ability to successfully implement these goals in Florida.

Effective May 31, 1997, the Company's management agreement with PPC was
terminated. Earnings per share related to the Company's management of this
contract were $.12 in 1997. Historically, the earning contributions from this
management agreement had been nominal.

Management fee revenue in 1996 was affected by an agreement reached in
June 1996 between the Company and OmniCare-TN, pursuant to which OmniCare-TN
agreed to reimburse the Company approximately $8.7 million for start-up costs
and other expenses incurred for the period January 1994 through September 1995.

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The contract settlement expense recorded in December 1995 of $9.7 million
represented a one-time adjustment to management fee revenues and its effect on
other related accounts based on the provisions of the revised management
agreement between UA-TN and OmniCare-TN as approved by the State of Tennessee
in November 1995, retroactive to January 1994. Despite the fact that the
Company and OmniCare-TN took certain actions related to the costs reimbursed
under the agreement, the transaction was not sufficiently documented to allow
recognition of the same on the Company's financial statements in December 1995.

YEAR ENDED JUNE 30, 1997 COMPARED TO YEAR ENDED JUNE 30, 1996

Total revenues from continuing operations increased $20.1 million (22%),
from $92.4 million in 1996 to $112.5 million in 1997.

Medical premium revenues were $70.4 million in 1997, of which $56.5
million related to OmniCare-TN and $13.9 million to UltraMedix, an increase of
$35.9 million (104%) over medical premium revenues of $34.5 million in 1996.
Medical premiums for OmniCare-TN increased $27.8 million (97%), from $28.7
million in 1996 to $56.5 million in 1997. The net increase is due to 12 months
of activity in 1997 compared to 5 months in 1996, offset by a net decrease in
member months resulting from enrollment adjustments. The enrollment at
OmniCare-TN was approximately 40,100 at June 30, 1997, compared to
approximately 48,200 at June 30, 1996, a decrease of 8,100 members or 17%.
The State of Tennessee's disenrollment of approximately 7,000 members in the
quarter ending December 1996 was the primary reason for the decrease. This
action was taken by the State based upon the return of undeliverable
questionnaires mailed to members, which the State requested for continued
participation. OmniCare-TN has contested the validity of this method of
determining the continued eligibility of the Medicaid recipients and has
contacted approximately 3,000 of these disenrolled members to request that they
contact the State to regain their eligibility, retroactive from the date of
disenrollment. The outcome of this effort is pending.

Medical premiums for UltraMedix increased $8.1 million (140%), from $5.8
million in 1996 to $13.9 million in 1997. The net increase is due to 12 months
of activity in 1997 compared to 5 months in 1996. UltraMedix's enrollment at
June 30, 1997 was approximately 18,100, an increase of 7,000 (63%) from the
June 30, 1996 enrollment of approximately 11,100 members. UltraMedix has made
significant enrollment gains in the commercial market since approval of its HMO
license in October 1995. The increase in the commercial market was due in part
to the State of Florida's unsuccessful initiative to mandate the enrollment of
Medicaid eligibles into managed care. UltraMedix was selected to participate
in this program and the contract award would have capped UltraMedix's Medicaid
enrollment, including existing members, at approximately 48,000 during the
contract period. Because of legal challenges from unsuccessful bidders to the
State's request for proposal, the initiative has been halted indefinitely.

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To minimize the uncertainty related to rate reductions contemplated by the
initiative, UltraMedix has retargeted its marketing efforts to expand its
commercial business. This has contributed to the change in UltraMedix's
enrollment mix from 98%:2% (Medicaid-to-commercial) as of June 1996, to 53%:47%
as of June 1997. As of September 1997, the mix was 46%:54%.

The average per member per month ("PMPM") premium rate in 1997 for
OmniCare-TN was $110 and for UltraMedix $98. BASED ON CURRENT TRENDS AND
HISTORICAL CONTRACT ADJUSTMENTS BY THE RESPECTIVE STATE AGENCIES, MANAGEMENT
EXPECTS A 3% TO 4% RATE INCREASE FOR THE EXISTING OMNICARE-TN MEDICAID MEMBERS
AND 7% TO 11% INCREASE IN THE ULTRAMEDIX MEDICAID RATES. MANAGEMENT EXPECTS
THAT THE ULTRAMEDIX PMPM ALSO WILL BE AFFECTED BY THE CHANGE IN THE MEMBERSHIP
MIX, REFLECTING HIGHER COMMERCIAL RATES.

Management fees were $40.0 million in 1997, a decrease of $15.9 million
(28%) from fees of $55.9 million in fiscal 1996. $8.5 million of the decrease
was due to the purchase of majority ownership interests in UltraMedix and
OmniCare-TN in January 1996, resulting in the consolidation of these entities,
including the elimination of inter-company management fees. $8.7 million of the
decrease was due to an agreement reached in June 1996 between the Company and
OmniCare-TN, pursuant to which OmniCare-TN agreed to reimburse the Company
approximately $8.7 million for start-up costs and other expenses incurred for
the period January 1994 through September 1995.

Operating revenues of OmniCare-MI decreased in 1997 due primarily to a net
decrease in enrollment rates of approximately 2%, which resulted in decreased
management fees to the Company of approximately $1.4 million. These decreases
were offset by a $2.0 million increase in management fees from PPC,
attributable primarily to increased PPC enrollment of approximately 52%, offset
by a decrease in premium rates of approximately 15% and 11 months of management
fees in 1997 compared to 12 months in 1996.

The Company's management agreement with PPC was terminated pursuant to
binding arbitration, effective May 31, 1997, based in part on a dispute between
the parties with respect to the payment of non-emergent transportation costs
for enrollees as a marketing expense to be incurred under the management
agreement.

OmniCare-MI was notified in May 1997 that it had been selected to
participate in the State of Michigan's initiative to mandate Medicaid
enrollment into managed care organizations. Similar to the initiative in
Florida, the State's initiative was legally challenged by unsuccessful bidders
responding to the State's request for proposal. Because of these legal
challenges, the State did not assign the Medicaid eligibles to plans that were
awarded contracts in the bid process, but did, however, institute the rate
reduction component of this new program effective July 1997. With the
indefinite delay in the assignment of approximately 90,000 eligible recipients
and the implementation of the rate reductions of 10% to 15%, the operating
revenues of OmniCare-MI and the resulting management fees to the Company are
likely to be affected in 1998. There can be no assurances that OmniCare-MI can
control health care costs at the rate of the premium reductions.

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26
Total expenses before income taxes from continuing operations totaled
$119.0 million in 1997, compared to $95.8 million in 1996, an increase of $23.2
million or 24%.

Of the total medical service expenses of $57.8 million in 1997, $45.4
million relates to OmniCare-TN and $12.4 million to UltraMedix, an increase of
$27.9 million (93%) over medical service expenses of $29.9 million in 1996. The
percentage of medical service expenses to medical premium revenues, or the
medical loss ratio ("MLR"), was 80% for OmniCare-TN and 88% for UltraMedix in
1997. The OmniCare-TN MLR for 1997 was positively affected by the State of
Tennessee's $2.4 million settlement to adjust the amount of claims saving paid
and/or accrued to the State of Tennessee prior to the Plan obtaining its
TennCare HMO license and the recognition of duplicate claims paid to providers.

EXCLUDING THESE NON-RECURRING ADJUSTMENTS, MANAGEMENT BELIEVES THAT THE
MLR FOR OMNICARE-TN COULD INCREASE 3% TO 6% OVER THE NEXT SEVERAL QUARTERS.
This increase could be offset by an anticipated enrollment increase as a result
of the Plan obtaining its commercial HMO license and expanding its service
area. The Company also recently implemented a claims scanning system at
OmniCare-TN. Management believes this new capability will greatly enhance the
Plan's ability to improve operating efficiencies related to claims processing.

MANAGEMENT ALSO EXPECTS A 4% TO 7% DECREASE IN THE MLR FOR ULTRAMEDIX AS A
RESULT OF AN EXPECTED INCREASE IN THE COMMERCIAL MEMBERSHIP BASE, RENEGOTIATION
OF PROVIDER CONTRACTS, NEW SYSTEMS IMPLEMENTATION AND OTHER CORRECTIVE ACTIONS
TO IMPROVE UTILIZATION AND CASE MANAGEMENT PRACTICES. Some of these actions
will also be instituted at OmniCare-TN.

Marketing, general and administrative expenses ("MG&A") increased $2.7
million (5%), from $50.1 million in 1996 to $52.8 million in 1997, due to the
following: (i) MG&A for the Company's operation of PPC increased $1.0 million,
but PPC-related MG&A as a percentage of management fee revenues decreased 9%
from 95% in 1996 to 86% in 1997, due primarily to the mandated Medicaid
initiative that increased enrollment without a corresponding marketing effort;
(ii) MG&A for corporate headquarters, including the cost to operate
OmniCare-MI, increased $1.9 million, and MG&A as a percentage of management fee
revenues increased 9%, from 93% in 1996 to 102% in 1997, due to several
factors, including: a) a $1.4 million decrease in management fees from
OmniCare-MI; b) an average 5% salary rate increase, and c) a $.3 million
adjustment to increase rent expense in 1997 calculated as the difference
between the lease obligations of the Company and the estimated rental income
from sub-tenants for the remaining life of the Company's lease in Pennsylvania;
and (iii) a net decrease of approximately $200,000 related to the Company's
Florida and Tennessee operations.

Equity in net losses of unconsolidated affiliates decreased approximately
$.7 million, from $.7 million in 1996 to zero in 1997, due to the Company's
acquisition of a majority interest in OmniCare-TN and UltraMedix in January
1996.

Depreciation and amortization in 1997 was $4.1 million, compared to $3.4
million in 1996, an increase of $.7 million (21%). The increase was due
primarily to the amortization of goodwill related to acquisitions and computer
software.

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Interest expense increased approximately $.3 million (27%), from $1.1
million in 1996 to $1.4 million in 1997, due to increased borrowings against
the line of credit.

Of the bad debt expense of $1.8 million in 1997, $1.1 million relates to a
valuation reserve established to estimate the net recovery of $1.2 million in
refundable advances made by OmniCare-TN to a third party administrator. The
third party administrator has denied the obligation and, as a result, the
Company is pursuing legal action to collect the receivable. The balance of the
1997 bad debt expense is due to an additional write-down of approximately $.7
million recorded to reduce the Company's $4.0 million investment in
HealthScope. Prior year reserves totaled $1.1 million. As the investment was
capital in nature, no tax credits have been taken against the cumulative
reserve of $1.8 million. MANAGEMENT BELIEVES THAT THE CONTINUED OPERATIONAL
IMPROVEMENTS MADE BY THE NEW MANAGEMENT OF HEALTHSCOPE, THE REDUCTION OF
MONTHLY OPERATING COST, CLIENT GROWTH AND THE ANNOUNCED ROLLOUT OF THE STATE OF
NEW YORK'S MANDATORY MEDICAID INITIATIVE IN EARLY 1998, ARE ALL CRITICAL
FACTORS IN DETERMINING THE ULTIMATE RECOVERABILITY OF THIS INVESTMENT.

The contract settlement expense recorded in December 1995 of $9.7 million
represented a one-time adjustment to management fee revenues and its effect on
other related accounts based on the provisions of the revised management
agreement between UA-TN and OmniCare-TN, as approved by the State of Tennessee
in November 1995, retroactive to January 1994. Despite the fact that
OmniCare-TN agreed to reimburse the Company approximately $8.7 million in June
1996 for the start-up and other costs incurred by the Company between January
1994 and September 1995, the transaction was not sufficiently documented to
allow recognition of the same on the Company's financial statements in December
1995.

The estimated Company expense related to the pending shareholder class
action lawsuit settlement, net of insurance coverage, is $1.15 million. The
pending settlement is subject to federal court approval. See also - "Legal
Proceedings".

As a result of the foregoing, the Company recognized losses from
continuing operations before income taxes of $6.5 million in 1997, compared to
losses from continuing operations before income taxes of $3.4 million in 1996,
a $3.1 million change. The federal statutory tax rate for continuing operations
for 1997 and 1996 was approximately 34%. Goodwill amortization related to
equity investments, equity losses from unconsolidated affliates and losses
related to capital investments not deductible for tax purposes resulted in an
effective tax rate of approximately 19% in 1997. These differences resulted in
a tax expense on the 1996 losses. Net losses from continuing operations in
1997 were $5.3 million, compared to net losses from continuing operations of
$3.7 million in 1996, a change of $1.6 million.

Earnings from discontinued operations, net of income taxes, was $1.8
million in 1997, compared to $.9 million in 1996, an increase of $.9 million.
This change is due primarily to a contract entered in June 1996 with the State
of Maryland's workers' compensation insurance fund.

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YEAR ENDED JUNE 30, 1996 COMPARED TO YEAR ENDED JUNE 30, 1995

Total revenues from continuing operations increased $32.6 million (55%),
from $59.8 million in 1995 to $92.4 million in 1996.

Medical premium revenues were $34.5 million in 1996, of which $28.7
million related to OmniCare-TN and $5.8 million to UltraMedix. The average
1996 PMPM for OmniCare-TN was $105 and for UltraMedix $98.

Management fees decreased $2.0 million (3%) to $55.9 million in 1996 from
$57.9 million in 1995. The change was attributable to a decrease in management
fees from the owned Managed Plans of $3.5 million, from $20.7 million in 1995
to $17.2 million in 1996, offset by an increase from the operated Managed Plans
of $1.5 million, from $37.2 million in 1995 to $38.7 million in 1996. Of the
$3.5 million decrease in management fees from the owned Managed Plans, $1.8
million and $1.7 million were from UltraMedix and OmniCare-TN, respectively.
The approximate $1.8 million decrease in management fees from UltraMedix was
due to increased cost reimbursement of $1.0 million, offset by the elimination
of management fees due, to post-acquisition consolidation of $2.8 million.

