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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


Form 10-K

|                                                |  |                                                                                                 
|----------------------------------------------- |  | ------------------------------------------------------------------------------------------------
|(Mark One)                                      |  |                                                                                                 
|x                                               |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934    
|For the fiscal year ended December 31,
    2002
|                                               
|OR                                             
|                                               
|o                                               |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d) OF
    THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 1-9550

BEVERLY ENTERPRISES, INC.

(Exact name of Registrant as specified in its
charter)


|                                                                   |  |                                         
|------------------------------------------------------------------ |  | ----------------------------------------
|Delaware                                                           |  | 62-1691861                              
|(State or other jurisdiction of
    incorporation or organization) |  | (I.R.S. Employer
    Identification No.)

One Thousand Beverly Way

Fort Smith, Arkansas 72919


(Address of principal executive offices)


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

Registrants website:www.beverlycares.com

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

|                                      |  |                                                                      
|------------------------------------- |  | ---------------------------------------------------------------------
|Title of each class                   |  | Name of each exchange on which registered                            
|                                      |  |                                                                      
|Common Stock, $.10 par value          |  | New
    York Stock
    Exchange            Pacific
    Stock Exchange
|9% Senior Notes due February 15, 2006 |  | New
    York Stock Exchange                                          

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     þNo o

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.     o

Indicate by check mark if Registrant is an
accelerated filer as of June 30, 2002 (as defined in
Exchange Act
Rule 12b-2).     Yes     þNo o

The aggregate market value of the voting stock
held by nonaffiliates of Registrant was $790,263,327 as of
June 28, 2002.

104,716,012

(Number of shares of common stock outstanding,
net of treasury shares, as of February 28, 2003)

Part III is incorporated by reference
from the Proxy Statement for the Annual Stockholders Meeting to
be held on May 22, 2003.



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TABLE OF CONTENTS



|                                                                             |                                                                                                |  |  |  |  |  |  | 
|---------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|FORWARD-LOOKING STATEMENTS                                                  
|PART I                                                                      
|                                                                             | ITEM 1. BUSINESS.                                                                             
|                                                                             | ITEM 2. PROPERTIES.                                                                           
|                                                                             | ITEM 3. LEGAL PROCEEDINGS.                                                                    
|                                                                             | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.                                  
|PART II                                                                     
|                                                                             | ITEM 5. MARKET FOR THE COMPANYS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.               
|                                                                             | ITEM 6. SELECTED FINANCIAL DATA.                                                              
|                                                                             | ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
|                                                                             | ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.                          
|                                                                             | ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.                             
|                                                                             | ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. 
|                                                                             | ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.                                     
|                                                                             | ITEM 11. EXECUTIVE COMPENSATION.                                                              
|                                                                             | ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.                      
|                                                                             | ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.                                      
|                                                                             | ITEM 14. CONTROLS AND PROCEDURES                                                              
|PART IV                                                                     
|                                                                             | ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.                     
|INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
|SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS                            
|SIGNATURES                                                                  
|CERTIFICATIONS                                                              
|INDEX TO EXHIBITS                                                           
|EX-10.22 Executive Deferred Compensation Plan                               
|EX-10.32 Employment Contract - William R Floyd                              
|EX-10.33 Employment/Severance Agreement-Devereaux                           
|EX-10.34 Severance Agreement - Bobby W Stephens                             
|EX-10.35 Employment Contract - Douglas J Babb                               
|EX-10.36 Severance Agreement - Michael J Matheny                            
|EX-10.37 Severance Agreement - T Jerald Moore                               
|EX-10.59 Amendment No.5 to Participation Agreement                          
|EX-10.60 Amendment No.6 to Participation Agreement                          
|EX-10.62 Amendment No.5 to Services Agreement                               
|EX-10.65 Amendment No.3 to Credit Agreement                                 
|EX-10.66 Amendment No.4 to Credit Agreement                                 
|EX-10.76 Loan Agreement with Bank of America N.A.                           
|EX-10.77 Guaranty with Bank of America N.A.                                 
|EX-21.1 Subsidiaries of Registrant                                          
|EX-23.1 Consent of Ernst & Young LLP                                        



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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. The Companys website 
www.beverlycares.com  provides access to the
Companys Securities and Exchange Commission reports within
24 hours of filing.

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, refinance and comply with 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;                                                                                                                                                                                     
|
| |  | the effects of adopting new accounting standards;                                                                                                                                                                                                                                                                                                        
|
| |  | liabilities and other claims asserted against the
    Company, including patient care liabilities, as well as the
    resolution of lawsuits brought about by the announcement or
    settlement of federal government investigations and the
    announcement of increases in reserves for patient care
    liabilities (see Item 3. Legal Proceedings);
|
| |  | our ability to predict future reserve levels for
    patient care liabilities;                                                                                                                                                                                                                                                                           
|
| |  | our ability to execute strategic divestitures in
    a timely manner at fair value;                                                                                                                                                                                                                                                                      
|
| |  | our ability to improve our fundamental business
    processes and reduce costs throughout the organization;                                                                                                                                                                                                                                              
|
| |  | our ability to attract and retain qualified
    personnel;                                                                                                                                                                                                                                                                                               
|
| |  | the availability and terms of capital to fund
    acquisitions, capital improvements and ongoing operations;                                                                                                                                                                                                                                             
|
| |  | 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, results
of operations or cash flows could be materially and 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, we caution investors not to place undue reliance
on them.

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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 clinics and rehabilitation therapy services.
We are one of the largest operators of nursing facilities in the
United States. On December 31, 2002, we operated 452
nursing facilities with 49,667 licensed beds. Our nursing
facilities are located in 26 states and the District of
Columbia, and range in capacity from 20 to 355 licensed beds. On
December 31, 2002, we also operated 29 assisted living
centers containing 841 units, 151 outpatient clinics, and
49 hospice and home care centers. (See Item 2. Properties.)
Our nursing facilities had average occupancy, based on
operational beds, of 87.9%, 86.9% and 87.0% during the years
ended December 31, 2002, 2001, and 2000, respectively.

Operations

In the first quarter of 2002, we reorganized our
operations into four primary operating segments, which include:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Nursing facilities, which provide long-term
    healthcare through the operation of nursing homes and assisted
    living centers. Our nursing facilities provide residents 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
    provides complex and intensive medical services to residents
    with higher acuity disorders outside the traditional acute care
    hospital setting. In addition, certain of our nursing facilities
    provide assisted living services. Approximately 95% of our net
    operating revenues are derived from services provided by our
    Nursing Facilities segment;
|
| |  | AEGIS, which provides rehabilitation therapy
    services under contract to Beverly and non-Beverly facilities.
    Approximately 2% of our net operating revenues are derived from
    services provided by our AEGIS segment;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | Home Care, which provides home health, hospice
    and home medical equipment services. Approximately 3% of our net
    operating revenues are derived from services provided by our
    Home Care segment. A portion of this segment, MK Medical,
    was held for sale as of December 31, 2002, and as such its
    operations are included in discontinued operations in the
    accompanying consolidated statements of operations; and                                                                                                                                                                                                                                                                                                                      
|
| |  | Matrix, which operates outpatient therapy and
    other clinics and a managed care network. This segment was held
    for sale as of December 31, 2002, and as such its
    operations are included in discontinued operations in the
    accompanying consolidated statements of operations. We sold the
    outpatient rehabilitation therapy clinic operations and the
    managed care network of Matrix in January 2003.                                                                                                                                                                                                                                                                                                                                    

Business in each operating segment is conducted
by one or more corporations. The corporations comprising each of
the four operating segments also have separate boards of
directors. See Item 8  Note 13 for segment
information.

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 elderly 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

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and 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 the Department of Veterans Affairs; and
|
| |  | private payors, including commercial insurers and
    managed care payors.                       

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.                                    

|            |                   |          |  |          |  |                   |  |          |  |         |  |          |  |  |  |     |  |  |  |     |  |  |  |     | 
|----------- | ----------------- | -------- |  | -------- |  | ----------------- |  | -------- |  | ------- |  | -------- |  |  |  | --- |  |  |  | --- |  |  |  | --- | 
|            |                   |          |  |          |  |                  
|            |                   | Medicaid |  | Medicare |  | Private and Other
|            |                   |          |  |          |  |                  
|            |                   | Patient  |  |          |  | Patient           |  |          |  | Patient |  |         
|            |                   | Days     |  | Revenues |  | Days              |  | Revenues |  | Days    |  | Revenues
|            |                   |          |  |          |  |                   |  |          |  |         |  |         
|Year ended: |                   |          |  |          |  |                   |  |          |  |         |  |          |  |  |  |     |  |  |  |     |  |  |  |    
|            | December 31, 2002 |          |  | 71%      |  |                   |  | 53%      |  |         |  | 11%      |  |  |  | 26% |  |  |  | 18% |  |  |  | 21% | 
|            | December 31, 2001 |          |  | 71%      |  |                   |  | 55%      |  |         |  | 10%      |  |  |  | 25% |  |  |  | 19% |  |  |  | 20% | 
|            | December 31, 2000 |          |  | 71%      |  |                   |  | 56%      |  |         |  | 10%      |  |  |  | 22% |  |  |  | 19% |  |  |  | 22% | 

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 patient care is the most profitable, and
Medicaid patient care is 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.

Medicaid programs currently exist in all of the
26 states, and the District of Columbia, in which we
operate nursing facilities. These programs differ in certain
respects from state to state, but they are all subject to
federal-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 (see below). We are unable to estimate the ultimate
impact of any changes in state 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 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)

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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 have substantial
operations are experiencing deficits in their fiscal operating
budgets. There can be no assurance that these states, 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 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 determined by
classifying a patient into one of 44 Resource Utilization
Grouping (RUG) categories, based on the nature of
the patients condition and services needed.

In 1999 and 2000, certain refinements were made
to the 1997 Act. These refinements restored substantial Medicare
funding to skilled nursing facilities and other healthcare
providers originally eliminated by the 1997 Act. Certain of
these refinements were eliminated effective September 30,
2002, including, among other things:



| |   |                                                                           
| | - | --------------------------------------------------------------------------
| |  | a 16.66% add-on to the nursing component of all
    44 RUG categories; and
|
| |  | a 4% overall increase in the adjusted rates for
    all 44 RUG categories.

Our net operating revenues were reduced in 2002
by approximately $14.0 million as a result of the
elimination of these add-ons in the fourth quarter. Assuming a
similar volume and mix of Medicare patients in 2003, we
anticipate our net operating revenues will decline an additional
$42.0 million from 2002, for an annual impact of
$56.0 million. While it is possible that the federal
government may restore some or all of these payments in the
future, we can give no assurances that will occur, or if it
should occur, when it might happen and whether it will be
retroactive.

Certain of the refinements made in 1999 and 2000
remain in place today including, among other things:



| |   |                                                                     
| | - | --------------------------------------------------------------------
| |  | a 20% add-on for the high acuity non-therapy RUG
    categories; and
|
| |  | a 6.7% add-on for all rehabilitation RUG
    categories.            

In addition, the 1999 and 2000 refinements to the
1997 Act included a three year moratorium on the two $1,500
Part B therapy caps. This moratorium expired on
December 31, 2002. However, on February 7, 2003, the
Centers for Medicare and Medicaid Services (CMS),
formerly known as the Health Care Financing Administration
(HCFA) of the Department of Health and Human
Services (HHS), announced that the Part B
therapy caps will be implemented on July 1, 2003.
Implementation will be on a prospective basis only. Based on the
current volume of Part B therapy in our nursing homes, the
decrease in our annual net operating revenues is anticipated to
be approximately $16.0 million. Our AEGIS outside therapy
contract business will likely be further impacted in terms of
revenue and may be required to adjust therapy staffing levels to
offset a portion of this revenue impact.

The 20% add-on for high acuity non-therapy RUG
categories and the 6.7% add-on for all rehabilitation RUG
categories will expire when CMS releases their refinements to
the current RUG payment system. We generate approximately
$38.6 million in annual net operating revenues related to
these add-ons. We cannot currently predict when CMS will release
their refinements nor can we predict what their ultimate impact
will be on our operating results or cash flows.

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On February 10, 2003, CMS published a
proposed rule to reduce by 30 percent the amount that
Medicare reimburses skilled nursing facilities and other
non-hospital providers for bad debts arising from uncollectible
Medicare coinsurance and deductibles. The proposal is to phase
in the reduction over a three-year period at 10 percent per
year beginning October 1, 2003. Based on our current volume
of Medicare bad debts, the proposed change would reduce our net
operating revenues for the fourth quarter of 2003 by
approximately $425,000 (calculated at the 10% reduction level).
The annual impact of this proposed change at the 30% reduction
level would be approximately $5.1 million.

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 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 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
    $3,000 per day;             
|
| |  | 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.                                                                           

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.

5



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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 utilize a program called the Beverly
Quality System to help ensure quality care is provided in
all of our facilities. The program is comprised of four
elements: facility-based Quality Assurance and Assessment
Committees; Quality Councils; facility performance assessments
and a performance improvement model. All elements of the Beverly
Quality System are addressed by a multi-disciplinary team which
includes regional and district level business leaders and
clinical consultants. Additional consultative support is
provided by designated Quality Management Directors within the
organization.

During 2002, CMS conducted a pilot project in
five states, Colorado, Maryland, Ohio, Rhode Island and
Washington, where it publicly reported on the performance of
each nursing home in those states in terms of quality of care.
This reporting used a set of quality indicators calculated from
the minimum data set assessments prepared by the nursing homes
on each resident. This project was extended to all facilities
nationwide in November 2002, and is expected to assist consumers
in evaluating nursing homes, and 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 program 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 and 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, we entered into a
Corporate Integrity Agreement with the Office of Inspector
General (the OIG) of HHS. 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

6



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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 Antifraud
Amendments (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 physical therapy,
occupational therapy, prescription drugs and home health. The
types of financial relationships 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
    service claimed;                                                                      
|
| |  | refunds of any amounts collected;                                                                                                      
|
| |  | assessments of up to twice the amount claimed for
    each service;                                                                    
|
| |  | civil monetary penalties up to $100,000 for each
    arrangement or scheme designed to circumvent the Stark
    Laws prohibitions; 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.

7



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

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
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 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

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

In August 2000, final regulations establishing
standards for electronic data 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 standards were required to be implemented by
October 2002, unless a covered entity applied for, and was
granted, an extension of up to one year. We have updated our
systems and are compliant with the new standards for electronic
transactions and code sets. However, we applied for and were
granted an extension until October 2003, primarily because
several of our trading partners, including some state Medicaid
agencies, were not prepared to implement the new transactions
and code sets.

In December 2000, HIPAA privacy standards were
released, and were then further revised in August 2002. Most
covered entities under HIPAA must implement the privacy
standards by April 2003. The privacy standards are designed to
protect the privacy of certain individually identifiable health
information. The privacy standards have required us to make
certain updates to our policies and procedures and we are
conducting training for our associates surrounding these
standards. We expect to be in full compliance with the privacy
standards by April 2003.

On February 20, 2003, CMS issued final
regulations with respect to HIPAAs security standards and
modifications to the electronic data transactions and code sets.
Most covered entities must comply with the security standards by
April 14, 2005. The regulations governing electronic data
transaction standards, which are effective on March 24,
2003, will not delay our October 2003 compliance deadline. All
standards are required to be fully implemented within two years
of final issuance, with civil and criminal penalties established
for noncompliance.

HHS has estimated 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 a five year period.
We continue to evaluate and update our processes and procedures
to meet the requirements of the new standards; however, we do
not believe their ongoing implementation will have a material
impact on our consolidated financial position, results of
operations or cash flows.

We are Subject to Increasingly Expensive and
Unpredictable Patient Care Liability Costs and the Risk of
Insolvency of Our Insurance Carriers.

General liability and professional liability
costs for the long-term care industry have become increasingly
expensive and difficult to estimate. We have experienced
substantial increases in both the number of claims and lawsuits,
as well as the size of the typical claim and lawsuit. This was
most evident for us in the state of Florida, where well-intended
patient rights statutes tend to be exploited by
plaintiffs attorneys. This growth in patient care
liability claims and lawsuits in Florida reached a level where
it was not possible for us to continue to operate profitably in
the state and precipitated the disposition of our Florida
operations in December 2001. However, there are other states
where the laws have, and will continue to attract
plaintiffs attorneys for similar reasons.

Primarily as a result of these issues, insurance
companies are ceasing to insure long-term care companies, or
severely limiting their capacity to write long-term care general
and professional liability insurance. In addition, in the wake
of the September 11, 2001 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
typically requiring companies to significantly increase their
liability retention levels and/or pay substantially higher
premiums for reduced coverage. We are experiencing higher
premiums and retention levels.

We have purchased insurance for property,
casualty and other risks from numerous insurance companies. In
many cases, the policies provide coverage for events occurring
in specific time frames that may only be determined in later
years. We exercise care in selecting companies from which we
purchase insurance

9



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including review of published ratings by
recognized rating agencies, advice from national brokers and
consultants, and review of trade information sources. There
exists a risk that any of these insurance companies may become
insolvent and unable to fulfill their obligation to defend, pay
or reimburse us when that obligation becomes due. Although we
believe the companies we have purchased insurance from are
solvent, in light of the dramatic changes occurring in the
insurance industry in recent years, we can not be assured that
they will remain solvent and able to fulfill their obligations.


Our Failure to Attract and Retain Qualified
Personnel Could Harm Our Business.

At December 31, 2002, we had approximately
55,000 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.

In recent years, we have experienced periodic
difficulty attracting and retaining nursing assistants,
certified nurses aides and other facility-based personnel.
In addition, there has been a growing shortage of registered and
licensed nurses in this country. We continue to address these
challenges through recruiting, orientation, retention and
training initiatives. In the past year, we have experienced a
leveling off of the growth in our weighted average wage rate and
a decline 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 7% of our associates, employed 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. Although our facilities have never experienced any
material work stoppages and we believe that our relations with
associates and labor organizations are generally good, we cannot
predict the effect continued union representation or
organizational activities will have on our future operations.

Excessive litigation is a tactic common to
corporate campaigns and one that is being employed
against us. There are several proceedings before the National
Labor Relations Board and the appellate courts which consolidate
individual cases from separate facilities. We are vigorously
defending these proceedings and do not believe that the ultimate
resolution of these cases will have a material adverse affect on
our consolidated financial position, results of operations, or
cash flows.

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 impact our census (volume and payor mix of
patients). 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 availability of eldercare services delivered
    to the home.                                                              

The negative 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, 2002, our consolidated
balance sheet reflected approximately $630.2 million of
outstanding indebtedness and approxi-

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mately $73.9 million of amounts we owe to
the federal government under the civil settlement agreement. In
addition, we have $139.5 million of off-balance sheet
financing. (See Item 8  Notes 8 and 9.) 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.                                                                                                                                                                                    

During 2002, we reduced our balance sheet
indebtedness by $111.5 million, our amounts owed to the
federal government under the civil settlement agreement by
$11.0 million and our off-balance sheet financing by
$42.9 million. However, 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
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; 
|
| |  | require us to comply with certain debt service
    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.                                   

In February 2003, we executed an amendment to our
Credit Facility (see Item 8 
Note 8) and our off-balance sheet lease arrangement
(collectively, the 2003 Amendments). The 2003
Amendments provide for:



| |   |                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------
| |  | modification of certain financial covenant levels;                                                                 
|
| |  | changes in the interest rates on our borrowings;                                                                   
|
| |  | the pledging of additional assets as collateral
    for certain of the lenders;                                    
|
| |  | use of a portion of the proceeds from the sales
    of assets to repay obligations or reduce available borrowings; 
|
| |  | reduced availability under the Credit Facility;                                                                    
|
| |  | accelerated maturity for the lease arrangement to
    the same date as our Credit Facility and various other items.

We believe we will be able to comply with the
amended covenants throughout 2003 and the availability under our
Credit Facility, if required, is expected to be adequate to
supplement any liquidity needs in 2003.

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

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to fund our other liquidity needs. If this
occurs, 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 and
Publicly Traded Debt Prices.

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 rating agencies lower their
ratings or outlook on the Company, or if the securities analysts
who regularly follow our stock lower their ratings or
projections of our future growth and financial performance, the
market price of our common stock and of our publicly traded
senior notes could be impacted.

Executive Officers

Each executive officer is elected or appointed by
the Board of Directors. The executive officers as of
February 28, 2003, are as follows:

|                            |  |                                                                                       |  |     |    | 
|--------------------------- |  | ------------------------------------------------------------------------------------- |  | --- | -- | 
|Name                        |  | Position                                                                              |  | Age
|                            |  |                                                                                       |  |    
|William R. Floyd            |  | Chairman of the Board, President, Chief Executive
    Officer and Director            |  |     | 58 | 
|Douglas J. Babb             |  | Executive Vice President and Chief Administrative
    and Legal Officer and Secretary |  |     | 50 | 
|David R. Devereaux          |  | Chief Operating Officer  Nursing
    Facilities                                      |  |     | 40 | 
|Jeffrey P. Freimark         |  | Executive Vice President, Chief Financial and
    Information Officer                 |  |     | 47 | 
|Patrice K. Acosta           |  | Senior Vice President  Professional
    Services                                     |  |     | 46 | 
|Pamela H. Daniels           |  | Senior Vice President, Controller and Chief
    Accounting Officer                    |  |     | 39 | 
|James M. Griffith           |  | Senior Vice President  Investor
    Relations and Corporate Communications           |  |     | 60 | 
|Patricia C. Kolling         |  | Senior Vice President  Compliance                                                    |  |     | 56 | 
|Blaise J. Mercadante, Ph.D. |  | Senior Vice President  Marketing and
    New Business Innovation                     |  |     | 49 | 
|Harold A. Price, Ph.D.      |  | Senior Vice President  Sales and
    Business Development                            |  |     | 53 | 
|Richard D. Skelly, Jr.      |  | Senior Vice President and Treasurer                                                   |  |     | 43 | 
|Crystal J. Wright           |  | Senior Vice President  Human Resources                                               |  |     | 54 | 
|Chris W. Roussos            |  | President  CERES Strategies                                                          |  |     | 38 | 
|Cindy H. Susienka           |  | President  AEGIS Therapies and Home
    Care                                         |  |     | 43 | 

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 and Chief
Administrative and Legal Officer in October 2002. 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

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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. He
became head of Information Technology in October 2002. From May
2001 to January 4, 2002 he was Senior Executive Vice
President and Chief Financial Officer of OfficeMax, Inc. 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.

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. 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.

Ms. Kolling joined the Company in February
1989 as a rehabilitation consultant. She was elected Vice
President  Rehabilitation in 1994, Vice
President  PPS in 1998 and Vice President 
Medicare Programs in 2000. She was elected Senior Vice
President  Compliance in October 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.

Mr. Price joined the Company in August 2002
as Senior Vice President  Sales and Business
Development. Prior to that, he worked with Beverly on a
consulting basis for 18 months. Before becoming a
consultant, he was Vice President  Strategic
Relations and Business Development for SelfCare, Inc. from 1999
to 2000. For the 17 years prior, he held various positions
with Nova Care, Inc. ultimately as Senior Vice
President  Sales and Marketing.

Mr. Skelly joined the Company in April 2002
as Senior Vice President and Treasurer. From September 2001 to
March 2002, he served as Senior Vice President and Treasurer of
OfficeMax, Inc. From June 1997 to August 2001, he held various
positions with The Grand Union Company, including Acting Chief
Financial Officer and Treasurer.

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 and
President of CERES Strategies in October 2002. From 2000 to 2001
he was Division 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.




ITEM 2. PROPERTIES.

On December 31, 2002, we operated
452 nursing facilities, 29 assisted living centers,
151 outpatient clinics and 49 hospice and home care
centers in 32 states and the District of Columbia. Most of
our 136 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

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centers are included in the collateral securing
our obligations under various debt agreements. (See
Item 8  Note 8.)


