<PAGE>
                                MERIDIAN HEALTHCARE GROWTH AND INCOME FUND
                                           LIMITED PARTNERSHIP

                                            1996 ANNUAL REPORT

                                              March 14, 1997

Dear Investor:

         The General Partners of the Meridian  Healthcare Growth and Income Fund
Limited  Partnership  are pleased to discuss the  operating  performance  of our
seven nursing home facilities.

OPERATIONS

         Patient revenues for the Fund's seven operating  partnerships increased
by  approximately  $2,632,000  (or 6%) for the year ended  December  31, 1996 as
compared  to the year  ended  December  31,  1995.  The  increase  is  primarily
attributable to increased  Medicare census as well as increased room rates which
resulted  in an  effective  rate  increase  of 4.1% (or  $1,652,000)  over 1995.
Continued  efforts in  Medicare  maximization  resulted  in an  increase  of the
Medicare  population in the seven facilities from 8.6% of total patient days for
1995 to 9.8% of total patient days in 1996. As a result,  ancillary  consumption
increased by $847,000 in 1996 as compared to 1995.  In addition,  revenues  were
further increased by recognition of retroactive cost settlement adjustments that
were $366,000 higher than those recognized in 1995. These positive  variances in
revenue were offset by an overall  census decline of 1,806 patient days in 1996,
as  compared  to 1995,  which  accounted  for a negative  variance in revenue of
$233,000. Private census also declined in 1996 when compared to 1995.

         Profitability  for the Fund declined  approximately  $169,000 (or 8.9%)
from $1,891,000 in 1995 to $1,722,000 in 1996. The decline in profitability  was
primarily attributable to increased operating expenses which were not completely
covered by the Medicare and Medicaid reimbursement programs. Operating expenses,
as a percentage of patient revenues,  increased to 81% in 1996 from 80% in 1995.
With the continued  increase in Medicare census, the overall acuity level of the
residents was higher than in 1995 resulting in increased salaries,  benefits and
ancillary costs.  Additionally,  maintenance  costs in 1996 were $100,000 higher
than in 1995 due to the  continued  aging of the  buildings.  The four  Maryland
facilities  were built in the late 1960's and early 1970's and are  beginning to
need increasing levels of repair and maintenance.

         Also  contributing to the decline in  profitability  was an increase of
$172,000 (or 34%) in general and administrative  expenses in 1996 as compared to
1995.  The  majority  of  this  increase  was  due to  higher  professional  and
consulting costs incurred in 1996.

         Interest  expense  decreased  $84,000  (or 3.8%) in 1996  versus  1995.
Approximately  $5.7 million of the Fund's debt bears  interest at floating rates
which were, on average, lower in 1996 than in 1995.

LIQUIDITY AND CAPITAL RESOURCES

         Effective July 29, 1996 the Fund modified the revolving credit facility
(the  "Facility")  by increasing  the maximum amount to $4,000,000 and extending
the  maturity  date until  February 28, 1998.  The  Facility is  designated  for
working  capital  needs and  issuance  of  letters of credit.  The  Facility  is
primarily  secured by the accounts  receivable of the Fund. Any outstanding cash
borrowings under the Facility bear interest at LIBOR plus 1.75%. At December 31,
1996 the outstanding borrowings under this Facility totaled $1,000,000.

FINANCING

         The Fund's  long-term debt on the four Maryland  facilities and the New
Jersey facility,  totaling $24,592,000,  matures in February,  1998. The General
Partners will be reviewing refinancing options throughout 1997.

         At  December  31,  1996,  the  Randallstown  facility  did not meet its
required  ratio of cash flow to debt  service as a result of  measures  taken in
response to the State survey received earlier in the year. To date, the

                                                    1

<PAGE>
                                MERIDIAN HEALTHCARE GROWTH AND INCOME FUND
                                           LIMITED PARTNERSHIP

bank has not issued a formal waiver to the Fund.  Based upon the 1997  operating
budget,  operations  at  Randallstown  are  expected  to improve  and return the
facility to full  compliance  with its loan  agreement.  Should the facility not
meet the required cash flow to debt service ratio for the first quarter of 1997,
the lender would require certain of the Fund's operating partnerships and/or the
Fund to become  either  joint  and  several  co-obligors  or  guarantors  of the
obligation.