The decrease in management fees from OmniCare-TN of approximately $1.7
million (12%) was due to: (i) a 29% decrease in enrollment from approximately
62,800 members at June 30, 1995 to approximately 48,200 members at June 30,
1996 as a result of the Bureau of TennCare's decisions to terminate coverage
for Working Uninsured who were delinquent in the payment of premiums
to the State under the TennCare program and to terminate approximately 3,400
members in April 1996 from whom questionnaires sent by TennCare were returned
undeliverable. The net effect of these enrollment adjustments was a decrease
in management fees of $4.6 million; (ii) the change in the net management fee
percentage charged to the Plan decreased the management fees due to the Company
by approximately $4.3 million, and (iii) a $3.4 million decrease in management
fee due to post-acquisition consolidation; offset by (a) an approximate $1.9
million increase in management fees due to TennCare's increase in premium
rates, and (b) the Plan's decision to reimburse the Company approximately $8.7
million in June 1996 for the start-up and other costs incurred by the Company
between January 1994 and September 1995.

Of the $1.5 million increase in management fees from the operated Managed
Plans, increased operating revenues of PPC due to increased enrollment of
approximately 26% resulted in increased management fees of approximately $1.8
million, offset by a net decrease in management fees from OmniCare-MI of
approximately $.3 million. The Company's management agreement with PPC was
terminated effective May 31, 1997.

Total expenses before income taxes from continuing operations totaled
$95.8 million in 1996, compared to $49.0 million in 1995, an increase of $46.8
million or 96%.

Of the total medical service expenses of $29.9 million in 1996, $24.6
million relates to

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OmniCare-TN and $5.3 million to UltraMedix. The MLR was 86% for OmniCare-TN
and 93% for UltraMedix.

MG&A increased $6.4 million (15%), from $43.7 million in 1995 to $50.1
million in 1996, due to the following: (i) MG&A for the Company's operation of
PPC increased $1.6 million, but PPC - related MG&A as a percentage of
management fee revenues remained constant at 95% for 1996 and 1995, due
primarily to the mandated Medicaid initiative that increased enrollment without
the corresponding marketing effort; (ii) MG&A for corporate headquarters,
including the cost to operate OmniCare-MI, increased $4.8 million, and MG&A as
a percentage of management fee revenues increased 21%, from 77% in 1995 to 93%
in 1996, due to several factors, including: a) increased payroll and
promotional efforts to expand the provider network, product development and
preparation for NCQA accreditation reviews, and b) an approximately $.5 million
increase related to the Company's development costs in Pennsylvania, Louisiana,
Georgia and Illinois, and (iii) a net decrease of approximately $.1 million
related to the Company's Florida and Tennessee operations.

Equity in net losses of unconsolidated affiliates decreased $2.1 million,
from $2.8 million in 1995 to $.7 million in 1996, due to the Company's
recognition of its share of the losses as a shareholder of OmniCare-TN (50%)
and UltraMedix (30.4%) through January 1996, at which time the Company acquired
a majority interest in these Plans.

Depreciation and amortization in 1996 was $3.4 million, compared to $1.9
million in 1995, an increase of $1.5 million (79%). The increase was due
primarily to the amortization of goodwill related to acquisitions and computer
software.

The approximate $.6 million (120%) increase in interest expense, from
approximately $.5 million in 1995 to $1.1 million in 1996, was due to increased
borrowings against the line of credit.

Bad debt expense of $1.0 million in 1996 relates to a valuation reserve
established to estimate the net recoverability of the Company's $4.0 million
investment in HealthScope. Bad debt expense of approximately $.1 million
related to this investment was also established in 1995.

The contract settlement expense recorded in December 1995 of $9.7 million
represented a one-time adjustment to management fee revenues, and its effect on
other related accounts, based on the provisions of the revised management
agreement between UA-TN and OmniCare-TN, as approved by the State of Tennessee
in November 1995, retroactive to January 1994. The effect on management fee
revenues for the period January 1, 1994 to September 30, 1995, as adjusted in
December 1995, represents a reduction in management fees of approximately $11.7
million, offset by a decrease in goodwill of approximately $.6 million related
to the Company's 50% equity ownership in OmniCare-TN at the time. Additionally,
the contract settlement charge was reduced by the $1.4 million reversal of the
valuation allowance established in June 1995, representing a charge to adjust
the carrying value of the Company's investments, advances and notes receivable
from and related to OmniCare-TN to their estimated fair values as of June 30,
1995.

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30

As a result of the foregoing, the Company recognized losses from
continuing operations before income taxes of $3.4 million in 1996, compared to
earnings from continuing operations before income taxes of $10.8 million in
1995, a $14.2 million change. The federal statutory tax rate for continuing
operations for 1996 and 1995 was approximately 34% and 35%, respectively.
Goodwill amortization related to equity investments, equity losses from
unconsolidated affliates and losses related to capital investments not
deductible for tax purposes resulted in an effective tax rate of zero in 1996
and approximately 42% in 1995. Net losses from continuing operations in 1996
were $3.7 million, compared to net earnings from continuing operations of $6.2
million in 1995, a change of $9.9 million.

Earnings from discontinued operations, net of income taxes, was
approximately $.9 million in 1996, compared to approximately $.4 million in
1995, an increase of $.5 million. This change is due primarily to the number
of new contracts entered into during the year.

YEAR ENDED JUNE 30, 1995 COMPARED TO YEAR ENDED JUNE 30, 1994

Total revenues from continuing operations increased $21.4 million (56%),
from $38.4 million in 1994 to $59.8 million in 1995.

Management fees were $57.9 million in 1995, an increase of $20.6 million
(55%) over fees of $37.3 million in 1994, due in part to: (i) increased
operating revenues of OmniCare-MI, due primarily to increased enrollment and
premium rates of 8% and 4%, respectively, that resulted in increased management
fees of approximately $2.8 million; (ii) increased operating revenues of PPC,
due primarily to increased enrollment offset by a decrease in premium rates of
22% and 2%, respectively, that resulted in increased management fees of
approximately $1.2 million; (iii) a net decrease in management fees of
approximately $.1 million, due to OmniCare-MI's recognition of retroactive rate
adjustments in 1994, and (iv) an increase in management fees of $1.2 million,
from approximately $.7 million in 1994 to $1.9 million in 1995, related to the
Company's administration of OmniCare-MI's COB program.

The Company's management of UltraMedix also contributed to the increase in
management fees. Under the UltraMedix management agreement, which became
effective February 1, 1994, the Company was reimbursed the administrative cost
to manage the Plan, plus a percentage of the Plan's income before income taxes
and extraordinary expenses. Effective February 1995, the management agreement
was amended to provide the Company with reimbursement of the administrative
cost to manage the Plan, plus 3/4 of 1% of the Plan's gross revenues. In 1995,
the Company recognized $5.0 million in management fees compared to $1.3 million
in 1994, an increase of $3.7 million.

The Company's management of OmniCare-TN also contributed to the increase
in management fees. Management fees in 1995 were $15.6 million, an increase of
$11.8 million over fees of $3.8 million in 1994. The OmniCare-TN management
agreement with UA-TN was effective for five months in 1994, compared to 12
months in 1995. In November 1994, the TennCare Bureau notified the Company
that management fees charged under the original

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31

management agreement, effective February 1, 1994, exceeded the guidelines of
the TennCare contract. In April 1995, the Company submitted a revised
management agreement to the TennCare Bureau. In June 1995, the State notified
the Company of its rejection of the revised agreement. The Company submitted a
second revised management agreement that was approved by the State in November
1995, retroactive to January 1994.

The Company proposed to the Board of Directors of OmniCare-TN that a
second Promissory Note payable solely from future non-TennCare related revenues
to UA-TN be issued for the amount of any accrued management fees not otherwise
payable under the second revised management agreement, or from interest
earnings and OmniCare-TN's share of savings not required to be returned to the
State of Tennessee under TennCare regulations. On October 5, 1995, the Board
of Directors of OmniCare-TN approved such additional Promissory Note up to an
aggregate principal amount of $6.0 million, to be repaid solely from future
non-TennCare related revenues.

Interest and other income in 1995 were $1.9 million, an increase of
approximately $.7 million (58%) over income of $1.2 million in 1994.
Approximately $.3 million (43%) of the increase was due to interest income on
notes due from OmniCare-TN and UltraMedix.

Total expenses before income taxes from continuing operations totaled
$49.0 million in 1995, compared to $28.7 million in 1994, an increase of $20.3
million or 71%.

MG&A increased $16.2 million (59%), from $27.5 million in 1994 to $43.7
million in 1995, and represented approximately 74% and 75% as a percentage of
management fees in 1994 and 1995, respectively. The Company's activities in
Tennessee and Florida represented approximately $10.7 million of the increase,
due primarily to 12 months of operations in 1995 compared to approximately 5
months in 1994. Included in the MG&A increase for Tennessee and Florida was $.5
million representing a charge to earnings in connection with an estimate of the
effect of potential OmniCare-TN enrollment adjustments and $1.8 million
representing a charge to adjust the carrying value of the Company's
investments, advances and notes receivable from related parties to their
estimated fair value at June 30, 1995.

The MG&A increase related to operations of the Corporate headquarters and
PPC was $4.0 million and $1.5 million, respectively. Included in the Corporate
headquarters increase was $1.3 million related to the Company's development
costs in Pennsylvania and Louisiana.

Equity in net losses of unconsolidated affiliates of $2.8 million in 1995
was due to the Company's recognition of its share of the losses as a
shareholder of OmniCare-TN (50%) and UltraMedix (30.4%) of $2.6 million and
approximately $.2 million, respectively. Net equity losses in 1994 were
approximately $.1 million and related to the Company's investment in UltraMedix.
The effective dates of the Company's investments in UltraMedix and OmniCare-TN
were March 1994 and July 1994, respectively. In January 1996, the Company
acquired a majority interest in these entities.

The $1.1 million (138%) increase in depreciation and amortization, from
approximately

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32

$.8 million in 1994 to $1.9 million in 1995, was due to depreciation taken on
furniture and equipment acquired over the past 24 months and the amortization
of goodwill related to investments in affiliates.

The approximate $.2 million (67%) increase in interest expense, from
approximately $.3 million in 1994 to approximately $.5 million in 1995, was due
primarily to interest costs on the term loan agreement entered into in August
1993, and increased borrowings against the line of credit.

Bad debt expense of approximately $.1 million in 1995 represents a
valuation reserve on the Company's investment in HealthScope.

As a result of the foregoing, the Company recognized earnings from
continuing operations before income taxes of $10.8 million in 1995, compared to
earnings from continuing operations before income taxes of $9.8 million in
1994, a $1.0 million change. The federal statutory tax rate for continuing
operations for 1995 and 1994 was approximately 35%. Goodwill amortization
related to equity investments and equity losses from unconsolidated affliates
not deductible for tax purposes resulted in an effective tax rate of 42% in
1995 and 34% in 1994. Net earnings from continuing operations in 1995 were
$6.2 million, compared to net earnings from continuing operations of $6.5
million in 1994, a change of $.3 million.

Earnings from discontinued operations, net of income taxes, was
approximately $.4 million in 1995, compared to approximately $.9 million in
1994, a change of $.5 million.

RECENTLY ENACTED PRONOUNCEMENTS

Effective July 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of".

In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 128 ("SFAS 128"), Earnings Per
Share, which (1) replaces the presentation of primary earnings per share (EPS)
with a presentation of basic EPS; (2) requires dual presentation of basic and
diluted EPS on the face of the consolidated statements of operations regardless
of whether basic and diluted EPS are the same; and (3) requires a
reconciliation of the numerator and denominator used in computing basic and
diluted EPS. Basic EPS excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. Diluted EPS is computed
similarly to fully diluted EPS pursuant to Accounting Principles Board Opinion
15. SFAS 128 is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods; earlier application is not
permitted. SFAS 128 requires restatement of all prior period EPS data
presented. The Company does not expect the effects of applying SFAS 128 to be
significant.

Statement of Financial Accounting Standards No. 123, "Accounting for Stock
Based Compensation" ("SFAS 123"), is effective for fiscal years beginning after
December 15, 1995.

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Management has elected to follow the provisions of Accounting Principles Board
Opinion No. 25, as allowed under SFAS 123. The adoption of SFAS 123 has not
had a material effect on the Company's consolidated financial
statements.

LIQUIDITY AND CAPITAL RESOURCES

At June 30, 1997, the Company had (i) cash and cash equivalents and
short-term marketable securities of $17.4 million, compared to $30.9 million at
June 30, 1996, (ii) working capital of negative $13.0 million, compared to $6.9
million at June 30, 1996, and (iii) a current assets-to-current-liabilities
ratio of .67-to-1 and 1.2-to-1 at June 30, 1997 and June 30, 1996, respectively.
The principal sources of funds for the Company during the 12 months ended
June 30, 1997 were long-term borrowings of $5.1 million, proceeds from the
sale of furniture and equipment of approximately $.4 million, investments
and advances to affiliates of approximately $.1 million, offset by $9.8 million
used in net operating activities, net purchase of marketable securities of $.4
million, furniture and equipment additions of $3.3 million, investing cash used
in discontinued operations of $3.2 million, $2.9 million to repay long-term
debt and repurchase of common stock of approximately $.1 million.

In November 1995, the Company entered into an agreement with a bank
amending an earlier loan agreement that increased the line of credit facility
and converted prior borrowings of $6.1 million under a line of credit to a term
loan. Based on the revised agreement, the Company has a $20 million unsecured
line-of-credit commitment that expires in February 1998, and bears interest at
prime, or 1% over the one, two, three or six-month LIBOR rate. The Company's
outstanding line of credit borrowings at June 30, 1997 were $19.4 million. The
$6.1 million term loan bears interest at prime, or 1.25% over the one, two,
three or six-month LIBOR rate. The monthly principal payable is approximately
$126,000, with the loan due in November 1999. The outstanding balance at June
30, 1997 is $3.5 million.