The following is a summary of our nursing
facilities, assisted living centers, outpatient clinics and
hospice and home care centers at December 31, 2002:

|                     |  |                    |     |                |  |        |        |         |  |            |    |            |  |  |     |  |  |  |     |  |  |  |    | 
|-------------------- |  | ------------------ | --- | -------------- |  | ------ | ------ | ------- |  | ---------- | -- | ---------- |  |  | --- |  |  |  | --- |  |  |  | -- | 
|                     |  |                    |     |                |  |        |        |         |  |           
|                     |  | Nursing Facilities |     |                |  |        |        |        
|                     |  |                    |     | Assisted       |  |        |        |        
|                     |  |                    |     | Living Centers |  |        |        | Hospice
|                     |  |                    |     | Total          |  |        |        |         |  | and Home  
|                     |  |                    |     | licensed       |  |        |        | Total   |  | Outpatient |    | Care      
|Location             |  | Number             |     | beds           |  | Number |        | units   |  | Clinics(1) |    | Centers(2)
|                     |  |                    |     |                |  |        |        |         |  |            |    |           
|Alabama              |  |                    | 21  |                |  |        | 2,783  |         |  |            |   |            |  |  |    |  |  |  |    |  |  |  |   | 
|Arizona              |  |                    | 3   |                |  |        | 480    |         |  |            |   |            |  |  |    |  |  |  |    |  |  |  |   | 
|Arkansas             |  |                    | 34  |                |  |        | 4,081  |         |  |            | 3  |            |  |  | 64  |  |  |  |    |  |  |  |   | 
|California           |  |                    | 60  |                |  |        | 6,362  |         |  |            | 3  |            |  |  | 185 |  |  |  | 40  |  |  |  | 11 | 
|Colorado             |  |                    |    |                |  |        |       |         |  |            |   |            |  |  |    |  |  |  | 16  |  |  |  |   | 
|Delaware             |  |                    |    |                |  |        |       |         |  |            |   |            |  |  |    |  |  |  | 4   |  |  |  |   | 
|District of Columbia |  |                    | 1   |                |  |        | 355    |         |  |            |   |            |  |  |    |  |  |  |    |  |  |  |   | 
|Georgia              |  |                    | 15  |                |  |        | 1,970  |         |  |            | 4  |            |  |  | 133 |  |  |  | 16  |  |  |  | 1  | 
|Hawaii               |  |                    | 2   |                |  |        | 396    |         |  |            |   |            |  |  |    |  |  |  |    |  |  |  |   | 
|Illinois             |  |                    | 3   |                |  |        | 275    |         |  |            |   |            |  |  |    |  |  |  |    |  |  |  |   | 
|Indiana              |  |                    | 28  |                |  |        | 3,571  |         |  |            | 1  |            |  |  | 16  |  |  |  |    |  |  |  | 1  | 
|Iowa                 |  |                    |    |                |  |        |       |         |  |            |   |            |  |  |    |  |  |  |    |  |  |  | 1  | 
|Kansas               |  |                    | 21  |                |  |        | 1,257  |         |  |            | 2  |            |  |  | 29  |  |  |  |    |  |  |  |   | 
|Kentucky             |  |                    | 8   |                |  |        | 1,039  |         |  |            |   |            |  |  |    |  |  |  |    |  |  |  |   | 
|Maryland             |  |                    | 4   |                |  |        | 585    |         |  |            | 1  |            |  |  | 19  |  |  |  | 7   |  |  |  |   | 
|Massachusetts        |  |                    | 19  |                |  |        | 2,068  |         |  |            |   |            |  |  |    |  |  |  |    |  |  |  |   | 
|Minnesota            |  |                    | 30  |                |  |        | 2,367  |         |  |            | 1  |            |  |  | 16  |  |  |  |    |  |  |  |   | 
|Mississippi          |  |                    | 19  |                |  |        | 2,395  |         |  |            |   |            |  |  |    |  |  |  |    |  |  |  |   | 
|Missouri             |  |                    | 23  |                |  |        | 2,252  |         |  |            | 3  |            |  |  | 101 |  |  |  |    |  |  |  | 1  | 
|Nebraska             |  |                    | 24  |                |  |        | 2,128  |         |  |            | 1  |            |  |  | 19  |  |  |  |    |  |  |  | 3  | 
|Nevada               |  |                    |    |                |  |        |       |         |  |            |   |            |  |  |    |  |  |  |    |  |  |  | 1  | 
|New Jersey           |  |                    | 1   |                |  |        | 140    |         |  |            |   |            |  |  |    |  |  |  |    |  |  |  |   | 
|North Carolina       |  |                    | 10  |                |  |        | 1,278  |         |  |            | 1  |            |  |  | 16  |  |  |  | 10  |  |  |  | 19 | 
|Ohio                 |  |                    | 9   |                |  |        | 1,242  |         |  |            |   |            |  |  |    |  |  |  | 5   |  |  |  |   | 
|Pennsylvania         |  |                    | 42  |                |  |        | 4,772  |         |  |            | 3  |            |  |  | 72  |  |  |  | 10  |  |  |  | 7  | 
|South Carolina       |  |                    |    |                |  |        |       |         |  |            |   |            |  |  |    |  |  |  | 12  |  |  |  |   | 
|South Dakota         |  |                    | 17  |                |  |        | 1,175  |         |  |            | 1  |            |  |  | 36  |  |  |  |    |  |  |  |   | 
|Tennessee            |  |                    | 7   |                |  |        | 929    |         |  |            | 2  |            |  |  | 55  |  |  |  |    |  |  |  |   | 
|Texas                |  |                    |    |                |  |        |       |         |  |            |   |            |  |  |    |  |  |  | 31  |  |  |  | 2  | 
|Virginia             |  |                    | 14  |                |  |        | 1,843  |         |  |            | 3  |            |  |  | 80  |  |  |  |    |  |  |  |   | 
|Washington           |  |                    | 9   |                |  |        | 922    |         |  |            |   |            |  |  |    |  |  |  |    |  |  |  |   | 
|West Virginia        |  |                    | 3   |                |  |        | 310    |         |  |            |   |            |  |  |    |  |  |  |    |  |  |  |   | 
|Wisconsin            |  |                    | 25  |                |  |        | 2,692  |         |  |            |   |            |  |  |    |  |  |  |    |  |  |  | 2  | 
|                     |  |                    |     |                |  |        |        |         |  |            |    |            |  |  |     |  |  |  |     |  |  |  |    | 
|                     |  |                    | 452 |                |  |        | 49,667 |         |  |            | 29 |            |  |  | 841 |  |  |  | 151 |  |  |  | 49 | 
|                     |  |                    |     |                |  |        |        |         |  |            |    |            |  |  |     |  |  |  |     |  |  |  |    | 
|Classification       |  |                    |     |                |  |        |        |         |  |            |    |            |  |  |     |  |  |  |     |  |  |  |    | 
|Owned                |  |                    | 315 |                |  |        | 34,462 |         |  |            | 24 |            |  |  | 555 |  |  |  |    |  |  |  |   | 
|Leased               |  |                    | 136 |                |  |        | 15,130 |         |  |            | 5  |            |  |  | 286 |  |  |  | 151 |  |  |  | 49 | 
|Managed              |  |                    | 1   |                |  |        | 75     |         |  |            |   |            |  |  |    |  |  |  |    |  |  |  |   | 
|                     |  |                    |     |                |  |        |        |         |  |            |    |            |  |  |     |  |  |  |     |  |  |  |    | 
|                     |  |                    | 452 |                |  |        | 49,667 |         |  |            | 29 |            |  |  | 841 |  |  |  | 151 |  |  |  | 49 | 
|                     |  |                    |     |                |  |        |        |         |  |            |    |            |  |  |     |  |  |  |     |  |  |  |    | 






|    |                                                                                                                                                                                                                 
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | As of December 31, 2002, the outpatient
    clinics were held for sale. We disposed of 141 of these clinics
    in January 2003, retaining 10 locations in North Carolina
    that continue to be held for sale.
|   
|(2) | As of December 31, 2002, MK Medical, a
    durable medical equipment business with 7 units in
    California and one in Nevada, was held for sale.                                                              

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##### Table of Contents






ITEM 3. LEGAL PROCEEDINGS.

(a) As previously reported, on
October 2, 1998, a purported class action lawsuit was filed
in the United States District Court for the Eastern District of
Arkansas by Jack Kushner against the Company and certain of its
officers (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. (See Item 8  Note 9.) 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 judgment 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). On January 23, 2003, the Eighth Circuit
entered an order affirming the district courts order
dismissing the case with prejudice. The plaintiffs appealed the
order of the Eighth Circuit en banc, but, on
February 27, 2003, the Eighth Circuit denied the petition.
The Eighth Circuit is obligated to issue a mandate within seven
days of the date of the order denying the petition, thereby
ordering the district court to enforce its ruling and dismiss
the case. If the plaintiffs decide to petition for a writ of
certiorari to the United States Supreme Court within
90 days, plaintiffs may move to stay the mandate pending
the filing of this petition.

(b) On October 31, 2002, a shareholder
derivative action entitled Paul Dunne and Helene Dunne,
derivatively on behalf of nominal defendant Beverly Enterprises,
Inc. v. Beryl F. Anthony, Jr., et al. was filed in
the Circuit Court of Sebastian County, Arkansas, Fort Smith
Division (No. CIV-2002-1241). This case is purportedly
brought derivatively on behalf of the Company against various
current and former officers and directors. We learned of this
case when it was served on one defendant on January 22,
2003. The complaint alleges causes of action for breach of
fiduciary duty against the defendants based on:
(1) allegations that defendants failed to establish and
maintain adequate accounting controls such that the Company
failed to record adequate reserves for patient care liability
costs; and (2) allegations that certain defendants sold
Company stock while purportedly in possession of material
non-public information. While this case is in its preliminary
stages, we do not believe there is any merit to this lawsuit.

(c) Effective October 15, 2002, we
entered into a Settlement Agreement with CMS. The Settlement
Agreement resolved reimbursement issues relating to all Medicare
cost reporting periods ending on or before December 31,
2000, including all outstanding issues from the February 2000
settlement of the federal governments investigation of our
allocation to the Medicare program of certain nursing labor
costs in our skilled nursing facilities. Under the terms of the
Settlement Agreement, we paid CMS $35.0 million in November
2002. This cash payment was included in the fourth quarter 2001
estimated pre-tax charge related to this matter of
$77.5 million. The Settlement Agreement did not result in
any increase to the fourth quarter 2001 estimated charge.

(d) As previously disclosed, we notified
federal and California healthcare regulatory authorities (CMS,
OIG, the California Attorney Generals office and the
California Department of Health) of our intent to conduct an
internal investigation of past billing practices relating to
MK Medical, our medical equipment business unit based in
Fresno, California. An independent accounting firm has reviewed
MK Medicals government payor billings since
October 1, 1998, the date Beverly acquired the unit.
Deficiencies identified by the accounting firm primarily relate
to inadequate documentation supporting Medicare and Medi-Cal
claims for reimbursement for drugs, wheelchairs, and other
durable medical equipment distributed by MK Medical.
Specifically, the review identified instances of missing or
incomplete certificates of medical necessity, treatment
authorization requests, prescriptions, and other documentation
MK Medical is required to maintain in order to be entitled
to reimbursement from government payors. Based on the results of
the accounting firms review, we have estimated our
potential overpayment from government payors to be approximately
$18.0 million for the period from October 1, 1998 to
2002. We have reduced MK Medicals operating revenues,
through discontinued operations on the 2002 consolidated
statement of operations, and have established a reserve,
included in Other accrued liabilities on the 2002
consolidated balance sheet, for this amount. We have advised
regulatory authorities of the accounting firms results.
Our liability with respect to this matter could exceed the
reserved amount. We can give no assurance of the final outcome
of this matter or its impact on our financial position, results
of operations and cash flows.

15



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##### Table of Contents



(e) On August 16, 2002, August 26,
2002, and September 26, 2002, respectively, Ernest
Baer v. Beverly Enterprises, Inc., et. al. (CIV.
No. 02-2190) (the Baer Case), Stanley V.
Kensic v. Beverly Enterprises, Inc., et. al. (CIV.
No. 02-2193) (the Kensic Case) and Charles
Krebs v. Beverly Enterprises, Inc., et. al. (CIV.
No. 02-2222) (the Krebs Case) were filed in the
United States District Court, Western District of Arkansas,
Fort Smith Division. The Baer Case, the Kensic Case and the
Krebs Case were filed as purported securities fraud class
actions under Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934 and Rule 10b-5 promulgated thereunder.

Each of the Baer Case, the Kensic Case and the
Krebs Case separately named Beverly Enterprises, Inc. as a
defendant along with various current officers and our
independent auditors. In all three cases, the purported class
period runs from October 16, 2000 to and including
July 19, 2002. Plaintiffs claim that the defendants, during
the purported class period, made multiple false and misleading
statements. Due to the preliminary state of the Baer Case, the
Kensic Case and the Krebs Case and the fact that none of these
cases alleges damages with any specificity, we are unable at
this time to assess the probable outcome of the cases. We
believe that plaintiffs allegations that the defendants
acted unlawfully are without merit and the defendants will
vigorously defend the Baer Case, the Kensic Case and the Krebs
Case. 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.

(f) On August 1, 2002, the Company and
the State of California reached an agreement on the settlement
of an investigation by the Attorney Generals office and
the District Attorney of Santa Barbara County of patient
care issues in several California nursing facilities. In
accordance with the terms of the settlement agreement, Beverly
Enterprises  California, Inc. has entered a plea of
nolo contendere to two felony charges under
Californias Elder Abuse statute and during July 2002, paid
a fine of $54,000 related to the plea. In addition, Beverly
Enterprises  California, Inc. reimbursed the Attorney
General and the Santa Barbara County District Attorney
$533,000 for the costs of their investigations and will pay a
$2.0 million civil penalty in four equal, quarterly
installments of $500,000, which began in the third quarter
of 2002.

In addition, a Permanent Injunction
(Permanent Injunction) was entered requiring nursing
facilities in California, operated by subsidiaries of the
Company, to comply with all applicable laws and regulations and
to conduct certain training and education programs. The Company
recorded a pre-tax charge against earnings of $6.3 million
during the second quarter of 2002 to reflect the terms of the
settlement and related costs, and we expect to incur additional
annual costs for implementation of the Permanent Injunction.
Certain revisions were made to our Corporate Integrity Agreement
(CIA) in conjunction with the Permanent Injunction
requiring:



| |   |                                                                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | additional training for clinical associates,
    contractors and agents who perform services in our California
    nursing facilities; and                                                                                                                 
|
| |  | hiring an independent quality monitor to assess
    the effectiveness, reliability and thoroughness of our quality
    care systems and our response to quality of care issues in our
    nursing facilities in California, Arizona, Hawaii and Washington.

(g) As previously reported, the following
derivative lawsuits have been filed in the state courts of
Arkansas and Delaware, as well as the federal district court in
Arkansas, assertedly on behalf of the Company (collectively, the
Derivative Actions):



| |   |                                                                                                                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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;
|
| |  | 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;                                                                                                                                 

16



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##### Table of Contents





| |   |                                                                                                                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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, was removed to federal district court and
    was dismissed February 3, 2000;                                               
|
| |  | 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 Eighth 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. See paragraph
(a) above for a description of the status of the Class
Action.

The Derivative Actions each name the
Companys directors as defendants, as well as the Company
as a nominal defendant. The Lyons action also names 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 as a result of
alleged conduct giving rise to the Class Action. 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.

(h) We are party to various legal matters
relating to patient care, including claims that our services
have resulted in injury or death to residents of our facilities.
We have experienced an increasing trend in the number and
severity of the claims asserted against us. We believe that
there has been, and will continue to be, an increase in
governmental investigations of long-term care providers. Adverse
determinations in legal proceedings or governmental
investigations, whether currently asserted or arising in the
future, could have a material adverse effect on us.

(i) 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.




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, 2002.

17



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##### Table of Contents






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 under the symbol BEV. 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.

|     |                                     |        |   |       |  |  |   |      | 
|---- | ----------------------------------- | ------ | - | ----- |  |  | - | ---- | 
|     |                                     |       
|     |                                     | Prices
|     |                                     |       
|     |                                     | High   |   | Low  
|     |                                     |        |   |      
|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                       |        | $ | 9.50  |  |  | $ | 5.66 | 
|     | Second Quarter                      |        |   | 9.18  |  |  |   | 6.95 | 
|     | Third Quarter                       |        |   | 7.95  |  |  |   | 1.90 | 
|     | Fourth Quarter                      |        |   | 3.89  |  |  |   | 1.60 | 
|2003 |                                     |        |   |       |  |  |   |     
|     | First Quarter (through February 28) |        | $ | 3.00  |  |  | $ | 1.63 | 

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
2002 and 2001, we did not pay any cash dividends on, or
repurchase any of, our Common Stock and no future dividends are
currently planned.

On February 28, 2003, there were
4,992 record holders of our Common Stock.

18



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##### Table of Contents






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 2002, 2001 and 2000 included in
Item 8.

|                                                                                                                                                 |                                                                                              |                                               |           |             |           |         |           |             |           |            |           |             |           |   |           |             |           |   |           |             |           | 
|------------------------------------------------------------------------------------------------------------------------------------------------ | -------------------------------------------------------------------------------------------- | --------------------------------------------- | --------- | ----------- | --------- | ------- | --------- | ----------- | --------- | ---------- | --------- | ----------- | --------- | - | --------- | ----------- | --------- | - | --------- | ----------- | --------- | 
|                                                                                                                                                 |                                                                                              |                                              
|                                                                                                                                                 |                                                                                              | At or for the years ended December 31,       
|                                                                                                                                                 |                                                                                              |                                              
|                                                                                                                                                 |                                                                                              | 2002(1)                                       |           | 2001(1)     |           | 2000(1) |           | 1999(1)     |           | 1998(1)(2)
|                                                                                                                                                 |                                                                                              |                                               |           |             |           |         |           |             |           |           
|                                                                                                                                                 |                                                                                              |                                              
|                                                                                                                                                 |                                                                                              | (Dollars in thousands, except per share data)
|Consolidated Statement of Operations
    Data:                                                                                                   |                                                                                              |                                               |           |             |           |         |           |             |           |            |           |             |           |   |           |             |           |   |           |            
|Net operating revenues                                                                                                                           |                                                                                              | $                                             | 2,419,923 |             |           | $       | 2,599,963 |             |           | $          | 2,523,265 |             |           | $ | 2,411,740 |             |           | $ | 2,723,567 |            
|Interest income                                                                                                                                  |                                                                                              |                                               | 4,748     |             |           |         | 2,982     |             |           |            | 2,522     |             |           |   | 4,248     |             |           |   | 10,661    |            
|                                                                                                                                                 |                                                                                              |                                               |           |             |           |         |           |             |           |            |           |             |           |   |           |             |           |   |           |            
|                                                                                                                                                 |                                                                                              | Total revenues                                |           |             | 2,424,671 |         |           |             | 2,602,945 |            |           |             | 2,525,787 |   |           |             | 2,415,988 |   |           |             | 2,734,228 | 
|Costs and expenses:                                                                                                                              |                                                                                              |                                               |           |             |           |         |           |             |           |            |           |             |           |   |           |             |           |   |           |            
|                                                                                                                                                 | Operating and administrative:                                                                |                                               |           |             |           |         |           |             |           |            |           |             |           |   |           |             |           |   |           |             |          
|                                                                                                                                                 |                                                                                              | Wages and related                             |           |             | 1,433,413 |         |           |             | 1,562,324 |            |           |             | 1,523,316 |   |           |             | 1,463,657 |   |           |             | 1,611,114 | 
|                                                                                                                                                 |                                                                                              | Provision for insurance and related items     |           |             | 125,341   |         |           |             | 101,418   |            |           |             | 120,893   |   |           |             | 88,377    |   |           |             | 154,267   | 
|                                                                                                                                                 |                                                                                              | Other                                         |           |             | 645,460   |         |           |             | 683,614   |            |           |             | 716,400   |   |           |             | 675,077   |   |           |             | 792,481   | 
|                                                                                                                                                 | Interest                                                                                     |                                               |           | 66,824      |           |         |           | 79,342      |           |            |           | 79,944      |           |   |           | 72,392      |           |   |           | 65,845      |          
|                                                                                                                                                 | Depreciation and amortization                                                                |                                               |           | 81,124      |           |         |           | 81,208      |           |            |           | 87,778      |           |   |           | 88,262      |           |   |           | 84,391      |          
|                                                                                                                                                 | Florida insurance reserve adjustment                                                         |                                               |           | 22,179      |           |         |           |            |           |            |           |            |           |   |           |            |           |   |           |            |          
|                                                                                                                                                 | California investigation settlement and related
    costs                                    |                                               |           | 6,300       |           |         |           |            |           |            |           |            |           |   |           |            |           |   |           |            |          
|                                                                                                                                                 | Special charges and adjustments related to
    settlements with the federal government       |                                               |           | (9,441      | )         |         |           | 77,495      |           |            |           |            |           |   |           | 202,447     |           |   |           | 1,865       |          
|                                                                                                                                                 | Asset impairments, workforce reductions and other
    unusual items                          |                                               |           | 79,506      |           |         |           | 197,389     |           |            |           | 17,249      |           |   |           | 23,796      |           |   |           | 70,675      |          
|                                                                                                                                                 | Year 2000 remediation                                                                        |                                               |           |            |           |         |           |            |           |            |           |            |           |   |           | 12,397      |           |   |           | 9,719       |          
|                                                                                                                                                 |                                                                                              |                                               |           |             |           |         |           |             |           |            |           |             |           |   |           |             |           |   |           |            
|                                                                                                                                                 |                                                                                              | Total costs and expenses                      |           |             | 2,450,706 |         |           |             | 2,782,790 |            |           |             | 2,545,580 |   |           |             | 2,626,405 |   |           |             | 2,790,357 | 
|                                                                                                                                                 |                                                                                              |                                               |           |             |           |         |           |             |           |            |           |             |           |   |           |             |           |   |           |            
|Loss before provision for (benefit from) income
    taxes, discontinued operations and cumulative effect of changes
    in accounting principles |                                                                                              |                                               | (26,035   | )           |           |         | (179,845  | )           |           |            | (19,793   | )           |           |   | (210,417  | )           |           |   | (56,129   | )          
|Provision for (benefit from) income taxes                                                                                                        |                                                                                              |                                               | 6,085     |             |           |         | 57,574    |             |           |            | (4,636    | )           |           |   | (78,587   | )           |           |   | (27,925   | )          
|                                                                                                                                                 |                                                                                              |                                               |           |             |           |         |           |             |           |            |           |             |           |   |           |             |           |   |           |            
|Loss before discontinued operations and
    cumulative effect of changes in accounting principles                                                |                                                                                              |                                               | (32,120   | )           |           |         | (237,419  | )           |           |            | (15,157   | )           |           |   | (131,830  | )           |           |   | (28,204   | )          
|Discontinued operations, net of taxes of
    $0  2002; $3,814  2001;
    $(17,626)  2000; $(492)  1999; and
    $932  1998                  |                                                                                              |                                               | (36,799   | )           |           |         | (63,853   | )           |           |            | (39,345   | )           |           |   | (2,817    | )           |           |   | 1,598     |            
|Cumulative effect of changes in accounting
    principles, net of taxes of $0  2002;
    $2,811  1998(3)                                       |                                                                                              |                                               | (77,171   | )           |           |         |          |             |           |            |          |             |           |   |          |             |           |   | (4,415    | )          
|                                                                                                                                                 |                                                                                              |                                               |           |             |           |         |           |             |           |            |           |             |           |   |           |             |           |   |           |            
|Net loss                                                                                                                                         |                                                                                              | $                                             | (146,090  | )           |           | $       | (301,272  | )           |           | $          | (54,502   | )           |           | $ | (134,647  | )           |           | $ | (31,021   | )          
|                                                                                                                                                 |                                                                                              |                                               |           |             |           |         |           |             |           |            |           |             |           |   |           |             |           |   |           |            
|Basic and diluted income (loss) per share of
    common stock:                                                                                   |                                                                                              |                                               |           |             |           |         |           |             |           |            |           |             |           |   |           |             |           |   |           |            
|                                                                                                                                                 | Before discontinued operations and cumulative
    effect of changes in accounting principles |                                               | $         | (0.31       | )         |         | $         | (2.28       | )         |            | $         | (0.15       | )         |   | $         | (1.29       | )         |   | $         | (0.27       | )        
|                                                                                                                                                 | Discontinued operations, net of taxes                                                        |                                               |           | (0.35       | )         |         |           | (0.61       | )         |            |           | (0.38       | )         |   |           | (0.03       | )         |   |           | 0.02        |          
|                                                                                                                                                 | Cumulative effect of changes in accounting
    principles, net of taxes                      |                                               |           | (0.74       | )         |         |           |            |           |            |           |            |           |   |           |            |           |   |           | (0.04       | )        
|                                                                                                                                                 |                                                                                              |                                               |           |             |           |         |           |             |           |            |           |             |           |   |           |             |           |   |           |            
|                                                                                                                                                 | Net loss(4)                                                                                  |                                               | $         | (1.39       | )         |         | $         | (2.90       | )         |            | $         | (0.53       | )         |   | $         | (1.31       | )         |   | $         | (0.30       | )        
|                                                                                                                                                 |                                                                                              |                                               |           |             |           |         |           |             |           |            |           |             |           |   |           |             |           |   |           |            
|                                                                                                                                                 | Shares used to compute per share amounts                                                     |                                               |           | 104,726,000 |           |         |           | 104,037,000 |           |            |           | 102,452,000 |           |   |           | 102,491,000 |           |   |           | 103,762,000 |          
|Other Financial Data:                                                                                                                            |                                                                                              |                                               |           |             |           |         |           |             |           |            |           |             |           |   |           |             |           |   |           |            
|Cash flow from operations                                                                                                                        |                                                                                              | $                                             | 116,633   |             |           | $       | 220,897   |             |           | $          | 37,010    |             |           | $ | 189,141   |             |           | $ | 6,789     |            
|Capital expenditures                                                                                                                             |                                                                                              | $                                             | 100,103   |             |           | $       | 89,401    |             |           | $          | 76,027    |             |           | $ | 95,414    |             |           | $ | 150,451   |            
|Consolidated Balance Sheet Data:                                                                                                                 |                                                                                              |                                               |           |             |           |         |           |             |           |            |           |             |           |   |           |             |           |   |           |            
|Total assets                                                                                                                                     |                                                                                              | $                                             | 1,349,895 |             |           | $       | 1,681,070 |             |           | $          | 1,875,993 |             |           | $ | 1,982,880 |             |           | $ | 2,160,511 |            
|Current portion of long-term debt                                                                                                                |                                                                                              | $                                             | 41,463    |             |           | $       | 64,231    |             |           | $          | 227,111   |             |           | $ | 34,052    |             |           | $ | 27,773    |            
|Long-term debt, excluding current portion                                                                                                        |                                                                                              | $                                             | 588,714   |             |           | $       | 677,442   |             |           | $          | 564,247   |             |           | $ | 746,164   |             |           | $ | 878,270   |            
|Stockholders equity                                                                                                                             |                                                                                              | $                                             | 153,472   |             |           | $       | 296,497   |             |           | $          | 583,993   |             |           | $ | 641,124   |             |           | $ | 776,206   |            
|Other Data:                                                                                                                                      |                                                                                              |                                               |           |             |           |         |           |             |           |            |           |             |           |   |           |             |           |   |           |            
|Average occupancy(5)                                                                                                                             |                                                                                              |                                               | 87.9      | %           |           |         | 86.9      | %           |           |            | 87.0      | %           |           |   | 87.2      | %           |           |   | 88.7      | %          
|Number of nursing home beds                                                                                                                      |                                                                                              |                                               | 49,667    |             |           |         | 52,115    |             |           |            | 59,799    |             |           |   | 62,217    |             |           |   | 62,293    |            



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The operations of Matrix and MK Medical have been
    reclassified as discontinued operations for all periods
    presented since they met the criteria under
    SFAS No. 144 as assets held for sale at
    December 31, 2002. In accordance with
    SFAS No. 145, the extraordinary loss on the early
    extinguishment of debt of $2,717 in 1998 has been reclassified
    as asset impairments, workforce reductions and other unusual
    items, and its related tax benefit, in the amount of $1,057, has
    been reclassified as provision for (benefit from) income taxes.
|   
|(2) | Includes the operations of American Transitional
    Hospitals, Inc. through June 30, 1998.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|(3) | Includes a $77,171 goodwill impairment charge
    relating to the 2002 adoption of SFAS No. 142 and a
    $4,415 charge in 1998 relating to the adoption of SOP 98-5
    which changed the accounting for start-up costs.                                                                                                                                                                                                                                                                                                                                                             
|   
|(4) | Certain amounts will not add due to rounding.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|(5) | 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
    operationally ready for use.                                                                                                                                                                                                                                                                                                                                                                

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##### Table of Contents








|        |                                                                                           
|------- | ------------------------------------------------------------------------------------------
|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.



| |                                                                                  
| | ---------------------------------------------------------------------------------
| | Revenue Recognition, Accounts Receivable
    and Allowances for Doubtful Accounts

Our revenues are derived primarily from providing
long-term healthcare services. Approximately 80% 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 at standard charges when services are provided,
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 at least a possibility that
recorded estimates may change by a material amount in the near
term. Consistent with health care industry accounting practices,
changes to these third-party revenue estimates are recorded in
the year the change or adjustment becomes known.

