MERIDIAN HEALTHCARE GROWTH AND INCOME FUND
                                                LIMITED PARTNERSHIP


                                                1997 Annual Report

                                                  March 17, 1998

         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

         Profitability for the Fund increased approximately $546,000 (or 32%) to
$2,268,000 in 1997 as compared to $1,722,000 in 1996.  Patient  revenues for the
Fund's seven operating  partnerships  increased by approximately  $1,712,000 (or
3.6%)  for the year  ended  December  31,  1997 as  compared  to the year  ended
December 31, 1996.  The increase is  primarily  attributable  to increased  room
rates which  resulted in an effective  rate increase of 6% (or  $1,767,000),  of
which $1,466,000 relates to Medicaid residents. Effective July 1, 1997, the four
Maryland  facilities  received  Medicaid  increases  of  5%- 6% as  compared  to
approximately  2.5% on July 1, 1996. Also  contributing to the Medicaid increase
was a shift to higher acuity Medicaid residents at the facilities. The remaining
rate increase of  approximately  $296,000 was generated  equally by Medicare and
private payor  classes.  Among  Medicare  patients,  there has been a shift to a
higher  acuity  resident,  while  there  has been a shift in the  census  mix of
private  payors to  facilities  with higher base  private  rates.  Additionally,
ancillary  usage  increased  in 1997 versus  1996.  Partially  offsetting  these
favorable variances was a decrease of approximately $252,000 in prior year third
party cost report settlements.

         Operating  expenses as a percentage of revenues remained  consistent at
80% of revenue.  Salaries,  wages and benefits increased  approximately $462,000
(or 2%) during 1997 versus 1996 due to inflationary wage increases.  As a result
of the  shortage  in  certified  nursing  assistants  in the State of  Maryland,
nursing agency usage increased approximately $109,000 in 1997 as compared to the
prior year.  Also  contributing  to the  operating  expense  increase was higher
ancillary utilization in 1997 as compared to the prior year. This increase was a
result of the higher  acuity  residents in the  facilities  as well as increased
utilization by the Medicaid population.  On a per day basis,  Medicaid ancillary
utilization is $1.98 higher in 1997 than in 1996.

         Interest expense  decreased  $113,000 in 1997 as compared to 1996. This
decrease is primarily due to line of credit  borrowings that were repaid in full
in April, 1997.

FINANCING

         On March 3, 1998,  the Fund  entered into a renewal  commitment  with a
bank to  refinance  all of the  existing  indebtedness.  Under  the terms of the
refinancing,  the  mortgages  will  mature on  February  28,  2000 and will bear
interest at LIBOR plus 1.55%. The refinancing will also extend the

                                      -1-

<PAGE>


line of credit  commitment  until  February 28, 2000.  The Fund has a $4,000,000
line of credit which is  designated  for working  capital needs and is primarily
secured by the accounts receivable of the Fund. At December 31, 1997, there were
no outstanding borrowings under this line of credit.

CASH DISTRIBUTIONS

         On February 13, 1998, the Fund made a cash  distribution of $826,410 to
its assignee limited  partners,  which was funded from nursing center operations
generated  during the fourth  quarter  of 1997  after  payment of  approximately
$72,000 of upper tier expenses. During 1997, nursing center operations generated
approximately  89%  of  the  total  distributions  after  payments  for  capital
improvements, long term debt principal reduction and upper tier expenses.

         Based on a preliminary  review of the 1998 operating budget,  operating
results are  projected to improve over 1997 results.  Distributions  to partners
are expected to remain at current  levels and operating cash flow is expected to
completely fund the distributions.

SUMMARY

         The major challenge to the Fund in the foreseeable future is to control
operating  expenses  while  maximizing  revenues  through  strategic  admissions
policies.  In  light  of the  improved  operating  performance  of  the  nursing
facilities coupled with a favorable 1998 projection, the General Partners expect
to begin  evaluating  possible  disposition  strategies for the Fund in 1998. We
will keep you advised of developments in this area in our quarterly reports.


Very truly yours,

    /s/  John M. Prugh                      /s/  Michael R. Walker

John M. Prugh, President                 Michael R. Walker, President
Brown Healthcare, Inc.                   Meridian Healthcare Investments, Inc.
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, 1997
and 1996 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,   1997.   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 that our audits provide a reasonable basis for our opinion.

In our opinion, the 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, 1997 and 1996, and
the  results of its  operations  and its cash flows for each of the years in the
three-year period ended December 31, 1997 in conformity with generally  accepted
accounting principles.