In August 1993, the Company entered into a $7.0 million bank term loan
agreement. The term loan bears interest at prime, or 1.5% over one, three, or
six-month LIBOR rate, not to exceed a total rate of 5% per annum. The monthly
principal payable is approximately $117,000, with the loan due in August 1998.
Covenants of the term loan agreement provide for certain net worth and
financial ratio requirements. At June 30, 1997, the Company was in violation
of a covenant that set a floor on a debt service coverage ratio. The Company
obtained a waiver for this provision from the lending institution. The loan is
collateralized by all of the assets of the Company. The Company's outstanding
borrowings at June 30, 1997 were approximately $1.0 million.

In previous fiscal years, the Company provided a $1 million letter of
credit on behalf of

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OmniCare-LA and a $1.0 million capital contribution to OmniCare-LA, and a $2.1
million capital contribution to PhilCare, in satisfaction of applicable
statutory requirements. In addition, the Company funded $4.1 million on behalf
of OmniCare of Georgia, Inc. in satisfaction of applicable reserve and net
worth requirements. The foregoing funds were provided by the Company from the
line of credit arrangement. In October 1996, the Company withdrew its HMO
licensure application from Georgia, along with the $4.1 million used to fund
the statutory reserve requirements. The Company anticipates additional funding
requirements for its initiatives in Louisiana and Pennsylvania to approximate
an aggregate amount of $7 million, and to be applied toward the establishment
of statutory reserves and payment of operational costs. There can be no
assurance that the Company will fund these requirements. The source for these
funding requirements is anticipated from third party investors and borrowings.

The Company anticipates that additional cash flow and working capital may
be necessitated by business expansion needs (including potential acquisitions)
and new marketing program requirements. The Company has submitted and expects
to continue to submit proposals to governmental, quasi-governmental and private
entities to provide managed care services. Management believes that as it
continues to pursue other contractual relationships, the Company's cash
reserves, marketable securities, future cash flows from operations and proceeds
from borrowings and the sale of CHF will be sufficient to enable the Company
to continue to develop its operations, support its anticipated business
expansion and satisfy its working capital needs for the foreseeable future.
The proposed sale of CHF for $30 million in cash is expected to reduce debt by
approximately $16 million and to provide adequate cash for other Company
pursuits.

RECENT INITIATIVES

In May 1997, the Company responded to a request for proposals from a North
Carolina-based organization (the "NCO") to provide HMO management services.
The NCO conducted a site visit during July 1997. The Company is one of two
finalists for a management and development contract. It is anticipated that
final negotiations will be completed by the NCO with the final decision to be
made during the third quarter of fiscal 1998.

EFFECTS OF INFLATION

Management believes that the Company's cost controls, risk management
programs and related procedures will allow the Company to substantially
mitigate the effects of any inflation.

ITEM 8. FINANCIAL STATEMENTS

The consolidated financial statements, notes and the report of the
independent certified public accountants thereon are presented beginning at
page F-1 of this Form 10-K and are hereby incorporated by reference into this
Item 8.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not applicable
PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Identification of Directors and Executive Officers. Information
concerning the directors and executive officers of the Company set forth below
is as of September 19, 1997:

NAME AGE POSITION HELD
---- --- -------------

Julius V. Combs, M.D. 66 Chairman and Chief Executive Officer
Ronald R. Dobbins 62 President and Chief Operating Officer
Anita C. R. Gorham 56 Secretary
Osbie Howard 54 Senior Vice President, UA-Tennessee
Louis J. Nicholas 58 Senior Vice President, Chief Executive Officer, CHF
Jagannathan Vanaharam 56 Senior Vice President, Finance and Treasurer
John S. Zaleskie 55 Senior Vice President, UA-Florida
Gail Pabarue Bennett 41 Vice President, Legal Affairs
Danny H. McNeal 36 Vice President, Planning and Development
Francisco Ramos 40 Vice President, Management Information Systems
William C. Sharp, M.D. 47 Vice President, Medical Services
William C. Brooks 67 Director
Vivian L. Carpenter, Ph.D. 44 Director (1)
William B. Fitzgerald, Esq. 55 Director
Harcourt G. Harris, M.D. 69 Director
Ronald M. Horwitz, Ph.D. 59 Director (1)
Emmett S. Moten, Jr. 53 Director (1)

(1) As required by Michigan law, directors Carpenter, Horwitz and
Moten, have been designated "independent directors" by the Board.

There are no family relationships among executive officers or other
significant employees. None of the executive officers, except as described
below, is a party to or otherwise involved in any legal proceedings adverse to
the Company or its subsidiaries. Dr. Combs, Mr. Dobbins and Mr. Vanaharam were
named as defendants in the shareholder class action lawsuit

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36

recently settled by the Company. See also "Legal Proceedings." The following
information indicates the business experience of each officer and director
during the prior five years:

Julius V. Combs, M.D. has been the Company's Chairman of the Board and
Chief Executive Officer, as well as a director of the Company since its
inception. His current term as a director expires at the Annual Meeting of
Shareholders to be held in 1999. He is Chairman of the Board's Executive
Committee and is a member of the Board's Compensation and Finance, Investment
and Planning Committees. Dr. Combs is also a director and Chairman of
UltraMedix, Chairman Emeritus of the Board of Trustees of OmniCare-MI, and
President and director of OmniCare-TN. Dr. Combs was in private medical
practice from 1964 to 1995.

Ronald R. Dobbins has been President and Chief Operating Officer, as well
as a director of the Company since its inception. His current term expires at
the Annual Meeting of Shareholders to be held in 1999. Mr. Dobbins is Chairman
of the Board's Finance, Investment and Planning Committee and a member of the
Board's Executive and Compensation Committees. Mr. Dobbins is also President of
OmniCare-MI, as well as a member of its Board of Trustees. He is also a
director of UltraMedix and OmniCare-TN. He is a member of the Board of
Directors of Michigan National Bank/Michigan National Corporation, Golden State
Mutual Life Insurance Company and a member of the governing board of the
American Association of Health Plans.

Anita C. R. Gorham has been the Secretary and a director of the Company
since 1984. Her current term expires at the Annual Meeting of Shareholders to
be held in 1998. She is Chairwoman of the Board's Compensation Committee and a
member of its Executive and Nominating Committees. Ms. Gorham is also a member
of the Board of Trustees of OmniCare-MI. Ms. Gorham has been employed by
Central Michigan University, Troy, Michigan, since 1987. She has served as
Academic Advisor and Regional Manager for Academic Services. She is currently
Associate Director for Professional Development and a faculty member. Ms.
Gorham is also a faculty member at Detroit College of Business.

Osbie Howard joined OmniCare-TN in June 1995 as Executive Director of
OmniCare-TN and, in November 1995, was appointed Senior Vice President of the
Company. Mr. Howard previously served as Treasurer of the City of Memphis, a
position he had held since January 1992. From June 1979 to April 1988, Mr.
Howard was executive vice president of the Tennessee Valley Center for Minority
Economic Development and from April 1988 to January 1992, he was an officer
with a real estate development, property management and financial services
concern.

Louis J. Nicholas joined the Company in May 1993 as a Senior Vice
President and director following the Company's acquisition of CHF-HPM Limited
Partnership. His current term expires at the Annual Meeting of Shareholders to
be held in 1997. He is a member of the Board's Compensation Committee. Mr.
Nicholas is also the Chairman, President and Chief Executive Officer and a
director of CHF. He was formerly the sole shareholder of CHF, Inc., the general
partner of CHF-HPM Limited Partnership. Mr. Nicholas founded CHF, Inc. in
1988.

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37

Jagannathan Vanaharam became Senior Vice President of Finance in 1991 and
Treasurer in 1990. From 1985 to 1990, Mr. Vanaharam was the Vice President of
Finance. From 1976 to 1985, Mr. Vanaharam served in various accounting
capacities with OmniCare-MI and is currently a director and treasurer of
OmniCare-TN and UltraMedix.

John S. Zaleskie joined the Company in September 1995 as Executive
Director/CEO of UltraMedix. In November 1995, Mr. Zaleskie was appointed
Senior Vice President of the Company. From March 1993 to February 1994, Mr.
Zaleskie previously served UltraMedix as Vice President of Corporate
Administration, Personnel and Management Information Systems before joining
Information Network Corporation, a provider of administrative and claims
systems support for managed care organizations, as director of sales and
marketing. Prior to this, Mr. Zaleskie served in a variety of marketing and
management positions with IBM Corporation over a 33-year period. Mr. Zaleskie
is also a member of the Board of Directors of UltraMedix.

Gail Pabarue Bennett was appointed Vice President of Legal Affairs in
August 1997. Prior to joining the Company, Ms. Bennett was a partner at
Bodman, Longley & Dahling, LLP, a law firm based in Detroit, Michigan from 1993
to 1997. From 1991 to 1993 Ms. Bennett was a partner at Kitch, Drutchas,
Wagner & Kenny, P.C.. Ms. Bennett serves on the Board of Directors of the
Michigan Society of Health Care Attorneys, and has been a member of the State
Bar of Michigan since 1985.

Danny H. McNeal was appointed Vice President of Planning and Development
in August 1997. He was Assistant Vice President of Planning and Development
from July 1994 to August 1997, and Director of New Business Development and
Research and Development Analyst from 1992 to 1994. Mr. McNeal had been
Business Controller for Corning Incorporated prior to joining the Company. Mr.
McNeal is a CPA and an Administrative Services Manager.

Francisco Ramos joined the Company in 1992 as Chief Information Officer
and became Vice President of Management Information Services in 1994. He was
formerly employed by Information Associates, a subsidiary of Dun & Bradstreet
Software, after 10 years with Young and Rubicam. Mr. Ramos has served in
various management capacities of corporate technology and possesses over 17
years of information systems experience.

William C. Sharp, M.D. joined the Company in May 1993 as Vice President of
Medical Services. From 1990 to 1993 he was the Medical Director for the
Company's CountyCare and TPA/PPO programs on a consulting basis. Dr. Sharp has
also been involved in the private practice of medicine for 19 years,
specializing in internal medicine. He is also an Assistant Professor at Wayne
State University Medical School, Department of Internal Medicine. Dr. Sharp is
also a Fellow of the American College of Physicians and of the American College
of Medical Quality.

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38

William C. Brooks was appointed to the Board of Directors in September
1997. His current term expires at the Annual Meeting of Shareholders to be
held in 1998. He is a member of the Board's Finance, Investment and Planning
Committee. Mr. Brooks retired in 1997 from General Motors Corporation,
Detroit, Michigan, as Vice President, Corporate Affairs, after serving in
various executive positions beginning in 1973. He is a member of the Board of
Directors of the Louisiana-Pacific, DTE Energy Company and Detroit Edison
Company and Chairman of Entech Human Resources Consulting Services, Inc.

Vivian L. Carpenter, Ph.D. was appointed to the Board of Directors in
April 1997. Her current term expires at the Annual Meeting of Shareholders to
be held in 1998. She is a member of the Board's Audit, Executive and Nominating
Committees. Dr. Carpenter is Assistant Dean and Associate Professor of
Accounting at Florida A & M University's School of Business and Industry,
Tallahassee, Florida, where she has served in that capacity since June 1995.
Prior to that, Dr. Carpenter served as Associate Professor and Director of
Academic Programs at Florida A & M from August 1992.

William B. Fitzgerald, Esq. was appointed to the Board of Directors in
April 1997. His current term expires at the Annual Meeting of Shareholders to
be held in 1997. He is a member of the Board's Finance, Investment and
Planning Committee. From 1989 to the present, Mr. Fitzgerald has been a
principal of Fund Administration Services in Grosse Pointe Farms, Michigan,
providing management and consulting services to self-funded insurance programs.
Since 1990, he has also been an attorney at the law firm of Timmis and Inman
in Detroit, Michigan. Mr. Fitzgerald is also on the Board of Trustees of
OmniCare-MI.

Harcourt G. Harris, M.D. has been a director of the Company since 1985.
His current term expires at the Annual Meeting of Shareholders to be held in
1998. He is the Chairman of the Board's Nominating Committee and a member of
the Board's Executive Committee. He is also Chairman of the Board of Trustees
of OmniCare-MI. Dr. Harris, now retired, was involved in the private practice
of medicine for 30 years, specializing in internal medicine.

Ronald M. Horwitz, Ph.D. was appointed to the Board of Directors in April
1997. His current term expires at the Annual Meeting of Shareholders to be held
in 1998. He is a member of the Board's Audit and Finance, Investment and
Planning Committees. Dr. Horwitz is a Professor of Finance at Oakland
University School of Business Administration, in Rochester, Michigan, where he
has served in that capacity since 1991. From 1979 to 1990, Dr. Horwitz was the
Dean of the School of Business Administration at Oakland University. Dr.
Horwitz is also the Principal of Ronald M. Horwitz and Assoc., Financial
Consultants, and a director of Providence Hospital and Medical Centers.

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39

Emmett S. Moten, Jr. has been a director of the Company since 1988. His
current term expires at the Annual Meeting of Shareholders to be held in 1997.
He is the Chairman of the Board's Audit Committee and a member of the Board's
Compensation and Finance, Investment and Planning Committees. Since October
1996, Mr. Moten has been the President of Moten Associates, a real estate
development and consulting company. From July 1988 to October 1996, he was
Vice President of Development for Little Caesar Enterprises, Inc., a national
fast food franchise concern. Prior to assuming that position, Mr. Moten was
Director of the Community & Economic Development Department for the City of
Detroit for nearly 10 years.

