<PAGE>

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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-K

<Table>
<C>          <S>
 (MARK ONE)
    [X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
             SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)



             FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001



                                   OR




    [ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
             THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
</Table>

                         COMMISSION FILE NUMBER: 1-9550

                           BEVERLY ENTERPRISES, INC.
             (Exact name of Registrant as specified in its charter)

<Table>
<S>                                            <C>
                   DELAWARE                                      62-1691861
       (State or other jurisdiction of                        (I.R.S. Employer
        incorporation or organization)                      Identification No.)
</Table>

                            ONE THOUSAND BEVERLY WAY
                           FORT SMITH, ARKANSAS 72919
                    (Address of principal executive offices)

       Registrant's telephone number, including area code: (479) 201-2000

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

<Table>
<Caption>
                                                           NAME OF EACH EXCHANGE
            TITLE OF EACH CLASS                             ON WHICH REGISTERED
            -------------------                            ---------------------
<S>                                             <C>
        Common Stock, $.10 par value                      New York Stock Exchange
                                                           Pacific Stock Exchange
   9% Senior Notes due February 15, 2006                  New York Stock Exchange
   9 5/8% Senior Notes due April 15, 2009                           None
</Table>

        Securities registered pursuant to Section 12(g) of the Act: NONE

     INDICATE BY CHECK MARK WHETHER 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 REGISTRANT
WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.  YES  [X]     NO [ ]

     INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K.  [X]

     THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NONAFFILIATES OF
REGISTRANT WAS $606,136,988 AS OF FEBRUARY 28, 2002.

                                  104,390,585

  (NUMBER OF SHARES OF COMMON STOCK OUTSTANDING, NET OF TREASURY SHARES, AS OF
                               FEBRUARY 28, 2002)

     PART III IS INCORPORATED BY REFERENCE FROM THE PROXY STATEMENT FOR THE
ANNUAL STOCKHOLDERS MEETING TO BE HELD ON MAY 23, 2002.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>

                           FORWARD-LOOKING STATEMENTS

     References throughout this document to the Company include Beverly
Enterprises, Inc. and its wholly owned subsidiaries. In accordance with the
Securities and Exchange Commission's "Plain English" guidelines, this Annual
Report on Form 10-K has been written in the first person. In this document, the
words "we", "our", "ours" and "us" refer only to Beverly Enterprises, Inc. and
its wholly owned subsidiaries and not any other person.

     This Annual Report on Form 10-K, and other information we provide from time
to time, contains certain "forward-looking" statements as that term is defined
by the Private Securities Litigation Reform Act of 1995. All statements
regarding our expected future financial position, results of operations or cash
flows, continued performance improvements, ability to service and refinance our
debt obligations, ability to finance growth opportunities, ability to control
our patient care liability costs, ability to respond to changes in government
regulations, ability to execute our three-year strategic plan and similar
statements including, without limitation, those containing words such as
"believes," "anticipates," "expects," "intends," "estimates," "plans," and other
similar expressions are forward-looking statements.

     Forward-looking statements involve known and unknown risks and
uncertainties that may cause our actual results in future periods to differ
materially from those projected or contemplated in the forward-looking
statements as a result of, but not limited to, the following factors:

     - national and local economic conditions, including their effect on the
       availability and cost of labor, utilities and materials;

     - the effect of government regulations and changes in regulations governing
       the healthcare industry, including our compliance with such regulations;

     - changes in Medicare and Medicaid payment levels and methodologies and the
       application of such methodologies by the government and its fiscal
       intermediaries;

     - liabilities and other claims asserted against the Company, including
       patient care liabilities, as well as the resolution of the Class Action
       and Derivative Lawsuits (see "Item 3. Legal Proceedings");

     - our ability to attract and retain qualified personnel;

     - the availability and terms of capital to fund acquisitions and capital
       improvements;

     - the competitive environment in which we operate;

     - our ability to maintain and increase census levels; and

     - demographic changes.

     See "Item 1. Business" for a discussion of various governmental regulations
and other operating factors relating to the healthcare industry and the related
risk factors. You should carefully consider the risks described herein before
making any investment decisions in the Company. These risks and uncertainties
are not the only ones facing the Company. There may be additional risks that we
do not presently know of or that we currently deem immaterial. If any of these
risks actually occur, our business, financial condition or results of operations
could be materially adversely affected. In that case, the trading price of our
Common Stock could decline, and you may lose all or part of your investment.
Given these risks and uncertainties, we can give no assurances that these
forward-looking statements will, in fact, transpire and, therefore, caution
investors not to place undue reliance on them.

                                        1
<PAGE>

                                     PART I

ITEM 1. BUSINESS.

GENERAL

     Our business consists principally of providing healthcare services,
including the operation of nursing facilities, assisted living centers, hospice
and home care centers, outpatient therapy clinics and rehabilitation therapy
services. We are one of the largest operators of nursing facilities in the
United States. On February 28, 2002, we operated 466 nursing facilities with
51,054 licensed beds. Our nursing facilities are located in 28 states and the
District of Columbia, and range in capacity from 20 to 355 beds. On February 28,
2002, we also operated 29 assisted living centers containing 841 units, 154
outpatient therapy clinics, and 53 hospice and home care centers. (See "Item 2.
Properties"). Our nursing facilities had average occupancy, based on operational
beds, of 86.9%, 87.0% and 87.2% during the years ended December 31, 2001, 2000,
and 1999, respectively.

OPERATIONS

     At December 31, 2001, we were organized into three primary operating
segments, which included:

     - nursing facilities, which provide long-term healthcare through the
       operation of nursing homes and assisted living centers;

     - innovation and services group, which includes rehabilitation therapy,
       hospice, home care and a business strategy and development division; and

     - TMX, formerly known as Matrix/Theraphysics, which operates outpatient
       therapy clinics and a managed care network.

     Business in each operating segment is conducted by one or more
corporations. The corporations comprising each of the three operating segments
also have separate boards of directors. See "Part II, Item 8 -- Note 11 of Notes
to Consolidated Financial Statements" for segment information.

     Our nursing facilities provide patients with routine long-term care
services, including daily nursing, dietary, social and recreational services and
a full range of pharmacy services and medical supplies. Our skilled staff also
offers complex and intensive medical services to patients with higher acuity
disorders outside the traditional acute care hospital setting. In addition, our
nursing facilities provide assisted living services. Approximately 92% of our
total net operating revenues are derived from services provided by our nursing
facilities segment.

     Our innovation and services group provides rehabilitative therapy services,
hospice and home care services within our nursing facilities as well as for
other healthcare providers. Approximately 4% of our total net operating revenues
are derived from services provided by our innovation and services segment.

     TMX provides outpatient therapy services through its stand-alone clinics,
as well as managed care advisory services. Approximately 4% of our total net
operating revenues are derived from services provided by our TMX segment.

WE RELY ON REIMBURSEMENT FROM GOVERNMENTAL PROGRAMS FOR A MAJORITY OF OUR
REVENUES.

     As a provider of healthcare services, we are subject to various federal,
state and local healthcare statutes and regulations. We must comply with state
licensing requirements in order to operate healthcare facilities and to
participate in government-sponsored healthcare funding programs, such as
Medicaid and Medicare. Medicaid is a medical assistance program for the
indigent, operated by individual states with the financial participation of the
federal government. Medicare is a health insurance program for the aged and
certain other chronically disabled individuals, operated by the federal
government. These programs are increasingly seeking to control healthcare costs
and to reduce or limit increases in reimbursement rates for healthcare services.
Changes in the reimbursement policies of these funding programs as a result of
budget cuts by federal and

                                        2
<PAGE>

state governments or other legislative and regulatory actions could have a
material adverse effect on our consolidated financial position, results of
operations and cash flows.

     We receive payments for services provided to patients from:

     - each of the states in which our facilities are located under the
       applicable Medicaid program;

     - the federal government under the Medicare program; and

     - private payors, including commercial insurers, managed care payors and
       the Veterans Administration.

     The following table sets forth for the periods indicated:

     - nursing facility patient days derived from the indicated sources of
       payment as a percentage of total nursing facility patient days; and

     - revenues derived from the indicated sources of payment as a percentage of
       total net operating revenues.

<Table>
<Caption>
                                        MEDICAID             MEDICARE        PRIVATE AND OTHER
                                   ------------------   ------------------   ------------------
                                   PATIENT              PATIENT              PATIENT
                                    DAYS     REVENUES    DAYS     REVENUES    DAYS     REVENUES
                                   -------   --------   -------   --------   -------   --------
<S>                                <C>       <C>        <C>       <C>        <C>       <C>
Year ended:
  December 31, 2001..............    71%        52%       10%        25%       19%        23%
  December 31, 2000..............    71%        53%       10%        21%       19%        26%
  December 31, 1999..............    71%        51%        9%        21%       20%        28%
</Table>

     Changes in the mix of our patient population among the Medicaid, Medicare
and private categories can significantly affect our revenues and profitability.
In most states, private patients are the most profitable, and Medicaid patients
are the least profitable.

     We receive ancillary revenues by providing occupational, physical, speech,
respiratory and intravenous therapy, as well as sales of pharmaceuticals and
other services. Such services are currently provided primarily to Medicare and
private pay patients.

     Medicaid programs currently exist in all of the states in which we operate
nursing facilities. These programs differ in certain respects from state to
state, but they are all subject to federally-imposed requirements. At least 50%
of the funds available under these programs is provided by the federal
government under a matching program.

     Currently, many state Medicaid programs use a cost-based reimbursement
system. This means that a facility is reimbursed for the reasonable direct and
indirect allowable costs it incurs in providing routine patient care services
(as defined by the programs). In addition, certain states provide for efficiency
incentives or a return on equity, subject to certain cost ceilings. These costs
normally include allowances for administrative and general costs, as well as the
costs of property and equipment (e.g. depreciation and interest, fair rental
allowance or rental expense).

     State Medicaid reimbursement programs vary as to the level of allowable
costs which are reimbursed to operators. In some states, cost-based
reimbursement is subject to retrospective adjustment through cost report
settlement. In other states, reimbursements made to a facility that are
subsequently determined to be less than or in excess of allowable costs may be
adjusted through future reimbursements to the facility and to other facilities
owned by the same operator. Still other states reimburse facilities based upon
costs from a prior base year, adjusted for inflation. Several states in which we
currently operate have enacted reimbursement programs which are based on patient
acuity versus traditional cost-based methodologies. Many other states are
actively developing reimbursement systems based on patient acuity or that follow
a methodology similar to Medicare's prospective payment system. We are unable to
estimate the ultimate impact of any changes in reimbursement programs on our
future consolidated financial position, results of operations, or cash flows.

     While federal regulations do not provide states with grounds to curtail
funding of their Medicaid cost reimbursement programs due to state budget
deficiencies, states have done so in the past. No assurance can be

                                        3
<PAGE>

given that states will not do so in the future or that the future funding of
Medicaid programs will remain at levels comparable to the present levels. In
August 1997, the Balanced Budget Act of 1997 (the "1997 Act") was signed into
law. Under the 1997 Act, states are authorized to develop their own standards
for setting payment rates. It requires each state to use a public process for
establishing proposed rates whereby the methodologies and justifications used
for setting such rates are available for public review and comment. This
requires facilities to become more involved in the rate setting process since
failure to do so may interfere with a facility's ability to challenge rates
later. Currently, several states in which we operate are experiencing deficits
in their fiscal operating budgets. There can be no assurance that those states
in which we operate that are experiencing budget deficits, as well as other
states in which we operate, will not reduce payment rates.

     Under the Nursing Home Resident Protection Amendments of 1999, a nursing
facility is required to continue providing care to Medicaid residents, as well
as current non-Medicaid residents who may qualify for Medicaid in the future,
even if the facility decides to withdraw from the Medicaid program.

     Healthcare system reform and concerns over rising Medicare and Medicaid
costs have been high priorities for both the federal and state governments. The
1997 Act included numerous program changes directed at balancing the federal
budget. The legislation changed Medicare and Medicaid policy in a number of
ways, including the phase-in of the Medicare prospective payment system ("PPS")
for skilled nursing facilities. PPS reimburses a skilled nursing facility based
upon the acuity level of Medicare patients. Acuity level is measured by the
Resource Utilization Grouping ("RUG") category a particular patient is
classified, based on the nature of the patient's condition and services
provided. There are 44 RUG categories.

     In November 1999, the Medicare, Medicaid and State Child Health Insurance
Program ("SCHIP") Balanced Budget Refinement Act of 1999 ("BBRA 1999") was
signed into law. BBRA 1999 refined the 1997 Act and restored approximately $2.7
billion in Medicare funding for skilled nursing providers over the subsequent
three years. The provisions of BBRA 1999 included, among other things:

     - the option for a skilled nursing provider to continue being reimbursed in
       accordance with the payment schedule set forth under the 1997 Act, or
       100% of the federally-determined acuity-adjusted rate, effective for cost
       reporting periods starting on or after January 1, 2000;

     - a temporary increase of 20% in the federal adjusted per diem rates for 15
       RUG categories covering extensive services, special care, clinically
       complex, and high and medium rehabilitation, for the period from April 1,
       2000 through September 30, 2000; however, CMS did not recalculate the
       necessary refinements to the overall RUG-III system, and the 20% increase
       was extended until such time as the calculations are completed;

     - a 4% increase in the federal adjusted per diem rates for all 44 RUG
       categories for each of the periods October 1, 2000 through September 30,
       2001 and October 1, 2001 through September 30, 2002;

     - a two-year moratorium on implementing the two Part B $1,500 therapy
       limitations contained in the 1997 Act, effective January 1, 2000 through
       December 31, 2001.

     We chose to be reimbursed at 100% of the federally-determined
acuity-adjusted rate on approximately 300 of our nursing facilities effective
January 1, 2000 and an additional 48 effective January 1, 2001. Effective
January 1, 2002, this transition was complete and all nursing facilities are to
be reimbursed at the full federal rate.

     In December 2000, the Medicare, Medicaid and SCHIP Benefits Improvement and
Protection Act of 2000 ("BIPA") was signed into law. BIPA was intended to invest
an additional $35 billion in enhanced medical benefits and to increase Medicare
and Medicaid payments to providers over the subsequent five years. Approximately
$2 billion of this amount was expected to benefit nursing home providers and
approximately $2 billion was intended to benefit home health agencies. The
specific provisions of BIPA included, among other things:

     - an inflation update to the full market basket for federal fiscal year
       2001 for skilled nursing facilities and home health agencies, and market
       basket minus .5% in federal fiscal years 2002 and 2003 for skilled
       nursing facilities;
                                        4
<PAGE>

     - a 16.66% increase in the nursing component of all 44 RUG categories
       effective April 1, 2001, with a requirement that all skilled nursing
       facilities post on a daily basis for each shift the current number of
       licensed and unlicensed nursing staff directly responsible for resident
       care in the facility beginning January 1, 2003;

     - an additional one-year moratorium on therapy caps through December 31,
       2002;

     - a 6.7% increase in the federal adjusted per diem rates for the
       rehabilitation RUG categories starting April 1, 2001;

     - a 5% increase in the base Medicare daily payment rates for hospice care
       beginning April 1, 2001; and

     - an additional one-year delay until September 30, 2002 in the 15%
       reduction in aggregate PPS rates for home health agencies.

     Certain of the BIPA provisions supercede those of the 1997 Act and BBRA
1999, and other provisions are supplements to those regulations. On October 1,
2002, certain of the BBRA 1999 and BIPA provisions will expire unless the
federal government extends the current regulations. These provisions include the
16.66% increase in the nursing component of all 44 RUG categories and the 4%
overall increase in the adjusted rates for all 44 RUG categories. Assuming a
similar volume and mix of Medicare patients as those we experienced in 2001, if
these add-ons were completely eliminated, our annual net operating revenues
would be reduced by an estimated $55,500,000 (or approximately $13,900,000 for
2002, assuming an October 1, 2002 implementation date), including:

     - $37,600,000 annually ($9,400,000 for 2002) related to the elimination of
       the 16.66% add-on for the nursing component; and

     - $17,900,000 annually ($4,475,000 for 2002) related to the elimination of
       the 4% add-on for all RUG categories.

     In addition, the 6.7% increase for the rehabilitation RUG categories and
the 20% add-on for the high-acuity non-therapy RUG categories will expire when
CMS releases their refinements to the RUG system. Currently, we generate annual
net operating revenues related to these add-ons of approximately $37,700,000. We
cannot currently estimate when these refinements will be released, nor what the
impact will be of such refinements on our overall operating results or cash
flows.

OUR INDUSTRY IS HEAVILY REGULATED BY THE GOVERNMENT WHICH REQUIRES OUR
COMPLIANCE WITH A VARIETY OF LAWS.

     The operation of our facilities and the services we provide are subject to
periodic inspection by governmental authorities to ensure that we are complying
with standards established for continued licensure under state law and
certification for participation under the Medicare and Medicaid programs.
Additionally, in certain states, certificates of need or other similar approvals
are required for expansion of our operations. We could be adversely affected if
we are unable to obtain these approvals, if the standards applicable to
approvals or the interpretation of those standards change and by possible delays
and expenses associated with obtaining approvals. Our failure to obtain, retain
or renew any required regulatory approvals, licenses or certificates could
prevent us from being reimbursed for certain of our services.

     CMS, formerly known as the Health Care Financing Administration ("HCFA") of
the Department of Health and Human Services ("HHS") published survey,
certification and enforcement guidelines in July 1999 and December 1999 to
implement the Medicare and Medicaid provisions of the Omnibus Budget
Reconciliation Act of 1987 ("OBRA 1987"). OBRA 1987 authorized CMS to develop
regulations governing survey, certification and enforcement of the requirements
for participation by skilled nursing facilities under

                                        5
<PAGE>

Medicare and nursing facilities under Medicaid. Among the provisions that CMS
adopted were requirements that:

     - surveys focus on residents' outcomes;

     - all deviations from the participation requirements will be considered
       deficiencies, but all deficiencies will not constitute noncompliance; and

     - penalties will result for certain types of deficiencies.

     The regulations also identify remedies, as alternatives to termination from
participation, and specify the categories of deficiencies for which these
remedies will be applied. These remedies include:

     - installation of temporary management;

     - denial of payment for new admissions;

     - denial of payment for all patients;

     - civil monetary penalties of $50 to $10,000;

     - closure of facility and/or transfer of patients in emergencies;

     - directed plans of correction; and

     - directed in-service training.

     CMS's most recent enforcement guidelines established criteria that:

     - mandate the immediate application of remedies before the provider has an
       opportunity to correct the deficiency;

     - impose a "per instance" civil monetary penalty up to $10,000 per day; and

     - allow termination in as few as two days.

     Although we could be adversely affected if a substantial portion of our
programs or facilities were eventually determined not to be in compliance with
the CMS regulations, we believe our programs and facilities are generally in
compliance.

     In the ordinary course of our business, we receive notices of deficiencies
for failure to comply with various regulatory requirements. We review all such
notices and take timely and appropriate corrective action. In most cases, the
facility and the reviewing agency will agree upon the steps to be taken to bring
the facility into compliance with regulatory requirements. In some cases or upon
repeat violations, the reviewing agency may take a number of adverse actions
against a facility. These adverse actions include:

     - the imposition of fines;

     - temporary suspension of admission of new patients to the facility;

     - decertification from participation in the Medicaid or Medicare programs;
       or

     - in extreme circumstances, revocation of a facility's license

     We have been subject to certain of these adverse actions in the past and
could be subject to adverse actions in the future which could result in
significant penalties, as well as adverse publicity.

     We have a Quality Management ("QM") program to help ensure that high
quality care is provided in all of our facilities. Our nationwide network of
quality managers are healthcare professionals of a variety of backgrounds
including registered nurses, dietitians and social workers who work with
regional, district and facility based professionals. Facility based QM is
structured through our Beverly Quality System. With a philosophy of quality
improvement, reviews are conducted by local quality improvement teams to
identify potential problems and assist in the development of plans of
corrections to improve care delivery.

                                        6
<PAGE>

     CMS has reported that, during 2002, it will conduct a pilot project in five
states, including Colorado, Maryland, Ohio, Rhode Island and Washington, where
it will publicly report on the performance of each nursing home in those states
in terms of quality of care. This reporting will take place using a set of
quality indicators calculated from the minimum data set assessments prepared on
each resident. This project is expected to be extended to all facilities
nationwide by the end of 2002 and is expected to assist CMS in working with the
nursing home industry to develop quality improvement programs where needed.

     The Social Security Act and regulations of HHS state that providers and
related persons who have been convicted of a criminal offense related to the
delivery of an item or service under the Medicare or Medicaid programs or who
have been convicted, under state or federal law, of a criminal offense relating
to neglect or abuse of residents in connection with the delivery of a healthcare
item or service cannot participate in the Medicare or Medicaid programs.
Furthermore, providers and related persons who have been convicted of fraud, who
have had their licenses revoked or suspended, or who have failed to provide
services of adequate quality may be excluded from the Medicare and Medicaid
programs.

     In February 2000, as part of the settlement of an investigation by the
federal government into our allocation of certain costs to the Medicare program
(See "Item 3. Legal Proceedings"), we entered into a Corporate Integrity
Agreement with the Office of Inspector General (the "OIG"). This agreement
requires that we monitor, on an ongoing basis, our compliance with the
requirements of the federal healthcare programs. This agreement addresses our
obligations to ensure that we comply with the requirements for participation in
the federal healthcare programs. It also includes our functional and training
obligations, audit and review requirements, recordkeeping and reporting
requirements, as well as penalties for breach/noncompliance of the agreement. We
believe that we are generally in compliance with the requirements of the
Corporate Integrity Agreement and file annual reports with the OIG documenting
our compliance.

     There are "fraud and abuse" anti-kickback provisions in the Social Security
Act (the "Antifraud Amendments") which make it a criminal felony offense to
knowingly and willfully offer, pay, solicit or receive payment in order to
induce business for which reimbursement is provided under government health
programs, including Medicare and Medicaid. In addition, violators can be subject
to civil penalties, as well as exclusion from future participation in government
health programs. The Antifraud Amendments have been broadly interpreted to make
payment of any kind, including many types of business and financial arrangements
among providers and between providers and beneficiaries, potentially illegal if
any purpose of the payment or financial arrangement is to induce a referral.
Accordingly, joint ventures, space and equipment rentals, management and
personal services contracts, and certain investment arrangements among providers
may be subject to increased regulatory scrutiny.

     From time to time, HHS puts into effect regulations describing, or
clarifying, certain arrangements that are not subject to enforcement action
under the Social Security Act (the "Safe Harbors"). The Safe Harbors described
in the regulations are narrow, leaving a wide range of economic relationships,
which many hospitals, physicians and other healthcare providers consider to be
legitimate business arrangements, possibly subject to enforcement action under
the Antifraud Amendments. The regulations do not intend to comprehensively
describe all lawful relationships between healthcare providers and referral
sources. The regulations clearly state that just because an arrangement does not
qualify for Safe Harbor protection does not mean it violates the Antifraud
Amendments. However, it may subject a particular arrangement or relationship to
increased regulatory scrutiny.

     In addition to the Antifraud Amendments, Section 1877 of the Social
Security Act (known as the "Stark Law") imposes restrictions on financial
relationships between physicians and certain entities. The Stark Law provides
that if a physician (or an immediate family member of a physician) has a
financial relationship with an entity that provides certain designated health
services, the physician may not refer a Medicare or Medicaid patient to the
entity. In addition, the entity may not bill for services provided by that
physician unless an exception to the financial relationship exists. Designated
health services include certain services, such as physical therapy, occupational
therapy, prescription drugs and home health. The types of financial relation-

                                        7
<PAGE>

ships that can trigger the referral and billing prohibitions include ownership
or investment interests, as well as compensation arrangements. Penalties for
violating the law are severe, and include:

     - denial of payment for services provided;

     - civil monetary penalties of $15,000 for each item claimed;

     - assessments equal to 200% of the dollar value of each such service
       provided; and

     - exclusion from the Medicare and Medicaid programs.

     Many states where we operate have laws similar to the Antifraud Amendments
and the Stark Law, but with broader effect since they apply regardless of the
source of payment for care. These laws typically provide criminal and civil
penalties, as well as loss of licensure. The scope of these state laws is broad
and little precedent exists for their interpretation or enforcement.

     The Health Insurance Portability and Accountability Act of 1996 ("HIPAA")
includes comprehensive revisions or supplements to the Antifraud Amendments.
Under HIPAA, it is a federal criminal offense to commit healthcare fraud.
Healthcare fraud is defined as knowingly and willfully executing or attempting
to execute a "scheme or device" to defraud any healthcare benefit program. In
addition, for the first time, federal enforcement officials have the ability to
exclude from the Medicare and Medicaid programs any investors, officers and
managing employees associated with business entities that have committed
healthcare fraud, even if the investor, officer or employee had no actual
knowledge of the fraud. HIPAA established that it is a violation to pay a
Medicare or Medicaid beneficiary so as to influence such beneficiary to order or
receive services from a particular provider or practitioner. Many of the HIPAA
provisions became effective January 1, 1997.

     The 1997 Act also contained a significant number of new fraud and abuse
provisions. For example, civil monetary penalties may also be imposed for
violations of the Antifraud Amendments (previously, exclusion or criminal
prosecution were the only actions under the Antifraud Amendments), as well as
for contracting with an individual or entity that a provider knows or should
know is excluded from a federal healthcare program. The 1997 Act provides for
civil monetary penalties of $50,000 and damages of not more than three times the
amount of payment received from the prohibited activity.

     In 1976, Congress established the OIG at HHS to identify and eliminate
fraud, abuse and waste in HHS programs and to promote efficiency and economy in
HHS departmental operations. The OIG carries out this mission through a
nationwide program of audits, investigations and inspections. In order to
provide guidance to healthcare providers on ways to engage in legitimate
business practices and avoid scrutiny under the fraud and abuse statutes, the
OIG has from time to time issued "fraud alerts" identifying segments of the
healthcare industry and particular practices that are vulnerable to abuse. The
OIG has issued three fraud alerts targeting the skilled nursing industry:

     - an August 1995 alert which relates to the providing of medical supplies
       to nursing facilities, the fraudulent billing for medical supplies and
       equipment and fraudulent supplier transactions;

     - a May 1996 alert which focuses on the providing of fraudulent
       professional services to nursing facility residents; and

     - a March 1998 alert which addresses the interrelationship between hospice
       services and the nursing home industry, and potentially illegal practices
       and arrangements.

     The fraud alerts encourage persons having information about potentially
abusive practices or transactions to report such information to the OIG.

     In addition to laws addressing referral relationships, several federal laws
impose criminal and civil sanctions for fraudulent and abusive billing
practices. The federal False Claims Act imposes sanctions, consisting of
monetary penalties of up to $11,000 for each claim and three times the amount of
damages, on entities and persons who knowingly present or cause to be presented
to the federal government a false or fraudulent claim for payment. The Social
Security Act prohibits the knowing and willful making of a false

                                        8
<PAGE>

statement or misrepresentation of a material fact with respect to the submission
of a claim for payment under government health programs (including the Medicare
and Medicaid programs). Violations of this provision are a felony offense
punishable by fines and imprisonment. The HIPAA provisions establish criminal
penalties for fraud, theft, embezzlement, and the making of false statements
with respect to healthcare benefit programs (which includes private, as well as
government programs). Government prosecutors are increasing their use of the
federal False Claims Act to prosecute quality of care deficiencies in healthcare
facilities. Their theory behind this is that the submission of a claim for
services provided in a manner which falls short of quality of care standards can
constitute the submission of a false claim. Under federal law, private parties
may bring qui tam whistle-blower lawsuits alleging false claims. Some states
have adopted similar whistle-blower and/or false claims provisions.

     In addition to increasing the resources devoted to investigating
allegations of fraud and abuse in the Medicare and Medicaid programs, federal
and state regulatory and law enforcement authorities are taking an increasingly
strict view of the requirements imposed on healthcare providers by the Social
Security Act and Medicare and Medicaid regulations. From time to time, the
Company, like other healthcare providers, is required to provide records to
state or federal agencies to aid in such investigations. It is possible that
these entities could initiate investigations in the future at facilities we
operate and that such investigations could result in significant penalties, as
well as adverse publicity.

     A joint federal/state initiative, Operation Restore Trust, was created in
1995 to focus audit and law enforcement efforts on geographic areas and provider
types receiving large concentrations of Medicare and Medicaid funds. Under
Operation Restore Trust, the OIG and CMS have undertaken a variety of activities
to address fraud and abuse by nursing homes, home health providers and medical
equipment suppliers. These activities include financial audits, creation of a
Fraud and Waste Report Hotline, and increased investigations and enforcement
activity.

     In addition to its antifraud provisions, HIPAA also requires improved
efficiency in healthcare delivery by standardizing electronic data interchange
and by protecting the confidentiality and security of health data. More
specifically, HIPAA calls for:

     - standardization of electronic patient health, administrative and
       financial data;

     - unique health identifiers for individuals, employers, health plans and
       healthcare providers; and

     - security standards protecting the confidentiality and integrity of
       individually identifiable health information.

     In August 2000, final regulations surrounding standards for electronic
transactions and code sets, as required under HIPAA, were released. These
standards will allow entities within the healthcare system to exchange medical,
billing and other information and to process transactions in a more timely and
cost effective manner. These new transactions and code sets must be implemented
by October 2002, unless a covered entity applies for, and is granted, an
extension of up to one year. In December 2000, the final privacy standards were
released and must be implemented by April 2003. The privacy standards are
designed to protect the privacy of patients' medical information. While the Bush
administration and Congress could reexamine these privacy standards, it is
unlikely there will be changes to the standards or to the effective date.
Security and other standards are expected to be issued in 2002. All standards
are required to be fully implemented within two years of final issuance, with
civil and criminal penalties established for noncompliance.

     HHS estimates that implementation of the electronic transactions and code
sets, the privacy standards and the security standards will cost the healthcare
industry between $1.8 billion and $6.3 billion over the next five years.
Specifications have been written and are currently being coded and tested
surrounding the implementation of standardized electronic transactions. An
internal working group is assessing the impact of the new privacy and security
standards on our current systems and processes and designing plans for their
implementation. We continue to evaluate the impact of the new standards on our
processes and procedures; however, we do not feel their implementation will have
a material impact on our consolidated financial position or results of
operations.

                                        9
<PAGE>

WE ARE SUBJECT TO INCREASINGLY EXPENSIVE AND UNPREDICTABLE PATIENT CARE
LIABILITY COSTS.

