UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

            |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                     For the fiscal year ended June 30, 2001

                                       OR
          |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                         Commission File Number 0-22261

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

           DELAWARE                                      06-1468252
---------------------------                 ------------------------------------
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
incorporation or organization)

1577 New Britain Avenue, Farmington, Connecticut                  06032
------------------------------------------------         -----------------------
    (Address of principal executive office)                     (Zip Code)

        Registrant's telephone number, including area code (860) 674-2700

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

      Title of each class                         Name of each exchange on
      -------------------                             which registered
                                                  ------------------------

Common stock, $.01 Par Value                                N/A

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

                                      None
--------------------------------------------------------------------------------
                                (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 the disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |_|

Based on the closing sales price on September 26, 2001, the aggregate market
value of the voting common stock held by nonaffiliates of the registrant was
$200,000.


                                       1
<PAGE>

                        LEXINGTON HEALTHCARE GROUP, INC.

                                Table of Contents

                                                                      Page No.
Part I
         Item 1.  Business                                                3
Item 2.           Properties                                              7
         Item 3.  Legal Proceedings                                       8
         Item 4.  Submission of Matters to a Vote of Security Holders     8

Part II
         Item 5.  Market for Registrant's Common Equity and Related
                  Stockholder Matters                                     9
         Item 6.  Selected Financial Data                                11
         Item 7.  Management's Discussion and Analysis of Financial
                  Condition and Results of Operations                    11
         Item 8.  Financial Statements and Supplementary Data       17, F-1-F-20
         Item 9.  Changes in and Disagreements with Accountants
                  on Accounting and Financial Disclosure                 18

Part III
         Item 10. Directors and Executive Officers of the Registrant     18
         Item 11. Executive Compensation                                 19
         Item 12. Security Ownership of Certain Beneficial Owners
                  and Management                                         21
         Item 13. Certain Relationships and Related Transactions         22

Part IV
         Item 14. Exhibits, Financial Statement Schedules, and
                  Reports on Form 8-K.                                   24


                                       2
<PAGE>

                                     Part 1

Item I. Business

Lexington Healthcare Group, Inc. has four wholly-owned subsidiaries: Balz
Medical Services, Inc.("BALZ"), Professional Relief Nurses, Inc.("PRN"),
Lexington Highgreen Holding, Inc., and Lexicore Rehab Services, L.L.C.
(collectively, the "Company"). The Company also controls one joint venture,
Lexicon Pharmacy Services, L.L.C .

Lexington Healthcare Group, Inc.

Lexington Healthcare Group, Inc. was incorporated on February 23, 1996. Prior to
its initial public offering in May 1997, the Company had operated as Lexington
Healthcare Group, LLC, a limited liability company that was formed on March 8,
1995 and commenced operations on July 1, 1995. The Company's principal offices
are located at 1577 New Britain Avenue, Farmington, Connecticut 06032 and its
telephone number is (860) 674-2700.

The Company is a long-term and subacute care provider, which operates eight
nursing home facilities (the "Facilities") at June 30, 2001 with a total of
1,033 licensed beds in the State of Connecticut. The Facilities provide a broad
range of healthcare services, including nursing care, subacute care (including
rehabilitation therapy), and other specialized services (such as care to
Alzheimer's patients). The Company's strategy in healthcare is to integrate the
main disciplines of nursing, pharmacy, social services and other therapies under
one program.

The Facilities service two basic patient populations: the traditional geriatric
patient population and the population of subacute care patients with higher
acuity disorders who require more complex and intensive medical services.
Subacute care patients generally require more rehabilitative therapy and are
residents for a shorter period of time than traditional geriatric patients. An
important part of the Company's strategy is to achieve high occupancy and a
favorable payer mix by offering specialty medical services. The Facilities have
an occupancy rate of approximately 89% as of August 31, 2001. The Company
operates a dedicated subacute unit within two of the Facilities, in addition to
providing subacute services in each of the other Facilities.

Lexington Highgreen Holding, Inc.

On July 1, 1997, Lexington Highgreen Holding, Inc. purchased substantially all
of the assets of two skilled nursing facilities, Greenwood Health Center and
Highland Acres Extend-a-Care Center from Beverly Enterprises, Inc. ("Beverly").
All real estate, property, fixed and substantially all operating assets of the
nursing homes were acquired for a purchase price of approximately $6.8 million
which was financed by a mortgage on the real estate from Nationwide Health
Properties, Inc., the previous lessor to Beverly.


                                       3
<PAGE>

Lexicore Rehab Services, L.L.C.

On October 15, 1997 Lexicore Rehab Services, L.L.C. began operations as a 50%
owned joint venture with Core Rehab Management, L.L.C. The joint venture was
controlled by the Company and the results of its operations from inception are
included in the Company's consolidated financial statements with appropriate
recognition of minority interest. As of January 1, 1999, the Company acquired
the remaining 50% membership interest for a nominal amount plus $120,000 of
contingent payments which are payable based on the occurrence of certain future
events. Henceforth the Company accounted for Lexicore's operations as a
wholly-owned subsidiary; minority interest and liabilities were adjusted
accordingly. Lexicore is presently serving the Company's nursing homes and PRN
with further expansion plans underway in Connecticut and Massachusetts.

Lexicon Pharmacy Services, L.L.C.

On December 1, 1997 Lexicon Pharmacy Services, L.L.C. began operations as a 70%
owned joint venture with Pharmacy Corporation of America. The joint venture is
controlled by the Company and the results of its operations from inception are
included in the Company's consolidated financial statements with appropriate
recognition of minority interest. Lexicon has ceased operations as of March 31,
2000. Once remaining accounts receivable have been collected and all obligations
paid, the members will terminate Lexicon.

Balz Medical Services, Inc.

On June 14, 2000, in order to raise working capital, BALZ sold its operating
assets and business (exclusive of cash and accounts receivable) to an unrelated
company, for $539,000 plus assumption of certain liabilities relating to
financed equipment and leases. In connection with this sale, the Company
recorded a loss on the transaction of $1,089,000 which represented the
difference in the recorded book value of assets sold (including goodwill) and
the sales price, and includes a $363,000 charge to settle an employment contract
with the President of BALZ.

Reimbursement from Medicare and Medicaid

The Medicare Part A program provides reimbursement for extended care services
furnished to Medicare beneficiaries who are admitted to skilled nursing
facilities after at least a three-day stay in an acute care hospital. The
Medicare Part B program provides reimbursement for patients receiving ancillary
services who have not had the required stay at a hospital or have exhausted
their Part A benefits. Medicaid is a state-administrated program that provides
assistance to the indigent and certain other eligible persons. Private pay
patients typically have financial resources (including managed care insurance
coverage) to pay for their care and do not rely on government programs for
financial support.

The long-term care industry has experienced many changes in recent years
including the implementation of the Balanced Budget Act of 1997 ("BBA"), which
resulted in a new Medicare Prospective Payment System (known as PPS). Under PPS,
Medicare revenues are substantially less than those earned under the former
cost-based reimbursement system. Some of the Company's Medicare rate cuts were
restored in October 1999 and April 2000; in addition, a 4% federal rate increase
became effective October 1, 2000 and a 10% increase became effective April 1,
2001.


                                       4
<PAGE>

In Connecticut, multiple long term care entities have undergone financial
reorganization in recent years due to reduced occupancy and PPS-related revenue
reductions and increasing cost pressures (including union costs), and have
experienced considerable losses in the market value of their own securities.

Risks Associated With Reimbursement Process

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

Government Regulation

Long-term care facilities must comply with certain requirements to participate
in the Medicare or Medicaid program. Regulations promulgated pursuant to the
Omnibus Budget Reconciliation Act of 1987 were adopted by CMS (formerly HCFA)
effective July 1, 1995 and obligate facilities to demonstrate quality of care,
quality of life, physician services, nursing services, governing survey,
certification and enforcement procedures to be used by state and federal survey
agencies to determine facilities' level of compliance with the participation
requirements for Medicare and Medicaid. These regulations require that surveys
focus on residents' outcomes of care and state that all deviations from
participation requirements will be considered deficiencies, but a facility may
have deficiencies and be in substantial compliance with the regulations. The
regulations identify alternative remedies against facilities and specify the
categories of deficiencies for which they will be applied. The alternative
remedies include, but are not limited to: civil monetary penalties of up to
$10,000 per day; facility closure and/or transfer of residents in emergencies;
denial of payment for new or all admissions; directed plans of correction; and
directed in-service training. Failure to comply with certain standards as a
condition to participate in Medicare and Medicaid programs may result in
termination of the provider's Medicare and Medicaid provider agreements.

Potential Adverse Effect of Change In Revenue Sources

Changes in the mix of patients among the Medicaid, Medicare and private pay
categories, and among different types of private pay sources, could
significantly affect the revenues and the profitability of the Company's
operations. There can be no assurance that the Company will continue to attract
and retain private pay patients or maintain its current payor or revenue mix. In
addition, there can be no assurance that the facilities operated by the Company,
or the provision of services and products by the Company, now or in the future,
will initially meet or continue to meet the requirements for participation in
the Medicare and Medicaid programs. A loss of Medicare or Medicaid certification
or a change in Company reimbursement under Medicare or Medicaid could have an
adverse effect on its financial condition and results of operations.


                                       5
<PAGE>

Competition

The long-term and subacute care industry is highly competitive. The nature of
competition varies by location. The Company's facilities generally operate in
communities that are also served by similar facilities operated by others. Some
competing facilities are located in buildings that are newer than those operated
by the Company and provide services not offered by the Company, and some are
operated by entities having greater financial and other resources and longer
operating histories than the Company. In addition, some facilities are operated
by nonprofit organizations or government agencies supported by endowments,
charitable contributions, tax revenues and other resources not available to the
Company. Some hospitals that either currently provide long-term and subacute
care services or are converting their under-utilized facilities into long-term
and subacute care facilities are also a potential source of competition to the
Company. The Company competes with other facilities based on key competitive
factors such a its reputation for the quality and comprehensiveness of care
provided; the commitment and expertise of its staff; the innovativeness of its
treatment programs; local physician and hospital support; marketing programs;
charges for services; and the physical appearance, location and condition of its
facilities. The range of specialized services, together with the price charged
for services, are also competitive factors in attracting patients from large
referral sources.

Employees

As of September 1, 2001 the Company had approximately 1,250 full and part-time
employees, of which approximately 61% were covered by collective bargaining
agreements.


                                       6
<PAGE>

Item 2. Properties

The following properties are leased as of June 30, 2001.

                                                                   Approximate
Location                                              Use            Sq. Ft.
                                                      ---           Occupied
                                                                   -----------

Bentley Gardens                                  Nursing Home        21,500
31 Terrace Avenue, West Haven, CT 06516-2698

Country Manor                                    Nursing Home        27,000
64 Summit Road, Prospect, CT 06712-7060

Fairfield Manor                                  Nursing Home        55,000
23 Prospect Street, Norwalk, CT 06850-3798

Pond Point                                       Nursing Home        27,000
60 Platt Street, Milford, CT 06460-7697

Adams House                                      Nursing Home        25,500
80 Fern Drive, Torrington, CT 06790

Heritage Heights                                 Nursing Home        42,000
22 Hospital Avenue, Danbury, CT 06810

Professional Relief Nurses, Inc.               Nursing Services
1010 Wethersfield Avenue, Hartford, CT 06114                          5,500
454 Wolcott Street, Waterbury, CT 06705                               2,250
560 Saw Mill Road, West Haven, CT 06516                               1,300

Lexington Healthcare Group, Inc.               Corporate Offices      4,500
1577 New Britain Avenue, Farmington, CT 06032

The following properties are owned as of June 30, 2001.

                                                                   Approximate
Location                                              Use            Sq. Ft.
                                                      ---           Occupied
                                                                   -----------
Greenwood Health Center                          Nursing Home        53,000
5 Greenwood Street, Hartford, CT 06106

Highland Acres Extend-a-Care Center              Nursing Home        20,500
108 East Lake Street, Winsted, CT  06098

Management considers its properties to be well maintained and sufficient for its
present operations.


                                       7
<PAGE>

Item 3. Legal Proceedings

Government Investigation

The Company has previously disclosed that the Company and certain members of
former senior management were named as targets of a grand jury investigation
being conducted by the Office of the United States Attorney for the District of
Connecticut (the "Government"). By letter dated June 26, 2001, the Government
advised counsel to the Company and other targets of the grand jury investigation
that criminal prosecution of the Company and certain members of former senior
management "has been declined based on information and evidence obtained to
date." In addition, by letter dated July 9, 2001, the Government further advised
counsel to the Company and other targets of the grand jury investigation that
"the civil division of [the U.S. Attorney's] office has closed its investigation
of Lexington Healthcare Group, Inc. at this time."

Other Legal Proceedings

The former President and Administrator of Professional Relief Nurses, Inc.
(PRN), the Company's home care subsidiary, initiated a lawsuit against Lexington
Healthcare Group, Inc., PRN, and Jack Friedler, the Company's former Chairman
and CEO, in connection with her termination in July 1998. In September 1999, the
Company settled the suit to avoid the expenses of protracted litigation. The
Company has recorded a provision for lawsuit settlement of $539,000 for the year
ended June 30, 1999.

The Company received notice of lawsuits initiated against it in April 2000
concerning four nursing homes, which it was managing for SunBridge Healthcare
Corporation; the claims are being made by affiliates of SunBridge for therapy
and pharmacy services rendered. The total claimed is $1.2 million of which $1.1
million is reflected by invoices recorded on the Company's books. The Company
settled these claims for approximately $400,000, which is payable monthly over
the next 18 months. The Company has recorded a provision for lawsuit settlement
of $94,000 for the year ended June 30, 2001 for the difference between the
settlement amount and the liability, net of credits, previously recovered by the
Company.