The following officers and directors failed to file Form 3 or Form 4 with
the Securities and Exchange Commission for the periods indicated: Dr. Julius V.
Combs (October 1996 and May 1997), Ronald R. Dobbins (January 1997), William B.
Fitzgerald (April 1997) and Emmett S. Moten, Jr. (October 1996). All of the
foregoing directors subsequently filed the appropriate form with the SEC for
the periods indicated.

ITEM 11. EXECUTIVE COMPENSATION

Each of the Directors of the Company receives $250 for each Board of
Directors' and committee meeting attended. In addition, each director who is
not also an employee of the Company receives an annual stipend of $15,000 as
compensation for director services. Directors are also entitled to
reimbursement for reasonable out-of-pocket expenses incurred when on Company
business in their capacities as directors.

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40

The following Summary Compensation Table sets forth the annual salary,
bonus and all other compensation awarded to the Company's Chief Executive
Officer and its four most highly compensated executive officers whose
respective salary and bonus exceeded $100,000.

LONG TERM COMPENSATION
----------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
-------------------------------------------------------------------------------------------
OTHER ALL
ANNUAL OTHER
COMPEN RESTRICTED COMPEN-
NAME AND PRINCIPAL SALARY BONUS -SATION STOCK OPTIONS LTIP/ SATION
POSITION YEAR ($) ($) ($) AWARDS /SARS PAYOUTS ($)(1)

JULIUS V. COMBS, M.D. 1997 327,957 --
Chairman of the Board, 1996 295,392 176,800 -- -- -- -- 7,500
Chief Executive Officer 1995 292,712 -- -- -- -- -- 7,500
and Director -- -- -- -- 7,997

RONALD R. DOBBINS 1997 327,957 --
President, Chief 1996 295,392 163,200 -- -- -- -- 7,500
Operating Officer 1995 292,712 -- -- -- -- -- 7,500
and Director -- -- -- -- 8,377

LOUIS J. NICHOLAS 1997 476,316 --
Senior Vice President, 1996 426,556 --
Chief Executive Officer, 1995 384,760 -- -- -- -- -- 7,500
CHF and Director -- -- -- -- -- 7,500
-- -- -- -- 7,500

JAGANNATHAN 1997 197,134 -- -- -- -- -- 7,500
VANAHARAM 1996 170,434
Senior Vice President, 1995 158,045 -- -- -- -- -- 7,500
Finance and Treasurer -- -- -- -- -- 7,233

WILLIAM C. SHARP, M.D. 1997 196,064 -- -- -- -- -- 7,500
Vice President, 1996 178,651 -- -- -- -- -- 7,500
Medical Services 1995 182,484 -- -- -- -- 4,375

(1) Represents the Company's annual contribution to the 401(K)
Savings Plan.

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41

STOCK OPTION PLANS

The Company has adopted a stock option plan (the "Plan"), under which
331,250 common shares are presently reserved for issuance upon exercise of
options granted under the Plan. No options have been granted under the Plan.
Under the Plan, incentive stock options may be granted to employees, and
non-incentive stock options may be granted to employees, directors and such
other persons as the Board of Directors (or a committee appointed by the Board)
determines will contribute to the Company's success, at exercise prices equal
to at least 100% of the fair market value of the common shares on the date of
grant. In addition to administering the Plan, the Board (or the committee)
determines the number of common shares subject to each option, the term of each
non-incentive stock option, and the time or times when the non-incentive stock
option becomes exercisable, though in no event may the option be exercisable
prior to one year after the date of grant. Incentive stock options are granted
for a term of five years, and are exercisable cumulatively at the rate of 25%
per year commencing one year after the date of grant.

The Company's Employee Stock Purchase Plan ("ESPP"), which became
effective October 1996, enables all eligible employees of the Company to
subscribe for shares of common stock on an annual offering date at a purchase
price which is the lesser of 85% of the fair market value of the shares on the
first day or the last day of the annual period. Employee contributions to the
ESPP for 1997 were approximately $.2 million. 200,000 common shares were
reserved for issuance. Pursuant to the ESPP, 42,415 shares were issued
subsequent to year end for the period ended June 30, 1997.

401(K) SAVINGS PLAN

The Company sponsors a retirement plan intended to be qualified under
Section 401(k) of the Internal Revenue Code of 1986, as amended. All employees
over age 21, other than non-resident aliens, are eligible to participate in the
plan. Employees may contribute to the plan on a tax-deferred basis up to 15%
of their total salary. Under the plan, the Company makes matching
contributions on each employee's behalf up to a maximum of 5% of each
employee's total salary. As of June 30, 1997, 227 employees had elected to
participate in the plan. For the fiscal year ended June 30, 1997, the Company
contributed approximately $.6 million to the plan.

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42

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information, as of September 19,
1997, concerning the beneficial ownership of Common Shares held by (i) each
shareholder known by the Company to own more than 5% of the Common Shares, (ii)
each director of the Company, (iii) each principal officer of the Company, and
(iv) all directors and officers as a group. Except as otherwise noted, each of
the persons named below possesses sole voting and investment power with respect
to all shares set forth opposite his or her name.

COMMON SHARES
BENEFICIALLY OWNED
NAME OF
BENEFICIAL OWNER NUMBER PERCENT
----------------- --------- -------

Julius V. Combs, M.D. (3)(5)(8) 434,143 6.6%
Ronald R. Dobbins (3)(5) 264,405 4.0
Louis J. Nicholas (3)(5)(7) 162,720 2.5
Harcourt G. Harris, M.D. (1) 30,907 *
William B. Fitzgerald (1) 33,346 *
Anita C. R. Gorham (3) 23,436 *
Vivian L. Carpenter, Ph.D. (1) 10,000 *
Ronald M. Horwitz, Ph.D. (1) 500 *
Jagannathan Vanaharam (2) 107,777 1.6
John S. Zaleskie (2) 4,668 *
William C. Sharp, M.D. (2) 6,185 *
Osbie Howard (2) 1,918 *
Danny H. McNeal (2)(9) 462 *
Francisco Ramos (2 )(9) 407 *
All directors and officers as a
group (17 persons) 1,080,874 16.4
Richard M. Brown, M.D. (4)(6) 411,727 6.3

- -------------
* Percentage of common shares beneficially owned does not
exceed 1% of the total common shares outstanding.

(1) Beneficial owner is a director of the Company.
(2) Beneficial owner is an officer of the Company.
(3) Beneficial owner is a director and an officer of the Company.
(4) Dr. Brown's address is 1200 Ardmoor, Birmingham, Michigan
48010.
(5) The address for the listed person is 1155 Brewery Park
Boulevard, Suite 200, Detroit, Michigan 48207.
(6) Reflects all shares held of record in the name of a trust
having as its Trustee the shareholder indicated.
(7) 47,545 common shares are held of record in the name of
CHF-HPM Limited Partnership, a Maryland limited partnership, of
which Phase V, Inc., a Maryland

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43

corporation, is the General Partner.
Louis J. Nicholas is the sole shareholder of Phase V, Inc. Mr.
Nicholas disclaims beneficial ownership in such common shares for
purposes of Section 16 under the Exchange Act. The remaining 112,643
shares are held by Mr. Nicholas directly.
(8) 13,692 Common Shares are held in the name of a trust having
Dr. Combs as its Trustee.
(9) Not a reporting person for the purposes of Section 16 of the
Securities Exchange Act of 1934.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The ownership, operation and management of the Company involve various
potential conflicts of interest, including the relationships and transactions
described below. Management of the Company believes that these agreements and
transactions have been on terms that are as fair to the Company as could have
been obtained from unaffiliated parties.

COMMON OFFICERS AND DIRECTORS. As indicated in the chart below, certain
officers and directors of the Company are also members of the Board of
Trustees/Directors and officers of OmniCare-MI, OmniCare-TN, and UltraMedix.
Consequently, such individuals are likely to influence the operation of the
Company and negotiations and arrangements between the Company and these
entities, including the respective management agreements. Conflicts of interest
may arise relating to matters that are presented to the Company's Board of
Directors for consideration and with respect to which the Company and
OmniCare-MI, OmniCare-TN and UltraMedix may have differing interests, including
matters relating to the management agreements.

NAME UAHC OMNICARE-MI OMNICARE-TN ULTRAMEDIX
- ------------------------ ----------- ----------- ----------- ----------

Julius V. Combs, M.D. Chairman, Chairman President, Chairman,
CEO, Emeritus, Director Director
Director Trustee
Ronald R. Dobbins President, President, Director Director
COO, Trustee
Director
Harcourt G. Harris, M.D. Director Chairman, -- --
Trustee
Anita C.R. Gorham Secretary, Trustee -- --
Director
Jagannathan Vanaharam Senior Vice -- Director, Director,
President Treasurer Treasurer

MANAGEMENT AGREEMENTS. The Company's management agreements with the
Managed Plans were negotiated between related entities. However, the
management agreements were

41
44
reviewed, revised and approved by the respective Managed Plans' full Boards.
Evaluation of the Company's activities under the OmniCare-MI management
agreement are made by the Management Review Committee composed of members of the
OmniCare-MI Board. No Board member of OmniCare-MI with any interest in the
Company is permitted to sit on the Management Review Committee. There presently
is no comparable committee that reviews the Company's performance under the
other Managed Plans' management agreements.

COMMON OWNERSHIP. The Company has an ownership interest in certain of the
Managed Plans, namely OmniCare-TN and UltraMedix. As of June 30, 1997, the
Company owned a 75% interest in OmniCare-TN and a 51% interest in UltraMedix.
In addition, the Company currently owns a 49% interest in PhilCare and a 100%
interest in OmniCare-LA.

AFFILIATIONS WITH PRIMARY CARE PROVIDER. Dr. Sharp, Vice President of
Medical Services and an officer of the Company, is also affiliated with M.C.
Physicians Association, P.C., a primary care provider contracting with
OmniCare-MI.

HEALTH INSURANCE BENEFITS FOR COMPANY EMPLOYEES. Health care benefits for
some employees of the Company are provided through OmniCare-MI, UltraMedix and,
formerly, PPC. For the fiscal year ended June 30, 1997, the Company paid
premiums of approximately $1.6 million for such benefits.

EMPLOYMENT AGREEMENTS. The Company entered into five year employment
agreements with Dr. Combs, Chief Executive Officer, and Mr. Dobbins, President
and Chief Operating Officer, expiring March 1996, subject to automatic renewal
for successive one-year terms, unless terminated by the Company or the
executive upon 90 days' notice prior to the end of the initial term or the
renewal terms, as the case may be. Under their respective employment
agreements, Dr. Combs and Mr. Dobbins currently receive an annual base salary
of $327,957, plus an annual bonus to be based upon performance specifications
and/or goals to be agreed upon by the Company and the executive, with the bonus
payable to Dr. Combs for any year of employment to be not less than 30%, nor
more than 60%, of his base salary for such year, and the bonus payable to Mr.
Dobbins to be not less than 25%, nor more than 50%, of his base salary for such
year. No bonus is payable to the executive for any year in which he is
employed by the Company for fewer than six months and any bonus will be
pro-rated to the extent the executive is employed less than the full year. Dr.
Combs and Mr. Dobbins have waived any bonus for the fiscal year ended June 30,
1997.

Under each employment agreement, the executive may, upon giving 30 days
written notice, terminate the agreement in the event there is a change of
control or ownership (as defined in the employment agreement) of the Company
and the executive's powers and duties significantly change or the executive has
good reason (as defined in the employment agreement) to terminate or, as a
result of the change of control or ownership, the executive is unable to
exercise or perform his powers, functions and duties. In the event of such
termination, the executive will receive (i) all monies earned under any Company
long-term incentive plan, (ii) a lump sum severance payment equal to his base
salary for 36 months at the rate payable at the time notice of termination was
given, and (iii) the bonus that he would otherwise be entitled to

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45
for the year in which his employment is terminated. Based upon the executive's
current base salary, the Company estimates that the lump sum severance payment
payable to each Dr. Combs and Mr. Dobbins under this provision would be
approximately $1.1 million.

In the event the executive terminates his employment due to a breach of
his employment agreement by the Company, he will receive earned and unpaid
salary accrued to the date of termination, together with any bonus that would
otherwise be payable to him for the year in which the agreement is terminated.

In the event the executive's employment is terminated without cause by the
Company, the executive will receive his base salary until the last day of the
24th full calendar month immediately following such termination, but in no
event will the executive be entitled to such payments following his normal
retirement date, defined as the August 31st nearest to the date on which the
executive attains the age of 65.

In the event the executive's employment is terminated for cause, death or
disability, the executive (or his estate) will receive earned and unpaid salary
accrued to the date of termination but shall not be entitled to any bonus which
might otherwise be payable to the executive for the year in which his
employment is terminated.

Dr. Combs and Mr. Dobbins have each agreed that for the longer of (i) 12
months from the date of termination of his employment agreement, or (ii) the
period during which the executive receives payments under his employment
agreement, plus the 12 months immediately following expiration of such period,
he will not engage in the development of a managed health care product or
service nor render services similar or related to those which he rendered as an
employee of the Company in any county in which the Company provides any managed
health care product or service or within any contiguous county.

The Company is also party to an employment agreement by and between CHF
and Louis J. Nicholas (the "Executive") dated as May 7, 1993, pursuant to which
it agreed to: (i) refrain from impeding the Executive's ability to operate CHF
in a prudent manner consistent with maximizing a return for purposes of the
Contingent Promissory Note; (ii) elect the Executive to its Board of Directors
and as a Senior Vice President; (iii) pay liquidated damages if the Executive
is terminated without good cause or good reason, as those terms are defined
therein; and (iv) provide Board of Directors' review of a termination of the
Executive for good cause by CHF. In addition, the employment agreement
provides the Company with the right to cease payments under the Contingent
Promissory Note in the event of a material breach of the agreement by the
Executive. Under the Agreement of Purchase and Sale of Stock to sell CHF, Mr.
Nicholas must release the Company from its employment obligations effective
as of the closing date of the proposed CHF sale as a condition of the Company's
obligation to close the transaction. Mr. Nicholas, if elected at the Company's
Annual Shareholders Meeting in 1997, will continue to serve on the Company's
Board of Directors.