We record bad debt expense monthly using a
percentage of revenue approach that reflects our historical
experience. Each quarter we adjust the reserves for bad debts
according to 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. Private pay accounts usually represent our highest
collectibility risk. In addition, specific accounts that are
determined to be uncollectible (due to bankruptcy, insufficient
documentation, lack of third party coverage or financial
resources and the like) are fully reserved when such
determinations are made. If circumstances change (including, but
not limited to: economic downturn; higher than expected defaults
or denials; reduced collections; and changes in our payor mix),
our estimates of the recoverability of our receivables could be
reduced by a material amount. Our provision for bad debts
represented 2.3%, 1.7% and 2.9% of net operating revenues in
2002, 2001 and 2000, respectively. Our allowance for doubtful
accounts represented 20% and 17% of patient accounts receivable
at December 31, 2002 and 2001, respectively.



| |                                          
| | -----------------------------------------
| | Insurance and Patient Liability
    Risks

General 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/or pay substantially higher premiums for
reduced coverage. The Companys retained liabilities have
increased in recent years.

We have purchased insurance for property,
casualty and other risks from numerous insurance companies. In
many cases, the policies provide coverage for events occurring
in specific time frames that may only be determined in later
years. We exercise care in selecting companies from which we
purchase insurance including review of published ratings by
recognized rating agencies, advice from national brokers and
consultants, and review of trade information sources. There
exists a risk that any of these insurance companies may become
insolvent and unable to fulfill its obligation to defend, pay or
reimburse us when that obligation becomes due. Although we
believe the companies we have purchased insurance from are
solvent, in light of the dramatic changes occurring in the
insurance industry in recent years, we cannot be assured that
they will remain solvent and able to fulfill their obligations.

20



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##### Table of Contents



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. These 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. The actuarial 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
loss-sensitive insurance policies with affiliated and
unaffiliated insurance companies. 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 in certain
prior policy years. The Companys retained liabilities are
estimated by our independent actuaries. On an undiscounted
basis, these liabilities totaled approximately
$208.0 million at December 31, 2002. On our financial
statements, these liabilities are discounted at 10% 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 2002 of $1.4 million. Our
independent actuaries estimate our range of discounted exposure
for these liabilities to be $168.6 million to
$185.2 million. Our recorded reserves for these liabilities
totaled $174.0 million at December 31, 2002.



| |                              
| | -----------------------------
| | Off-Balance Sheet Obligations

We have two off-balance sheet financing
arrangements which totaled approximately $139.5 million at
December 31, 2002, including:



| |   |                                                                                       
| | - | --------------------------------------------------------------------------------------
| |  | $70.0 million of Medium-Term Notes due March
    2005 (the Medium-Term Notes); and  
|
| |  | $69.5 million under an off-balance sheet
    lease arrangement expiring in April 2004.

The Medium-Term Notes are obligations of a
non-consolidated bankruptcy remote, qualifying special purpose
entity, Beverly Funding Corporation (BFC).
BFCs sole purpose is to acquire, own, hold, and otherwise
administer certain patient accounts receivable originated and
sold to it by certain of the Companys operating
subsidiaries and to issue beneficial interests in those
receivables. Under the terms of the arrangement, certain wholly
owned operating subsidiaries of the Company (groups of nursing
facilities within each state that the Company operates, referred
to as the Selling Subsidiaries), which are separate
legal entities, sell Medicaid and Veterans Administration
patient accounts receivable at their net realizable value to
Beverly Health and Rehabilitation Services, Inc.
(BHRS), a wholly owned operating subsidiary of the
Company. BFC then purchases these receivables under a revolving
sales structure from BHRS at a discount of 1%. BFC receives
its funding from: 1) the issuance of debt to third-party
investors; and 2) investments made in BFC by Beverly
Enterprises, Inc. (the parent company and a
non-transferor). At December 31, 2002 and 2001, BFC had
approximately $101.4 million and $101.9 million,
respectively, of net receivables.

The Medium-Term Notes were issued in June and
July 1999 to third-party investors. The proceeds were used to
redeem $50.0 million of then outstanding medium-term notes
issued by BFC in 1994 that were nearing maturity and to purchase
additional eligible receivables from BHRS. Beverly Enterprises,
Inc. also increased its investment in BFC allowing BFC to
purchase additional eligible receivables to serve as excess
collateral for the new Medium-Term Notes. Under the terms of the
arrangement, BFC is required to maintain receivables in excess
of the outstanding balance of the Medium-Term Notes based on a
calculated formula included in the Master Sales and Servicing
Agreement.

The Medium-Term Notes mature in 2005; however,
according to the provisions of the notes, principal payments on
these obligations, calculated based on quarterly collections of
the underlying receivables, begin during the second quarter of
2004. Based on current collection trends, it is expected that
these obligations will be paid off by the third quarter of 2004.

BHRS recognizes a loss at the time the
receivables are sold to BFC equal to the 1% discount and this
loss is included in Other operating and administrative
costs and expenses and in Net cash provided by

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##### Table of Contents



operating activities in our consolidated
financial statements. BHRS provides invoicing and collection
services related to the purchased receivables for a market-based
servicing fee. Neither the loss on sale of receivables nor the
servicing fee revenue is material to the Companys results
of operations or cash flows.


Prior to June 1999, BFCs assets,
liabilities and operating results were consolidated with the
Company. However, in June 1999 in connection with the redemption
of previously issued medium-term notes, and issuance of the
Medium-Term Notes in June and July 1999, the Master Sale and
Servicing Agreement was amended so that BFC met the definition
of a qualifying special purpose entity as defined in Statement
of Financial Accounting Standards No. 125, Accounting
for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities(SFAS No. 125). Specifically, BFC was
no longer permitted to hold or purchase receivables that
originated prior to January 1, 1997 (a condition that
prevented it from becoming a qualifying special purpose entity
prior to June 1999). The Company continually evaluates the
organizational structure and operations of BFC to ensure that it
remains legally isolated from the Company and each of its
operating subsidiaries and that it maintains its status as a
qualifying special purpose entity and, thereby, remains
deconsolidated.

The Companys investment in BFC has been
recorded as a non-current asset in the accompanying consolidated
balance sheets, which is subject to periodic collectibility
review. The primary factor in the collectibility review is the
determination of the net realizable value of the excess
receivables serving as collateral for the Medium-Term Notes. The
net realizable value is determined through a collectibility
analysis of the receivables purchased and held by BFC. This
collectibility analysis considers historical collection
experience and is adjusted according to the aging of the
receivables. Once the net realizable value of the excess
receivables is determined, we compare it to the carrying value
of the asset and adjust the asset downward when the analysis
indicates that it will not be recovered.

At December 31, 2002 and 2001, the
Companys investment of approximately $31.0 million
and $33.0 million, respectively, was included in
Other assets on the consolidated balance sheets. At
December 31, 2002 and 2001, BFC had excess receivables of
approximately $31.0 million and $33.0 million,
respectively. Our total investments in BFC have been adjusted
from their initial value of $35.0 million due to cumulative
credit losses incurred by BFC associated with the purchased
receivables since June 1999. We believe our asset will be
realized upon the maturity and repayment of the Medium-Term
Notes and collection of the excess receivables and is expected
to approximate the Companys recorded asset.

At December 31, 2002, the Company leased
five nursing facilities, one assisted living center and its
corporate headquarters under an off-balance sheet lease
arrangement. The special purpose entity lessor financed the
construction of these properties and we lease the properties
under a master operating lease agreement, which matures in April
2004. (See Item 8  Note 8 for a discussion
of the 2003 Amendments and their impact on this financing
arrangement.) 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% (or approximately
$56.0 million at December 31, 2002) is guaranteed by
the Company and secured by second mortgages on the related
properties.

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 current generally accepted accounting
principles. In January 2003, the Financial Accounting Standards
Board issued FASB Interpretation No. 46, Consolidation
of Variable Interest Entities (FIN 46),
which is effective for us in the third quarter of 2003. Under
this interpretation, we do not currently anticipate that our
accounting for BFC will be affected. However, based on our
initial evaluation of FIN 46, it is possible that the
special purpose entity lessor in the lease arrangement may need
to be consolidated with the Company beginning in the third
quarter of 2003. We are continuing to evaluate the consolidation
and transition rules under FIN 46, however, if the special
purpose entity lessor needs to be consolidated, the leased
assets will be consolidated at their depreciated cost and
recorded as capital leased assets, with the difference between
the historical and the depreciated cost on the date of
consolidation being recorded as the cumulative effect of an
accounting change. The remaining obligation as of July 1,
2003 ($69.5 million as of December 31, 2002 and
expected to be $52.7 million as of July 1, 2003) would
be recorded as a capital lease obligation on the Companys

22



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##### Table of Contents



consolidated balance sheet. If consolidated under
FIN 46, we will continue to make quarterly payments under
the obligation, to be recorded as interest expense, and the
capital leased assets will be depreciated, increasing our annual
depreciation and amortization expense by approximately
$2.3 million. Under the terms of the lease arrangement, we
have the option to purchase the leased assets and prepay the
obligation.


In addition, we have off-balance sheet debt
guarantees of approximately $31.5 million that primarily
arose from our sale of nursing facilities. We also guarantee
certain third-party operating leases. Those guarantees arose
from our dispositions of leased facilities and the underlying
leases have approximately $13.3 million of minimum rental
commitments remaining through the initial lease terms. In
addition, we guarantee an officers bank loan of
approximately $200,000, which is collateralized by shares of our
common stock pledged by the officer. See Item 8 
Note 9 for a more complete description of each of these
items. Each of these guarantees will be subject to FASB
Interpretation No. 45, Guarantors Accounting and
Disclosure Requirements for Guarantees Including Indirect
Guarantees of Indebtedness of Others
(FIN 45), issued in November 2002. See New
Accounting Standards below.



| |                  
| | -----------------
| | Asset Impairments

We recorded pre-tax asset impairment charges of
$71.6 million, $171.1 million and $9.7 million
for the years ended December 31, 2002, 2001 and 2000,
respectively. We also recorded additional impairments of
goodwill of $77.2 million in 2002 as the cumulative effect
of an accounting change. We evaluate our long-lived assets for
impairment whenever indicators of impairment exist, in
accordance with Statement of Financial Accounting Standards
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets (SFAS No. 144).
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 affecting
    reimbursement;
|
| |  | decrease in cash flows or cash flow deficiencies;                 
|
| |  | 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 2002, changes in the regulatory
environment affecting Medicare reimbursement led to a long-lived
asset impairment analysis on our Nursing Facilities segment.
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 facilities, led to impairment analyses on these
assets. 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.

These impairment analyses included:



| |   |                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | estimating the undiscounted cash flows to be
    generated by each clinic, unit, facility or property, primarily
    over the remaining life of the primary asset; and                                           
|
| |  | reducing the carrying value of the asset to the
    estimated fair value when the total estimated undiscounted cash
    flows was less than the current book value of the clinic, unit,
    facility or property.

In estimating the undiscounted cash flows for our
nursing facilities, we primarily used our internally prepared
budgets and forecast information, with certain probability
adjustments, including, but not limited to, the following items:
Medicare and Medicaid funding; overhead costs; capital
expenditures; and patient care liability costs. In order to
estimate the fair values of the nursing facilities, we used a
discounted cash flow approach, supplemented by public resource
information on valuations of nursing facility sales
transactions, by region of the country. Where the estimated
undiscounted cash flows were negative, we estimated the fair
values based on discounted public resource information, sales
values or estimated salvage value. For other lines of business
that lack significant property investments, we discounted the
next five years of expected cash flows. A substantial change in
the estimated future cash flows for these facilities or
businesses could materially change the estimated fair values of
these assets, possibly resulting in an additional impairment.

23



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##### Table of Contents



In July 2001, Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible
Assets (SFAS No. 142) was issued,
which established new rules on the accounting for goodwill and
other intangible assets. In accordance with this standard, we
performed the initial screening for potential impairments of our
indefinite lived intangible assets by reporting unit as of
January 1, 2002. We determined the estimated fair values of
each reporting unit using discounted cash flow analyses, along
with independent source data related to recent transactions.
Based on this determination, we identified potential goodwill
impairments at our Matrix segment and at Care Focus, a reporting
unit within our Home Care segment. We engaged a qualified,
independent valuation group to determine the estimated fair
values of each of these reporting units. Their analysis was
completed in the fourth quarter of 2002, and led to the
recording of goodwill impairment charges as the cumulative
effect of an accounting change of $77.2 million as of
January 1, 2002, including $70.6 million for Matrix
and $6.6 million for Care Focus. Based on our annual
October 1, 2002 assessment of all reporting units, no
additional impairment of goodwill was required.

During 2001, management initiated a formal plan
to dispose of all of our nursing facility 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 4 for a more detailed
discussion of this transaction, including related exit and other
costs, and other impairments we have recorded. Under accounting
standards in effect in 2001, our Florida assets were not
considered discontinued operations.

Operating Results



| |                      
| | ---------------------
| | 2002 Compared to 2001



| |                                                  
| | -------------------------------------------------
| | Results of Operations 
    Continuing Operations

We reported a net loss from continuing operations
for the year ended December 31, 2002 of $32.1 million,
compared to a net loss from continuing operations of
$237.4 million for the year ended December 31, 2001.
The net loss from continuing operations for 2002 included
pre-tax charges totaling approximately $98.6 million,
including:



| |   |                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | $79.5 million for asset impairments,
    workforce reductions and other unusual items;                                                                           
|
| |  | $22.2 million for the Florida insurance
    reserve adjustment;                                                                                                  
|
| |  | $6.3 million for the California
    investigation settlement and related costs; and                                                                              
|
| |  | partially offset by a $9.4 million
    adjustment to reduce estimated reserves no longer needed,
    related to settlements of federal government investigations.

The $79.5 million for asset impairments,
workforce reductions and other unusual items includes the
following:



| |   |                                                                                                                                                                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | $74.6 million write-down of property and
    equipment on certain nursing facilities whose book value
    exceeded fair value when tested for impairment as a result of
    the reduction in Medicare funding effective October 1,
    2002. These assets were included in the total assets of the
    Nursing Facilities operating segment in 2002;
|
| |  | $8.5 million of workforce reductions (see
    below); and                                                                                                                                                                                                                                                                                           
|
| |  | $3.0 million adjustment to asset impairments
    and $600,000 reversal of workforce reduction charges recorded in
    2001, which were no longer needed.                                                                                                                                                                                            

We recorded a pre-tax charge of $8.5 million
during 2002 for workforce reductions which were primarily the
result of a continuing operational reorganization required to
support the implementation of our three year strategic plan.
During 2002, we notified 133 associates that their positions
would be eliminated. The charge included the following:



| |   |                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------
| |  | $8.0 million of cash expenses, approximately
    $4.1 million of which was paid during the year ended
    December 31, 2002; and

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| |   |                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------
| |  | non-cash expenses of $500,000 related to the
    issuance of 124,212 shares under our Stock Grant Plan (as
    defined herein).

We estimate the annual cost savings of this
operational reorganization to be approximately
$11.2 million.

The following table summarizes activity in our
estimated workforce reduction and exit costs for the years ended
December 31 (in thousands):

|                          |                       |            |       |        |   |            |        |         |   |            |       |         |   |   |        |        |   |   |       |        |   |   |       |        |  
|------------------------- | --------------------- | ---------- | ----- | ------ | - | ---------- | ------ | ------- | - | ---------- | ----- | ------- | - | - | ------ | ------ | - | - | ----- | ------ | - | - | ----- | ------ | -
|                          |                       |            |       |        |   |           
|                          |                       | 2002       |       | 2001   |   | 2000      
|                          |                       |            |       |        |   |           
|                          |                       | Workforce  |       | Exit   |   | Workforce  |        | Exit    |   | Workforce  |       | Exit   
|                          |                       | Reductions |       | Costs  |   | Reductions |        | Costs   |   | Reductions |       | Costs  
|                          |                       |            |       |        |   |            |        |         |   |            |       |        
|Balance beginning of year |                       | $          | 7,631 |        |   | $          | 15,030 |         |   | $          | 4,151 |         |   | $ | 5,208  |        |   | $ | 5,165 |        |   | $ | 7,915 |       
|                          | Charged to operations |            |       | 8,454  |   |            |        | 2,633   |   |            |       | 23,118  |   |   |        | 18,165 |   |   |       | 5,904  |   |   |       | 3,000  |  
|                          | Cash payments         |            |       | (9,074 | ) |            |        | (10,313 | ) |            |       | (15,448 | ) |   |        | (8,343 | ) |   |       | (6,918 | ) |   |       | (3,207 | )
|                          | Stock transactions    |            |       | (1,008 | ) |            |        |        |   |            |       | (4,158  | ) |   |        |       |   |   |       |       |   |   |       |       |  
|                          | Reversals             |            |       | (585   | ) |            |        | (2,359  | ) |            |       | (32     | ) |   |        |       |   |   |       |       |   |   |       | (2,500 | )
|                          |                       |            |       |        |   |            |        |         |   |            |       |         |   |   |        |        |   |   |       |        |   |   |       |       
|Balance end of year       |                       | $          | 5,418 |        |   | $          | 4,991  |         |   | $          | 7,631 |         |   | $ | 15,030 |        |   | $ | 4,151 |        |   | $ | 5,208 |       
|                          |                       |            |       |        |   |            |        |         |   |            |       |         |   |   |        |        |   |   |       |        |   |   |       |       

Net loss from continuing operations for 2001
included pre-tax charges totaling approximately
$197.4 million primarily for asset impairments, exit costs
and workforce reductions. See 2001 Compared to
2000  Results of Operations.



| |             
| | ------------
| | Income Taxes

We recorded a provision for income taxes of
approximately $6.1 million for the year ended
December 31, 2002, primarily related to state income taxes.
We increased our valuation allowance on our deferred tax assets
by $45.5 million during 2002 to $199.2 million as of
December 31, 2002. This valuation allowance is required
under the guidance of SFAS No. 109 due to our
historical operating performance and our reported cumulative net
losses. Our realization of the deferred tax benefits primarily
associated with our net operating losses is dependent upon our
achieving sufficient future 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 losses in 2002 and 2001
and uncertainties created by Medicare reimbursement enhancements
which expired on September 30, 2002, a valuation allowance
is considered to be appropriate under the more stringent
accounting standards for the realization of these deferred tax
benefits, which is contingent upon future income.

At December 31, 2002, for income tax
purposes, we had federal net operating loss carryforwards of
$164.7 million which expire in years 2017 through 2022;
general business tax credit carryforwards of $28.7 million
which expire in years 2008 through 2022; and alternative minimum
tax credit carryforwards of $19.1 million which do not
expire. Future tax benefits associated with these carryforwards
are not recorded in our 2002 and 2001 consolidated financial
statements as a result of the valuation allowance recorded.



| |                       
| | ----------------------
| | Net Operating Revenues

We reported net operating revenues of
$2,419.9 million during the year ended December 31,
2002 compared to $2,600.0 million for the same period in
2001. Approximately 95% and 96% of our total net operating
revenues for each of the years ended December 31, 2002 and
2001, respectively, were derived from services provided by our
Nursing Facilities segment. The decrease in net operating
revenues of approximately $180.1 million for the year ended
December 31, 2002, as compared to the same period in 2001,
is due to the following:



| |   |                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a decrease of $319.8 million due to
    dispositions, primarily related to our Florida facilities;                                                                        
|
| |  | an increase of approximately $98.9 million
    from facilities we operated during each of the years ended
    December 31, 2002 and 2001 (same facility
    operations);

25



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| |   |                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------
| |  | an increase of $35.6 million from growth in
    AEGIS external therapy business; and                                                       
|
| |  | an increase of $5.2 million due to a
    facility acquisition, and the opening of a newly constructed
    facility and four hospice centers.

The increase in net operating revenues of
approximately $98.9 million from same facility operations
for the year ended December 31, 2002, as compared to the
same period in 2001, was primarily due to the following:



| |   |                                                                                              
| | - | ---------------------------------------------------------------------------------------------
| |  | $84.1 million due to an increase in
    Medicaid, Medicare and private payment rates;        
|
| |  | $17.6 million due to a positive shift in our
    patient mix;                                
|
| |  | $14.8 million due to an increase in Medicare
    Part B revenues; and                        
|
| |  | partially offset by a decrease of
    $23.7 million due to a decline in same facility census.

Effective October 1, 2002, certain Medicare
add-on payments were eliminated when the federal government
failed to pass legislation to restore the funding. These add-on
payments included a 16.66% add-on to the nursing component of
all 44 Resource Utilization Grouping (RUG)
categories and a 4% overall increase in the adjusted rates for
all 44 RUG categories. Our net operating revenues were reduced
by approximately $14.0 million as a result of the
elimination of these add-ons in the fourth quarter of 2002.
(This reduction is netted above with the increases in payment
rates from all sources of revenue for 2002 over 2001.) Assuming
a similar volume and mix of Medicare patients in 2003, we
anticipate our net operating revenues will decline an additional
$42.0 million from 2002, for an annual impact of
$56.0 million.