                                                 KPMG Peat Marwick LLP

February 6, 1998, except for paragraph 2 of note 4 which is as of March 3, 1998
Philadelphia, Pennsylvania
                                      -3-

<PAGE>


              MERIDIAN HEALTHCARE GROWTH AND INCOME FUND
                          LIMITED PARTNERSHIP
           Consolidated Balance Sheets (Dollars in thousands)
<TABLE>
<CAPTION>
                                                                         December 31,
                                                                           1997          1996
Assets
Current assets
<S>                                                                     <C>           <C>
    Cash and cash equivalents                                           $  2,275      $  3,962
    Accounts receivable, net of allowance for doubtful
      accounts of $513 in 1997 and $551 in 1996                            6,437         6,429
    Estimated third-party payor settlements                                  343           105
    Prepaid expenses and other current assets                                565           514

Total current assets                                                       9,620        11,010

Property and equipment
    Land and improvements                                                  1,848         1,832
    Buildings and improvements                                            43,088        42,569
    Furniture and equipment                                                4,308         3,873
    Construction in progress                                                 --            140
                                                                          49,244        48,414
    Accumulated depreciation                                             (14,405)      (12,734)
                                                                          34,839        35,680

Other assets
    Goodwill, net                                                          5,239         5,490
    Loan acquisition costs, net                                                9            64
    Preopening costs, net                                                    --             11
                                                                           5,248         5,565

Total assets                                                            $ 49,707      $ 52,255

Liabilities and Partners' Capital
Current liabilities
    Current portion of long-term debt                                   $    707      $    621
    Accrued compensation and related costs                                 1,054         2,415
    Accounts payable and other accrued expenses
      Trade                                                                1,007           934
      Related party                                                        1,179         1,213
    Estimated third-party payor settlements                                4,234         2,958

Total current liabilities                                                  8,181         8,141

Deferred management fee payable                                              812           770
Loan payable to Development General Partner                                1,035           984
Line of credit borrowings                                                    --          1,000
Long-term debt                                                            23,328        23,971
                                                                          25,175        26,725

Partners' capital (deficit)
    General partners                                                        (153)         (143)
    Assignee limited partners; 1,540,040 units issued and outstanding     16,504        17,532

Total partners' capital                                                   16,351        17,389

Total liabilities and partners' capital                                 $ 49,707      $ 52,255

See the accompanying notes to consolidated financial statements.
</TABLE>
                                      -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,
                                 1997 1996 1995

Revenues
<S>                                                      <C>       <C>       <C>
    Medicaid and Medicare patients                       $38,154   $36,589   $33,483
    Private and other patients                            11,103    10,956    11,490
    Investment and other income                              311       340       425
                                                          49,568    47,885    45,398

Expenses
    Operating, including $6,760, $5,300 and $4,437
      to related parties                                  39,463    38,386    36,036
    Management and administration fees
      to related parties                                   3,184     3,087     2,920
    General and administrative                               635       677       505
    Depreciation and amortization                          1,988     1,870     1,819
    Interest expense                                       2,030     2,143     2,227
                                                          47,300    46,163    43,507

Net earnings                                             $ 2,268   $ 1,722   $ 1,891



Net earnings per unit of assignee limited partnership interest - basic (computed
    based on 1,540,040 units
    outstanding in 1997, 1996 and 1995)                  $  1.46   $  1.12   $  1.23
</TABLE>



See the accompanying notes to consolidated financial statements.

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

Consolidated  Statements of Partners' Capital  (Deficit)
    (Dollars in thousands)
<TABLE>
<CAPTION>
                                            Assignee
                                  General    Limited
                                  Partners   Partners    Total



<S>                              <C>        <C>        <C>
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

Net earnings                           23      2,245      2,268

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

Balance at December  31, 1997    $   (153)  $ 16,504   $ 16,351
</TABLE>


See the accompanying notes to consolidated financial statements.
                                      -6-
<PAGE>
              MERIDIAN HEALTHCARE GROWTH AND INCOME FUND
                          LIMITED PARTNERHSIP

                 Consolidated Statements of Cash Flows
                         (Dollars in thousands)
<TABLE>
<CAPTION>
                                                                         Years Ended December 31,

                                                                          1997      1996      1995

Cash flows from operating activities
<S>                                                                     <C>       <C>       <C>
    Net earnings                                                        $ 2,268   $ 1,722   $ 1,891
    Adjustments to reconcile net earnings to net cash
       provided by operating activities
          Depreciation of property and equipment                          1,671     1,553     1,502
          Amortization of intangibles                                       317       317       317
          Minority interest in net earnings of operating
            partnerships                                                     26        20        22
          Increase in loan payable to Development General Partner            51        52        51
          Increase in deferred management fee payable                        42        42        39
          Change in other assets and liabilities
                Accounts receivable                                          (8)     (262)     (120)
                Estimated third-party payor settlements                   1,038     2,578       108
                Prepaid expenses and other current assets                   (51)       57      (155)
                Accrued compensation and related costs                   (1,361)    1,316      (311)
                Accounts payable and other
                  accrued expenses                                           27      (732)     (412)