LEGISLATION

         The State of North  Carolina has again  delayed the  effective  date of
elimination  in its  Medicaid  methodology  of the  current  reimbursement  rate
component  for equity until July 1, 1997.  Fund  management  had  projected  the
effective  date of this  elimination  to be July 1,  1996.  As a result  of this
action,  Medicaid  reimbursements  from North Carolina during the second half of
1996  were  approximately  $129,000  over  budget.  Future  action  by the North
Carolina Medicaid Agency could affect the reimbursement component for equity and
therefore reduce Medicaid reimbursement for the Fund by up to $234,000 annually.

CASH DISTRIBUTIONS

         On February 14, 1997, the Fund made a distribution of $826,410 of which
approximately  $534,853,  or 65%,  was funded  from  nursing  center  operations
generated  during the fourth  quarter  of 1996  after  payment of  approximately
$68,000 of upper tier expenses. During 1996, nursing center operations generated
approximately  77% of the  total  distributions  after  payment  of  upper  tier
expenses totaling approximately $277,000.

         Over the past three years, while operating results have fluctuated, the
three-year  cash  flow  generated  by the  seven  nursing  home  facilities  has
generated sufficient cash flow to fund 96% of the 8.5% distribution to partners.
Based on a preliminary  review of the 1997  operating  budget,  Fund  management
expects distributions will remain at current levels throughout 1997.

SUMMARY

         The major challenge to the Fund in the foreseeable future is to control
operating  expenses  while  maximizing  revenues  through  strategic  admissions
policies. Your General Partners believe we remain well positioned to effectively
compete in the long-term healthcare marketplace.

Very truly yours,



John M. Prugh, President                   Michael R. Walker, President
Brown-Healthcare, Inc.                     Meridian Healthcare InvestmentsInc.
Administrative General Partner             Development General Partner

                                                    2

<PAGE>

                                       INDEPENDENT AUDITORS' REPORT



To the Partners of
Meridian Healthcare Growth and
Income Fund Limited Partnership:

We have  audited  the  accompanying  consolidated  balance  sheets  of  Meridian
Healthcare  Growth and Income Fund Limited  Partnership  as of December 31, 1996
and 1995 and the related consolidated statements of earnings,  partners' capital
(deficit)  and cash flows for each of the years in the  three-year  period ended
December  31,   1996.   These   consolidated   financial   statements   are  the
responsibility  of the Fund's  management.  Our  responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit 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 our audits provide a reasonable basis for our opinion.

In our opinion, the 1996 and 1995 consolidated  financial statements referred to
above  present  fairly,  in all material  respects,  the  financial  position of
Meridian  Healthcare  Growth and Income Fund Limited  Partnership as of December
31, 1996 and 1995, and the results of its operations and its cash flows for each
of the years in three-year  period ended  December 31, 1996 in  conformity  with
generally accepted accounting principles.

                                              KPMG Peat Marwick LLP

February 7, 1997, except for paragraph 7 of note 4 which is as of March 14, 1997
Philadelphia, Pennsylvania

                                                    3
<PAGE>
                                MERIDIAN HEALTHCARE GROWTH AND INCOME FUND
                                           LIMITED PARTNERSHIP

                           Consolidated Balance Sheets (Dollars in thousands)
<TABLE>
<CAPTION>
                                                                                           December 31,

                                                                                  1996                     1995
Assets
Current assets
<S>                                                                               <C>                     <C>     
    Cash and cash equivalents                                                     $ 3,962                 $  1,539
    Accounts receivable, net of allowance for doubtful
      accounts of $551 in 1996 and $440 in 1995                                     6,429                    6,167
    Estimated third-party payor settlements                                           105                      337
    Prepaid expenses and other current assets                                         514                      571

Total current assets                                                               11,010                    8,614

Property and equipment
    Land and improvements                                                           1,832                    1,823
    Buildings and improvements                                                     42,569                   42,440
    Furniture and equipment                                                         3,873                    3,543
    Construction in progress                                                          140                              --
                                                                                   48,414                   47,806
    Accumulated depreciation                                                       (12,734)                 (11,181)
                                                                                   35,680                   36,625

Other assets
    Goodwill, net                                                                   5,490                    5,743
    Loan acquisition costs, net                                                        64                      100
    Preopening costs, net                                                               11                       25
                                                                                    5,565                    5,868

Total assets                                                                      $52,255                 $ 51,107