Additional Medicare add-on payments, currently
approximating $38.6 million of our annual net operating
revenues, are scheduled to expire when CMS releases refinements
to the current RUG payment system. We cannot currently predict
when this will happen, or the ultimate impact it will have on
our operating results or cash flows. In addition, we currently
anticipate that on July 1, 2003, Part B therapy caps
will go into effect on a prospective basis. Based on the current
volume of Part B therapy in our nursing homes, the decrease
in our annual net operating revenues is anticipated to be
approximately $16.0 million. Our AEGIS outside therapy
contract business will likely be further impacted in terms of
revenue and may be required to adjust therapy staffing levels to
offset a portion of this revenue impact.



| |                                          
| | -----------------------------------------
| | Operating and Administrative
    Expenses

We reported operating and administrative expenses
of $2,204.2 million during the year ended December 31,
2002 compared to $2,347.4 million for the same period in
2001. The decrease of approximately $143.2 million consists
of the following:



| |   |                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a decrease of $267.2 million due to
    dispositions, primarily related to our Florida facilities;                                               
|
| |  | an increase of $10.5 million due to a
    facility acquisition, and the opening of a newly constructed
    facility and four hospice centers; and
|
| |  | an increase of approximately $113.5 million
    in same facility operations.                                                                     

The increase in operating and administrative
expenses of approximately $113.5 million from same facility
operations for the year ended December 31, 2002, as
compared to the same period in 2001, was due primarily to the
following:



| |   |                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | $38.7 million of additional wages and
    related expenses primarily due to an increase in our weighted
    average wage rate and an increase in nursing hours per patient
    day;        
|
| |  | $27.9 million additional provision for
    reserves on accounts and notes receivable;                                                                                                      
|
| |  | $28.0 million due to an increase in
    contracted services, primarily due to outsourcing certain
    housekeeping, laundry and dietary services in our Nursing
    Facilities segment; and
|
| |  | $23.9 million increase in our provision for
    insurance and related claims, as discussed below.                                                                                          

26



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##### Table of Contents



Our provision for insurance and related items
increased approximately $23.9 million for the year ended
December 31, 2002, as compared to the same period in 2001,
primarily due to rising patient care liability costs. Based on
the results of our mid-year actuarial study completed in
mid-July, we recorded a pre-tax charge of $43.3 million to
increase our reserves for prior policy-year patient care
liability costs, including $22.2 million related to our
previously operated Florida facilities, which have been sold,
and $21.1 million related to same facility operations. 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. Our most recent actuarial study indicated our
reserves were adequate. However, the provision and liability
have been difficult to 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.



| |                      
| | ---------------------
| | Interest Expense, Net

Interest income increased to $4.7 million
for the year ended December 31, 2002, as compared to
$3.0 million for the same period in 2001 primarily due to
certain notes receivable accepted as partial consideration for
the sale of the Florida facilities. Interest expense decreased
to $66.8 million for the year ended December 31, 2002,
as compared to $79.3 million for the same period in 2001.
This was primarily due to the reduction of debt using the net
proceeds from the sale of the Florida facilities.



| |                              
| | -----------------------------
| | Depreciation and Amortization

Depreciation and amortization expense was
$81.1 million for the year ended December 31, 2002, as
compared to $81.2 million for the same period in 2001.
Depreciation and amortization decreased approximately
$6.2 million due to the elimination of amortization on
goodwill and other indefinite lived intangibles with the
implementation of SFAS No. 142, and the dispositions
of, or lease terminations on, certain facilities. However, these
decreases were substantially offset by increases of
$6.1 million related to capital additions and improvements
as well as acquisitions and openings.



| |                        
| | -----------------------
| | Discontinued Operations

In accordance with the provisions of
SFAS No. 144, the results of operations of Matrix and
MK Medical have been reclassified and reported, for all
periods presented, as discontinued operations in the
accompanying consolidated statements of operations. Following is
a summary of the discontinued operations of Matrix and MK
Medical for the years ended December 31 (in thousands):

|                                                |                       |        |        |            |  |       |         |         |   |            |         |         |   |        |         |            |   |       |         |         |   |   |         |         |   |   |         |         |   |   |        |        |   |   |         |         |  
|----------------------------------------------- | --------------------- | ------ | ------ | ---------- |  | ----- | ------- | ------- | - | ---------- | ------- | ------- | - | ------ | ------- | ---------- | - | ----- | ------- | ------- | - | - | ------- | ------- | - | - | ------- | ------- | - | - | ------ | ------ | - | - | ------- | ------- | -
|                                                |                       |        |        |            |  |      
|                                                |                       | 2002   |        | 2001       |  | 2000 
|                                                |                       |        |        |            |  |      
|                                                |                       | Matrix |        | MK Medical |  | Total |         | Matrix  |   | MK Medical |         | Total   |   | Matrix |         | MK Medical |   | Total
|                                                |                       |        |        |            |  |       |         |         |   |            |         |         |   |        |         |            |   |      
|Net operating revenues(1)                       |                       | $      | 86,840 |            |  | $     | (4,452  | )       |   | $          | 82,388  |         |   | $      | 90,694  |            |   | $     | 23,289  |         |   | $ | 113,983 |         |   | $ | 78,367  |         |   | $ | 29,429 |        |   | $ | 107,796 |        
|                                                |                       |        |        |            |  |       |         |         |   |            |         |         |   |        |         |            |   |       |         |         |   |   |         |         |   |   |         |         |   |   |        |        |   |   |         |        
|Operating income (loss)(1)                      |                       | $      | 1,078  |            |  | $     | (31,610 | )       |   | $          | (30,532 | )       |   | $      | (8,652  | )          |   | $     | (10,674 | )       |   | $ | (19,326 | )       |   | $ | (30,017 | )       |   | $ | (1,170 | )      |   | $ | (31,187 | )      
|Exit costs                                      |                       |        | (1,001 | )          |  |       | (1,257  | )       |   |            | (2,258  | )       |   |        |        |            |   |       |        |         |   |   |        |         |   |   |        |         |   |   |       |        |   |   |        |        
|Asset impairments                               |                       |        |       |            |  |       | (1,250  | )       |   |            | (1,250  | )       |   |        | (32,482 | )          |   |       | (8,231  | )       |   |   | (40,713 | )       |   |   | (25,784 | )       |   |   |       |        |   |   | (25,784 | )      
|Workforce reductions and other unusual items(2) |                       |        | 230    |            |  |       | (2,989  | )       |   |            | (2,759  | )       |   |        |        |            |   |       |        |         |   |   |        |         |   |   |        |         |   |   |       |        |   |   |        |        
|                                                |                       |        |        |            |  |       |         |         |   |            |         |         |   |        |         |            |   |       |         |         |   |   |         |         |   |   |         |         |   |   |        |        |   |   |         |        
|                                                | Pre-tax income (loss) |        | $      | 307        |  |       | $       | (37,106 | ) |            |         | (36,799 | ) |        | $       | (41,134    | ) |       | $       | (18,905 | ) |   |         | (60,039 | ) |   | $       | (55,801 | ) |   | $      | (1,170 | ) |   |         | (56,971 | )
|                                                |                       |        |        |            |  |       |         |         |   |            |         |         |   |        |         |            |   |       |         |         |   |   |         |         |   |   |         |         |   |   |        |        |   |   |         |        
|Provision for (benefit from) income taxes       |                       |        |        |            |  |       |         |         |   |            |        |         |   |        |         |            |   |       |         |         |   |   | 3,814   |         |   |   |         |         |   |   |        |        |   |   | (17,626 | )      
|                                                |                       |        |        |            |  |       |         |         |   |            |         |         |   |        |         |            |   |       |         |         |   |   |         |         |   |   |         |         |   |   |        |        |   |   |         |        
|Discontinued operations, net of taxes           |                       |        |        |            |  |       |         |         |   | $          | (36,799 | )       |   |        |         |            |   |       |         |         |   | $ | (63,853 | )       |   |   |         |         |   |   |        |        |   | $ | (39,345 | )      
|                                                |                       |        |        |            |  |       |         |         |   |            |         |         |   |        |         |            |   |       |         |         |   |   |         |         |   |   |         |         |   |   |        |        |   |   |         |        



---



|    |                                                                                                                                              
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes an adjustment of $18.0 million in
    2002 for estimated overpayments to MK Medical by government
    payors. (See Item 8  Note 9.)
|   
|(2) | Includes $1.0 million accrued for legal and
    related fees associated with the MK Medical estimated
    overpayment issue.                 

27



---



##### Table of Contents





| |                                           
| | ------------------------------------------
| | Cumulative Effect of Accounting
    Change

In July 2001, the Financial Accounting Standards
Board issued SFAS No. 142, which established new rules
on the accounting for goodwill and other intangible assets.
Under SFAS No. 142, goodwill and intangible assets
with indefinite lives are no longer amortized; however, they are
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. With respect
to our goodwill and intangible assets, SFAS No. 142
was effective for us beginning January 1, 2002.

Following is a summary of adjusted operating
results reflecting the effects of adopting
SFAS No. 142, net of income taxes, for the periods
ended December 31 (in thousands, except per share amounts):

|                  |                               |                          |          |      |  |      |          |       |  |   |         |       | 
|----------------- | ----------------------------- | ------------------------ | -------- | ---- |  | ---- | -------- | ----- |  | - | ------- | ----- | 
|                  |                               |                         
|                  |                               | Years Ended December 31,
|                  |                               |                         
|                  |                               | 2002                     |          | 2001 |  | 2000
|                  |                               |                          |          |      |  |     
|Reported net loss |                               | $                        | (146,090 | )    |  | $    | (301,272 | )     |  | $ | (54,502 | )    
|Add back:         |                               |                          |          |      |  |      |          |       |  |   |         |      
|                  | Goodwill amortization         |                          |          |     |  |      |          | 3,917 |  |   |         | 4,465 | 
|                  | Operating rights amortization |                          |          |     |  |      |          | 252   |  |   |         | 268   | 
|                  |                               |                          |          |      |  |      |          |       |  |   |         |      
|Adjusted net loss |                               | $                        | (146,090 | )    |  | $    | (297,103 | )     |  | $ | (49,769 | )    
|                  |                               |                          |          |      |  |      |          |       |  |   |         |      

|                                    |                               |                          |       |      |  |      |       |      |  |   |       |      | 
|----------------------------------- | ----------------------------- | ------------------------ | ----- | ---- |  | ---- | ----- | ---- |  | - | ----- | ---- | 
|                                    |                               |                         
|                                    |                               | Years Ended December 31,
|                                    |                               |                         
|                                    |                               | 2002                     |       | 2001 |  | 2000
|                                    |                               |                          |       |      |  |     
|Reported diluted net loss per share |                               | $                        | (1.39 | )    |  | $    | (2.90 | )    |  | $ | (0.53 | )   
|Add back:                           |                               |                          |       |      |  |      |       |      |  |   |       |     
|                                    | Goodwill amortization         |                          |       |     |  |      |       | 0.04 |  |   |       | 0.04 | 
|                                    | Operating rights amortization |                          |       |     |  |      |       |     |  |   |       |     | 
|                                    |                               |                          |       |      |  |      |       |      |  |   |       |     
|Adjusted diluted net loss per share |                               | $                        | (1.39 | )    |  | $    | (2.86 | )    |  | $ | (0.49 | )   
|                                    |                               |                          |       |      |  |      |       |      |  |   |       |     

We completed the impairment assessment of our
indefinite lived intangible assets, other than goodwill, during
the first quarter of 2002, with no impairment identified.
SFAS No. 142 described a two-step process for testing
goodwill for impairment. The first step is a screen for
potential impairment, while the second step measures the amount
of the impairment, if any. Upon completion of the first step of
the goodwill impairment test for all reporting units of the
Company, results indicated that goodwill appeared to be impaired
for our Matrix and Home Care Services  Care Focus
reporting units. We subjected the goodwill at these reporting
units to step two under SFAS No. 142.

We engaged a qualified, independent third party
to determine the estimated fair value of these two reporting
units. Their valuation was completed during the fourth quarter
of 2002, and the resulting impairment losses amounted to
approximately $70.6 million for Matrix and
$6.6 million for Home Care Services  Care Focus.
As required by SFAS No. 142, these impairment losses
have been recorded in the accompanying statement of operations
as the cumulative effect of a change in accounting for goodwill
as of January 1, 2002.

In accordance with SFAS No. 142, we
completed our annual impairment assessment of all of our
indefinite lived intangible assets, including goodwill, as of
October 1, 2002 with no additional impairment required.



| |                         
| | ------------------------
| | New Accounting Standards

In January 2003, the FASB issued Interpretation
No. 46, Consolidation of Variable Interest Entities,
(FIN 46). FIN 46 requires a variable
interest entity (VIE), sometimes known as a special
purpose entity, to be consolidated by a company when that
company is subject to a majority of the risk of loss from the
VIEs activities or entitled to receive a majority of the
VIEs residual returns, or both. FIN 46 is effective
on July 1, 2003 as it relates to VIEs created prior to
February 1, 2003. Based on our initial evaluation of
FIN 46,

28



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##### Table of Contents



it is possible that the special purpose entity
lessor in the lease arrangement may need to be consolidated with
the Company beginning in the third quarter of 2003. We are
continuing to evaluate the consolidation and transition rules
under FIN 46, however if the special purpose entity lessor
needs to be consolidated, the leased assets will be consolidated
at their depreciated cost and recorded as capital leased assets,
with the difference between the historical and the depreciated
cost on the date of consolidation being recorded as the
cumulative effect of an accounting change. The remaining
obligation as of July 1, 2003 ($69.5 million as of
December 31, 2002 and expected to be $52.7 million as
of July 1, 2003) would be recorded as a capital lease
obligation on the Companys consolidated balance sheet. The
assets would be depreciated and payments on the obligations
would be recorded as interest expense until the obligations are
satisfied. FIN 46 is not expected to impact our accounting
treatment of BFC. (See Off-Balance Sheet Obligations
herein.)


In November 2002, the FASB issued Interpretation
No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others (FIN 45).
FIN 45 requires certain guarantees to be recorded at fair
value when a transaction is consummated. This differs from
current practice, which is generally to record a liability only
when a loss is probable and reasonably estimable. FIN 45
applies to guarantee contracts having financial guarantees,
performance guarantees, indemnification or indirect guarantees
of the indebtedness of others. FIN 45 also requires a
guarantor to make significant new disclosures, even when the
likelihood of making any payments under the guarantee is remote.
We have complied with the new disclosure requirements, which are
effective for us as of December 31, 2002. The recognition
and measurement provisions of FIN 45 are applicable on a
prospective basis to guarantees issued or modified after
December 31, 2002. We are continuing our review of the
implications of FIN 45, which may impact our accounting for
future dispositions.

In July 2002, the FASB issued Statement of
Financial Accounting Standards No. 146, Accounting for
Costs Associated with Exit or Disposal Activities
(SFAS No. 146). SFAS No. 146
requires that a liability for a cost associated with an exit or
disposal activity be recognized and measured at its fair value
when the liability is incurred rather than when an entity
commits to an exit plan. Depending on the terms of the exit or
disposal, under SFAS No. 146, severance pay could be
recognized over time or up front. Also, SFAS No. 146
requires that a liability be recognized, measured at its fair
value, when an entity ceases operation at a location covered
under a pre-existing contract, such as a lease. Fair value in
this case would represent the present value of the future
payment obligations net of assumed receipts, such as sublease
income, at current market value. SFAS No. 146 is
effective for all exit or disposal activities initiated after
December 31, 2002. Many of the provisions of
SFAS No. 146 affect only the timing of when a
liability is recorded and not the amount of the liability.
Therefore, we do not expect there will be a material effect on
our consolidated financial position or results of operations as
a result of adopting SFAS No. 146.

In April 2002, the FASB issued Statement of
Financial Accounting Standards No. 145, Rescission of
FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections
(SFAS No. 145). This Statement eliminates
extraordinary accounting treatment for reporting gains or losses
on debt extinguishments, and amends certain other existing
accounting pronouncements. The provisions of this Statement are
effective for the Company beginning with the first quarter of
2003 with restatement of prior year debt extinguishment-related
extraordinary items required.



| |                      
| | ---------------------
| | 2001 Compared to 2000



| |                                                  
| | -------------------------------------------------
| | Results of Operations 
    Continuing Operations

We reported a net loss from continuing operations
for the year ended December 31, 2001 of
$237.4 million, compared to a net loss from continuing
operations of $15.2 million for the year ended
December 31, 2000. Net loss from continuing operations for
2001 included pre-tax charges totaling approximately
$197.4 million, primarily including $171.1 million for
asset impairments, exit and other costs and $24.2 million
for workforce reductions and related costs. These pre-tax
charges have been included in the

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consolidated statement of operations caption
Asset impairments, workforce reductions and other unusual
items. The asset impairment and exit costs relate to:




| |   |                                                                                                                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | $75.1 million write-down of Florida
    facilities and $55.1 million of Florida exit and other
    costs, as discussed below. These assets were included in the
    total assets of the Nursing Facilities segment as of
    December 31, 2001;                                                                                 
|
| |  | write-down of goodwill of $15.4 million,
    property, equipment and other intangible assets of
    $1.0 million and recording of closing and other costs of
    $2.8 million on under-performing Home Care businesses.
    These assets were included in the total assets of the Home Care
    segment as of December 31, 2001;
|
| |  | write-down of property and equipment of
    $10.0 million, and goodwill and other intangibles of
    $600,000 on certain under-performing nursing facilities. These
    assets were included in the total assets of the Nursing
    Facilities operating segment as of December 31, 2001;                                       
|
| |  | write-off of abandoned projects and investments
    totaling $7.8 million; and                                                                                                                                                                                                                                                  
|
| |  | $3.3 million related to the termination of a
    lease in Indiana and the write-off of the net book value of the
    related assets.                                                                                                                                                                                            

During 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) in Florida and certain
other assets which would 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 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 held for sale. Management estimated the fair
value less selling costs of such assets and took pre-tax charges
in 2001 totaling $75.1 million to write-down the Florida
assets. 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 transaction on
January 8, 2002.

In conjunction with the sale of the Florida
facilities, we also recorded pre-tax charges totaling
$55.1 million for certain exit and other costs. These costs
related to severance agreements, termination payments on certain
contracts and various other items. At December 31, 2001,
the Florida assets held for sale totaled approximately
$120.8 million and were classified as current assets in the
consolidated balance sheet.

Annualized revenues for the Florida facilities
were approximately $288.0 million. During the year ended
December 31, 2001, our Florida nursing home operations
recorded pre-tax income of approximately $600,000. This amount
does not include certain costs which were recorded at the parent
company level and were not fully allocated to the individual
subsidiaries or facilities. 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 $6.8 million.

During 2001, we recorded pre-tax charges totaling
approximately $24.2 million for workforce reductions and
related costs. Approximately $23.1 million 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:



| |   |                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | $18.0 million of cash expenses,
    approximately $4.9 million and $11.3 million of which
    was paid during the years ended December 31, 2002 and 2001,
    respectively;
|
| |  | non-cash expenses of $4.5 million 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 estimated the annual costs savings of this
operational reorganization to be approximately
$14.0 million. Much of this savings was realized in 2001,
since the majority of the workforce reductions took place in

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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. Approximately $600,000 of these workforce reduction
charges in 2001 were reversed during 2002.


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, are entitled to the immediate
vesting of their restricted stock. 669,754 shares of Common
Stock under the Stock Grant Plan have been issued in 2002 and
2001 to various officers in exchange for shares of restricted
stock held by them, which have been 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 $77.5 million which is included in the
caption Special charges and adjustments related to
settlements with the federal government. This charge
included a $35.0 million cash settlement and the write-off
of $81.5 million of related cost report receivables, offset
by a $39.0 million reserve established in 1999 for related
issues. This matter was settled with CMS in the fourth quarter
of 2002, and required no increase in accruals previously
recorded.



| |             
| | ------------
| | 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
$153.7 million valuation allowance on our deferred tax
assets. This valuation allowance was required under the guidance
of SFAS No. 109 due to our historical operating
performance and our reported cumulative net losses. 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.



| |                       
| | ----------------------
| | Net Operating Revenues

We reported net operating revenues of
$2,600.0 million during the year ended December 31,
2001 compared to $2,523.3 million for the same period in
2000. Approximately 96% 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
$76.7 million for the year ended December 31, 2001, as
compared to the same period in 2000, consists of the following:



| |   |                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | an increase of approximately $150.6 million
    from facilities we operated during each of the years ended
    December 31, 2001 and 2000 (same facility
    operations);
|
| |  | an increase of $19.9 million due to
    acquisitions and openings of newly-constructed facilities;                                                                         
|
| |  | an increase of $13.7 million from growth in
    AEGIS external therapy business; and                                                                                      
|
| |  | a decrease of $107.5 million due to
    dispositions.                                                                                                                      

The increase in net operating revenues of
approximately $150.6 million 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:



| |   |                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------
| |  | $164.1 million due to an increase in
    Medicaid, Medicare and private payment rates;                                            
|
| |  | $8.9 million due to a positive shift in our
    patient mix;                                                                      
|
| |  | partially offset by a decrease of
    $16.5 million due to a decline in same facility census; and                                 
|
| |  | $5.5 million due to one less calendar day
    during the year ended December 31, 2001, as compared to the
    same period in 2000.

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| |                                          
| | -----------------------------------------
| | Operating and Administrative
    Expenses

We reported operating and administrative expenses
of $2,347.4 million during the year ended December 31,
2001 compared to $2,360.6 million for the same period in
2000. The decrease of approximately $13.2 million consists
of the following:



| |   |                                                                                                   
| | - | --------------------------------------------------------------------------------------------------
| |  | a decrease of $74.2 million due to
    dispositions;                                              
|
| |  | an increase of approximately $42.2 million
    in same facility operations; and                   
|
| |  | an increase of $18.8 million due to
    acquisitions and openings of newly-constructed facilities.

The increase in operating and administrative
expenses of approximately $42.2 million 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:



| |   |                                                                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | $90.1 million of additional wages and
    related expenses primarily due to an increase in our weighted
    average wage rate;                                                                                                           
|
| |  | $5.5 million due to an increase in other
    contracted services;                                                                                                                                                                        
|
| |  | partially offset by a $41.5 million decrease
    in bad debt expense primarily due to improved collections on our
    patient accounts receivable; and                                                                                   
|
| |  | $19.5 million decrease in our provision for
    insurance and related items primarily due to an incremental
    pre-tax charge of approximately $44.4 million recorded in
    2000 to increase reserves for patient care liability costs.

Excluding this $44.4 million pre-tax charge
for 2000, our provision for insurance and related items
increased approximately $24.9 million for the year ended
December 31, 2001, as compared to the same period in 2000,
primarily due to rising patient care liability costs.



| |                              
| | -----------------------------
| | Depreciation and Amortization

Depreciation and amortization expense decreased
approximately $6.6 million to $81.2 million for the
year ended December 31, 2001, as compared to
$87.8 million 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.



| |                                                                             
| | ----------------------------------------------------------------------------
| | Discontinued
    Operations See 2002
    vs. 2001  Discontinued Operations



| |                                
| | -------------------------------
| | Liquidity and Capital Resources

At December 31, 2002, we had approximately
$115.4 million in cash and cash equivalents. We anticipate
$20.5 million of this cash balance at December 31,
2002, while not legally restricted, will be utilized primarily
to fund certain general liability and workers compensation
claims and expenses. At December 31, 2002, we had
approximately $124.1 million of unused commitments under
our $150.0 million credit facility, with utilization being
for standby letters of credit primarily in support of certain
insurance programs, security deposits, and debt or guaranteed
debt obligations. At December 31, 2002, we had negative
working capital of approximately $41.7 million reflected on
our consolidated balance sheet.

Net cash provided by operating activities for the
year ended December 31, 2002 was approximately
$116.6 million compared to approximately
$220.9 million for the same period in 2001. This decline
was primarily related to reducing accounts payable and accrued
liabilities by approximately $85.3 million, including
$35.0 million paid to CMS in November 2002. Net cash
provided by investing activities and net cash used in financing
activities were approximately $62.3 million and
$152.9 million, respectively, for the year ended
December 31, 2002. We received net cash proceeds of
approximately $169.5 million from the dispositions of
facilities and other assets in 2002. These net proceeds, along
with cash generated from

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operations, were used to repay approximately
$116.5 million of long-term debt and $42.9 million of
off-balance sheet financing and to fund capital expenditures
totaling approximately $100.1 million in 2002.


Effective December 31, 2002, we executed an
amendment to our Credit Facility, as well as amendments with
certain of our other lenders covering debt of approximately
$88.8 million (collectively, the 2002
Amendments), which modified certain financial covenant
levels. The 2002 Amendments were required because recording the
special charges, as discussed in Item 8 
Note 4, would have resulted in our noncompliance with a
financial covenant ratio contained in those debt agreements.

In February 2003, we executed an additional
amendment to our Credit Facility and our off-balance sheet lease
arrangement (collectively, the 2003 Amendments). The
2003 Amendments provide for, among other things:



| |   |                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------
| |  | further modification of certain financial
    covenant levels;                                                     
|
| |  | changes in the interest rates on our borrowings;                                                                   
|
| |  | the pledging of additional assets as collateral
    for certain of the lenders;                                    
|
| |  | use of a portion of the proceeds from the sales
    of assets to repay obligations or reduce available borrowings; 
|
| |  | reduced availability under the Credit Facility;                                                                    
|
| |  | accelerated maturity for the lease arrangement to
    the same date as our Credit Facility and various other items.

We believe we will be able to comply with the
amended covenants throughout 2003 and the availability under our
Credit Facility, if required, is expected to be adequate to
supplement any liquidity needs in 2003.

We conduct business with third parties and have
accounts and notes receivable due from third parties who could
be financially impacted by the expiration of the Medicare add-on
payments. We currently believe that an adequate provision has
been made for the possibility of these receivables becoming
uncollectible and we continually monitor and adjust these
allowances as necessary.

In 2002, we completed a full evaluation of our
nursing home portfolio, which included the identification of
facilities that account for a disproportionate share of
projected patient care liability costs. As a result of this
evaluation, we expect to divest a significant portion of our
current nursing home capacity over the next two years. This
process represents a significant acceleration of our strategy to
strengthen the nursing home portfolio. Over the next three
years, we also will be implementing initiatives to improve our
fundamental business processes and plan to reduce costs by
approximately $40.0 million throughout the organization. We
can give no assurance that we will be able to execute the
divestiture strategy in a timely manner at fair values or that
we will be able to reduce costs to achieve our stated objective
within the time period projected.

We currently anticipate that cash flows from
operations and availability under our banking arrangements will
be adequate to repay our debts due within one year of
approximately $41.5 million, to make operating lease and
other contractual payments of approximately $107.0 million,
to make normal recurring capital additions and improvements of
approximately $50.0 million, to make selective acquisitions
and to meet working capital requirements for the year ending
December 31, 2003. 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.