     General liability and professional liability costs for the long-term care
industry have become increasingly expensive and difficult to estimate. We, along
with most of our competitors, are experiencing substantial increases in both the
number of claims and lawsuits, as well as the size of the typical claim and
lawsuit. This has been most evident recently in the state of Florida, where
well-intended patient rights' statutes tended to be exploited by plaintiffs'
attorneys. The tort laws in the state of Florida have been changed, which should
begin to mitigate some of these issues in Florida over the longer term. However,
there are other states where the laws have, and will continue to attract
plaintiffs' attorneys for similar reasons.

     Because of these issues, insurance companies are exiting certain states,
including Florida, or severely limiting their capacity to write long-term care
general and professional liability insurance. In addition, in the wake of the
September 11 events, the insurance environment in general has become unstable,
making it increasingly difficult to obtain coverage for patient care liabilities
and other risks. When insurance coverage is available, insurance carriers are
requiring companies to significantly increase their liability retention levels
and pay substantially higher premiums for reduced coverage.

OUR FAILURE TO ATTRACT QUALIFIED PERSONNEL COULD HARM OUR BUSINESS.

     At December 31, 2001, we had approximately 57,000 associates. We are
subject to both federal minimum wage and applicable federal and state wage and
hour laws. In addition, we maintain various employee benefit plans.

     During the past few years, due primarily to nationwide low unemployment
rates, we have experienced periodic difficulty attracting and retaining nursing
assistants, certified nurses' aides and other facility-based personnel. In
addition, there is a growing shortage of registered and licensed nurses in this
country. We are addressing these challenges through recruiting, orientation,
retention and training initiatives. These initiatives may not stabilize or
improve our ability to attract and retain employees for these positions in the
long term. However, in the past few months we have seen a leveling off of both
our weighted average wage rate and in our use of contract nursing personnel. Our
inability to control labor availability and cost could have a material adverse
affect on our future operating results.

     Approximately 8% of our associates, who work in approximately 100 of our
nursing facilities, are represented by various labor unions. Certain labor
unions have publicly stated that they are concentrating their organizing efforts
within the long-term healthcare industry. Being one of the largest employers
within the long-term healthcare industry, we have been the target of a
"corporate campaign" by two AFL-CIO affiliated unions attempting to organize
certain of our facilities. Our subsidiaries have never experienced any material
work stoppages and we believe that our relations with our associates and labor
organizations are generally good. However, we cannot predict the effect
continued union representation or organizational activities will have on our
future activities. There can be no assurance that continued union representation
and organizational activities will not result in material work stoppages, which
could have a material adverse effect on our operations.

     Excessive litigation is a tactic common to "corporate campaigns" and one
that is being employed against us. There are several proceedings against
facilities, and subsidiaries operating them, before the National Labor Relations
Board ("NLRB") and the appellate courts. These proceedings consolidate
individual cases from separate facilities. We are vigorously defending these
proceedings. We believe, based on advice from our Deputy General Counsel for
Labor and Employment, that a number of these cases are without merit or, if
meritorious, are not material to our consolidated financial position, results of
operations, or cash flows.

                                        10
<PAGE>

CERTAIN TRENDS IN THE HEALTHCARE INDUSTRY ARE PUTTING PRESSURE ON OUR ABILITY TO
MAINTAIN NURSING FACILITY CENSUS.

     Over the past decade a number of trends have developed that have impacted
our census. These trends include:

     - overbuilding of nursing facilities in states that have eliminated the
       certificate of need process for new construction;

     - creation of nursing facilities by acute care hospitals to keep discharged
       patients within their complex;

     - rapid growth of assisted living facilities, which sometimes are more
       attractive to less medically complex patients; and

     - the development of the scope and availability of health services
       delivered to the home.

     The impact of these trends on nursing facility census varies from facility
to facility, from community to community and from state to state.

OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION.

     We have a significant amount of indebtedness and other obligations. At
December 31, 2001, our consolidated balance sheet reflected approximately
$741,673,000 of outstanding indebtedness; approximately $84,859,000 of amounts
we owe to the federal government under the civil settlement agreement; and a
$35,000,000 cash payment under the settlement offer made to the federal
government on February 4, 2002. In addition, we have $182,400,000 of off-balance
sheet financing ($42,900,000 of which was paid down with a portion of the
proceeds from the sale of our Florida facilities in January 2002). Our
substantial indebtedness could:

     - require us to dedicate a substantial portion of our cash flow from
       operations to payments on our indebtedness, thereby reducing the
       availability of our cash flow to fund working capital, capital
       expenditures and other general corporate activities;

     - limit our flexibility in planning for, or reacting to, changes in our
       business and industry;

     - place us at a competitive disadvantage compared to other less leveraged
       competitors;

     - increase our vulnerability to general adverse economic and industry
       conditions; or

     - limit our ability to pursue business opportunities that may be in our
       interest.

     If we add new indebtedness to our existing debt levels, it could increase
the related risks that we face.

IF WE ARE UNABLE TO GENERATE SUFFICIENT CASH FLOW TO SERVICE OUR INDEBTEDNESS,
OUR BUSINESS AND FINANCIAL RESULTS COULD SUFFER.

     Our ability to make payments on our indebtedness and to fund planned
expenditures depends on our ability to generate cash flow in the future. This,
to some extent, is subject to general economic, financial, competitive,
legislative, regulatory and other factors that are beyond our control. In
addition, our ability to borrow funds under our $150,000,000 secured revolving
credit facility depends on our satisfying various covenants. These covenants,
among other things:

     - limit our ability and the ability of our subsidiaries to borrow and place
       liens on our assets or their assets;

     - require us to comply with certain coverage ratio tests;

     - require us to maintain a minimum consolidated net worth;

     - limit our ability to merge with other parties or sell all or
       substantially all of our assets; and

     - limit our and our subsidiaries' ability to make investments.

                                        11
<PAGE>

     We cannot assure you that our business will generate cash flow from
operations or that future borrowings will be available to us under our credit
facility in an amount sufficient to enable us to pay our indebtedness or to fund
our other liquidity needs. Our inability to generate sufficient cash flow to
service our indebtedness could have a material adverse affect on our business
and results of operations.

THERE MAY BE VOLATILITY IN OUR STOCK PRICE.

     The market price of our Common Stock is based in large part on professional
securities analysts' expectations that our business will continue to grow and
that we will achieve certain profit levels. If our financial performance in a
particular quarter does not meet the expectations of securities analysts, this
may adversely affect the views of those securities analysts concerning our
growth potential and future financial performance. If the securities analysts
who regularly follow our Common Stock lower their ratings of our Common Stock or
lower their projections for our future growth and financial performance, the
market price of our Common Stock could drop significantly.

ITEM 2. PROPERTIES.

     On February 28, 2002, we operated 466 nursing facilities, 29 assisted
living centers, 154 outpatient therapy clinics and 53 hospice and home care
centers in 32 states and the District of Columbia. Most of our 142 leased
nursing facilities are subject to "net" leases which require us to pay all
taxes, insurance and maintenance costs. Most of these leases have original terms
from ten to fifteen years and contain at least one renewal option. Renewal
options typically extend the original terms of the leases by five to fifteen
years. Many of these leases also contain purchase options. We consider our
physical properties to be in good operating condition and suitable for the
purposes for which they are being used. Certain of our nursing facilities and
assisted living centers are included in the collateral securing our obligations
under various debt agreements. See "Part II, Item 8 -- Note 6 of Notes to
Consolidated Financial Statements."

                                        12
<PAGE>

     The following is a summary of our nursing facilities, assisted living
centers, outpatient therapy clinics and hospice and home care centers at
February 28, 2002:

<Table>
<Caption>
                                      NURSING FACILITIES
                                      -------------------      ASSISTED
                                                            LIVING CENTERS                  HOSPICE
                                                  TOTAL     --------------   OUTPATIENT    AND HOME
                                                LICENSED             TOTAL    THERAPY        CARE
LOCATION                              NUMBER      BEDS      NUMBER   UNITS    CLINICS       CENTERS
--------                              -------   ---------   ------   -----   ----------   -----------
<S>                                   <C>       <C>         <C>      <C>     <C>          <C>
Alabama.............................     21       2,783       --       --        --           --
Arizona.............................      3         480       --       --        --           --
Arkansas............................     34       4,081        3       64        --           --
California..........................     60       6,362        3      185        39           12
Colorado............................     --          --       --       --        16           --
Delaware............................     --          --       --       --         4           --
District of Columbia................      1         355       --       --        --           --
Georgia.............................     15       1,970        4      133        17            2
Hawaii..............................      2         396       --       --        --           --
Illinois............................      3         275       --       --        --           --
Indiana.............................     30       3,819        1       16        --            1
Kansas..............................     22       1,335        2       29        --           --
Kentucky............................      8       1,039       --       --        --           --
Maryland............................      4         585        1       19         6           --
Massachusetts.......................     19       2,073       --       --        --           --
Michigan............................      2         206       --       --        --           --
Minnesota...........................     30       2,368        1       16        --           --
Mississippi.........................     21       2,618       --       --        --           --
Missouri............................     26       2,572        3      101        --            1
Nebraska............................     24       2,159        1       19        --            4
Nevada..............................     --          --       --       --        --            1
New Jersey..........................      1         120       --       --        --           --
North Carolina......................     10       1,278        1       16        10           23
Ohio................................     11       1,326       --       --         5           --
Pennsylvania........................     42       4,781        3       72        10            6
South Carolina......................      2         216       --       --        13           --
South Dakota........................     17       1,204        1       36        --           --
Tennessee...........................      7         929        2       55        --           --
Texas...............................     --          --       --       --        34            2
Virginia............................     15       1,893        3       80        --           --
Washington..........................      8         802       --       --        --           --
West Virginia.......................      3         310       --       --        --           --
Wisconsin...........................     25       2,719       --       --        --            1
                                        ---      ------       --      ---       ---           --
                                        466      51,054       29      841       154           53
                                        ===      ======       ==      ===       ===           ==
CLASSIFICATION
Owned...............................    323      35,130       24      555        --           --
Leased..............................    142      15,849        5      286       154           53
Managed.............................      1          75       --       --        --           --
                                        ---      ------       --      ---       ---           --
                                        466      51,054       29      841       154           53
                                        ===      ======       ==      ===       ===           ==
</Table>

     Effective December 1, 2001, we entered into a lease agreement on all of our
Florida facilities, including 49 nursing facilities and four assisted living
centers. We closed the real estate transaction on January 8, 2002.

                                        13
<PAGE>

ITEM 3. LEGAL PROCEEDINGS.

     On February 3, 2000, we entered into a series of agreements with the U.S.
Department of Justice and the Office of Inspector General of the Department of
Health and Human Services. These agreements settled the federal government's
investigations of the Company relating to our allocation to the Medicare program
of certain nursing labor costs in our skilled nursing facilities from 1990 to
1998 (the "Allocation Investigations").

     The agreements consist of:

     - a Plea Agreement;

     - a Civil Settlement Agreement;

     - a Corporate Integrity Agreement; and

     - an agreement concerning the disposition of 10 nursing facilities.

     Under the Plea Agreement, one of our subsidiaries pled guilty to one count
of mail fraud and 10 counts of making false statements to Medicare and paid a
criminal fine of $5,000,000 during the first quarter of 2000.

     Under the Civil Settlement Agreement, we paid the federal government
$25,000,000 during the first quarter of 2000 and are reimbursing the federal
government an additional $145,000,000 through withholdings from our biweekly
Medicare periodic interim payments in equal installments through the first
quarter of 2008. In addition, we agreed to resubmit certain Medicare filings to
reflect reduced labor costs allocated to the Medicare program.

     Under the Corporate Integrity Agreement, we are required to monitor, on an
ongoing basis, our compliance with the requirements of the federal healthcare
programs. This agreement addresses our obligations to ensure that we comply with
the requirements for participation in the federal healthcare programs. It also
includes our functional and training obligations, audit and review requirements,
recordkeeping and reporting requirements, as well as penalties for
breach/noncompliance of the agreement. We believe that we are generally in
compliance with the requirements of the Corporate Integrity Agreement and file
annual reports with the OIG documenting our compliance.

     In accordance with our agreement to dispose of 10 nursing facilities, we
disposed of seven of the facilities during 2000 and the remaining three
facilities during 2001.

     On July 6, 1999, an amended complaint was filed by the plaintiffs in a
previously disclosed purported class action lawsuit pending against the Company
and certain of our officers in the United States District Court for the Eastern
District of Arkansas (the "Class Action"). Plaintiffs filed a second amended
complaint on September 9, 1999 which asserted claims under Section 10(b)
(including Rule 10b-5 promulgated thereunder) and under Section 20 of the
Securities Exchange Act of 1934 arising from practices that were the subject of
the Allocation Investigations. The defendants filed a motion to dismiss that
complaint on October 8, 1999. Oral argument on this motion was held on April 6,
2000. By order and judgement dated October 17, 2001, defendants' motion to
dismiss was granted, and the complaint was dismissed with prejudice. Plaintiffs
appealed this decision to the Eighth Circuit Court of Appeals (Case No.
01-3677). The briefing schedule has been completed. Oral argument is scheduled
for April 18, 2002. Due to the preliminary state of the Class Action and the
fact the second amended complaint does not allege damages with any specificity,
we are unable at this time to assess the probable outcome of the Class Action or
the materiality of the risk of loss. We believe that we acted lawfully with
respect to plaintiff investors and will vigorously defend the Class Action.
However, we can give no assurances of the ultimate impact on our consolidated
financial position, results of operations or cash flows as a result of these
proceedings.

                                        14
<PAGE>

     In addition, since July 29, 1999, eight derivative lawsuits have been filed
in the state courts of Arkansas, California and Delaware, as well as the federal
district court in Arkansas, assertedly on behalf of the Company, (collectively,
the "Derivative Actions"), including:

     - Norman M. Lyons v. David R. Banks, et al., Case No. OT99-4041, was filed
       in the Chancery Court of Pulaski County, Arkansas (4th Division) on or
       about July 29, 1999, and the parties filed an Agreed Motion to Stay the
       proceedings on January 17, 2000;

     - Alfred Badger, Jr. v. David R. Banks, et al., Case No. OT99-4353, was
       filed in the Chancery Court of Pulaski County, Arkansas (1st Division) on
       or about August 17, 1999 and voluntarily dismissed on November 30, 1999;

     - James L. Laurita v. David R. Banks, et al., Case No. 17348NC, was filed
       in the Delaware Chancery Court on or about August 2, 1999;

     - Kenneth Abbey v. David R. Banks, et al., Case No. 17352NC, was filed in
       the Delaware Chancery Court on or about August 4, 1999;

     - Alan Friedman v. David R. Banks, et al., Case No. 17355NC, was filed in
       the Delaware Chancery Court on or about August 9, 1999;

     - Elles Trading Company v. David R. Banks, et al., was filed in the
       Superior Court for San Francisco County, California on or about August 4,
       1999 and removed to federal district court;

     - Kushner v. David R. Banks, et al., Case No. LR-C-98-646, was filed in the
       United States District Court for the Eastern District of Arkansas
       (Western Division) on September 30, 1999 and was appealed to the 8th
       Circuit Court of Appeals on November 5, 2001; and

     - Richardson v. David R. Banks, et al., Case No. LR-C-99-826, was filed in
       the United States District Court for the Eastern District of Arkansas
       (Western Division) on November 4, 1999.

     The Laurita, Abbey and Friedman actions were subsequently consolidated by
order of the Delaware Chancery Court. On or about October 1, 1999, the
defendants moved to dismiss the Laurita, Abbey and Friedman actions. In February
2002, the Delaware Chancery Court entered a stipulation of dismissal without
prejudice. The Kushner and Richardson actions were ordered to be consolidated as
In Re Beverly Enterprises, Inc. Derivative Litigation and by agreed motion,
Plaintiffs filed an amended, consolidated complaint on April 21, 2000.
Defendants filed a motion to dismiss the consolidated derivative complaint and a
motion to strike portions thereof on July 21, 2000. The parties have agreed to
stay the consolidated action pending the outcome of the motion to dismiss in the
Class Action.

     The Derivative Actions each name the Company's directors as defendants, as
well as the Company as a nominal defendant. The Badger and Lyons actions also
name as defendants certain of the Company's current and former officers. The
Derivative Actions each allege breach of fiduciary duties to the Company and its
stockholders arising primarily out of the Company's alleged exposure to loss due
to the Class Action and the Allocation Investigations. The Lyons and Richardson
actions also assert claims for abuse of control and constructive fraud arising
from the same allegations, and the Richardson action also claims unjust
enrichment.

     Due to the preliminary state of the Derivative Actions and the fact the
complaints do not allege damages with any specificity, we are unable at this
time to assess the probable outcome of the Derivative Actions or the materiality
of the risk of loss. We believe that plaintiffs' allegations that the defendants
acted unlawfully are without merit and the defendants will vigorously defend the
Derivative Actions. However, we can give no assurances of the ultimate impact on
our consolidated financial position, results of operations or cash flows as a
result of these proceedings.

     There are various other lawsuits and regulatory actions pending against the
Company arising in the normal course of business, some of which seek punitive
damages that are generally not covered by insurance. We do not believe that the
ultimate resolution of such other matters will have a material adverse effect on
our consolidated financial position, results of operations, or cash flows.

                                        15
<PAGE>

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

     There were no matters submitted to a vote of our security holders during
the last quarter of our fiscal year ended December 31, 2001.

EXECUTIVE OFFICERS AND DIRECTORS

     Each of our executive officers and directors holds office until a successor
is elected, or until the earliest of death, resignation or removal. Each
executive officer is elected or appointed by the Board of Directors. The
executive officers and directors, as of February 28, 2002, are as follows:

<Table>
<Caption>
                        NAME                                           POSITION                    AGE
                        ----                                           --------                    ---
<S>                                                    <C>                                         <C>
William R. Floyd(3)..................................  Chairman of the Board, President, Chief
                                                         Executive Officer and Director            57
Douglas J. Babb......................................  Executive Vice President -- Law and
                                                         Government Relations and Secretary        49
David R. Devereaux...................................  Chief Operating Officer -- Nursing
                                                       Facilities                                  39
Jeffrey P. Freimark..................................  Executive Vice President and Chief
                                                       Financial Officer                           46
Michael J. Matheny...................................  Executive Vice President -- Information
                                                         Technology and Chief Information
                                                         Officer                                   54
Bobby W. Stephens....................................  Executive Vice President -- Procurement     57
Patrice K. Acosta....................................  Senior Vice President -- Professional
                                                       Services                                    45
Jo Ann Beard, R.N., J.D..............................  Senior Vice President -- Quality
                                                       Management                                  56
Pamela H. Daniels....................................  Senior Vice President, Controller and
                                                       Chief Accounting Officer                    38
James M. Griffith....................................  Senior Vice President -- Investor
                                                       Relations and Corporate Communications      59
Cletus C. Hess.......................................  Senior Vice President -- Compliance         37
Schuyler Hollingsworth, Jr. .........................  Senior Vice President and Treasurer         55
Blaise J. Mercadante.................................  Senior Vice President -- Marketing and
                                                       New Business Innovation                     48
Crystal J. Wright....................................  Senior Vice President -- Human Resources    53
Chris W. Roussos.....................................  President -- MATRIX Rehabilitation          37
Cindy H. Susienka....................................  President -- AEGIS Therapies                42
Beryl F. Anthony, Jr.(3).............................  Director                                    64
Harris Diamond(2)(3).................................  Director                                    49
John D. Fowler, Jr. .................................  Director                                    44
James R. Greene(1)(2)................................  Director                                    80
Edith E. Holiday(2)(3)...............................  Director                                    50
John P. Howe, III, M.D(2)(3).........................  Director                                    59
James W. McLane(1)(2)................................  Director                                    63
Marilyn R. Seymann, Ph.D.(1)(2)......................  Director                                    59
</Table>

---------------

(1) Member of the Audit and Compliance Committee.

(2) Member of the Nominating and Compensation Committee.

(3) Member of the Quality Management Committee.

                                        16
<PAGE>

     Mr. Floyd joined the Company in April 2000 as President and Chief Operating
Officer. He was elected Chief Executive Officer in February 2001 and Chairman of
the Board in December 2001. From 1996 to 1998, he was Chief Executive Officer of
Choice Hotels International, and from 1995 to 1996, he was Chief Operating
Officer of Taco Bell Corporation. He has been a director of the Company since
July 2000.

     Mr. Babb joined the Company in April 2000 as Executive Vice President,
General Counsel and Secretary. He was named head of Government Relations in
January 2001. Mr. Babb was Senior Vice President and Chief of Staff for
Burlington Northern Santa Fe Corporation ("BNSF") from 1995 to 1997 and Senior
Vice President -- Merchandise Business Unit for BNSF from 1997 to 1999.

     Mr. Devereaux joined the Company in August 1998 as Senior Vice
President -- Operations for the Specialty Services Division of the Nursing
Facilities segment. He was elected President of the corporations within the
Nursing Facilities segment in January 2001 and Chief Operating Officer in July
2001. From 1996 to 1998, Mr. Devereaux was District Vice President of Manor Care
Health Services.

     Mr. Freimark joined the Company in January 2002 as Executive Vice President
and Chief Financial Officer. From May 2001 to January 4, 2002 he was Senior
Executive Vice President and Chief Financial Officer of OfficeMax. From March
1997 to May 2001 he was with The Grand Union Company where he held positions as
Executive Vice President, Chief Financial Officer and President and Chief
Executive Officer.

     Mr. Matheny joined the Company in March 2001 as Executive Vice
President -- Information Technology. From 1996 to 2001, Mr. Matheny was Vice
President -- Information Services at Cracker Barrel Old Country Store, Inc.

     Mr. Stephens joined the Company as a staff accountant in 1969. He was
elected Assistant Vice President in 1978, Vice President of the Company and
President of the Company's Central Division in 1980, and Executive Vice
President in February 1990.

     Ms. Acosta joined the Company in October 1996 as Vice President -- Risk
Management. She was elected Senior Vice President -- Professional Services in
January 2001. From January 1995 to September 1996, Ms. Acosta was Vice
President -- Risk Management at Regency Health Services.

     Ms. Beard joined the Company as a Senior Attorney in May 1986. In 1996 she
was elected Vice President and Deputy General Counsel. In February 2002 she was
elected Senior Vice President -- Quality Management.

     Ms. Daniels joined the Company in May 1988 as Audit Coordinator. She was
elected Vice President, Controller and Chief Accounting Officer in October 1996
and Senior Vice President in December 1999.

     Mr. Griffith joined the Company in November 1995 as Senior Vice
President -- Investor Relations and Corporate Communications.

     Mr. Hess joined the Company in May 1995 as Senior
Attorney -- Reimbursement. He was elected Vice President -- Compliance in May
1998 and Senior Vice President in December 1999.

     Mr. Hollingsworth joined the Company in June 1985 as Assistant Treasurer.
He was elected Treasurer in 1988, Vice President in 1990 and Senior Vice
President in March 1992. Mr. Hollingsworth left the Company in March 2002.

     Mr. Mercadante joined the Company in 2002 as Senior Vice
President -- Marketing and New Business Innovation. From 1999 to 2002, he was
President of Blazing Insights Group and from 1996 to 1999 he was Executive Vice
President -- Marketing at Universal Studios.

     Ms. Wright joined the Company in April 2001 as Senior Vice
President -- Human Resources. From May 1994 to March 2001 she was Vice
President -- Human Resources of CONDEA Vista Company, predecessor to SASOL North
America.

     Mr. Roussos joined the Company in August 2001 as a management designee of
Matrix Rehabilitation. He was elected President of Matrix Rehabilitation in
February 2002. From 2000 to 2001 he was Division

                                        17
<PAGE>

General Manager of American Homestar and from 1996 to 2000 he was General
Manager of Fleetwood Enterprises.

     Ms. Susienka joined the Company in June 1998 as President -- AEGIS
Therapies. From 1987 to 1998 she held various positions at NovaCare, Inc.,
including Regional Vice President.

     Mr. Anthony served as a member of the United States Congress and was
Chairman of the Democratic Congressional Campaign Committee from 1987 through
1990. In 1993, he became a partner in the Winston & Strawn law firm. He has been
a director of the Company since January 1993.

     Mr. Diamond has been President and Chief Executive Officer of Weber
Shandwick Worldwide, a subsidiary of the Interpublic group of companies and its
predecessor, BSMG Worldwide, a subsidiary of True North Communications since
1996. He is a director of Caremark Rx, Inc. He has been a director of the
Company since March 2001. Mr. Diamond resigned from the Board in March 2002.

     Mr. Fowler is President and director of Large Scale Biology Corporation, a
publicly traded healthcare company involved in the development and
commercialization of proprietary life science technologies. From 1998 to 2001,
he was Managing Director of the Healthcare Group at J.P. Morgan & Company and
from 1992 to 1998, he served as Managing Director and Co-Head of the Healthcare
Investment Banking Group at Salomon Brothers, Inc. He was elected a director of
the Company in February 2002.

     Mr. Greene's principal occupation has been that of a director and
consultant to various U.S. and international businesses since 1986. He is a
director of Buck Engineering Company and Bank Leumi. He has been a director of
the Company since January 1991.

     Ms. Holiday is an attorney. She served as White House Liaison for the
Cabinet and all federal agencies during the George H.W. Bush administration.
Prior to that, Ms. Holiday served as General Counsel of the U.S. Treasury
Department, as well as its Assistant Secretary of Treasury for Public Affairs
and Public Liaison. She is a director of Amerada Hess Corporation, Canadian
National Railway Company, Digex Incorporated, Hercules Incorporated, H.J. Heinz
Company and RTI International Metals, Inc. She is also a director or trustee of
various investment companies in the Franklin Templeton group of funds. She has
been a director of the Company since March 1995.

     Dr. Howe is President and Chief Executive Officer of Project HOPE (Health
Opportunities for People Everywhere), a not-for-profit organization dedicated to
improving the health standards of communities around the world by providing
health education, health policy research and humanitarian assistance. He is a
director of Southwest Foundation for Biomedical Research and San Antonio Medical
Foundation. From 1985 to 2001, Dr. Howe was President of the University of Texas
Health Science Center at San Antonio. He has been a director of the Company
since August 2001.

     Mr. McLane is Chairman, President, Chief Executive Officer and director of
Healthaxis Inc. From 1997 until 2000, he was President, Chief Operating Officer
and director of NovaCare, Inc. He previously served as Executive Vice President
of Aetna Life and Casualty and as Chief Executive Officer of Aetna Health Plans.
He is a director of UltraTouch, Inc. He has been a director of the Company since
October 2000.

     Ms. Seymann is President and Chief Executive Officer of M One, Inc., a
management risk and information systems consulting firm specializing in the
financial services industry. She is a director of Community First Bankshares,
Inc., NorthWestern Corporation and American Tool Company. She has been a
director of the Company since March 1995.

     During 2001, there were 12 meetings of the Board of Directors. Each
director, except Harris Diamond, attended at least 75% of the meetings of the
Board and committees on which he or she served.

     Non-employee directors received an annual retainer fee of $25,000 prorated
from January through May 2001 and $35,000 prorated from June through December
2001 for serving on the Board and an additional fee of $1,000 for each Board or
committee meeting attended ($500 if attended by telephone). The chairperson of
each committee received an additional $1,000 for each committee meeting
attended. Such fees can be deferred, at the option of the director, as provided
for under the Non-Employee Director Deferred

                                        18
<PAGE>

Compensation Plan (discussed below). Mr. Floyd, our current Chairman of the
Board, President and Chief Executive Officer, received no additional cash
compensation during 2001 for serving on the Board or its committees.

     The Non-Employee Director Deferred Compensation Plan provides each
non-employee director the opportunity to receive awards equivalent to shares of
our Common Stock ("deferred share units") and to defer receipt of compensation
for services rendered to the Company. There are three types of contributions
available under the plan:

     - deferral of all or part of retainer and meeting fees to a pre-tax
       deferred compensation account either into a cash account, which is
       credited with interest, or a deferred share unit account, with each unit
       having a value equivalent to one share of our Common Stock;

     - a 25% match on the amount of fees deferred in the deferred share unit
       account; and

     - a grant of 675 deferred share units each year.

     Distributions under the plan will commence upon retirement, termination,
death or disability and will be made in shares of our Common Stock unless the
Board of Directors approves payment in cash.

     Under the Non-Employee Directors Stock Option Plan, there are 450,000
shares of our $.10 par value common stock ("Common Stock") authorized for
issuance, subject to certain adjustments. The plan, as amended, provides that an
option to purchase 11,000 shares be granted to each non-employee director on
June 1 of each year until the plan is terminated, subject to the availability of
shares. Such stock options are granted at a purchase price equal to the fair
market value of our Common Stock on the date of grant, become exercisable one
year after the date of grant and expire ten years after the date of grant.

                                        19
<PAGE>

                                    PART II

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

     Our Common Stock is listed on the New York and Pacific Stock Exchanges. The
table below sets forth, for the periods indicated, the range of high and low
sales prices of our Common Stock as reported on the New York Stock Exchange
composite tape.

<Table>
<Caption>
                                                                  PRICES
                                                              --------------
                                                               HIGH     LOW
                                                              ------   -----
<S>                                                           <C>      <C>
2000
  First Quarter.............................................  $ 4.56   $2.50
  Second Quarter............................................    4.00    2.75
  Third Quarter.............................................    6.38    2.56
  Fourth Quarter............................................    8.25    3.81
2001
  First Quarter.............................................  $ 8.50   $5.94
  Second Quarter............................................   10.73    5.20
  Third Quarter.............................................   12.10    8.50
  Fourth Quarter............................................   10.69    6.50
2002
  First Quarter (through February 28).......................  $ 9.50   $5.66
</Table>

     We are subject to certain restrictions under our long-term debt agreements
related to the payment of cash dividends on, and the repurchase of, our Common
Stock. During 2001 and 2000, we did not pay any cash dividends on our Common
Stock and no future dividends are currently planned. During 2000, we repurchased
1,174,500 shares of our Common Stock for treasury. No shares were repurchased in
2001 and no repurchases are currently planned.

     On February 28, 2002, there were 5,049 record holders of our Common Stock.

EMPLOYEE STOCK PURCHASE PLAN

     The Beverly Enterprises 1988 Employee Stock Purchase Plan (as amended and
restated, the "ESPP") enables all full-time employees having completed one year
of continuous service to purchase shares of our Common Stock at the current
market price through payroll deductions. Effective January 1, 2001, we reduced
our contribution from 30% to 15% of the participant's contribution. Each
participant specifies the amount to be withheld from earnings per two-week pay
period, subject to certain limitations. The total charge to our statement of
operations for the year ended December 31, 2001 related to this plan was
approximately $458,000. On December 31, 2001, there were approximately 2,000
participants in the plan.