Net cash provided by operating activities                                 4,020     6,663     2,932

Cash flows from investing activities
    Additions to property and equipment                                    (830)     (608)     (413)
    Additions to other assets                                               --        (13)      --

Net cash used in investing activities                                      (830)     (621)     (413)

Cash flows from financing activities
    Line of credit borrowings, net                                       (1,000)      281       719
    Net proceeds from issuance of long-term debt                            --        --      6,208
    Repayment of long-term debt                                            (557)     (557)   (6,494)
    Distributions to partners                                            (3,306)   (3,306)   (3,306)
    Distributions to minority interests                                     (14)      (37)      (39)

Net cash used in financing activities                                    (4,877)   (3,619)   (2,912)

Net increase (decrease) in cash and cash equivalents                     (1,687)    2,423      (393)
Cash and cash equivalents, beginning of year                              3,962     1,539     1,932

Cash and cash equivalents, end of year                                  $ 2,275   $ 3,962   $ 1,539
</TABLE>



See the accompanying notes to consolidated financial statements.
                                      -7-

<PAGE>

                                    MERIDIAN HEALTHCARE GROWTH AND INCOME FUND
                                                LIMITED PARTNERSHIP

             Notes to Consolidated Financial Statements (continued)


(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

                        1997               429,000                    93.2%
                        1996               431,000                    94.3%
                        1995               430,000                    94.8%


(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

             Notes to Consolidated Financial Statements (continued)


(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 $342,000 in 1997, $594,000 in 1996 and $227,000 in 1995.

       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  $567,000  and  $512,000 at December 31, 1997 and 1996,
       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  $387,000 and
       $376,000 at December  31, 1997 and 1996,  respectively.  At December  31,
       1997, all preopening costs have been fully amortized.

                                      -9-

<PAGE>


                                    MERIDIAN HEALTHCARE GROWTH AND INCOME FUND
                                                LIMITED PARTNERSHIP

             Notes to Consolidated Financial Statements (continued)


(2)    Summary of Significant Accounting Policies (continued)

       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
       $2,426,000 and $2,175,000 at December 31, 1997 and 1996, respectively.

       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>
                                                                                 1997         1996          1995

<S>                                                                            <C>          <C>            <C>
                  Net earnings per consolidated statements of earnings         $2,268       $1,722         $1,891
                  Accelerated depreciation deducted for income
                    tax purposes over straight-line depreciation
                    deducted for financial reporting purposes                    (228)        (302)          (366)
                  Amortization of goodwill deducted for financial reporting
                    purposes, not deducted for income tax purposes                248          253            232
                  Differences in timing of revenue recognition
                    for financial reporting purposes and
                    income tax purposes                                           422          435            198
                  Differences in timing of expense deductions for
                    financial reporting purposes and income tax purposes         (197)          82            294

                  Taxable earnings                                              $2,513      $2,190         $2,249
</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

             Notes to Consolidated Financial Statements (continued)


(2)    Summary of Significant Accounting Policies (continued)

       Intangibles and Long-Lived Assets

       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" in 1996.  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.

       Reclassifications

       Certain prior year amounts have been reclassified to conform with current
year presentation.

(3)    Related Party Transactions

       The nursing  centers owned by the operating  partnerships  are managed by
       Meridian Healthcare,  Inc. (MHC), an affiliate of the Development General
       Partner.  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, 1997 and 1996,  the amounts  deferred
       under this  agreement,  including  interest  at 9% per annum,  aggregated
       $812,000 and $770,000, 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  accumulated  interest from inception of the
       loan at 9% per annum,  were  $1,035,000 and $984,000 at December 31, 1997
       and 1996,  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

             Notes to Consolidated Financial Statements (continued)


(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>
                                                                 1997              1996             1995

<S>                                                             <C>                <C>              <C>
           Management and administration fees                   $3,184             $3,087           $2,920
           Drugs and medical supplies purchases                  2,230              2,305            1,648
           Nursing and rehabilitation services                   4,530              2,995            2,789
           Interest expense on borrowings                           93                 94               90

</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
       64%,67%, and 66% in 1997, 1996 and 1995, respectively, 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  expired February
       28,  1998 at which  time any and all  outstanding  borrowings  under  the
       agreement  became due.  Borrowings are secured  primarily by the accounts
       receivable  of the  Fund.  Any  outstanding  cash  borrowings  under  the
       facility bear interest based on a LIBOR rate plus 175 basis points (7.29%
       at December 31, 1997 and December 31,1996). The weighted average interest
       rate on borrowings  during 1996 was 7.45%.  Borrowings  outstanding under
       the line at December 31, 1996 totaled $1,000,000. There were no borrowing
       outstanding  at December 31, 1997.  Letters of credit  outstanding  under
       this  agreement at December  31, 1997 and 1996  totaled $0 and  $200,000,
       respectively.