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##### Table of Contents



Obligations and Commitments

A summary of our long-term contractual
obligations and commitments in future years as of
December 31, 2002 is shown below (in thousands):

|                                    |                                    |       |         |                        |  |           |        |           |  |            |        |         |  |   |         |         |  |   |         |         | 
|----------------------------------- | ---------------------------------- | ----- | ------- | ---------------------- |  | --------- | ------ | --------- |  | ---------- | ------ | ------- |  | - | ------- | ------- |  | - | ------- | ------- | 
|                                    |                                    |       |         |                       
|                                    |                                    |       |         | Payments Due by Period
|                                    |                                    |       |         |                       
|                                    |                                    | Total |         | 2003                   |  | 2004-2005 |        | 2006-2007 |  | After 2007
|                                    |                                    |       |         |                        |  |           |        |           |  |           
|Contractual obligations:            |                                    |       |         |                        |  |           |        |           |  |            |        |         |  |   |         |         |  |   |         |        
|Long-term debt                      |                                    | $     | 621,025 |                        |  | $         | 40,611 |           |  | $          | 55,466 |         |  | $ | 216,904 |         |  | $ | 308,044 |        
|Capital lease obligations           |                                    |       | 9,152   |                        |  |           | 852    |           |  |            | 1,449  |         |  |   | 700     |         |  |   | 6,151   |        
|Operating leases                    |                                    |       | 205,984 |                        |  |           | 51,631 |           |  |            | 79,741 |         |  |   | 33,084  |         |  |   | 41,528  |        
|Off-balance sheet lease arrangement |                                    |       | 69,456  |                        |  |           | 35,000 |           |  |            | 34,456 |         |  |   |        |         |  |   |        |        
|Other long-term obligations         |                                    |       | 73,891  |                        |  |           | 18,125 |           |  |            | 36,250 |         |  |   | 19,516  |         |  |   |        |        
|Data processing agreement           |                                    |       | 9,470   |                        |  |           | 2,196  |           |  |            | 4,392  |         |  |   | 2,882   |         |  |   |        |        
|                                    |                                    |       |         |                        |  |           |        |           |  |            |        |         |  |   |         |         |  |   |         |        
|                                    | Total contractual cash obligations |       | $       | 988,978                |  |           | $      | 148,415   |  |            | $      | 211,754 |  |   | $       | 273,086 |  |   | $       | 355,723 | 
|                                    |                                    |       |         |                        |  |           |        |           |  |            |        |         |  |   |         |         |  |   |         |        

|                              |                              |           |        |                                            |  |           |        |           |  |            |       |        |  |   |       |       |  |   |       |       | 
|----------------------------- | ---------------------------- | --------- | ------ | ------------------------------------------ |  | --------- | ------ | --------- |  | ---------- | ----- | ------ |  | - | ----- | ----- |  | - | ----- | ----- | 
|                              |                              |           |        |                                           
|                              |                              | Total     |        | Amount of Commitment Expiration Per Period
|                              |                              | Amounts   |        |                                           
|                              |                              | Committed |        | 2003                                       |  | 2004-2005 |        | 2006-2007 |  | After 2007
|                              |                              |           |        |                                            |  |           |        |           |  |           
|Other commercial commitments: |                              |           |        |                                            |  |           |        |           |  |            |       |        |  |   |       |       |  |   |       |      
|Letters of credit             |                              | $         | 25,944 |                                            |  | $         | 16,744 |           |  | $          | 9,200 |        |  | $ |      |       |  | $ |      |      
|Guarantees                    |                              |           | 31,528 |                                            |  |           | 9,018  |           |  |            | 8,450 |        |  |   | 7,365 |       |  |   | 6,695 |      
|Other commercial commitments  |                              |           | 1,500  |                                            |  |           | 1,500  |           |  |            |      |        |  |   |      |       |  |   |      |      
|                              |                              |           |        |                                            |  |           |        |           |  |            |       |        |  |   |       |       |  |   |       |      
|                              | Total commercial commitments |           | $      | 58,972                                     |  |           | $      | 27,262    |  |            | $     | 17,650 |  |   | $     | 7,365 |  |   | $     | 6,695 | 
|                              |                              |           |        |                                            |  |           |        |           |  |            |       |        |  |   |       |       |  |   |       |      

These obligations and commitments do not include
$70.0 million of Medium-Term Notes due March 2005 which are
off-balance sheet obligations of BFC. (See
Item 8  Note 1.)






|         |                                                                
|-------- | ---------------------------------------------------------------
|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.

|                               |                       |                         |   |        |   |              |   |              |   |      |   |            |   |       |   |         |   |      |   |        |   |  |   |         |   |  |   |         |  |  |   |         |  |  |   |         | 
|------------------------------ | --------------------- | ----------------------- | - | ------ | - | ------------ | - | ------------ | - | ---- | - | ---------- | - | ----- | - | ------- | - | ---- | - | ------ | - |  | - | ------- | - |  | - | ------- |  |  | - | ------- |  |  | - | ------- | 
|                               |                       |                         |   |        |   |              |   |             
|                               |                       | Expected Maturity Dates |   |        |   | Fair Value   |   | Fair Value  
|                               |                       |                         |   |        |   | December 31, |   | December 31,
|                               |                       | 2003                    |   | 2004   |   | 2005         |   | 2006         |   | 2007 |   | Thereafter |   | Total |   | 2002    |   | 2001
|                               |                       |                         |   |        |   |              |   |              |   |      |   |            |   |       |   |         |   |     
|                               |                       |                        
|                               |                       | (Dollars In Thousands) 
|Total long-term debt:          |                       |                         |   |        |   |              |   |              |   |      |   |            |   |       |   |         |   |      |   |        |   |  |   |         |   |  |   |         |  |  |   |         |  |  |   |        
|                               | Fixed rate            |                         | $ | 37,893 |   |              | $ | 33,381       |   |      | $ | 21,325     |   |       | $ | 195,404 |   |      | $ | 21,541 |   |  | $ | 313,258 |   |  | $ | 622,802 |  |  | $ | 578,282 |  |  | $ | 734,602 | 
|                               | Average interest rate |                         |   | 7.98   | % |              |   | 7.11         | % |      |   | 8.01       | % |       |   | 8.88    | % |      |   | 7.73   | % |  |   | 9.06    | % |  |   |         |  |  |   |         |  |  |   |         | 
|                               | Variable rate         |                         | $ | 3,570  |   |              | $ | 1,926        |   |      | $ | 283        |   |       | $ | 312     |   |      | $ | 347    |   |  | $ | 937     |   |  | $ | 7,375   |  |  | $ | 7,375   |  |  | $ | 25,491  | 
|                               | Average interest rate |                         |   | 3.85   | % |              |   | 3.92         | % |      |   | 4.92       | % |       |   | 4.88    | % |      |   | 4.85   | % |  |   | 5.29    | % |  |   |         |  |  |   |         |  |  |   |         | 
|Total notes receivable:        |                       |                         |   |        |   |              |   |              |   |      |   |            |   |       |   |         |   |      |   |        |   |  |   |         |   |  |   |         |  |  |   |         |  |  |   |        
|                               | Fixed rate            |                         | $ | 16,018 |   |              | $ | 198          |   |      | $ | 60         |   |       | $ | 45      |   |      | $ | 15,987 |   |  | $ | 1       |   |  | $ | 32,309  |  |  | $ | 24,548  |  |  | $ | 21,660  | 
|                               | Average interest rate |                         |   | 9.32   | % |              |   | 8.01         | % |      |   | 5.83       | % |       |   | 8.30    | % |      |   | 12.81  | % |  |   | 8.30    | % |  |   |         |  |  |   |         |  |  |   |         | 
|                               | Variable rate         |                         | $ | 35     |   |              | $ | 37           |   |      | $ | 39         |   |       | $ | 41      |   |      | $ | 43     |   |  | $ | 254     |   |  | $ | 449     |  |  | $ | 449     |  |  | $ | 1,050   | 
|                               | Average interest rate |                         |   | 5.25   | % |              |   | 5.25         | % |      |   | 5.25       | % |       |   | 5.25    | % |      |   | 5.25   | % |  |   | 5.25    | % |  |   |         |  |  |   |         |  |  |   |         | 
|Off-balance sheet obligations: |                       |                         |   |        |   |              |   |              |   |      |   |            |   |       |   |         |   |      |   |        |   |  |   |         |   |  |   |         |  |  |   |         |  |  |   |        
|                               | Variable rate         |                         | $ | 35,000 |   |              | $ | 104,456      |   |      | $ |           |   |       | $ |        |   |      | $ |       |   |  | $ |        |   |  | $ | 139,456 |  |  | $ | 139,456 |  |  | $ | 182,357 | 
|                               | Average interest rate |                         |   | 5.43   | % |              |   | 3.20         | % |      |   |           |   |       |   |        |   |      |   |       |   |  |   |        |   |  |   |         |  |  |   |         |  |  |   |         | 

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ITEM 8. CONSOLIDATED FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA.

|                                                              |  |      |    | 
|------------------------------------------------------------- |  | ---- | -- | 
|                                                              |  | Page
|                                                              |  |     
|Report of Ernst & Young LLP, Independent
    Auditors         |  |      | 36 | 
|Consolidated Balance Sheets                                   |  |      | 37 | 
|Consolidated Statements of Operations                         |  |      | 38 | 
|Consolidated Statements of Stockholders
    Equity           |  |      | 39 | 
|Consolidated Statements of Cash Flows                         |  |      | 40 | 
|Notes to Consolidated Financial Statements                    |  |      | 41 | 
|Supplementary Data (Unaudited) 
    Quarterly Financial Data |  |      | 72 | 

35



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##### Table of Contents



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, 2002 and 2001, and the related consolidated
statements of operations, stockholders equity, and cash
flows for each of the three years in the period ended
December 31, 2002. Our audits also included the financial
statement schedule listed in the Index at Item 15(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, 2002 and 2001, and the
consolidated results of its operations and its cash flows for
each of the three years in the period ended December 31,
2002, 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.

As discussed in Note 1 to the consolidated
financial statements, in 2002 the Company changed its method of
accounting for goodwill.



| |                      
| | ---------------------
| | -s- ERNST & YOUNG LLP

Little Rock, Arkansas

February 19, 2003, except for Notes 8
and 9


as to which the date is February 28, 2003


36



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##### Table of Contents



BEVERLY ENTERPRISES, INC.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)


|                                         |                                                                             |                                                      |                            |          |          |         |           |          |          |         | 
|---------------------------------------- | --------------------------------------------------------------------------- | ---------------------------------------------------- | -------------------------- | -------- | -------- | ------- | --------- | -------- | -------- | ------- | 
|                                         |                                                                             |                                                     
|                                         |                                                                             | December 31,                                        
|                                         |                                                                             |                                                     
|                                         |                                                                             | 2002                                                 |                            | 2001    
|                                         |                                                                             |                                                      |                            |         
|ASSETS                                  
|                                        
|Current assets:                          |                                                                             |                                                      |                            |          |          |         |           |         
|                                         | Cash and cash equivalents                                                   |                                                      | $                          | 115,445  |          |         | $         | 89,343   |         
|                                         | Accounts receivable  patient, less
    allowance for doubtful accounts:    |                                                      |                            |          |          |         |           |          |         
|                                         |                                                                             | 2002  $43,189; 2001  $51,400                       |                            |          | 169,100  |         |           |          | 242,865  |        
|                                         | Accounts receivable  nonpatient, less
    allowance for doubtful accounts: |                                                      |                            |          |          |         |           |          |         
|                                         |                                                                             | 2002  $1,347; 2001  $908                           |                            |          | 6,799    |         |           |          | 12,914   |        
|                                         | Notes receivable, less allowance for doubtful
    notes:                    |                                                      |                            |          |          |         |           |          |         
|                                         |                                                                             | 2002  $6,038; 2001  $714                           |                            |          | 10,388   |         |           |          | 18,662   |        
|                                         | Operating supplies                                                          |                                                      |                            | 13,980   |          |         |           | 25,701   |         
|                                         | Assets held for sale                                                        |                                                      |                            | 36,418   |          |         |           | 120,843  |         
|                                         | Prepaid expenses and other                                                  |                                                      |                            | 23,577   |          |         |           | 13,720   |         
|                                         |                                                                             |                                                      |                            |          |          |         |           |         
|                                         |                                                                             |                                                      | Total current assets       |          |          | 375,707 |           |          |          | 524,048 | 
|Property and equipment, net              |                                                                             |                                                      | 789,283                    |          |          |         | 873,585   |         
|Other assets:                            |                                                                             |                                                      |                            |          |          |         |           |         
|                                         | Goodwill, net                                                               |                                                      |                            | 63,377   |          |         |           | 144,884  |         
|                                         | Other, less allowance for doubtful accounts and
    notes:                  |                                                      |                            |          |          |         |           |          |         
|                                         |                                                                             | 2002  $1,853; 2001  $4,393                         |                            |          | 121,528  |         |           |          | 138,553  |        
|                                         |                                                                             |                                                      |                            |          |          |         |           |         
|                                         |                                                                             |                                                      | Total other assets         |          |          | 184,905 |           |          |          | 283,437 | 
|                                         |                                                                             |                                                      |                            |          |          |         |           |         
|                                         |                                                                             | $                                                    | 1,349,895                  |          |          | $       | 1,681,070 |         
|                                         |                                                                             |                                                      |                            |          |          |         |           |         
|                                        
|LIABILITIES AND STOCKHOLDERS
    EQUITY
|                                        
|Current liabilities:                     |                                                                             |                                                      |                            |          |          |         |           |         
|                                         | Accounts payable                                                            |                                                      | $                          | 65,546   |          |         | $         | 93,728   |         
|                                         | Accrued wages and related liabilities                                       |                                                      |                            | 98,206   |          |         |           | 109,295  |         
|                                         | Accrued interest                                                            |                                                      |                            | 12,783   |          |         |           | 14,708   |         
|                                         | General and professional liabilities                                        |                                                      |                            | 77,025   |          |         |           | 51,784   |         
|                                         | Federal government settlement obligations                                   |                                                      |                            | 11,915   |          |         |           | 45,891   |         
|                                         | Liabilities held for sale                                                   |                                                      |                            | 3,239    |          |         |           |         |         
|                                         | Other accrued liabilities                                                   |                                                      |                            | 107,241  |          |         |           | 112,609  |         
|                                         | Current portion of long-term debt                                           |                                                      |                            | 41,463   |          |         |           | 64,231   |         
|                                         |                                                                             |                                                      |                            |          |          |         |           |         
|                                         |                                                                             |                                                      | Total current liabilities  |          |          | 417,418 |           |          |          | 492,246 | 
|Long-term debt                           |                                                                             |                                                      | 588,714                    |          |          |         | 677,442   |         
|Other liabilities and deferred items     |                                                                             |                                                      | 190,291                    |          |          |         | 214,885   |         
|Commitments and contingencies            |                                                                             |                                                      |                            |          |          |         |           |         
|Stockholders equity:                    |                                                                             |                                                      |                            |          |          |         |           |         
|                                         | Preferred stock, shares authorized: 25,000,000                              |                                                      |                            |         |          |         |           |         |         
|                                         | Common stock, shares issued:                                                |                                                      |                            |          |          |         |           |          |         
|                                         |                                                                             | 2002  113,249,341; 2001 
    112,813,303           |                            |          | 11,325   |         |           |          | 11,281   |        
|                                         | Additional paid-in capital                                                  |                                                      |                            | 891,782  |          |         |           | 887,668  |         
|                                         | Accumulated deficit                                                         |                                                      |                            | (641,293 | )        |         |           | (495,203 | )       
|                                         | Accumulated other comprehensive income                                      |                                                      |                            | 517      |          |         |           | 2,029    |         
|                                         | Treasury stock, at cost:                                                    |                                                      |                            |          |          |         |           |          |         
|                                         |                                                                             | 2002  8,391,546 shares;
    2001  8,515,758 shares |                            |          | (108,859 | )       |           |          | (109,278 | )      
|                                         |                                                                             |                                                      |                            |          |          |         |           |         
|                                         |                                                                             |                                                      | Total stockholders equity |          |          | 153,472 |           |          |          | 296,497 | 
|                                         |                                                                             |                                                      |                            |          |          |         |           |         
|                                         |                                                                             | $                                                    | 1,349,895                  |          |          | $       | 1,681,070 |         
|                                         |                                                                             |                                                      |                            |          |          |         |           |         

See accompanying notes.

37



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##### Table of Contents



BEVERLY ENTERPRISES, INC.

CONSOLIDATED STATEMENTS OF
OPERATIONS

(In thousands, except per share
amounts)


|                                                                                                                                                  |                                                                                               |                                           |                          |         |           |           |           |         |           |           |           |         |           |           | 
|------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------- | ----------------------------------------- | ------------------------ | ------- | --------- | --------- | --------- | ------- | --------- | --------- | --------- | ------- | --------- | --------- | 
|                                                                                                                                                  |                                                                                               |                                          
|                                                                                                                                                  |                                                                                               | Years Ended December 31,                 
|                                                                                                                                                  |                                                                                               |                                          
|                                                                                                                                                  |                                                                                               | 2002                                      |                          | 2001    |           | 2000     
|                                                                                                                                                  |                                                                                               |                                           |                          |         |           |          
|Net operating revenues                                                                                                                            |                                                                                               | $                                         | 2,419,923                |         |           | $         | 2,599,963 |         |           | $         | 2,523,265 |        
|Interest income                                                                                                                                   |                                                                                               |                                           | 4,748                    |         |           |           | 2,982     |         |           |           | 2,522     |        
|                                                                                                                                                  |                                                                                               |                                           |                          |         |           |           |           |         |           |           |           |        
|                                                                                                                                                  |                                                                                               |                                           | Total revenues           |         |           | 2,424,671 |           |         |           | 2,602,945 |           |         |           | 2,525,787 | 
|Costs and expenses:                                                                                                                               |                                                                                               |                                           |                          |         |           |           |           |         |           |           |           |        
|                                                                                                                                                  | Operating and administrative:                                                                 |                                           |                          |         |           |           |           |         |           |           |           |         |          
|                                                                                                                                                  |                                                                                               | Wages and related                         |                          |         | 1,433,413 |           |           |         | 1,562,324 |           |           |         | 1,523,316 |          
|                                                                                                                                                  |                                                                                               | Provision for insurance and related items |                          |         | 125,341   |           |           |         | 101,418   |           |           |         | 120,893   |          
|                                                                                                                                                  |                                                                                               | Other                                     |                          |         | 645,460   |           |           |         | 683,614   |           |           |         | 716,400   |          
|                                                                                                                                                  | Interest                                                                                      |                                           |                          | 66,824  |           |           |           | 79,342  |           |           |           | 79,944  |          
|                                                                                                                                                  | Depreciation and amortization                                                                 |                                           |                          | 81,124  |           |           |           | 81,208  |           |           |           | 87,778  |          
|                                                                                                                                                  | Florida insurance reserve adjustment                                                          |                                           |                          | 22,179  |           |           |           |        |           |           |           |        |          
|                                                                                                                                                  | California investigation settlement and related
    costs                                     |                                           |                          | 6,300   |           |           |           |        |           |           |           |        |          
|                                                                                                                                                  | Special charges and adjustments related to
    settlements with the federal government        |                                           |                          | (9,441  | )         |           |           | 77,495  |           |           |           |        |          
|                                                                                                                                                  | Asset impairments, workforce reductions and other
    unusual items                           |                                           |                          | 79,506  |           |           |           | 197,389 |           |           |           | 17,249  |          
|                                                                                                                                                  |                                                                                               |                                           |                          |         |           |           |           |         |           |           |           |        
|                                                                                                                                                  |                                                                                               |                                           | Total costs and expenses |         |           | 2,450,706 |           |         |           | 2,782,790 |           |         |           | 2,545,580 | 
|                                                                                                                                                  |                                                                                               |                                           |                          |         |           |           |           |         |           |           |           |        
|Loss before provision for (benefit from) income
    taxes, discontinued operations and cumulative effect of change
    in accounting for goodwill |                                                                                               |                                           | (26,035                  | )       |           |           | (179,845  | )       |           |           | (19,793   | )      
|Provision for (benefit from) income taxes                                                                                                         |                                                                                               |                                           | 6,085                    |         |           |           | 57,574    |         |           |           | (4,636    | )      
|                                                                                                                                                  |                                                                                               |                                           |                          |         |           |           |           |         |           |           |           |        
|Loss before discontinued operations and
    cumulative effect of change in accounting for goodwill                                                |                                                                                               |                                           | (32,120                  | )       |           |           | (237,419  | )       |           |           | (15,157   | )      
|Discontinued operations, net of income taxes
    (benefit): 2002  $0; 2001  $3,814;
    2000  $(17,626)                                        |                                                                                               |                                           | (36,799                  | )       |           |           | (63,853   | )       |           |           | (39,345   | )      
|Cumulative effect of change in accounting for
    goodwill, net of income taxes of $0                                                             |                                                                                               |                                           | (77,171                  | )       |           |           |          |         |           |           |          |        
|                                                                                                                                                  |                                                                                               |                                           |                          |         |           |           |           |         |           |           |           |        
|Net loss                                                                                                                                          |                                                                                               | $                                         | (146,090                 | )       |           | $         | (301,272  | )       |           | $         | (54,502   | )      
|                                                                                                                                                  |                                                                                               |                                           |                          |         |           |           |           |         |           |           |           |        
|Basic and diluted loss per share of common stock:                                                                                                 |                                                                                               |                                           |                          |         |           |           |           |         |           |           |           |        
|                                                                                                                                                  | Before discontinued operations and cumulative
    effect of change in accounting for goodwill |                                           | $                        | (0.31   | )         |           | $         | (2.28   | )         |           | $         | (0.15   | )        
|                                                                                                                                                  | Discontinued operations, net of income taxes
    (benefit)                                    |                                           |                          | (0.35   | )         |           |           | (0.61   | )         |           |           | (0.38   | )        
|                                                                                                                                                  | Cumulative effect of change in accounting for
    goodwill, net of income taxes               |                                           |                          | (0.74   | )         |           |           |        |           |           |           |        |          
|                                                                                                                                                  |                                                                                               |                                           |                          |         |           |           |           |         |           |           |           |        
|                                                                                                                                                  | Net loss per share of common stock                                                            |                                           | $                        | (1.39   | )         |           | $         | (2.90   | )         |           | $         | (0.53   | )        
|                                                                                                                                                  |                                                                                               |                                           |                          |         |           |           |           |         |           |           |           |        
|                                                                                                                                                  | Shares used to compute net loss per share                                                     |                                           |                          | 104,726 |           |           |           | 104,037 |           |           |           | 102,452 |          
|                                                                                                                                                  |                                                                                               |                                           |                          |         |           |           |           |         |           |           |           |        

See accompanying notes.

38



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##### Table of Contents



BEVERLY ENTERPRISES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY

(Dollars in thousands)


|                              |                                                                                  |                                                                                                         |        |            |   |             |         |               |   |          |          |       |          |   |       |   |        |   |          |        |   |   |         |          |          |  
|----------------------------- | -------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------- | ------ | ---------- | - | ----------- | ------- | ------------- | - | -------- | -------- | ----- | -------- | - | ----- | - | ------ | - | -------- | ------ | - | - | ------- | -------- | -------- | -
|                              |                                                                                  |                                                                                                         |        |            |   |             |         | Accumulated   |   |          |          |      
|                              |                                                                                  |                                                                                                         |        | Additional |   |             |         | other         |   |          |          |      
|                              |                                                                                  | Common                                                                                                  |        | paid-in    |   | Accumulated |         | comprehensive |   | Treasury |          |      
|                              |                                                                                  | stock                                                                                                   |        | capital    |   | deficit     |         | income (loss) |   | stock    |          | Total
|                              |                                                                                  |                                                                                                         |        |            |   |             |         |               |   |          |          |      
|Balances at January 1, 2000   |                                                                                  | $                                                                                                       | 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 |         
|                              | Employee stock transactions related to
    436,038 shares of common stock, net   |                                                                                                         |        | 44         |   |             |         | 3,680         |   |          |          |      |          |   |       |  |        |   |          |       |   |   |         | 3,724    |         
|                              | Reissuance of 124,212 shares of common stock
    from treasury                   |                                                                                                         |        |           |   |             |         | 434           |   |          |          |      |          |   |       |  |        |   |          | 419    |   |   |         | 853      |         
|                              | Comprehensive loss:                                                              |                                                                                                         |        |            |   |             |         |               |   |          |          |       |          |   |       |   |        |   |          |        |   |   |         |          |         
|                              |                                                                                  | Unrealized losses on securities, net of income
    taxes of $0                                          |        |            |  |             |         |               |  |          |          |       |         |   |       |   | (1,464 | ) |          |        |  |   |         |          | (1,464   | )
|                              |                                                                                  | Foreign currency translation adjustments, net of
    income taxes of $0                                 |        |            |  |             |         |               |  |          |          |       |         |   |       |   | (48    | ) |          |        |  |   |         |          | (48      | )
|                              |                                                                                  | Net loss                                                                                                |        |            |  |             |         |               |  |          |          |       | (146,090 | ) |       |   |       |   |          |        |  |   |         |          | (146,090 | )
|                              |                                                                                  |                                                                                                         |        |            |   |             |         |               |   |          |          |       |          |   |       |   |        |   |          |        |   |   |         |         
|                              | Total comprehensive loss                                                         |                                                                                                         |        |            |   |             |         |               |   |          |          |       |          |   |       |   |        |   |          |        |   |   |         | (147,602 | )       
|                              |                                                                                  |                                                                                                         |        |            |   |             |         |               |   |          |          |       |          |   |       |   |        |   |          |        |   |   |         |         
|Balances at December 31, 2002 |                                                                                  | $                                                                                                       | 11,325 |            |   | $           | 891,782 |               |   | $        | (641,293 | )     |          | $ | 517   |   |        | $ | (108,859 | )      |   | $ | 153,472 |         
|                              |                                                                                  |                                                                                                         |        |            |   |             |         |               |   |          |          |       |          |   |       |   |        |   |          |        |   |   |         |         

See accompanying notes.