     Effective November 2, 2001, Merrill Lynch & Co. transferred the ESPP
records and responsibilities to Computershare Trust Co., Inc. ("Computershare
Trust"), 300 Davidson Avenue, Somerset, NJ 08873. Computershare Trust was
appointed broker to open and maintain an account in each participant's name and
to purchase shares of our Common Stock on the New York Stock Exchange for each
participant.

                                        20
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA.

     The following table of selected financial data should be read along with
our consolidated financial statements and related notes thereto for 2001, 2000
and 1999 included elsewhere in this Annual Report on Form 10-K.

<Table>
<Caption>
                                                                AT OR FOR THE YEARS ENDED DECEMBER 31,
                                               ------------------------------------------------------------------------
                                                   2001           2000           1999         1998(1)        1997(2)
                                               ------------   ------------   ------------   ------------   ------------
                                                            (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                            <C>            <C>            <C>            <C>            <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net operating revenues.......................  $  2,709,861   $  2,625,610   $  2,546,672   $  2,812,232   $  3,217,099
Interest income..............................         3,077          2,650          4,335         10,708         13,201
                                               ------------   ------------   ------------   ------------   ------------
    Total revenues...........................     2,712,938      2,628,260      2,551,007      2,822,940      3,230,300
Costs and expenses:
  Operating and administrative...............     2,464,851      2,481,914      2,354,328      2,633,135      2,888,021
  Interest...................................        79,373         80,016         72,578         65,938         82,713
  Depreciation and amortization..............        93,001        100,061         99,160         93,722        107,060
  Asset impairments, workforce reductions and
    other unusual items......................       238,102         43,033         23,818         69,443         44,000
  Special charges related to an offer to
    settle and a settlement with the federal
    government...............................        77,495             --        202,447          1,865             --
  Year 2000 remediation......................            --             --         12,402          9,719             --
                                               ------------   ------------   ------------   ------------   ------------
    Total costs and expenses.................     2,952,822      2,705,024      2,764,733      2,873,822      3,121,794
                                               ------------   ------------   ------------   ------------   ------------
Income (loss) before provision for (benefit
  from) income taxes, extraordinary charge
  and cumulative effect of accounting
  change.....................................      (239,884)       (76,764)      (213,726)       (50,882)       108,506
Provision for (benefit from) income taxes....        61,388        (22,262)       (79,079)       (25,936)        49,913
Extraordinary charge, net of income tax
  benefit of $1,057..........................            --             --             --         (1,660)            --
Cumulative effect of accounting change, net
  of income tax benefit of $2,811............            --             --             --         (4,415)            --
                                               ------------   ------------   ------------   ------------   ------------
Net income (loss)............................  $   (301,272)  $    (54,502)  $   (134,647)  $    (31,021)  $     58,593
                                               ============   ============   ============   ============   ============
Diluted income (loss) per share of common
  stock:
  Before extraordinary charge and cumulative
    effect of accounting change..............  $      (2.90)  $      (0.53)  $      (1.31)  $       (.24)  $        .57
  Extraordinary charge.......................            --             --             --           (.02)            --
  Cumulative effect of accounting change.....            --             --             --           (.04)            --
                                               ------------   ------------   ------------   ------------   ------------
  Net income (loss)..........................  $      (2.90)  $      (0.53)  $      (1.31)  $       (.30)  $        .57
                                               ============   ============   ============   ============   ============
  Shares used to compute per share amounts...   104,037,000    102,452,000    102,491,000    103,762,000    103,422,000
OTHER FINANCIAL DATA:
Cash flow from operations....................  $    220,897   $     37,010   $    189,141   $      6,789   $    144,204
EBITDA(3)....................................  $    245,010   $    143,696   $    192,344   $    179,097   $    329,078
EBITDA Margin %(3)...........................          9.04%          5.47%          7.55%          6.37%         10.23%
Capital expenditures.........................  $     89,401   $     76,027   $     95,414   $    150,451   $    133,087
CONSOLIDATED BALANCE SHEET DATA:
Total assets.................................  $  1,681,070   $  1,875,993   $  1,982,880   $  2,160,511   $  2,073,469
Current portion of long-term debt............  $     64,231   $    227,111   $     34,052   $     27,773   $     31,551
Long-term debt, excluding current portion....  $    677,442   $    564,247   $    746,164   $    878,270   $    686,941
Stockholders' equity.........................  $    296,497   $    583,993   $    641,124   $    776,206   $    862,505
OTHER DATA:
Average occupancy(4).........................          86.9%          87.0%          87.2%          88.7%          88.9%
Number of nursing home beds..................        52,115         59,799         62,217         62,293         63,552
</Table>

---------------

(1) Includes the operations of American Transitional Hospitals, Inc. through
    June 30, 1998.

(2) Includes the operations of Pharmacy Corporation of America through December
    3, 1997.

(3) EBITDA is calculated as earnings before interest, taxes, depreciation,
    amortization and special charges. EBITDA Margin % is calculated by dividing
    EBITDA by net operating revenues.

(4) Calculated by dividing actual patient days by available patient days.
    Available patient days are calculated by multiplying total calendar days by
    the number of beds that are physically and operationally ready for use.

                                        21
<PAGE>

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

CRITICAL ACCOUNTING POLICIES

     The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States.
The accounting policies discussed below are considered by management to be
critical to an understanding of our financial statements because their
application requires significant judgment and reliance on estimations of matters
that are inherently uncertain. Specific risks related to these critical
accounting policies are described in the following paragraphs.

  ACCOUNTS RECEIVABLE AND ALLOWANCES FOR DOUBTFUL ACCOUNTS

     Our revenues are derived primarily from providing long-term healthcare
services. More than 70% of our current net operating revenues is derived from
funds provided under federal and state medical assistance programs. As discussed
more fully in Item 8 -- Note 1, we record our revenues when services are
provided at standard charges, adjusted to amounts estimated to be received under
governmental programs or other third-party contractual arrangements. These
revenues are subject to audit and retroactive adjustment by governmental and
third-party agencies. Due to the complexity of the laws and regulations
governing the federal and state medical assistance programs, there is a
possibility that recorded estimates may change by a material amount in the near
term.

     We record bad debt expense monthly using a percentage of revenue that
reflects our historical experience. Every quarter, we adjust the reserves for
bad debts based on the aging of the receivables. These adjustments are based on
our weighted average experience by payor type, and recognize the relative risk
depending on the source of the payment. In addition, specific accounts that are
determined to be uncollectible (due to bankruptcy, insufficient documentation,
and the like) are fully reserved when such determinations are made. If
circumstances change (economic downturn, higher than expected defaults or
denials), our estimates of the recoverability of our receivables could be
reduced by a material amount. Our provision for bad debts represented 2% of net
operating revenues in 2001, 3% in 2000 and 1% in 1999. Our allowance for
doubtful accounts represented 17% and 22% of patient accounts receivable at
December 31, 2001 and 2000, respectively.

  INSURANCE AND PATIENT LIABILITY RISKS

     General liability and professional liability costs for the long-term care
industry have become increasingly expensive and difficult to estimate. In
addition, insurance coverage for patient care liability and other risks, for
nursing facilities specifically and companies in general, has become
increasingly difficult to obtain. When obtained, insurance carriers are often
requiring companies to significantly increase their liability retention levels
and pay substantially higher premiums for reduced coverage.

     As described more fully in Item 8 -- Note 1, we believe adequate provision
has been made in the financial statements for liabilities that may arise out of
patient care and other services. Such provisions are made based primarily upon
the results of independent actuarial valuations, prepared by actuaries with
long-term care industry experience. This provision also includes accruals for
insurance premiums for the coverage period and our estimate of any experience
adjustments to premiums. Such valuations are prepared twice a year using the
most recent trends of claims, settlements and other relevant data.

     The majority of our auto liability and workers' compensation risks are
insured through insurance policies with third parties. For our general and
professional liabilities, we are responsible for the first dollar of each claim,
up to a self-insurance limit determined by the individual policies, subject to
aggregate limits for certain policy years. Those liabilities are estimated by
the independent actuaries and are discounted at 10% on our financial statements
to their present value using expected loss payment timing patterns. The discount
rate is based upon our best estimate of the incremental borrowing rate that
would be required to fund these liabilities with uncollateralized debt. A
reduction in the discount rate by one-half of a percentage point would have
resulted in an additional pre-tax charge for 2001 of $1,219,000. On an
undiscounted basis, these liabilities

                                        22
<PAGE>

totaled $203,800,000 at December 31, 2001. Our risk management and independent
actuaries estimate our range of discounted exposure for these liabilities to be
$152,500,000 to $198,500,000. Our recorded reserves for these liabilities were
$173,690,000 at December 31, 2001.

  OFF-BALANCE SHEET OBLIGATIONS

     We have two off-balance sheet financing arrangements which totaled
approximately $182,400,000 at December 31, 2001, including:

     - $70,000,000 of Medium Term Notes due March 2005; and

     - $112,400,000 of Synthetic Leases ($42,900,000 of which was paid down in
       January 2002 in conjunction with the sale of our Florida facilities).

     The Medium Term Notes are obligations of a bankruptcy-remote subsidiary of
the Company, Beverly Funding Corporation ("BFC"). These notes are collateralized
by Medicaid and Veterans Administration accounts receivable that are sold by
Beverly Health and Rehabilitation Services, Inc., a wholly owned subsidiary, to
BFC at a discount. These daily transactions constitute true sales of receivables
for which BFC bears the risk of collection. BFC is a legally-isolated entity
whose assets cannot be used to satisfy claims of the Company or any of its other
subsidiaries. Therefore, in accordance with current generally accepted
accounting standards, the assets and liabilities of BFC are not consolidated
with Beverly Enterprises, Inc.

     Because BFC is a wholly owned subsidiary of the Company, its total equity
of approximately $33,000,000 at December 31, 2001 is recorded as an asset on the
consolidated balance sheet of the Company and its operating loss of
approximately $3,000,000 is fully reflected in the operating results of the
Company. If BFC was required to be reconsolidated with the Company, we would
record additional assets of approximately $53,000,000 and debt obligations of
$70,000,000 on the consolidated statements. See Item 8 -- Note 6 for a more
detailed description of this transaction.

     At December 31, 2001, the Company leased 11 nursing facilities, one
assisted living center and its corporate headquarters under an off-balance sheet
financing arrangement, typically referred to as a synthetic lease. The lessor
financed the construction of these properties and we lease the properties under
a master operating lease agreement, which matures in August 2004. At that time,
we can renew the lease for up to two years (at the lessor's option), purchase
the properties at original cost, or coordinate the sale of the properties to a
third-party.

     There is a third-party entity at risk under this arrangement for 3% of the
original commitment. Of the remaining 97% original commitment, 17% is secured by
first mortgages on the related properties and 83% is guaranteed by the Company
and secured by second mortgages on the related properties. If these leases were
required to be reconsolidated with the Company, they would be recorded as
capital lease assets and obligations with our consolidated assets and related
liabilities increasing by approximately $69,500,000, after the paydowns related
to the Florida facilities. The annual lease payments would be recorded as
interest expense and we would be required to record depreciation and
amortization expense on the assets. The additional non-cash expense for
depreciation and amortization, after the paydowns related to the Florida
facilities, is estimated to be approximately $2,300,000 per year.

     We monitor these off-balance sheet obligations throughout the year and
believe the obligations and any related assets should not be included in our
consolidated financial statements under generally accepted accounting
principles. However, if changes in accounting standards or facts surrounding
these obligations would require these obligations to be consolidated, the impact
on our financial position, operating results, and cash flows would not be
significant and consolidation would not impact compliance with any of our debt
covenants.

     In addition, we have off-balance sheet debt guarantees of approximately
$53,000,000 and we guarantee certain third-party operating leases and officer
loans. See Item 8 -- Note 7 for a more complete description of each of these
items.

                                        23
<PAGE>

  ASSET IMPAIRMENTS

     We recorded asset impairment charges of $211,800,000 and $35,500,000 for
the years ended December 31, 2001 and 2000, respectively. We evaluate our
long-lived assets for impairment whenever indicators of impairment exist. These
indicators of impairment can include, but are not limited to, the following:

     - a history of operating losses, with expected future losses;

     - changes in the regulatory environment effecting reimbursement;

     - changes in the way an asset is used in the business; and

     - commitment to a plan to sell or otherwise dispose of an asset.

     During 2000, operating losses at certain Matrix clinics and management's
determination to dispose of, or terminate the leases on, six nursing facilities,
led to impairment analyses to be calculated on these assets. During 2001,
continuing operating losses in several of our lines of business, including
certain Matrix clinics, our managed care contracting entity, certain Home Care
businesses and a few of our nursing homes, led to impairment analyses on these
businesses.

     These impairment analyses included:

     - estimating the undiscounted cash flows to be generated by each clinic,
       unit or facility, primarily over the weighted average remaining life of
       the assets; and

     - reducing the carrying value of the asset to the estimated fair value when
       the total undiscounted cash flows was less than the current book value of
       the clinic, unit or facility.

     In order to estimate the fair values of the clinic, unit or facility we
used a discounted cash flow approach. For the nursing homes, we discounted the
estimated future cash flows over the remaining lives of the primary assets. For
other lines of business that lack significant property investments, we
discounted the next 10 years of expected cash flows. Cash flows for all lines of
business were estimated using historical results, without an inflation factor,
and adjusted for known trends. Those cash flows were discounted at our weighted
average cost of capital. A 1% change in the discount rate would not have a
material impact on the impairment calculations. A substantial change in the
estimated future cash flows for these businesses could materially change the
estimated fair values of these assets, possibly resulting in an additional
impairment. In certain of the Home Care businesses where the cash flows were
negative, we estimated the fair values based on our knowledge of recent sales of
comparable businesses.

     Also, during 2001, management initiated a formal plan to dispose of all of
our nursing home operations in Florida. Accordingly, these assets were written
down to their estimated sales value less selling costs. We ultimately leased
these assets to a third party in the fourth quarter of 2001, with the real
estate transaction closing in January 2002. See Item 8 -- Note 3 for a more
detailed discussion of this transaction, including related exit costs, and other
impairments we have recorded.

  DEFERRED TAX ASSETS

     As of December 31, 2001, we had a full valuation allowance of $153,700,000
against our net deferred tax assets. Providing for this allowance resulted in a
charge to our statement of operations of $52,100,000 during 2001, which was
recorded through the provision for income taxes. This valuation allowance was
required under current generally accepted accounting principles because of our
pre-tax loss in 2001, cumulative losses over the past several years and the
inherent uncertainty associated with the realization of future income.

     SFAS No. 109 indicates, under cumulative loss circumstances, management's
expectations as to future taxable income, even if supported by detailed
forecasts and projections, are rarely sufficient to overcome historical results
in order to conclude that the deferred tax assets will ultimately be realized.
In addition, the federal government's decision to extend or rescind certain
Medicare provisions due to expire on September 30, 2002, has created further
uncertainty surrounding projected earnings results. Therefore, we believe a full
valuation allowance against our net deferred tax assets is prudent.

                                        24
<PAGE>

     Notwithstanding the valuation allowance, we will not be required to record
a provision for federal income taxes and our state tax provision should be
minimal on future pre-tax income of at least $225,000,000. In addition, we will
not be required to pay regular federal income taxes on pre-tax income generated
in the near future due to the utilization of federal net operating loss
carryforwards and the realization of existing temporary differences. Using
current projections, we expect this situation to exist for at least the next two
years.

OPERATING RESULTS

  2001 COMPARED TO 2000

  RESULTS OF OPERATIONS

     We reported a net loss for the year ended December 31, 2001 of
$301,272,000, compared to a net loss of $54,502,000 for the year ended December
31, 2000. Net loss for 2001 included pre-tax charges totaling approximately
$238,100,000, primarily including $211,800,000 for asset impairments and exit
costs and $24,200,000 for workforce reductions. These pre-tax charges have been
included in the consolidated statement of operations caption "Asset impairments,
workforce reductions and other unusual items." The asset impairment and exit
costs primarily relate to:

     - $75,100,000 write-down of Florida facilities and $55,100,000 of Florida
       exit costs, as discussed below;

     - write-down of goodwill of $31,200,000, and property, equipment and other
       intangible assets of $1,300,000 on certain under-performing outpatient
       therapy clinics, as well as Theraphysics, our managed care contracting
       entity, which had operating losses for the past three years and expected
       future operating losses. These assets were included in the total assets
       of the TMX operating segment during the year ended December 31, 2001;

     - write-down of goodwill of $21,800,000, property, equipment and other
       intangible assets of $1,000,000 and recording of closing and other cost
       of $4,600,000 on under-performing Home Care businesses that management
       plans to dispose of during 2002. These assets were included in the total
       assets of the Innovation and Services operating segment during the year
       ended December 31, 2001;

     - write-down of property and equipment of $10,000,000, and goodwill and
       other intangibles of $600,000 on certain under-performing nursing
       facilities that management plans to sell, close or terminate the leases
       on. These assets were included in the total assets of the Nursing
       Facilities operating segment during the year ended December 31, 2001;

     - write-off of abandoned projects and investments totaling $7,800,000; and

     - $3,300,000 related to the termination of a lease in Indiana and the
       write-off of the net book value of the related assets.

     During the first quarter of 2001, a formal plan was initiated by management
to pursue the sale of our nursing home operations in Florida, which included 49
nursing facilities (6,129 beds) and four assisted living centers (315 units)
(the "Florida facilities"). The plan included the pursuit of the sale of one
additional nursing facility (56 beds) which was sold during the third quarter of
2001 and certain other assets which will be sold in separate transactions. The
decision to sell these properties was made primarily due to the excessive
patient care liability costs that we had been incurring in recent periods in the
state of Florida. Accordingly, the property and equipment, identifiable
intangibles and operating supplies of our Florida nursing home operations at
March 31, 2001 were considered assets to be disposed of, as that term is defined
in Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of
("SFAS No. 121"). Management estimated the fair value less selling costs of such
assets based upon verbal and non-binding purchase prices from potential buyers
and determined that an impairment write-down was necessary as of March 31, 2001.
The pre-tax charge recorded during the first quarter of 2001 related to this
write-down was approximately $68,900,000. In July 2001, we entered into a
definitive agreement to sell the Florida facilities to FC Properties, formerly
known as NMC of Florida, LLC and recorded an additional impairment write-down of
approximately $6,200,000. Effective December 1, 2001,

                                        25
<PAGE>

we entered into a lease agreement on the Florida facilities with Florida Health
Care Properties and we closed the real estate transaction on January 8, 2002.

     In conjunction with the sale of the Florida facilities, we also recorded
pre-tax charges totaling $55,100,000 for certain exit costs. These costs relate
to severance agreements, termination payments on certain contracts and various
other items. At December 31, 2001, the Florida assets held for sale totaled
approximately $120,843,000 and are classified as current assets in the
consolidated balance sheet.

     Annualized revenues for the Florida facilities were approximately
$288,000,000. During the year ended December 31, 2001, our Florida nursing home
operations recorded pre-tax income of approximately $612,000. Such amount does
not include certain costs which are currently recorded at the parent company
level and are not fully allocated to the individual subsidiaries or facilities.
In accordance with SFAS No. 121, we did not record depreciation and amortization
expense on the Florida assets during the period these assets were held for sale,
since these assets were adjusted to their estimated net realizable value. The
amount of depreciation and amortization expense that we did not have to record
during the year ended December 31, 2001 on the Florida assets was approximately
$6,785,000.

     We recorded pre-tax charges totaling approximately $24,200,000 during 2001
for workforce reductions. These reductions were the result of an operational
reorganization required to support the implementation of a new three year
strategic plan. Approximately $23,100,000 of these pre-tax charges related to
severance and other employment agreements for approximately 240 associates who
were notified in 2001 that their positions would be eliminated, including:

     - $18,000,000 of cash expenses, approximately $10,900,000 of which was paid
       during the year ended December 31, 2001;

     - non-cash expenses of $4,500,000 related to the issuance of shares under
       our Stock Grant Plan; and

     - non-cash expenses of $600,000 related to other long-term incentive
       agreements.

     We estimate the annual cost savings of this operational reorganization to
be approximately $14,000,000. Much of this savings was realized in 2001, since
the majority of the workforce reductions took place in the first quarter. These
estimated savings are net of the additional costs we incurred to increase the
operations and clinical staff at the facility and district level.

     In January 2001, we filed a registration statement under Form S-8 with the
Securities and Exchange Commission registering 1,174,500 shares of our Common
Stock. These shares were previously repurchased by the Company and held in
treasury. They will be issued under the Beverly Enterprises, Inc. Stock Grant
Plan (the "Stock Grant Plan") to holders of restricted stock who, by virtue of
the terms of their employment contracts, severance agreements or other similar
arrangements, have a claim to the immediate vesting of their restricted stock.
In conjunction with the reorganization (as discussed above), 644,476 shares of
Common Stock under the Stock Grant Plan have been issued to various officers who
made such claims, and the shares of restricted stock held by such officers were
cancelled.

     On February 4, 2002, we made a settlement offer to the federal government
to resolve open reimbursement issues under the former cost-reimbursement system
for Medicare. For accounting purposes, this settlement offer was required to be
recorded in our operating results for the year ended December 31, 2001 and
resulted in a pre-tax charge of approximately $77,500,000 which is included in
the caption "Special charges related to an offer to settle and a settlement with
the federal government." This charge includes a $35,000,000 cash settlement
offer and the write-off of $81,500,000 of related cost report receivables,
offset by a $39,000,000 reserve established in 1999 for related issues.

     Net loss for 2000 included pre-tax charges totaling approximately
$43,000,000 for asset impairments, workforce reductions and other unusual items.
See "2000 Compared to 1999 -- Results of Operations."

                                        26
<PAGE>

  INCOME TAXES

     We recorded a provision for income taxes at 26% for the year ended December
31, 2001, even though we had a pre-tax loss, primarily due to the recording of a
$153,697,000 valuation allowance on our deferred tax assets. This valuation
allowance was required under the guidance of SFAS No. 109 Accounting for Income
Taxes due to our historical operating performance and our reported cumulative
net losses. Our realization of the deferred tax asset benefits is dependent upon
our achieving at least $225,000,000 of pre-tax income. Under federal income tax
regulations, we have up to 20 years to generate sufficient taxable income to
realize the deferred benefits. However, given the size of our pre-tax loss in
2001 and uncertainties relating to Medicare reimbursement enhancements which may
expire on September 30, 2002, a valuation allowance was considered to be
appropriate under the more stringent accounting standards for the realization of
these deferred tax benefits contingent upon future income. If the federal
government does not approve the extension of certain Medicare enhancements, our
estimated annualized negative impact on net operating revenues is approximately
$55,500,000. In addition, if CMS releases refinements to the RUG system, we
could experience an additional reduction in revenues.

     Our annual effective tax rate for 2000 was 29%, which was different than
the federal statutory rate primarily due to amortization of nondeductible
goodwill and state income taxes, partially offset by the benefit of certain tax
credits. Amortization of nondeductible goodwill was impacted in 2000 by the
write-down of goodwill on certain under-performing outpatient therapy clinics.

     At December 31, 2001, for income tax purposes, we had federal net operating
loss carryforwards of $91,661,000 which expire in years 2018 through 2021;
general business tax credit carryforwards of $21,137,000 which expire in years
2009 through 2021; and alternative minimum tax credit carryforwards of
$18,608,000 which do not expire. Future tax benefits associated with these
carryforwards are not recorded in our 2001 consolidated financial statements as
a result of the valuation allowance recorded.

  NET OPERATING REVENUES

     We reported net operating revenues of $2,709,861,000 during the year ended
December 31, 2001 compared to $2,625,610,000 for the same period in 2000.
Approximately 92% of our total net operating revenues for each of the years
ended December 31, 2001 and 2000 were derived from services provided by our
nursing facilities segment. The increase in net operating revenues of
approximately $84,200,000 for the year ended December 31, 2001, as compared to
the same period in 2000, consists of the following:

     - an increase of $171,800,000 from facilities we operated during each of
       the years ended December 31, 2001 and 2000 ("same facility operations");

     - an increase of $19,900,000 due to acquisitions and openings of
       newly-constructed facilities; and

     - a decrease of $107,500,000 due to dispositions.

     The increase in net operating revenues of $171,800,000 from same facility
operations for the year ended December 31, 2001, as compared to the same period
in 2000, was primarily due to the following:

     - $164,100,000 due to an increase in Medicaid, Medicare and private payment
       rates;

     - $13,700,000 due to an increase in our rehabilitation therapy business'
       external contracts; and

     - $8,900,000 due to a positive shift in our patient mix.

     Such increases were partially offset by decreases of:

     - $16,500,000 due to a decline in same facility occupancy to 87.5% for the
       year ended December 31, 2001, as compared to 87.6% for the same period in
       2000; and

     - $5,500,000 due to one less calendar day during the year ended December
       31, 2001, as compared to the same period in 2000.

                                        27
<PAGE>

     Acquisitions and openings of newly-constructed facilities which occurred
during the year ended December 31, 2001 and the year ended December 31, 2000
caused our net operating revenues to increase $19,900,000 for the year ended
December 31, 2001, as compared to the same period in 2000. During the year ended
December 31, 2001, we acquired one nursing facility (185 beds), eight previously
leased nursing facilities (903 beds) and certain other assets. During 2000, we
acquired seven nursing facilities (1,210 beds), one previously leased nursing
facility (105 beds) and certain other assets, and we opened four newly-
constructed nursing facilities (418 beds), which were operated for a full year
in 2001.

     Dispositions that occurred during the years ended December 31, 2001 and
2000 caused our net operating revenues to decrease $107,500,000 for the year
ended December 31, 2001, as compared to the same period in 2000. During the year
ended December 31, 2001, we sold, closed or terminated the leases on 18 nursing
facilities (1,768 beds), one assisted living center (12 units), three outpatient
therapy clinics, one home care center and certain other assets. We recognized
net pre-tax gains, which were included in net operating revenues during the year
ended December 31, 2001, of approximately $600,000 as a result of these
dispositions.

     During 2000, we sold, closed or terminated the leases on 39 nursing
facilities (4,263 beds) and certain other assets. We recognized net pre-tax
gains, which were included in net operating revenues during the year ended
December 31, 2000, of approximately $2,000,000 as a result of these
dispositions.

     The acquired and disposed facilities in 2001 and 2000 were immaterial to
our consolidated financial position and operating results in each year.

  OPERATING AND ADMINISTRATIVE EXPENSES

     We reported operating and administrative expenses of $2,464,851,000 during
the year ended December 31, 2001 compared to $2,481,914,000 for the same period
in 2000. The decrease of approximately $17,100,000 consists of the following:

     - an increase of $40,700,000 in same facility operations;

     - an increase of $20,100,000 due to acquisitions and openings of
       newly-constructed facilities; and

     - a decrease of $77,900,000 due to dispositions.

     The increase in operating and administrative expenses of $40,700,000 from
same facility operations for the year ended December 31, 2001, as compared to
the same period in 2000, was due primarily to the following:

     - $90,100,000 of additional wages and related expenses primarily due to an
       increase in our weighted average wage rate; and

     - $13,400,000 due to an increase in other contracted services.

     Such increases were partially offset by the following:

     - $37,300,000 decrease in bad debt reserves primarily due to improved
       collections on our patient accounts receivable; and

     - $19,500,000 decrease in our provision for insurance and related items
       primarily due to an incremental pre-tax charge of approximately
       $44,400,000 recorded in 2000 to increase reserves for patient care
       liability costs.

     Excluding this $44,400,000 pre-tax charge for 2000, our provision for
insurance and related items increased approximately $24,900,000 for the year
ended December 31, 2001, as compared to the same period in 2000, primarily due
to rising patient care liability costs. We believe that adequate provision has
been made in the financial statements for liabilities that may arise out of
patient care services. Such provisions are made based upon the results of
independent actuarial valuations and other information available, including
management's best judgments and estimates. However, the provision and liability
have been difficult to

                                        28
<PAGE>

estimate and have been escalating in recent periods. There can be no assurance
that the provision and the resulting reserves will not require material
adjustment in future periods.

  DEPRECIATION AND AMORTIZATION

     Depreciation and amortization expense decreased approximately $7,100,000 to
$93,001,000 for the year ended December 31, 2001, as compared to $100,061,000
for the same period in 2000 primarily due to the discontinuation of depreciation
and amortization of our Florida nursing home assets, as they were classified as
held for sale at March 31, 2001.

  NEW ACCOUNTING STANDARDS

     In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, Business Combinations ("SFAS No. 141"),
which is effective for all business combinations completed after June 30, 2001.
SFAS No. 141 eliminates the pooling-of-interests method of accounting for
business combinations except for qualifying business combinations initiated
prior to July 1, 2001. In addition, SFAS No. 141 further clarifies the criteria
to recognize intangible assets separately from goodwill. We do not expect there
to be a significant impact on our consolidated financial position, results of
operations or cash flows as a result of adopting SFAS No. 141.

     In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets
("SFAS No. 142"), which establishes new rules on the accounting for goodwill and
other intangible assets. Under SFAS No. 142, goodwill and intangible assets with
indefinite lives will no longer be amortized; however, they will be subject to
annual impairment tests as prescribed by the Statement. Intangible assets with
definite lives will continue to be amortized over their estimated useful lives.
The amortization provisions of SFAS No. 142 apply immediately to goodwill and
intangible assets acquired after June 30, 2001. With respect to goodwill and
intangible assets acquired prior to July 1, 2001, SFAS No. 142 will be effective
for us beginning in the first quarter of 2002. The assessment of any impairment
as of January 1, 2002, has to be made by June 30, 2002, and measured and
recorded before the end of 2002. We are currently performing the required
impairment tests on our goodwill and other indefinite life intangibles; however,
we cannot currently estimate the impact these impairment tests will have on our
consolidated financial position or results of operations. Any impairment loss
recognized as a result of initially adopting SFAS No. 142 will be recorded as a
cumulative effect of a change in accounting principle. Subsequent to adoption,
impairment charges will be recognized in operations. The amortization provisions
of SFAS No. 142 are expected to benefit our results of operations by
approximately $6,600,000, or $.04 per share diluted, on an annual basis as a
result of no longer amortizing goodwill and certain intangibles.

     In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets ("SFAS No. 144"), which addresses financial
accounting and reporting for the impairment of long-lived assets and for
long-lived assets to be disposed of (other than goodwill and intangibles which
are covered by SFAS No. 142). SFAS No. 144 supersedes SFAS No. 121 and the
accounting and reporting provisions of Accounting Principles Board Opinion No.
30, Reporting the Results of Operations -- Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions, for segments of a business to be disposed of. SFAS No.
144 will be effective for us beginning in the first quarter of 2002. We have not
completed our review of SFAS No. 144 but do not expect there to be a material
effect on our consolidated financial position or results of operations.