       On March 3, 1998, the Fund entered into a renewal  commitment with a bank
       to  refinance  all of the existing  indebtedness.  Under the terms of the
       refinancing, the mortgages will mature on February 28, 2000 and will bear
       interest at LIBOR plus 1.55%.  The refinancing  will also extend the line
       of  credit   commitment   until  February  28,  2000.  The   accompanying
       consolidated financial statements reflect $23,328,000 of outstanding debt
       as long-term pursuant to the effect of this transaction

                                      -12-

<PAGE>


                                    MERIDIAN HEALTHCARE GROWTH AND INCOME FUND
                                                LIMITED PARTNERSHIP

             Notes to Consolidated Financial Statements (continued)


(4)    Debt (continued)

       Long-term debt at December 31 consists of the following (in thousands):

<TABLE>
<CAPTION>
                                                                                   1997          1996
                  Mortgage notes payable
<S>                                                                             <C>            <C>
                    Maryland facilities                                         $16,464        $16,798
                    Woodlands facility                                            5,924          6,044
                    Frederick facility                                            1,258          1,338
                    Hamilton facility                                               389            412
                                                                                 24,035         24,592
                  Less current portion                                             (707)          (621)
                                                                                $23,328        $23,971
</TABLE>

       The Maryland  facilities'  mortgage  notes payable bore interest at fixed
       rates of 7.56% and 7.74% for $8,835,000 and $3,785,000,  respectively, of
       the outstanding debt on the Maryland facilities.

       The remaining  debt of $3,844,000  bore interest at a variable rate based
       on a LIBOR rate plus 175 basis  points  (7.24% at  December  31, 1997 and
       1996).  Principal  and interest  were payable  monthly based on a 25-year
       mortgage schedule through February, 1998.

       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
       bore  interest at a fixed rate of 8.05%.  Principal  was payable  monthly
       based upon a 25-year mortgage schedule through maturity.

       The mortgage notes payable on the Frederick and Hamilton  facilities bore
       interest  at the bank's  prime  rate of  interest  plus  0.75%  (9.25% at
       December 31, 1997 and 9.0% at December 31,  1996).  Principal was payable
       monthly based on a 15-year mortgage schedule through February, 1998.

       The mortgage  notes payable were secured by deeds of trust on the related
       property.  Under  the  terms  of these  loan  agreements,  the  operating
       partnerships were obligated to conform with specific  financial  criteria
       and  are  subject  to  certain  other  covenants.  The  most  significant
       financial  criterion  required 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.
       Covenants  under the renewal  commitment  which the Fund has entered into
       are expected to be similar to the aforementioned.


                                      -13-

<PAGE>


                                    MERIDIAN HEALTHCARE GROWTH AND INCOME FUND
                                                LIMITED PARTNERSHIP

             Notes to Consolidated Financial Statements (continued)


(4)    Debt (continued)

       Effective  March 14, 1997 the lender  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  provided that should  Randallstown
       meet all its covenants for the quarter  ended March  31,1997,  the lender
       would waive the earlier events of default. The Randallstown  facility did
       not meet the  required  ratio of cash flow to debt  service  at March 31,
       1997 and certain  partnerships  and/or the Fund became  either  joint and
       several co-obligors or guarantors of the obligation, note and the loan.

       Long-term debt maturing in each of the three years subsequent to December
       31, 1997 under the renewal  commitment  is $707,000 in 1998,  $749,000 in
       1999 and $22,579,000 in 2000.

       Cash  outflows  from  operating   activities  include  interest  paid  of
       $1,803,000,   $2,001,000   and   $2,252,000  in  1997,   1996  and  1995,
       respectively.

(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 1997
       and 1996. Cash  distributions per unit aggregated $2.12 in 1997, 1996 and
       1995.

(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, 1997
       and 1996, 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.

       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  $139,000
       in 1997, $208,000 in 1996 and $230,000 in 1995.

                                      -14-

<PAGE>


                                    MERIDIAN HEALTHCARE GROWTH AND INCOME FUND
                                                LIMITED PARTNERSHIP

             Notes to Consolidated Financial Statements (continued)

(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.

       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, 1997,  the carrying  value of the
       fixed-rate debt of $18,543,000 approximates fair value.

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

                                      -15-

<PAGE>


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

                                                     Form 10-K
A copy of the  Fund's  Annual  Report  on Form  10-K for 1997 as filed  with the
Securities  and Exchange  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 questions  regarding your  investment,  please call
Denise Shaduk, Investment Coordinator, at
(410) 727-4083.

Please  submit  changes  in  name,   address,   investment   representative  and
distribution instructions to Investor Relations at the above address.

                                      -16-