39



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##### Table of Contents



BEVERLY ENTERPRISES, INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

(In thousands)


|                                                |                                                                                                                            |                                                                                        |                                                |                                                          |        |         |          |          |         |        |         |            |         |         |         |  
|----------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------- | ---------------------------------------------- | -------------------------------------------------------- | ------ | ------- | -------- | -------- | ------- | ------ | ------- | ---------- | ------- | ------- | ------- | -
|                                                |                                                                                                                            |                                                                                       
|                                                |                                                                                                                            | Years Ended December 31,                                                              
|                                                |                                                                                                                            |                                                                                       
|                                                |                                                                                                                            | 2002                                                                                   |                                                | 2001                                                     |        | 2000   
|                                                |                                                                                                                            |                                                                                        |                                                |                                                          |        |        
|Cash flows from operating activities:           |                                                                                                                            |                                                                                        |                                                |                                                          |        |         |          |          |         |        |         |           
|                                                | Net loss                                                                                                                   |                                                                                        | $                                              | (146,090                                                 | )      |         | $        | (301,272 | )       |        | $       | (54,502    | )      
|                                                | Adjustments to reconcile net loss to net cash
    provided by operating activities, including discontinued
    operations: |                                                                                        |                                                |                                                          |        |         |          |          |         |        |         |            |        
|                                                |                                                                                                                            | Depreciation and amortization                                                          |                                                |                                                          | 88,943 |         |          |          | 93,001  |        |         |            | 100,061 |        
|                                                |                                                                                                                            | Provision for reserves on patient, notes and
    other receivables, net                |                                                |                                                          | 55,570 |         |          |          | 44,251  |        |         |            | 72,481  |        
|                                                |                                                                                                                            | Amortization of deferred financing costs                                               |                                                |                                                          | 3,096  |         |          |          | 4,051   |        |         |            | 2,571   |        
|                                                |                                                                                                                            | Florida insurance reserve adjustment                                                   |                                                |                                                          | 22,179 |         |          |          |        |        |         |            |        |        
|                                                |                                                                                                                            | California investigation settlement and related
    costs                              |                                                |                                                          | 6,300  |         |          |          |        |        |         |            |        |        
|                                                |                                                                                                                            | Special charges and adjustments related to
    settlements with the federal government |                                                |                                                          | (9,441 | )       |          |          | 77,495  |        |         |            |        |        
|                                                |                                                                                                                            | Asset impairments, workforce reductions and other
    unusual items                    |                                                |                                                          | 85,773 |         |          |          | 238,102 |        |         |            | 43,033  |        
|                                                |                                                                                                                            | Cumulative effect of change in accounting for
    goodwill                             |                                                |                                                          | 77,171 |         |          |          |        |        |         |            |        |        
|                                                |                                                                                                                            | Gains on dispositions of facilities and other
    assets, net                          |                                                |                                                          | (1,855 | )       |          |          | (568    | )      |         |            | (2,013  | )      
|                                                |                                                                                                                            | Deferred income taxes                                                                  |                                                |                                                          |       |         |          |          | 54,901  |        |         |            | (26,262 | )      
|                                                |                                                                                                                            | Insurance related accounts                                                             |                                                |                                                          | 8,411  |         |          |          | 11,830  |        |         |            | 38,376  |        
|                                                |                                                                                                                            | Changes in operating assets and liabilities, net
    of acquisitions and dispositions: |                                                |                                                          |        |         |          |          |         |        |         |            |         |        
|                                                |                                                                                                                            |                                                                                        | Accounts receivable  patient                  |                                                          |        | 7,896   |          |          |         | (3,523 | )       |            |         | (78,608 | )      
|                                                |                                                                                                                            |                                                                                        | Operating supplies                             |                                                          |        | 3,081   |          |          |         | 567    |         |            |         | 2,367   |        
|                                                |                                                                                                                            |                                                                                        | Prepaid expenses and other receivables         |                                                          |        | 988     |          |          |         | 728    |         |            |         | (3,188  | )      
|                                                |                                                                                                                            |                                                                                        | Accounts payable and other accrued liabilities |                                                          |        | (85,335 | )        |          |         | 8,846  |         |            |         | (47,144 | )      
|                                                |                                                                                                                            |                                                                                        | Income taxes payable                           |                                                          |        | 9,790   |          |          |         | 188    |         |            |         | 1,348   |        
|                                                |                                                                                                                            |                                                                                        | Other, net                                     |                                                          |        | (9,844  | )        |          |         | (7,700 | )       |            |         | (11,510 | )      
|                                                |                                                                                                                            |                                                                                        |                                                |                                                          |        |         |          |          |         |        |         |           
|                                                |                                                                                                                            |                                                                                        |                                                | Total adjustments                                        |        |         | 262,723  |          |         |        | 522,169 |            |         |         | 91,512  |  
|                                                |                                                                                                                            |                                                                                        |                                                |                                                          |        |         |          |          |         |        |         |           
|                                                |                                                                                                                            |                                                                                        |                                                | Net cash provided by operating activities                |        |         | 116,633  |          |         |        | 220,897 |            |         |         | 37,010  |  
|Cash flows from investing activities:           |                                                                                                                            |                                                                                        |                                                |                                                          |        |         |          |          |         |        |         |           
|                                                | Capital expenditures                                                                                                       |                                                                                        |                                                | (100,103                                                 | )      |         |          | (89,401  | )       |        |         | (76,027    | )      
|                                                | Proceeds from dispositions of facilities and
    other assets                                                              |                                                                                        |                                                | 169,471                                                  |        |         |          | 20,795   |         |        |         | 24,335     |        
|                                                | Payments for acquisitions, net of cash acquired                                                                            |                                                                                        |                                                |                                                         |        |         |          | (4,024   | )       |        |         | (3,797     | )      
|                                                | Collections on notes receivable                                                                                            |                                                                                        |                                                | 1,616                                                    |        |         |          | 238      |         |        |         | 17,804     |        
|                                                | Proceeds from (payments for) designated funds, net                                                                         |                                                                                        |                                                | (260                                                     | )      |         |          | (8,950   | )       |        |         | 503        |        
|                                                | Other, net                                                                                                                 |                                                                                        |                                                | (8,389                                                   | )      |         |          | (5,312   | )       |        |         | (4,555     | )      
|                                                |                                                                                                                            |                                                                                        |                                                |                                                          |        |         |          |          |         |        |         |           
|                                                |                                                                                                                            |                                                                                        |                                                | Net cash provided by (used for) investing
    activities |        |         | 62,335   |          |         |        | (86,654 | )          |         |         | (41,737 | )
|Cash flows from financing activities:           |                                                                                                                            |                                                                                        |                                                |                                                          |        |         |          |          |         |        |         |           
|                                                | Revolver borrowings                                                                                                        |                                                                                        |                                                |                                                         |        |         |          | 442,000  |         |        |         | 1,508,000  |        
|                                                | Repayments of Revolver borrowings                                                                                          |                                                                                        |                                                |                                                         |        |         |          | (606,000 | )       |        |         | (1,458,000 | )      
|                                                | Proceeds from issuance of long-term debt                                                                                   |                                                                                        |                                                | 5,000                                                    |        |         |          | 205,248  |         |        |         |           |        
|                                                | Repayments of long-term debt                                                                                               |                                                                                        |                                                | (116,496                                                 | )      |         |          | (106,150 | )       |        |         | (39,217    | )      
|                                                | Repayments of off-balance sheet financing                                                                                  |                                                                                        |                                                | (42,901                                                  | )      |         |          |         |         |        |         |           |        
|                                                | Purchase of common stock for treasury                                                                                      |                                                                                        |                                                |                                                         |        |         |          |         |         |        |         | (3,874     | )      
|                                                | Proceeds from exercise of stock options                                                                                    |                                                                                        |                                                | 1,699                                                    |        |         |          | 3,648    |         |        |         | 81         |        
|                                                | Deferred financing costs                                                                                                   |                                                                                        |                                                | (168                                                     | )      |         |          | (9,554   | )       |        |         | (1,007     | )      
|                                                |                                                                                                                            |                                                                                        |                                                |                                                          |        |         |          |          |         |        |         |           
|                                                |                                                                                                                            |                                                                                        |                                                | Net cash provided by (used for) financing
    activities |        |         | (152,866 | )        |         |        | (70,808 | )          |         |         | 5,983   |  
|                                                |                                                                                                                            |                                                                                        |                                                |                                                          |        |         |          |          |         |        |         |           
|Net increase in cash and cash equivalents       |                                                                                                                            |                                                                                        | 26,102                                         |                                                          |        |         | 63,435   |          |         |        | 1,256   |           
|Cash and cash equivalents at beginning of year  |                                                                                                                            |                                                                                        | 89,343                                         |                                                          |        |         | 25,908   |          |         |        | 24,652  |           
|                                                |                                                                                                                            |                                                                                        |                                                |                                                          |        |         |          |          |         |        |         |           
|Cash and cash equivalents at end of year        |                                                                                                                            | $                                                                                      | 115,445                                        |                                                          |        | $       | 89,343   |          |         | $      | 25,908  |           
|                                                |                                                                                                                            |                                                                                        |                                                |                                                          |        |         |          |          |         |        |         |           
|Supplemental schedule of cash flow information: |                                                                                                                            |                                                                                        |                                                |                                                          |        |         |          |          |         |        |         |           
|                                                | Cash paid (received) during the year for:                                                                                  |                                                                                        |                                                |                                                          |        |         |          |          |         |        |         |            |        
|                                                |                                                                                                                            | Interest, net of amounts capitalized                                                   |                                                | $                                                        | 65,658 |         |          | $        | 76,358  |        |         | $          | 75,839  |        
|                                                |                                                                                                                            | Income tax payments (refunds), net                                                     |                                                |                                                          | (3,705 | )       |          |          | 6,299   |        |         |            | 2,652   |        

See accompanying notes.

40



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##### Table of Contents



BEVERLY ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

Years ended December 31, 2002, 2001 and
2000


1. Summary of Significant Accounting
Policies



| |                      
| | ---------------------
| | Basis of Presentation

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

On December 31, 2002, we operated
452 nursing facilities, 29 assisted living centers, 151
outpatient clinics and 49 hospice and home care centers in
32 states and the District of Columbia. Our operations also
include rehabilitation therapy services. Our consolidated
financial statements include the accounts of the Company and all
of its wholly owned subsidiaries. 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 the lower of
carrying value or fair value, 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 ($87.9 million and
$197.1 million at December 31, 2002 and 2001,
respectively, net of accumulated amortization of
$24.5 million and $52.2 million, respectively) and
other indefinite lived intangible assets ($11.4 million and
$11.1 million at December 31, 2002 and 2001
respectively, net of accumulated amortization of
$5.4 million and $5.6 million, respectively) are
stated at the lower of carrying value or fair value. In July
2001, Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible
Assets(SFAS No. 142) was issued, which
established new rules on the accounting for goodwill and other
intangible assets. Under SFAS No. 142, goodwill and
intangible assets with indefinite lives are no longer amortized;
however, they are 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. With respect to our goodwill and intangible assets,
SFAS No. 142 was effective for us beginning
January 1, 2002.

41



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##### Table of Contents



BEVERLY ENTERPRISES, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Years ended December 31, 2002, 2001 and
2000




|   |                                                             
|-- | ------------------------------------------------------------
|1. | Summary of Significant Accounting
    Policies  (Continued)

Following is a summary of adjusted operating
results reflecting the effects of adopting
SFAS No. 142, net of income taxes, for the periods
ended December 31 (in thousands, except per share amounts):

|                  |                               |                          |          |      |  |      |          |       |  |   |         |       | 
|----------------- | ----------------------------- | ------------------------ | -------- | ---- |  | ---- | -------- | ----- |  | - | ------- | ----- | 
|                  |                               |                         
|                  |                               | Years Ended December 31,
|                  |                               |                         
|                  |                               | 2002                     |          | 2001 |  | 2000
|                  |                               |                          |          |      |  |     
|Reported net loss |                               | $                        | (146,090 | )    |  | $    | (301,272 | )     |  | $ | (54,502 | )    
|Add back:         |                               |                          |          |      |  |      |          |       |  |   |         |      
|                  | Goodwill amortization         |                          |          |     |  |      |          | 3,917 |  |   |         | 4,465 | 
|                  | Operating rights amortization |                          |          |     |  |      |          | 252   |  |   |         | 268   | 
|                  |                               |                          |          |      |  |      |          |       |  |   |         |      
|Adjusted net loss |                               | $                        | (146,090 | )    |  | $    | (297,103 | )     |  | $ | (49,769 | )    
|                  |                               |                          |          |      |  |      |          |       |  |   |         |      

|                                    |                               |                          |       |      |  |      |       |      |  |   |       |      | 
|----------------------------------- | ----------------------------- | ------------------------ | ----- | ---- |  | ---- | ----- | ---- |  | - | ----- | ---- | 
|                                    |                               |                         
|                                    |                               | Years Ended December 31,
|                                    |                               |                         
|                                    |                               | 2002                     |       | 2001 |  | 2000
|                                    |                               |                          |       |      |  |     
|Reported diluted net loss per share |                               | $                        | (1.39 | )    |  | $    | (2.90 | )    |  | $ | (0.53 | )   
|Add back:                           |                               |                          |       |      |  |      |       |      |  |   |       |     
|                                    | Goodwill amortization         |                          |       |     |  |      |       | 0.04 |  |   |       | 0.04 | 
|                                    | Operating rights amortization |                          |       |     |  |      |       |     |  |   |       |     | 
|                                    |                               |                          |       |      |  |      |       |      |  |   |       |     
|Adjusted diluted net loss per share |                               | $                        | (1.39 | )    |  | $    | (2.86 | )    |  | $ | (0.49 | )   
|                                    |                               |                          |       |      |  |      |       |      |  |   |       |     

In accordance with this standard, we performed
the initial screening for potential impairments of our
indefinite lived intangible assets by reporting unit as of
January 1, 2002. We determined the estimated fair values of
each reporting unit using discounted cash flow analyses, along
with independent source data related to recent transactions.
Based on this determination, we identified potential goodwill
impairments at our Matrix and Home Care Services 
Care Focus reporting units.

We engaged a qualified independent valuation
group to determine the estimated fair values of each of these
reporting units. Their valuation analysis was completed in the
fourth quarter of 2002, and led to the recording of a cumulative
effect of a change in accounting for goodwill of
$77.2 million as of January 1, 2002, including
$70.6 million for Matrix and $6.6 million for Care
Focus. In accordance with SFAS No. 142, we test
goodwill for impairment on an annual basis as of October 1
for each of our reporting units. We also test goodwill for
impairment, between annual tests, if an event occurs that would
more likely than not reduce the fair value of a reporting unit
below its carrying amount. Based on the October 1, 2002
analysis, no additional impairment of goodwill or other
indefinite lived intangibles was identified.

Following is a summary of our finite lived
intangible assets and related accumulated amortization, by major
classification, which are included in Other assets
at December 31 (in thousands):

|                              |       |            |       |              |  |                |       |       |  |      |       |       |  |   |       |       |  |   |       |       |  |   |       |       | 
|----------------------------- | ----- | ---------- | ----- | ------------ |  | -------------- | ----- | ----- |  | ---- | ----- | ----- |  | - | ----- | ----- |  | - | ----- | ----- |  | - | ----- | ----- | 
|                              |       |            |       |              |  |                |       |       |  |     
|                              |       |            |       | Accumulated  |  |               
|                              |       | Cost Basis |       | Amortization |  | Carrying Value
|                              |       |            |       |              |  |               
|                              |       | 2002       |       | 2001         |  | 2002           |       | 2001  |  | 2002 |       | 2001 
|                              |       |            |       |              |  |                |       |       |  |      |       |      
|Operating rights and licenses |       | $          | 2,161 |              |  | $              | 4,440 |       |  | $    | 114   |       |  | $ | 2,003 |       |  | $ | 2,047 |       |  | $ | 2,437 |      
|Leasehold interests           |       |            | 2,134 |              |  |                | 3,900 |       |  |      | 2,053 |       |  |   | 3,747 |       |  |   | 81    |       |  |   | 153   |      
|                              |       |            |       |              |  |                |       |       |  |      |       |       |  |   |       |       |  |   |       |       |  |   |       |      
|                              | Total |            | $     | 4,295        |  |                | $     | 8,340 |  |      | $     | 2,167 |  |   | $     | 5,750 |  |   | $     | 2,128 |  |   | $     | 2,590 | 
|                              |       |            |       |              |  |                |       |       |  |      |       |       |  |   |       |       |  |   |       |       |  |   |       |      

The weighted-average amortization period for
these intangibles is approximately 18 years, including
20 years for operating rights and licenses and
16 years for leasehold interests. Amortization expense
related to

42



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##### Table of Contents



BEVERLY ENTERPRISES, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Years ended December 31, 2002, 2001 and
2000




|   |                                                             
|-- | ------------------------------------------------------------
|1. | Summary of Significant Accounting
    Policies  (Continued)

these intangibles for the years ended
December 31, 2002, 2001 and 2000 was $300,000, $400,000 and
$800,000, respectively. Our estimated aggregate annual
amortization expense for these intangibles for each of the next
five years is approximately $100,000.

On an ongoing basis, we review the carrying value
of our finite lived intangibles in light of any events or
circumstances that indicate they may be impaired or that the
amortization period may need to be adjusted and make any
necessary adjustments. As of December 31, 2002, we do not
believe there are any indications that the carrying values, or
the useful lives, of these assets need to be adjusted. We have
no residual values assigned to our finite lived intangible
assets.



| |                                
| | -------------------------------
| | Impairment of Long-Lived Assets

In August 2001, the FASB 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
(other than goodwill and indefinite lived intangibles) and for
long-lived assets to be disposed of. SFAS No. 144
supersedes 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) and 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. We adopted
the provisions of SFAS No. 144 in 2002. Similar to
SFAS No. 121, SFAS No. 144 requires
impairment losses to be recognized for long-lived assets used in
operations when indicators of impairment are present and the
estimated undiscounted cash flows are not sufficient to recover
the assets carrying amounts. The impairment loss is
measured by comparing the estimated fair value of the asset,
usually based on discounted cash flows, to its carrying amount.
In accordance with SFAS No. 144, we assess the need
for an impairment write-down when such indicators of impairment
are present. (See Note 4.)



| |                        
| | -----------------------
| | Discontinued Operations

SFAS No. 144 also addresses the
accounting for and disclosure of long-lived assets to be
disposed of by sale. Under SFAS No. 144, when a
long-lived asset or group of assets (disposal group) meets
certain criteria set forth in the Statement, including a
commitment by the Company to a plan to sell the long-lived asset
(disposal group) within one-year:



| |   |                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the long-lived asset (disposal group) will be
    measured at the lower of its carrying value or fair value less
    costs to sell and classified as held for sale on the
    consolidated balance sheet; and
|
| |  | the related operations of the long-lived asset
    (disposal group) will be reported as discontinued operations in
    the consolidated statement of operations, with all comparable
    periods restated.   

At December 31, 2002, Matrix and MK Medical
met the criteria set forth in SFAS No. 144 to be
classified as held for sale. (See Note 5.)



| |                              
| | -----------------------------
| | Transfers of Financial Assets

The Company has an agreement to sell, on an
ongoing basis, certain of its patient accounts receivable
through a revolving sales structure and retains servicing
responsibilities for the transferred receivables. The Company
accounts for the transfers of receivables as sales in accordance
with Statement of Financial Accounting Standards No. 140,
Accounting for Transfers and Servicing of Financial Assets
and Extinguish-

43



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##### Table of Contents



BEVERLY ENTERPRISES, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Years ended December 31, 2002, 2001 and
2000


1. Summary of Significant Accounting
Policies  (Continued)

ments of Liabilities (SFAS
No. 140). Accordingly, the related patient accounts
receivable are not included in the consolidated balance sheets.

During 2002, 2001 and 2000 the Company, through
its wholly owned subsidiary Beverly Health and Rehabilitation
Services, Inc. (BHRS), sold on a revolving basis
certain Medicaid and Veterans Administration (VA)
patient accounts receivable to a non-consolidated bankruptcy
remote, qualifying special purpose entity (QSPE),
Beverly Funding Corporation (BFC) at a discount of
1%. These daily transactions constitute true sales of
receivables for which BFC bears the risk of collection.

Activities related to the revolving sales
structure with BFC were as follows for the years ended
December 31 (in thousands):

|                                |  |      |         |      |  |      |         |  |  |   |         | 
|------------------------------- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | ------- | 
|                                |  | 2002 |         | 2001 |  | 2000
|                                |  |      |         |      |  |     
|New receivables sold            |  | $    | 867,772 |      |  | $    | 801,707 |  |  | $ | 810,163 | 
|Cash collections remitted       |  |      | 857,731 |      |  |      | 818,168 |  |  |   | 794,953 | 
|Fees received for servicing     |  |      | 2,119   |      |  |      | 2,085   |  |  |   | 2,233   | 
|Loss on the sale of receivables |  |      | 8,678   |      |  |      | 8,017   |  |  |   | 8,102   | 

BHRS provides invoicing and collection services
related to the receivables for a market-based servicing fee.
BHRS recognizes a loss for the 1% discount at the time of sale
which is included in Other operating and administrative
costs and expenses and in Net cash provided by
operating activities in our consolidated financial
statements. The loss on sale and the servicing fee revenue are
not considered material to the Companys operating results
or cash flows.

At December 31, 2002 and 2001, the Company
had an investment in BFC of approximately $31.0 million and
$33.0 million, respectively, which approximated the excess
level of receivables held by BFC to over collateralize
$70.0 million of Medium-Term Notes (the Medium-Term
Notes). The investment is included in Other
assets in the consolidated balance sheet and is subject to
periodic collectibility review. The primary factor in the
collectibility review is the determination of the net realizable
value of the excess collateral. The net realizable value is
determined through a collectibility analysis of the receivables
purchased and held by BFC. This collectibility analysis
considers historical collection experience and is adjusted
according to the aging of the receivables. The carrying value of
the asset is adjusted downward when the analysis indicates that
it will not be recovered.

BFC has $70.0 million of Medium-Term Notes,
which are collateralized by outstanding Medicaid and VA patient
accounts receivable purchased from BHRS. BFC is required to
maintain receivables in excess of the outstanding balance of the
Medium-Term Notes, based on a calculated formula in the Master
Sale and Servicing Agreement. Based on ongoing reviews of
BFCs operations, the Company believes that BFC meets the
criteria set forth in SFAS No. 140, and related
interpretive guidance, to be a QSPE. Therefore, the assets and
liabilities of BFC are not consolidated with Beverly
Enterprises, Inc. At December 31, 2002, BFC had total
assets of approximately $102.7 million, pledged as
collateral for the Medium-Term Notes. The assets of BFC cannot
be used to satisfy claims of the Company or any of its
subsidiaries. The Medium-Term Notes currently mature in March
2005; however, according to the provisions of the notes,
principal payments on these obligations, calculated based on
quarterly collections of the underlying receivables, begin in
the second quarter of 2004. Based on current collection trends,
it is expected that these obligations will be paid off by the
third quarter of 2004.

44



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##### Table of Contents



BEVERLY ENTERPRISES, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Years ended December 31, 2002, 2001 and
2000




|   |                                                             
|-- | ------------------------------------------------------------
|1. | Summary of Significant Accounting
    Policies  (Continued)



| |          
| | ---------
| | Insurance

General 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 certain 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/or pay substantially higher
premiums for reduced coverage. There exists a risk that any of
these insurance companies may become insolvent and unable to
fulfill their obligation to defend, pay or reimburse us when
that obligation becomes due. Although we believe the companies
we have purchased insurance from are solvent, in light of the
dramatic changes occurring in the insurance industry in recent
years, we cannot be assured that they will remain solvent and
able to fulfill their obligations.

We believe that adequate provision has been made
in the financial statements for liabilities that may arise out
of patient care and related services provided to date. These
provisions are based primarily upon the results of independent
actuarial valuations, prepared by actuaries with long-term care
industry experience. These independent valuations are formally
prepared twice a year using the most recent trends of claims,
settlements and other relevant data. In addition to the
actuarial estimate of claim payments, our provision for
insurance includes accruals for insurance premiums for the
coverage period and our estimate of any experience adjustments
to premiums.

Based on the results of the mid-year actuarial
study completed in mid-July of 2002, performed by our
independent actuaries, we recorded a pre-tax charge of
$43.3 million related to an increase in our reserves for
prior policy year patient care liability costs, including
$22.2 million attributable to our previously operated
Florida facilities. We completed the sale of our Florida
facilities in January 2002; however, we are liable for patient
care liability claims and other costs for those facilities
through the date of sale, subject to insurance.

We insure certain of our auto liability, general
liability, professional liability and workers compensation
risks through various types of loss sensitive insurance policies
with affiliated and unaffiliated insurance companies, some of
which are subject to reinsurance agreements between the insurer
and Beverly Indemnity, Ltd., a wholly owned subsidiary of the
Company. For our general and professional liabilities, we are
typically 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. The
liabilities for incurred losses retained by Beverly and not
covered by insurance are estimated by the independent actuaries
and are discounted on our financial statements at 10% 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 of approximately $1.4 million for
the year ended December 31, 2002. The discounted insurance
liabilities are included in the consolidated balance sheet
captions as follows at December 31 (in thousands):

|                                      |  |      |         |      |  |   |         | 
|------------------------------------- |  | ---- | ------- | ---- |  | - | ------- | 
|                                      |  | 2002 |         | 2001
|                                      |  |      |         |     
|Accrued wages and related liabilities |  | $    | 2,574   |      |  | $ | 1,996   | 
|General and professional liabilities  |  |      | 77,025  |      |  |   | 51,784  | 
|Other liabilities and deferred items  |  |      | 94,414  |      |  |   | 119,910 | 
|                                      |  |      |         |      |  |   |         | 
|                                      |  | $    | 174,013 |      |  | $ | 173,690 | 
|                                      |  |      |         |      |  |   |         | 

On an undiscounted basis, the total retained
liabilities as of December 31, 2002 and 2001 were
approximately $208.0 million and $203.8 million,
respectively. As of December 31, 2002, approximately

45



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##### Table of Contents



BEVERLY ENTERPRISES, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Years ended December 31, 2002, 2001 and
2000




|   |                                                             
|-- | ------------------------------------------------------------
|1. | Summary of Significant Accounting
    Policies  (Continued)

$2.8 million in funds (the Beverly
Indemnity funds) are restricted for the payment of insured
claims. In addition, we anticipate that approximately
$20.5 million of our existing cash at December 31,
2002, while not legally restricted, will be utilized primarily
to fund certain workers compensation, general and
professional liability claims and expenses. We do not expect to
use this cash for other purposes.



| |                   
| | ------------------
| | Stock-Based Awards

On December 31, 2002, the FASB issued
Statement of Financial Accounting Standards No. 148,
Accounting for Stock-Based Compensation 
Transition and Disclosure
(SFAS No. 148). SFAS No. 148
amends Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation
(SFAS No. 123) to provide alternative
methods of transition for an entity that changes to the fair
value method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the
disclosure provisions of SFAS No. 123 and Accounting
Principles Board Opinion No. 28, Interim Financial
Reporting (APB 28) to require expanded and
more prominent disclosure of the effects of an entitys
accounting policy with respect to stock-based employee
compensation on reported net income and earnings per share in
annual and interim financial statements and allows companies to
continue to use the intrinsic value method of APB 25.
SFAS No. 148 is effective for us as of
December 31, 2002.