The Company is involved in other legal proceedings and is subject to certain
lawsuits and claims in the ordinary course of its business. Although the
ultimate effect of these matters is often difficult to predict, management
believes that their resolution will not have a material adverse effect on the
Company.

Item 4. Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.


                                       8
<PAGE>

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters

Lexington Healthcare Group, Inc.'s common stock, $.01 par value, was traded on
the National Market System of the NASDAQ Stock Market. Effective on July 16,
1998, the trading of the Company's stock was moved from the NASDAQ National
Market to The NASDAQ Small Cap Market because the Company did not meet certain
new criteria for continued trading on the National Market.

The Company was notified on March 31, 2000 that, since it was no longer in
compliance with the net tangible asset criteria for continued listing on The
NASDAQ Small Cap Market, its securities were delisted from the NASDAQ Stock
Market effective with the open of business April 3, 2000. Subsequently, the
Company's common stock has traded on the pink sheets.

The following table presents its high and low market prices, and dividend
information since trading began on May 14, 1997.

                Quarterly Common Stock Price Ranges and Dividends

           Quarter             High               Low             Dividend
      FY 1997
             4th               8 1/4             5 1/2              $-0-
      FY 1998
             1st                 7                 3                $-0-
             2nd              3 15/16            2 5/8              $-0-
             3rd                 4               2 7/8              $-0-
             4th               3 7/16            2 1/2              $-0-
      FY 1999
             1st              2 21/32             7/8               $-0-
             2nd               3 1/8              7/8               $-0-
             3rd               2 1/2              7/8               $-0-
             4th               1 1/2             15/16              $-0-
      FY 2000
             1st              1 11/16             5/8               $-0-
             2nd              1 7/16              1/4               $-0-
             3rd              3 1/16             17/32              $-0-
            4th               1 31/32             1/4               $-0-


           Quarter             High               Low             Dividend
      FY 2001
             1st              11/32               1/4               $-0-
             2nd              13/32               3/32              $-0-
             3rd               5/32               1/8               $-0-
             4th              11/64               1/16              $-0-



                                       9
<PAGE>

Lexington Healthcare Group, Inc.'s common stock purchase warrants entitle the
holder to purchase one share of common stock at a price of $6.00 per share at
any time through May 13, 2003. Trading in the Company's warrants was also moved
to The NASDAQ Small Cap Market on July 16, 1998 and was then delisted from The
NASDAQ Small Cap Market on April 3, 2000 as discussed above. The common stock
warrants have traded on the pink sheets since then.

The following table presents its high and low market prices since trading began
on May 14, 1997.

                   Quarterly Common Stock Warrant Price Ranges

          Quarter             High              Low
      FY 1997
              4th            3 3/8             1 1/2
      FY 1998
              1st            3 1/4              7/8
              2nd            1 5/16             5/8
              3rd             27/32             1/4
              4th             17/32             1/4
      FY 1999
              1st             13/32            3/16
              2nd              7/8              1/8
              3rd             19/32            3/16
              4th              7/16             1/8
      FY 2000
              1st              5/16             3/32
              2nd             13/32             1/32
              3rd              3/4              3/32
              4th              1/4              1/64
      FY 2001
              1st              3/16             1/64
              2nd              1/64             1/64
              3rd               -                -
              4th               -                -

The Company has not paid dividends to date and has no present intention of
paying any dividends on its Common Stock in the foreseeable future, as it
intends to reinvest profits, if any, in the development and expansion of its
business.

The number of shareholders of record for the Company's common stock as of June
30, 2001 was 29; the Company believes that its shares are beneficially owned by
over 500 individuals.

On September 26, 2001, the closing price of the Company's common stock was $.17.


                                       10
<PAGE>

Item 6. Selected Financial Data

<TABLE>
<CAPTION>
                                                                               Year ended June 30,
                                                                               -------------------
                                                               2001        2000        1999        1998        1997
                                                               ----        ----        ----        ----        ----
                                                                    (Amounts in Thousands, Except Per Share Data)
                                                                    ---------------------------------------------
<S>                                                            <C>         <C>         <C>         <C>         <C>
Statement of Operations Data
    Net revenues                                               $68,571     $77,453     $76,892     $58,252     $35,900
    Operating costs and expenses                               (76,416)    (81,536)    (78,264     (58,248)    (36,241)
    Other income                                                    --          --          --         280          --
                                                               -------------------------------------------------------
    Income (loss) before income taxes and minority interest     (7,845)     (4,083)     (1,372)        284        (341)
    Provision for (benefit from) income taxes *                     --          --          15          30         (66)
    Minority interest                                               93         (20)       (190)       (224)         --
                                                               -------------------------------------------------------
    NET INCOME (LOSS) *                                        $(7,752)    $(4,103)    $(1,577)    $    30     $  (275)
                                                               =======     =======     =======     =======     =======

    Basic earnings (loss) per common share *                   $ (2.20)    $ (1.15)    $  (.38)    $   .01     $  (.10)
                                                               -------     -------     -------     -------     -------

Balance Sheet Data
    Cash and cash equivalents                                  $ 1,467     $ 1,265     $ 3,675     $   831     $ 1,000
    Working capital (deficiency)                                (9,440)     (1,498)      1,059       3,074         287
    Total assets                                                29,599      30,958      34,283      25,613      15,432
    Short-term borrowings                                        8,002       4,296       3,867         398          49
    Total long-term debt excluding current maturities            9,140       7,892       7,768       7,424         107
    Total stockholders equity (deficiency)                     $(7,625)    $   127     $ 4,232     $ 6,383     $ 6,395
</TABLE>

Item 7. Management's Discussion and Analysis of Financial Condition and Results
        of Operations

The following discussion and analysis provides information which management
believes is relevant to an assessment and understanding of the Company's
consolidated results of operations and financial condition. The discussion
should be read in conjunction with the consolidated financial statements and
notes thereto.


                                       11
<PAGE>

Overview

During the fiscal year ended June 30, 2001 the Company's operations were
negatively affected by certain nonrecurring losses and expenses including a
Union strike and settlement costs, legal fees of a federal investigation,
nonrecurring charges relating to terminated operations, provision for lawsuits
settlements, costs related to the former president's consulting agreement and
reduced revenue from prior period Medicare audit settlements which resulted in
approximately $2,500,000 in additional losses recognized in the current fiscal
year. In addition, revenues were negatively impacted by a reduction in beds. In
March 2001, 30 beds were reduced pursuant to a Certificate of Need (CON)
agreement with the State and an additional 40 beds were reduced through an
informal agreement with the State starting in January 2001.

Management has submitted a request to the State for rate relief because of the
reduced reimbursement caused by the bed reductions described above and because
of the continuing under reimbursement of costs associated with the care of
Medicaid patients. The Company received approval for increased rates at certain
Facilities and rate increases are pending at other Facilities. As a result of
the requested rate increases, management anticipates the total increase in
revenue for Medicaid patients, based upon current census, will be in excess of
$1,700,000 for the fiscal year ending June 30, 2002. In addition, management has
implemented an aggressive marketing program and anticipates increased revenue
from improved patient mix and occupancy of over $1,200,000 in fiscal 2002 and is
in the process of reviewing the status of unprofitable subsidiaries and
facilities.

The Company continues to believe that the demand for long-term care and
specialty medical services will increase substantially over the next decade due
primarily to favorable demographic trends, advances in medical technology and
emphasis on healthcare cost containment. At the same time, government
restrictions and high construction and start-up costs are expected to limit the
supply of long-term care facilities and home care agencies. In addition, the
Company anticipates that recent trends toward industry consolidation will
continue.

The Company's operating strategy is to increase nursing home profitability
levels through aggressive marketing and by offering rehabilitation therapies and
other specialized services; by adhering to strict cost standards at the Facility
level while providing effective patient care and containing corporate overhead
expenses; and becoming a fully integrated health network whereby the Company
will increase marketing of rehabilitative services and nursing services to
affiliated and non-affiliated nursing homes and hospitals, as well as patients
at home.

By concentrating its facilities and ancillary service operations within a
selected geographic region, the Company's strategy is to achieve operating
efficiencies through economies of scale, reduced corporate overhead, more
effective management supervision and financial controls. In addition, the
Company believes that geographic concentration also enhances the Company's
ability to establish more effective relationships with referral sources and
regulatory authorities in the State of Connecticut.


                                       12
<PAGE>

Results of Operations

Year ended June 30, 2001 ("2001 period") vs. year ended June 30, 2000 ("2000
period")

The 2001 period includes the operating results of the eight nursing facilities
operated by the Company and the operations of PRN and Lexicore Rehab services.

The 2000 period includes the operating results of the eight nursing facilities
operated by the Company, the operations of two nursing homes managed by the
Company from July 1, 1999 through August 31, 1999, the operations of PRN and
Lexicore Rehab Services for a full year, the operations of BALZ for eleven
months, and the operations of the pharmacy joint venture company for nine
months.

Revenues in the 2001 period decreased from the 2000 period by $8,882,000 or by
11.5% largely as a result of the termination of the management agreement for two
nursing homes, and due to the sale of the assets and the business of BALZ, and
the termination of Lexicon's operations and bed reductions mandated by a
certificate of need (CON) agreement with the State of Connecticut.

The Company had a net loss of $7,752,000 or ($2.20) per share for the 2001
period and a net loss of $4,103,000 or ($1.15) per share for the 2000 period.
During the 2001 period the Company's operations were negatively affected by the
following nonrecurring expenses and losses:

Nonrecurring charges-relating to terminated operations                $  677,000
Union strike and settlement costs, net                                   960,000
Legal fees of federal investigation                                      273,000
Provision for settlement of lawsuits                                      94,000
Prior period Medicare audit settlements                                  311,000
Former president consulting agreement                                    187,000
                                                                      ----------

Total                                                                 $2,502,000

Additional net losses of approximately $1,000,000 were incurred during the 2001
period as a result of reduced revenue caused by bed reductions mandated by a CON
agreement with the State of Connecticut.

Results of Operations

Year ended June 30, 2000 ("2000 period") vs. year ended June 30, 1999 ("1999
period")

The 2000 period includes the operating results of the eight nursing facilities
operated by the Company, the operations of two nursing homes managed by the
Company from July 1, 1999 through August 31, 1999, the operations of PRN and
Lexicore Rehab Services for a full year, the operations of BALZ for eleven
months, and the operations of the pharmacy joint venture company for nine
months.

The 1999 period includes the operating results of the six nursing facilities
operated by the Company, the operations of the four nursing homes managed by the
Company since November 1, 1998, and the operations of its subsidiaries (BALZ,
PRN and Lexicore Rehab Services) and pharmacy joint venture company for a full
year.


                                       13
<PAGE>

Revenues in the 2000 period increased over the 1999 period by $561,000 or 1%, as
a result of many factors. Nursing home revenues increased by $1.7 million, net,
due to Medicaid rate increases which were offset by lower overall census (due to
the termination of the management contract for two homes), although census in
existing nursing homes increased by 2%. Subsidiary company revenues were lower
by $1.2 million as operations were sold or terminated.

Revenue received under cost reimbursement agreements is subject to audit and
retroactive adjustment by third-party payors. Provisions for estimated
adjustments are reflected in patient service revenue. Differences between
estimated adjustments and final settlements are recorded in the year of
settlement. The Company has recorded reductions in patient service revenue of
$230,000 and $443,000 during the years ended June 30, 2000 and 1999,
respectively, in connection with adjustments of previously recorded estimated
settlements as shown below:

                                    Year ended June 30
                                    ------------------
                                     2000         1999
                                     ----         ----
                       Medicare   $(185,000)   $(402,000)
                       Medicaid     (45,000)     (41,000)
                                  -----------------------
                                  $(230,000)   $(443,000)
                                  ==========   ==========

Operating expenses in the 2000 period increased over the 1999 period by
$3,272,000 or 4%, largely as a result of increased wages resulting from Medicaid
rate increases and increased census in the existing nursing homes, $250,000 of
contract termination payments to the former CEO and $343,000 of costs relating
to the government investigation. Interest expense increased by $245,000 as a
result of additional borrowings on the mortgage for improvements to the
facilities acquired in July 1997 and additional line of credit borrowings at
increased interest rates.

Results of Operations

Year ended June 30, 1999 ("1999 period") vs. year ended June 30, 1998 ("1998
period")

The 1999 period includes the operating results of the six nursing facilities
operated by the Company, the operations of the four nursing homes managed by the
Company since November 1, 1998, and the operations of its subsidiaries (BALZ,
PRN and Lexicore Rehab Services) and pharmacy joint venture company for a full
year.

The 1998 period includes the operating results of the six nursing facilities and
of the acquired subsidiaries, BALZ and PRN, for a full year and of the newly
formed joint ventures since inception, but only for part of the year.

Revenues in the 1999 period increased over the 1998 period by $18,640,000 or
32%, largely as a result of the addition of the four managed facilities and
growth in the subsidiaries and joint venture companies. Of the total change, an
increase of $20,404,000 pertained to the new nursing home management contract
and growth in the healthcare businesses acquired previously, but in the existing
nursing facilities there was a net decrease of $1,764,000 due to a 3.3% overall
decrease in occupancy, Medicare settlement adjustments, and mix changes. In 1999
private pay occupancy increased approximately 4.6% over 1998, while in the same
period Medicaid and Medicare occupancy decreased 3.4% and 8.0%, respectively.