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46

CHARITABLE FOUNDATION. For the fiscal year June 30, 1997, the Company made
$150,000 in contributions to United American Healthcare Foundation, a Michigan
nonprofit corporation that assists minority organizations involved in the
promotion of health and education. Dr. Combs, Mr. Dobbins, Dr. Francis Kornegay
and Mr. Milton Watson, shareholders of the Company, are directors of the
foundation. Dr. Combs and Mr. Dobbins are not compensated for their services
as directors of the Foundation.

PART IV

ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K

(a) (1) & (2) The financial statements listed in the accompanying Index to
Consolidated Financial Statements at page F-1 are filed as part of this Form
10-K report.

(3) The Exhibit Index lists the exhibits required by Item 601
of Regulation S-K to be filed as a part of this Form 10-K report. The Exhibit
Index identifies those documents which are exhibits filed herewith or
incorporated by reference to (i) the Company's Form S-1 Registration Statement
under the Securities Act of 1933, as amended, declared effective on April 23,
1991 (Commission File No. 33-36760), (ii) the Company's Form 10-K for its
fiscal years ended June 30, 1992, 1993, 1994, 1995 and 1996, (iii) the
Company's Form 8-K filed with the Commission August 8, 1991, (iv) the Company's
Form 8-K filed with the Commission April 23, 1993, (v) the Company's Form 8-K
filed with the Commission May 24, 1993, (vi) the Company's Form 8-K/A filed
with the Commission July 21, 1993, (vii) the Company's Form 8-K filed with the
Commission January 29, 1996, (viii) the Company's Form 8-K filed with the
Commission April 19, 1996, (ix) the Company's Form 10-Q for its quarter ended
March 31, 1996, (x) ) the Company's Form 10-Q for its quarter ended September
30, 1996, or (xi) the Company's Form 10-Q for its quarter ended March 31, 1997.
The Exhibit Index is hereby incorporated by reference into this Item 14.

(b) No reports on Form 8-K were filed with respect to the last three
months of fiscal 1997.

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47

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page

Report of Independent Certified Public
Accountants........................................................ F-2

Consolidated Balance Sheets as of June 30, 1997 and
1996............................................................... F-3

Consolidated Statements of Operations for each of the three
years in the period ended June 30,
1997............................................................... F-4

Consolidated Statements of Cash Flows for each of the three
years in the period ended June 30, 1997....................... F-5

Consolidated Statements of Shareholders' Equity for each
of the three years in the period ended June 30, 1997.......... F-7

Notes to Consolidated Financial Statements......................... F-8

F-1
48
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

BOARD OF DIRECTORS
UNITED AMERICAN HEALTHCARE CORPORATION

We have audited the accompanying consolidated balance sheets of United
American Healthcare Corporation (a Michigan corporation) and Subsidiaries as of
June 30, 1997 and 1996, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended June 30, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the financial
statements of OmniCare Health Plan, Inc. of Tennessee, a 75%-owned subsidiary,
which statements reflect total assets of $12,751,000 and $25,902,000 as of June
30, 1997 and 1996, respectively, and total revenues of $57,384,000 and
$29,247,000 for the periods then ended. These statements were audited by other
independent auditors whose reports thereon have been furnished to us, and our
opinion expressed herein, insofar as it relates to the amounts included for
OmniCare Health Plan, Inc. of Tennessee, is based solely on the reports of the
other independent auditors.

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

In our opinion, based on our audits and the aforementioned reports of other
independent auditors, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of United American Healthcare Corporation and Subsidiaries as of June 30, 1997
and 1996 and the results of their operations and their cash flows for each of
the three years in the period ended June 30, 1997 in conformity with generally
accepted accounting principles.

/s/ GRANT THORNTON LLP

Detroit, Michigan
September 30, 1997

F-2
49
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

JUNE 30,
---------------------
1997 1996
-------- -----------

ASSETS
- ------
Current assets
Cash and cash equivalents $ 9,582 $23,679
Marketable securities 7,860 7,251
Premium, commission and service fees receivable 5,275 4,860
Other receivables 2,441 2,099
Refundable federal income taxes 115 1,522
Prepaid expenses and other 587 624
Deferred income taxes 746 351
------- ---------
Total current assets 26,606 40,386

Property and equipment, net 10,100 10,301
Intangible assets, net 10,557 11,546
Investments in and advances to affiliates 4,400 5,236
Statutory reserves 3,937 7,863
Deferred income taxes 2,376 1,156
Other assets 1,940 2,048
Net assets of discontinued operations 19,746 14,703
------- ---------
$79,662 $93,239
======= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities
Current portion of long-term debt
Line of credit $19,356 $ -
Term loans 2,495 2,912
Medical claims payable 8,735 25,678
Accounts payable and accrued expenses 6,539 2,976
Accrued compensation and related benefits 2,098 1,941
Other current liabilities 380 -
------- ---------
Total current liabilities 39,603 33,507

Long-term debt, less current portion 2,017 18,742
Accrued rent 1,599 1,211
Deferred income taxes 2,037 1,957

Shareholders' equity
Preferred, 5,000,000 shares authorized; none issued - -
Common, 15,000,000 shares authorized; 6,535,941
and 6,560,941 issued and outstanding in
1997 and 1996 10,498 10,625
Retained earnings 23,996 27,411
Unrealized net holding losses on marketable securities (88) (214)
------- ---------
34,406 37,822
------- ---------
$79,662 $93,239
======= =========

See accompanying notes to the financial statements.

F-3
50
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

YEAR ENDED JUNE 30,
-----------------------------------
1997 1996 1995
--------- --------- ---------

REVENUES
Medical premiums $ 70,430 $34,523 $ -
Management fees from related parties 40,033 55,906 57,940
Interest and other income 2,086 1,950 1,850
--------- --------- ---------

Total revenues 112,549 92,379 59,790

EXPENSES
Medical services 57,832 29,901 -
Marketing, general and administrative 52,755 50,077 43,662
Depreciation and amortization 4,069 3,370 1,905
Equity in net losses of unconsolidated
affiliates - 652 2,816
Interest expense 1,360 1,087 480
Bad debt expense 1,844 980 100
Contract settlement - 9,685 -
Shareholder lawsuit settlement 1,150 - -
--------- --------- ---------

Total expenses 119,010 95,752 48,963
--------- --------- ---------
(Loss) earnings from continuing operations
before income tax expense (6,461) (3,373) 10,827
Income tax expense (credit) (1,201) 284 4,598
--------- --------- ---------

(Loss) earnings from continuing operations (5,260) (3,657) 6,229
Discontinued operations, net of income taxes 1,845 909 367
--------- --------- ---------

NET (LOSS) EARNINGS $ (3,415) $(2,748) $ 6,596
========= ========= =========
NET (LOSS) EARNINGS PER COMMON SHARE:

(LOSS) EARNINGS PER COMMON SHARE FROM
CONTINUING OPERATIONS $ (0.80) $ (0.56) $ 0.95
NET (LOSS) EARNINGS PER COMMON SHARE $ (0.52) $ (0.42) $ 1.01
========= ========= =========

See accompanying notes to the financial statements.

F-4
51
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

YEAR ENDED JUNE 30,
---------------------------------------
1997 1996 1995
--------- -------- --------

OPERATING ACTIVITIES
Net (loss) earnings $ (3,415) $ (2,748) $ 6,596
Adjustments to reconcile net (loss) earnings to net cash
(used in) provided by operating activities:
Discontinued operations (1,845) (909) (367)
Bad debt expense 1,844 980 100
Loss on disposal of assets (11) (23) -
Depreciation and amortization 4,069 3,370 1,905
Accrued rent 388 155 265
Contract settlement - 9,685 -
Deferred income taxes (credit) (1,604) 656 (372)
Equity in net losses of unconsolidated affiliates - 652 2,816
Changes in assets and liabilities net of effects from
acquisitions in 1997 and 1996
(Increase) decrease in premiums, commissions and service fees receivable (1,531) 716 (36)
(Increase) decrease in other receivables (342) (469) 2,629
Decrease (increase) in refundable income taxes 1,407 649 (2,592)
Decrease (increase) in prepaid expenses and other 37 (123) (339)
Decrease (increase) in statutory reserves 3,926 (81) (5,100)
Decrease in other assets 108 - -
Decrease in medical claims payable (16,943) (2,625) -
Increase (decrease) in accounts payable and accrued expenses 3,563 (203) 1,137
Increase (decrease) in accrued compensation and related benefits 157 484 (246)
Increase (decrease) in other current liabilities 380 (254) 51
--------- -------- --------
Total adjustments (6,397) 12,660 (149)
--------- -------- --------
Net cash (used in) provided by operating activities (9,812) 9,912 6,447

INVESTING ACTIVITIES
Acquisition of businesses, net of cash acquired - 10,664 -
Net (purchases of) proceeds from marketable securities (414) 4,183 5,197
Proceeds from the sale of furniture and equipment 400 - -
Purchase of furniture and equipment (3,276) (4,839) (5,474)
Investments in and advances to affiliates 108 (8,267) (4,227)
Decrease in intangible assets 8 - -
Increase in other assets - (336) (345)
Decrease (increase) in long-term notes receivable - (1,764) (3,184)
Cash used in discontinued operations (3,198) (3,252) (32)
--------- -------- --------
Net cash used in investing activities (6,372) (3,611) (8,065)

F-5

52
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS-CONTINUED
(IN THOUSANDS)

YEAR ENDED JUNE 30,
----------------------------
1997 1996 1995
-------- -------- --------

FINANCING ACTIVITIES
Borrowings under line of credit agreement 5,117 13,588 6,041
Payments made on long-term debt (2,903) (2,408) (1,400)
Repurchase of common stock (127) - -
-------- -------- --------
Net cash provided by financing activities 2,087 11,180 4,641
-------- -------- --------
Net (decrease) increase in cash and cash equivalents (14,097) 17,481 3,023
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 23,679 6,198 3,175
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 9,582 $ 23,679 $ 6,198
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 1,673 $ 989 $ 524
======== ======== ========
Income taxes paid $ 1,150 $ 815 $ 3,594
======== ======== ========

Supplemental schedule of noncash investing activities for fiscal 1997
represents the acquisition of certain contract rights, assets and
assumed liabilities of Spectera, Inc., and is included with net cash
flows used in investing activities of discontinued operations; and for
1996 represents the acquisition of majority interests in OmniCare
Health Plan, Inc. of Tennessee and UltraMedix Healthcare Systems, Inc.
as follows:

Fair value of assets acquired $(1,765) $(33,174) $ -
Cash acquired - 20,327 -
Liabilities assumed 750 23,511 -
-------- -------- --------
$(1,015) $ 10,664 $ -
======== ======== ========

See accompanying notes to the financial statements.

F-6
53

UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)

Unrealized net
Number of holding loss
common Common Retained on marketable
shares shares earnings securities Total
------- ------ -------- ------------ -----

Balance at June 30, 1994 6,561 $10,625 $23,563 $ - $34,188

Net earnings - - 6,596 - 6,596
Unrealized net holding loss
on marketable securities - - - (276) (276)
-------- ------- ------- ------ -------
Balance at June 30, 1995 6,561 10,625 30,159 (276) 40,508
Net loss - - (2,748) - (2,748)
Unrealized net holding gain
on marketable securities - - - 62 62
-------- ------- ------- ------ -------
Balance at June 30, 1996 6,561 10,625 27,411 (214) 37,822
Net loss - - (3,415) - (3,415)
Unrealized net holding gain
on marketable securities - - - 126 126

Purchase of common stock (25) (127) - - (127)
-------- ------- ------- ------ -------
Balance at June 30, 1997 6,536 $10,498 $23,996 $ (88) $34,406
======== ======= ======= ====== =======

See accompanying notes to the financial statements

F-7
54
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997, 1996 AND 1995

NOTE 1 - ORGANIZATION
- ---------------------

BUSINESS. The Company is a multi-state provider of health care
services, including consulting services to managed care
organizations and the provision of health care services in
Tennessee and Florida. The Company operates in a single segment.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------

A. PRINCIPLES OF CONSOLIDATION. The consolidated financial
statements include the accounts of United American Healthcare
Corporation, and all of its majority-owned subsidiaries, together
referred to as (the "Company"). All significant intercompany
transactions and balances have been eliminated in consolidation.
Interest of other investors in the Company's majority-owned
subsidiaries are accounted for as minority interests. Non-majority
investments in affiliates in which management has the ability to
exercise significant influence are recorded on the equity method.
As discussed in Note 3, Corporate Healthcare Financing, Inc. and
Subsidiaries is presented as discontinued operations. Accordingly,
prior years' amounts have been restated.

B. REVENUE RECOGNITION. Medical premium revenues are recognized
in the month in which members are entitled to receive health care
services. Medical premiums collected in advance are recorded as
deferred revenues. Management fee revenues are recognized in the
period the related services are performed.

C. MEDICAL SERVICES EXPENSE RECOGNITION. The Company contracts
with various health care providers for the provision of certain
medical services to its members and generally compensates those
providers on a capitated and fee for service basis. The Company
provides for medical claims incurred but unreported and the cost of
adjudicating claims based primarily on past experience, together
with current factors, using accepted actuarial methods. Estimates
are adjusted as changes in these factors occur and such adjustments
are reported in the year of determination. Although considerable
variability is inherent in such estimates, management believes that
these reserves are adequate.