  2000 COMPARED TO 1999

  RESULTS OF OPERATIONS

     Net loss was $54,502,000 for the year ended December 31, 2000, compared to
net loss of $134,647,000 for the year ended December 31, 1999. Net loss for 2000
included a pre-tax charge of approximately $44,400,000 related to increasing
reserves for patient care liability costs (See "Operating and Administrative
Expenses"), as well as pre-tax charges totaling approximately $43,000,000 for
asset impairments, workforce

                                        29
<PAGE>

reductions and other unusual items (as described below). Net loss for 1999
included special pre-tax charges of approximately $202,400,000 related to the
settlements of, and investigation costs related to, the Allocation
Investigations, as well as pre-tax charges totaling approximately $23,800,000
for asset impairments, workforce reductions and other unusual items.

     During 2000, we recorded pre-tax charges totaling approximately
$43,000,000, including $35,500,000 for asset impairments and $6,100,000 for
workforce reductions. These asset impairment charges primarily related to:

     - write-down of goodwill of $24,800,000 and property and equipment of
       $1,000,000 on certain under-performing outpatient therapy clinics
       primarily having operating losses for the past three years and expected
       future operating losses. These assets were included in the total assets
       of the TMX operating segment.

     - write-down of property and equipment of $5,100,000 and recording of
       closing and other costs of $3,000,000 related to six nursing facilities
       with an aggregate carrying value of approximately $6,000,000. Management
       closed or terminated the leases on five of these facilities during 2001.
       These assets generated pre-tax losses of approximately $2,400,000 during
       the year ended December 31, 2000 and were included in the total assets of
       our Nursing Facilities operating segment.

     - write-off of abandoned projects totaling $2,100,000;

     - write-off of an investment in a physician practice management company of
       $2,000,000; and

     - reversal of $2,500,000 of prior year asset impairment charges.

     The workforce reduction charges of $6,100,000 primarily related to
severance agreements associated with seven executives. Approximately $2,200,000
was paid during 2000, and the remainder was paid during the first quarter of
2001. Four of the executives were notified in late 2000 that their positions
would be eliminated as part of a reorganization of our operating and support
group functions. This reorganization was formally announced in the first quarter
of 2001.

     On February 3, 2000, we entered into a series of separate agreements with
the U.S. Department of Justice and the Office of Inspector General (the "OIG")
of the Department of Health and Human Services. These agreements settled the
federal government's investigations of the Company relating to our allocation to
the Medicare program of certain nursing labor costs in our skilled nursing
facilities from 1990 to 1998 (the "Allocation Investigations") (See "Part I,
Item 3. Legal Proceedings"). In anticipation of such settlements, we recorded
special pre-tax charges of approximately $202,400,000 ($127,500,000, net of
income taxes, or $1.24 per share diluted) during the year ended December 31,
1999, which included:

     - provisions totaling $128,800,000 representing the net present value of
       the separate civil and criminal settlements;

     - impairment losses of $17,000,000 on 10 nursing facilities that pled
       guilty to submitting erroneous cost reports to the Medicare program in
       conjunction with the criminal settlement and were required to be sold or
       closed;

     - $39,000,000 for certain prior year cost report related items estimated to
       be affected by the settlements;

     - $3,100,000 of debt issuance and refinancing costs related to various bank
       debt modifications as a result of the settlements; and

     - $14,500,000 for other investigation and settlement related costs.

     During the fourth quarter of 1999, we recorded pre-tax charges totaling
approximately $23,800,000 related to restructuring of agreements on certain
leased facilities, severance and other workforce reduction expenses, asset
impairments and other unusual items. We negotiated the terminations of lease
agreements on 19 nursing facilities (2,047 beds), which resulted in a pre-tax
charge of $17,300,000. We disposed of 17 of these nursing facilities during 2000
and one additional facility during 2001. During 2000, we reversed $2,500,000 of
the original charge for changes in our initial accounting estimates. In
addition, we accrued
                                        30
<PAGE>

$5,900,000 during the fourth quarter of 1999 primarily related to severance
agreements associated with three executives. Substantially all of the $5,900,000
was paid during the first quarter of 2000.

  INCOME TAXES

     We had an annual effective tax rate of 29% for the year ended December 31,
2000, compared to an annual effective tax rate of 37% for the year ended
December 31, 1999. The annual effective tax rate for 2000 was different than the
federal statutory rate primarily due to amortization of nondeductible goodwill
and state income taxes, partially offset by the benefit of certain tax credits.
Amortization of nondeductible goodwill was impacted by the write-down of
goodwill on certain under-performing outpatient therapy clinics (as discussed
above). The annual effective tax rate for 1999 was different than the federal
statutory rate primarily due to the impact of state income taxes.

  NET OPERATING REVENUES

     We reported net operating revenues of $2,625,610,000 during the year ended
December 31, 2000 compared to $2,546,672,000 for the same period in 1999.
Approximately 92% and 91% of our total net operating revenues for the years
ended December 31, 2000 and 1999, respectively, were derived from services
provided by our nursing facilities segment. The increase in net operating
revenues of approximately $78,900,000 for the year ended December 31, 2000, as
compared to the same period in 1999, consists of the following:

     - an increase of $96,800,000 from facilities we operated during each of the
       years ended December 31, 2000 and 1999 ("same facility operations");

     - an increase of $50,500,000 due to acquisitions and openings of
       newly-constructed facilities;

     - partially offset by a decrease of $68,400,000 due to dispositions.

     The increase in net operating revenues of $96,800,000 from same facility
operations related to the following:

     - $123,100,000 due to an increase in Medicaid, Medicare and private payment
       rates;

     - $5,900,000 due to one additional calendar day during the year ended
       December 31, 2000, as compared to the same period in 1999; and

     - $18,600,000 due primarily to prior year cost report related settlements
       and various other items.

     Such increases were partially offset by decreases of:

     - $20,200,000 due to lower revenues from outpatient rehabilitation services
       primarily resulting from increased contractual adjustments;

     - $15,400,000 due to lower revenues from home care services; and

     - $15,200,000 due to a decline in same facility occupancy to 87.6% for the
       year ended December 31, 2000, as compared to 88.2% for the same period in
       1999.

     Net operating revenues increased $50,500,000 for the year ended December
31, 2000, as compared to the same period in 1999, due to acquisitions which
occurred during the years ended December 31, 2000 and 1999. (See "2001 Compared
to 2000 -- Results of Operations" for discussion of 2000 acquisitions.) During
1999, we purchased three outpatient therapy clinics, two home care centers, two
nursing facilities (284 beds), one previously leased nursing facility (190 beds)
and certain other assets. In addition, we opened eight newly-constructed nursing
facilities (979 beds) and three assisted living centers (156 units) during 1999.
The acquisitions of the facilities and other assets were accounted for as
purchases. The operations of the acquired facilities and other assets, as well
as the newly-constructed facilities, were immaterial to our consolidated
financial position and results of operations.

                                        31
<PAGE>

     Net operating revenues decreased $68,400,000 for the year ended December
31, 2000, as compared to the same period in 1999, due to dispositions that
occurred during the years ended December 31, 2000 and 1999. (See "2001 Compared
to 2000 -- Results of Operations" for discussion of 2000 dispositions.)

     During 1999, we sold or terminated the leases on 12 nursing facilities
(1,291 beds), one assisted living center (10 units), 17 home care centers and
certain other assets. We recognized net pre-tax losses, which were included in
net operating revenues during the year ended December 31, 1999, of approximately
$4,000,000 as a result of these dispositions. The operations of the disposed
facilities and other assets were immaterial to our consolidated financial
position and results of operations.

  OPERATING AND ADMINISTRATIVE EXPENSES

     We reported operating and administrative expenses of $2,481,914,000 during
the year ended December 31, 2000 compared to $2,354,328,000 for the same period
in 1999. The increase of approximately $127,600,000 consists of the following:

     - an increase of $146,600,000 from same facility operations;

     - an increase of $57,100,000 due to acquisitions and openings of
       newly-constructed facilities;

     - partially offset by a decrease of $76,100,000 due to dispositions.

     Operating and administrative expenses increased $146,600,000 from same
facility operations for the year ended December 31, 2000, as compared to the
same period in 1999. This increase was due primarily to the following:

     - $52,900,000 increase in wages and related expenses primarily due to an
       increase in our weighted average wage rate;

     - $10,800,000 increase in wages and related expenses due to increased use
       of contract nursing personnel;

     - $34,400,000 due primarily to increases in allowances for uncollectible
       patient accounts receivable;

     - $32,500,000 due to an increase in our provision for insurance and related
       items; and

     - $10,400,000 due to an increase in other contracted services.

     Our weighted average wage rate and use of contract nursing personnel
increased in 2000 as compared to 1999. Many of our nursing facilities were
having increasing difficulties attracting nursing assistants, certified nurses'
aides and other personnel. We continue to address this challenge through several
recruiting and retention programs and training initiatives. No assurance can be
given that these programs and training initiatives will improve or stabilize our
ability to attract these nursing and related personnel.

  INTEREST EXPENSE, NET

     Interest income decreased to $2,650,000 for the year ended December 31,
2000, as compared to $4,335,000 for the same period in 1999 primarily due to the
payoff of various notes receivable. Interest expense increased to $80,016,000
for the year ended December 31, 2000, as compared to $72,578,000 for the same
period in 1999. This was primarily due to imputed interest on the civil
settlement of approximately $4,400,000 and an increase in Revolver borrowings
resulting from the $30,000,000 civil and criminal settlements paid in the first
quarter of 2000.

  DEPRECIATION AND AMORTIZATION

     Depreciation and amortization expense increased to $100,061,000 for the
year ended December 31, 2000, as compared to $99,160,000 for the same period in
1999, primarily related to the impact of capital additions, improvements and
acquisitions.

                                        32
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

     At December 31, 2001, we had approximately $89,300,000 in cash and cash
equivalents, approximately $31,800,000 of net working capital and approximately
$134,500,000 of unused commitments under our $150,000,000 revolving credit
facility.

     Net cash provided by operating activities for the year ended December 31,
2001 was approximately $220,900,000. This amount increased approximately
$183,900,000 from the year ended December 31, 2000 primarily due to the
following:

     - operational improvements, as reflected by the increase in EBITDA in 2001
       over 2000;

     - a reduction in patient accounts receivable during the year ended December
       31, 2001 compared to the year ended December 31, 2000 primarily due to
       improved collections, as well as an increase in Medicare periodic interim
       payments;

     - proceeds received during 2001 of $28,900,000 related to a refund of
       certain workers compensation premiums and a settlement on certain
       insurance policies; and

     - the $25,000,000 civil and $5,000,000 criminal settlement payments made
       during the first quarter of 2000, which negatively impacted operating
       cash flows for the year ended December 31, 2000.

     Net cash used for investing and financing activities were approximately
$86,700,000 and $70,800,000, respectively, for the year ended December 31, 2001.
From investing activities, we received cash proceeds of approximately
$20,800,000 from the dispositions of facilities and other assets and we paid for
capital expenditures totaling approximately $89,400,000. Our primary financing
activity during 2001 included net repayments of $65,000,000 on our debt
obligations.

     During April 2001, we completed the restructuring of our $375,000,000
credit facility, which was scheduled to mature on December 31, 2001. We entered
into a new $150,000,000 credit facility (the "Credit Facility") which matures in
April 2004 and issued $200,000,000 of 9 5/8% senior notes due 2009 (the "Senior
Notes") through a private placement. During the second quarter of 2001, we filed
a registration statement under Form S-4 with the Securities and Exchange
Commission registering the Senior Notes. During the third quarter, we exchanged
(the "Exchange Offer") all of the Senior Notes issued through the private
placement for publicly registered Senior Notes. We did not receive any proceeds
as a result of the Exchange Offer. The Senior Notes are unsecured obligations,
guaranteed by substantially all of our present and future subsidiaries (the
"Subsidiary Guarantors") and impose on us certain restrictive covenants. The net
proceeds from issuance of the Senior Notes were used to repay borrowings under
the $375,000,000 credit facility and for general corporate purposes.

     The Credit Facility provides for a Revolver/Letter of Credit Facility.
Revolver borrowings currently bear interest at adjusted LIBOR plus 2.625%, the
Base Rate, as defined, plus 1.625% or the adjusted CD rate, as defined, plus
2.75%, at our option. These interest rates may be adjusted quarterly based on a
leverage ratio calculation. The Credit Facility is secured by mortgages on
certain nursing facilities and the stock of certain subsidiaries, is guaranteed
by the Subsidiary Guarantors and imposes on us certain financial tests and
restrictive covenants.

     Effective December 31, 2001, we executed an amendment to our Credit
Facility, as well as amendments with certain of our other lenders covering debt
of approximately $132,500,000 (collectively the "Amendments"), which modified
certain financial covenant levels. The Amendments were required because
recording the special charges, as discussed in Item 8 -- Notes 2 and 3, would
have resulted in our noncompliance with certain financial covenants contained in
those debt agreements.

     During 2001, we entered into a $2,900,000 promissory note in conjunction
with the construction of a nursing facility and notes payable of approximately
$18,400,000 in conjunction with the acquisitions of seven nursing facilities.
Such debt instruments bear interest at rates ranging from 7.00% to 10.25%,
require monthly installments of principal and interest, and are secured by
mortgage interests in the real property and security interests in the personal
property of the nursing facilities.

                                        33
<PAGE>

     At December 31, 2001, we leased 11 nursing facilities (6 of which are in
Florida), one assisted living center and our corporate headquarters under an
off-balance sheet financing arrangement subject to operating leases with the
lessor. We have the option to purchase the facilities at the end of the initial
lease terms at original cost. Such financing arrangement was entered into for
the construction of these facilities and as of December 31, 2001, had
$112,400,000 of outstanding commitments ($42,900,000 of which was paid down in
January 2002 in conjunction with the sale of our Florida facilities).

     We currently anticipate that cash flows from operations and borrowings
under our banking arrangements, if required, will be adequate to repay our debts
due within one year of approximately $64,200,000, to make normal recurring
capital additions and improvements of approximately $80,000,000, to make
operating lease and other contractual payments of approximately $127,800,000, to
make selective acquisitions, including the purchase of previously leased
facilities, and to meet working capital requirements for the year ending
December 31, 2002. If cash flows from operations or availability under our
existing banking arrangements fall below expectations, we may be required to
delay capital expenditures, dispose of certain assets, issue additional debt
securities, or consider other alternatives to improve liquidity.

OBLIGATIONS AND COMMITMENTS

     A summary of our long-term contractual obligations and commitments in
future years as of December 31, 2001 is as follows (in thousands):

<Table>
<Caption>
                                                          PAYMENTS DUE BY PERIOD
                                               ---------------------------------------------
                                    TOTAL        2002     2003-2004   2005-2006   AFTER 2006
                                  ----------   --------   ---------   ---------   ----------
<S>                               <C>          <C>        <C>         <C>         <C>
Contractual obligations:
Long-term debt..................  $  731,382   $ 62,976   $ 68,426    $245,533     $354,447
Capital lease obligations.......      10,291      1,255      1,624         967        6,445
Operating leases................     287,254     71,838    109,015      56,548       49,853
Other long-term obligations.....     145,144     53,125     36,250      36,250       19,519
Data processing agreement.......       4,144      2,878      1,266          --           --
                                  ----------   --------   --------    --------     --------
  Total contractual cash
     obligations................  $1,178,215   $192,072   $216,581    $339,298     $430,264
                                  ==========   ========   ========    ========     ========
</Table>

<Table>
<Caption>
                                                   AMOUNT OF COMMITMENT EXPIRATION PER PERIOD
                                        TOTAL     ---------------------------------------------
                                       AMOUNTS                                          AFTER
                                      COMMITTED     2002     2003-2004    2005-2006      2006
                                      ---------   --------   ----------   ----------   --------
<S>                                   <C>         <C>        <C>          <C>          <C>
Other commercial commitments:
Lines of credit.....................   $ 1,000    $ 1,000     $    --       $   --     $    --
Letters of credit...................     9,796      9,796          --           --          --
Guarantees..........................    53,594     23,481      10,908        5,595      13,610
Other commercial commitments........     1,500      1,500          --           --          --
                                       -------    -------     -------       ------     -------
  Total commercial commitments......   $65,890    $35,777     $10,908       $5,595     $13,610
                                       =======    =======     =======       ======     =======
</Table>

     These obligations and commitments do not include $70,000,000 of Medium Term
Notes due March 2005, which are off-balance sheet obligations of the Company
(See Item 8 -- Note 6).

                                        34
<PAGE>

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

     We are exposed to market risk because we utilize financial instruments. The
market risks inherent in these instruments are attributable to the potential
loss from adverse changes in the general level of U.S. interest rates. We manage
our interest rate risk exposure by maintaining a mix of fixed and variable rates
for debt and notes receivable. The following table provides information
regarding our market sensitive financial instruments and constitutes a
forward-looking statement.

<Table>
<Caption>
                                                                                                      FAIR VALUE     FAIR VALUE
                                                                                                     DECEMBER 31,   DECEMBER 31,
EXPECTED MATURITY DATES   2002      2003       2004      2005       2006     THEREAFTER    TOTAL         2001           2000
-----------------------  -------   -------   --------   -------   --------   ----------   --------   ------------   ------------
                                                                 (DOLLARS IN THOUSANDS)
                                                                 ----------------------
<S>                      <C>       <C>       <C>        <C>       <C>        <C>          <C>        <C>            <C>
Total long-term debt:
 Fixed rate............  $41,116   $31,901   $ 37,659   $26,021   $219,887    $359,598    $716,182     $734,602       $570,029
 Average interest
   rate................     7.61%     8.21%      7.87%     8.04%      8.86%       9.13%

 Variable rate.........  $23,115   $   233   $    257   $   281   $    311    $  1,294    $ 25,491     $ 25,491       $202,670
 Average interest
   rate................     5.80%     5.62%      5.59%     5.57%      5.54%       5.83%

Total notes receivable:
 Fixed rate............  $19,304   $ 7,206   $     18   $    18   $     --    $     --    $ 26,546     $ 21,660       $  2,243
 Average interest
   rate................     6.65%     9.34%        --        --         --          --

 Variable rate.........  $    72   $    73   $     79   $    84   $     89    $    653    $  1,050     $  1,050       $  1,198
 Average interest
   rate................     5.75%     5.75%      5.75%     5.75%      5.75%       5.75%

Off-balance sheet
 financing(1):
 Variable rate.........  $    --   $    --   $182,357   $    --   $     --    $     --    $182,357     $182,357       $183,534
 Average interest
   rate................       --        --       4.56%       --         --          --
</Table>

---------------

(1) $42,900,000 was paid down in January 2002 in conjunction with the sale of
    our Florida facilities.

                                        35
<PAGE>

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

<Table>
<Caption>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Report of Ernst & Young LLP, Independent Auditors...........   37
Consolidated Balance Sheets.................................   38
Consolidated Statements of Operations.......................   39
Consolidated Statements of Stockholders' Equity.............   40
Consolidated Statements of Cash Flows.......................   41
Notes to Consolidated Financial Statements..................   42
Supplementary Data (Unaudited) -- Quarterly Financial
  Data......................................................   65
</Table>

                                        36
<PAGE>

               REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Beverly Enterprises, Inc.

     We have audited the accompanying consolidated balance sheets of Beverly
Enterprises, Inc. as of December 31, 2001 and 2000, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 2001. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.

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

     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Beverly Enterprises, Inc. at December 31, 2001 and 2000, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
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.

                                          /s/ ERNST & YOUNG LLP

Little Rock, Arkansas
February 4, 2002

                                        37
<PAGE>

                           BEVERLY ENTERPRISES, INC.

                          CONSOLIDATED BALANCE SHEETS
                             (DOLLARS IN THOUSANDS)

<Table>
<Caption>
                                                                   DECEMBER 31,
                                                              -----------------------
                                                                 2001         2000
                                                              ----------   ----------
<S>                                                           <C>          <C>
                                       ASSETS

Current assets:
  Cash and cash equivalents.................................  $   89,343   $   25,908
  Accounts receivable -- patient, less allowance for
     doubtful accounts:
     2001 -- $51,400; 2000 -- $91,636.......................     242,865      323,143
  Accounts receivable -- nonpatient, less allowance for
     doubtful accounts:
     2001 -- $908; 2000 -- $1,106...........................      12,914       19,831
  Notes receivable, less allowance for doubtful notes:
     2001 -- $714; 2000 -- $72..............................      18,662        2,197
  Operating supplies........................................      25,701       29,134
  Deferred income taxes.....................................          --       24,379
  Assets held for sale......................................     120,843           --
  Prepaid expenses and other................................      13,720       18,787
                                                              ----------   ----------
          Total current assets..............................     524,048      443,379
Property and equipment, net.................................     873,585    1,063,247
Other assets:
  Goodwill, net.............................................     144,884      203,742
  Deferred income taxes.....................................          --       27,721
  Other, less allowance for doubtful accounts and notes:
     2001 -- $4,393; 2000 -- $3,767.........................     138,553      137,904
                                                              ----------   ----------
          Total other assets................................     283,437      369,367
                                                              ----------   ----------
                                                              $1,681,070   $1,875,993
                                                              ==========   ==========

                        LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Accounts payable..........................................  $   93,728   $   84,420
  Accrued wages and related liabilities.....................     109,295      106,300
  Accrued interest..........................................      14,708       15,744
  General and professional liabilities......................      51,784        8,655
  Federal government settlement obligations.................      45,891       10,024
  Other accrued liabilities.................................     112,609       80,457
  Current portion of long-term debt.........................      64,231      227,111
                                                              ----------   ----------
          Total current liabilities.........................     492,246      532,711
Long-term debt..............................................     677,442      564,247
Other liabilities and deferred items........................     214,885      195,042
Commitments and contingencies
Stockholders' equity:
  Preferred stock, shares authorized: 25,000,000............          --           --
  Common stock, shares issued: 2001 -- 112,813,303;
     2000 -- 112,818,798....................................      11,281       11,282
  Additional paid-in capital................................     887,668      876,981
  Accumulated deficit.......................................    (495,203)    (193,931)
  Accumulated other comprehensive income....................       2,029          718
  Treasury stock, at cost: 2001 -- 8,515,758 shares;
     2000 -- 9,061,300 shares...............................    (109,278)    (111,057)
                                                              ----------   ----------
          Total stockholders' equity........................     296,497      583,993
                                                              ----------   ----------
                                                              $1,681,070   $1,875,993
                                                              ==========   ==========
</Table>

                            See accompanying notes.

                                        38
<PAGE>

                           BEVERLY ENTERPRISES, INC.

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

<Table>
<Caption>
                                                                 YEARS ENDED DECEMBER 31,
                                                           ------------------------------------
                                                              2001         2000         1999
                                                           ----------   ----------   ----------
<S>                                                        <C>          <C>          <C>
Net operating revenues...................................  $2,709,861   $2,625,610   $2,546,672
Interest income..........................................       3,077        2,650        4,335
                                                           ----------   ----------   ----------
          Total revenues.................................   2,712,938    2,628,260    2,551,007
Costs and expenses:
  Operating and administrative:
     Wages and related...................................   1,626,354    1,591,519    1,542,148
     Provision for insurance and related items...........     101,418      120,893       88,377
     Other...............................................     737,079      769,502      723,803
  Interest...............................................      79,373       80,016       72,578
  Depreciation and amortization..........................      93,001      100,061       99,160
  Asset impairments, workforce reductions and other
     unusual items.......................................     238,102       43,033       23,818
  Special charges related to an offer to settle and a
     settlement with the federal government..............      77,495           --      202,447
  Year 2000 remediation..................................          --           --       12,402
                                                           ----------   ----------   ----------
          Total costs and expenses.......................   2,952,822    2,705,024    2,764,733
                                                           ----------   ----------   ----------
Loss before provision for (benefit from) income taxes....    (239,884)     (76,764)    (213,726)
Provision for (benefit from) income taxes................      61,388      (22,262)     (79,079)
                                                           ----------   ----------   ----------
Net loss.................................................  $ (301,272)  $  (54,502)  $ (134,647)
                                                           ==========   ==========   ==========
Basic and diluted loss per share of common stock:
  Net loss per share of common stock.....................  $    (2.90)  $    (0.53)  $    (1.31)
                                                           ==========   ==========   ==========
  Shares used to compute net loss per share..............     104,037      102,452      102,491
                                                           ==========   ==========   ==========
</Table>

                            See accompanying notes.

                                        39
<PAGE>

                           BEVERLY ENTERPRISES, INC.

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                             (DOLLARS IN THOUSANDS)

<Table>
<Caption>
                                                                                             ACCUMULATED
                                                                 ADDITIONAL                     OTHER
                                           PREFERRED   COMMON     PAID-IN     ACCUMULATED   COMPREHENSIVE   TREASURY
                                             STOCK      STOCK     CAPITAL       DEFICIT     INCOME (LOSS)     STOCK       TOTAL
                                           ---------   -------   ----------   -----------   -------------   ---------   ---------
<S>                                        <C>         <C>       <C>          <C>           <C>             <C>         <C>
Balances at January 1, 1999..............   $    --    $11,028    $876,383     $  (4,782)      $  760       $(107,183)  $ 776,206
  Employee stock transactions related to
    106,642 shares of common stock,
    net..................................        --        10         (746)           --           --              --        (736)
  Comprehensive income (loss):
    Unrealized gains on securities, net
      of income taxes of $202............        --        --           --            --          301              --         301
    Net loss.............................        --        --           --      (134,647)          --              --    (134,647)
                                                                                                                        ---------
  Total comprehensive loss...............        --        --           --            --           --              --    (134,346)
                                            -------    -------    --------     ---------       ------       ---------   ---------
Balances at December 31, 1999............        --    11,038      875,637      (139,429)       1,061        (107,183)    641,124
  Employee stock transactions related to
    2,436,442 shares of common stock,
    net..................................        --       244        1,344            --           --              --       1,588
  Purchase of 1,174,500 shares of common
    stock for treasury...................        --        --           --            --           --          (3,874)     (3,874)
  Comprehensive income (loss):
    Foreign currency translation
      adjustments, net of income taxes of
      $257...............................        --        --           --            --          383              --         383
    Unrealized losses on securities, net
      of income tax benefit of $177......        --        --           --            --         (263)             --        (263)
    Gains reclassified into earnings from
      other comprehensive income, net of
      income tax benefit of $311.........        --        --           --            --         (463)             --        (463)
    Net loss.............................        --        --           --       (54,502)          --              --     (54,502)
                                                                                                                        ---------
  Total comprehensive loss...............        --        --           --            --           --              --     (54,845)
                                            -------    -------    --------     ---------       ------       ---------   ---------
Balances at December 31, 2000............        --    11,282      876,981      (193,931)         718        (111,057)    583,993
  Employee stock transactions related to
    5,495 shares of common stock, net....        --        (1)       8,456            --           --              --       8,455
  Reissuance of 545,542 shares of common
    stock from treasury..................        --        --        2,231            --           --           1,779       4,010
  Comprehensive income (loss):
    Foreign currency translation
      adjustments, net of income tax
      benefit of $222....................        --        --           --            --         (330)             --        (330)
    Unrealized gains on securities, net
      of income taxes of $1,104..........        --        --           --            --        1,641              --       1,641
    Net loss.............................        --        --           --      (301,272)          --              --    (301,272)
                                                                                                                        ---------
  Total comprehensive loss...............        --        --           --            --           --              --    (299,961)
                                            -------    -------    --------     ---------       ------       ---------   ---------
Balances at December 31, 2001............   $    --    $11,281    $887,668     $(495,203)      $2,029       $(109,278)  $ 296,497
                                            =======    =======    ========     =========       ======       =========   =========
</Table>

                            See accompanying notes.

                                        40
<PAGE>

                           BEVERLY ENTERPRISES, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<Table>
<Caption>
                                                                    YEARS ENDED DECEMBER 31,
                                                              -------------------------------------
                                                                2001         2000          1999
                                                              ---------   -----------   -----------
<S>                                                           <C>         <C>           <C>
Cash flows from operating activities:
  Net loss..................................................  $(301,272)  $   (54,502)  $  (134,647)
  Adjustments to reconcile net loss to net cash provided by
    operating activities:
    Depreciation and amortization...........................     93,001       100,061        99,160
    Provision for reserves on patient, notes and other
      receivables, net......................................     44,251        72,481        32,089
    Amortization of deferred financing costs................      4,051         2,571         2,909
    Asset impairments, workforce reductions and other
      unusual items.........................................    238,102        43,033        23,818
    Special charges related to an offer to settle and a
      settlement with the federal government................     77,495            --       202,447
    (Gains) losses on dispositions of facilities and other
      assets, net...........................................       (568)       (2,013)        4,004
    Deferred income taxes...................................     54,901       (26,262)      (83,079)
    Insurance related accounts..............................     11,830        38,376        33,500
    Changes in operating assets and liabilities, net of
      acquisitions and dispositions:
      Accounts receivable -- patient........................     (3,523)      (78,608)          901
      Operating supplies....................................        567         2,367          (800)
      Prepaid expenses and other receivables................        728        (3,188)        1,121
      Accounts payable and other accrued expenses...........      8,846       (47,144)      (16,536)
      Income taxes payable..................................        188         1,348        25,175
      Other, net............................................     (7,700)      (11,510)         (921)
                                                              ---------   -----------   -----------
         Total adjustments..................................    522,169        91,512       323,788
                                                              ---------   -----------   -----------
         Net cash provided by operating activities..........    220,897        37,010       189,141
Cash flows from investing activities:
  Capital expenditures......................................    (89,401)      (76,027)      (95,414)
  Proceeds from dispositions of facilities and other
    assets..................................................     20,795        24,335        41,941
  Payments for acquisitions, net of cash acquired...........     (4,024)       (3,797)       (6,985)
  Collections on notes receivable...........................        238        17,804        22,185
  Proceeds from (payments for) designated funds, net........     (8,950)          503           256
  Other, net................................................     (5,312)       (4,555)      (33,264)
                                                              ---------   -----------   -----------
         Net cash used for investing activities.............    (86,654)      (41,737)      (71,281)
Cash flows from financing activities:
  Revolver borrowings.......................................    442,000     1,508,000     1,132,000
  Repayments of Revolver borrowings.........................   (606,000)   (1,458,000)   (1,284,000)
  Proceeds from issuance of long-term debt..................    205,248            --       125,820
  Repayments of long-term debt..............................   (106,150)      (39,217)      (80,605)
  Purchase of common stock for treasury.....................         --        (3,874)           --
  Proceeds from exercise of stock options...................      3,648            81           129
  Deferred financing costs paid.............................     (9,554)       (1,007)       (3,830)
                                                              ---------   -----------   -----------
         Net cash provided by (used for) financing
           activities.......................................    (70,808)        5,983      (110,486)
                                                              ---------   -----------   -----------
Net increase in cash and cash equivalents...................     63,435         1,256         7,374
Cash and cash equivalents at beginning of year..............     25,908        24,652        17,278
                                                              ---------   -----------   -----------
Cash and cash equivalents at end of year....................  $  89,343   $    25,908   $    24,652
                                                              =========   ===========   ===========
Supplemental schedule of cash flow information:
  Cash paid (received) during the year for:
    Interest, net of amounts capitalized....................  $  76,358   $    75,839   $    68,314
    Income tax payments (refunds), net......................      6,299         2,652       (21,175)
</Table>

                            See accompanying notes.