We continue to use the intrinsic value method to
account for our stock options. 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 the respective vesting periods on a straight-line
basis. See Note 10 for the pro forma effects on our
reported net loss and diluted net loss per share if we
recognized compensation expense on all stock-based awards and
other disclosures as required by SFAS No. 148.



| |         
| | --------
| | Revenues

Our revenues are derived primarily from providing
long-term healthcare services. Approximately 80% of our net
operating revenues is derived from federal and state medical
assistance programs. Approximately 50% and 44% of our net
patient accounts receivable at December 31, 2002 and 2001,
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 3 for a discussion of a settlement with the
federal government related to Medicare cost reimbursement issues
and Note 9 for the estimated potential overpayment from
government programs resulting from an internal investigation of
our home medical equipment unit. Excluding these items, changes
in estimates related to third party receivables resulted in an
increase in net operating revenues of approximately
$1.7 million and $8.1 million for the years ended
December 31, 2002 and 2000, respectively, and a decrease in
net operating revenues of approximately $2.0 million for
the year ended December 31, 2001.

Compliance with laws and regulations governing
the Medicare and Medicaid programs is subject to government
review and interpretation, as well as significant regulatory
action including fines, penalties, and

46



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##### Table of Contents



BEVERLY ENTERPRISES, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Years ended December 31, 2002, 2001 and
2000


1. Summary of Significant Accounting
Policies  (Continued)

possible 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.



| |                                                 
| | ------------------------------------------------
| | Receivables and Concentration of Credit
    Risk

We have significant accounts and notes 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 a portion of these and other
receivables becoming uncollectible and continually monitor and
adjust these allowances as necessary. In establishing our
estimate of uncollectible accounts and notes, we consider our
historical collection experience, the aging of the account and
the payor classification. Private pay accounts usually represent
our highest collectibility risk. Certain interest-bearing notes
receivable are placed on a nonaccrual basis when uncertainty
arises as to the collectibility of principal or interest. Notes
receivable of $9.5 million and $5.6 million at
December 31, 2002 and 2001, respectively, were on a
nonaccrual basis and specific collectibility allowances of
$6.9 million and $4.3 million, respectively, have been
recorded on these nonaccrual notes.



| |             
| | ------------
| | 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. Due to the
uncertainty of generating future income necessary to realize
certain deferred tax benefits, primarily relating to net
operating loss carryforwards, we have established a full
valuation allowance on our net deferred tax assets. (See
Note 11.)



| |                            
| | ---------------------------
| | Comprehensive Income (Loss)

Comprehensive income (loss) includes charges and
credits to stockholders equity not included in net loss.
Accumulated other comprehensive income, net of income taxes,
primarily consists of net unrealized gains on available-for-sale
securities of $512,000 and $2.0 million at
December 31, 2002 and 2001, respectively.

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 $500,000 of unrealized gains, net of income taxes,
and recognized a pre-tax gain of $1.5 million in 2000.
During 2001, this security was sold and we recognized an
additional pre-tax gain of $300,000. These gains were included
in net operating revenues.



| |                         
| | ------------------------
| | New Accounting Standards

In January 2003, the FASB issued Interpretation
No. 46, Consolidation of Variable Interest Entities,
(FIN 46). FIN 46 requires a variable
interest entity (VIE), sometimes known as a special
purpose entity, to be consolidated by a company when that
company is subject to a majority of the risk of loss from the
VIEs activities or entitled to receive a majority of the
VIEs residual returns, or both. FIN 46 is effective
on July 1, 2003 as it relates to VIEs created prior to
February 1, 2003. Based on our initial evaluation of
FIN 46, it is possible that the special purpose entity
lessor in the lease arrangement may need to be consolidated with
the Company beginning in the third quarter of 2003. We are
continuing to evaluate the consolidation and transition rules
under FIN 46, however if the special purpose entity lessor
needs to be consolidated, the leased

47



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##### Table of Contents



BEVERLY ENTERPRISES, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Years ended December 31, 2002, 2001 and
2000


1. Summary of Significant Accounting
Policies  (Continued)

assets will be consolidated at their depreciated
cost and recorded as capital leased assets, with the difference
between the historical and the depreciated cost on the date of
consolidation being recorded as the cumulative effect of an
accounting change. The remaining obligation as of July 1,
2003 ($69.5 million as of December 31, 2002 and
expected to be $52.7 million as of July 1, 2003) would
be recorded as a capital lease obligation on the Companys
consolidated balance sheet. The assets would be depreciated and
payments on the obligations would be recorded as interest
expense until the obligations are satisfied. FIN 46 is not
expected to impact our accounting treatment of BFC. (See
Transfers of Financial Assets, herein.)

In November 2002, the FASB issued Interpretation
No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others (FIN 45).
FIN 45 requires certain guarantees to be recorded at fair
value when a transaction is consummated. This differs from
current practice, which is generally to record a liability only
when a loss is probable and reasonably estimable. FIN 45
applies to guarantee contracts having financial guarantees,
performance guarantees, indemnification or indirect guarantees
of the indebtedness of others. FIN 45 also requires a
guarantor to make significant new disclosures, even when the
likelihood of making any payments under the guarantee is remote.
We have complied with the new disclosure requirements, which are
effective for us as of December 31, 2002. The recognition
and measurement provisions of FIN 45 are applicable on a
prospective basis to guarantees issued or modified after
December 31, 2002. We are continuing our review of the
implications of FIN 45, which may impact our accounting for
future dispositions.

In July 2002, the FASB issued Statement of
Financial Accounting Standards No. 146, Accounting for
Costs Associated with Exit or Disposal Activities
(SFAS No. 146). SFAS No. 146
requires that a liability for a cost associated with an exit or
disposal activity be recognized and measured at its fair value
when the liability is incurred rather than when an entity
commits to an exit plan. Depending on the terms of the exit or
disposal, under SFAS No. 146, severance pay could be
recognized over time or up front. Also, SFAS No. 146
requires that a liability be recognized, measured at its fair
value, when an entity ceases operation at a location covered
under a pre-existing contract, such as a lease. Fair value in
this case would represent the present value of the future
payment obligations net of assumed receipts, such as sublease
income, at current market value. SFAS No. 146 is
effective for all exit or disposal activities initiated after
December 31, 2002. Many of the provisions of
SFAS No. 146 affect only the timing of when a
liability is recorded and not the amount of the liability.
Therefore, we do not expect there will be a material effect on
our consolidated financial position or results of operations as
a result of adopting SFAS No. 146.

In April 2002, the FASB issued Statement of
Financial Accounting Standards No. 145, Rescission of
FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections
(SFAS No. 145). This Statement eliminates
extraordinary accounting treatment for reporting gains or losses
on debt extinguishments, and amends certain other existing
accounting pronouncements. The provisions of this Statement are
effective for the Company beginning with the first quarter of
2003 and require restatement of prior year debt
extinguishment-related extraordinary items.



| |      
| | -----
| | Other

Certain prior year amounts have been reclassified
to conform with the 2002 financial statement presentation.
Assets held for sale are reported based on their status as of
the balance sheet date. Certain per share amounts will not add
due to rounding.

48



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##### Table of Contents



BEVERLY ENTERPRISES, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Years ended December 31, 2002, 2001 and
2000


2. California Investigation Settlement
and Related Costs

On August 1, 2002, the Company and the State
of California reached an agreement on the settlement of an
investigation by the Attorney Generals office and the
District Attorney of Santa Barbara County of patient care
issues in several California nursing facilities. In accordance
with the terms of the settlement agreement, Beverly
Enterprises  California, Inc. entered a plea of
nolo contendere to two felony charges under
Californias Elder Abuse statute and paid a fine of $54,000
related to the plea. In addition, Beverly
Enterprises  California, Inc. reimbursed the Attorney
General and the Santa Barbara County District Attorney
$533,000 for the costs of their investigations and will pay a
$2.0 million civil penalty in four equal, quarterly
installments of $500,000, which began in the third quarter of
2002.

A Permanent Injunction (Permanent
Injunction) was entered requiring nursing facilities in
California, operated by subsidiaries of the Company, to comply
with all applicable laws and regulations and conduct certain
training and education programs. The Company recorded a pre-tax
charge against earnings of $6.3 million during the second
quarter of 2002 to reflect the terms of the settlement and
related costs, and we expect to incur additional annual costs
for implementation of the Permanent Injunction.

Certain revisions were made to our Corporate
Integrity Agreement (CIA) in conjunction with the
Permanent Injunction requiring:



| |   |                                                                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | additional training for clinical associates,
    contractors and agents who perform services in our California
    nursing facilities; and                                                                                                                 
|
| |  | hiring an independent quality monitor to assess
    the effectiveness, reliability and thoroughness of our quality
    care systems and our response to quality of care issues in our
    nursing facilities in California, Arizona, Hawaii and Washington.



|   |                                                                                       
|-- | --------------------------------------------------------------------------------------
|3. | Special Charges and Adjustments Related to
    Settlements with the Federal Government

Effective October 15, 2002, we entered into
a settlement agreement with CMS (the Settlement
Agreement), which resolved certain reimbursement issues
relating to: (1) costs of services provided to
Medicare patients during 1996 through 1998 under the federal
governments former cost-reimbursement system;
(2) co-payments due from Medicare beneficiaries, who were
also eligible for Medicaid, for the years 1996 through 2000; and
(3) all outstanding issues from the Allocation
Investigations (see Note 9). Under the terms of the
Settlement Agreement, we paid CMS $35.0 million in November
2002.

Because the issues related to this matter arose
prior to December 31, 2001 and an offer to settle was made
prior to releasing our 2001 consolidated financial statements,
we reflected a pre-tax charge related to this matter of
$77.5 million in our 2001 results of operations, including:



| |   |                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------
| |  | $35.0 million related to an estimated cash
    payment to CMS, which was made in November 2002;                                                      
|
| |  | $81.5 million related to the write-off of
    Medicare cost report receivables for 1996 through 1998 and
    co-payment issues for 1999 and 2000; and
|
| |  | partially offset by $39.0 million 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. In anticipation of settlement, we
recorded special pre-tax charges of approximately
$202.4 million during the year ended
December 31, 1999.

49



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##### Table of Contents



BEVERLY ENTERPRISES, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Years ended December 31, 2002, 2001 and
2000




|   |                                                                                                        
|-- | -------------------------------------------------------------------------------------------------------
|3. | Special Charges and Adjustment Related to
    Settlements with the Federal
    Government  (Continued)

In connection with the final settlement with CMS
in 2002, we were able to revise the amount of legal fees and
other costs we originally expected to incur in conjunction with
these settlements. Accordingly, legal and related fees accrued
for these matters in prior years were reduced by
$9.4 million during 2002.

The remaining obligations and reserves related to
these matters are included in the consolidated balance sheet
captions as follows at December 31 (in thousands):

|                                          |  |      |        |      |  |   |        | 
|----------------------------------------- |  | ---- | ------ | ---- |  | - | ------ | 
|                                          |  | 2002 |        | 2001
|                                          |  |      |        |     
|Federal government settlement obligations |  | $    | 11,915 |      |  | $ | 10,891 | 
|Other accrued liabilities                 |  |      |       |      |  |   | 8,267  | 
|Other liabilities and deferred items      |  |      | 61,976 |      |  |   | 73,968 | 
|                                          |  |      |        |      |  |   |        | 
|                                          |  | $    | 73,891 |      |  | $ | 93,126 | 
|                                          |  |      |        |      |  |   |        | 

4. Asset Impairments, Workforce
Reductions and Other Unusual Items

During 2002, we recorded pre-tax charges totaling
approximately $79.5 million, including $71.6 million
for asset impairments and $7.9 million for workforce
reductions. The asset impairment charges of $71.6 million
consist of the following:



| |   |                                                                                                                                                                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | $74.6 million write-down of property and
    equipment on certain nursing facilities whose book value
    exceeded estimated fair value when tested for impairment. This
    impairment was determined in accordance with
    SFAS No. 144. These assets were included in the total
    assets of the Nursing Facilities segment as of December 31,
    2002; and
|
| |  | $3.0 million adjustment to asset impairment
    charges recorded in 2001, primarily resulting from the sale of
    previously impaired assets at prices above the carrying value.                                                                                                                                                                                

The October 1, 2002 elimination of certain
funding under the Medicare program affected the cash flows, and
therefore the fair values, of each of our nursing facilities.
This event led to an impairment assessment on each of our
nursing facilities, including:



| |   |                                                                                                                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | estimating the undiscounted cash flows to be
    generated by each of the facilities over the remaining life of
    the primary asset; and                                                                                                                                   
|
| |  | reducing the carrying value of the asset to the
    estimated fair value when the total estimated undiscounted
    future cash flows was less than the current book value of the
    long-lived assets (excluding goodwill and other indefinite lived
    intangible assets).

In estimating the undiscounted cash flows for the
2002 impairment assessment, we primarily used our internally
prepared budgets and forecast information, with certain
probability adjustments, including, but not limited to, the
following items: Medicare and Medicaid funding; overhead costs;
capital expenditures; and patient care liability costs. In order
to estimate the fair values of the nursing facilities, we used a
discounted cash flow approach, supplemented by public resource
information on valuations of nursing facility sales
transactions, by region of the country. Where the estimated
undiscounted cash flows were negative, we estimated the fair
values based on discounted public resource information, sales
values or estimated salvage value. A substantial change in the
estimated future cash flows for these facilities could
materially change the estimated fair values of these assets,
possibly resulting in an additional impairment.

During 2002, we recorded pre-tax charges of
$7.9 million for workforce reductions, including a charge
of approximately $8.5 million for 133 associates who were
notified in 2002 that their positions would be

50



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##### Table of Contents



BEVERLY ENTERPRISES, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Years ended December 31, 2002, 2001 and
2000




|   |                                                                                  
|-- | ---------------------------------------------------------------------------------
|4. | Asset Impairments, Workforce Reductions and
    Other Unusual Items  (Continued)

eliminated, net of a $600,000 reversal of
workforce reduction charges recorded in 2001 which were no
longer needed. The $8.5 million pre-tax charges included the
following:



| |   |                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------
| |  | $8.0 million of cash expenses, approximately
    $4.1 million of which was paid during the year ended
    December 31, 2002; and
|
| |  | non-cash expenses of $500,000 related to the
    issuance of 124,212 shares under our Stock Grant Plan.                         

The following table summarizes activity in our
estimated workforce reduction and exit costs for the years ended
December 31 (in thousands):

|                          |                       |            |       |            |   |            |        |         |   |            |       |         |   |   |        |        |   |   |       |        |   |   |       |        |  
|------------------------- | --------------------- | ---------- | ----- | ---------- | - | ---------- | ------ | ------- | - | ---------- | ----- | ------- | - | - | ------ | ------ | - | - | ----- | ------ | - | - | ----- | ------ | -
|                          |                       |            |       |            |   |           
|                          |                       | 2002       |       | 2001       |   | 2000      
|                          |                       |            |       |            |   |           
|                          |                       | Workforce  |       |            |   | Workforce  |        | Exit    |   | Workforce  |       | Exit   
|                          |                       | Reductions |       | Exit Costs |   | Reductions |        | Costs   |   | Reductions |       | Costs  
|                          |                       |            |       |            |   |            |        |         |   |            |       |        
|Balance beginning of year |                       | $          | 7,631 |            |   | $          | 15,030 |         |   | $          | 4,151 |         |   | $ | 5,208  |        |   | $ | 5,165 |        |   | $ | 7,915 |       
|                          | Charged to operations |            |       | 8,454      |   |            |        | 2,633   |   |            |       | 23,118  |   |   |        | 18,165 |   |   |       | 5,904  |   |   |       | 3,000  |  
|                          | Cash payments         |            |       | (9,074     | ) |            |        | (10,313 | ) |            |       | (15,448 | ) |   |        | (8,343 | ) |   |       | (6,918 | ) |   |       | (3,207 | )
|                          | Stock transactions    |            |       | (1,008     | ) |            |        |        |   |            |       | (4,158  | ) |   |        |       |   |   |       |       |   |   |       |       |  
|                          | Reversals             |            |       | (585       | ) |            |        | (2,359  | ) |            |       | (32     | ) |   |        |       |   |   |       |       |   |   |       | (2,500 | )
|                          |                       |            |       |            |   |            |        |         |   |            |       |         |   |   |        |        |   |   |       |        |   |   |       |       
|Balance end of year       |                       | $          | 5,418 |            |   | $          | 4,991  |         |   | $          | 7,631 |         |   | $ | 15,030 |        |   | $ | 4,151 |        |   | $ | 5,208 |       
|                          |                       |            |       |            |   |            |        |         |   |            |       |         |   |   |        |        |   |   |       |        |   |   |       |       

During 2001, we recorded pre-tax charges totaling
approximately $197.4 million, primarily including
$171.1 million for asset impairments and exit costs and
$24.2 million for workforce reductions and related costs.
The asset impairment and exit costs primarily related to:



| |   |                                                                                                                                                                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | $75.1 million write-down of Florida
    facilities and $55.1 million of Florida exit and other
    costs, as discussed below. These assets were included in the
    total assets of the Nursing Facilities segment as of December
    31, 2001;                                                                                           
|
| |  | write-down of goodwill of $15.4 million,
    property, equipment and other intangible assets of
    $1.0 million and recording of closing and other costs of
    $2.8 million on under-performing Home Care businesses.
    These assets were included in the total assets of the Home Care
    operating segment as of December 31, 2001;
|
| |  | write-down of property and equipment of
    $10.0 million, and goodwill and other intangibles of
    $600,000 on certain under-performing nursing facilities. These
    assets were included in the total assets of the Nursing
    Facilities operating segment as of December 31, 2001;                                                 
|
| |  | write-off of abandoned projects and investments
    totaling $7.8 million; and                                                                                                                                                                                                                                                            
|
| |  | $3.3 million 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
under-performing units and facilities in 2001 included:



| |   |                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | estimating the undiscounted cash flows to be
    generated by each unit or facility, primarily over the weighted
    average remaining life of the assets; and                    
|
| |  | reducing the carrying value of the assets to the
    estimated fair value when the total undiscounted cash flows was
    less than the current book value of the unit or facility.

51



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##### Table of Contents



BEVERLY ENTERPRISES, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Years ended December 31, 2002, 2001 and
2000




|   |                                                                                  
|-- | ---------------------------------------------------------------------------------
|4. | Asset Impairments, Workforce Reductions and
    Other Unusual Items  (Continued)

In order to estimate the fair values of the unit,
facility or property for the 2001 impairment assessment, we used
a discounted cash flow approach. For the nursing facilities, we
discounted the estimated future cash flows over the remaining
life of the primary asset. For the Home Care businesses that
lacked 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
one percent change in the discount rate would not have a
material impact on the impairment calculations. Where the cash
flows were negative, we estimated the fair values based on our
knowledge of recent or pending sales of comparable businesses.

During 2001, a formal plan was initiated by
management to pursue the sale of our nursing home operations in
Florida, which included 49 nursing facilities and four
assisted living centers (the Florida facilities).
The plan included the pursuit of the sale of one additional
nursing facility in Florida and certain other assets which would
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 the state of
Florida. Accordingly, the property and equipment, identifiable
intangibles and operating supplies of our Florida nursing home
operations were considered assets held for sale. Management
estimated the fair value less selling costs of such assets and
took pre-tax charges in 2001 totaling $75.1 million to
write-down the Florida assets. 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 in January 2002 with no further gain or loss.

In conjunction with the sale of our Florida
facilities, we also recorded pre-tax charges totaling
$55.1 million for certain exit and other costs. These costs
related to severance agreements, termination payments on certain
contracts and various other items. At December 31, 2001,
the Florida assets held for sale totaled approximately
$120.8 million and were classified as current assets in the
2001 consolidated balance sheet.

Annualized revenues for the Florida facilities
were approximately $288.0 million. During the year ended
December 31, 2001, our Florida nursing home operations
recorded pre-tax income of approximately $600,000. This amount
did not include certain costs which were recorded at the parent
company level and were not fully allocated to the individual
subsidiaries or facilities. 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 $6.8 million.

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 $24.2 million during 2001.
Approximately $23.1 million 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:



| |   |                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | $18.0 million of cash expenses,
    approximately $4.9 million and $11.3 million of which
    was paid during the years ended December 31, 2002 and 2001,
    respectively;
|
| |  | non-cash expenses of $4.5 million 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.                                                                                         

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BEVERLY ENTERPRISES, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Years ended December 31, 2002, 2001 and
2000




|   |                                                                                  
|-- | ---------------------------------------------------------------------------------
|4. | Asset Impairments, Workforce Reductions and
    Other Unusual Items  (Continued)

During 2000, we recorded pre-tax charges totaling
approximately $17.2 million, primarily including
$9.7 million for asset impairments and exit costs and
$6.1 million for workforce reductions and related costs.
The asset impairment charges and exit costs of $9.7 million
primarily related to:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | write-down of property and equipment of
    $5.1 million and recording of closing and other costs of
    $3.0 million related to six nursing facilities with an
    aggregate carrying value of approximately $6.0 million. We
    closed or terminated the leases on five of these facilities
    during 2001 and one facility in 2002. These assets generated
    pre-tax losses of approximately $2.4 million 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
    $2.1 million;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | write-off of an investment in a physician
    practice management company of $2.0 million; and                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | reversal of $2.5 million of prior year exit
    costs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

The workforce reduction charges of
$6.1 million primarily related to severance agreements
associated with seven executives. Approximately
$2.2 million 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.

5.     Discontinued
Operations

During the fourth quarter of 2002, a formal plan
was approved by our board of directors to pursue the sale of our
Matrix segment and MK Medical business unit. The decision
to sell these non-strategic assets was made primarily to allow
us to further reduce our debt level and to reinvest in
facilities, technology and other business opportunities
consistent with our strategic objectives.

In accordance with SFAS No. 144, the
assets and liabilities of Matrix and the assets of MK Medical
have been reclassified to the corresponding held for
sale asset and liability line items in the accompanying
consolidated balance sheet. The related asset carrying values
were adjusted, if appropriate, to reflect the estimated fair
values less costs to sell. The results of operations of Matrix
and MK Medical for all periods presented, as well as the
write-downs to estimated fair values less costs to sell and
related exit costs in 2002, have been reported as discontinued
operations in the accompanying consolidated statements of
operations. In addition, we have included certain
non-operational nursing facilities in assets held for sale in
the accompanying consolidated balance sheets, which we expect to
dispose of in 2003.

A summary of the asset and liability line items
from which the reclassifications have been made at
December 31, 2002 (in thousands) is as follows:

|                                  |                            |        |        |         |  |         |       |       |  |   |       |       |  |   |        |        | 
|--------------------------------- | -------------------------- | ------ | ------ | ------- |  | ------- | ----- | ----- |  | - | ----- | ----- |  | - | ------ | ------ | 
|                                  |                            |        |        | MK      |  |         |       |      
|                                  |                            | Matrix |        | Medical |  | Nursing |       | Total
|                                  |                            |        |        |         |  |         |       |      
|Current assets                    |                            | $      | 13,711 |         |  | $       | 923   |       |  | $ |      |       |  | $ | 14,634 |       
|Property and equipment, net       |                            |        | 6,588  |         |  |         | 1,183 |       |  |   | 6,696 |       |  |   | 14,467 |       
|Goodwill                          |                            |        | 3,713  |         |  |         |      |       |  |   |      |       |  |   | 3,713  |       
|Other assets                      |                            |        | 3,531  |         |  |         | 73    |       |  |   |      |       |  |   | 3,604  |       
|                                  |                            |        |        |         |  |         |       |       |  |   |       |       |  |   |        |       
|                                  | Total assets held for sale |        | $      | 27,543  |  |         | $     | 2,179 |  |   | $     | 6,696 |  |   | $      | 36,418 | 
|                                  |                            |        |        |         |  |         |       |       |  |   |       |       |  |   |        |       
|Current liabilities held for sale |                            | $      | 3,239  |         |  | $       |      |       |  | $ |      |       |  | $ | 3,239  |       
|                                  |                            |        |        |         |  |         |       |       |  |   |       |       |  |   |        |       

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BEVERLY ENTERPRISES, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Years ended December 31, 2002, 2001 and
2000




|   |                                          
|-- | -----------------------------------------
|5. | Discontinued
    Operations  (Continued)

During January 2003, we sold the outpatient
rehabilitation clinic operations and the managed care network of
Matrix for gross cash proceeds of $36.0 million. During
February 2003, we sold one of the non-operational nursing
facilities for $5.5 million, including cash and a
$4.1 million note receivable. We expect to sell the
remaining Matrix operations, MK Medical assets and the remaining
non-operational nursing facilities during 2003.