D. REINSURANCE. Reinsurance premiums are reported as medical
services expense, while the related reinsurance recoveries are
reported as deductions from medical services expense.

F-8
55
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES-CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997, 1996, AND 1995

E. MARKETABLE SECURITIES. The Company's securities are
classified in the available for sale category, which consists of
those securities which the Company intends to hold for an indefinite
period of time but not necessarily to maturity, and are carried at
estimated fair value. Unrealized gains and losses related to
securities available for sale, net of applicable income taxes, are
reported as a separate component of shareholders' equity.

F. PROPERTY AND EQUIPMENT. Property and equipment are stated at
cost less accumulated depreciation and amortization. Depreciation
and amortization are provided using the straight-line method over
the estimated useful lives of the respective assets, which range
from 5 to 13 years. The Company uses accelerated methods for income
tax purposes. The Company has internally developed customized
software, and has capitalized the related costs. During the year
ended June 30, 1997, approximately $322,000 of interest was
capitalized in connection with the development of this computer
software. Property and equipment consist of the following at
June 30 (in thousands):

1997 1996
------ ------
Furniture and fixtures $ 2,092 $ 1,859
Equipment 9,185 8,812
Computer software 6,402 5,018
------- -------
17,679 15,689
Less accumulated depreciation
and amortization (7,579) (5,388)
------- -------
$10,100 $10,301
======= =======

G. INTANGIBLE ASSETS. Intangible assets resulting from business
acquisitions are carried at cost and are currently being amortized
on a straight-line basis over their estimated useful lives of 10
years. Intangible assets consist of the following at June 30 (in
thousands):

1997 1996
------- -------
Goodwill $11,987 $11,995
Less accumulated amortization (1,430) (449)
-------
$10,557 $11,546
======= =======

F-8
56
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES-CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997, 1996 AND 1995

H. LONG-LIVED ASSETS. Effective July 1, 1996, the Company
adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of" (SFAS No. 121). Following the
criteria set forth in SFAS No. 121, long-lived assets and certain
identifiable intangibles are reviewed by the Company for events or
changes in circumstances, which would indicate that the carrying
value may not be recoverable. In making this determination, the
Company considers a number of factors, including estimated future
undiscounted cash flows associated with long-lived assets. Based
upon its most recent analysis, the Company believes that long-lived
assets are recorded at their net recoverable values.

I. CASH AND CASH EQUIVALENTS. The Company considers all highly
liquid instruments purchased with original maturities of three
months or less to be cash equivalents.

J. NET (LOSS) EARNINGS PER COMMON SHARE. Net (loss) earnings
per common share is based on the weighted-average number of common
shares outstanding during each period. The number of shares used in
the computation of (loss) earnings per common share is 6,553,297 for
the year ended June 30, 1997 and 6,560,941 for the years ended June
30, 1996 and 1995.

K. INCOME TAXES. The Company accounts for income taxes in
accordance with the provisions of SFAS No. 109. Deferred income tax
assets and liabilities are recognized for differences between the
financial statement and tax bases of assets and liabilities based on
enacted tax rates and laws. Valuation allowances are established
when necessary to reduce deferred tax assets to the amount expected
to be realized.

The deferred income tax provision or benefit generally reflects the
net change in deferred income tax assets and liabilities during the
year. The current income tax provision reflects the tax
consequences of revenues and expenses currently taxable or
deductible for the period.

L. STOCK PURCHASE AND OPTION PLANS. The Company follows the
provisions of Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees. Should options be issued to
non-employees, the Company would follow the provisions of Statement
of Financial Accounting Standard No. 123 ("SFAS 123"), Accounting
for Stock-Based Compensation.

F-10
57
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES-CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997, 1996 AND 1995

M. RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARD. In February
1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 128 ("SFAS 128"), Earnings Per
Share, which (1) replaces the presentation of primary earnings per
share (EPS) with a presentation of basic EPS; (2) requires dual
presentation of basic and diluted EPS on the face of the
consolidated statements of operations regardless of whether basic
and diluted EPS are the same; and (3) requires a reconciliation of
the numerator and denominator used in computing basic and diluted
EPS. Basic EPS excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number of
common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts
to issue common stock were exercised or converted into common stock
or resulted in the issuance of common stock that then shared in the
earnings of the entity.

Diluted EPS is computed similarly to fully diluted EPS
pursuant to Accounting Principles Board Opinion 15. SFAS 128 is
effective for financial statements issued for periods ending after
December 15, 1997, including interim periods; earlier application
is not permitted. SFAS 128 requires restatement of all prior period
EPS data presented. The Company does not expect the effects of
applying SFAS 128 to be significant.

N. USE OF ESTIMATES. The accompanying consolidated financial
statements have been prepared in conformity with generally accepted
accounting principles which 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. Actual results could differ
from those estimates as more information becomes available and any
such difference could be significant.

O. RECLASSIFICATIONS. Certain reclassifications have been made
to prior years' financial statements amounts to conform to the
current period classifications.

F-11
58
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES-CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997, 1996 AND 1995

NOTE 3 - ACQUISITIONS AND DISPOSITIONS
- --------------------------------------

ACQUISITIONS

CORPORATE HEALTHCARE FINANCING, INC. ("CHF")

On May 7, 1993, CHF acquired substantially all of the assets and
assumed certain liabilities of a Maryland limited partnership, in a
business combination accounted for as a purchase. The cost at the time
of the acquisition was approximately $9.6 million and is included with
net assets of discontinued operations in the accompanying balance sheet.

Through June 30, 1997 and 1996, the purchase price was cumulatively
increased to $6.6 million and $4.5 million respectively, pursuant to a
contingent promissory note that, depending upon CHF's earnings (as
defined in the agreement) over seven years from the acquisition date,
could increase the purchase price by a maximum amount of $6.6 million.
At June 30, 1997, approximately $.5 million remained payable under the
terms of this note.

OMNICARE HEALTH PLAN, INC. OF TENNESSEE-TN ("OMNICARE-TN")

In February 1994, the Company entered into a long-term agreement to
manage OmniCare-TN and effective July 1994 acquired a 50% equity interest
in OmniCare-TN for approximately $1.3 million in cash. The excess of the
purchase price over the Company's equity interest in the net assets at
the effective date of acquisition of approximately $4.1 million is being
amortized over ten years on a straight-line basis.

Effective January 31, 1996, the Company purchased an additional 25%
of the voting common stock, and 100% of the preferred stock, of
OmniCare-TN. This increased the Company's ownership in the voting common
stock of OmniCare-TN to 75%. The purchase price for the additional
common stock and preferred stock of OmniCare-TN was $.1 million and $10.9
million, respectively, of which $8.7 million was the conversion of
OmniCare-TN debt to the Company to equity and $2.3 million in cash. The
acquisition was accounted for under the purchase method of accounting.
Results of operations are included in the accompanying financial
statements effective with the date of purchase of the majority common
stock ownership interest. The excess of the purchase price over the fair
value of the net assets acquired of approximately $3.3 million has been
recorded as goodwill, and is being amortized over ten years on a
straight-line basis. Goodwill is reduced by the subsequent utilization of
OmniCare-TN's net operating losses.

F-12
59
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES-CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997, 1996, AND 1995

ULTRAMEDIX HEALTHCARE SYSTEMS, INC. ("ULTRAMEDIX")

In February 1994, the Company entered into a long-term agreement to
manage UltraMedix and acquired a 30.4% equity interest for approximately
$1.4 million in cash. The excess of the purchase price over the Company's
equity interest in the net assets of UltraMedix at the date of
acquisition of approximately $1.7 million has been recorded as goodwill,
and is being amortized over ten years on a straight-line basis.

Effective January 29, 1996, the Company purchased an additional
20.6% of the voting common stock, and 100% of the preferred stock, of
UltraMedix. This increased the Company's ownership in the voting common
stock of UltraMedix to 51%. The purchase price for the additional common
stock and preferred stock of UltraMedix was approximately $1.9 million in
cash. The acquisition was accounted for under the purchase method of
accounting. Results of operations are included in the accompanying
financial statements effective with the date of purchase of the majority
common stock ownership interest. The excess of the purchase price over
the fair value of the net assets acquired of approximately $2.9 million
has been recorded as goodwill, and is being amortized over ten years on a
straight-line basis.

F-13
60
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES-CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997, 1996 AND 1995
SPECTERA, INC.

Effective December 31, 1996, CHF acquired certain contract rights,
assets and assumed certain liabilities of Spectera, Inc. for
approximately $1.8 million in cash and debt. The excess purchase price
over the fair market value of the net assets acquired of approximately
$1.0 million has been charged to goodwill, and is included with net
assets of discontinued operations in the accompanying balance sheet.

DISPOSITION

On September 12, 1997 the Company's Board of Directors approved the
proposed stock sale of CHF and Subsidiaries for $30 million in cash to an
entity related to the Company via common shareholders. CHF provides
administrative services to self-funded employers and employee welfare
plans, including health benefit plan design and development of workers'
compensation and unemployment benefit programs.

The sale, which is contingent upon the buyer securing financing, is
expected to close in the Company's third quarter of fiscal 1998. In
anticipation of this sale, the results of CHF and its subsidiaries are
reported as discontinued operations in the consolidated financial
statements for all periods presented. The assets and liabilities of CHF
and its subsidiaries have been reported in the accompanying consolidated
balance sheets as net assets of discontinued operations, except for cash
and cash equivalents of $.8 million and $.7 million, which are included
with cash and cash equivalents in the accompanying consolidated balance
sheets as of June 30, 1997 and 1996, respectively.

Discontinued operations are summarized as follows:

YEAR ENDED JUNE 30,
--------------------------
1997 1996 1995
------- -------- -------

(IN THOUSANDS)
Total revenues $18,803 $10,661 $8,797
Total expenses 16,958 9,752 8,430
Earnings from discontinued operations (1) $ 1,845 $ 909 $ 367
======= ======== =======

(1) Net of income taxes of $1,164, $766 and $852 in 1997, 1996 and 1996,
respectively.

F-14
61
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES-CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997, 1996, AND 1995

CHF and Subsidiaries balance sheets are summarized as follows:

JUNE 30,
----------------------------
1997 1996
--------- ---------
(IN THOUSANDS)
ASSETS
- ------

Cash and cash equivalents $ 804 $ 700
Commission, service fees and other receivables, net 9,927 6,057
Property and equipment, net 2,126 992
Intangible assets, net 9,217 7,995
Other assets 982 720
--------- ---------
$23,056 $16,464
========= =========
LIABILITIES AND SHAREHOLDER'S EQUITY
- ------------------------------------
Accounts payable and accrued expenses $1,221 $ 667
Accrued compensation and related benefits 628 395
Payable to parent 2,201 330
Debt payable within one year 197 -
Long-term debt 461 -
--------- ---------
4,708 1,392
Shareholder's equity 18,348 15,072
--------- ---------
$23,056 $16,464
========= =========

PRO FORMA EFFECTS OF THE CHF SALE

On a pro forma basis, the CHF sale would have decreased the 1997
loss from continuing operations by approximately $1.3 million ($2 million
pretax), or $0.20 per share. Approximately $.5 million represents
investment income on invested net proceeds, and approximately $.8 million
represents a reduction of interest expense resulting from the repayment of
debt. On a pro forma basis, the impact on the June 30, 1997 Consolidated
Balance Sheet would be to increase marketable securities by approximately
$10 million, representing the net proceeds from the sale after payment of
income taxes of approximately $3.8 million, and the reduction of debt by
approximately $16 million.

F-15
62
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES-CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997, 1996 AND 1995

NOTE 4 - MARKETABLE SECURITIES
- ------------------------------

Following is a summary of available-for-sale marketable securities as of
June 30 (in thousands):

AMORTIZED GROSS UNREALIZED GROSS UNREALIZED FAIR
COST HOLDING GAINS HOLDING LOSSES VALUE
---------------- ---------------- ---------------- ----------------

1997:
Municipal tax-exempt bonds $6,935 $41 $ - $6,976
U.S. Government obligations 532 3 - 535
Obligations of foreign
governments 25 - - 25
Equity securities 504 - (180) 324
---------------- ---------------- ---------------- ----------------
$7,996 $44 $(180) $7,860
================ ================ ================ ================
1996:
Municipal tax-exempt bonds $7,304 $ - $(165) $7,139
U.S. Government obligations - - - -
Obligations of foreign
governments 25 - - 25
Equity securities 254 - (167) 87
---------------- ---------------- ---------------- ----------------
$7,583 $ - $(332) $7,251
================ ================ ================ ================

As of June 30, 1997, investments in debt securities mature as follows (in
thousands):

WITHIN 1 YEAR 1- 5 YEARS 5-10 YEARS AFTER 10 YEARS
---------------- ---------------- ---------------- ----------------

AT AMORTIZED COST:
Municipal tax-exempt bonds $3,269 $2,916 $ - $ 750
U.S. Government obligations - 532 - -
Obligations of foreign
governments - 25 - -
---------------- ---------------- ---------------- ----------------
$3,269 $3,473 $ - $ 750
================ ================ ================ ================
AT FAIR VALUE:
Municipal tax-exempt bonds $3,319 $2,907 $ - $ 750
U.S. Government obligations - 535 - -
Obligations of foreign
governments - 25 - -
---------------- ---------------- ---------------- ----------------
$3,319 $3,467 $ - $ 750
================ ================ ================ ================

F-16
63
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES-CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997, 1996, AND 1995

NOTE 5 - STATUTORY RESERVES
- ---------------------------

Certain of the Company's subsidiaries are obligated by state
regulations to maintain a specified level of escrowed funds to assure the
provision of healthcare services to enrollees. To fulfill these
statutory requirements, the Company maintains funds in highly liquid
escrowed investments.