                                        41
<PAGE>

                           BEVERLY ENTERPRISES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

  Basis of Presentation

     References herein to the Company include Beverly Enterprises, Inc. and its
wholly owned subsidiaries.

     We provide healthcare services in 32 states and the District of Columbia.
Our operations include nursing facilities, assisted living centers, hospice and
home care centers, outpatient therapy clinics and rehabilitation therapy
services. Our consolidated financial statements include the accounts of the
Company and all of our wholly owned subsidiaries, except for a bankruptcy
remote, legally-isolated subsidiary. All significant intercompany accounts and
transactions have been eliminated.

  Use of Estimates

     Generally accepted accounting principles require management to make
estimates and assumptions when preparing financial statements that affect:

     - the reported amounts of assets and liabilities at the date of the
       financial statements; and

     - the reported amounts of revenues and expenses during the reporting
       period.

     They also require management to make estimates and assumptions regarding
contingent assets and liabilities at the date of the financial statements.
Actual results could differ from those estimates.

  Cash and Cash Equivalents

     Cash and cash equivalents include time deposits and certificates of deposit
with original maturities of three months or less.

  Property and Equipment

     Property and equipment is stated at cost less accumulated depreciation or,
where appropriate, the present value of the related capital lease obligations
less accumulated amortization. Depreciation and amortization are computed using
the straight-line method over the estimated useful lives of the assets.

  Intangible Assets

     Goodwill (stated at cost less accumulated amortization of $32,505,000 in
2001 and $34,985,000 in 2000) has been amortized over periods not to exceed 40
years using the straight-line method. Operating and leasehold rights and
licenses, which are included in the consolidated balance sheet caption "Other
assets," (stated at cost less accumulated amortization of $11,297,000 in 2001
and $17,538,000 in 2000) are amortized over the lives of the related assets (not
to exceed 40 years) and leases (principally 10 to 15 years), using the
straight-line method.

     On an ongoing basis, we review the carrying value of our intangible assets
in light of any events or circumstances that indicate they may be impaired or
that the amortization period may need to be adjusted. If such circumstances
suggest the intangible value cannot be recovered, calculated based on
undiscounted cash flows over the remaining amortization period, the carrying
value of the intangible will be reduced by such shortfall. In addition, we
assess long-lived assets for impairment under SFAS No. 121 (see below). Under
those rules, intangible assets associated with assets acquired in a purchase
business combination are included in impairment evaluations when events or
circumstances exist that indicate the carrying value of those assets may not be
recoverable. As of December 31, 2001, we do not believe there is any indication
that the carrying values of our intangibles need to be adjusted, after
consideration of impairments recorded in 2001.

                                        42
<PAGE>
                           BEVERLY ENTERPRISES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                  YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

     In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets
("SFAS No. 142"), which establishes new rules on the accounting for goodwill and
other intangible assets. Under SFAS No. 142, goodwill and intangible assets with
indefinite lives will no longer be amortized; however, they will be subject to
annual impairment tests as prescribed by the Statement. Intangible assets with
definite lives will continue to be amortized over their estimated useful lives.
The amortization provisions of SFAS No. 142 apply immediately to goodwill and
intangible assets acquired after June 30, 2001. With respect to goodwill and
intangible assets acquired prior to July 1, 2001, SFAS No. 142 will be effective
for us beginning in the first quarter of 2002. We are currently performing the
required impairment tests on our goodwill and other indefinite life intangibles;
however, we cannot estimate the impact these impairment tests will have on our
consolidated financial position or results of operations. Any impairment loss
recognized as a result of initially adopting SFAS No. 142 will be recorded as a
cumulative effect of a change in accounting principle. Subsequent to adoption,
impairment charges will be recognized in operations. The amortization provisions
of SFAS No. 142 are expected to benefit our results of operations by
approximately $6,600,000, or $.04 per share diluted, on an annual basis as a
result of no longer amortizing goodwill and certain intangibles.

  Impairment of Long-Lived Assets

     Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,
("SFAS No. 121") requires impairment losses to be recognized for long-lived
assets used in operations when indicators of impairment are present and the
undiscounted cash flows are not sufficient to recover the assets' carrying
amounts. The impairment loss is measured by comparing the fair value of the
asset, usually based on discounted cash flows, to its carrying amount. In
accordance with SFAS No. 121, we assess the need for an impairment write-down
when such indicators of impairment are present. (See Note 3).

     In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets ("SFAS No. 144"), which addresses financial
accounting and reporting for the impairment of long-lived assets and for
long-lived assets to be disposed of. SFAS No. 144 supersedes SFAS No. 121, and
the accounting and reporting provisions of Accounting Principles Board Opinion
No. 30, Reporting the Results of Operations -- Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions, for segments of a business to be disposed of.
SFAS No. 144 will be effective for us beginning in the first quarter of 2002. We
have not completed our review of SFAS No. 144 but do not expect there will be a
material effect on our consolidated financial position or results of operations.

  Insurance

     General liability and professional liability costs for the long-term care
industry, especially in the state of Florida, have become increasingly expensive
and difficult to estimate. We believe that adequate provision has been made in
the financial statements for liabilities that may arise out of patient care
services. These provisions are made based upon the results of independent
actuarial valuations and other information available, including management's
best judgments and estimates. These provisions and liabilities have been
escalating in recent periods. Based on a study completed by an independent
actuarial firm, we recorded a pre-tax charge in 2000 of approximately
$44,400,000 related to increasing reserves for patient care liability costs,
primarily in the state of Florida. Excluding such charge from 2000, our
provision for insurance and related items increased approximately $24,900,000
for the year ended December 31, 2001, as compared to the same period in 2000.
This increase was primarily related to an increase in our patient care liability
costs, primarily in

                                        43
<PAGE>
                           BEVERLY ENTERPRISES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                  YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

Florida. We have completed the sale of our Florida facilities; however, we are
liable for patient care liability claims and other costs for those facilities
through the date of sale, subject to insurance. There can be no assurance that
such provision and liability will not require material adjustment in future
periods.

     On December 31, 1998, Beverly Indemnity, Ltd., one of our wholly owned
subsidiaries, completed a risk transfer of substantially all of its pre-May 1998
auto liability, general liability, professional liability and workers'
compensation claims liability to a third party insurer effected through a loss
portfolio transfer ("LPT") valued as of December 31, 1998. In exchange for a
premium of approximately $116,000,000, we acquired reinsurance of approximately
$180,000,000 to insure auto liability, general liability, professional liability
and workers' compensation losses. In addition, in exchange for a premium of
approximately $4,000,000, we acquired excess coverage of approximately
$20,000,000 for general liability losses. As of December 31, 2001, based upon
estimates and analyses by our independent actuaries, the remaining liabilities
for those losses exceeding the total aggregate limit were approximately
$26,000,000 on a discounted basis. These amounts have been reflected in our
insurance reserves at December 31, 2001.

     Prior to the LPT, and for subsequent periods not covered by the LPT, we
insure the majority of our auto liability, general liability, professional
liability and workers' compensation risks through insurance policies with third
parties, some of which are subject to reinsurance agreements between the insurer
and Beverly Indemnity, Ltd. The liabilities for estimated incurred losses not
covered by third party insurance are discounted at 10% to their present value
based on expected loss payment patterns determined by independent actuaries. The
discount rate approximates our incremental borrowing rate for uncollateralized
debt. Had the discount rate been reduced by one-half of a percentage point, we
would have incurred a pre-tax charge of approximately $1,219,000 for the year
ended December 31, 2001. The discounted insurance liabilities are included in
the consolidated balance sheet captions as follows (in thousands):

<Table>
<Caption>
                                                                2001       2000
                                                              --------   --------
<S>                                                           <C>        <C>
Accrued wages and related liabilities.......................  $  1,996   $  2,128
General and professional liabilities........................    51,784      8,655
Other liabilities and deferred items........................   119,910     97,025
                                                              --------   --------
                                                              $173,690   $107,808
                                                              ========   ========
</Table>

     On an undiscounted basis, the total insurance liabilities as of December
31, 2001 and 2000 were approximately $203,800,000 and $126,400,000,
respectively. As of December 31, 2001, we had deposited approximately $2,200,000
in funds (the "Beverly Indemnity funds") that are restricted for the payment of
insured claims. In addition, we anticipate that approximately $9,800,000 of our
existing cash at December 31, 2001, while not legally restricted, will be
utilized primarily to fund certain workers' compensation and general and
professional liability claims and expenses. We do not expect to use this cash
for other purposes.

  Stock Based Awards

     Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation, ("SFAS No. 123") encourages, but does not require,
companies to recognize compensation expense for stock-based awards based on
their fair market value on the date of grant. We have elected to continue
accounting for our stock-based awards in accordance with Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees. Accordingly, we
do not recognize compensation expense for our stock option grants, which are
issued at fair market value on the date of grant. However, we recognize
compensation expense for our restricted stock grants at the fair market value of
our Common Stock on the date of grant over

                                        44
<PAGE>
                           BEVERLY ENTERPRISES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                  YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

the respective vesting periods on a straight-line basis. See Note 8 for the pro
forma effects on our reported net loss and diluted net loss per share if we
recognized compensation expense on stock-based awards in accordance with SFAS
No. 123.

  Revenues

     Our revenues are derived primarily from providing long-term healthcare
services. Approximately 77%, 74% and 72% of our net operating revenues for 2001,
2000 and 1999, respectively, were derived from federal and state medical
assistance programs. Approximately 44% and 52% of our net patient accounts
receivable at December 31, 2001 and 2000, respectively, are due from such
programs. We record revenues when services are provided at standard charges
adjusted to amounts estimated to be received under governmental programs and
other third-party contractual arrangements based on contractual terms and
historical experience. These revenues and receivables are reported at their
estimated net realizable amounts and are subject to audit and retroactive
adjustment.

     Retroactive adjustments are estimated in the recording of revenues in the
period the related services are rendered. These amounts are adjusted in future
periods as adjustments become known or as cost reporting years are no longer
subject to audits, reviews or investigations. Due to the complexity of the laws
and regulations governing the Medicare and Medicaid programs, there is at least
a possibility that recorded estimates will change by a material amount in the
near term. See Note 2 for a discussion of a settlement offer made to the federal
government in February 2002 related to open Medicare cost reimbursement issues.
Excluding this settlement offer, changes in estimates related to third party
receivables resulted in a decrease in net operating revenues of approximately
$2,000,000 for each of the years ended December 31, 2001 and 1999, and an
increase in net operating revenues of approximately $8,100,000 for the year
ended December 31, 2000.

     Laws and regulations governing the Medicare and Medicaid programs are
complex and subject to interpretation. Compliance with laws and regulations
governing the Medicare and Medicaid programs are subject to government review
and interpretation, as well as significant regulatory action including fines,
penalties, and exclusion from the Medicare and Medicaid programs. In addition,
under the Medicare program, if the federal government makes a formal demand for
reimbursement, even related to contested items, payment must be made for those
items before the provider is given an opportunity to appeal and resolve the
issue.

  Concentration of Credit Risk

     We have significant accounts receivable whose collectibility or
realizability is dependent upon the performance of certain governmental
programs, primarily Medicare and Medicaid. These receivables represent our only
concentration of credit risk. We do not believe there are significant credit
risks associated with these governmental programs. We believe that an adequate
provision, based on historical experience, has been made for the possibility of
these and other receivables proving uncollectible and continually monitor and
adjust these allowances as necessary. In establishing our estimate of
uncollectible accounts, we consider our historical collection experience, the
aging of the account and the payor classification.

  Income Taxes

     We follow the liability method in accounting for income taxes. The
liability method requires deferred tax assets and liabilities to be recorded at
currently enacted tax rates based on the difference between the tax basis of
assets and liabilities and their carrying amounts for financial reporting
purposes, referred to as temporary differences. (See Note 9).

                                        45
<PAGE>
                           BEVERLY ENTERPRISES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                  YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

  Comprehensive Income (Loss)

     Comprehensive loss includes net loss, as well as charges and credits to
stockholders' equity not included in net loss. Accumulated other comprehensive
income, net of income taxes, consists of the following (in thousands):

<Table>
<Caption>
                                                              DECEMBER 31,
                                                              -------------
                                                               2001    2000
                                                              ------   ----
<S>                                                           <C>      <C>
Net unrealized gains on available-for-sale securities.......  $1,976   $335
Foreign currency translation adjustments....................      53    383
                                                              ------   ----
                                                              $2,029   $718
                                                              ======   ====
</Table>

     During the year ended December 31, 2000, we transferred one of our
securities from the available-for-sale category to the trading category. As a
result of such transfer, we reversed $463,000 of unrealized gains, net of income
taxes, on such security and recognized a pre-tax gain of $1,477,000 in 2000.
During 2001, this security was sold and we recognized an additional pre-tax gain
of $256,000. These gains were included in net operating revenues.

  New Accounting Standard for Business Combinations

     In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, Business Combinations ("SFAS No. 141"),
which is effective for all business combinations completed after June 30, 2001.
SFAS No. 141 eliminates the pooling-of-interests method of accounting and
further clarifies the criteria to recognize intangible assets separately from
goodwill. We do not expect there to be a significant impact on our consolidated
financial position, results of operations or cash flows as a result of adopting
SFAS No. 141.

  Other

     Certain prior year amounts have been reclassified to conform with the 2001
financial statement presentation.

2. SPECIAL CHARGES RELATED TO AN OFFER TO SETTLE AND A SETTLEMENT WITH THE
FEDERAL GOVERNMENT

     In February 2002, we made a settlement offer to the Centers for Medicare
and Medicaid Services ("CMS"), which, if accepted, would resolve reimbursement
issues relating to costs of services provided to Medicare patients during 1996
through 1998 under the federal government's former cost-reimbursement system.
This settlement offer would also resolve reimbursement issues for co-payments
due from Medicare beneficiaries, who were also eligible for Medicaid, for years
1999 and 2000. Because the issues related to this settlement offer arose prior
to December 31, 2001, we reflected this settlement offer in our 2001 financial
statements. As a result, we recorded a special pre-tax charge of approximately
$77,500,000 for the year ended December 31, 2001, which included:

     - $35,000,000 related to a proposed cash payment to CMS, which, if
       accepted, is expected to be made during 2002;

     - $81,500,000 related to the write-off of Medicare cost report receivables
       for 1996 through 1998 and co-payment issues for 1999 and 2000; offset by

                                        46
<PAGE>
                           BEVERLY ENTERPRISES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                  YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

2. SPECIAL CHARGES RELATED TO AN OFFER TO SETTLE AND A SETTLEMENT WITH THE
FEDERAL
   GOVERNMENT -- (CONTINUED)

     - $39,000,000 in reserves established in conjunction with the 2000
       investigation settlements as discussed below.

     On February 3, 2000, we entered into a series of separate agreements with
the U.S. Department of Justice and the Office of Inspector General of the
Department of Health and Human Services. These agreements settled the Allocation
Investigations (See Note 7). In anticipation of such settlements, we recorded a
special pre-tax charge of approximately $202,400,000 ($127,500,000, net of
income taxes, or $1.24 per share diluted) during the year ended December 31,
1999, which included:

     - provisions totaling $128,800,000 representing the net present value of
       the separate civil and criminal settlements;

     - impairment losses of $17,000,000 on 10 nursing facilities that pled
       guilty to submitting erroneous cost reports to the Medicare program in
       conjunction with the criminal settlement, and were required to be sold or
       closed;

     - $39,000,000 reserves for certain prior year cost report related items
       affected by the settlements;

     - $3,100,000 of debt issuance and refinancing costs related to various bank
       debt modifications as a result of the settlements; and

     - $14,500,000 for other investigation and settlement related costs.

     The remaining reserves related to these items are included in the
consolidated balance sheet captions as follows (in thousands):

<Table>
<Caption>
                                                               2001       2000
                                                              -------   --------
<S>                                                           <C>       <C>
Federal government settlement obligations...................  $10,891   $ 10,024
Other accrued liabilities...................................    8,267      8,877
Other liabilities and deferred items........................   73,968     84,846
Allowances for accounts receivable -- patient...............       --     39,327
                                                              -------   --------
                                                              $93,126   $143,074
                                                              =======   ========
</Table>

3. ASSET IMPAIRMENTS, WORKFORCE REDUCTIONS AND OTHER UNUSUAL ITEMS

     During 2001, we recorded pre-tax charges totaling approximately
$238,100,000, primarily including $211,800,000 for asset impairments and exit
costs and $24,200,000 for workforce reductions. The asset impairment and exit
costs primarily relate to:

     - $75,100,000 write-down of Florida facilities and $55,100,000 of Florida
       exit costs, as discussed below;

     - write-down of goodwill of $31,200,000, and property, equipment and other
       intangible assets of $1,300,000 on certain under-performing outpatient
       therapy clinics, as well as Theraphysics, our managed care contracting
       entity, which had operating losses for the past three years and expected
       future operating losses. These assets were included in the total assets
       of the TMX operating segment during the year ended December 31, 2001;

     - write-down of goodwill of $21,800,000, property, equipment and other
       intangible assets of $1,000,000 and recording of closing and other cost
       of $4,600,000 on under-performing Home Care businesses that management
       plans to turnaround operations or dispose of during 2002. These assets
       were included in

                                        47
<PAGE>
                           BEVERLY ENTERPRISES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                  YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

3. ASSET IMPAIRMENTS, WORKFORCE REDUCTIONS AND OTHER UNUSUAL
   ITEMS -- (CONTINUED)

   the total assets of the Innovation and Services operating segment during the
   year ended December 31, 2001;

     - write-down of property and equipment of $10,000,000, and goodwill and
       other intangibles of $600,000 on certain under-performing nursing
       facilities that management plans to sell, close or terminate the leases
       on. These assets were included in the total assets of the Nursing
       Facilities operating segment during the year ended December 31, 2001;

     - write-off of abandoned projects and investments totaling $7,800,000; and

     - $3,300,000 related to the termination of a lease in Indiana, including
       the write-off of net book value of the related assets.

     The asset impairment analyses on our clinics, units and facilities
included:

     - estimating the undiscounted cash flows to be generated by each clinic,
       unit or facility, primarily over the weighted average remaining life of
       the assets; and

     - reducing the carrying value of the asset to the estimated fair value when
       the total undiscounted cash flows was less than the current book value of
       the clinic, unit or facility.

     In order to estimate the fair values of the clinic, unit or facility we
used a discounted cash flow approach. For the nursing homes, we discounted the
estimated future cash flows over the remaining lives of the primary assets. For
other lines of business that lack significant property investments, we
discounted the next 10 years of expected cash flows. Cash flows for all lines of
business were estimated using historical results, without an inflation factor,
and adjusted for known trends. Those cash flows were discounted at our weighted
average cost of capital. A 1% change in the discount rate would not have a
material impact on the impairment calculations. A substantial change in the
estimated future cash flows for these businesses could materially change the
estimated fair values of these assets, possibly resulting in an additional
impairment. In certain of the Home Care businesses where the cash flows were
negative, we estimated the fair values based on our knowledge of recent sales of
comparable businesses.

     During the first quarter of 2001, a formal plan was initiated by management
to pursue the sale of our nursing home operations in Florida, which included 49
nursing facilities (6,129 beds) and four assisted living centers (315 units)
(the "Florida facilities"). The plan included the pursuit of the sale of one
additional nursing facility (56 beds) which was sold during the third quarter of
2001 and certain other assets which will be sold in separate transactions. The
decision to sell these properties was made due primarily to the excessive
patient care liability costs that we had been incurring in recent periods in the
state of Florida. Accordingly, the property and equipment, identifiable
intangibles and operating supplies of our Florida nursing home operations at
March 31, 2001 were considered assets to be disposed of, as that term is defined
in SFAS No. 121. Management estimated the fair value less selling costs of such
assets based upon verbal and non-binding purchase prices from potential buyers
and determined that an impairment write-down was necessary as of March 31, 2001.
The pre-tax charge recorded during the first quarter of 2001 related to this
write-down was approximately $68,900,000. In July 2001, we entered into a
definitive agreement to sell the Florida facilities to FC Properties, formerly
known as NMC of Florida, LLC, and recorded an additional impairment write-down
of approximately $6,200,000. Effective December 1, 2001 we entered into a lease
agreement on the Florida facilities with Florida Health Care Properties and we
closed the real estate sale on January 8, 2002 with no further gain or loss.

     In conjunction with the sale of Florida, we also recorded pre-tax charges
totaling $55,100,000 for certain exit costs. These costs relate to severance
agreements, termination payments on certain contracts and various

                                        48
<PAGE>
                           BEVERLY ENTERPRISES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                  YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

3. ASSET IMPAIRMENTS, WORKFORCE REDUCTIONS AND OTHER UNUSUAL
   ITEMS -- (CONTINUED)

other items. At December 31, 2001, the Florida assets held for sale totaled
approximately $120,843,000 and are classified as current assets in the condensed
consolidated balance sheet.

     Annualized revenues for the Florida facilities were approximately
$288,000,000. During the year ended December 31, 2001, our Florida nursing home
operations recorded pre-tax income of approximately $612,000. Such amount does
not include certain costs which are currently recorded at the parent company
level and are not fully allocated to the individual subsidiaries or facilities.
In accordance with SFAS No. 121, we did not record depreciation and amortization
expense on the Florida assets during the period these assets were held for sale,
since these assets were adjusted to their estimated net realizable value. The
amount of depreciation and amortization expense that we did not have to record
during the year ended December 31, 2001 on the Florida assets was approximately
$6,785,000.

     In January 2001, we implemented a new three-year strategic plan and
operationally reorganized our business. As a result of this operational
reorganization, we recorded pre-tax charges totaling approximately $24,200,000
during 2001. Approximately $23,100,000 of these pre-tax charges related to
severance and other employment agreements for approximately 240 associates who
were notified in 2001 that their positions would be eliminated, including:

     - $18,000,000 of cash expenses, approximately $10,900,000 of which was paid
       during the year ended December 31, 2001;

     - non-cash expenses of $4,500,000 related to the issuance of shares under
       our Stock Grant Plan; and

     - non-cash expenses of $600,000 related to other long-term incentive
       agreements.

     During 2000, we recorded pre-tax charges totaling approximately
$43,000,000, primarily including $35,500,000 for asset impairments and
$6,100,000 for workforce reductions. The asset impairment charges of $35,500,000
primarily related to:

     - write-down of goodwill of $24,800,000 and property and equipment of
       $1,000,000 on certain under-performing outpatient therapy clinics having
       operating losses for the past three years and expected future operating
       losses. These assets were included in the total assets of the TMX
       operating segment.

     - write-down of property and equipment of $5,100,000 and recording of
       closing and other costs of $3,000,000 related to six nursing facilities
       with an aggregate carrying value of approximately $6,000,000. Management
       closed or terminated the leases on five of these facilities during 2001.
       These assets generated pre-tax losses of approximately $2,400,000 during
       the year ended December 31, 2000 and were included in the total assets of
       the Nursing Facilities operating segment.

     - write-off of abandoned projects totaling $2,100,000;

     - write-off of an investment in a physician practice management company of
       $2,000,000; and

     - reversal of $2,500,000 of prior year asset impairment charges (discussed
       below).

     The workforce reduction charges of $6,100,000 primarily related to
severance agreements associated with seven executives. Approximately $2,200,000
was paid during 2000, and the remainder was paid during the first quarter of
2001. Four of the executives were notified in late 2000 that their positions
would be eliminated as part of a reorganization of our operating and support
group functions. This reorganization was formally announced in the first quarter
of 2001.

     During the fourth quarter of 1999, we recorded pre-tax charges totaling
approximately $23,800,000 related to restructuring of agreements on certain
leased facilities, severance and other workforce reduction

                                        49
<PAGE>
                           BEVERLY ENTERPRISES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                  YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

3. ASSET IMPAIRMENTS, WORKFORCE REDUCTIONS AND OTHER UNUSUAL
   ITEMS -- (CONTINUED)

expenses, asset impairments, and other unusual items. We negotiated the
terminations of lease agreements on 19 nursing facilities (2,047 beds), which
resulted in a charge of $17,300,000. We disposed of 17 of these nursing
facilities during 2000 and one additional facility during 2001. During 2000, we
reversed $2,500,000 of the original charge for changes in our initial accounting
estimates. In addition, we accrued $5,900,000 during the fourth quarter of 1999
primarily related to severance agreements associated with three executives.
Substantially all of the $5,900,000 was paid during the first quarter of 2000.

4. ACQUISITIONS AND DISPOSITIONS

     During the year ended December 31, 2001, we acquired one nursing facility
(185 beds), eight previously leased nursing facilities (903 beds) and certain
other assets for cash of approximately $3,700,000, assumed debt of approximately
$18,400,000, security deposits of $200,000 and incurred closing and other costs
of approximately $300,000. These acquisitions were accounted for as purchases.
Also during such period, we sold, closed or terminated the leases on 18 nursing
facilities (1,768 beds), one assisted living center (12 units), three outpatient
therapy clinics, one home care center and certain other assets for cash proceeds
of approximately $20,400,000 and a note receivable of approximately $3,900,000.
We did not operate three of the nursing facilities (355 beds) which had been
leased to other nursing home operators. We recognized net pre-tax gains, which
were included in net operating revenues during the year ended December 31, 2001,
of approximately $600,000 as a result of these dispositions. In addition, we
terminated the lease on one nursing facility (223 beds) in Indiana and recorded
a pre-tax charge of approximately $3,300,000 which was included in the
consolidated statement of operations caption "Asset impairments, workforce
reductions and other unusual items."

     During the year ended December 31, 2000, we acquired seven nursing
facilities (1,210 beds), one previously leased nursing facility (105 beds) and
certain other assets for cash of approximately $3,000,000, closing and other
costs of approximately $1,500,000 and write-off of notes receivable of
approximately $900,000. The acquisitions of these facilities and other assets
were accounted for as purchases. Also during 2000, we sold, closed or terminated
the leases on 39 nursing facilities (4,263 beds) and certain other assets for
cash proceeds of approximately $24,200,000 and notes receivable of approximately
$100,000. We did not operate five of these nursing facilities (409 beds), which
were leased to other nursing home operators in prior year transactions. We
recognized net pre-tax gains, which were included in net operating revenues
during the year ended December 31, 2000, of approximately $2,000,000 as a result
of these dispositions.

     During the year ended December 31, 1999, we purchased three outpatient
therapy clinics, two home care centers, two nursing facilities (284 beds), one
previously leased nursing facility (190 beds) and certain other assets for cash
of approximately $6,000,000, assumed debt of approximately $15,100,000 and
incurred closing and other costs of approximately $1,700,000. The acquisitions
of these facilities and other assets were accounted for as purchases and
resulted in the recording of goodwill of approximately $8,400,000. Also during
such period, we sold or terminated the leases on 12 nursing facilities (1,291
beds), one assisted living center (10 units), 17 home care centers and certain
other assets for cash proceeds of approximately $7,100,000 and notes receivable
of approximately $1,000,000. We did not operate two of the nursing facilities
(166 beds), which were leased to other nursing home operators in prior year
transactions. We recognized net pre-tax losses, which were included in net
operating revenues during the year ended December 31, 1999, of approximately
$4,000,000 as a result of these dispositions.

     The operations of all of the facilities and other assets we acquired or
disposed of in 2001, 2000 and 1999 were immaterial to our consolidated financial
position and results of operations.

                                        50
<PAGE>
                           BEVERLY ENTERPRISES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                  YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

5.  PROPERTY AND EQUIPMENT

     Following is a summary of property and equipment and related accumulated
depreciation and amortization, by major classification, at December 31 (in
thousands):

<Table>
<Caption>
                                          TOTAL                     OWNED                 LEASED
                                 -----------------------   -----------------------   -----------------
                                    2001         2000         2001         2000       2001      2000
                                 ----------   ----------   ----------   ----------   -------   -------
<S>                              <C>          <C>          <C>          <C>          <C>       <C>
Land, buildings and
  improvements.................  $1,246,338   $1,455,859   $1,224,910   $1,426,088   $21,428   $29,771
Furniture and equipment........     340,113      383,749      335,452      377,197     4,661     6,552
Construction in progress.......      31,297       29,196       31,297       29,196        --        --
                                 ----------   ----------   ----------   ----------   -------   -------
                                  1,617,748    1,868,804    1,591,659    1,832,481    26,089    36,323
Less accumulated depreciation
  and amortization.............     744,163      805,557      726,221      780,474    17,942    25,083
                                 ----------   ----------   ----------   ----------   -------   -------
                                 $  873,585   $1,063,247   $  865,438   $1,052,007   $ 8,147   $11,240
                                 ==========   ==========   ==========   ==========   =======   =======
</Table>

     We record depreciation and amortization using the straight-line method over
the following estimated useful lives: land improvements -- 5 to 15 years;
buildings -- 35 to 40 years; building improvements -- 5 to 20 years; leasehold
improvements -- 5 to 20 years or term of lease, if less; furniture and
equipment -- 5 to 15 years. Capitalized lease assets are amortized over the
remaining initial terms of the leases.

     Depreciation and amortization expense related to property and equipment,
including the amortization of assets under capital lease obligations, for the
years ended December 31, 2001, 2000 and 1999 was $76,280,000, $83,311,000 and
$83,328,000, respectively.