Liabilities and Partners' Capital
Current liabilities
    Current portion of long-term debt                                             $   621                 $    553
    Line of credit borrowings                                                                --                719
    Accrued compensation and related costs                                          2,415                    1,099
    Accounts payable and other accrued expenses
      Trade                                                                           934                    1,038
      Related party                                                                 1,213                    1,857
    Estimated third-party payor settlements                                         2,958                      612

Total current liabilities                                                           8,141                    5,878

Deferred management fee payable                                                       770                      728
Loan payable to Development General Partner                                           984                      932
Line of credit borrowings                                                           1,000                              --
Long-term debt                                                                     23,971                   24,596
                                                                                   26,725                   26,256

Partners' capital (deficit)
    General partners                                                                  (143)                    (127)
    Assignee limited partners; 1,540,040 units issued and outstanding              17,532                   19,100

Total partners' capital                                                            17,389                   18,973

Total liabilities and partners' capital                                           $52,255                 $ 51,107
</TABLE>

See the accompanying notes to consolidated financial statements.

                                                             4
<PAGE>
                                MERIDIAN HEALTHCARE GROWTH AND INCOME FUND
                                           LIMITED PARTNERSHIP

                       Consolidated Statements of Earnings
                 (Dollars in thousands except per unit amounts)


<TABLE>
<CAPTION>
                                                                                  Years Ended December 31,
                                                                        1996               1995             1994

Revenues
<S>                                                                    <C>               <C>               <C>    
    Medicaid and Medicare patients                                     $36,589           $33,483           $31,831
    Private patients                                                    10,885            11,359            10,813
    Investment and other income                                            411               556               208
                                                                        47,885            45,398            42,852

Expenses
    Operating, including $5,300, $4,437 and $3,450
      to related parties                                                38,386            36,036            32,664
    Management and administration fees
      to related parties                                                 3,087             2,920             2,773
    General and administrative                                             677               505               581
    Depreciation and amortization                                        1,870             1,819             1,926
    Interest expenses                                                    2,143             2,227             2,005
                                                                        46,163            43,507            39,949

Net earnings                                                           $ 1,722           $ 1,891           $ 2,903



Net earnings per unit of assignee
    limited partnership interest
    (computed based on 1,540,040 units
    outstanding in 1996, 1995 and 1994)                                $  1.12           $  1.23           $  1.88


See the accompanying notes to consolidated financial statements.
</TABLE>

                                                             5
<PAGE>
                                MERIDIAN HEALTHCARE GROWTH AND INCOME FUND
                                           LIMITED PARTNERSHIP


                         Consolidated Statements of Partners' Capital (Deficit)
                                          (Dollars in thousands)

<TABLE>
<CAPTION>

                                                                     General            Limited                       
                                                                    Partners            Partners             Total

<S>                                                              <C>                 <C>                <C>       
Balance at December 31, 1993                                     $     (109)         $  20,900          $   20,791

Net earnings                                                            29               2,874               2,903

Distributions to partners                                               (33)             (3,273)             (3,306)

Balance at December  31, 1994                                          (113)            20,501              20,388

Net earnings                                                            19               1,872               1,891

Distributions to partners                                               (33)             (3,273)             (3,306)

Balance at December  31, 1995                                          (127)            19,100              18,973

Net earnings                                                            17               1,705               1,722

Distributions to partners                                               (33)             (3,273)             (3,306)

Balance at December  31, 1996                                    $     (143)         $  17,532          $   17,389

See the accompanying notes to consolidated financial statements.
</TABLE>

                                                             6

<PAGE>
                                MERIDIAN HEALTHCARE GROWTH AND INCOME FUND
                                           LIMITED PARTNERSHIP


                                    Consolidated Statements of Cash Flows
                                            (Dollars in thousands)
<TABLE>
<CAPTION>

                                                                                 Years Ended December 31,

                                                                        1996              1995              1994

Cash flows from operating activities
<S>                                                                    <C>               <C>               <C>    
    Net earnings                                                       $ 1,722           $ 1,891           $ 2,903
    Adjustments to reconcile net earnings to net cash
       provided by operating activities
          Depreciation of property and equipment                         1,553             1,502             1,514
          Amortization of intangibles                                       317              317               412
          Minority interest in net earnings of operating
            partnerships                                                     20               22                32
          Increase in loan payable to Development General Partner            52               51                36
          Increase in deferred management fee payable                        42               39                57
          Change in other assets and liabilities
                Accounts receivable                                        (262)             (120)           (2,372)
                Estimated third-party payor settlements                  2,578               108               403
                Prepaid expenses and other current assets                   57               (155)             (196)
                Accrued compensation and related costs                   1,316               (311)               7
                Accounts payable and other
                  accrued expenses                                         (732)             (412)           2,424