Revenue received under cost reimbursement agreements is subject to audit and
retroactive adjustment by third-party payors. Provisions for estimated
adjustments are reflected in patient


                                       14
<PAGE>

service revenue. Differences between estimated adjustments and final settlements
are recorded in the year of settlement. The Company has recorded reductions in
patient service revenue of $443,000 and $699,000 during the years ended June 30,
1999 and 1998, respectively, in connection with adjustments of previously
recorded estimated settlements as shown below:

                                    Year ended June 30,
                                    -------------------
                                    1999         1998
                                    ----         ----
                       Medicare   $(402,000)   $(115,000)
                       Medicaid     (41,000)    (584,000)
                                  -----------------------
                                  $(443,000)   $(699,000)
                                  ==========   ==========

Operating expenses in the 1999 period increased over the 1998 period by
$20,016,000 or 34%, largely as a result of the addition of the four managed
facilities and growth in the subsidiaries and joint venture companies. Of the
total cost increase, $17,202,000 pertained to the nursing homes and healthcare
businesses acquired and $2,027,000, net was from decreased existing-facility
costs, offset by increases in subsidiary and joint venture and corporate,
general and administrative costs. Interest expense increased by $248,000 mostly
as a result of additional borrowings on the 1997 mortgage for improvements to
the facilities acquired in July 1997 and additional line of credit borrowings.
Other expense of $539,000 was recorded in connection with a provision for
lawsuit settlement.

Income taxes of $15,000 were provided in the 1999 period on loss before income
taxes and minority interest of $1,372,000. Such provision is due to state taxes
on income reported by certain subsidiaries, which are taxed separately from
other entities in the consolidated group.


                                       15
<PAGE>

Liquidity and Capital Resources

The Company has primarily financed its operations through operating revenues,
borrowings from banks, the prior operator of certain of the facilities and other
private lenders including by extending terms with trade creditors and
stockholders, by financing its accounts receivable, through a public offering of
its common stock, and through the sale of bed licenses.

As shown in the accompanying consolidated financial statements, the Company has
reported net losses for the last three fiscal years totaling $13,432,000 and, as
of June 30, 2001, has a working capital deficiency of $9,440,000 and a
stockholders' deficiency of $7,625,000. In addition, the Company is not in
compliance with certain covenants on its line of credit agreement and is unable
to satisfy its trade creditors in the ordinary course of business and is in
arrears on its related party operating lease obligation. These conditions create
an uncertainty about the Company's ability to continue as a going concern.

Management has implemented a plan to return the Company to profitability, which
includes receipt of significant increases in Medicaid revenue through the
request for rate relief submitted to the State, improvements to patient mix and
occupancy and significant reductions in operating and administrative costs. In
addition, management is in the process of negotiating settlement plans with
trade creditors and restructuring its debt financing. The ability of the Company
to continue as a going concern is dependent on the success of the above plan and
the continuing forbearance of default remedies by its line of credit lender.

During the 2001 period, the Company expended approximately $2,088,000 in capital
improvements to its leased facilities of which $1,392,000 was funded by the
mortgagor, banks or capital lease financing.

At June 30, 2001, the Company had a working capital deficit of $9,440,000 as
compared to a working capital deficit of $1,498,000 at June 30, 2000. The
increase in the working capital deficit is due primarily to the $7,752,000
operating loss reported for the 2001 period.

In December 1998, the Company entered into a financing agreement with a
healthcare lender for up to $4,500,000, subsequently increased to $6,000,000,
which is secured by its accounts receivable and certain other assets. As of June
30, 2001, $5,217,000 was borrowed under this agreement. The Company has
increased its utilization of this line of credit to finance working capital
needs as a result of payback of Medicare and Medicaid settlements, costs of the
government investigation, and operating losses.


                                       16
<PAGE>

Commencing in April 2001, the Company engaged unrelated professional service
firms to perform the dietary and laundry and housekeeping for the nursing homes.
Management anticipates that these contracts should generate approximately
$1,500,000 in positive cash flow based upon sixty-day payment terms in place.

At June 30, 2001, the company had cash and cash equivalents of $1,467,000,
receivables of $13,622,000, inventories of $379,000 and prepaid expenses and
other current assets of $1,501,000. Receivables decreased by $2,876,000 since
June 30, 2000 due primarily to the termination of operations of the BALZ and
Lexicon operations.

Inflation has not had, nor is it expected to have, a material impact on the
operations and financial condition of the Company.

Forward Looking Statements

This Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in the forward-looking statements as a result of certain factors.

Item 8. Financial Statements and Supplementary Data

Index to Consolidated Financial Statements

Reports of Independent Certified Public Accountants on Consolidated Financial
Statements as of June 30, 2001 and 2000 and for the Years Ended June 30, 2001,
2000, and 1999

Financial Statements:

      Consolidated Balance Sheets
            June 30, 2001 and 2000

      Consolidated Statements of Operations
            Years Ended June 30, 2001, 2000, and 1999

      Consolidated Statements of Changes in Stockholders' Equity (Deficiency)
            Years Ended June 30, 2001, 2000, and 1999

      Consolidated Statements of Cash Flows,
            Years Ended June 30, 2001, 2000, and 1999

      Notes to Consolidated Financial Statements


                                       17
<PAGE>

                LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                             JUNE 30, 2001 AND 2000

<TABLE>
<CAPTION>
                                                                       2001         2000
                                                                   -----------  -----------
<S>                                                                <C>          <C>
                                     ASSETS
CURRENT ASSETS
    Cash and cash equivalents                                      $ 1,467,000  $ 1,265,000
    Accounts receivable - net of allowance for
      doubtful accounts of $2,046,000 and $1,634,000
      for 2001 and 2000, respectively                               13,622,000   16,498,000
    Current portion of operating subsidy and note receivable           371,000      465,000
    Inventories                                                        379,000      437,000
    Prepaid and other current assets                                 1,130,000      912,000
                                                                   -----------  -----------
         Total current assets                                       16,969,000   19,577,000

PROPERTY, EQUIPMENT & LEASEHOLD IMPROVEMENTS, net                    6,173,000    4,477,000

OTHER ASSETS
    Security deposits - related parties                              2,337,000    2,337,000
    Residents' funds                                                   398,000      370,000
    Goodwill - net of accumulated amortization of  $461,000 and
      $349,000 for 2001 and 2000, respectively                       1,775,000    1,886,000
    Bed licenses - net of accumulated amortization of $464,000
      and $348,000 for 2001 and 2000, respectively                   1,278,000    1,394,000
    Operating subsidy receivable, less current portion                  20,000      247,000
    Other assets, net                                                  649,000      670,000
                                                                   -----------  -----------
                                                                     6,457,000    6,904,000
                                                                   -----------  -----------
                                                                   $29,599,000  $30,958,000
                                                                   ===========  ===========

               LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)

CURRENT LIABILITIES
    Notes payable (current portion)                                $ 7,897,000  $ 4,176,000
    Due to SunBridge - purchased receivables                         2,891,000    2,094,000
    Accounts payable and accrued expenses                           15,291,000   14,423,000
    Estimated third-party payor settlements-Medicaid                    67,000      131,000
    Estimated third-party payor settlements-Medicare                    79,000       57,000
    Capital leases payable (current portion)                           105,000      120,000
    Income taxes payable                                                79,000       74,000
                                                                   -----------  -----------
         Total current liabilities                                  26,409,000   21,075,000

OTHER LIABILITIES
    Notes payable (less current portion)                             8,997,000    7,652,000
    Capital leases payable (less current portion)                      143,000      240,000
    Residents' funds payable                                           398,000      370,000
    Deferred rent                                                    1,024,000      809,000
    Other liabilities                                                  183,000      120,000
                                                                   -----------  -----------
                                                                    10,745,000    9,191,000
                                                                   -----------  -----------
         Total liabilities                                          37,154,000   30,266,000
                                                                   -----------  -----------

 COMMITMENTS AND CONTINGENCIES (Note N)

 MINORITY INTERESTS                                                     70,000      565,000

 STOCKHOLDERS' EQUITY (DEFICIENCY)
    Common stock, par value $.01 per share, authorized
      15,000,000 shares                                                 35,000       35,000
    Additional paid-in capital                                       5,556,000    5,556,000

    Deficit                                                        -----------  -----------
         Total stockholders' equity (deficiency)                    (7,625,000)     127,000
                                                                   -----------  -----------
                                                                   $29,599,000  $30,958,000
                                                                   ===========  ===========
</TABLE>


  The accompanying notes are an integral part of these consolidated financial
                                  statements.
<PAGE>

                LEXINGTON HEATLHCARE GROUP, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                FOR THE YEARS ENDED JUNE 30, 2001, 2000, AND 1999

<TABLE>
<CAPTION>
                                                               2001          2000           1999
                                                           -----------   -----------    -----------
<S>                                                        <C>           <C>            <C>
REVENUES
    Net patient service revenue                            $68,340,000   $72,792,000    $58,867,000
    Management fee revenue                                        --       4,378,000     17,620,000
    Other revenue                                              231,000       283,000        405,000
                                                           -----------   -----------    -----------
            Total revenues                                  68,571,000    77,453,000     76,892,000

EXPENSES
    Salaries and benefits                                   53,994,000    58,042,000     57,109,000
    Other operating expenses                                12,010,000     8,765,000      7,678,000
    Food, medical and other supplies                         3,496,000     7,279,000      7,778,000
    Corporate, general and administrative expenses           2,337,000     2,648,000      2,555,000
    Interest expense                                         1,426,000     1,285,000      1,040,000
    Depreciation and amortization                              648,000       780,000        817,000
    Provision for bad debts                                    501,000     1,305,000        748,000
    Special items:
       Nonrecurring charges                                    677,000          --             --
       Union strike and settlement costs, net                  960,000          --             --
       Legal fees of federal investigation                     273,000       343,000           --
       Provision for settlement of lawsuits                     94,000          --        539,000
       Loss on sale of business                                   --       1,089,000           --
                                                           -----------   -----------    -----------
            Total special items                              2,004,000     1,432,000        539,000
                                                           -----------   -----------    -----------
            Total expenses                                  76,416,000    81,536,000     78,264,000
                                                           -----------   -----------    -----------

   Loss from operations                                     (7,845,000)   (4,083,000)    (1,372,000)

PROVISION FOR INCOME TAXES                                        --            --           15,000

MINORITY INTEREST IN (INCOME) LOSS  OF
    CONSOLIDATED JOINT VENTURES                                 93,000       (20,000)      (190,000)
                                                           -----------   -----------    -----------

    Net loss                                               $(7,752,000)  $(4,103,000)   $(1,577,000)
                                                           ===========   ===========    ===========

    Basic loss per common share                            $     (2.20)  $     (1.15)   $     (0.38)
                                                           ===========   ===========    ===========

    Weighted average number of common shares outstanding     3,525,000     3,568,000      4,125,000
                                                           ===========   ===========    ===========
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.
<PAGE>

                LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
     CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
                FOR THE YEARS ENDED JUNE 30, 2001, 2000 AND 1999

<TABLE>
<CAPTION>
                                                       Common Stock                      Note
                                                   --------------------  Additional  Receivable -    Retained
                                                    Number                 Paid-in      Related      Earnings
                                                   of Shares   Amount      Capital       Party       (Deficit)         Total
                                                   ---------  ---------  -----------  -----------  ------------    ------------
<S>                                                <C>        <C>        <C>          <C>          <C>             <C>
Balance, June 30, 1998                             4,125,000  $  41,000  $ 6,126,000  $      --    $    216,000    $ 6,383,000

Net loss                                                --         --           --           --      (1,577,000)    (1,577,000)

Reclassification of note receivable - related
  party                                                 --         --           --       (574,000)         --         (574,000)
                                                   ---------  ---------  -----------  -----------  ------------    -----------

Balance, June 30, 1999                             4,125,000     41,000    6,126,000     (574,000)   (1,361,000)     4,232,000

Increase in note receivable - related par               --         --           --       (2,000)           --           (2,000)

Retirement of common stock received in
  satisfaction of related party note receivable
                                                    (600,000)    (6,000)    (570,000)     576,000          --             --

Net loss                                                --         --           --           --      (4,103,000)    (4,103,000)
                                                   ---------  ---------  -----------  -----------  ------------    -----------

Balance, June 30, 2000                             3,525,000     35,000    5,556,000         --      (5,464,000)       127,000

Net loss                                                 --         --           --          --      (7,752,000)    (7,752,000)
                                                   ---------  ---------  -----------  -----------  ------------    -----------

Balance, June 30, 2001                             3,525,000  $  35,000  $ 5,556,000  $      --    $(13,216,000)   $(7,625,000)
                                                   =========  =========  ===========  ===========  ============    ===========
</TABLE>
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
<PAGE>

                LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                FOR THE YEARS ENDED JUNE 30, 2001, 2000 AND 1999