                                        51
<PAGE>
                           BEVERLY ENTERPRISES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                  YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

6.  LONG-TERM DEBT

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

<Table>
<Caption>
                                                                2001       2000
                                                              --------   --------
<S>                                                           <C>        <C>
Revolver borrowings under Credit Facility...................  $     --   $164,000
9 5/8% Senior Notes due April 15, 2009, unsecured...........   200,000         --
9% Senior Notes due February 15, 2006, unsecured............   180,000    180,000
Notes and mortgages, less imputed interest: 2001 -- $29,
  2000 -- $46; due in installments through the year 2031, at
  effective interest rates of 3.90% to 12.50%, a portion of
  which is secured by property, equipment and other assets
  with a net book value of $236,754 at December 31, 2001....   192,736    183,416
Industrial development revenue bonds, due in installments
  through the year 2013, at effective interest rates of
  4.75% to 10%, a portion of which is secured by property
  and other assets with a net book value of $173,351 at
  December 31, 2001.........................................   115,730    134,015
7% A.I. Credit Corp. Note due in installments through
  January 2002, secured by a surety bond....................    12,500     65,000
8.750% First Mortgage Bonds due July 1, 2008, secured by
  first mortgages on 4 nursing facilities with an aggregate
  net book value of $9,627 at December 31, 2001.............    11,623     12,238
8.625% First Mortgage Bonds due October 1, 2008, secured by
  first mortgages on 8 nursing facilities with an aggregate
  net book value of $22,896 at December 31, 2001............    18,793     19,700
7.24% Series 1995 Bonds due June 2005, paid off in November
  2001......................................................        --     18,000
                                                              --------   --------
                                                               731,382    776,369
Present value of capital lease obligations, less imputed
  interest: 2001 -- $316
  2000 -- $349, at effective interest rates of 6.25% to
     16.49%.................................................    10,291     14,989
                                                              --------   --------
                                                               741,673    791,358
Less amounts due within one year............................    64,231    227,111
                                                              --------   --------
                                                              $677,442   $564,247
                                                              ========   ========
</Table>

     During April 2001, we completed the restructuring of our $375,000,000
credit facility, which was scheduled to mature on December 31, 2001. We entered
into a new $150,000,000 revolving credit facility (the "Credit Facility") which
matures in April 2004 and issued $200,000,000 of 9 5/8% senior notes due 2009
(the "9 5/8% Senior Notes") through a private placement. The net proceeds from
issuance of the 9 5/8% Senior Notes were used to repay borrowings under the
$375,000,000 credit facility and for general corporate purposes. During the
second quarter of 2001, we filed a registration statement under Form S-4 with
the Securities and Exchange Commission registering the 9 5/8% Senior Notes.
During the third quarter, we exchanged (the "Exchange Offer") all of the 9 5/8%
Senior Notes issued through the private placement for publicly registered 9 5/8%
Senior Notes. We did not receive any proceeds as a result of the Exchange Offer.

     We have $180,000,000 of 9% Senior Notes due February 15, 2006 (the "9%
Senior Notes") which were sold through a public offering. The 9 5/8% Senior
Notes and the 9% Senior Notes are unsecured obligations guaranteed by
substantially all of our present and future subsidiaries (the "Subsidiary
Guarantors") and impose on us certain restrictive covenants. Separate financial
statements of the Subsidiary Guarantors are not considered to be material to
holders of our senior notes since the guaranty of each of the Subsidiary

                                        52
<PAGE>
                           BEVERLY ENTERPRISES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                  YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

6. LONG-TERM DEBT -- (CONTINUED)

Guarantors is joint and several and full and unconditional (except that
liability thereunder is limited to an aggregate amount equal to the largest
amount that would not render its obligations thereunder subject to avoidance
under Section 548 of the Bankruptcy Code of 1978, as amended, or any comparable
provisions of applicable state law), and Beverly Enterprises, Inc., the parent,
has no operations or material assets separate from its investment in its
subsidiaries.

     The Credit Facility provides for a Revolver/Letter of Credit Facility.
Revolver borrowings under the Credit Facility currently bear interest at
adjusted LIBOR plus 2.625%, the Base Rate, as defined, plus 1.625% or the
adjusted CD rate, as defined, plus 2.75%, at our option. The interest rates may
be adjusted quarterly based on a leverage ratio calculation. The Credit Facility
is secured by property, equipment and other assets associated with nine nursing
facilities with an aggregate net book value of approximately $14,100,000 at
December 31, 2001 and the stock of certain subsidiaries. In addition, it is
guaranteed by the Subsidiary Guarantors and imposes on us certain financial
tests and restrictive covenants.

     Effective December 31, 2001, we executed an amendment to our Credit
Facility, as well as amendments with certain of our other lenders covering debt
of approximately $132,500,000, (collectively, the "Amendments"), which modified
certain financial covenant levels. The Amendments were required since recording
the special charges, as discussed in Notes 2 and 3, would have resulted in our
noncompliance with certain financial covenants contained in those debt
agreements.

     During 2001, we entered into a $2,900,000 promissory note for the
construction of a nursing facility and notes payable of approximately
$18,400,000 for the acquisitions of seven nursing facilities. These debt
instruments have interest rates ranging from 7.00% to 10.25%, require monthly
installments of principal and interest, and are secured by mortgage interests in
the real property and security interests in the personal property of the nursing
facilities.

     Maturities and sinking fund requirements of long-term debt, including
capital leases, for the years ended December 31 are as follows (in thousands):

<Table>
<Caption>
                                    2002      2003      2004      2005       2006     THEREAFTER    TOTAL
                                   -------   -------   -------   -------   --------   ----------   --------
<S>                                <C>       <C>       <C>       <C>       <C>        <C>          <C>
Future minimum lease payments....  $ 2,158   $ 1,650   $ 1,486   $ 1,265   $    958    $ 10,663    $ 18,180
Less interest....................     (903)     (793)     (719)     (654)      (602)     (4,218)     (7,889)
                                   -------   -------   -------   -------   --------    --------    --------
Net present value of future
  minimum lease payments.........    1,255       857       767       611        356       6,445      10,291
Notes, mortgages and bonds.......   62,976    31,277    37,149    25,691    219,842     354,447     731,382
                                   -------   -------   -------   -------   --------    --------    --------
                                   $64,231   $32,134   $37,916   $26,302   $220,198    $360,892    $741,673
                                   =======   =======   =======   =======   ========    ========    ========
</Table>

     Most of our capital leases, as well as our operating leases, have original
terms from ten to fifteen years and contain at least one renewal option (which
could extend the term of the leases by five to fifteen years), purchase options,
escalation clauses and provisions for payments by us of real estate taxes,
insurance and maintenance costs.

     We have $70,000,000 of Medium Term Notes due March 2005, which is
off-balance sheet financing for the Company. The Medium Term Notes are
collateralized by patient accounts receivable, which are sold by Beverly Health
and Rehabilitation Services, Inc., one of our wholly owned subsidiaries, to
Beverly Funding Corporation ("BFC"), a bankruptcy remote subsidiary. In 1999,
such debt was refinanced and we were required by Statement of Financial
Accounting Standards No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," to deconsolidate BFC. At
December 31, 2001, BFC

                                        53
<PAGE>
                           BEVERLY ENTERPRISES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                  YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

6. LONG-TERM DEBT -- (CONTINUED)

had total assets of approximately $103,000,000, which cannot be used to satisfy
claims of the Company or any of our subsidiaries, but are pledged to
collateralize the Medium Term Notes.

7.  COMMITMENTS AND CONTINGENCIES

     Our future minimum rental commitments required by all noncancelable
operating leases with initial or remaining terms in excess of one year as of
December 31, 2001, are as follows (in thousands):

<Table>
<Caption>
YEAR ENDING
DECEMBER 31,
------------
<S>                                                            <C>
2002........................................................   $ 71,838
2003........................................................     59,384
2004........................................................     49,631
2005........................................................     36,307
2006........................................................     20,241
Thereafter..................................................     49,853
                                                               --------
                                                               $287,254
                                                               ========
</Table>

     Our total future minimum rental commitments are net of approximately
$3,258,000 of minimum sublease rental income due in the future under
noncancelable subleases. The following table summarizes certain information
relative to our operating leases for the years ended December 31 (in thousands):

<Table>
<Caption>
                                                         2001       2000       1999
                                                       --------   --------   --------
<S>                                                    <C>        <C>        <C>
Rent expenses, net of sublease rent income...........  $106,814   $114,889   $115,598
Sublease rent income.................................     2,248      3,312      7,096
Contingent rent expense, based primarily on
  revenues...........................................     7,000     14,000     18,000
</Table>

     At December 31, 2001, we leased 11 nursing facilities (6 of which are in
Florida), one assisted living center and our corporate headquarters under an
off-balance sheet financing arrangement subject to operating leases with the
lessor. We have the option to purchase the facilities at the end of the initial
lease terms at original cost. This financing arrangement was entered into for
the construction of these facilities and as of December 31, 2001, had
$112,400,000 of outstanding commitments ($42,900,000 of which was paid down in
January 2002 in conjunction with the sale of our Florida facilities).

     Our management information systems data processing functions have been
outsourced under an agreement which was renegotiated during 2001 and expires in
2004. Our future minimum commitments as of December 31, 2001 under this
agreement are as follows: 2002 -- $2,878,000; 2003 -- $972,700; and 2004 --
$293,100. We incurred approximately $3,407,000, $5,221,000 and $6,515,000 under
this agreement during the years ended December 31, 2001, 2000 and 1999,
respectively.

     We are contingently liable for approximately $52,976,000 of long-term debt
maturing on various dates through 2019, as well as annual interest and letter of
credit fees totaling approximately $4,393,000. These contingent liabilities
principally arose from our sale of nursing facilities and retirement living
centers. We operate the facilities related to approximately $22,041,000 of the
principal amount for which we are contingently liable, pursuant to long-term
agreements accounted for as operating leases. In addition, we are contingently
liable for various operating leases that were assumed by purchasers and are
secured by the rights

                                        54
<PAGE>
                           BEVERLY ENTERPRISES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                  YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

7.  COMMITMENTS AND CONTINGENCIES -- (CONTINUED)

thereto, as well as approximately $618,000 of loans to certain of our officers,
which are collateralized by shares of our Common Stock pledged by the officers.

     On February 3, 2000, we entered into a series of separate agreements with
the U.S. Department of Justice and the Office of Inspector General (the "OIG")
of the Department of Health and Human Services. These agreements settled the
federal government's investigations of the Company relating to our allocation to
the Medicare program of certain nursing labor costs in our skilled nursing
facilities from 1990 to 1998 (the "Allocation Investigations").

     The agreements consist of:

     - a Plea Agreement;

     - a Civil Settlement Agreement;

     - a Corporate Integrity Agreement; and

     - an agreement concerning the disposition of 10 nursing facilities.

     Under the Plea Agreement, one of our subsidiaries pled guilty to one count
of mail fraud and 10 counts of making false statements to Medicare and paid a
criminal fine of $5,000,000 during the first quarter of 2000.

     Under the Civil Settlement Agreement, we paid the federal government
$25,000,000 during the first quarter of 2000 and are reimbursing the federal
government an additional $145,000,000 through withholdings from our biweekly
Medicare periodic interim payments in equal installments through the first
quarter of 2008. The present value of the remaining obligation included as
liabilities on our consolidated balance sheet was $84,859,000 at December 31,
2001 and $94,870,000 at December 31, 2000. In addition, we agreed to resubmit
certain Medicare filings to reflect reduced labor costs allocated to the
Medicare program. (See proposed settlement offer described in Note 2.)

     Under the Corporate Integrity Agreement, we are required to monitor, on an
ongoing basis, our compliance with the requirements of the federal healthcare
programs. This agreement addresses our obligations to ensure that we comply with
the requirements for participation in the federal healthcare programs. It also
includes our functional and training obligations, audit and review requirements,
recordkeeping and reporting requirements, as well as penalties for
breach/noncompliance of the agreement. We believe that we are generally in
compliance with the requirements of the Corporate Integrity Agreement.

     In accordance with our agreement to dispose of 10 nursing facilities, we
disposed of seven of the facilities during 2000 and the remaining three
facilities during 2001.

     On July 6, 1999, an amended complaint was filed by the plaintiffs in a
previously disclosed purported class action lawsuit pending against the Company
and certain of our officers in the United States District Court for the Eastern
District of Arkansas (the "Class Action"). Plaintiffs filed a second amended
complaint on September 9, 1999 which asserted claims under Section 10(b)
(including Rule 10b-5 promulgated thereunder) and under Section 20 of the
Securities Exchange Act of 1934 arising from practices that were the subject of
the Allocation Investigations. The defendants filed a motion to dismiss that
complaint on October 8, 1999. Oral argument on this motion was held on April 6,
2000. By order and judgement dated October 17, 2001, defendants' motion to
dismiss was granted, and the complaint was dismissed with prejudice. Plaintiffs
appealed this decision to the Eighth Circuit Court of Appeals (Case No.
01-3677). The briefing schedule has been completed. Oral argument is scheduled
for April 18, 2002. Due to the preliminary state of the Class Action and the
fact the second amended complaint does not allege damages with any specificity,
we are unable at this time to assess the probable outcome of the Class Action or
the materiality of the risk of loss. We believe
                                        55
<PAGE>
                           BEVERLY ENTERPRISES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                  YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

7.  COMMITMENTS AND CONTINGENCIES -- (CONTINUED)

that we acted lawfully with respect to plaintiff investors and will vigorously
defend the Class Action. However, we can give no assurances of the ultimate
impact on our consolidated financial position, results of operations or cash
flows as a result of these proceedings.

     In addition, since July 29, 1999, eight derivative lawsuits have been filed
in the state courts of Arkansas, California and Delaware, as well as the federal
district court in Arkansas, assertedly on behalf of the Company (collectively,
the "Derivative Actions"). Due to the preliminary state of the Derivative
Actions and the fact the complaints do not allege damages with any specificity,
we are unable at this time to assess the probable outcome of the Derivative
Actions or the materiality of the risk of loss. We believe that plaintiffs'
allegations that the defendants acted unlawfully are without merit and the
defendants will vigorously defend the Derivative Actions. However, we can give
no assurances of the ultimate impact on our consolidated financial position,
results of operations or cash flows as a result of these proceedings.

     There are various other lawsuits and regulatory actions pending against the
Company arising in the normal course of business, some of which seek punitive
damages that are generally not covered by insurance. We do not believe that the
ultimate resolution of such other matters will have a material adverse effect on
our consolidated financial position or results of operations.

8. STOCKHOLDERS' EQUITY

     We have 300,000,000 shares of authorized $.10 par value common stock
("Common Stock"). We are subject to certain restrictions under our long-term
debt agreements related to the payment of cash dividends on our Common Stock.
During 2001 and 2000, we did not pay any cash dividends on our Common Stock. We
have 25,000,000 shares of authorized $1 par value preferred stock, all of which
remain unissued. The Board of Directors has authority, without further
stockholder action, to set rights, privileges and preferences for any unissued
shares of preferred stock.

     In January 2001, we filed a registration statement under Form S-8 with the
Securities and Exchange Commission registering 1,174,500 shares of our Common
Stock. These shares were previously repurchased by the Company and held in
treasury. They may be issued under the Beverly Enterprises, Inc. Stock Grant
Plan (the "Stock Grant Plan") to holders of restricted stock who, by virtue of
the terms of their employment contracts, severance agreements or other similar
arrangements, have a claim to the immediate vesting of their restricted stock.
In conjunction with the operational reorganization (as discussed in Note 3),
644,476 shares of Common Stock under the Stock Grant Plan have been issued to
various officers who made such claims, and the shares of restricted stock held
by such officers were cancelled. Compensation expense of $4,500,000 was recorded
in 2001 in connection with the issuance of these shares.

     During 1997, the New Beverly 1997 Long-Term Incentive Plan was approved
(the "1997 Long-Term Incentive Plan"). The plan became effective December 3,
1997 and will remain in effect until December 31, 2006, subject to early
termination by the Board of Directors. The Compensation Committee of the Board
of Directors (the "Committee") is responsible for administering the 1997
Long-Term Incentive Plan and has complete discretion in determining the number
of shares or units to be granted, in setting performance goals and in applying
other restrictions to awards, as needed, under the plan. The 1997 Long-Term
Incentive Plan was originally authorized to issue 10,000,000 shares of Common
Stock, subject to certain adjustments, under the 1997 Long-Term Incentive Plan
in the form of nonqualified stock options, incentive stock options, stock
appreciation rights, restricted stock, restricted stock units, performance
awards, bonus stock and other stock unit awards. In May 2001, the stockholders
approved an amendment to this plan which authorized the issuance of an
additional 5,000,000 shares. In general, nonqualified and incentive stock
options must be granted at a purchase price equal to the fair market value of
our Common Stock on the date of grant. Options

                                        56
<PAGE>
                           BEVERLY ENTERPRISES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                  YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

8. STOCKHOLDERS' EQUITY -- (CONTINUED)

issued at fair market value do not require the recording of compensation expense
upon issuance. Options shall be exercisable at such times and be subject to such
restrictions and conditions as the Committee shall determine and expire no later
than 10 years from the grant date. Stock appreciation rights may be granted
alone, in tandem with an option or in addition to an option. Stock appreciation
rights shall be exercisable at such times and be subject to such restrictions
and conditions as the Committee shall determine and expire no later than 10
years from the grant date. Restricted stock awards are outright stock grants
which have a minimum vesting period of one year for performance-based awards and
three years for other awards. Performance awards, bonus stock and other stock
unit awards may be granted based on the achievement of certain performance or
other goals and will carry certain restrictions, as defined. The issuance of
restricted stock and other stock awards usually require the recognition of
compensation expense measured by the fair value of the stock on the date of
grant.

     During 1997, the New Beverly Non-Employee Directors Stock Option Plan was
approved (the "Non-Employee Directors Stock Option Plan"). The plan became
effective December 3, 1997 and will remain in effect until December 31, 2007,
subject to early termination by the Board of Directors. We have 450,000 shares
of Common Stock authorized for issuance, subject to certain adjustments, under
the Non-Employee Directors Stock Option Plan. The Non-Employee Directors Stock
Option Plan was amended by the Board of Directors on March 28, 2001 to provide
that each nonemployee director be granted an option to purchase 11,000 shares of
our Common Stock on June 1 of each year until the plan is terminated, subject to
the availability of shares. Such options are granted at a purchase price equal
to the fair market value of our Common Stock on the date of grant, become
exercisable one year after the date of grant and expire 10 years after the date
of grant.

     During 2000, we offered all employees holding stock options granted prior
to February 2000 the opportunity to exchange all or part of their stock options
for shares of restricted stock. This resulted in the issuance of approximately
2,400,000 shares of restricted stock, which vest four years after the grant
date, in exchange for options to purchase approximately 4,800,000 shares of
stock.

                                        57
<PAGE>
                           BEVERLY ENTERPRISES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                  YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

8. STOCKHOLDERS' EQUITY -- (CONTINUED)

     The following table summarizes stock option and restricted stock data
relative to our long-term incentive plans for the years ended December 31:

<Table>
<Caption>
                                           2001                     2000                    1999
                                  ----------------------   ----------------------   ---------------------
                                               WEIGHTED-                WEIGHTED-               WEIGHTED-
                                                AVERAGE                  AVERAGE                 AVERAGE
                                  NUMBER OF    EXERCISE    NUMBER OF    EXERCISE    NUMBER OF   EXERCISE
                                    SHARES       PRICE       SHARES       PRICE      SHARES       PRICE
                                  ----------   ---------   ----------   ---------   ---------   ---------
<S>                               <C>          <C>         <C>          <C>         <C>         <C>
Options outstanding at beginning
  of year.......................   3,790,326     $5.02      7,307,459     $9.08     8,163,565     $9.20
Changes during the year:
  Granted.......................   3,914,323      7.77      2,569,325      3.32       121,627      6.51
  Exercised.....................    (943,608)     3.93       (134,035)     3.52       (40,450)     6.44
  Cancelled.....................    (952,781)     8.59     (5,952,423)     9.31      (937,283)     9.88
                                  ----------               ----------               ---------
Options outstanding at end of
  year..........................   5,808,260      6.46      3,790,326      5.02     7,307,459      9.08
                                  ==========               ==========               =========
Options exercisable at end of
  year..........................   1,289,677      7.19      1,104,815      7.30     4,107,067      8.56
                                  ==========               ==========               =========
Options available for grant at
  end of year...................   5,266,422                3,343,233               2,413,967
                                  ==========               ==========               =========
Restricted stock outstanding at
  beginning of year.............   2,354,873                   67,519                      --
Changes during the year:
  Granted.......................     205,360                2,453,832                  84,491
  Vested........................     (75,709)                 (90,181)                (16,972)
  Forfeited.....................  (1,193,952)                 (76,297)                     --
                                  ----------               ----------               ---------
Restricted stock outstanding at
  end of year...................   1,290,572                2,354,873                  67,519
                                  ==========               ==========               =========
</Table>

     Exercise prices for options outstanding as of December 31, 2001 ranged from
$3.00 to $14.38. The weighted-average remaining contractual life of these
options is eight years. The following table provides certain information with
respect to stock options outstanding at December 31, 2001:

<Table>
<Caption>
                                        OPTIONS OUTSTANDING                     OPTIONS EXERCISABLE
                          -----------------------------------------------   ----------------------------
                                                            WEIGHTED-
                                          WEIGHTED-          AVERAGE                        WEIGHTED-
                            OPTIONS        AVERAGE          REMAINING         OPTIONS        AVERAGE
RANGE OF EXERCISE PRICES  OUTSTANDING   EXERCISE PRICE   CONTRACTUAL LIFE   EXERCISABLE   EXERCISE PRICE
------------------------  -----------   --------------   ----------------   -----------   --------------
<S>                       <C>           <C>              <C>                <C>           <C>
$ 3.00 - $ 6.68........    2,158,816        $ 3.79             7.29            657,094        $ 4.01
$ 7.00 - $ 9.80........    3,227,024        $ 7.58             8.99            241,500        $ 8.72
$10.10 - $11.76........      371,795        $11.29             9.31            340,458        $11.29
$12.88 - $14.38........       50,625        $13.58             6.15             50,625        $13.58
                           ---------                                         ---------
$ 3.00 - $14.38........    5,808,260        $ 6.46             8.34          1,289,677        $ 7.19
                           =========                                         =========
</Table>

     We recognize compensation expense for our restricted stock grants at the
fair market value of our Common Stock on the date of grant, amortized over their
respective vesting periods on a straight-line basis. The total charges to our
consolidated statements of operations for the years ended December 31, 2001,
2000

                                        58
<PAGE>
                           BEVERLY ENTERPRISES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                  YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

8. STOCKHOLDERS' EQUITY -- (CONTINUED)

and 1999 related to these restricted stock grants were approximately $1,741,000,
$1,149,000 and $198,000, respectively.

     Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if we accounted for our
stock option grants under the fair market value method as prescribed by this
statement. The fair market value of our stock options was estimated at the date
of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for the years ended December 31, 2001, 2000 and
1999, respectively:

     - risk-free interest rates of 4.3%, 5.1% and 6.5%;

     - volatility factors of the expected market price of our Common Stock of
       .59, .57 and .46; and

     - expected option lives of five years.

     We do not currently pay cash dividends on our Common Stock and no future
dividends are currently planned. The weighted-average assumptions resulted in a
weighted average fair market value of options granted during 2001, 2000 and 1999
of $4.25 per share, $1.80 per share and $3.17 per share, respectively.

     The Black-Scholes option valuation model was developed for use in
estimating the fair market value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation models
require the input of highly subjective assumptions including the expected stock
price volatility. Because our stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair market value estimates, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair market value of our stock options.

     For purposes of pro forma disclosures, the estimated fair market value of
the stock options is amortized to expense over their respective vesting periods.
The following table summarized our pro forma net loss and diluted net loss per
share, assuming we accounted for our stock option grants in accordance with SFAS
No. 123, for the years ended December 31:

<Table>
<Caption>
                                                          2001      2000       1999
                                                        --------   -------   --------
<S>                                                     <C>        <C>       <C>
Pro forma net loss (in thousands).....................  $303,980   $50,084   $138,924
Pro forma diluted net loss per share..................  $   2.92   $  0.49   $   1.36
</Table>

     The pro forma amounts for 2000 reflect the impact of the cancellation of
approximately 4,800,000 stock options in exchange for approximately 2,400,000
shares of restricted stock (as discussed above). The pro forma effects are not
necessarily indicative of the effects on future years.

     The Beverly Enterprises 1988 Employee Stock Purchase Plan (as amended and
restated) enables all full-time employees having completed one year of
continuous service to purchase shares of our Common Stock at the current market
price through payroll deductions. Effective January 1, 2001, we reduced our
contributions from 30% to 15% of the participant's contribution. Each
participant specifies the amount to be withheld from earnings per two-week pay
period, subject to certain limitations. The total charges to our consolidated
statements of operations for the years ended December 31, 2001, 2000 and 1999
related to this plan were approximately $458,000, $1,192,000 and $1,723,000,
respectively.

                                        59
<PAGE>
                           BEVERLY ENTERPRISES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                  YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

9. INCOME TAXES

     The provision for (benefit from) income taxes consists of the following for
the years ended December 31 (in thousands):

<Table>
<Caption>
                                                         2001       2000       1999
                                                        -------   --------   --------
<S>                                                     <C>       <C>        <C>
Federal:
  Current.............................................  $ 1,487   $     --   $     --
  Deferred............................................   56,831    (26,962)   (72,001)
State:
  Current.............................................    5,000      4,000      4,000
  Deferred............................................   (1,930)       700    (11,078)
                                                        -------   --------   --------
                                                        $61,388   $(22,262)  $(79,079)
                                                        =======   ========   ========
</Table>

     A reconciliation of our income tax provision (benefit) computed at the
statutory federal income tax rate to our actual provision for (benefit from)
income taxes is summarized as follows for the years ended December 31 (dollars
in thousands):

<Table>
<Caption>
                                                         2001       2000       1999
                                                       --------   --------   --------
<S>                                                    <C>        <C>        <C>
Tax (benefit) at statutory rate......................  $(83,959)  $(26,868)  $(74,804)
General business tax credits.........................    (5,987)    (2,138)    (2,470)
State tax provision, net.............................   (10,666)     3,055     (4,601)
Impairment charges...................................     7,090      4,358         48
Increase in valuation allowance......................   153,697         --         --
Other................................................     1,213       (669)     2,748
                                                       --------   --------   --------
                                                       $ 61,388   $(22,262)  $(79,079)
                                                       ========   ========   ========
</Table>

     Deferred income taxes reflect the impact of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. The tax effects of temporary
differences giving rise to our deferred tax assets and liabilities at December
31, 2001 and 2000 are as follows (in thousands):

<Table>
<Caption>
                                                     2001                   2000
                                             --------------------   --------------------
                                              ASSET     LIABILITY    ASSET     LIABILITY
                                             --------   ---------   --------   ---------
<S>                                          <C>        <C>         <C>        <C>
Insurance reserves.........................  $ 74,878   $     --    $ 40,399   $     --
General business tax credit
  carryforwards............................    21,137         --      12,257         --
Alternative minimum tax credit
  carryforwards............................    18,608         --      15,873         --
Provision for dispositions.................    57,605      2,791      17,705      2,688
Provision for Medicare repayment...........    69,812         --      40,757         --
Depreciation and amortization..............    15,513    127,005       2,388    123,548
Operating supplies.........................        --     12,099          --     13,246
Federal net operating loss carryforwards...    30,772         --      53,489         --
Other......................................    27,254     19,987      34,364     25,650
                                             --------   --------    --------   --------
                                             $315,579   $161,882    $217,232   $165,132
Valuation allowances:
  Federal..................................  (134,219)        --          --         --
  State....................................   (19,478)        --          --         --
                                             --------   --------    --------   --------
          Net deferred tax balances........  $161,882   $161,882    $217,232   $165,132
                                             ========   ========    ========   ========
</Table>

                                        60
<PAGE>
                           BEVERLY ENTERPRISES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                  YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

9. INCOME TAXES -- (CONTINUED)

     At December 31, 2001, for federal income tax purposes, we had federal net
operating loss carryforwards of $91,661,000 which expire in years 2018 through
2021; general business tax credit carryforwards of $21,137,000 which expire in
years 2009 through 2021; and alternative minimum tax credit carryforwards of
$18,608,000 which do not expire.

     Under the guidance of SFAS No. 109 and based upon the available evidence,
which includes our operating results in recent years, our reported cumulative
losses, and the inherent uncertainty associated with the realization of future
income (including the extension of Medicare reimbursement enhancements due to
expire on September 30, 2002), we have provided a valuation allowance on our net
deferred tax assets as of December 31, 2001.

10. FAIR VALUES OF FINANCIAL INSTRUMENTS

     Financial Accounting Standards Statement No. 107, Disclosures about Fair
Value of Financial Instruments, requires disclosure of fair value information
about financial instruments, whether or not recognized in the balance sheet, for
which it is practicable to estimate that value. In cases where quoted market
prices are not available, fair values are based on estimates using present value
or other valuation techniques. Those techniques are significantly affected by
the assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instrument. Statement No. 107 excludes certain
financial instruments and all nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
represent our underlying value. We used the following methods and assumptions in
estimating our fair value disclosures for financial instruments:

  Cash and Cash Equivalents

     The carrying amount reported in the consolidated balance sheets for cash
and cash equivalents approximates its fair value.

  Notes Receivable, Net (Including Current Portion)

     For variable-rate notes that reprice frequently and with no significant
change in credit risk, fair values are based on carrying values. The fair values
for fixed-rate notes are estimated using discounted cash flow analyses, using
interest rates currently being offered for loans with similar terms to borrowers
of similar credit quality.

  Beverly Indemnity Funds

     The carrying amount reported in the consolidated balance sheets for the
Beverly Indemnity funds approximates its fair value and is included in the
consolidated balance sheet caption "Prepaid expenses and other".

  Long-term Debt (Including Current Portion)

     The carrying amounts of our variable-rate borrowings approximate their fair
values. The fair values of the remaining long-term debt are estimated using
discounted cash flow analyses, based on our incremental borrowing rates for
similar types of borrowing arrangements.

                                        61
<PAGE>
                           BEVERLY ENTERPRISES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                  YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

10. FAIR VALUES OF FINANCIAL INSTRUMENTS -- (CONTINUED)

  Federal Government Settlements (Including Current Portion)

     The carrying amount of our obligations to the federal government resulting
from the settlements of the Allocation Investigations is included in the
consolidated balance sheet captions "Federal government settlement obligations"
and "Other liabilities and deferred items." These obligations are non-interest
bearing, and as such, were imputed at their approximate fair market rate of 9%
for accounting purposes. The settlement offer made to the federal government in
February 2002 includes a cash payment of $35,000,000 which is expected to be
paid in 2002 and is included in the consolidated balance sheet caption "Federal
government settlement obligations." The carrying amounts of these obligations
approximate their fair values.