Net cash provided by operating activities                                6,663             2,932             5,220
Cash flows from investing activities
    Additions to property and equipment                                    (608)             (413)             (467)
    Additions to other assets                                               (13)                    --               --

Net cash used in investing activities                                      (621)             (413)             (467)

Cash flows from financing activities
    Line of credit borrowings, net                                         281               719                     --
    Net proceeds from issuance of long-term debt                                  --       6,208                     --
    Repayment of long-term debt                                            (557)           (6,494)             (410)
    Distributions to partners                                            (3,306)           (3,306)           (3,306)
    Distributions to minority interests                                     (37)              (39)              (32)

Net cash used in financing activities                                    (3,619)           (2,912)           (3,748)

Net increase (decrease) in cash and cash equivalents                     2,423               (393)           1,005
Cash and cash equivalents, beginning of year                             1,539             1,932               927

Cash and cash equivalents, end of year                                 $ 3,962           $ 1,539           $ 1,932
</TABLE>

See the accompanying notes to consolidated financial statements.

                                                             7
<PAGE>
                                MERIDIAN HEALTHCARE GROWTH AND INCOME FUND
                                           LIMITED PARTNERSHIP


                               Notes to Consolidated Financial Statements
                                    December 31, 1996, 1995 and 1994


  (1)  Organization and Operations

     Meridian Healthcare Growth and Income Fund Limited Partnership (the "Fund")
was  organized  under the laws of the State of  Delaware  and will  continue  to
operate through December 31, 2037, unless terminated sooner under the provisions
of the Partnership Agreement. The Fund's Administrative General Partner is Brown
Healthcare,  Inc.  and  the  Fund's  Development  General  Partner  is  Meridian
Healthcare  Investments,  Inc. Brown Healthcare  Holding Co., Inc. is the Fund's
Assignor Limited Partner. Meridian Healthcare Investments,  Inc. is a subsidiary
of Genesis Health Ventures, Inc.
 
      The Fund owns 98.99%  limited  partnership  interests in seven  operating
       partnerships. Each partnership owns and operates a nursing center located
       in Maryland,  New Jersey, or North Carolina. As described further in Note
       3,  Meridian  Healthcare,  Inc.  ("MHC")  and  other  affiliates  of  the
       Development  General  Partner  manage the  nursing  centers  and  provide
       personnel to the  operating  partnerships  along with certain other goods
       and services.

       The Fund, through its operating  partnerships,  derives substantially all
       of its  revenue  from  extended  healthcare  provided  to nursing  center
       residents  including  room and board,  nursing care,  and drugs and other
       medical services.  Total patient days available and occupancy (unaudited)
       at the facilities in each of the three years were as follows:

                      Year                Days                   Occupancy

                      1996               431,000                    94.3%
                      1995               430,000                    94.8%
                      1994               433,000                    94.4%

(2)    Summary of Significant Accounting Policies

       Principles of Consolidation

The    consolidated  financial  statements  include the accounts of the Fund and
       its 98.99% owned consolidated partnerships.  All significant transactions
       and balances between the Fund and its consolidated partnerships have been
       eliminated in consolidation.

       Cash and Cash Equivalents

       Cash and cash  equivalents  primarily  consist of cash deposits in banks,
       money  market  funds,  and  certificates  of  deposit.  All cash and cash
       equivalents have an original maturity of less than three months,  and are
       stated at cost which approximates market value.

                                                           8
<PAGE>
                                MERIDIAN HEALTHCARE GROWTH AND INCOME FUND
                                           LIMITED PARTNERSHIP


       (2) Summary of Significant Accounting Policies (continued)

       Revenue

       The Fund derives a substantial  portion of its revenue under Medicaid and
       Medicare  cost  reimbursement  programs  which are  subject  to audit and
       adjustment, in some cases, by the respective third-party payors. The Fund
       provides an allowance  for  potential  audit  adjustments  to the interim
       reimbursement  amounts received under these cost reimbursement  programs.
       Revisions to this  allowance,  if any, are recorded as an  adjustment  to
       revenues in the year such amounts are determined. Such revisions to prior
       year cost  reimbursement  settlements  resulted  in a credit to  earnings
       aggregating  $594,000  in  1996  and  $227,000  in  1995.  There  were no
       revisions to this allowance in 1994.