<TABLE>
<CAPTION>
                                                                               2001           2000           1999
                                                                            -----------    -----------    -----------
<S>                                                                         <C>            <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES
   Net loss                                                                 $(7,752,000)   $(4,103,000)   $(1,577,000)
   Adjustments to reconcile net loss to net cash
      provided by (used in) operating activities:
        Depreciation and amortization                                           648,000        780,000        817,000
        Change in allowance for doubtful accounts                               412,000        786,000        502,000
        Increase (decrease) in deferred rent                                    215,000        495,000        (50,000)
        Loss on sale of business                                                   --          726,000           --
        Minority interest in income of consolidated joint ventures              (93,000)        20,000        190,000
        Changes in operating assets and liabilities:
          Increase in accounts payable and accrued expenses                   3,516,000      1,030,000      4,941,000
          Decrease (increase) in accounts receivable                          2,464,000     (1,035,000)
          Increase (decrease) in Due to SunBridge - purchased receivables       797,000       (488,000)     2,582,000
          Increase in other liabilities                                          63,000           --             --
          Decrease (increase) in inventories                                     58,000        382,000       (281,000)
          Increase (decrease) in income taxes payable                             5,000         34,000        (51,000)
          Decrease in other assets                                               (8,000)      (208,000)       (51,000)
          Decrease in estimated third-party payor settlements - Medicaid
             and Medicare, net                                                  (42,000)      (751,000)      (550,000)
          Increase (decrease) in prepaid and other current assets              (218,000)        94,000       (601,000)
                                                                            -----------    -----------    -----------
            Net cash provided by (used in) operating activities                  65,000     (2,238,000)       103,000
                                                                            -----------    -----------    -----------
CASH FLOWS FROM INVESTING ACTIVITIES
   Repayments of operating subsidy and note receivable                          321,000        185,000        168,000
   Proceeds from sale of business                                                  --           40,000           --
   Disbursements on note receivable - related party                                --           (2,000)       (99,000)
   Repayments of note receivable - related party                                   --             --        120,000
   Acquisition of property, equipment and leasehold improvements               (696,000)      (542,000)      (583,000)
                                                                            -----------    -----------    -----------
            Net cash used in  investing activities                             (375,000)      (319,000)      (394,000)
                                                                            -----------    -----------    -----------
CASH FLOWS FROM FINANCING ACTIVITIES
   Proceeds from line of credit, net                                          1,161,000        424,000      3,431,000
   Repayments of capital lease obligations                                     (112,000)      (142,000)      (122,000)
   Repayments of mortgage and notes payable                                    (135,000)      (135,000)      (120,000)
   Minority investment (distribution) in consolidated joint ventures           (402,000)          --          (54,000)
                                                                            -----------    -----------    -----------
            Net cash provided by financing activities                           512,000        147,000      3,135,000
                                                                            -----------    -----------    -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                            202,000     (2,410,000)     2,844,000

CASH AND CASH EQUIVALENTS, beginning of year                                  1,265,000      3,675,000        831,000
                                                                            -----------    -----------    -----------
CASH AND CASH EQUIVALENTS, end of year                                      $ 1,467,000    $ 1,265,000    $ 3,675,000
                                                                            ===========    ===========    ===========
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.
<PAGE>

                LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                FOR THE YEARS ENDED JUNE 30, 2001, 2000 AND 1999

<TABLE>
<CAPTION>
                                                                             2001         2000           1999
                                                                          ----------   ----------     ----------
<S>                                                                       <C>          <C>            <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
    Cash payments for:
          Interest                                                        $1,418,590   $1,285,000     $1,040,000
          Income taxes                                                          --        (15,000)         9,000

    Non-cash investing and financing activities:
          Reduction of accounts payable and accrued expenses
             through assumption of notes payable                          $2,648,000   $     --       $     --
          Certain assets acquired through assumption of mortgage
             note payable                                                  1,375,000      455,000        392,000
          Equipment and leasehold improvements acquired through
             assumption of notes payable and capital leases                   17,000       76,000        232,000
          Common stock received in satisfaction note receivable -
             related party                                                      --        576,000           --
          Promissory note received and accounts receivable recorded
             in connection with sale of business                                --        499,000           --
          Equipment distributed to joint venture member in satisfaction
             of accounts payable                                                --         80,000           --
</TABLE>


  The accompanying notes are an integral part of these consolidated financial
                                  statements.
<PAGE>

                LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          JUNE 30, 2001, 2000 AND 1999

NOTE A - SIGNIFICANT ACCOUNTING POLICIES

         PRINCIPLES OF CONSOLIDATION

         The consolidated financial statements include the accounts of Lexington
         Healthcare Group, Inc. and all of its wholly-owned subsidiaries: Balz
         Medical Services, Inc. ("BALZ"), Professional Relief Nurses, Inc.
         ("PRN"), Lexington Highgreen Holding, Inc. and Lexicore Rehab Services,
         L.L.C. (Lexicore) (collectively, the "Company") as well as the accounts
         of a joint venture controlled by the Company, Lexicon Pharmacy
         Services, L.L.C. All material intercompany balances and transactions
         have been eliminated in consolidation.

         As of January 1, 1999, the Company acquired the remaining 50%
         membership interest of Lexicore for a nominal amount plus $120,000 of
         contingent payments which are payable based on the occurrence of
         certain future events. The acquisition of Lexicore has been accounted
         for using the purchase method of accounting and, accordingly, the
         purchase price has been allocated to the assets purchased and
         liabilities assumed based on their fair value on the date of
         acquisition. The Company has not recorded any goodwill in connection
         with this purchase. Henceforth, the Company has accounted for Lexicore
         as a wholly-owned subsidiary.

         NATURE OF OPERATIONS

         The Company is a long-term and subacute care provider, which operates
         eight nursing home facilities at June 30, 2001 with a total of 1,033
         beds licensed by the State of Connecticut. The Company also provides
         physical, occupational and speech therapy and other services to
         qualified health care facilities, and provides health care services in
         the homes of its patients.

         JOINT VENTURE

         The Company has a 70% interest in Lexicon Pharmacy Services, L.L.C.
         ("Lexicon"), a Delaware limited liability company, which was formed on
         October 31, 1997 to provide institutional pharmacy services to health
         care facilities and the patients residing therein. The joint venture is
         controlled by the Company and the assets, liabilities and results of
         its operations from inception are included in the Company's
         consolidated financial statements with appropriate recognition of
         minority interest. Lexicon has ceased operations as of March 31, 2000.
         Once remaining accounts receivable have been collected and all
         obligations paid, the members will terminate Lexicon. During the year
         ended June 30, 2001, the Company recorded a nonrecurring charge to
         operations of $308,000 related primarily to uncollectible accounts
         receivable.

         USE OF ESTIMATES

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


                                                                             F-1
<PAGE>

                LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                          JUNE 30, 2001, 2000 AND 1999

NOTE A - SIGNIFICANT ACCOUNTING POLICIES (Continued)

         REVENUE RECOGNITION

         PATIENT SERVICE REVENUE

         Revenues are recognized at the time the service is provided to the
         patient. A substantial amount of the Company's revenues are billed to
         third party payors, i.e., Medicaid, Medicare and others under the
         provisions of reimbursement formulas and regulations in effect.

         Patient service revenue is reported at the estimated net realizable
         amount from residents, third-party payors, and others for services
         rendered. Revenue received under cost reimbursement agreements is
         subject to audit and retroactive adjustment by third-party payors.
         Provisions for estimated adjustments have been reflected in patient
         service revenue. Differences between estimated adjustments and final
         settlements are recorded in the year of settlement.

         MANAGEMENT FEES

         As consideration for services provided under an interim management
         agreement with SunBridge Healthcare Corporation which was terminated in
         fiscal 2000 (see Note B), the Company was entitled to retain the excess
         of any revenues earned in the delivery of patient services over the
         expenses incurred during the term and was responsible for any excess of
         expenses incurred over revenues earned in the operation of the
         facilities during the term. Such revenues have been classified as
         management fee revenue in the accompanying consolidated statement of
         operations.

         The Company recognizes other management fees as they are earned and
         accrues related fees payable to subcontractors as they are incurred.

         CASH EQUIVALENTS

         For the purpose of the consolidated statements of cash flows, the
         Company defines cash equivalents as highly liquid instruments with an
         original maturity of three months or less. The Company had cash
         equivalents of $1,068,000 at June 30, 2001 and $865,000 at June 30,
         2000, consisting of overnight investments and certificates of deposit.

         INVENTORIES

         Inventories consisting of food, chemicals and supplies are valued at
         the lower of cost or market, with cost determined on a first-in,
         first-out (FIFO) basis.


                                                                             F-2
<PAGE>

                LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                          JUNE 30, 2001, 2000 AND 1999

NOTE A - SIGNIFICANT ACCOUNTING POLICIES (Continued)

         PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS

         Property, equipment and leasehold improvements are stated at cost.
         Depreciation is provided on a straight-line basis over the estimated
         useful lives of the property and equipment. Leasehold improvements are
         amortized over the remaining period of the respective leases or the
         estimated useful lives of the improvement, whichever is shorter.

         Maintenance, repairs and minor renovations are charged to operations as
         incurred. Expenditures which substantially increase the useful lives of
         the related assets are capitalized.

         RESIDENTS' FUNDS

         Residents' funds represent cash balances which have been deposited into
         a separate bank account and are restricted for the use of the
         residents.

         INCOME TAXES

         The Company recognizes deferred tax liabilities and assets for the
         expected future tax consequences of events that have been included in
         the consolidated financial statements or tax returns. Under this
         method, deferred tax liabilities and assets are determined based on the
         difference between the financial statement and tax bases of assets and
         liabilities using enacted tax rates in effect for the year in which the
         differences are expected to reverse.

         NET LOSS PER COMMON SHARE

         The Company has adopted Statement of Financial Accounting Standards
         (SFAS) No. 128, "Earnings Per Share". Dilutive earnings per share has
         not been presented as the potentially dilutive stock options are
         anti-dilutive.

         RECLASSIFICATIONS

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

         RECENT ACCOUNTING STANDARDS

         SEGMENT REPORTING

         Statement of Financial Accounting Standards No. 131, "Disclosures about
         Segments of an Enterprise and Related Information," ("SFAS 131")
         changed the way public companies report financial and descriptive
         information about their operating segments. The Company provides health
         care services and many other closely related ancillary services to its
         patients and residents. All of these services fall within one
         reportable segment as defined in SFAS 131.


                                                                             F-3
<PAGE>

                LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                          JUNE 30, 2001, 2000 AND 1999

NOTE A - SIGNIFICANT ACCOUNTING POLICIES (Continued)

         RECENT ACCOUNTING STANDARDS (Continued)

         DERIVATIVE INSTRUMENTS

         Statement of Financial Accounting Standards No. 133, "Accounting for
         Derivative Instruments and Hedging Activities" ("SFAS 133") requires
         all derivatives to be recognized in the consolidated balance sheet at
         fair value. Gains or losses from changes in fair value would be
         recognized in earnings in the period of change unless the derivative is
         designated as a hedging instrument. In June 1999, Statement of
         Financial Accounting Standards No. 137, amended SFAS 133 delaying its
         effective date to fiscal years beginning after June 15, 2000. The
         Company does not currently hold any derivative instruments nor does it
         engage in hedging activities. Therefore, this new standard has not
         impacted the Company's consolidated financial statements.

         ACCOUNTING FOR BUSINESS COMBINATIONS, GOODWILL AND OTHER INTANGIBLE
         ASSETS

         Statements of Financial Accounting Standards (SFAS) No. 141, "Business
         Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets"
         were issued in July, 2001. These standards change the accounting for
         business combinations by, among other things, prohibiting the
         prospective use of pooling-of-interests accounting and requiring
         companies to stop amortizing goodwill and certain intangible assets
         with indefinite useful lives. Instead, goodwill and intangible assets
         deemed to have an indefinite useful life will be subject to an annual
         review for impairment. The new standard for goodwill and other
         intangible assets will be effective for fiscal years beginning after
         December 15, 2001 unless the Company elects for early adoption in which
         case the standard will be effective in the first quarter of fiscal
         2002. The new standard requiring the purchase method for business
         combinations applies to all business combinations consummated after
         June 30, 2001.

         Upon adoption, the Company will stop amortizing goodwill and bed
         licenses which, based on their current levels, would reduce
         amortization expense and increase net income by approximately $228,000
         per year.

NOTE B - ACQUISITIONS AND DISPOSITIONS OF BUSINESS

         MANAGEMENT OF SUN HOMES, ACQUISITION OF ADAMS AND HERITAGE AND
         TERMINATION OF MANAGEMENT AGREEMENT

         On November 1, 1998 the Company began providing management services for
         four skilled nursing facilities in Connecticut under an interim
         Management Agreement with SunBridge Healthcare Corporation
         ("SunBridge"), a New Mexico corporation and nation-wide healthcare
         provider.

         As consideration for the services provided under this Management
         Agreement, the Company was entitled to retain the excess of any
         revenues earned in the delivery of patient services over the expenses
         incurred during the term and was responsible for any excess of expenses
         incurred over revenues earned in the operation of the facilities during
         the term.


                                                                             F-4
<PAGE>

                LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                          JUNE 30, 2001, 2000 AND 1999

NOTE B - ACQUISITIONS AND DISPOSITIONS OF BUSINESS (Continued)

         MANAGEMENT OF SUN HOMES, ACQUISITION OF ADAMS AND HERITAGE AND
         TERMINATION OF MANAGEMENT AGREEMENT (Continued)

         Under the terms of the agreement SunBridge retained responsibility for
         all building lease costs. In addition, the Company purchased
         substantially all of SunBridge's accounts receivable for these
         facilities. As of June 30, 2001, the balance owed is presented as "Due
         to SunBridge - purchased receivables" in the accompanying consolidated
         balance sheets.

         As a result of this agreement, the Company earned management fees of
         $4,422,000 and $17,394,000 and incurred costs and expenses of
         $4,407,000 and $17,004,000 during the years ended June 30, 2000 and
         1999, respectively.