     The carrying amounts and estimated fair values of our financial instruments
at December 31, 2001 and 2000 are as follows (in thousands):

<Table>
<Caption>
                                                     2001                    2000
                                             ---------------------   ---------------------
                                             CARRYING                CARRYING
                                              AMOUNT    FAIR VALUE    AMOUNT    FAIR VALUE
                                             --------   ----------   --------   ----------
<S>                                          <C>        <C>          <C>        <C>
Cash and cash equivalents..................  $ 89,343    $ 89,343    $ 25,908    $ 25,908
Notes receivable, net (including current
  portion).................................    22,710      22,710       3,304       3,441
Beverly Indemnity funds....................     2,163       2,163         669         669
Long-term debt (including current
  portion).................................   741,673     760,093     791,358     772,699
Federal government settlements (including
  current portion).........................   119,859     119,859      94,870      94,870
</Table>

     At December 31, 2001 and 2000, we had outstanding defeased long-term debt
with aggregate carrying values of $4,855,000 and $1,750,000, respectively. The
fair value of such defeased debt was approximately $5,124,000 and $1,821,000 at
December 31, 2001 and 2000, respectively. The fair value was estimated using
discounted cash flow analyses, based on our incremental borrowing rates for
similar types of borrowing arrangements.

     In order to consummate certain dispositions and other transactions, we have
agreed to guarantee the debt assumed or acquired by the purchaser or the
performance under a lease, by the lessor. It is not practicable to estimate the
fair value of our off-balance sheet guarantees (see Note 7). We do not charge a
fee for entering into such agreements and contracting with a financial
institution to estimate such amounts could not be done without incurring
excessive costs. In addition, unlike us, a financial institution would not be in
a position to assume the underlying obligations and operate the nursing
facilities collateralizing the obligations, which would significantly impact the
calculation of the fair value of such off-balance sheet guarantees.

     At December 31, 2001 and 2000, we guaranteed approximately $618,000 and
$2,260,000, respectively, of loans to certain of our officers, which are
collateralized by shares of our Common Stock pledged by the officers. The fair
value of such loans was approximately $618,000 and $2,341,000 at December 31,
2001 and 2000, respectively. The fair value was estimated using discounted cash
flow analyses, based on our incremental borrowing rates for similar types of
borrowing arrangements.

11. SEGMENT INFORMATION

     Statement of Financial Accounting Standards No. 131, Disclosures about
Segments of an Enterprise and Related Information, provides disclosure
guidelines for segments of a company based on a management approach to defining
operating segments.

                                        62
<PAGE>
                           BEVERLY ENTERPRISES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                  YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

11. SEGMENT INFORMATION -- (CONTINUED)

  Description of the Types of Services from which each Operating Segment Derives
  its Revenues

     In January 2001, we implemented a new three-year strategic plan aimed at
accomplishing four fundamental strategies:

     - streamline our nursing home portfolio to strengthen our long-term
       financial position;

     - accelerate the growth of our service and knowledge business;

     - establish a leadership position in eldercare; and

     - reengineer our organization in order to focus our resources on profitable
       growth and new opportunities.

     In order to support the implementation of these strategies, in the first
quarter of 2001, we reorganized our operations into three primary segments:

     - nursing facilities, which provide long-term healthcare through the
       operation of nursing homes and assisted living centers;

     - innovation and services group, which includes rehabilitation therapy,
       hospice, home care and a business strategy and development division; and

     - TMX, formerly known as Matrix/Theraphysics, which operates outpatient
       therapy clinics and a managed care network.

  Measurement of Segment Income or Loss and Segment Assets

     The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies (see Note 1). We
evaluate performance and allocate resources based on income or loss from
operations before income taxes, excluding any unusual items.

  Factors Management Used to Identify Our Operating Segments

     Our operating segments are strategic business units that offer different
services within the healthcare continuum. Business in each operating segment is
conducted by one or more corporations. The corporations comprising each
operating segment also have separate boards of directors.

                                        63
<PAGE>
                           BEVERLY ENTERPRISES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                  YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

11. SEGMENT INFORMATION -- (CONTINUED)

     The following table summarizes certain information for each of our
operating segments (in thousands):

<Table>
<Caption>
                                                  INNOVATION
                                     NURSING     AND SERVICES
                                    FACILITIES      GROUP         TMX      ALL OTHER(1)      TOTALS
                                    ----------   ------------   --------   -------------   ----------
<S>                                 <C>          <C>            <C>        <C>             <C>
Year ended December 31, 2001
  Revenues from external
     customers....................  $2,500,821     $115,454     $ 90,715     $   2,871     $2,709,861
  Intercompany revenues...........          --      180,661           --        11,360        192,021
  Interest income.................         193            4           95         2,785          3,077
  Interest expense................      25,914           74           31        53,354         79,373
  Depreciation and amortization...      71,541        4,401       10,147         6,912         93,001
  Pre-tax income (loss)...........     114,384       29,866      (14,113)     (370,021)      (239,884)
  Total assets....................   1,347,255       71,278      121,153       141,384      1,681,070
  Capital expenditures............      80,965        3,272        2,054         3,110         89,401
Year ended December 31, 2000
  Revenues from external
     customers....................  $2,427,554     $111,858     $ 90,697     $  (4,499)    $2,625,610
  Intercompany revenues...........          --      139,024           --        11,695        150,719
  Interest income.................         225            2          128         2,295          2,650
  Interest expense................      27,107          170           71        52,668         80,016
  Depreciation and amortization...      78,984        3,972       10,830         6,275        100,061
  Pre-tax income (loss)...........     105,192       23,869      (14,291)     (191,534)       (76,764)
  Total assets....................   1,508,748      106,780      164,841        95,624      1,875,993
  Capital expenditures............      59,818        3,878        3,381         8,950         76,027
Year ended December 31, 1999
  Revenues from external
     customers....................  $2,305,341     $130,092     $106,922     $   4,317     $2,546,672
  Intercompany revenues...........          --      140,216           --        11,643        151,859
  Interest income.................         240           --           88         4,007          4,335
  Interest expense................      28,434          246          179        43,719         72,578
  Depreciation and amortization...      79,454        3,519        9,709         6,478         99,160
  Pre-tax income (loss)...........     109,884       33,736      (10,319)     (347,027)      (213,726)
  Total assets....................   1,501,670      107,523      218,248       155,439      1,982,880
  Capital expenditures............      73,029        4,711        5,807        11,867         95,414
</Table>

---------------

(1) Consists of the operations of our corporate headquarters and related
    overhead, as well as certain non-operating revenues and expenses. Such
    amounts also include pre-tax charges totaling approximately $315,597,000,
    $87,400,000 and $270,300,000 for 2001, 2000 and 1999, respectively. Such
    pre-tax charges primarily related to increasing reserves for patient care
    liability costs (in 2000 and 1999), asset impairments, workforce reductions
    and other unusual items, special charges related to federal government
    settlements, and year 2000 remediation costs (as discussed herein).

                                        64
<PAGE>

                           BEVERLY ENTERPRISES, INC.

                         SUPPLEMENTARY DATA (UNAUDITED)
                            QUARTERLY FINANCIAL DATA
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

     The following is a summary of our quarterly results of operations for the
years ended December 31, 2001 and 2000.
<Table>
<Caption>
                                                      2001                                               2000
                             -------------------------------------------------------   -----------------------------------------
                               1ST        2ND        3RD         4TH        TOTAL        1ST        2ND        3RD        4TH
                             --------   --------   --------   ---------   ----------   --------   --------   --------   --------
<S>                          <C>        <C>        <C>        <C>         <C>          <C>        <C>        <C>        <C>
Total revenues.............  $659,855   $680,789   $691,902   $ 680,392   $2,712,938   $646,927   $655,888   $665,889   $659,556
                             ========   ========   ========   =========   ==========   ========   ========   ========   ========
Income (loss) before
  provision for (benefit
  from) income taxes.......  $(95,045)  $ 10,126   $ 21,950   $(176,915)  $ (239,884)  $ 10,098   $ 13,001   $(32,831)  $(67,032)
Provision for (benefit
  from) income taxes.......   (42,771)     4,558      9,877      89,724       61,388      3,837      4,479    (10,360)   (20,218)
                             --------   --------   --------   ---------   ----------   --------   --------   --------   --------
Net income (loss)..........  $(52,274)  $  5,568   $ 12,073   $(266,639)  $ (301,272)  $  6,261   $  8,522   $(22,471)  $(46,814)
                             ========   ========   ========   =========   ==========   ========   ========   ========   ========
Income (loss) per share of
  common stock:
  Basic:
    Net income (loss)......  $   (.50)  $    .05   $    .12   $   (2.56)  $    (2.90)  $    .06   $    .08   $   (.22)  $   (.45)
                             ========   ========   ========   =========   ==========   ========   ========   ========   ========
  Diluted:
    Net income (loss)......  $   (.50)  $    .05   $    .11   $   (2.56)  $    (2.90)  $    .06   $    .08   $   (.22)  $   (.45)
                             ========   ========   ========   =========   ==========   ========   ========   ========   ========
    Shares used to compute
      basic net income
      (loss) per share.....   103,705    103,884    104,264     104,286      104,037    102,281    101,321    102,473    103,720
                             ========   ========   ========   =========   ==========   ========   ========   ========   ========
    Shares used to compute
      diluted net income
      (loss) per share.....   103,705    105,691    106,572     104,286      104,037    102,402    101,323    102,473    103,720
                             ========   ========   ========   =========   ==========   ========   ========   ========   ========
Common stock price range:
  High.....................  $   8.50   $  10.73   $  12.10   $   10.69                $   4.56   $   4.00   $   6.38   $   8.25
  Low......................  $   5.94   $   5.20   $   8.50   $    6.50                $   2.50   $   2.75   $   2.56   $   3.81

<Caption>
                                2000
                             ----------
                               TOTAL
                             ----------
<S>                          <C>
Total revenues.............  $2,628,260
                             ==========
Income (loss) before
  provision for (benefit
  from) income taxes.......  $  (76,764)
Provision for (benefit
  from) income taxes.......     (22,262)
                             ----------
Net income (loss)..........  $  (54,502)
                             ==========
Income (loss) per share of
  common stock:
  Basic:
    Net income (loss)......  $     (.53)
                             ==========
  Diluted:
    Net income (loss)......  $     (.53)
                             ==========
    Shares used to compute
      basic net income
      (loss) per share.....     102,452
                             ==========
    Shares used to compute
      diluted net income
      (loss) per share.....     102,452
                             ==========
Common stock price range:
  High.....................
  Low......................
</Table>

---------------

     We recorded a provision for income taxes at 26% for the year ended December
31, 2001, even though we had a pre-tax loss, primarily due to the recording of a
valuation allowance on our deferred tax assets. This valuation allowance was
required under the guidance of SFAS No. 109 due to our recent historical
operating results, our reported cumulative losses and uncertainties relating to
future income. Our annual effective tax rate for 2000 was 29%, which was
different than the federal statutory rate primarily due to amortization of
nondeductible goodwill and state income taxes, partially offset by the benefit
of certain tax credits. Amortization of nondeductible goodwill was impacted in
2000 by the write-down of goodwill on certain under-performing outpatient
therapy clinics.

                                        65
<PAGE>

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

     None.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.

     Incorporated herein by reference from our definitive proxy statement for
the Annual Stockholders Meeting to be held on May 23, 2002, to be filed pursuant
to Regulation 14A.

ITEM 11. EXECUTIVE COMPENSATION.

     Incorporated herein by reference from our definitive proxy statement for
the Annual Stockholders Meeting to be held on May 23, 2002, to be filed pursuant
to Regulation 14A.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

     Incorporated herein by reference from our definitive proxy statement for
the Annual Stockholders Meeting to be held on May 23, 2002, to be filed pursuant
to Regulation 14A.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     Incorporated herein by reference from our definitive proxy statement for
the Annual Stockholders Meeting to be held on May 23, 2002, to be filed pursuant
to Regulation 14A.

                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

  (a) 1 and 2. The Consolidated Financial Statements and Consolidated Financial
  Statement Schedule

     The consolidated financial statements and consolidated financial statement
schedule listed in the accompanying index to consolidated financial statements
and financial statement schedules are filed as part of this annual report.

  3. Exhibits

     The exhibits listed in the accompanying index to exhibits are incorporated
by reference herein or are filed as part of this annual report.

  (b) Reports on Form 8-K

     We did not file any reports on Form 8-K during the quarter ended December
31, 2001.

  (c) Exhibits

     See the accompanying index to exhibits referenced in Item 14(a)(3) above
for a list of exhibits incorporated herein by reference or filed as part of this
annual report.

  (d) Financial Statement Schedule

     See the accompanying index to consolidated financial statements and
financial statement schedules referenced in Item 14(a)1 and 2, above.

                                        66
<PAGE>

                           BEVERLY ENTERPRISES, INC.

                 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
                         FINANCIAL STATEMENT SCHEDULES
                                  (ITEM 14(a))

<Table>
<Caption>
                                                               PAGE
                                                               ----
<S>                                                            <C>
1. Consolidated financial statements:
   Report of Ernst & Young LLP, Independent Auditors........    37
   Consolidated Balance Sheets at December 31, 2001 and
     2000...................................................    38
   Consolidated Statements of Operations for each of the
     three years in the period ended December 31, 2001......    39
   Consolidated Statements of Stockholders' Equity for each
     of the three years in the period ended December 31,
     2001...................................................    40
   Consolidated Statements of Cash Flows for each of the
     three years in the period ended December 31, 2001......    41
   Notes to Consolidated Financial Statements...............    42
   Supplementary Data (Unaudited) -- Quarterly Financial
     Data...................................................    65

2. Consolidated financial statement schedule for each of the
   three years in the period ended December 31, 2001:
   II -- Valuation and Qualifying Accounts..................    68

   All other schedules are omitted because they are either
   not applicable or the items do not meet the various
   disclosure requirements.
</Table>

                                        67
<PAGE>

                           BEVERLY ENTERPRISES, INC.

                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
                  YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
                                 (IN THOUSANDS)

<Table>
<Caption>
                                             CHARGED                        DUE TO
                               BALANCE AT   (CREDITED)                   ACQUISITIONS               BALANCE AT
                               BEGINNING        TO        WRITE-OFFS/        AND                      END OF
DESCRIPTION                     OF YEAR     OPERATIONS    RECOVERIES     DISPOSITIONS    OTHER         YEAR
-----------                    ----------   ----------    -----------    ------------   --------    ----------
<S>                            <C>          <C>           <C>            <C>            <C>         <C>
Year ended December 31, 2001:
  Allowance for doubtful
     accounts:
     Accounts receivable --
       patient...............   $91,636      $43,658       $(95,214)(A)     $4,022      $  7,298     $ 51,400
     Accounts receivable --
       nonpatient............     1,372           89           (477)            --            90        1,074*
     Notes receivable........     3,573          504             93            107           664        4,941
                                -------      -------       --------         ------      --------     --------
                                $96,581      $44,251       $(95,598)        $4,129      $  8,052     $ 57,415
                                =======      =======       ========         ======      ========     ========
  Valuation allowance on
     deferred tax assets.....   $    --      $52,100       $     --         $   --      $101,597(B)  $153,697
                                =======      =======       ========         ======      ========     ========
Year ended December 31, 2000:
  Allowance for doubtful
     accounts:
     Accounts receivable --
       patient...............   $64,398      $72,420       $(42,090)        $  949      $ (4,041)    $ 91,636
     Accounts receivable --
       nonpatient............     1,423          932           (983)            --            --        1,372*
     Notes receivable........     5,604         (871)          (709)          (451)           --        3,573
                                -------      -------       --------         ------      --------     --------
                                $71,425      $72,481       $(43,782)        $  498      $ (4,041)    $ 96,581
                                =======      =======       ========         ======      ========     ========
Year ended December 31, 1999:
  Allowance for doubtful
     accounts:
     Accounts receivable --
       patient...............   $21,764      $67,400(C)    $(26,901)        $1,901      $    234     $ 64,398
     Accounts receivable --
       nonpatient............       677          963             17             --          (234)       1,423*
     Notes receivable........     2,921        3,733         (1,400)            --           350        5,604
                                -------      -------       --------         ------      --------     --------
                                $25,362      $72,096       $(28,284)        $1,901      $    350     $ 71,425
                                =======      =======       ========         ======      ========     ========
</Table>

---------------

(A)  Includes the write-off of $39,000,000 of Medicare cost report related
     receivables against a related reserve established in 1999 (see below), in
     conjunction with the February 2002 settlement offer we made to the federal
     government (see Note 2).

(B)  Represents a full valuation allowance on the tax benefits associated with
     our 2001 net operating loss.

(C)  Includes $39,000,000 for certain prior year cost report related items
     affected by the Allocation Investigations, as well as $1,007,000 for
     additional accounts receivable-patient reserves required on the 10 nursing
     facilities being disposed of as a result of the settlements of such
     investigations.

 *   Includes amounts classified in long-term other assets as well as current
     assets.

                                        68
<PAGE>

                           BEVERLY ENTERPRISES, INC.

                               INDEX TO EXHIBITS
                                (ITEM 14(a)(3))

<Table>
<Caption>
        EXHIBIT
         NUMBER                                       DESCRIPTION
        -------                                       -----------
<C>                      <S>  <C>
          3.1            --   Form of Restated Certificate of Incorporation of New Beverly
                              Holdings, Inc. (incorporated by reference to Exhibit 3.1 to
                              Beverly Enterprises, Inc.'s Annual Report on Form 10-K for
                              the year ended December 31, 1997)
          3.2            --   Form of Certificate of Amendment of Certificate of
                              Incorporation of New Beverly Holdings Inc., changing its
                              name to Beverly Enterprises, Inc. (incorporated by reference
                              to Exhibit 3.2 to Beverly Enterprises, Inc.'s Annual Report
                              on Form 10-K for the year ended December 31, 1997)
          3.3            --   By-Laws of Beverly Enterprises, Inc. (incorporated by
                              reference to Exhibit 3.4 to Beverly Enterprises, Inc.'s
                              Registration Statement on Form S-1 filed on June 4, 1997
                              (File No. 333-28521))
          4.1            --   Indenture dated as of February 1, 1996 between Beverly
                              Enterprises, Inc. and Chemical Bank, as Trustee, with
                              respect to Beverly Enterprises, Inc.'s 9% Senior Notes due
                              February 15, 2006 (the "9% Indenture") (incorporated by
                              reference to Exhibit 4.1 to Beverly Enterprises, Inc.'s
                              Annual Report on Form 10-K for the year ended December 31,
                              1995)
          4.2            --   Form of Supplemental Indenture No. 2 to the 9% Indenture
                              dated as of November 19, 1997 (incorporated by reference to
                              Exhibit 4.2 to Beverly Enterprises, Inc.'s Registration
                              Statement on Form S-4 filed on September 8, 1997 (File No.
                              333-35137))
          4.3            --   Indenture dated as of April 25, 2001 between Beverly
                              Enterprises, Inc., and The Bank of New York, as Trustee,
                              with respect to Beverly Enterprises, Inc.'s 9 5/8% Senior
                              Notes due 2009.
          4.4            --   Indenture dated as of April 1, 1993 (the "First Mortgage
                              Bond Indenture"), among Beverly Enterprises, Inc., Delaware
                              Trust Company, as Corporate Trustee, and Richard N. Smith,
                              as Individual Trustee, with respect to First Mortgage Bonds
                              (incorporated by reference to Exhibit 4.1 to Beverly
                              Enterprises, Inc.'s Quarterly Report on Form 10-Q for the
                              quarter ended March 31, 1993)
          4.5            --   First Supplemental Indenture dated as of April 1, 1993 to
                              the First Mortgage Bond Indenture, with respect to 8.750%
                              First Mortgage Bonds due 2008 (incorporated by reference to
                              Exhibit 4.2 to Beverly Enterprises, Inc.'s Quarterly Report
                              on Form 10-Q for the quarter ended March 31, 1993)
          4.6            --   Second Supplemental Indenture dated as of July 1, 1993 to
                              the First Mortgage Bond Indenture, with respect to 8.625%
                              First Mortgage Bonds due 2008 (replaces Exhibit 4.1 to
                              Beverly Enterprises, Inc.'s Current Report on Form 8-K dated
                              July 15, 1993) (incorporated by reference to Exhibit 4.15 to
                              Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q
                              for the quarter ended June 30, 1993)
          4.7            --   Trust Indenture dated as of December 1, 1994 from Beverly
                              Funding Corporation, as Issuer, to Chemical Bank, as Trustee
                              (the "Chemical Indenture") (incorporated by reference to
                              Exhibit 10.45 to Beverly Enterprises, Inc.'s Registration
                              Statement on Form S-4 filed on February 13, 1995 (File
                              No.33-57663))
          4.8            --   First Amendment and Restatement, dated as of June 1, 1999,
                              of Trust Indenture, dated as of December 1, 1994, from
                              Beverly Funding Corporation, as Issuer, to The Chase
                              Manhattan Bank, as Trustee (incorporated by reference to
                              Exhibit 10.2 to Beverly Enterprises, Inc.'s Quarterly Report
                              on Form 10-Q for the quarter ended September 30, 1999)
</Table>

                                        69
<PAGE>

<Table>
<Caption>
        EXHIBIT
         NUMBER                                       DESCRIPTION
        -------                                       -----------
<C>                      <S>  <C>
          4.9            --   Series Supplement dated as of December 1, 1994 to the
                              Chemical Indenture (incorporated by reference to Exhibit
                              10.46 to Beverly Enterprises, Inc.'s Registration Statement
                              on Form S-4 filed on February 13, 1995 (File No. 33-57663))
          4.10           --   Series Supplement, dated as of June 1, 1999, by and between
                              Beverly Funding Corporation and The Chase Manhattan Bank
                              ("1999-1 Series Supplement") (incorporated by reference to
                              Exhibit 10.3 to Beverly Enterprises, Inc.'s Quarterly Report
                              on Form 10-Q for the quarter ended September 30, 1999)
          4.11           --   First Amendment, dated as of July 14, 1999, to the 1999-1
                              Series Supplement (incorporated by reference to Exhibit 10.4
                              to Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q
                              for the quarter ended September 30, 1999)
                              In accordance with item 601 (b) (4) (iii) of Regulation S-K,
                              certain instruments pertaining to Beverly Enterprises,
                              Inc.'s long-term obligations have not been filed; copies
                              thereof will be furnished to the Securities and Exchange
                              Commission upon request.
         10.1*           --   Beverly Enterprises, Inc. Annual Incentive Plan.
         10.2*           --   1997 Long-Term Incentive Plan, as amended and restated as of
                              June 1, 2001 (the "1997 LTIP").
         10.3*           --   Beverly Enterprises, Inc. Non-Employee Directors' Stock
                              Option Plan, as amended and restated as of June 1, 2001 (the
                              "Directors' Option Plan")
         10.4*           --   Beverly Enterprises, Inc. Stock Grant Plan (incorporated by
                              reference to Exhibit 10.6 to Beverly Enterprises, Inc.'s
                              Annual Report on Form 10-K for the year ended December 31,
                              2000)
         10.5*           --   Executive Medical Reimbursement Plan (incorporated by
                              reference to Exhibit 10.5 to Beverly Enterprises, Inc.'s
                              Annual Report on Form 10-K for the year ended December 31,
                              1987)
         10.6*           --   Form of the Beverly Enterprises, Inc. Executive Life
                              Insurance Plan Split Dollar Agreement (incorporated by
                              reference to Exhibit 10.8 to Beverly Enterprises, Inc.'s
                              Annual Report on Form 10-K for the year ended December 31,
                              2000)
         10.7*           --   Executive Physicals Policy (incorporated by reference to
                              Exhibit 10.8 to Beverly Enterprises, Inc.'s Quarterly Report
                              on Form 10-Q for the quarter ended June 30, 1993)
         10.8*           --   Amended and Restated Deferred Compensation Plan effective
                              July 18, 1991 (incorporated by reference to Exhibit 10.6 to
                              Beverly Enterprises, Inc.'s Annual Report on Form 10-K for
                              the year ended December 31, 1991)
         10.9*           --   Amendment No. 1, effective September 29, 1994, to the
                              Deferred Compensation Plan (incorporated by reference to
                              Exhibit 10.13 to Beverly Enterprises, Inc.'s Registration
                              Statement on Form S-4 filed on February 13, 1995 (File No.
                              33-57663))
         10.10*          --   Executive Retirement Plan (incorporated by reference to
                              Exhibit 10.9 to Beverly Enterprises, Inc.'s Annual Report on
                              Form 10-K for the year ended December 31, 1987)
         10.11*          --   Amendment No. 1, effective as of July 1, 1991, to the
                              Executive Retirement Plan (incorporated by reference to
                              Exhibit 10.8 to Beverly Enterprises, Inc.'s Annual Report on
                              Form 10-K for the year ended December 31, 1991)
         10.12*          --   Amendment No. 2, effective as of December 12, 1991, to the
                              Executive Retirement Plan (incorporated by reference to
                              Exhibit 10.9 to Beverly Enterprises, Inc.'s Annual Report on
                              Form 10-K for the year ended December 31, 1991)
         10.13*          --   Amendment No. 3, effective as of July 31, 1992, to the
                              Executive Retirement Plan (incorporated by reference to
                              Exhibit 10.10 to Beverly Enterprises, Inc.'s Annual Report
                              on Form 10-K for the year ended December 31, 1992)
</Table>

                                        70
<PAGE>

<Table>
<Caption>
        EXHIBIT
         NUMBER                                       DESCRIPTION
        -------                                       -----------
<C>                      <S>  <C>
         10.14*          --   Amendment No. 4, effective as of January 1, 1993, to the
                              Executive Retirement Plan (incorporated by reference to
                              Exhibit 10.18 to Beverly Enterprises, Inc.'s Annual Report
                              on Form 10-K for the year ended December 31, 1994)
         10.15*          --   Amendment No. 5, effective as of September 29, 1994, to the
                              Executive Retirement Plan (incorporated by reference to
                              Exhibit 10.19 to Beverly Enterprises, Inc.'s Annual Report
                              on Form 10-K for the year ended December 31, 1994)
         10.16*          --   Amendment No. 6, effective as of January 1, 1996, to the
                              Executive Retirement Plan (incorporated by reference to
                              Exhibit 10.18 to Beverly Enterprises, Inc.'s Annual Report
                              on Form 10-K for the year ended December 31, 1997)
         10.17*          --   Amendment No. 7, effective as of September 1, 1997, to the
                              Executive Retirement Plan (incorporated by reference to
                              Exhibit 10.19 to Beverly Enterprises, Inc.'s Annual Report
                              on Form 10-K for the year ended December 31, 1997)
         10.18*          --   Amendment No. 8, dated as of December 11, 1997, to the
                              Executive Retirement Plan, changing its name to the
                              "Executive SavingsPlus Plan" (incorporated by reference to
                              Exhibit 10.20 to Beverly Enterprises, Inc.'s Annual Report
                              on Form 10-K for the year ended December 31, 1997)
         10.19*          --   Beverly Enterprises, Inc. Amended and Restated Supplemental
                              Executive Retirement Plan effective as of April 1, 2000
                              (incorporated by reference to Exhibit 10.21 to Beverly
                              Enterprises, Inc.'s Annual Report on Form 10-K for the year
                              ended December 31, 2000)
         10.20*          --   Beverly Enterprises, Inc. Amended and Restated Executive
                              Deferred Compensation Plan effective July 1, 2000
                              (incorporated by reference to Exhibit 10.22 to Beverly
                              Enterprises, Inc.'s Annual Report on Form 10-K for the year
                              ended December 31, 2000)
         10.21*          --   Beverly Enterprises, Inc. Non-Employee Director Deferred
                              Compensation Plan (the "Directors' Plan") (incorporated by
                              reference to Exhibit 10.1 to Beverly Enterprises, Inc.'s
                              Quarterly Report on Form 10-Q for the quarter ended June 30,
                              1997)
         10.22*          --   Amendment No. 1, effective as of December 3, 1997, to the
                              Directors' Plan (incorporated by reference to Exhibit 10.26
                              to Beverly Enterprises, Inc.'s Annual Report on Form 10-K
                              for the year ended December 31, 1997)
         10.23*          --   Beverly Enterprises, Inc.'s Supplemental Long-Term
                              Disability Plan (incorporated by reference to Exhibit 10.24
                              to Beverly Enterprises, Inc.'s Annual Report on Form 10-K
                              for the year ended December 31, 1996)
         10.24*          --   Form of Indemnification Agreement between Beverly
                              Enterprises, Inc. and its officers, directors and certain of
                              its employees (incorporated by reference to Exhibit 19.14 to
                              Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q
                              for the quarter ended June 30, 1987)
         10.25*          --   Form of request by Beverly Enterprises, Inc. to certain of
                              its officers or directors relating to indemnification rights
                              (incorporated by reference to Exhibit 19.5 to Beverly
                              Enterprises, Inc.'s Quarterly Report on Form 10-Q for the
                              quarter ended September 30, 1987)
         10.26*          --   Form of request by Beverly Enterprises, Inc. to certain of
                              its officers or employees relating to indemnification rights
                              (incorporated by reference to Exhibit 19.6 to Beverly
                              Enterprises, Inc.'s Quarterly Report on Form 10-Q for the
                              quarter ended September 30, 1987)
         10.27*          --   Agreement dated December 29, 1986 between Beverly
                              Enterprises, Inc. and Stephens Inc. (incorporated by
                              reference to Exhibit 10.20 to Beverly Enterprises, Inc.'s
                              Registration Statement on Form S-1 filed on January 18, 1990
                              (File No. 33-33052))
         10.28*          --   Severance Agreement and Release of Claims between Beverly
                              Enterprises, Inc. and David R. Banks.
</Table>