       Property and Depreciation

       Property and equipment are stated at cost less accumulated  depreciation.
       Major renewals and betterments  are capitalized and ordinary  repairs and
       maintenance are charged against operations in the period incurred.  Asset
       costs and related accumulated  depreciation are removed from the accounts
       upon  disposition  of an asset and the resulting gain or loss is included
       in the determination of earnings.

       Depreciation is computed using the straight-line method. Estimated useful
       lives  established  for  purposes of  computing  depreciation  range from
       thirty  to  forty  years  for   buildings,   twenty  years  for  building
       improvements, ten years for land improvements, and from five to ten years
       for furniture and equipment.

       Loan Acquisition Costs

       Loan acquisition costs, which represent costs incurred in connection with
       securing financing for the nursing centers, are capitalized and amortized
       using the  interest  method  over the  period  that the  related  debt is
       scheduled to be outstanding. Accumulated amortization of loan acquisition
       costs  aggregated  $512,000  and  $463,000 at December 31, 1996 and 1995,
       respectively.

       Preopening Costs

       Preopening costs,  which represent costs incurred prior to the opening of
       the  facility,  are amortized on a  straight-line  basis over five years.
       Accumulated  amortization  of preopening  costs  aggregated  $376,000 and
       $362,000 at December 31, 1996 and 1995, respectively.

       Goodwill

       Goodwill  arising  from the Fund's  purchase of its  limited  partnership
       interests in the operating  partnerships  is amortized on a straight-line
       basis over thirty years.  Accumulated amortization of goodwill aggregated
       $2,175,000 and $1,921,000 at December 31, 1996 and 1995, respectively.

                                                           9
<PAGE>
                                MERIDIAN HEALTHCARE GROWTH AND INCOME FUND
                                           LIMITED PARTNERSHIP

       (2)        Summary of Significant Accounting Policies (continued)

       Goodwill is reviewed  for  impairment  whenever  events or  circumstances
       provide  evidence that suggests that the carrying  amount of goodwill may
       not be recoverable.  The Fund assesses the  recoverability of goodwill by
       determining  whether  the  amortization  of the  goodwill  balance can be
       recovered through projected undiscounted cash flows.

       Income Taxes

       The  consolidated  financial  statements  of the Fund do not  include any
       provision for federal or state income taxes.  All items of Fund earnings,
       deductions and credits are allocated among the partners. The distributive
       share of the Fund's earnings, deductions and credits are included in each
       partner's federal and state income tax returns.

       A reconciliation of net earnings,  as reported on the Fund's consolidated
       statements of earnings,  to taxable earnings for the years ended December
       31, are summarized as follows (in thousands):
<TABLE>
<CAPTION>

                                                                                 1996          1995         1994

<S>                                                                            <C>          <C>            <C>   
                  Net earnings per consolidated statements of earnings         $1,722       $1,891         $2,903
                  Accelerated depreciation deducted for income
                    tax purposes over straight-line depreciation
                    deducted for financial reporting purposes                     (302)         (366)         (399)
                  Amortization of goodwill deducted for financial reporting
                    purposes, not deducted for income tax purposes                253          232            337
                  Differences in timing of revenue recognition
                    for financial reporting purposes and
                    income tax purposes                                           435          198            197
                  Expenses deducted for financial reporting
                    purposes, not deducted for income tax purposes                 82          294             14

                  Taxable earnings                                            $ 2,190        $2,249        $3,052

</TABLE>

Use of Estimates

       The  preparation  of financial  statements in conformity  with  generally
       accepted accounting  principles requires management to make estimates and
       assumptions that affect the amounts reported in the financial  statements
       and accompanying notes. Actual results could differ from those estimated.