         Effective September 1, 1999, the Company finalized agreements to
         acquire the operations of two of the managed facilities, Adams House
         and Heritage Heights. The related real property was leased (see Note J)
         with options to purchase which have been extended to August 31, 2002.
         These facilities are located in Torrington and Danbury, CT and have a
         total of 210 skilled nursing beds at June 30, 2001. Management
         contracts covering the two other SunBridge facilities with a total of
         239 skilled nursing beds were terminated as of August 31, 1999 and the
         operations of those facilities were returned to SunBridge.

         SALE OF BUSINESS

         On June 14, 2000 BALZ sold its operating assets and business (exclusive
         of cash and accounts receivable) to an unrelated company, for $539,000
         plus assumption of certain liabilities relating to financed equipment
         and leases. The agreement provided for a $40,000 cash payment at
         closing, a $260,000 note receivable requiring twelve equal monthly
         installments of principal and interest of $22,000 beginning July 1,
         2000, and a payment of $239,000 for the book value of inventory due 90
         days after closing.

         As of June 30, 2001, the Company has received only five of the payments
         due it under the note receivable, and has not received the payment for
         the book value of the inventory. However, the Company believes that its
         credit risk is minimal since it has the right to offset payables for
         goods purchased from the unrelated company in an amount sufficient to
         cover the unpaid amount of approximately $400,000 owing to the Company.

         In connection with this sale, the Company recorded a loss on the
         transaction of $1,089,000 for the year ended June 30, 2000 which
         represented the difference in the recorded book value of assets sold
         (including goodwill) and the sales price and includes a $363,000 charge
         to settle an employment contract with the President of BALZ (see Note
         N). During the year ended June 30, 2001, the Company recorded a
         nonrecurring charge to operations of $369,000 related primarily to
         uncollectible accounts receivable

         Prior to the sale of the business, BALZ had revenues of $2,491,000 and
         $3,025,000, expenses of $2,191,000 and $2,740,000 and net income of
         $300,000 and $285,000 for the nine months ended March 31, 2000 and the
         year ended June 30, 1999, respectively.


                                                                             F-5
<PAGE>

                LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                          JUNE 30, 2001, 2000 AND 1999

NOTE C - FINANCIAL INSTRUMENTS

         CONCENTRATIONS OF CREDIT RISK

         The Company's financial instruments that are exposed to concentrations
         of credit risk consist primarily of cash and cash equivalents,
         residents' funds, accounts receivable, operating subsidy receivable,
         note receivable and security deposits-related parties.

         Cash and cash equivalents and residents' funds

         The Company places its cash deposits with high credit-quality
         institutions and such deposits exceeded federal depository insurance
         limits by approximately $1,518,000 at June 30, 2001. However, the
         Company has not experienced any losses in this area and management
         believes its cash deposits are not subject to significant credit risk.

         Accounts receivable

         The Company grants credit without collateral to its patients, all of
         whom are residents of local communities in the State of Connecticut in
         which the Company's facilities are located, and most of whom are
         insured under third-party payor agreements. Management performs ongoing
         credit evaluations of its residents and has provided for potential
         credit losses through direct write-offs and an allowance for doubtful
         accounts which is considered to be adequate by management.

         The mix of receivables from patients, third-party payors and others as
         of June 30, 2001 and 2000 is as follows:

                                                                  2001     2000
                                                                 ------   ------

           Medicare and Medicaid                                    66%      67%
           Private insurance and other nongovernment agencies       26       27
           Other                                                     8        6
                                                                   ---      ---
                                                                   100%     100%
                                                                   ===      ===

         Operating subsidy receivable

         This amount is due from Beverly, a provider of health care services
         throughout the United States, in connection with the Company's purchase
         of substantially all of the assets of two skilled nursing facilities in
         1997. The receivable is unsecured, but Beverly has made all required
         payments in a timely manner, and management believes it is not subject
         to significant credit risk.

         Note receivable

         This amount is due from MedixDirect.com, LLC, an unrelated party with
         whom the Company is continuing to do business, in connection with the
         sale of the business of BALZ. The note is collateralized by the assets
         and business sold.


                                                                             F-6
<PAGE>

                LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                          JUNE 30, 2001, 2000 AND 1999

NOTE C - FINANCIAL INSTRUMENTS (Continued)

         CONCENTRATIONS OF CREDIT RISK (Continued)

         Security deposits - related parties

         This amount is controlled by entities related to the Company by common
         ownership (see Note J); accordingly, management believes it represents
         negligible credit risk.

         Fair Value Of Financial Instruments

         Statement of Financial Accounting Standards (SFAS) No. 107, Fair Value
         of Financial Instruments, requires disclosure of the fair value of
         financial instruments for which the determination of fair value is
         practicable. SFAS No. 107 defines the fair value of a financial
         instrument as the amount at which the instrument could be exchanged in
         a current transaction between willing parties.

         The carrying amounts of the Company's financial instruments approximate
         their fair values as outlined below:

            Cash and cash equivalents, residents' funds, accounts receivable,
            note receivable, and accounts and accrued expenses payable:
            The carrying amounts approximate their fair values because of the
            short maturity of those instruments.

            Notes payable and obligations under capital leases:
            The carrying amounts approximate fair value because the interest
            rates on the notes or leases approximate the Company's current
            borrowing rate.

            Security deposits - related parties and operating subsidy
            receivable:
            Management has determined that it is not practicable to estimate the
            fair value due to the lack of marketability of these financial
            instruments.

         The Company's financial instruments are held for other than trading
         purposes.

NOTE D - THIRD-PARTY REVENUE ADJUSTMENTS AND SETTLEMENTS

         The Company has recorded reductions in patient service revenue of
         $311,000, $230,000 and $443,000 during the years ended June 30, 2001,
         2000 and 1999, respectively, in connection with adjustments of
         previously recorded estimated settlements as shown below:

                                     Year ended June 30,
                          -----------------------------------------
                            2001            2000            1999
                          ---------       ---------       ---------
            Medicare      $(375,000)      $(185,000)      $(402,000)
            Medicaid         64,000         (45,000)        (41,000)
                          ---------       ---------       ---------
                          $(311,000)      $(230,000)      $(443,000)
                          =========       =========       =========


                                                                             F-7
<PAGE>

                LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                          JUNE 30, 2001, 2000 AND 1999

NOTE D - THIRD-PARTY REVENUE ADJUSTMENTS AND SETTLEMENTS (Continued)

         As of June 30, 2001 and 2000, the Company had recorded the following
         amounts as payable in connection with estimated Medicare and Medicaid
         settlements:

                            2001         2000
                          -------      --------
            Medicare      $79,000      $ 57,000
            Medicaid       67,000       131,000

         Such amounts represent management's best estimates of the amounts
         expected to be due and are based on anticipated results of ongoing
         negotiations, interpretation of applicable regulations and other
         assumptions. It is reasonably possible that the amounts the Company
         will ultimately be obligated to pay could differ materially in the near
         term.

NOTE E - PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS

         Property, equipment and leasehold improvements consist of the
         following:

                                                    June 30,        June 30,
                                                      2001            2000
                                                   ----------      ----------

            Land and land improvements             $  449,000      $  449,000
            Building and building improvements      3,723,000       2,079,000
            Equipment                               1,832,000       1,623,000
            Leasehold improvements                  1,597,000       1,362,000
                                                   ----------      ----------
                                                    7,601,000       5,513,000
            Less: accumulated depreciation and
            amortization                            1,428,000       1,036,000
                                                   ----------      ----------
                                                   $6,173,000      $4,477,000
                                                   ==========      ==========

         Construction in progress included in building and building improvements
         and leasehold improvements totaled $2,366,000 and $874,000 as of June
         30, 2001 and 2000, respectively. Depreciation and amortization expense
         totaled $392,000, $475,000, and 430,000 for the years ended June 30,
         2001, 2000, and 1999, respectively.

NOTE F - OTHER ASSETS

         On July 1, 1997, Lexington Highgreen Holding, Inc. (a wholly-owned
         subsidiary of Lexington Healthcare Group, Inc.) purchased substantially
         all of the assets of two skilled nursing facilities. The Company did
         not record any goodwill in connection with this purchase but has
         allocated $1,742,000 of the purchase price to bed licenses, which is
         being amortized over 15 years. The amount of bed license amortization
         was $116,000 in each of the years ended June 30, 2001, 2000 and 1999.


                                                                             F-8
<PAGE>

                LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                          JUNE 30, 2001, 2000 AND 1999

NOTE F - OTHER ASSETS (Continued)

         The acquisitions of BALZ and PRN in 1997 were accounted for using the
         purchase method of accounting and, accordingly, the purchase price was
         allocated to the assets purchased and the liabilities assumed based
         upon their fair values at date of acquisition. The excess of the
         purchase price over the fair value of the net assets acquired was
         $3,371,000 and was recorded as goodwill, which is being amortized on a
         straight-line basis over 20 years. During June 2000 the operating
         assets and business of BALZ were sold, resulting in the write off of
         the remaining amount of unamortized goodwill of $963,000. The June 30,
         2001 and 2000 goodwill balance relates to PRN. The amount of goodwill
         amortization was $112,000, $164,000, and $168,000 for the years ended
         June 30, 2001, 2000 and 1999, respectively

NOTE G - NOTE RECEIVABLE--RELATED PARTY

         In July 1999, the Company, pursuant to Board of Director's approval,
         exercised its remedies in default on an 8% interest-bearing promissory
         note due from an officer and director of the Company by seizing the
         collateral of 600,000 shares of the Company's common stock in
         satisfaction of the note and interest due. The shares received were
         initially put into the Company's treasury but have been retired as of
         June 30, 2000.

         The 600,000 shares had a market bid price of $731,000 at the time of
         their surrender and the note and accumulated interest had a carrying
         value of $576,000. The Company's Board of Directors considers the
         difference between the market price and carrying value of the note
         receivable of $155,000 to be a reasonable and fair discount for the
         shares received.

NOTE H - NOTES PAYABLE

         Notes payable consist of the following:

<TABLE>
<CAPTION>
                                                                    June 30,        June 30,
                                                                     2001             2000
                                                                  -----------      -----------
<S>                                                               <C>              <C>
            10% mortgage note secured by property and
                 equipment of two nursing homes; due in
                 2022, with monthly installments of
                 approximately $82,000                            $ 8,973,000      $ 7,711,000
            Line of credit at prime plus 3%, (8.75% at June
                 30, 2001) secured by accounts receivable
                 and other assets                                   5,217,000        4,056,000
            8.75% equipment term notes payable                         56,000           61,000
            Stipulated Judgment payable to Union Pension,
                 Welfare and Training Funds with interest at
                 18%; due in variable monthly installments
                 through July, 2002                                 2,488,000               --
            Note payable to a partnership related through
                 common ownership, unsecured, due in
                 October, 2001 with interest at 12%                   160,000               --
                                                                  -----------      -----------
                                                                   16,894,000       11,828,000
            Less: current portion                                   7,897,000        4,176,000
                                                                  -----------      -----------
                                                                  $ 8,997,000      $ 7,652,000
                                                                  ===========      ===========
</TABLE>


                                                                             F-9
<PAGE>

                LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                          JUNE 30, 2001, 2000 AND 1999

NOTE H - NOTES PAYABLE (Continued)

         In July 1997, the Company financed the purchase of two skilled nursing
         facilities with a $6.8 million mortgage note payable to Nationwide
         Health Properties, Inc. Nationwide agreed to finance up to $2 million
         in improvements to the nursing facilities made in connection with
         change of ownership requirements. Through June 30, 2001, $1,375,000 has
         been advanced for such improvements and is included in the mortgage
         obligation above. In addition, the Company is required to maintain a
         debt service reserve of $360,000 which, as of June 30, 2001 and 2000,
         is fully funded and is included in other assets in the accompanying
         consolidated balance sheets.

         The Company has a financing agreement through April 2003 with a
         healthcare lender for a line of credit of up to the lesser of $6
         million or an amount based on 85% of eligible accounts receivable, as
         defined in the agreement. The line of credit is subject to certain
         financial covenants, noncompliance with which would be considered to be
         an event or default and provide the lender with the right to demand
         repayment prior to the maturity date. At June 30, 2001, the Company is
         not in compliance with certain of the financial covenants. The Company
         is presently negotiating the restructuring of its line of credit
         financing and, in connection with such negotiations, the Company's
         interest rate was reduced to prime plus 2% subsequent to year end.

         Aggregate principal maturities of notes payable in succeeding years are
         as follows:

            Year ending June 30:
                   2002                                       $ 7,897,000
                   2003                                           301,000
                   2004                                           161,000
                   2005                                           177,000
                   2006                                           196,000
                   Subsequent to 2006                           8,162,000
                                                              -----------
                                                              $16,894,000
                                                              ===========

NOTE I - ACCOUNTS PAYABLE AND ACCRUED EXPENSES

         Accounts payable and accrued expenses consist of the following:

                                                     June 30,         June 30,
                                                       2001             2000
                                                   -----------      -----------

            Accounts payable                       $ 9,331,000      $ 8,582,000
            Accrued payroll and payroll taxes        3,292,000        3,855,000
            Other accrued expenses                   2,668,000        1,986,000
                                                   -----------      -----------
                                                   $15,291,000      $14,423,000
                                                   ===========      ===========


                                                                            F-10
<PAGE>

                LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                          JUNE 30, 2001, 2000 AND 1999

NOTE J - LEASE AND CONTRACTUAL SERVICES COMMITMENTS

         CAPITAL LEASES

         The following is an analysis of leased property under capital leases by
         major class at June 30, 2001:

            Equipment                           $ 552,000
            Less: accumulated amortization        297,000
                                                ---------
                                                $ 255,000
                                                =========

         Amortization expense relative to leased property under capital leases
         totaled $66,000, $79,000, and $80,000 for the years ended June 30,
         2001, 2000 and 1999 respectively, and is included in depreciation and
         amortization expense disclosed in Note E.