NOTE 6 - CONCENTRATION OF RISK
- ------------------------------

During the year ended June 30, 1997 approximately 50% of the
Company's revenues were derived from a single customer, TennCare, a State
of Tennessee program which provides medical benefits to Medicaid and
Working Uninsured recipients. TennCare withholds 10% of the Company's
monthly capitation payment. TennCare remits the monthly withhold amounts
to the Company when certain informational filing requirements are met by
the Company. Amounts withheld by TennCare as of June 30, 1997 totaled
approximately $1.8 million. This amount was paid subsequent to June 30,
1997. The Company has recorded a receivable of approximately $.8 million
from the State of Tennessee TennCare program adverse selection pool. The
receivable is based on tentative information provided to the Company by
the State of Tennessee.

NOTE 7 - INVESTMENTS IN AND ADVANCES TO AFFILIATES
- --------------------------------------------------

Investments in and advances to affiliates are comprised of the following
(in thousands):

JUNE 30,
------------------
1997 1996
--------- --------
PhilCare $2,100 $ 2,100
HealthScope 2,300 4,209
Less valuation allowance - (1,073)
-------- -------
$4,400 $ 5,236
======== =======

In May 1994, the Company acquired at book value a 49% equity
interest in PhilCare Health Systems, Inc. ("PhilCare"), a start up HMO in
Philadelphia, Pennsylvania for approximately $1,000 in cash. In
connection therewith, the Company funded PhilCare's applicable statutory
reserve and net worth requirements of $2.1 million in cash. PhilCare has
had deminimus revenue and expense activity since inception.

F-17
64
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES-CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997, 1996, AND 1995

United/HealthScope, Inc. ("UHI") was organized in March 1993 to
engage in development, consulting and contract management services for
publicly-funded managed care programs in the metropolitan New York area.
Through May 1997, outstanding amounts owed to the Company from UHI
totaled approximately $4.9 million. In May 1997, UHI's outstanding debt
and preferred stock were restructured. The Company converted its
interest in UHI, including advances, accrued interest and the value of
warrants held by the Company to one million shares of non-voting
preferred stock of the restructured UHI with a par value of $4 million
and a warrant to purchase 3,310 shares of UHI common stock, exercisable
at any time at a nominal price.

A valuation allowance of approximately $1.1 million, had been
established as of June 30, 1996. The conversion of the Company's loans
to UHI to preferred stock was treated as a "troubled debt restructuring"
and the investment was recorded at its estimated fair value at the date
of the restructuring. This resulted in bad debt expense of $.7 million
for the year ended June 30, 1997.

NOTE 8 - RELATED PARTY TRANSACTIONS
- -----------------------------------

The Company has entered into long-term management agreements with
Michigan Health Maintenance Organization Plans, Inc., dba as OmniCare
Health Plan, Inc. ("OmniCare-MI"), OmniCare-TN, and UltraMedix, hereafter
referred to as the "Managed Plans". Pursuant to the management
agreements, the Company provides management and consulting services to
the Managed Plans. Since August 1987, the Company had a management
agreement with Personal Physician Care, Inc. ("PPC"), an entity doing
business in Ohio and related through common officers and directors.
Effective May 31, 1997, the Company's management agreement with PPC was
terminated, based in part, upon a dispute between the parties with
respect to the payment of non-emergent transportation costs for enrollees
as a marketing expense to be incurred under the management agreement.
The Managed Plans are related via common officers and directors.

The commencement and expiration dates of these agreements follows:

COMMENCEMENT EXPIRATION
------------- ---------------
OmniCare-MI May 1985 December 2010
OmniCare-TN February 1994 February 1999
UltraMedix February 1994 February 1999

All of the agreements are subject to review every five years and can
be terminated without cause by the Managed Plans at the time of the
review or by either party with cause.

F-18
65
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES-CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997, 1996, AND 1995

Pursuant to the management agreements the Company is generally paid
a percentage of revenues and/or reimbursed the administrative cost to
manage the Plans. The Company is required to pay certain administrative
expenses associated with its activity on behalf of these Managed Plans.
All costs associated with the management of these Plans are expensed as
incurred. Under the terms of the management agreement through May 1997,
the Company occupied space that was leased and paid for by PPC.

The following table shows management fee revenue from the Managed
Plans as a percentage of the Company's total revenues.

YEAR ENDED JUNE 30,
--------------------------------------------
1997 1996 1995
-------- ------- -------
OmniCare-MI 26% 33% 51%
OmniCare-TN - 15 26
UltraMedix - 3 8

Management fees from PPC as a percentage of the Company's total
revenues
was 9% in 1997 and 1996 and 11% in 1995.

Health insurance for some of the Company's employees was provided by
the Managed Plans. This expense was approximately $1.6 million, $1.5
million and, $1.1 million for the years ended June 30, 1997, 1996 and
1995, respectively.

A director of the Company also served as a director and shareholder
of the Company's legal counsel until December 1995. Legal costs to this
law firm through December 1995 totaled approximately $.6 million and was
$.7 million for the year ended June 30, 1995. Pursuant to the management
agreement, certain of these legal expenses were incurred on behalf of
OmniCare-MI.

NOTE 9 - BENEFIT AND OPTION PLANS
- ---------------------------------

The Company offers a 401(K) retirement and savings plan that covers
substantially all of its employees. The Company's maximum matching
contribution is 5% of compensation. Company contributions to the 401(K)
plan were approximately $.6 million, $.5 million and $.4 million for the
years ended June 30, 1997, 1996 and 1995, respectively.

The Company has a stock option plan with 331,250 common shares
reserved for issuance upon exercise of options. No options have been
granted through June 30, 1997.

F-19
66
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES-CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997, 1996 AND 1995

The Company has reserved 200,000 common shares for its Employee
Stock Purchase Plan ("ESPP"), which became effective October 1996, and
enables all eligible employees of the Company to subscribe for shares of
common stock on an annual offering date at a purchase price which is the
lesser of 85% of the fair market value on the first day or the last day
of the annual period. Employee contributions to the ESPP for 1997 were
$.2 million. Had compensation cost for the ESPP been determined based
on the fair value at the measurement date consistent with SFAS 123, for
the year ended June 30, 1997 the Company's net loss and net loss per
common share would have been $3.4 million and $0.52, respectively.

NOTE 10 - INCOME TAXES
- ----------------------

The components of income tax expense (credit) are as follows
(in thousands):

YEAR ENDED JUNE 30,
------------------------
1997 1996 1995
--------- --------- -------

Continuing operations
Current $ 403 $(372) $4,970
Deferred (1,604) 656 (372)
------- ----- ------
$(1,201) $ 284 $4,598
======= ===== ======
Discoutinued operations $ 1,164 $ 766 $ 852
======= ===== ======

A reconciliation of the provision for ince taxes omfollows (in
thousands):

YEAR ENDED JUNE 30,
----------------------------
1997 1996 1995
--------- -------- -------

Income tax expense (credit) at the
statutory tax rate $(2,197) $(1,147) $3,681
State and city income tax 115 99 261
Tax-exempt interest on municipal bonds (138) (165) (221)
Non-deductible goodwill amortization 334 235 221
Other, net (28) 136 99
NOL reduction of goodwill (8) - -
Valuation allowance 721 1,126 557
-------- ------- ------
$(1,201) $ 284 $4,598
======== ======= ======

A valuation allowance was provided on that portion of the equity in
net losses in affiliates which reduces the Company's investment. The
Company believes it is more likely than not that if a tax deductible
event occurs, the result will be a capital loss. The capital loss is
able to be offset only by capital gains currently not generated by the
Company.

F-20
67
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES-CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997, 1996 AND 1995

Components of the Company's deferred tax assets and liabilities are
as follows at June 30 (in thousands):

1997 1996
-------- -------

Deferred tax assets:
Shareholder lawsuit settlement $ 391 $ -
Losses in unconsolidated affiliates 3,629 1,882
Rent 395 263
Bad debt expense 734 694
Compensation 331 236
Net unrealized holding loss 46 115
Net operating loss carryforward of purchased subsidiaries 5,529 5,537
------- --------
Total gross deferred tax assets 11,055 8,727
Valuation allowance (7,933) (7,220)
------- --------
Total net deferred tax assets 3,122 1,507
------- --------
Deferred tax liabilities:
Depreciation and amortization (348) (357)
Software development (1,422) (1,430)
Licensure costs (267) (170)
Total gross deferred tax liabilities (2,037) (1,957)
------- --------
Net deferred tax asset (liability) $ 1,085 $ (450)
======= ========

The valuation allowance balance at June 30, 1997 includes allowances
relating to net loss carryforwards ("NOLs") of OmniCare-TN and
UltraMedix, entities which are consolidated as of June 30, 1997. As of
June 30, 1997, these subsidiaries have NOLs for federal income tax
purposes of approximately $5.5 million that expire through the year 2011.

Activity in the valuation allowance is as follows (in thousands):

Balance at July 1, 1995 $ -
Change in valuation 557
------
Balance at June 30, 1995 $ 557
Change in valuation 1,126
NOLs of purchased subsidiaries 5,537
------
Balance at June 30, 1996 7,220
Change in valuation 721
Use of NOLs of purchased subsidiaries (8)
------
Balance at June 30, 1997 $7,933
======

The portion of the valuation allowance attributable to NOLs that
are subsequently utilized will reduce goodwill of the acquired companies.

F-21
68
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES-CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997, 1996 AND 1995

NOTE 11 - LEASES
- ----------------

The Company leases its facilities and various furniture and
equipment under operating leases expiring at various dates through May
2005. Terms of the facility leases generally provide that the Company
pay its pro rata share of all operating expenses, including insurance,
property taxes and maintenance.

Rent expense charged to operations for the years ended June 30,
1997, 1996 and 1995 totaled approximately $3.5 million, $3.0 million, and
$2.4 million, respectively. Additionally, in 1997 a $.3 million rent
accrual was recorded for the difference between the Company's lease
obligation and the expected sub-lease rental income over the remaining
life of the lease related to the Company's lease in Pennsylvania.

Minimum future rental payments under all noncancellable operating
leases having remaining terms in excess of one year as of June 30, 1997,
net of sublease rentals, total $12.5 million as follows (in thousands):
1998- $2,276; 1999-$2,121; 2000-$2,099; 2001-$1,645; 2002-$1,369;
thereafter $2,974.

F-22
69
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES-CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997, 1996 AND 1995

NOTE 12 - LONG TERM DEBT
- ------------------------

Debt at June 30 is as follows (in thousands):

1997 1996
--------- ---------

Maximum $20 million unsecured line of credit,
expiring in February 1998, bearing interest at prime
or 1% over the one, two, three or six-month LIBOR
rate. $ 19,356 $13,579

Term loan requiring monthly principal payments of
approximately $126,000, with the final due date in
November 1999, and bearing interest at prime or
1.25% over the one, two, three or six-month LIBOR
rate. 3,529 5,042

Term loan requiring monthly principal payments of
approximately $117,000, with final due date in
August 1998, and bearing interest at prime or 1.5%
over the six-month LIBOR rate. The loan is
collateralized by all assets of the Company.
Covenants of the loan agreement provide for certain
net worth and financial ratio requirements. The
Company has entered into an agreement that caps the
loan's interest rate at 5% per annum. The $122,000
cost of the cap is being amortized over the term of
the loan. 983 3,033
-------- -------
23,868 21,654
Less term debt payable within one year (2,495) (2,912)
Less line of credit payable within one year (19,356) -
-------- -------
Long-term debt, less current portion $ 2,017 $18,742
======== =======

Long-term debt at June 30, 1997 matures as follows (in thousands):
1998- $21,851; 1999- $1,513; 2000- $504.

At June 30, 1997, the Company was in violation of a covenant that
sets a floor on a debt service coverage ratio. The Company obtained a
waiver for this provision from the lending institution.

The Company has provided a $1 million letter of credit on behalf of
its wholly owned subsidiary, United American Healthcare of Louisiana,
Inc. and Subsidiary in satisfaction of applicable statutory requirements.

F-23
70
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES-CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997, 1996 AND 1995

NOTE 13 - MANAGED PLAN
- ----------------------

The following table sets forth summarized financial data of
OmniCare-MI. This information was derived from audited financial
statements, as of its respective year-ends (in thousands).

YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------

Current assets $ 32,521 $ 39,160 $ 45,528
Noncurrent assets 1,047 1,621 2,040
Current liabilities 16,955 24,347 31,336
Unrestricted net assets 16,613 16,434 16,232
Revenues 170,897 172,574 159,546
Expenses 170,666 172,371 158,241
Other expense-net 52 - -
Revenues over expenses 179 203 1,305

NOTE 14 - UNAUDITED SELECTED QUARTERLY FINANCIAL DATA
- -----------------------------------------------------

The following table presents selected quarterly financial data for the
years ended June 30, 1997 and 1996 (in thousands, except per share data):

QUARTERS ENDED
---------------------------------------------
JUNE 30 MARCH 31 DECEMBER 31 SEPTEMBER 30

1997:
Revenues $29,573 $28,030 $26,457 $28,489
(Loss) earnings from continuing
operations (3,660) (17) (1,033) (550)
Net (loss) earnings (3,953) 416 114 8
Net (loss) earnings per common share (0.60) 0.06 0.02 0.00

1996:
Revenues $40,127 $24,639 $12,965 $14,648
(Loss) earnings from continuing
operations (1,378) (1,034) (2,275) 1,030
Net (loss) earnings (1,059) (834) (2,275) 1,420
Net (loss) earnings per common share (0.16) (0.13) (0.35) 0.22

F-24
71
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES-CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997, 1996 AND 1995

In the quarter ended June 1997 the Company recorded a tentative
settlement of the consolidated class action shareholder lawsuit for $1.15
million. The Company also recorded a bad debt expense in the amount of
$1.1 million related to the valuation of an account receivable of
OmniCare-TN and $.7 million for its investment in HealthScope.
Additionally, during the quarter, a $.3 million rent expense estimate was
established for the difference between the Company's lease obligation and
the expected sub-lease rental income over the remaining life of the lease
related to the Company's lease in Pennsylvania. Also during the quarter
the Company increased the incurred but not reported medical liabilities
for UltraMedix and OmniCare-TN by $1.4 million.