                                                          10
<PAGE>
                                MERIDIAN HEALTHCARE GROWTH AND INCOME FUND
                                           LIMITED PARTNERSHIP

       (2) Summary of Significant Accounting Policies (continued)

       New Accounting Pronouncement

       For the year ended  December 31, 1996,  the Fund adopted the Statement of
       Financial  Accounting Standards No. 121 "Accounting for the Impairment of
       Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Statement
       121 provides  guidance for  recognition  and measurement of impairment of
       long-lived assets, certain identifiable  intangibles and goodwill related
       both to assets  to be held and used and  assets to be  disposed  of.  The
       adoption  of  Statement  121 did not have an impact  on the  consolidated
       financial statements.

                  (3)      Related Party Transactions

       The nursing  centers owned by the operating  partnerships  are managed by
       MHC.  Under  the  terms  of  the  management  agreements,  the  operating
       partnerships  are obligated to pay monthly  management  fees at an annual
       rate equal to 6% of each nursing center's  revenue.  However,  payment of
       one-half of the fees  incurred  for the  management  of the  Mooresville,
       Salisbury and Woodlands  nursing centers was deferred during the two-year
       period commencing with the Fund's acquisition of partnership interests in
       1988 and 1989.  As of December  31, 1996 and 1995,  the amounts  deferred
       under this  agreement,  including  interest  at 9% per annum,  aggregated
       $770,000 and $728,000, respectively. The Fund is obligated to repay these
       amounts when certain financial criteria are met.

       The  Fund  is  obligated  to  pay  the  Administrative   General  Partner
       administration  fees  equal  to the  greater  of 1/2 of 1% of the  Fund's
       annual  revenue or $75,000.  Certain of the operating  partnerships  also
       purchase drugs and medical supplies and other services from affiliates of
       the Development General Partner.

       The Development General Partner loaned the Fund $597,000,  as required by
       the Cash Flow  Deficit  Guaranty  Agreement,  to  support  the  operating
       deficits  generated by the Mooresville,  Salisbury and Woodlands  nursing
       centers during each center's first two years of operations  subsequent to
       the Fund's acquisition of partnership interests.  Loans outstanding under
       this arrangement,  including  interest at 9% per annum, were $984,000 and
       $932,000  at  December  31,  1996  and  1995,  respectively.  The Fund is
       obligated to repay such loans when certain specified  financial  criteria
       are met.

                                                          11
<PAGE>
                                MERIDIAN HEALTHCARE GROWTH AND INCOME FUND
                                           LIMITED PARTNERSHIP


       (3) Related Party Transactions (continued)

       Transactions  with the Fund's General  Partners and their  affiliates for
       the years ended December 31, are summarized as follows (in thousands):
<TABLE>
<CAPTION>

                                                                 1996               1995             1994
                                                                 ----               ----             ----

<S>                                                             <C>                <C>              <C>   
           Management and administration fees                   $3,087             $2,920           $2,773
           Drugs and medical supplies purchases                  2,305              1,648            1,349
           Nursing and rehabilitation services                   2,995              2,789            2,101
           Interest expense on borrowings                           94                 90               93

</TABLE>

           Neither the Fund nor the operating partnerships employ any personnel.
       All staff  required by the nursing  centers  are  employees  of MHC which
       charges  the  operating  partnerships  for  all  costs  related  to  such
       personnel  including  payroll  taxes,   workers'   compensation,   health
       insurance  and other fringe  benefits.  Salaries  and benefits  represent
       approximately 60% of total operating expenses.

       (4) Debt

       Effective  July 29,  1996,  the Fund  renewed and  increased  its line of
       credit  agreement to $4,000,000  which is designated for working  capital
       needs and issuance of letters of credit.  The agreement  expires February
       28,  1998 at which  time any and all  outstanding  borrowings  under  the
       agreement  become due.  Borrowings are secured  primarily by the accounts
       receivable of the Fund. The Fund expects the line of credit  agreement to
       be renewed.  Any  outstanding  cash  borrowings  under the facility  bear
       interest  based on a LIBOR rate plus 175 basis  points in 1996  (7.29% at
       December  31,  1996) and on the  bank's  prime rate of  interest  in 1995
       (8.50% at December 31,  1995).  The  weighted  average  interest  rate on
       borrowings during 1996 was 7.45%.  Borrowings  outstanding under the line
       at  December  31,  1996  and  1995  totaled   $1,000,000   and  $719,000,
       respectively.  Letters  of credit  outstanding  under this  agreement  at
       December 31, 1996 totaled $200,000.