         The following is a schedule by years of future minimum lease payments
         under capital leases, together with the present value of the net
         minimum lease payments:

            Year ending June 30:
                   2002                                         $ 149,000
                   2003                                           109,000
                   2004                                            40,000
                   2005                                            10,000
                                                                 --------
                   Total minimum lease payments                   308,000
                   Less: amount representing interest              60,000
                                                                ---------
                                                                $ 248,000
                                                                =========

         RELATED PARTY OPERATING LEASES

         The Company leases four of its nursing facilities (including certain
         equipment) under an operating lease from a partnership related through
         common ownership. The lease agreement, as amended, commenced on July 1,
         1995 and is for an eighteen-year period, with renewal options for up to
         thirteen years. Annual rentals under the lease are currently $2.5
         million.

         The Company has renegotiated the required rent payments covering the
         period October 1999 through February 2001 which reduced the rent due
         during that period by approximately $800,000. Recognition of the rent
         reduction has been accounted for by increasing deferred rent which
         equalizes the annual rent expense over the remaining fourteen-year
         lease term. Deferred rent payable represents the excess of rent expense
         determined on a straight-line basis over amounts paid to date pursuant
         to the lease with the related partnership.

         In addition, the Company leases its corporate office space from an
         entity related through common ownership under an operating lease which
         expires in February 2013 and has two five-year renewal options with
         rent at then market rates.


                                                                            F-11
<PAGE>

                LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                          JUNE 30, 2001, 2000 AND 1999

NOTE J - LEASE AND CONTRACTUAL SERVICES COMMITMENTS (Continued)

         RELATED PARTY OPERATING LEASES (Continued)

         Future minimum lease payments required under these related party lease
         obligations, net of sublease rentals are as follows:

            Year ending June 30:
                   2002                             $  2,629,000
                   2003                                2,640,000
                   2004                                2,665,000
                   2005                                2,679,000
                   2006                                2,683,000
                   Thereafter                         21,001,000
                                                    ------------
                                                    $ 34,297,000
                                                    ============

         Rent expense charged to operations under these related party operating
         leases, net of sublease rental income, aggregated $2,522,000,
         $2,540,000 and $2,538,000 for the years ended June 30, 2001, 2000, and
         1999, respectively.

         The Company has deposited with the related partnership, in connection
         with the nursing home facilities lease, a non-interest bearing security
         deposit of approximately $2.3 million as of June 30, 2001 and 2000. The
         Company has also deposited, in connection with its corporate office
         lease, a non-interest bearing security deposit of approximately $55,000
         as of June 30, 2001 and 2000.

         OTHER OPERATING LEASES

         The Company has other operating leases, including the lease of the
         Adams House and Heritage Heights facilities, which expire in various
         years through 2010. Rent expense charged to operations under such
         leases totaled approximately $682,000, $522,000, and $82,000 for the
         years ended June 30, 2001, 2000 and 1999, respectively.

         Future minimum lease payments required under these other operating
         leases are as follows:

            Year ending June 30:
                   2002                             $    690,000
                   2003                                  876,000
                   2004                                  937,000
                   2005                                  951,000
                   2006                                  900,000
                   Thereafter                          3,121,000
                                                    ------------
                                                    $  7,475,000
                                                    ============


                                                                            F-12
<PAGE>

                LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                          JUNE 30, 2001, 2000 AND 1999

NOTE J - LEASE AND CONTRACTUAL SERVICES COMMITMENTS (Continued)

         CONTRACTUAL SERVICES AGREEMENTS

         The Company executed contracts with unrelated entities for the
         provision of housekeeping and laundry services and dietary services.

         Housekeeping and Laundry Services

         The contracts for housekeeping and laundry services commenced in March,
         2001 and require annual payments of approximately $3,799,000, payable
         bi-weekly. The contracts have an initial term of one year but may be
         canceled upon ninety days written notice by either party. Expense under
         the contracts totaled $882,000 for the year ended June 30, 2001.

         Dietary Services

         The contracts for dietary services commenced in April, 2001 and require
         annual payments of approximately $5,731,000. The contracts continue for
         an initial term of three years and may be extended for an additional
         one year by providing written notice at least 90 days prior to
         expiration of the initial term. Expense under the contracts totaled
         $1,303,000 for the year ended June 30, 2001.

         A summary of amounts due under the dietary services contract in
         subsequent years is as follows:

            Year ending June 30:
                   2002                              $  5,731,000
                   2003                                 5,731,000
                   2004                                 4,428,000
                                                     ------------
                                                     $ 15,890,000
                                                     ============

NOTE K - STOCKHOLDERS' EQUITY

         WARRANTS

         The Company has issued warrants to purchase 1,940,625 shares of the
         Company's common stock at $6 per share, subject to adjustment in
         certain circumstances, which may be exercised at any time through May
         13, 2003. The warrants are subject to redemption by the Company at a
         price of $.05 per warrant provided that the closing price of the
         Company's common stock has equaled or exceeded $10 per share for a
         period of twenty consecutive trading days.

         The Company's Board of Directors approved the issuance to employees,
         directors and others of warrants to purchase 1,533,200 shares of the
         Company's common stock exercisable at $.56 cents per share; none of
         these warrants have been issued as of June 30, 2001.


                                                                            F-13
<PAGE>

                LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                          JUNE 30, 2001, 2000 AND 1999

NOTE K - STOCKHOLDERS' EQUITY (Continued)

         STOCK OPTION PLAN

         The Company has reserved 450,000 shares of its common stock for
         issuance pursuant to stock options which may be granted pursuant to the
         Company's 1997 Stock Option Plan. The Plan provides for grants to
         employees, consultants and directors of the Company. Subject to the
         provisions of the Plan, the Board has the authority to determine the
         individuals to whom the stock options are to be granted, the number of
         shares to be covered by each option, the exercise price, the type of
         option, the option period, the restrictions, if any, on the exercise of
         the option, the terms for the payment of the option price and other
         terms and conditions.

         The Company issued options to purchase 302,000 shares of its common
         stock to directors and employees at exercise prices ranging from $2.625
         to $3.062 based on the market value at date of grant. The Board of
         Directors re-priced these outstanding options in November 1998 at $.87
         based on the current market value. Such options vest at a rate of
         one-third per year and are fully vested on the fourth anniversary of
         their issuance. The options expire December 16, 2003 and March 17, 2004
         depending on their date of issuance.

         As of June 30, 2001, 62,000 options remain outstanding and 240,000
         options have been cancelled when the employees to whom they were issued
         terminated their employment. Through June 30, 2001 no options have been
         exercised.

         The Company has reserved 770,000 shares of its common stock for
         issuance pursuant to stock options to be granted to consultants,
         exercisable at $.56 per share, as compensation for services to be
         rendered pursuant to consulting agreements. None of these options have
         been issued as of June 30, 2001.

         The Company has adopted Statement of Financial Accounting Standards
         (SFAS) No. 123, "Accounting for Stock-Based Compensation". In
         accordance with the provisions of SFAS No. 123, the Company applies APB
         Opinion No. 25 in accounting for its stock option plans and,
         accordingly, does not recognize compensation cost at the grant date.

         If the Company had elected to recognize compensation cost based on the
         fair value of the options granted at grant date as prescribed by SFAS
         No. 123, net loss and loss per share would have been adjusted to the
         pro forma amounts indicated below:

<TABLE>
<CAPTION>
                                           Year ended                     Year ended                   Year ended
                                         June 30, 2001                  June 30, 2000                 June 30, 1999
                                  --------------------------    --------------------------    --------------------------
                                       As                            As                            As
                                    Reported      Pro forma       Reported      Pro forma       Reported      Pro forma
                                  -----------    -----------    -----------    -----------    -----------    -----------
            <S>                   <C>            <C>            <C>            <C>            <C>            <C>
            Net loss              $(7,752,000)   $(7,856,000)   $(4,103,000)   $(4,320,000)   $(1,577,000)   $(1,794,000)
                                  ===========    ===========    ===========    ===========    ===========    ===========
            Basic loss
            per common share

                                  $     (2.20)   $     (2.23)   $     (1.15)   $     (1.21)   $      (.38)   $      (.43)
                                  ===========    ===========    ===========    ===========    ===========    ===========
</TABLE>

         The fair value of each option grant is estimated on the date of grant
         with the following assumptions:

            Expected dividend yield        0%
            Expected volatility           41%
            Risk-free interest rate        5%
            Expected life of options      72 months


                                                                            F-14
<PAGE>

                LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                          JUNE 30, 2001, 2000 AND 1999

NOTE K - STOCKHOLDERS' EQUITY (Continued)

         PREFERRED STOCK

         The Company is authorized to issue 1,000,000 shares of preferred stock,
         $.01 par value, with such rights, preferences and designations and to
         be issued in such series as determined by the Board of Directors. As of
         June 30, 2001, the Company has issued no preferred stock.

NOTE L - INCOME TAXES

         The components of the provision for income taxes for the years ended
         June 30, 2001, 2000 and 1999 are as follows:

                                          2001           2000          1999
                                     ------------    -----------    -----------
            Current:
              Federal                $         --    $        --    $        --
              State                            --             --         15,000
                                     ------------    -----------    -----------
                                               --             --         15,000
                                     ------------    -----------    -----------
            Deferred:
              Federal                          --             --             --
              State                            --             --             --
                                     ------------    -----------    -----------
                                               --             --             --
                                     ------------    -----------    -----------
                                     $         --    $        --    $    15,000
                                     ============    ===========    ===========

         The significant components of the deferred tax provision for 2001, 2000
         and 1999 are as follows:

                                          2001           2000          1999
                                     ------------    -----------    -----------

            Net operating loss       $ (2,467,000)   $  (494,000)   $  (143,000)
            Bad debt reserve             (280,000)      (283,000)      (154,000)
            Property and equipment        158,000       (169,000)        28,000
            Organizational costs            6,000          5,000        (32,000)
            Deferred rent                 (82,000)      (214,000)        21,000
            Accrued expenses              776,000       (144,000)      (262,000)
            Deferred revenue              (47,000)      (514,000)        (1,000)
            Valuation allowance         1,936,000      1,813,000        543,000
                                     ------------    -----------    -----------
                                     $         --    $        --    $        --
                                     ============    ===========    ===========

         The components of the net deferred tax asset and liability as of June
         30, 2001 are as follows:

                                                         2001          2000
                                                     -----------    -----------
            Deferred tax assets (liabilities):
              Net operating loss                     $ 3,188,000    $   721,000
              Bad debt reserve                           849,000        569,000
              Property and equipment                     (30,000)       128,000
              Organizational costs                        14,000         20,000
              Deferred rent                              426,000        344,000
              Accrued expenses                            14,000        790,000
              Deferred revenue                           (99,000)      (146,000)
              Valuation allowance                     (4,327,000)    (2,391,000)
                                                     -----------    -----------
            Net deferred tax asset                   $    35,000    $    35,000
                                                     ===========    ===========


                                                                            F-15
<PAGE>

                LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                          JUNE 30, 2001, 2000 AND 1999

NOTE L - INCOME TAXES (Continued)

         The Company has recorded a valuation allowance of $4,327,000 and
         $2,391,000 at June 30, 2001 and 2000, respectively, to reflect the
         estimated amount of deferred tax assets. A valuation allowance is
         required if it is more likely than not that some or all of the deferred
         tax assets will not be realized in future years.

         The net change in the valuation allowance for deferred tax assets was
         an increase of $1,936,000, $1,813,000, and $543,000 for the years ended
         June 30, 2001, 2000 and 1999, respectively.

         The Company has federal and state operating loss carryforwards which
         total approximately $7,702,000 and $7,596,000, respectively, that are
         available to reduce federal and state taxable income. The federal
         operating loss carryforwards expire in various years through 2021 and
         the state operating loss carryforwards expire in various years through
         2006.

         The principal reasons for the difference between the statutory federal
         income tax rate and the effective rate are as follows:

                                                     2001      2000      1999
                                                    ------    ------    ------
            Statutory federal income tax rate        (34.0%)   (34.0%)   (34.0%)
            State taxes, net of federal benefits        --        --       1.2
            Goodwill amortization                      0.7       1.2       5.0
            Minority interest adjustment               1.8      (2.4)     (4.5)
            Bad debt expense                           1.8       4.8       8.8
            Accrued expenses                           2.6       3.0      11.7
            Other adjustments                          1.0      11.5      16.5
            Loss on sale of Balz assets                 --       1.0        --
            Valuation allowance                       26.1      14.8      (3.7)
                                                    ------    ------    ------
                                                        --%       --%      1.0%
                                                    ======    ======    ======

NOTE M - RISKS AND UNCERTAINTIES

         LABOR CONCENTRATION

         As of June 30, 2001, approximately 57% of the Company's employees were
         covered by three separate collective bargaining agreements with New
         England Health Care Employees Union, District 1199/SEIU, AFL-CIO
         ("Union"). Two of the agreements cover a facility each and expire in
         October, 2001 (representing 15% of the Company's employees), while the
         other agreement covers the remaining six facilities and expires on
         March 15, 2005.