Management fees to UA-TN were impacted during the quarter ended June
1996 by an agreement reached between UA-TN and OmniCare-TN during that
quarter, but effective November 1995, pursuant to which OmniCare-TN
agreed to reimburse UA-TN approximately $8.7 million for start-up costs
and other expenses incurred for the period January 1994 through September
1995 which were unrelated to OmniCare-TN's TennCare business and which
were over and above the amounts which OmniCare-TN could reimburse UA-TN
out of the capitation payments received by OmniCare-TN under the TennCare
contract. Further, UA-TN agreed to convert its claim for these
additional amounts owed to it by OmniCare-TN into approximately 8,680,000
shares of preferred stock of OmniCare-TN as complete and final settlement
of such obligation.

Also during the quarter ended June 30, 1996, the Company provided a
valuation allowance of approximately $.8 million to reflect its estimate
of the fair value of notes receivable from HealthScope at June 30, 1996
and increased the incurred but not reported medical liabilities for
UltraMedix and OmniCare-TN by $2.3 million.

NOTE 15 - CONTINGENCIES
- -----------------------

As previously reported by the Company, certain senior officers and the

Company are named defendants in two shareholder lawsuits filed in the
United States District Court for the Eastern District of Michigan (the
"Court") on August 23 and August 24, 1995. In September 1996, these
lawsuits were consolidated by the Court into a single cause of action.
The consolidated action alleged that certain senior officers and the
Company issued reports and statements that violated federal securities
laws. The Company and the officers contend that all material facts were
disclosed during the alleged period in question and that certain material
facts alleged to have not been disclosed, were already available in the
financial market place.

F-25
72
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES-CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997, 1996 AND 1995

Nevertheless, management concluded that continued defense of the
litigation was depleting the available insurance pool and that an
unfavorable outcome in excess of insurance policy limits could
potentially have an adverse impact on the Company's financial position.
Continuation of this litigation would have also diverted management's
focus from operations. Based on these facts, management pursued
settlement with the plaintiff. The parties have agreed to a proposed
settlement requiring the release of all claims and damages sought by the
plaintiff and payment by the Company of $3.25 million, of which the
Company anticipates $2.1 million to be paid by the insurance carrier. The
Company has recorded expense of $1.15 million in the accompanying
statement of operations in the year ended June 30, 1997. The pending
settlement is subject to federal court approval. The Company has agreed
to indemnify the named officers from monetary exposure in connection with
the lawsuit, subject to reimbursement by any named officer, in the event
he is found not to be entitled to such indemnification.

F-26
73

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 on the 14th day of
October 1997.
By: /s/ Jagannathan Vanaharam
-------------------------------
Jagannathan Vanaharam
Senior Vice President-Treasurer

Pursuant to the requirements of the Securities Act of 1934, this report
has been signed below by the following persons in the capacities and on the
date indicated.

/s/JULIUS V. COMBS, M.D. Chief Executive Officer October 14, 1997
- ------------------------ (Principal Executive Officer)
Julius V. Combs, M.D.

/s/ANITA C.R. GORHAM Secretary October 14, 1997
- --------------------
Anita C.R. Gorham

/s/JAGANNATHAN VANAHARAM Senior Vice President-Treasurer October 14, 1997
- ------------------------ (Principal Financial Officer)
Jagannathan Vanaharam

/s/PAUL G. SAMUELS Corporate Controller October 14, 1997
- ------------------ (Principal Accounting Officer)
Paul G. Samuels

/s/JULIUS V. COMBS, M.D. Director October 14, 1997
- ------------------------
Julius V. Combs, M.D.

/s/RONALD R. DOBBINS Director October 14, 1997
- --------------------
Ronald R. Dobbins

/s/WILLIAM C. BROOKS. Director October 14, 1997
- ---------------------
William C. Brooks

74

/s/VIVIAN L. CARPENTER, Ph.D. Director October 14, 1997
- -----------------------------
Vivian L. Carpenter, Ph.D.

/s/WILLIAM B. FITZGERALD, ESQ. Director October 14, 1997
- ------------------------------
William B. Fitzgerald, Esq.

/s/ANITA C.R. GORHAM Director October 14, 1997
- --------------------
Anita C.R. Gorham

/s/HARCOURT G. HARRIS, M.D. Director October 14, 1997
- ---------------------------
Harcourt G. Harris, M.D.

/s/RONALD M. HORWITZ, Ph.D. Director October 14, 1997
- ---------------------------
Ronald M. Horwitz, Ph.D.

/s/EMMETT S. MOTEN, JR. Director October 14, 1997
- -----------------------
Emmett S. Moten, Jr.

Director
- --------------------
Louis J. Nicholas

75

EXHIBIT INDEX

EXHIBIT INCORPORATED HEREIN BY FILED
NUMBER DESCRIPTION OF DOCUMENT REFERENCE TO HEREWITH
- ------- ----------------------- ---------------------- ----------

3.1 Restated Articles of Exhibit 3.1 to the
Incorporation of Registrant's Form S-1
Registrant. Registration Statement under
the Securities Act of 1933, as
amended, declared effective on
April 23, 1991 ("1991 S-1")

3.1(a) Certificate of Amendment Exhibit 3.1(a) to 1991 S-1
to the Articles of
Incorporation of
Registrant.

3.2 Amended and Restated Exhibit 3.2 to the
Bylaws of Registrant. Registrant's 1993 10-K

4.1 Incentive and Exhibit 4.1 to the
Non-Incentive Stock Registrant's 1995 10-K
Option Plan of
Registrant effective
March 25, 1991, as
amended.

4.2 Form of Common Share Exhibit 4.2 to the
Certificate. Registrant's 1995 10-K

10.1 Employees' Retirement Exhibit 10.1 to 1991 S-1
Plan for Registrant
dated May 1, 1985, with
First Amendment thereto
and Summary Plan
Description therefor.

10.2 Management Agreement Exhibit 10.2 to 1991 S-1
between Michigan Health
Maintenance Organization
Plans, Inc. and
Registrant dated March
15, 1985, as amended
June 12, 1985.

10.3 Management Agreement Exhibit 10.3 to 1991 S-1
between U.A. Health Care
Corporation and Personal
Physician Care, Inc.
dated March 18, 1987.

10.4 Amendment dated February Exhibit 10.5 to the
16, 1993 to Management Registrant's 1995 10-K
Agreement between United
American Healthcare
Corporation and Personal
Physician Care, Inc.
dated March 18, 1987.

10.5 Amendment dated June 16, Exhibit 10.4 to the
1994 to Management Registrant's 1994 10-K
Agreement between U.A.
Health Care Corporation
and Personal Physician
Care, Inc. dated March
18, 1987.

10.6 Management Agreement Exhibit 10.5 to Registrant's
between OmniCare Health 1994 Form 10-K
Plan, Inc. and United
American of Tennessee,
Inc. dated February 2,
1994.

10.7 Management Agreement Exhibit 10.6 to Registrant's
between UltraMedix 1994 Form 10-K
Health Care Systems,
Inc. and United American
of Florida, Inc. dated
February 1, 1994.

76

EXHIBIT INCORPORATED HEREIN BY FILED
NUMBER DESCRIPTION OF DOCUMENT REFERENCE TO HEREWITH
- ------- ----------------------- ---------------------- ----------

10.8 Amendment dated Exhibit 10.9 to the
September 4, 1995 to Registrant's 1995 10-K
Management Agreement
between UltraMedix
Healthcare Systems, Inc.
and United American of
Florida, Inc. dated
February 1, 1995.

10.9 Amendment dated Exhibit 10.10 to Registrant's
September 20, 1995 to 1995 10-K
Management Agreement
between UltraMedix
Health Care Systems,
Inc. and United American
of Florida, Inc. dated
February 1, 1995.

10.10 Lease Agreement between Form 8-K filed August 8, 1991
1155 Brewery Park
Limited Partnership and
Registrant dated July
24, 1991, effective May
1, 1992.

10.11 Amendment dated December Exhibit 10.8 to the
8, 1993 to Lease Registrant's 1994 10-K
agreement between 1155
Brewery Park Limited
Partnership and
Registrant dated July
24, 1991.

10.12 Amendment dated April Exhibit 10.13 to Registrant's
15, 1993 to Lease 1995 10-K
Agreement between 1155
Brewery Park Limited
Partnership and
Registrant dated July
24, 1991.

10.13 Lease Agreement between Exhibit 10.7 to the
Baltimore Center Registrant's 1993 10-K
Associates Limited
Partnership and
Corporate Healthcare
Financing, Inc. dated
August 24, 1988, as
amended April 12, 1993,
effective the later of
May 1, 1993 or the date
premises are ready for

77

EXHIBIT INCORPORATED HEREIN BY FILED
NUMBER DESCRIPTION OF DOCUMENT REFERENCE TO HEREWITH
- ------- ----------------------- ---------------------- ----------

occupancy.

10.14 Amendment dated May 11, Exhibit 10.11 to the
1994 (effective June 30, Registrant's 1994 10-K
1994) to Lease agreement
between Baltimore Center
Associates Limited
Partnership and
Corporate Healthcare
Financing, Inc.

10.15 Lease Agreement between Exhibit 10.2 to Registrant's
CLW Realty Asset Group, 1994 Form 10-K
Inc., as agent for The
Prudential Insurance
Company of America and
United American of
Florida dated May 31,
1994, effective June 1,
1994.

10.16 Lease Agreement between Exhibit 10.3 to Registrant's
Fleming Companies, Inc. 1994 Form 10-K
and United American of
Tennessee dated June 30,
1994, effective the date
premises are ready for
occupancy.

10.17 Lease Agreement between Exhibit 10.19 to Registrant's
International Business 1995 10-K
Machines Corporation and
Registrant dated August
29, 1994.

10.18 Amended and Restated Exhibit 10.20 to Registrant's
Line of Credit Facility 1995 10-K
Agreement between
Michigan National Bank
and Registrant dated
March 14, 1995.

10.19 Promissory notes between Exhibit 10.9 to the
Michigan National Bank Registrant's 1993 10-K
and Registrant dated
August 26, 1993.

10.20 Asset Purchase Agreement Form 8-K filed May 24, 1993
between CHF, Inc., and Form 8-K/A filed July 21,
Healthcare Plan 1993
Management, Inc.,
CHF-

78

EXHIBIT INCORPORATED HEREIN BY FILED
NUMBER DESCRIPTION OF DOCUMENT REFERENCE TO HEREWITH
- ------- ----------------------- ---------------------- ----------

HPM Limited
Partnership, Louis J.
Nicholas and Keith B.
Sullivan and Registrant
dated May 7, 1993.

10.21 Loan and Security Exhibit 10.18 to Registrant's
Agreement between 1994 Form 10-K
UltraMedix Health Care
Systems, Inc. and United
American of Florida
dated February 1, 1994.

10.22 Amendment dated June 13, Exhibit 10.26 to Registrant's
1995 to the Loan and 1995 10-K
Security Agreement
between UltraMedix Care
Systems, Inc. and United
American of Florida,
Inc. dated February 1,
1994.

10.23 Form of Stock Transfer Exhibit 10.19 to Registrant's
Services Agreement 1994 Form 10-K
between Huntington
National Bank and
Registrant.

10.24 Employment Agreement Exhibit 10.15 to 1991 S-1
between Julius V. Combs,
M.D. and Registrant
dated March 15, 1991.

10.25 Employment Agreement Exhibit 10.16 to 1991 S-1
between Ronald R.
Dobbins and Registrant
dated March 15, 1991.

10.26 Employment Agreement Exhibit 10.22 to Registrant's
between Louis J. 1994 Form 10-K
Nicholas and Corporate
Healthcare Financing,
Inc. dated May 7, 1993.

10.27 First Amendment to Form 10-Q for the Quarter
Contingent Note Ended March 31, 1996, filed
Promissory Note between May 14, 1996
CHF-HPM Limited
Partnership and the
Registrant

10.28 Acquisition of majority Form 8-K filed April 19, 1996
interest
79

EXHIBIT INCORPORATED HEREIN BY FILED
NUMBER DESCRIPTION OF DOCUMENT REFERENCE TO HEREWITH
- ------- ----------------------- ---------------------- ----------

in OmniCare
Health Plan, Inc. of
Tennessee and UltraMedix
Healthcare Systems, Inc.

10.29 Injured Workers' Form 10-K/A filed October 14,
Insurance Fund Contract 1996, as amended
No. IWIF 9-96 Managed
Care Contract with
Statutory Benefits
Management Corporation
dated June 19, 1996.

10.30 Ernst & Young LLP Report Form 10-K/A filed October 14,
of Independent Auditors 1996, as amended
as of June 30, 1996

10.31 Renaissance Center Form 10-Q for the Quarter
Office Lease Ended September 30, 1996,
filed November 13, 1996
10.32 Purchase Agreement Form 10-Q for the Quarter
between Statutory Ended December 31, 1996, filed
Benefits Management February 10, 1997
Corporation and
Spectera, Inc.

10.33 Agreement of Purchase *
and Sale of Stock, dated
September 12, 1997
between CHF Acquisition,
Inc. and the Registrant

10.34 Ernst & Young LLP Report *
of Independent Auditors
as of June 30, 1997

21 Subsidiaries of the Registrant

27 Financial Data Schedule *