                                        71
<PAGE>

<Table>
<Caption>
        EXHIBIT
         NUMBER                                       DESCRIPTION
        -------                                       -----------
<C>                      <S>  <C>
         10.29*          --   Employment Contract, made as of April 10, 2000, between
                              Beverly Enterprises, Inc. and William R. Floyd 10.30
                              (incorporated by reference to Exhibit 10.31 to Beverly
                              Enterprises, Inc.'s Annual Report on Form 10-K for the year
                              ended December 31, 2000)
         10.30*          --   Employment and Severance Agreement made as of March 5, 2001
                              between Beverly Enterprises, Inc. and Bobby W. Stephens.
         10.31*          --   Employment Agreement, dated February 15, 2001 between
                              Beverly Enterprises, Inc. and William A. Mathies
                              (incorporated by reference to Exhibit 10.1 to Beverly
                              Enterprises, Inc.'s Quarterly Report on Form 10-Q for the
                              quarter ended June 30, 2001).
         10.32*          --   Form of Employment Contract, made as of August 22, 1997,
                              between New Beverly Holdings, Inc. and certain of its
                              officers (incorporated by reference to Exhibit 10.20 to
                              Amendment No. 2 to Beverly Enterprises, Inc.'s Registration
                              Statement on Form S-1 filed on September 22, 1997 (File No.
                              333-28521))
         10.33*          --   Form of Irrevocable Trust Agreement for the Beverly
                              Enterprises, Inc. Executive Benefits Plan (incorporated by
                              reference to Exhibit 10.55 to Beverly Enterprises, Inc.'s
                              Registration Statement of Form S-4 filed on February 13,
                              1995 (File No. 33-57663))
         10.34           --   Master Lease Document -- General Terms and Conditions dated
                              December 30, 1985 for Leases between Beverly California
                              Corporation and various subsidiaries thereof as lessees and
                              Beverly Investment Properties, Inc. as lessor (incorporated
                              by reference to Exhibit 10.12 to Beverly California
                              Corporation's Annual Report on Form 10-K for the year ended
                              December 31, 1985)
         10.35           --   Agreement dated as of December 29, 1986 among Beverly
                              California Corporation, Beverly Enterprises -- Texas, Inc.,
                              Stephens Inc. and Real Properties, Inc. (incorporated by
                              reference to Exhibit 28 to Beverly California Corporation's
                              Current Report on Form 8-K dated December 30, 1986) and
                              letter agreement dated as of July 31, 1987 among Beverly
                              Enterprises, Inc., Beverly California Corporation, Beverly
                              Enterprises -- Texas, Inc. and Stephens Inc. with reference
                              thereto (incorporated by reference to Exhibit 19.13 to
                              Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q
                              for the quarter ended June 30, 1987)
         10.36           --   Agreement to Sale of Nursing Home Properties dated as of
                              July 13, 2001 among Beverly Enterprises Florida, Inc.,
                              Beverly Health and Rehabilitation Services, Inc., Beverly
                              Savana Cay Manor, Inc., Vantage Healthcare Corporation,
                              Peterson Health Care, Inc. and NMC of Florida, LLC (the
                              "Florida Sale Agreement").
         10.37           --   First Amendment to Florida Sale Agreement, dated as of
                              August 30, 2001.
         10.38           --   Second Amendment to Florida Sale Agreement, dated as of
                              October 29, 2001.
         10.39           --   Participation Agreement, dated as of August 28, 1998, among
                              Vantage Healthcare Corporation, Petersen Health Care, Inc.,
                              Beverly Savana Cay Manor, Inc., Beverly
                              Enterprises -- Georgia, Inc., Beverly
                              Enterprises -- California, Inc., Beverly Health and
                              Rehabilitation Services, Inc., Beverly
                              Enterprises -- Arkansas, Inc., Beverly
                              Enterprises -- Florida, Inc. and Beverly
                              Enterprises -- Washington, Inc. as Lessees and Structural
                              Guarantors; Beverly Enterprises, Inc. as Representative,
                              Construction Agent and Parent Guarantor; Bank of Montreal
                              Global Capital Solutions, Inc. as Agent Lessor and Lessor;
                              The Long-Term Credit Bank of Japan, LTD., Los Angeles
                              Agency, Bank of America National Trust and Savings
                              Association and Bank of Montreal, as Lenders; The Long-Term
                              Credit Bank of Japan, LTD., Los Angeles Agency as Arranger;
                              and Bank of Montreal as Co-Arranger and Syndication Agent
                              and Administrative Agent for the Lenders with respect to the
                              Lease Financing of New Headquarters for Beverly Enterprises,
                              Inc., Assisted Living and Nursing Facilities for Beverly
                              Enterprises, Inc. (incorporated by reference to Exhibit
                              10.37 to Beverly Enterprises, Inc.'s Annual Report on Form
                              10-K for the year ended December 31, 1998)
</Table>

                                        72
<PAGE>

<Table>
<Caption>
        EXHIBIT
         NUMBER                                       DESCRIPTION
        -------                                       -----------
<C>                      <S>  <C>
         10.40           --   Master Amendment No. 1 to Amended and Restated Participation
                              Agreement and Amended and Restated Master Lease and Open-End
                              Mortgage, entered into as of September 30, 1999, among
                              Beverly Enterprises, Inc. as Representative, Construction
                              Agent, Parent Guarantor and Lessee; Bank of Montreal Global
                              Capital Solutions, Inc., as Lessor and Agent Lessor; and
                              Bank of Montreal, as Administrative Agent, Arranger and
                              Syndication Agent (incorporated by reference to Exhibit 10.5
                              to Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q
                              for the quarter ended September 30, 1999)
         10.41           --   Amendment No. 2 to Amended and Restated Participation
                              Agreement entered into as of April 14, 2000 (incorporated by
                              reference to Exhibit 10.37 to Beverly Enterprises, Inc.'s
                              Annual Report on Form 10-K for the year ended December 31,
                              2000)
         10.42           --   Amendment to Participation Agreement dated as of December
                              29, 2000 (incorporated by reference to Exhibit 10.38 to
                              Beverly Enterprises, Inc.'s Annual Report on Form 10-K for
                              the year ended December 31, 2000)
         10.43           --   Master Amendment No. 3 to Amended and Restated Participation
                              Agreement, dated as of April 25, 2001.
         10.44           --   Amendment No. 4 to Amended and Restated Participation
                              Agreement, dated as of December 31, 2001.
         10.45           --   Master Services Agreement, dated as of September 18, 1997,
                              by and between Alltel Information Services, Inc. and Beverly
                              Enterprises, Inc. (incorporated by reference to Exhibit
                              10.41 to Beverly Enterprises, Inc.'s Annual Report on Form
                              10-K for the year ended December 31, 1999)
         10.46           --   Amended and Restated Credit Agreement, dated as of April 25,
                              2001, among Beverly Enterprises, Inc., the Banks listed
                              therein and Morgan Guaranty Trust Company of New York, as
                              Issuing Bank and Agent (the "Credit Agreement").
         10.47           --   Amendment No. 1 to the Credit Agreement, dated as of
                              December 31, 2001.
         10.48           --   Corporate Integrity Agreement between the Office of
                              Inspector General of the Department of Health and Human
                              Services and Beverly Enterprises, Inc. (incorporated by
                              reference to Exhibit 10.43 to Beverly Enterprises, Inc.'s
                              Annual Report on Form 10-K for the year ended December 31,
                              1999)
         10.49           --   Plea Agreement (incorporated by reference to Exhibit 10.44
                              to Beverly Enterprises, Inc.'s Annual Report on Form 10-K
                              for the year ended December 31, 1999)
         10.50           --   Addendum to Plea Agreement (incorporated by reference to
                              Exhibit 10.45 to Beverly Enterprises, Inc.'s Annual Report
                              on Form 10-K for the year ended December 31, 1999)
         10.51           --   Settlement Agreement between the United States of America,
                              Beverly Enterprises, Inc. and Domenic Todarello
                              (incorporated by reference to Exhibit 10.46 to Beverly
                              Enterprises, Inc.'s Annual Report on Form 10-K for the year
                              ended December 31, 1999)
         10.52           --   Agreement Regarding the Operations of Beverly
                              Enterprises -- California, Inc. (incorporated by reference
                              to Exhibit 10.47 to Beverly Enterprises, Inc.'s Annual
                              Report on Form 10-K for the year ended December 31, 1999)
         21.1            --   Subsidiaries of Registrant
         23.1            --   Consent of Ernst & Young LLP, Independent Auditors
</Table>

---------------

* Exhibits 10.1 through 10.33 are the management contracts, compensatory plans,
  contracts and arrangements in which any director or named executive officer
  participates.

                                        73
<PAGE>

                                   SIGNATURES

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

                                            BEVERLY ENTERPRISES, INC.
                                            Registrant

Dated: March 29, 2002                       By:    /s/ WILLIAM R. FLOYD
                                              ----------------------------------
                                                       William R. Floyd
                                              Chairman of the Board, President,
                                                 Chief Executive Officer and
                                                            Director

     Each person whose signature appears below constitutes and appoints Douglas
J. Babb and John W. Mackenzie, and each of them, his or her true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him or her and in his or her name, place and stead, in any and all
capacities, to sign any and all amendments to this report and to file the same,
with all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission granting unto said attorneys-in-fact and
agents and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he or she might do in person,
hereby ratifying and confirming all that said attorney-in-fact and agent or
either of them, or their or his substitutes or substitute, may lawfully do or
cause to be done by virtue hereof.

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

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

                  /s/ WILLIAM R. FLOYD                     Chairman of the Board,          March 29, 2002
 ------------------------------------------------------      President, Chief Executive
                    William R. Floyd                         Officer and Director

                /s/ JEFFREY P. FREIMARK                    Executive Vice President and    March 29, 2002
 ------------------------------------------------------      Chief Financial Officer
                  Jeffrey P. Freimark

                 /s/ PAMELA H. DANIELS                     Senior Vice President,          March 29, 2002
 ------------------------------------------------------      Controller and Chief
                   Pamela H. Daniels                         Accounting Officer

               /s/ BERYL F. ANTHONY, JR.                   Director                        March 29, 2002
 ------------------------------------------------------
                 Beryl F. Anthony, Jr.

                /s/ JOHN D. FOWLER, JR.                    Director                        March 29, 2002
 ------------------------------------------------------
                  John D. Fowler, Jr.

                  /s/ JAMES R. GREENE                      Director                        March 29, 2002
 ------------------------------------------------------
                    James R. Greene

                  /s/ EDITH E. HOLIDAY                     Director                        March 29, 2002
 ------------------------------------------------------
                    Edith E. Holiday

                 /s/ JOHN P. HOWE, III                     Director                        March 29, 2002
 ------------------------------------------------------
                   John P. Howe, III

                  /s/ JAMES W. MCLANE                      Director                        March 29, 2002
 ------------------------------------------------------
                    James W. McLane

                 /s/ MARILYN R. SEYMANN                    Director                        March 29, 2002
 ------------------------------------------------------
                   Marilyn R. Seymann
</Table>

                                        74
<PAGE>

                               INDEX TO EXHIBITS

<Table>
<Caption>
        EXHIBIT
         NUMBER                                       DESCRIPTION
        -------                                       -----------
<C>                      <S>  <C>
          3.1            --   Form of Restated Certificate of Incorporation of New Beverly
                              Holdings, Inc. (incorporated by reference to Exhibit 3.1 to
                              Beverly Enterprises, Inc.'s Annual Report on Form 10-K for
                              the year ended December 31, 1997)
          3.2            --   Form of Certificate of Amendment of Certificate of
                              Incorporation of New Beverly Holdings Inc., changing its
                              name to Beverly Enterprises, Inc. (incorporated by reference
                              to Exhibit 3.2 to Beverly Enterprises, Inc.'s Annual Report
                              on Form 10-K for the year ended December 31, 1997)
          3.3            --   By-Laws of Beverly Enterprises, Inc. (incorporated by
                              reference to Exhibit 3.4 to Beverly Enterprises, Inc.'s
                              Registration Statement on Form S-1 filed on June 4, 1997
                              (File No. 333-28521))
          4.1            --   Indenture dated as of February 1, 1996 between Beverly
                              Enterprises, Inc. and Chemical Bank, as Trustee, with
                              respect to Beverly Enterprises, Inc.'s 9% Senior Notes due
                              February 15, 2006 (the "9% Indenture") (incorporated by
                              reference to Exhibit 4.1 to Beverly Enterprises, Inc.'s
                              Annual Report on Form 10-K for the year ended December 31,
                              1995)
          4.2            --   Form of Supplemental Indenture No. 2 to the 9% Indenture
                              dated as of November 19, 1997 (incorporated by reference to
                              Exhibit 4.2 to Beverly Enterprises, Inc.'s Registration
                              Statement on Form S-4 filed on September 8, 1997 (File No.
                              333-35137))
          4.3            --   Indenture dated as of April 25, 2001 between Beverly
                              Enterprises, Inc., and The Bank of New York, as Trustee,
                              with respect to Beverly Enterprises, Inc.'s 9 5/8% Senior
                              Notes due 2009.
          4.4            --   Indenture dated as of April 1, 1993 (the "First Mortgage
                              Bond Indenture"), among Beverly Enterprises, Inc., Delaware
                              Trust Company, as Corporate Trustee, and Richard N. Smith,
                              as Individual Trustee, with respect to First Mortgage Bonds
                              (incorporated by reference to Exhibit 4.1 to Beverly
                              Enterprises, Inc.'s Quarterly Report on Form 10-Q for the
                              quarter ended March 31, 1993)
          4.5            --   First Supplemental Indenture dated as of April 1, 1993 to
                              the First Mortgage Bond Indenture, with respect to 8.750%
                              First Mortgage Bonds due 2008 (incorporated by reference to
                              Exhibit 4.2 to Beverly Enterprises, Inc.'s Quarterly Report
                              on Form 10-Q for the quarter ended March 31, 1993)
          4.6            --   Second Supplemental Indenture dated as of July 1, 1993 to
                              the First Mortgage Bond Indenture, with respect to 8.625%
                              First Mortgage Bonds due 2008 (replaces Exhibit 4.1 to
                              Beverly Enterprises, Inc.'s Current Report on Form 8-K dated
                              July 15, 1993) (incorporated by reference to Exhibit 4.15 to
                              Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q
                              for the quarter ended June 30, 1993)
          4.7            --   Trust Indenture dated as of December 1, 1994 from Beverly
                              Funding Corporation, as Issuer, to Chemical Bank, as Trustee
                              (the "Chemical Indenture") (incorporated by reference to
                              Exhibit 10.45 to Beverly Enterprises, Inc.'s Registration
                              Statement on Form S-4 filed on February 13, 1995 (File
                              No.33-57663))
          4.8            --   First Amendment and Restatement, dated as of June 1, 1999,
                              of Trust Indenture, dated as of December 1, 1994, from
                              Beverly Funding Corporation, as Issuer, to The Chase
                              Manhattan Bank, as Trustee (incorporated by reference to
                              Exhibit 10.2 to Beverly Enterprises, Inc.'s Quarterly Report
                              on Form 10-Q for the quarter ended September 30, 1999)
          4.9            --   Series Supplement dated as of December 1, 1994 to the
                              Chemical Indenture (incorporated by reference to Exhibit
                              10.46 to Beverly Enterprises, Inc.'s Registration Statement
                              on Form S-4 filed on February 13, 1995 (File No. 33-57663))
</Table>
<PAGE>

<Table>
<Caption>
        EXHIBIT
         NUMBER                                       DESCRIPTION
        -------                                       -----------
<C>                      <S>  <C>
          4.10           --   Series Supplement, dated as of June 1, 1999, by and between
                              Beverly Funding Corporation and The Chase Manhattan Bank
                              ("1999-1 Series Supplement") (incorporated by reference to
                              Exhibit 10.3 to Beverly Enterprises, Inc.'s Quarterly Report
                              on Form 10-Q for the quarter ended September 30, 1999)
          4.11           --   First Amendment, dated as of July 14, 1999, to the 1999-1
                              Series Supplement (incorporated by reference to Exhibit 10.4
                              to Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q
                              for the quarter ended September 30, 1999)
                              In accordance with item 601 (b) (4) (iii) of Regulation S-K,
                              certain instruments pertaining to Beverly Enterprises,
                              Inc.'s long-term obligations have not been filed; copies
                              thereof will be furnished to the Securities and Exchange
                              Commission upon request.
         10.1*           --   Beverly Enterprises, Inc. Annual Incentive Plan.
         10.2*           --   1997 Long-Term Incentive Plan, as amended and restated as of
                              June 1, 2001 (the "1997 LTIP").
         10.3*           --   Beverly Enterprises, Inc. Non-Employee Directors' Stock
                              Option Plan, as amended and restated as of June 1, 2001 (the
                              "Directors' Option Plan")
         10.4*           --   Beverly Enterprises, Inc. Stock Grant Plan (incorporated by
                              reference to Exhibit 10.6 to Beverly Enterprises, Inc.'s
                              Annual Report on Form 10-K for the year ended December 31,
                              2000)
         10.5*           --   Executive Medical Reimbursement Plan (incorporated by
                              reference to Exhibit 10.5 to Beverly Enterprises, Inc.'s
                              Annual Report on Form 10-K for the year ended December 31,
                              1987)
         10.6*           --   Form of the Beverly Enterprises, Inc. Executive Life
                              Insurance Plan Split Dollar Agreement (incorporated by
                              reference to Exhibit 10.8 to Beverly Enterprises, Inc.'s
                              Annual Report on Form 10-K for the year ended December 31,
                              2000)
         10.7*           --   Executive Physicals Policy (incorporated by reference to
                              Exhibit 10.8 to Beverly Enterprises, Inc.'s Quarterly Report
                              on Form 10-Q for the quarter ended June 30, 1993)
         10.8*           --   Amended and Restated Deferred Compensation Plan effective
                              July 18, 1991 (incorporated by reference to Exhibit 10.6 to
                              Beverly Enterprises, Inc.'s Annual Report on Form 10-K for
                              the year ended December 31, 1991)
         10.9*           --   Amendment No. 1, effective September 29, 1994, to the
                              Deferred Compensation Plan (incorporated by reference to
                              Exhibit 10.13 to Beverly Enterprises, Inc.'s Registration
                              Statement on Form S-4 filed on February 13, 1995 (File No.
                              33-57663))
         10.10*          --   Executive Retirement Plan (incorporated by reference to
                              Exhibit 10.9 to Beverly Enterprises, Inc.'s Annual Report on
                              Form 10-K for the year ended December 31, 1987)
         10.11*          --   Amendment No. 1, effective as of July 1, 1991, to the
                              Executive Retirement Plan (incorporated by reference to
                              Exhibit 10.8 to Beverly Enterprises, Inc.'s Annual Report on
                              Form 10-K for the year ended December 31, 1991)
         10.12*          --   Amendment No. 2, effective as of December 12, 1991, to the
                              Executive Retirement Plan (incorporated by reference to
                              Exhibit 10.9 to Beverly Enterprises, Inc.'s Annual Report on
                              Form 10-K for the year ended December 31, 1991)
         10.13*          --   Amendment No. 3, effective as of July 31, 1992, to the
                              Executive Retirement Plan (incorporated by reference to
                              Exhibit 10.10 to Beverly Enterprises, Inc.'s Annual Report
                              on Form 10-K for the year ended December 31, 1992)
         10.14*          --   Amendment No. 4, effective as of January 1, 1993, to the
                              Executive Retirement Plan (incorporated by reference to
                              Exhibit 10.18 to Beverly Enterprises, Inc.'s Annual Report
                              on Form 10-K for the year ended December 31, 1994)
         10.15*          --   Amendment No. 5, effective as of September 29, 1994, to the
                              Executive Retirement Plan (incorporated by reference to
                              Exhibit 10.19 to Beverly Enterprises, Inc.'s Annual Report
                              on Form 10-K for the year ended December 31, 1994)
</Table>
<PAGE>

<Table>
<Caption>
        EXHIBIT
         NUMBER                                       DESCRIPTION
        -------                                       -----------
<C>                      <S>  <C>
         10.16*          --   Amendment No. 6, effective as of January 1, 1996, to the
                              Executive Retirement Plan (incorporated by reference to
                              Exhibit 10.18 to Beverly Enterprises, Inc.'s Annual Report
                              on Form 10-K for the year ended December 31, 1997)
         10.17*          --   Amendment No. 7, effective as of September 1, 1997, to the
                              Executive Retirement Plan (incorporated by reference to
                              Exhibit 10.19 to Beverly Enterprises, Inc.'s Annual Report
                              on Form 10-K for the year ended December 31, 1997)
         10.18*          --   Amendment No. 8, dated as of December 11, 1997, to the
                              Executive Retirement Plan, changing its name to the
                              "Executive SavingsPlus Plan" (incorporated by reference to
                              Exhibit 10.20 to Beverly Enterprises, Inc.'s Annual Report
                              on Form 10-K for the year ended December 31, 1997)
         10.19*          --   Beverly Enterprises, Inc. Amended and Restated Supplemental
                              Executive Retirement Plan effective as of April 1, 2000
                              (incorporated by reference to Exhibit 10.21 to Beverly
                              Enterprises, Inc.'s Annual Report on Form 10-K for the year
                              ended December 31, 2000)
         10.20*          --   Beverly Enterprises, Inc. Amended and Restated Executive
                              Deferred Compensation Plan effective July 1, 2000
                              (incorporated by reference to Exhibit 10.22 to Beverly
                              Enterprises, Inc.'s Annual Report on Form 10-K for the year
                              ended December 31, 2000)
         10.21*          --   Beverly Enterprises, Inc. Non-Employee Director Deferred
                              Compensation Plan (the "Directors' Plan") (incorporated by
                              reference to Exhibit 10.1 to Beverly Enterprises, Inc.'s
                              Quarterly Report on Form 10-Q for the quarter ended June 30,
                              1997)
         10.22*          --   Amendment No. 1, effective as of December 3, 1997, to the
                              Directors' Plan (incorporated by reference to Exhibit 10.26
                              to Beverly Enterprises, Inc.'s Annual Report on Form 10-K
                              for the year ended December 31, 1997)
         10.23*          --   Beverly Enterprises, Inc.'s Supplemental Long-Term
                              Disability Plan (incorporated by reference to Exhibit 10.24
                              to Beverly Enterprises, Inc.'s Annual Report on Form 10-K
                              for the year ended December 31, 1996)
         10.24*          --   Form of Indemnification Agreement between Beverly
                              Enterprises, Inc. and its officers, directors and certain of
                              its employees (incorporated by reference to Exhibit 19.14 to
                              Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q
                              for the quarter ended June 30, 1987)
         10.25*          --   Form of request by Beverly Enterprises, Inc. to certain of
                              its officers or directors relating to indemnification rights
                              (incorporated by reference to Exhibit 19.5 to Beverly
                              Enterprises, Inc.'s Quarterly Report on Form 10-Q for the
                              quarter ended September 30, 1987)
         10.26*          --   Form of request by Beverly Enterprises, Inc. to certain of
                              its officers or employees relating to indemnification rights
                              (incorporated by reference to Exhibit 19.6 to Beverly
                              Enterprises, Inc.'s Quarterly Report on Form 10-Q for the
                              quarter ended September 30, 1987)
         10.27*          --   Agreement dated December 29, 1986 between Beverly
                              Enterprises, Inc. and Stephens Inc. (incorporated by
                              reference to Exhibit 10.20 to Beverly Enterprises, Inc.'s
                              Registration Statement on Form S-1 filed on January 18, 1990
                              (File No. 33-33052))
         10.28*          --   Severance Agreement and Release of Claims between Beverly
                              Enterprises, Inc. and David R. Banks.
         10.29*          --   Employment Contract, made as of April 10, 2000, between
                              Beverly Enterprises, Inc. and William R. Floyd 10.30
                              (incorporated by reference to Exhibit 10.31 to Beverly
                              Enterprises, Inc.'s Annual Report on Form 10-K for the year
                              ended December 31, 2000)
         10.30*          --   Employment and Severance Agreement made as of March 5, 2001
                              between Beverly Enterprises, Inc. and Bobby W. Stephens.
</Table>
<PAGE>

<Table>
<Caption>
        EXHIBIT
         NUMBER                                       DESCRIPTION
        -------                                       -----------
<C>                      <S>  <C>
         10.31*          --   Employment Agreement, dated February 15, 2001 between
                              Beverly Enterprises, Inc. and William A. Mathies
                              (incorporated by reference to Exhibit 10.1 to Beverly
                              Enterprises, Inc.'s Quarterly Report on Form 10-Q for the
                              quarter ended June 30, 2001).
         10.32*          --   Form of Employment Contract, made as of August 22, 1997,
                              between New Beverly Holdings, Inc. and certain of its
                              officers (incorporated by reference to Exhibit 10.20 to
                              Amendment No. 2 to Beverly Enterprises, Inc.'s Registration
                              Statement on Form S-1 filed on September 22, 1997 (File No.
                              333-28521))
         10.33*          --   Form of Irrevocable Trust Agreement for the Beverly
                              Enterprises, Inc. Executive Benefits Plan (incorporated by
                              reference to Exhibit 10.55 to Beverly Enterprises, Inc.'s
                              Registration Statement of Form S-4 filed on February 13,
                              1995 (File No. 33-57663))
         10.34           --   Master Lease Document -- General Terms and Conditions dated
                              December 30, 1985 for Leases between Beverly California
                              Corporation and various subsidiaries thereof as lessees and
                              Beverly Investment Properties, Inc. as lessor (incorporated
                              by reference to Exhibit 10.12 to Beverly California
                              Corporation's Annual Report on Form 10-K for the year ended
                              December 31, 1985)
         10.35           --   Agreement dated as of December 29, 1986 among Beverly
                              California Corporation, Beverly Enterprises -- Texas, Inc.,
                              Stephens Inc. and Real Properties, Inc. (incorporated by
                              reference to Exhibit 28 to Beverly California Corporation's
                              Current Report on Form 8-K dated December 30, 1986) and
                              letter agreement dated as of July 31, 1987 among Beverly
                              Enterprises, Inc., Beverly California Corporation, Beverly
                              Enterprises -- Texas, Inc. and Stephens Inc. with reference
                              thereto (incorporated by reference to Exhibit 19.13 to
                              Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q
                              for the quarter ended June 30, 1987)
         10.36           --   Agreement to Sale of Nursing Home Properties dated as of
                              July 13, 2001 among Beverly Enterprises Florida, Inc.,
                              Beverly Health and Rehabilitation Services, Inc., Beverly
                              Savana Cay Manor, Inc., Vantage Healthcare Corporation,
                              Peterson Health Care, Inc. and NMC of Florida, LLC (the
                              "Florida Sale Agreement").
         10.37           --   First Amendment to Florida Sale Agreement, dated as of
                              August 30, 2001.
         10.38           --   Second Amendment to Florida Sale Agreement, dated as of
                              October 29, 2001.
         10.39           --   Participation Agreement, dated as of August 28, 1998, among
                              Vantage Healthcare Corporation, Petersen Health Care, Inc.,
                              Beverly Savana Cay Manor, Inc., Beverly
                              Enterprises -- Georgia, Inc., Beverly
                              Enterprises -- California, Inc., Beverly Health and
                              Rehabilitation Services, Inc., Beverly
                              Enterprises -- Arkansas, Inc., Beverly
                              Enterprises -- Florida, Inc. and Beverly
                              Enterprises -- Washington, Inc. as Lessees and Structural
                              Guarantors; Beverly Enterprises, Inc. as Representative,
                              Construction Agent and Parent Guarantor; Bank of Montreal
                              Global Capital Solutions, Inc. as Agent Lessor and Lessor;
                              The Long-Term Credit Bank of Japan, LTD., Los Angeles
                              Agency, Bank of America National Trust and Savings
                              Association and Bank of Montreal, as Lenders; The Long-Term
                              Credit Bank of Japan, LTD., Los Angeles Agency as Arranger;
                              and Bank of Montreal as Co-Arranger and Syndication Agent
                              and Administrative Agent for the Lenders with respect to the
                              Lease Financing of New Headquarters for Beverly Enterprises,
                              Inc., Assisted Living and Nursing Facilities for Beverly
                              Enterprises, Inc. (incorporated by reference to Exhibit
                              10.37 to Beverly Enterprises, Inc.'s Annual Report on Form
                              10-K for the year ended December 31, 1998)
         10.40           --   Master Amendment No. 1 to Amended and Restated Participation
                              Agreement and Amended and Restated Master Lease and Open-End
                              Mortgage, entered into as of September 30, 1999, among
                              Beverly Enterprises, Inc. as Representative, Construction
                              Agent, Parent Guarantor and Lessee; Bank of Montreal Global
                              Capital Solutions, Inc., as Lessor and Agent Lessor; and
                              Bank of Montreal, as Administrative Agent, Arranger and
                              Syndication Agent (incorporated by reference to Exhibit 10.5
                              to Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q
                              for the quarter ended September 30, 1999)
</Table>
<PAGE>

<Table>
<Caption>
        EXHIBIT
         NUMBER                                       DESCRIPTION
        -------                                       -----------
<C>                      <S>  <C>
         10.41           --   Amendment No. 2 to Amended and Restated Participation
                              Agreement entered into as of April 14, 2000 (incorporated by
                              reference to Exhibit 10.37 to Beverly Enterprises, Inc.'s
                              Annual Report on Form 10-K for the year ended December 31,
                              2000)
         10.42           --   Amendment to Participation Agreement dated as of December
                              29, 2000 (incorporated by reference to Exhibit 10.38 to
                              Beverly Enterprises, Inc.'s Annual Report on Form 10-K for
                              the year ended December 31, 2000)
         10.43           --   Master Amendment No. 3 to Amended and Restated Participation
                              Agreement, dated as of April 25, 2001.
         10.44           --   Amendment No. 4 to Amended and Restated Participation
                              Agreement, dated as of December 31, 2001.
         10.45           --   Master Services Agreement, dated as of September 18, 1997,
                              by and between Alltel Information Services, Inc. and Beverly
                              Enterprises, Inc. (incorporated by reference to Exhibit
                              10.41 to Beverly Enterprises, Inc.'s Annual Report on Form
                              10-K for the year ended December 31, 1999)
         10.46           --   Amended and Restated Credit Agreement, dated as of April 25,
                              2001, among Beverly Enterprises, Inc., the Banks listed
                              therein and Morgan Guaranty Trust Company of New York, as
                              Issuing Bank and Agent (the "Credit Agreement").
         10.47           --   Amendment No. 1 to the Credit Agreement, dated as of
                              December 31, 2001.
         10.48           --   Corporate Integrity Agreement between the Office of
                              Inspector General of the Department of Health and Human
                              Services and Beverly Enterprises, Inc. (incorporated by
                              reference to Exhibit 10.43 to Beverly Enterprises, Inc.'s
                              Annual Report on Form 10-K for the year ended December 31,
                              1999)
         10.49           --   Plea Agreement (incorporated by reference to Exhibit 10.44
                              to Beverly Enterprises, Inc.'s Annual Report on Form 10-K
                              for the year ended December 31, 1999)
         10.50           --   Addendum to Plea Agreement (incorporated by reference to
                              Exhibit 10.45 to Beverly Enterprises, Inc.'s Annual Report
                              on Form 10-K for the year ended December 31, 1999)
         10.51           --   Settlement Agreement between the United States of America,
                              Beverly Enterprises, Inc. and Domenic Todarello
                              (incorporated by reference to Exhibit 10.46 to Beverly
                              Enterprises, Inc.'s Annual Report on Form 10-K for the year
                              ended December 31, 1999)
         10.52           --   Agreement Regarding the Operations of Beverly
                              Enterprises -- California, Inc. (incorporated by reference
                              to Exhibit 10.47 to Beverly Enterprises, Inc.'s Annual
                              Report on Form 10-K for the year ended December 31, 1999)
         21.1            --   Subsidiaries of Registrant
         23.1            --   Consent of Ernst & Young LLP, Independent Auditors
</Table>

---------------

* Exhibits 10.1 through 10.33 are the management contracts, compensatory plans,
  contracts and arrangements in which any director or named executive officer
  participates.