                                                                            F-16
<PAGE>

                LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                          JUNE 30, 2001, 2000 AND 1999

NOTE M - RISKS AND UNCERTAINTIES (Continued)

         PATIENT SERVICE REVENUE

         Approximately 91%, 97%, and 98% of net patient service revenue was
         derived under federal and state third-party reimbursement programs in
         2001, 2000 and 1999, respectively. These revenues are based, in part,
         on cost reimbursement principles and are subject to audit and
         retroactive adjustment by the respective third-party fiscal
         intermediaries. The general trend in the nursing home industry is lower
         private pay utilization due to liberal asset transfer rules and the
         degree of financial planning that takes place by the general public.
         The Company's ability to increase the current level of private pay
         utilization and thereby reduce reliance on third-party reimbursement is
         uncertain due to the economic and regulatory environment in which all
         Connecticut nursing homes operate.

         Laws and regulations governing the Medicare and Medicaid programs are
         complex and subject to interpretation. The Company believes that it is
         in compliance with all applicable laws and regulations and is not aware
         of any significant pending or threatened investigations involving
         allegations of potential wrongdoing. Compliance with such laws and
         regulations are subject to government review and interpretation as well
         as significant regulatory action including fines, penalties, and
         exclusion from the Medicare and Medicaid programs. Changes in the
         Medicare and Medicaid programs and/or the reduction of funding levels
         could have an adverse impact on the Company.

         MALPRACTICE INSURANCE

         The Company maintains malpractice insurance coverage on an occurrence
         basis. It is the intention of the Company to maintain such coverage on
         an occurrence basis in ensuing years. As of June 30, 2001, no known
         malpractice claims have been asserted against the Company which, either
         individually or in the aggregate, are in excess of insurance coverage.

NOTE N - COMMITMENTS AND CONTINGENCIES

         GOVERNMENT INVESTIGATION

         The Company has previously disclosed that the Company and certain
         members of former senior management were named as targets of a grand
         jury investigation being conducted by the Office of the United States
         Attorney for the District of Connecticut (the "Government"). By letter
         dated June 26, 2001, the Government advised counsel to the Company and
         other targets of the grand jury investigation that criminal prosecution
         of the Company and certain members of former senior management "has
         been declined based on information and evidence obtained to date". By
         letter dated July 9, 2001, the Government further advised counsel to
         the Company and other targets of the grand jury investigation that "the
         civil division of the [U.S. Attorney's] office has closed its
         investigation of the Company at this time".

         The Company recorded a charge to operations of $273,000 and $343,000
         for the years ended June 30, 2001 and 2000, respectively, relating to
         this matter.


                                                                            F-17
<PAGE>

                LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                          JUNE 30, 2001, 2000 and 1999

NOTE N - COMMITMENTS AND CONTINGENCIES (Continued)

         LABOR STRIKE

         Union employees of the Company commenced a one day job action in March
         2001 and commenced another strike on May 5, 2001 for a period of
         twenty-one days. The Company executed an Expedited Medicaid
         Reimbursement Agreement with the State of Connecticut ("the State")
         whereby the State reimbursed the Company for certain strike related
         incremental costs related to Medicaid patients, which approximated 80%
         of cost incurred. Ultimately, the Company incurred union strike and
         settlement costs, net of State reimbursement, of $960,000.

         The Company engaged nursing staffing firms to replace the striking
         workers and continued to maintain compliance with applicable State of
         Connecticut patient care and staffing regulations. The Company and one
         of the nursing staffing firms are presently disputing certain charges
         and it is anticipated that the matter will be resolved through
         voluntary mediation. Management believes the resolution of this matter
         will not have a material adverse effect on the Company's consolidated
         financial statements.

         EMPLOYMENT AGREEMENTS

         The Company had employment agreements with three of its former
         executive officers. During the year ended June 30, 2000, the Company's
         founder and CEO retired and the Company negotiated the settlement of
         its remaining obligation under his employment agreement for $250,000
         which has been recorded as a charge to operations in the accompanying
         consolidated statement of operations. As a result of this settlement,
         the former CEO completed the previously agreed-on repayment to the
         Company of $109,000 for certain trade payables owed to the Company by a
         business he previously owned.

         As a result of the sale of the business of BALZ during the year ended
         June 30, 2000 (see Note B), the Company settled the employment
         agreement with the President of BALZ for $363,000 which is included in
         the loss on sale of business recorded in the accompanying consolidated
         statement of operations.

         During the year ended June 30, 2001, the Company's President resigned
         and the related employment agreement was canceled upon execution of a
         consulting services agreement. The consulting services agreement
         terminated in March, 2001 and amounts paid thereunder of $187,000 were
         recorded as a charge to operations in the accompanying consolidated
         statement of operations.

         UNION PENSION CONTRIBUTION

         The Company's union employees participate in union pension plans to
         which the Company contributes an amount stipulated in each collective
         bargaining agreement. For the years ended June 30, 2001, 2000 and 1999,
         contributions were approximately $1,698,000, $1,807,000 and $1,458,000,
         respectively.


                                                                            F-18
<PAGE>

                LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                          JUNE 30, 2001, 2000 AND 1999

NOTE N - COMMITMENTS AND CONTINGENCIES (Continued)

         NON-UNION PENSION PLAN

         As of February 1, 1999, the Company implemented a new
         defined-contribution pension plan for non-union employees to which the
         Company contributes 4% of employee compensation annually; investments
         in the plan are directed by the participants. In connection therewith
         the Company has recorded pension expense of $422,000, $464,000 and
         $236,000 for the years ended June 30, 2001, 2000 and 1999,
         respectively.

         LAWSUIT SETTLEMENT

         The former President and Administrator of Professional Relief Nurses,
         Inc. (PRN), the Company's home care subsidiary, initiated a lawsuit
         against Lexington Healthcare Group, Inc., PRN, and the Company's former
         Chairman and CEO, in connection with her termination in July 1998. In
         September 1999 the Company reached a settlement in this suit to avoid
         the expenses of protracted litigation. The Company has recorded a
         provision for lawsuit settlement of $539,000 in the accompanying
         consolidated statement of operations for the year ended June 30, 1999.

         OTHER CONTINGENCIES

         The Company is also involved in other legal proceedings and is subject
         to certain lawsuits and claims in the ordinary course of its business.
         Although the ultimate effect of these matters is often difficult to
         predict, management believes that their resolution will not have a
         material adverse effect on the Company's consolidated financial
         statements.

         LEGISLATION, REGULATIONS AND MARKET CONDITIONS

         The Company is subject to extensive federal, state and local government
         regulation relating to licensure, conduct of operations, ownership of
         facilities, expansion of facilities and services and reimbursement for
         services. As such, in the ordinary course of business, the Company's
         operations are continuously subject to state and federal regulatory
         scrutiny, supervision and control. Such regulatory scrutiny often
         includes inquiries, investigations, examinations, audits, site visits
         and surveys, some of which may be non-routine. The Company believes
         that it is in substantial compliance with the applicable laws and
         regulations. However, if the Company is ever found to have engaged in
         improper practices, it could be subjected to civil, administrative or
         criminal fines, penalties or restitutionary relief which may have a
         material adverse impact on the Company's financial results and
         operations.


                                                                            F-19
<PAGE>

                LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                          JUNE 30, 2001, 2000 AND 1999

NOTE O - GOING CONCERN

         As shown in the accompanying consolidated financial statements, the
         Company has reported net losses for the last three fiscal years
         totaling $13,432,000 and, as of June 30, 2001, has a working capital
         deficiency of $9,440,000 and a stockholders' deficiency of $7,625,000.
         In addition, the Company is not in compliance with certain of the
         financial covenants on its line of credit agreement which may be
         considered an event of default. Further, the Company is unable to
         satisfy its trade creditors in the ordinary course of business and is
         in arrears on its related party lease obligation. These conditions
         create an uncertainty about the Company's ability to continue as a
         going concern.

         Management has implemented a plan to return the Company to
         profitability, which includes receipt of significant increases in
         Medicaid revenue through the request for rate relief submitted to the
         State, improvements to patient mix and occupancy and significant
         reductions in operating and administrative costs. Management projects
         that the Company can return to profitability within the next twelve
         months upon the successful implementation of the turnaround plan. In
         addition, management is in the process of negotiating settlement plans
         with trade creditors and restructuring its debt financing.

         The ability of the Company to continue as a going concern is dependent
         on the success of the above plan and the forebearance of default
         remedies by its primary lender. The consolidated financial statements
         do not include any adjustments that might be necessary if the Company
         is unable to continue as a going concern.


                                                                            F-20
<PAGE>

Item 9. Changes in and Disagreements with Accountants on Accounting and
        Financial Disclosure

                                     None.

Item 10. Directors and Executive Officers of the Registrant

The directors and executive officers of the Company, together with their ages
and present positions with the Company are as follows:

      Name                                       Age   Position
      ----                                       ---   --------
Oscar Litchtman...................................68   Chief Executive Officer,
                                                       Chairman of the Board,
                                                       President and Director
Ira J. Perlmuter..................................39   Director and Secretary
Irwin Katz........................................33   Director
Barry M. Feldscher................................57   Chief Operating Officer
Michael D. Logan .................................46   Chief Financial Officer

All directors of the Company hold office until the next annual meeting of the
stockholders and until their successors have been elected and qualified. The
officers of the Company are elected by the Board of Directors at the first
meeting after each annual meeting of the Company's stockholders, and hold office
until their death, until they resign or until they have been removed from
office.

The following is a brief summary of the background of each director and
executive officer of the Company:

Oscar Lichtman was elected Chairman, CEO, President and director effective
February 1, 2001 upon the retirement of the Company's then CEO and President,
Harry Dermer. He operates an investment practice which concentrates on the
securities of companies in the healthcare industry as well as real estate. Mr.
Lichtman has worked as an administrator for various educational institutions. He
received a B.A. from Yeshiva University and a Master of Science in Educational
Psychology from the Ferkauf Graduate School.

Ira J. Perlmuter was elected director and Secretary effective February 1, 2001.
He is the managing director of Cove Capital Advisors, Inc., a financial advisory
firm specializing in providing advice on restructuring, mergers and
acquisitions, and strategic planning to middle market companies. Prior to
founding Cove Capital in June 2000, Mr. Perlmuter served as a vice president of
The Chase Manhattan Bank's Restructuring Group where he concentrated on
corporate loan restructurings. Mr. Perlmuter received a B.A. from Brandeis
University in 1985 and an MBA in Finance from the Stern School of Business at
New York University in 1991.


                                       18
<PAGE>

Irwin Katz was elected a director effective February 1, 2001. He serves as the
Manager for the MIS division at the New York County Health Services Review
Organization ("NYCHSRO")/MedReview, Inc., a position he has held since April of
1997. Mr. Katz is responsible for the management and integrity of NYCHSRO's
multi-user Novell databases. Mr. Katz was NYCHSRO's Program Manager from August
1993 to April 1997, where he was responsible for the supervision of day-to-day
operations. He received his B.S. from SUNY in 1996 and a Masters in Public
Administration from the Robert F. Wagner Graduate School of Public Service in
1998.

Barry M. Feldscher has served as the Company's Chief Operating Officer since
February 1, 2001. He is a licensed nursing home administrator in New Jersey and
Pennsylvania. Mr. Feldscher is the principal of Barry Feldscher & Associates,
LLC, a company which consults with long term care facilities. Mr. Feldscher has
been employed in the long-term care industry for more than twenty-five years.
Between 1977 and 1997 he held senior management positions with HBA Management,
Inc. and Meadowview Management, Inc., operators and consultants in long term
care.

Michael D. Logan was hired as the Company's Chief Operating Officer on February
1, 2001. He is a Certified Public Accountant. Mr. Logan is the principal of
Logan & Associates, Inc., a CPA practice specializing in financial management
and advisory services to the long-term care industry. From 1986 to 1995 he was a
principal in Cerreta, Logan & Co., a firm specializing in management consulting
and audits in the long-term care industry. Prior thereto, he was an associate
with the CPA firm of Smolin, Lupin & Co., a large regional accounting firm
specializing in real estate accounting and auditing.

Item 11. Executive Compensation

The following table sets forth the cash compensation, as well as certain other
compensation paid or accrued, by the Company to Barry M. Feldscher, its current
Chief Operating Officer, to Michael D. Logan, its current Chief Financial
Officer, to Jack Friedler, its former Chief Executive Officer, to Harry Dermer,
its former Chief Executive Officer and President, to Mary Archambault, its
former Executive Vice President and former Secretary, and to Thomas E. Dybick,
its former Chief Financial Officer and Secretary during the fiscal years ended
June 30, 2001, 2000, 1999, 1998 and 1997. Messrs. Lichtman, Perlmuter and Katz
received no compensation during these periods.

Other than Messrs. Dermer and Dybick and Ms. Archambault, no other executive
officer of the Company had a total annual salary and bonus of $100,000 during
the reported periods.