       Long-term debt at December 31, consists of the following (in thousands):
<TABLE>
<CAPTION>

                                                                                   1996          1995
                  Mortgage notes payable
<S>                                                                             <C>            <C>    
                    Maryland facilities                                         $16,798        $17,119
                    Woodlands facility                                            6,044          6,176
                    Frederick facility                                            1,338          1,420
                    Hamilton facility                                               412            434
                                                                                 24,592         25,149
                  Less current portion                              (621)          (553)
                                                                                $23,971        $24,596
</TABLE>

The    Maryland  facilities' mortgage notes payable bear interest at fixed rates
       of 7.56% and 7.74% for $9,013,000 and  $3,861,000,  respectively,  of the
       outstanding debt on the Maryland facilities.

                                                          12
<PAGE>
                                MERIDIAN HEALTHCARE GROWTH AND INCOME FUND
                                           LIMITED PARTNERSHIP


       (4) Debt (continued)

       The remaining debt of $3,924,000  bears interest at a variable rate based
       on a LIBOR  rate plus 175 basis  points  (7.24% at  December  31,  1996).
       Principal and interest are payable  monthly  based on a 25-year  mortgage
       schedule through  February,  1998, at which time the remaining  principal
       amount is payable in a lump sum.

       On June 30, 1995,  the Woodlands  operating  partnership  refinanced  the
       existing  debt by  executing a second  amendment  to the  mortgage  note,
       effective June 1, 1995,  extending the note's  maturity date to February,
       1998, and increasing the face amount of the debt to $6,250,000.  The note
       bears  interest at a fixed rate of 8.05%.  Principal  is payable  monthly
       based upon a 25-year mortgage  schedule through  maturity,  at which time
       the remaining principal amount is payable in a lump sum.

       The mortgage notes payable on the Frederick and Hamilton  facilities bear
       interest  at the  bank's  prime  rate of  interest  plus  0.75%  (9.0% at
       December  31,  1996).  Principal  is payable  monthly  based on a 15-year
       mortgage  schedule  through  February,  1998, at which time the remaining
       principal amount is payable in a lump sum.

       The mortgage  notes  payable are secured by deeds of trust on the related
       property.  Under  the  terms  of these  loan  agreements,  the  operating
       partnerships  are obligated to conform with specific  financial  criteria
       and  are  subject  to  certain  other  covenants.  The  most  significant
       financial  criterion  requires each  operating  partnership to maintain a
       cash flow to debt  service  ratio of 1.25 to 1.0,  as defined by the loan
       agreements.  The  Randallstown  facility  failed  to meet  this  ratio at
       December 31, 1996 and September 30, 1996. Consequently,  the Randallstown
       facility was not in  compliance  with this  covenant  for its  $6,523,000
       mortgage note included within the Maryland facilities' mortgage notes.

       Effective   March  14,  1997  the  lender  has  agreed  under  a  Limited
       Forbearance  Agreement to refrain and forbear temporarily from exercising
       and  enforcing  any of its  remedies  for a period of time  ending on and
       including May 15, 1997. The agreement  provides that should  Randallstown
       meet all its covenants for the quarter  ended March  31,1997,  the lender
       will waive the earlier  events of default.  If all the  covenants are not
       met, the lender shall require that certain  partnerships  and/or the Fund
       become  either  joint  and  several  co-obligors  or  guarantors  of  the
       obligation, note and the loan.

       Long-term  debt maturing in each of the two years  subsequent to December
       31, 1996 is $621,000 in 1997 and $23,971,000 in 1998.

       Cash  outflows  from  operating   activities  include  interest  paid  of
       $2,001,000,   $2,252,000   and   $1,640,000  in  1996,   1995  and  1994,
       respectively.

                                                          13
<PAGE>
                                MERIDIAN HEALTHCARE GROWTH AND INCOME FUND
                                           LIMITED PARTNERSHIP

       (5) Distributions to Partners and Allocation of Net Income

       Cash is  distributable  and net earnings  are  allocable 1% to the Fund's
       general  partnership   interests  and  99%  to  its  limited  partnership
       interests. Cash distributable to partners is determined at the discretion
       of the Fund's general partners.

       Cash  distributions  to  partners  were  made from net cash  provided  by
       operating  activities  as disclosed on the  statements  of cash flows and
       excess  initial  working  capital  reserves of $374,000 in 1995.  No such
       distribution  from excess working capital  reserves were required in 1996
       and 1994. Cash  distributions per unit aggregated $2.12 in 1996, 1995 and
       1994.