                                       19
<PAGE>

<TABLE>
<CAPTION>
                                      -------------------------------------------   ---------------
                                                                                      Long Term
                                                   Annual Compensation               Compensation
                                      -------------------------------------------   ---------------
                                                                                        Stock
Name and Principal Position              Year            Salary            Bonus    Options Granted
---------------------------           -------------------------------------------   ---------------

<S>                                   <C>                <C>              <C>           <C>
Barry M. Feldscher,                   Fiscal 2001        $50,481 (1)         --            --
Chief Operating Officer

Michael D. Logan,                     Fiscal 2001        $23,846 (1)         --            --
Chief Financial Officer

Jack Friedler,                        Fiscal 1997       $260,000             --            --
Former Chief Executive Officer        Fiscal 1998       $266,250          $17,586        60,000
and Director                          Fiscal 1999       $270,022          $10,500          --
                                      Fiscal 2000       $511,188 (2)       $5,250       (60,000)
                                      Fiscal 2001          --                --            --

Harry Dermer,                         Fiscal 1997       $174,980             --            --
Former Chief Executive Officer,       Fiscal 1998       $179,196          $14,317        60,000
President, and Director               Fiscal 1999       $200,086           $8,077          --
                                      Fiscal 2000       $214,078           $4,038          --
                                      Fiscal 2001       $323,470 (3)       $4,038          --

Thomas E. Dybick,                     Fiscal 1997        $72,037             --            --
Former Chief Financial Officer        Fiscal 1998       $110,318           $4,392        20,000
and Secretary                         Fiscal 1999       $117,808           $2,250          --
                                      Fiscal 2000       $133,588           $2,500          --
                                      Fiscal 2001        $72,858             --         (20,000)

Mary Archambault,                     Fiscal 1997       $159,783             --            --
Former Executive Vice President,      Fiscal 1998       $107,088          $15,041        40,000
Former President of BALZ              Fiscal 1999       $135,874          $12,923          --
                                      Fiscal 2000       $557,577 (4)      $24,131       (40,000)
                                      Fiscal 2001          --                --            --
</TABLE>

(1)   Compensation commenced on February 1, 2001.

(2)   During the year ended June 30, 2000, Mr. Friedler, the Company's founder
      and CEO, retired; the Company negotiated the settlement of its remaining
      obligations under his employment agreement for $250,000. As a result of
      this settlement, Mr. Friedler completed the previously agreed-on repayment
      to the Company of $109,000 for certain trade payables owed to the Company
      by a business he previously owned.

(3)   During the year ended June 30, 2001, the Company's President resigned and
      the related employment agreement was canceled upon execution of a
      consulting services agreement. The consulting services agreement
      terminated in March 2001, and amounts paid thereunder of $187,000 were
      recorded as a charge to operations in the accompanying consolidated
      statement of operations.


                                       20
<PAGE>

(4)   As a result of the sale of the business of BALZ during the year ended June
      30, 2000, the Company settled an employment agreement with Ms.
      Archambault, the President of BALZ, for $363,000.

The Company had employment agreements with each of Jack Friedler, Harry Dermer,
and Mary Archambault, which became effective in 1997.

During the year ended June 30, 1998, the Company issued options to purchase
200,000 shares of its common stock to the above-noted officers at exercise
prices ranging from $2.625 to $3.062 based on the market value at date of grant.
The Board of Directors re-priced all outstanding options to all grantees in
November 1998 at $.87 per share based on the current market value at that date.
Options on 100,000 shares were cancelled in 2000 when Mr. Friedler and Ms.
Archambault terminated their employment. Options on 80,000 shares were cancelled
in 2001 when Mr. Dermer and Mr. Dybick terminated their employment.

The former President and Administrator of Professional Relief Nurses, Inc.
(PRN), the Company's home care subsidiary, initiated a lawsuit against Lexington
Healthcare Group, Inc., PRN, and Jack Friedler, the Company's Chairman and CEO,
in connection with her termination in July 1998. In September 1999 the Company
settled this suit to avoid the expenses of protracted litigation. See Item 3 for
further information.

Item 12. Security Ownership of Certain Beneficial Owners and Management

No person owned of record or was known to own beneficially more than five
percent (5%) of the outstanding common stock of the Company except as noted
below. The following table shows the amount of common stock owned as of
September 26, 2001 by each Director, and by all Directors and officers as a
group, consisting of six persons.

<TABLE>
<CAPTION>
                                           Number of Shares of          Percentage of Total Shares of
Name and Address of Beneficial             Outstanding Common Stock          Outstanding Common Stock
Owner (1)                                  Beneficially Owned (2)                  Beneficially Owned
--------                                   ----------------------                  ------------------
<S>                                                     <C>                                     <C>
Jack Friedler (3)                                       1,651,667                               46.8%
Harry Dermer (4)                                          358,700                               10.2%
New Generation LLC(5)                                     225,167                                6.4%
America Healthcare Services Corp. (6)                     225,167                                6.4%
Connecticut Investments LLC (7)                           225,166                                6.4%
Oscar Lichtman, Chairman, CEO and
President                                                      --                                  *
Irwin Katz, Director and Secretary                             --                                  *
Ira Perlmuter, Director                                        --                                  *
Michael Logan, Chief Financial Officer                         --                                  *
Barry Feldscher, Chief Operating Officer                       --                                  *
All Directors and Officers as a group                   1,651,667                               48.8%
</TABLE>

----------
*less than one percent


                                       21
<PAGE>

(1)   Unless otherwise indicated, the address of each person listed below is c/o
      Lexington Healthcare Group, Inc., 1577 New Britain Avenue, Farmington, CT,
      06032.

(2)   Pursuant to the rules and regulations of the Securities and Exchange
      Commission, shares of common stock that an individual or group has a right
      to acquire within 60 days pursuant to the exercise of options or warrants
      are deemed to be outstanding for the purposes of computing the percentage
      ownership of such individual or group, but are not deemed to be
      outstanding for the purposes of computing the percentage ownership of any
      other person shown in the table.

(3)   Includes 225,167 shares of common stock beneficially owned by New
      Generation LLC, with which Mr. Friedler is affiliated.

(4)   Includes 60,000 shares of common stock underlying options held by Mr.
      Dermer. Such options are currently exercisable. If the options held by New
      Generation LLC, Connecticut Investments LLC and America Healthcare
      Services Corporation are exercised. Mr. Dermer would own no more shares of
      Common stock in the Company, but would retain his option to purchase
      60,000 such shares.

(5)   Includes 119,567 shares of common stock underlying an option to purchase
      the shares from Mr. Dermer and Ms. Archambault.

(6)   Includes 119,567 shares of common stock underlying an option to purchase
      the shares from Mr. Dermer and Ms. Archambault.

(7)   Includes 119,566 shares of common stock underlying an option to purchase
      the shares from Mr. Dermer and Ms. Archambault.

Item 13. Certain Relationships and Related Transactions

During the year ended June 30, 2001, Harry Dermer, the Company's CEO and
President retired; the remaining agreement with the Company's former President
and CEO was canceled upon execution of a consulting services agreement in
January, 2001 for $187,000. The consulting services agreement was for a
two-month term through March, 2001. During the year ended June 30, 2000, Jack
Friedler, the Company's founder and former CEO, retired; the Company negotiated
the settlement of its remaining obligations under his employment agreement for
$250,000. As a result of this settlement, Mr. Friedler completed the previously
agreed-on repayment to the Company of $109,000 for certain trade payables owed
to the Company by a business he previously owned.

As a result of the sale of the business of BALZ during the year ended June 30,
2000, the Company settled an employment agreement with Mary Archambault, the
President of BALZ, for $363,000.

In July 1999, the Company, pursuant to Board of Director's approval, exercised
its remedies in default on an 8% interest-bearing promissory note due from the
Company's former CEO and by seizing the collateral of 600,000 shares of the
Company's common stock in satisfaction of the note and interest due. The shares
received were initially put into the Company's treasury but have been retired as
of June 30, 2000. This resulted in a reduction of working capital and
stockholders'


                                       22
<PAGE>

equity of $574,000 as shown in the June 30, 1999 consolidated statement of
changes in stockholders' equity.

The 600,000 shares had a market bid price of $731,000 at the time of their
surrender and the note and accumulated interest had a carrying value of
$576,000. The Company's Board of Directors considers the difference between the
market price and carrying value of the note receivable of $155,000 to be a
reasonable and fair discount for the shares received.

Effective July 1, 1995, the Company entered into a ten-year lease, which was
subsequently extended to eighteen years and retroactively amended, for four of
the nursing homes operated by the Company. Jack Friedler, the Company's former
Chief Executive Officer and other stockholders holding an additional 19.2% of
the outstanding common stock have a controlling interest in the lessor,
Fairfield Group Health Care Centers Limited Partnership ("Fairfield"). The
Company believes that the terms of the lease are as favorable to the Company as
those that could have been obtained from nonaffiliated parties.

The Company leases its corporate office space from an entity in which Jack
Friedler and Harry Dermer own 50% under an operating lease which expires in
February 2013 and has two five-year renewal options with rent at then market
rates. Further, prior to the sale of assets by BALZ, the Company leased office
and warehouse space for BALZ from a related limited liability company owned in
part by Messrs. Friedler and Dermer and Ms. Archambault under an operating lease
which expires January 31, 2002.

With respect to each of the foregoing transactions, although the Company has not
obtained any independent fairness opinions, the Company believes that the terms
of such transactions were as fair to the Company as could be obtained from an
unrelated third party. In the event the Company enters into negotiations to
acquire any business or assets of a related party it will secure an independent
appraisal. Future transactions with affiliates will be on terms no less
favorable than could be obtained from unaffiliated parties and will be approved
by a majority of the independent and/or disinterested members of the Board of
Directors.


                                       23
<PAGE>

                                     PART IV

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

(a)   Financial Statements

      (1)   The following financial statements are included in Part II Item 8:

            Report of Independent Certified Public Accountants on Financial
               Statements

            Financial Statements:
            Consolidated Balance Sheets - June 30, 2001 and 2000
            Consolidated Statements of Operations - Years Ended June 30, 2001,
               2000 and 1999
            Consolidated Statements of Changes in Stockholders' Equity
               (Deficiency) - Years Ended June 30, 2001, 2000 and 1999
            Consolidated Statements of Cash Flows - Years Ended June 30, 2001,
               2000 and 1999
            Notes to Consolidated Financial Statements

      (2)   The following schedule for the years 2001, 2000, and 1999 is
            submitted herewith:

            Report of Independent Certified Public Accountants on Financial
               Statement Schedule

            Schedule II - Valuation and Qualifying Accounts

            All other schedules are omitted because they are not applicable or
            the required information is shown in the consolidated financial
            statements or notes thereto.

(b)   Reports on Form 8-K:

(c)   Exhibits

            (11)  Earnings per share calculation

            (21)  Subsidiaries

            (23)  Independent Auditors' Consent


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<PAGE>

                                   SIGNATURES

                  Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, LEXINGTON HEALTHCARE GROUP, INC has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized:

                  LEXINGTON HEALTHCARE GROUP, INC.
                            (Registrant)

                  By: s/ Oscar Lichtman
                  ---------------------
                  Oscar Lichtman, CEO, Chairman, President and Director

                  Date: September 28, 2001

                  Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated:

s/ Michael Logan            Chief Financial Officer    Date: September 28, 2001
------------------------
Michael Logan

                            Chief Operating Officer    Date: September 28, 2001
------------------------
Barry Feldscher

                            Director                   Date: September 28, 2001
------------------------
Ira Perlmuter

                            Director, Secretary        Date: September 28, 2001
------------------------
Irwin Katz


                                       25
<PAGE>

                        DISANTO BERTOLINE & COMPANY, P.C.
                         628 Hebron Avenue, Building #3
                              Glastonbury, CT 06033

                          INDEPENDENT AUDITORS' REPORT

To the Board of Directors of
  Lexington Healthcare Group, Inc.
  Farmington, Connecticut

We have audited the accompanying consolidated balance sheets of Lexington
Healthcare Group, Inc. and subsidiaries as of June 30, 2001 and 2000, and the
related consolidated statements of operations, changes in stockholders' equity
(deficiency) and cash flows for the years ended June 30, 2001, 2000 and 1999.
These consolidated financial statements are the responsibility of the Company'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 U.S. generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated 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 Lexington Healthcare
Group, Inc. and subsidiaries as of June 30, 2001 and 2000, and the results of
their operations and their cash flows for the years ended June 30, 2001, 2000
and 1999 in conformity with U.S. generally accepted accounting principles.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note O to the
consolidated financial statements, the Company has suffered recurring losses
from operations and has a net capital deficiency that raise substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note O. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.


DISANTO BERTOLINE & COMPANY, P.C.


Glastonbury, Connecticut
September 21, 2001


                                       26
<PAGE>

                        DISANTO BERTOLINE & COMPANY, P.C.
                         628 Hebron Avenue, Building #3
                              Glastonbury, CT 06033

                          INDEPENDENT AUDITORS' REPORT

To the Board of Directors of
Lexington Healthcare Group, Inc.
Farmington, Connecticut

We have audited the consolidated financial statements of Lexington Healthcare
Group, Inc. and subsidiaries as of June 30, 2001 and 2000, and for the years
ended June 30, 2001, 2000 and 1999; and have issued our report thereon dated
September 21, 2001, which report includes an explanatory paragraph referring to
factors that raise substantial doubt about the Company's ability to continue as
a going concern; such consolidated financial statements and report are included
elsewhere in this Form 10-K. Our audits also included the financial statement
schedule of Lexington Healthcare Group, Inc. and subsidiaries, listed in Item
14. This financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, such financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.


DISANTO BERTOLINE & COMPANY, P.C.


Glastonbury, Connecticut
September 21, 2001


                                       27
<PAGE>

                LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
                                   SCHEDULE II
                        VALUATION AND QUALIFYING ACCOUNTS

                              Balance at   Charged to                 Balance
                               Beginning   Costs and                   End of
Year   Description              of Year     Expenses    Write-offs      Year
-------------------------------------------------------------------------------

2001   Allowance for
       doubtful accounts      $1,634,000   $1,027,000   $(615,000)   $2,046,000
                              ==========   ==========   =========    ==========

2000   Allowance for
       doubtful accounts      $  848,000   $1,305,000   $(519,000)   $1,634,000
                              ==========   ==========   =========    ==========

1999   Allowance for
       doubtful accounts      $  346,000   $  748,000   $(246,000)   $  848,000
                              ==========   ==========   =========    ==========


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