       (6) Employee Benefit Plans

       Certain   employees  of  the  Fund's  nursing  centers  are  eligible  to
       participate in the Genesis Health  Ventures,  Inc.  Retirement  Plan. The
       Plan covers all  employees  having  1,000 hours or more service in a plan
       year.  Employees'  contributions  to the plan may be  matched by the Fund
       based on years of service.  During the plan years ended December 31, 1996
       and 1995, a company  match of 50% of employee  contributions  up to 3% of
       the employee's  annual gross salary was accrued.  Additionally,  the Plan
       provides for discretionary employer contributions based on profits. Prior
       to January 1, 1995,  these  employees were eligible to participate in the
       Meridian  Healthcare Inc.  Retirement  Savings Plan. This plan was merged
       into the Genesis Health Ventures,  Inc. Retirement Plan effective January
       1, 1995.

       Certain  other  employees of the Fund's  nursing  centers are eligible to
       participate in Meridian  Healthcare,  Inc. Union Retirement  Savings Plan
       which  qualified  under Section  401(K) of the Internal  Revenue  Service
       Code.  In accordance  with the terms of the plan,  employees may elect to
       contribute a percentage of their  respective  annual  compensation to the
       plan, subject to certain limitations.  The Fund is obligated to match 50%
       of each  employee's  contribution  up to 3% of  their  respective  annual
       compensation.

       Charges to operations in connection with these plans aggregated  $208,000
       in 1996, $230,000 in 1995 and $114,000 in 1994.

       (7) Commitments and Contingencies

       The Fund is a party to  litigation  arising  in the  ordinary  course  of
       business. The Fund does not believe the results of such litigation,  even
       if the outcome is unfavorable to the Fund,  would have a material  effect
       on its consolidated financial position or results of operations.

       (8) Fair Value of Financial Instruments

       The Fund believes the carrying amount of cash and  equivalents,  accounts
       receivable   (net  of  allowance   for  doubtful   accounts),   estimated
       third-party payor settlements, prepaid expenses and other current assets,
       accounts payable and other accrued expenses and accrued  compensation and
       related costs approximates fair value because of the short-term  maturity
       of these instruments.

                                                          14
<PAGE>
                                MERIDIAN HEALTHCARE GROWTH AND INCOME FUND
                                           LIMITED PARTNERSHIP


       (8) Fair Value of Financial Instruments (continued)

       The fair  value of the Fund's  fixed-rate,  long-term  debt is  estimated
       based  on the  current  rates  offered  to the  Fund for debt of the same
       remaining  maturities.  At December 31, 1996,  the carrying  value of the
       fixed-rate debt of $18,919,000 approximates fair value.

       The carrying value of the Fund's floating-rate debt approximates its fair
value.

                                                          15
<PAGE>
                                MERIDIAN HEALTHCARE GROWTH AND INCOME FUND
                                           LIMITED PARTNERSHIP
       Directors and Executive Officers

       Meridian Healthcare Investments,
       Inc.
       Development General Partner

         Michael R. Walker
         President and Director

         Richard R. Howard
         Director

         George V. Hager, Jr.
         Vice President and Treasurer

       Brown Healthcare, Inc.
       Administrative General Partner

         John M. Prugh
         President and Director

         Peter E. Bancroft
         Vice President and Director

         Terry F. Hall
         Secretary

         Timothy M. Gisriel
         Treasurer

       Please submit changes in name,  address,  investment  representative  and
       distribution instructions to Investor Relations at the above
       address.
       Form  10-K A copy of the  Fund's  Annual  Report on Form 10-K for 1996 as
       filed  with the  Securities  and Ex change  Commission  is  available  to
       partners without charge on request by writing to:

         Investor Relations
         Brown Healthcare, Inc.
         225 East Redwood Street
         Baltimore, Maryland 21202

                                                    Auditors

       KPMG Peat Marwick LLP
       1600 Market Street
       Philadelphia, PA 19103-7212

                                                  Legal Counsel

       Piper & Marbury
       1100 Charles Center South
       36 South Charles Street
       Baltimore, Maryland 21201



                                               Further Information
       For further  information or ques tions regarding your investment,  please
       call Denise Shaduk, Invest ment Coordinator, at (410) 727-
       4083.


                                                    16