A summary of the discontinued operations of
Matrix and MK Medical for the years ended December 31 (in
thousands) follows:

|                                                |                       |        |        |            |  |       |         |         |   |            |         |         |   |        |         |            |   |       |         |         |   |   |         |         |   |   |         |         |   |   |        |        |   |   |         |         |  
|----------------------------------------------- | --------------------- | ------ | ------ | ---------- |  | ----- | ------- | ------- | - | ---------- | ------- | ------- | - | ------ | ------- | ---------- | - | ----- | ------- | ------- | - | - | ------- | ------- | - | - | ------- | ------- | - | - | ------ | ------ | - | - | ------- | ------- | -
|                                                |                       |        |        |            |  |      
|                                                |                       | 2002   |        | 2001       |  | 2000 
|                                                |                       |        |        |            |  |      
|                                                |                       | Matrix |        | MK Medical |  | Total |         | Matrix  |   | MK Medical |         | Total   |   | Matrix |         | MK Medical |   | Total
|                                                |                       |        |        |            |  |       |         |         |   |            |         |         |   |        |         |            |   |      
|Net operating revenues(1)                       |                       | $      | 86,840 |            |  | $     | (4,452  | )       |   | $          | 82,388  |         |   | $      | 90,694  |            |   | $     | 23,289  |         |   | $ | 113,983 |         |   | $ | 78,367  |         |   | $ | 29,429 |        |   | $ | 107,796 |        
|                                                |                       |        |        |            |  |       |         |         |   |            |         |         |   |        |         |            |   |       |         |         |   |   |         |         |   |   |         |         |   |   |        |        |   |   |         |        
|Operating income (loss)(1)                      |                       | $      | 1,078  |            |  | $     | (31,610 | )       |   | $          | (30,532 | )       |   | $      | (8,652  | )          |   | $     | (10,674 | )       |   | $ | (19,326 | )       |   | $ | (30,017 | )       |   | $ | (1,170 | )      |   | $ | (31,187 | )      
|Exit costs                                      |                       |        | (1,001 | )          |  |       | (1,257  | )       |   |            | (2,258  | )       |   |        |        |            |   |       |        |         |   |   |        |         |   |   |        |         |   |   |       |        |   |   |        |        
|Asset impairments                               |                       |        |       |            |  |       | (1,250  | )       |   |            | (1,250  | )       |   |        | (32,482 | )          |   |       | (8,231  | )       |   |   | (40,713 | )       |   |   | (25,784 | )       |   |   |       |        |   |   | (25,784 | )      
|Workforce reductions and other unusual items(2) |                       |        | 230    |            |  |       | (2,989  | )       |   |            | (2,759  | )       |   |        |        |            |   |       |        |         |   |   |        |         |   |   |        |         |   |   |       |        |   |   |        |        
|                                                |                       |        |        |            |  |       |         |         |   |            |         |         |   |        |         |            |   |       |         |         |   |   |         |         |   |   |         |         |   |   |        |        |   |   |         |        
|                                                | Pre-tax income (loss) |        | $      | 307        |  |       | $       | (37,106 | ) |            |         | (36,799 | ) |        | $       | (41,134    | ) |       | $       | (18,905 | ) |   |         | (60,039 | ) |   | $       | (55,801 | ) |   | $      | (1,170 | ) |   |         | (56,971 | )
|                                                |                       |        |        |            |  |       |         |         |   |            |         |         |   |        |         |            |   |       |         |         |   |   |         |         |   |   |         |         |   |   |        |        |   |   |         |        
|Provision for (benefit from) income taxes       |                       |        |        |            |  |       |         |         |   |            |        |         |   |        |         |            |   |       |         |         |   |   | 3,814   |         |   |   |         |         |   |   |        |        |   |   | (17,626 | )      
|                                                |                       |        |        |            |  |       |         |         |   |            |         |         |   |        |         |            |   |       |         |         |   |   |         |         |   |   |         |         |   |   |        |        |   |   |         |        
|Discontinued operations, net of taxes           |                       |        |        |            |  |       |         |         |   | $          | (36,799 | )       |   |        |         |            |   |       |         |         |   | $ | (63,853 | )       |   |   |         |         |   |   |        |        |   | $ | (39,345 | )      
|                                                |                       |        |        |            |  |       |         |         |   |            |         |         |   |        |         |            |   |       |         |         |   |   |         |         |   |   |         |         |   |   |        |        |   |   |         |        



---



|    |                                                                                                                                     
|--- | ------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes an adjustment of $18.0 million in
    2002 for estimated overpayments to MK Medical by government
    payors. (See Note 9.)
|   
|(2) | Includes $1.0 million accrued for legal and
    related fees associated with the MK Medical estimated
    overpayment issue.        

6. Acquisitions and
Dispositions

During the year ended December 31, 2002, we
sold, closed or terminated the leases on 69 nursing
facilities (8,132 beds), four assisted living centers
(315 units), four home care centers, 10 outpatient
clinics and certain other assets for cash proceeds of
approximately $170.9 million and notes receivable of
approximately $21.7 million. In December 2001, we leased to
another operator 49 of the nursing facilities (6,129 beds)
and the four assisted living centers, all of which were located
in Florida. Excluding the Florida properties, which had been
written down to net realizable value in 2001, we recognized
pre-tax gains of $6.0 million, which were included in net
operating revenues, pre-tax losses of $4.1 million, which
were included in other operating expenses and $100,000 of losses
included in discontinued operations during the year ended
December 31, 2002, as a result of these disposal
activities. The majority of these disposed assets were
classified as held for sale at December 31, 2001 and,
therefore, did not meet the criteria for classification as
discontinued operations.

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 $3.7 million, assumed debt
of approximately $18.4 million, 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

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BEVERLY ENTERPRISES, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Years ended December 31, 2002, 2001 and
2000




|   |                                                
|-- | -----------------------------------------------
|6. | Acquisitions and
    Dispositions  (Continued)

approximately $20.4 million and a note
receivable of approximately $3.9 million. We did not
operate three of the nursing facilities (355 beds) which
had been leased to other nursing home operators. We recognized
pre-tax gains of $4.8 million, which were included in net
operating revenues, pre-tax losses of $4.0 million which
were included in other operating expenses and $200,000 of losses
included in discontinued operations during the year ended
December 31, 2001, 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
$3.3 million 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 $3.0 million, closing and other costs
of approximately $2.4 million. 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 $24.2 million 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
pre-tax gains of $8.9 million, which were included in net
operating revenues, pre-tax losses of $5.5 million, which
were included in other operating expenses and $1.4 million of
losses included in discontinued operations during the year ended
December 31, 2000 as a result of these dispositions.

The operations of all of the facilities and other
assets we acquired or disposed of in 2002, 2001 and 2000 were
immaterial to our consolidated financial position and results of
operations.

7.     Property and
Equipment

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

|                                               |  |       |           |       |  |        |           |      |  |      |           |      |  |   |           |  |  |   |        |  |  |   |        | 
|---------------------------------------------- |  | ----- | --------- | ----- |  | ------ | --------- | ---- |  | ---- | --------- | ---- |  | - | --------- |  |  | - | ------ |  |  | - | ------ | 
|                                               |  |       |           |       |  |       
|                                               |  | Total |           | Owned |  | Leased
|                                               |  |       |           |       |  |       
|                                               |  | 2002  |           | 2001  |  | 2002   |           | 2001 |  | 2002 |           | 2001
|                                               |  |       |           |       |  |        |           |      |  |      |           |     
|Land, buildings and improvements               |  | $     | 1,153,084 |       |  | $      | 1,246,338 |      |  | $    | 1,138,054 |      |  | $ | 1,224,910 |  |  | $ | 15,030 |  |  | $ | 21,428 | 
|Furniture and equipment                        |  |       | 301,604   |       |  |        | 340,113   |      |  |      | 298,244   |      |  |   | 335,452   |  |  |   | 3,360  |  |  |   | 4,661  | 
|Construction in progress                       |  |       | 6,974     |       |  |        | 31,297    |      |  |      | 6,974     |      |  |   | 31,297    |  |  |   |       |  |  |   |       | 
|                                               |  |       |           |       |  |        |           |      |  |      |           |      |  |   |           |  |  |   |        |  |  |   |        | 
|                                               |  |       | 1,461,662 |       |  |        | 1,617,748 |      |  |      | 1,443,272 |      |  |   | 1,591,659 |  |  |   | 18,390 |  |  |   | 26,089 | 
|Less accumulated depreciation and amortization |  |       | 672,379   |       |  |        | 744,163   |      |  |      | 659,746   |      |  |   | 726,221   |  |  |   | 12,633 |  |  |   | 17,942 | 
|                                               |  |       |           |       |  |        |           |      |  |      |           |      |  |   |           |  |  |   |        |  |  |   |        | 
|                                               |  | $     | 789,283   |       |  | $      | 873,585   |      |  | $    | 783,526   |      |  | $ | 865,438   |  |  | $ | 5,757  |  |  | $ | 8,147  | 
|                                               |  |       |           |       |  |        |           |      |  |      |           |      |  |   |           |  |  |   |        |  |  |   |        | 

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; furniture and
equipment  5 to 15 years. Capital leased 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, 2002, 2001 and 2000 was $77.7 million,
$76.3 million and $83.3 million, respectively,
including depreciation and amortization expense on discontinued
operations of $5.4 million, $5.7 million and
$6.3 million, respectively.

55



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BEVERLY ENTERPRISES, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Years ended December 31, 2002, 2001 and
2000




7.     Property and
Equipment  (Continued)


Capitalized software costs of $53.6 million
and $64.3 million at December 31, 2002 and 2001,
respectively, net of accumulated amortization of
$30.8 million and $29.8 million, respectively, are
included in the accompanying consolidated balance sheet caption
Other assets. Amortization expense related to
capitalized software costs for the years ended December 31,
2002, 2001 and 2000 was $10.3 million, $8.6 million
and $7.1 million, respectively, including amortization
expense on discontinued operations of $1.7 million,
$1.2 million and $1.1 million, respectively.

8.     Long-term
Debt

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

|                                                                                                                                                                                                                                                                                                                |  |      |         |      |  |   |         | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | ---- |  | - | ------- | 
|                                                                                                                                                                                                                                                                                                                |  | 2002 |         | 2001
|                                                                                                                                                                                                                                                                                                                |  |      |         |     
|Revolver borrowings under Credit Facility,
    matures April 2004                                                                                                                                                                                                                                               |  | $    |        |      |  | $ |        | 
|9 5/8% Senior Notes due April 15,
    2009, unsecured                                                                                                                                                                                                                                                           |  |      | 200,000 |      |  |   | 200,000 | 
|9% Senior Notes due February 15, 2006,
    unsecured                                                                                                                                                                                                                                                            |  |      | 180,000 |      |  |   | 180,000 | 
|Notes and mortgages, less imputed interest:
    2002  $15, 2001  $29; due in installments
    through the year 2031, at effective interest rates of 3.77% to
    12.50%, a portion of which is secured by property, equipment and
    other assets with a net book value of $175,803 at
    December 31, 2002 |  |      | 133,554 |      |  |   | 192,736 | 
|Industrial development revenue bonds, due in
    installments through the year 2013, at effective interest rates
    of 4.10% to 10%, a portion of which is secured by property and
    other assets with a net book value of $104,462 at
    December 31, 2002                                                 |  |      | 78,530  |      |  |   | 115,730 | 
|7% A.I. Credit Corp. Note due in installments
    through January 2002, secured by a surety bond                                                                                                                                                                                                                |  |      |        |      |  |   | 12,500  | 
|8.750% First Mortgage Bonds due July 1,
    2008, secured by first mortgages on 4 nursing facilities
    with an aggregate net book value of $9,599 at December 31,
    2002                                                                                                                                    |  |      | 11,041  |      |  |   | 11,623  | 
|8.625% First Mortgage Bonds due October 1,
    2008, secured by first mortgages on 7 nursing facilities
    with an aggregate net book value of $22,533 at December 31,
    2002                                                                                                                                |  |      | 17,900  |      |  |   | 18,793  | 
|                                                                                                                                                                                                                                                                                                                |  |      |         |      |  |   |         | 
|                                                                                                                                                                                                                                                                                                                |  |      | 621,025 |      |  |   | 731,382 | 
|Present value of capital lease obligations, less
    imputed interest: 2002  $6,977, 2001 
    $7,889, at effective interest rates of 6.75% to 16.49%                                                                                                                                                         |  |      | 9,152   |      |  |   | 10,291  | 
|                                                                                                                                                                                                                                                                                                                |  |      |         |      |  |   |         | 
|                                                                                                                                                                                                                                                                                                                |  |      | 630,177 |      |  |   | 741,673 | 
|Less amounts due within one year                                                                                                                                                                                                                                                                                |  |      | 41,463  |      |  |   | 64,231  | 
|                                                                                                                                                                                                                                                                                                                |  |      |         |      |  |   |         | 
|                                                                                                                                                                                                                                                                                                                |  | $    | 588,714 |      |  | $ | 677,442 | 
|                                                                                                                                                                                                                                                                                                                |  |      |         |      |  |   |         | 

During 2001, we entered into a new
$150.0 million revolving credit facility (the Credit
Facility) which matures in April 2004 and issued
$200.0 million 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 our former $375.0 million credit facility and for
general corporate purposes. We filed a registration statement in
2001 under Form S-4 with the Securities and Exchange
Commission registering the 9 5/8% Senior Notes and
exchanged (the Exchange Offer) all of the
9 5/8% Senior Notes issued through the

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BEVERLY ENTERPRISES, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Years ended December 31, 2002, 2001 and
2000




8.     Long-term
Debt  (Continued)


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 $180.0 million 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
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. Prior to the 2003 Amendments
discussed below, revolver borrowings under the Credit Facility
bore interest at adjusted LIBOR plus 2.375%; the Base Rate, as
defined, plus 1.375%; or the adjusted CD rate, as defined, plus
2.50%, at our option. The interest rates could be adjusted
quarterly based on a leverage ratio calculation. The Credit
Facility was secured by property, equipment and other assets
associated with eight nursing facilities with an aggregate net
book value of approximately $12.4 million at
December 31, 2002 and the stock of certain subsidiaries. In
addition, it was guaranteed by the Subsidiary Guarantors and
imposed on us certain financial tests and restrictive covenants.
We had no revolver borrowings under the Credit Facility at
December 31, 2002 or 2001.

Effective December 31, 2002 and 2001, we
executed amendments to our Credit Facility, as well as
amendments with certain of our other lenders covering debt of
approximately $19.4 million and $20.1 million,
respectively, and off-balance sheet lease financing of
$69.5 million and $112.4 million, respectively
(collectively, the Amendments), which modified
certain financial covenant levels. These Amendments were
required since recording the special charges, as discussed in
Notes 3 and 4, would have resulted in our noncompliance
with a financial covenant ratio contained in those debt
agreements on each of these dates. As of December 31, 2002,
we were in compliance with the Amendments.

In February 2003, we executed an amendment to our
Credit Facility and our off-balance sheet lease arrangement (the
2003 Amendments). The 2003 Amendments were required
since our projected earnings for 2003, primarily due to the
reduction in Medicare funding, were not anticipated to reach the
level needed to meet the financial covenant requirements in
these debt arrangements. The primary impacts of the 2003
Amendments include the following:



| |   |                                                                                                                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | revolver borrowings bear interest at adjusted
    LIBOR plus 3.50%; the Base Rate, as defined, plus 2.50%; or the
    adjusted CD rate, as defined, plus 3.625%, at our option. These
    rates may be adjusted quarterly based on a leverage ratio
    calculation;
|
| |  | the Credit Facility will be secured by property,
    equipment and other assets having a market value, determined
    pursuant to the 2003 Amendments, of not less than
    $165.0 million;                                                                         
|
| |  | the Credit Facility will be frozen at a borrowing
    capacity of $100.0 million initially, and eventually
    adjusted to $85.0 million over its remaining term
    concurrent with receipt of proceeds from sales of
    facilities; and                          
|
| |  | we will purchase three leased properties in the
    first quarter of 2003 for $16.8 million with a portion of
    the proceeds from the sale of our Matrix outpatient therapy
    clinics and managed care network, and                                             

57



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##### Table of Contents



BEVERLY ENTERPRISES, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Years ended December 31, 2002, 2001 and
2000




8.     Long-term
Debt  (Continued)




| |  |                                                                                                                                                  
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------
| |  | apply a portion of the proceeds from anticipated
    divestitures in 2003 and 2004 to reduce the off-balance sheet
    lease arrangement further.

During 2002, we entered into a mortgage loan for
$5.0 million for the construction of a nursing facility.
This mortgage has terms and conditions similar to the Credit
Facility. During 2001, we entered into notes and mortgages
payable of approximately $21.3 million 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 estimated as follows (in thousands):

|                                                   |  |      |        |      |  |      |        |      |  |      |        |            |  |       |         |   |  |   |        |   |  |   |         |   |  |   |         |  
|-------------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ | ---------- |  | ----- | ------- | - |  | - | ------ | - |  | - | ------- | - |  | - | ------- | -
|                                                   |  | 2003 |        | 2004 |  | 2005 |        | 2006 |  | 2007 |        | Thereafter |  | Total
|                                                   |  |      |        |      |  |      |        |      |  |      |        |            |  |      
|Future minimum lease payments                      |  | $    | 1,648  |      |  | $    | 1,535  |      |  | $    | 1,292  |            |  | $     | 978     |   |  | $ | 894    |   |  | $ | 9,782   |   |  | $ | 16,129  |  
|Less interest                                      |  |      | (796   | )    |  |      | (722   | )    |  |      | (656   | )          |  |       | (602    | ) |  |   | (570   | ) |  |   | (3,631  | ) |  |   | (6,977  | )
|                                                   |  |      |        |      |  |      |        |      |  |      |        |            |  |       |         |   |  |   |        |   |  |   |         |   |  |   |         |  
|Net present value of future minimum lease payments |  |      | 852    |      |  |      | 813    |      |  |      | 636    |            |  |       | 376     |   |  |   | 324    |   |  |   | 6,151   |   |  |   | 9,152   |  
|Notes, mortgages and bonds                         |  |      | 40,611 |      |  |      | 34,494 |      |  |      | 20,972 |            |  |       | 195,340 |   |  |   | 21,564 |   |  |   | 308,044 |   |  |   | 621,025 |  
|                                                   |  |      |        |      |  |      |        |      |  |      |        |            |  |       |         |   |  |   |        |   |  |   |         |   |  |   |         |  
|                                                   |  | $    | 41,463 |      |  | $    | 35,307 |      |  | $    | 21,608 |            |  | $     | 195,716 |   |  | $ | 21,888 |   |  | $ | 314,195 |   |  | $ | 630,177 |  
|                                                   |  |      |        |      |  |      |        |      |  |      |        |            |  |       |         |   |  |   |        |   |  |   |         |   |  |   |         |  

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
terms 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.

9.     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, 2002, are
estimated as follows (in thousands):

|             |  |   |         | 
|------------ |  | - | ------- | 
|Year ending  |  |  
|December 31, |  |  
|             |  |  
|2003         |  | $ | 51,631  | 
|2004         |  |   | 43,188  | 
|2005         |  |   | 36,553  | 
|2006         |  |   | 21,188  | 
|2007         |  |   | 11,896  | 
|Thereafter   |  |   | 41,528  | 
|             |  |   |         | 
|             |  | $ | 205,984 | 
|             |  |   |         | 

Our total future minimum rental commitments are
net of approximately $2.1 million of minimum sublease
rental income due in the future under noncancelable subleases.
The following table summarizes

58



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##### Table of Contents



BEVERLY ENTERPRISES, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Years ended December 31, 2002, 2001 and
2000


9.     Commitments
and Contingencies  (Continued)

certain information relative to our operating
leases, including operating leases for discontinued operations,
for the years ended December 31 (in thousands):

|                                                                   |  |      |        |      |  |      |         |  |  |   |         | 
|------------------------------------------------------------------ |  | ---- | ------ | ---- |  | ---- | ------- |  |  | - | ------- | 
|                                                                   |  | 2002 |        | 2001 |  | 2000
|                                                                   |  |      |        |      |  |     
|Rent expense, net of sublease rent income                          |  | $    | 87,852 |      |  | $    | 106,814 |  |  | $ | 114,889 | 
|Sublease rent income                                               |  |      | 2,036  |      |  |      | 2,248   |  |  |   | 3,312   | 
|Estimated contingent rent expense, based
    primarily on revenues |  |      | 2,000  |      |  |      | 7,000   |  |  |   | 14,000  | 

At December 31, 2002, we leased five nursing
facilities, one assisted living center and our corporate
headquarters under an off-balance sheet lease arrangement. As of
December 31, 2002, we had $69.5 million of outstanding
commitments under this financing arrangement. The lessor
financed the construction of these properties and we lease the
properties under a master operating lease agreement, which
matures in 2004. Under the original commitment, we could
purchase the properties at original cost, or coordinate the sale
of the properties to a third-party, when the master lease
agreement matures. (See Note 8 for a discussion of the 2003
Amendments and their impact on this financing arrangement.)
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% (or approximately $56.0 million at
December 31, 2002) is guaranteed by the Company and secured
by second mortgages on the related properties.

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 current generally accepted accounting
principles. In January 2003, the Financial Accounting Standards
Board issued FASB Interpretation No. 46, Consolidation
of Variable Interest Entities (FIN 46),
which is effective for us in the third quarter of 2003. Based on
our initial evaluation of FIN 46, it is possible that the
special purpose entity lessor in the lease arrangement may need
to be consolidated with the Company beginning in the third
quarter of 2003. We are continuing to evaluate the consolidation
and transition rules under FIN 46, however if the special
purpose entity lessor needs to be consolidated, the leased
assets will be consolidated at their depreciated cost and
recorded as capital leased assets, with the difference between
the historical and the depreciated cost on the date of
consolidation being recorded as the cumulative effect of an
accounting change. The remaining obligation as of July 1,
2003 ($69.5 million as of December 31, 2002 and
expected to be $52.7 million as of July 1, 2003) would
be recorded as a capital lease obligation on the Companys
consolidated balance sheet. We will continue to make quarterly
payments under the obligation, to be recorded as interest
expense, and the capital leased assets will be depreciated,
increasing our annual depreciation and amortization expense by
approximately $2.3 million.

Our management information systems data
processing functions have been outsourced under an agreement
which was renegotiated during 2002 and expires in 2007. Our
future minimum commitments as of December 31, 2002 under
this agreement are estimated as follows: 2003 
$2.2 million; 2004  $2.2 million;
2005  $2.2 million; 2006 
$2.2 million and 2007  $700,000. We incurred
approximately $2.9 million, $3.4 million and
$5.2 million under this agreement during the years ended
December 31, 2002, 2001 and 2000, respectively.

We are contingently liable for approximately
$31.5 million of long-term debt maturing on various dates
through 2019, as well as annual interest and letter of credit
fees totaling approximately $3.1 million. These contingent
liabilities principally arose from our sale of nursing
facilities and retirement living centers. We operate the
facilities related to approximately $3.0 million of the
principal amount for which we are contingently liable, pursuant
to long-term agreements accounted for as operating leases. We
guarantee certain

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##### Table of Contents



BEVERLY ENTERPRISES, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Years ended December 31, 2002, 2001 and
2000




9.     Commitments
and Contingencies  (Continued)


third-party operating leases. These guarantees
arose from our dispositions of leased facilities and the
underlying leases have approximately $13.3 million of
minimum rental commitments remaining through the initial lease
terms. In addition, we guarantee an officers bank loan of
approximately $200,000, which is collateralized by shares of our
Common Stock pledged by the officer.

As previously disclosed, we notified federal and
California healthcare regulatory authorities (CMS, OIG, the
California Attorney Generals office and the California
Department of Health) of our intent to conduct an internal
investigation of past billing practices relating to
MK Medical, our medical equipment business unit based in
Fresno, California. An independent accounting firm has reviewed
MK Medicals government payor billings since
October 1, 1998, the date we acquired the company.
Deficiencies identified by the accounting firm primarily relate
to inadequate documentation supporting Medicare and Medi-Cal
claims for reimbursement for drugs, wheelchairs, and other
durable medical equipment distributed by MK Medical.
Specifically, the review identified instances of missing or
incomplete certificates of medical necessity, treatment
authorization requests, prescriptions, and other documentation
MK Medical is required to maintain in order to be entitled
to reimbursement from government payors. Based on the results of
the accounting firms review, we have estimated our
potential overpayment from government payors to be approximately
$18.0 million for the period from October 1, 1998 to
2002. We have reduced MK Medicals operating revenues,
through discontinued operations on the 2002 consolidated
statement of operations, and have established a reserve,
included in Other accrued liabilities on the 2002
consolidated balance sheet, for this amount. We have advised
regulatory authorities of the accounting firms results.
Our liability with respect to this matter could exceed the
reserved amount. We can give no assurance of the final outcome
of this matter or its impact on our financial position, results
of operations and cash flows.

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
$5.0 million during the first quarter of 2000.

Under the Civil Settlement Agreement, we paid the
federal government $25.0 million during 2000 and are
reimbursing the federal government an additional
$145.0 million 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 $73.9 million at December 31, 2002 and
$84.9 million at December 31, 2001. In addition, we
agreed to resubmit certain Medicare filings to reflect reduced
labor costs allocated to the Medicare program. The adjustments
for these resubmitted filings were part of the Settlement
Agreement with CMS. (See Note 3.)

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BEVERLY ENTERPRISES, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Years ended December 31, 2002, 2001 and
2000




9.     Commitments
and Contingencies  (Continued)


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 or 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 October 31, 2002, a shareholder
derivative action entitled Paul Dunne and Helene Dunne,
derivatively on behalf of nominal defendant Beverly Enterprises,
Inc. v. Beryl F. Anthony, Jr., et al. was filed in
the Circuit Court of Sebastian County, Arkansas, Fort Smith
Division (No. CIV-2002-1241). This case is purportedly
brought derivatively on behalf of the Company against various
current and former officers and directors. We learned of this
case when it was served on one defendant on January 22,
2003. The complaint alleges causes of action for breach of
fiduciary duty against the defendants based on:
(1) allegations that defendants failed to establish and
maintain adequate accounting controls such that the Company
failed to record adequate reserves for patient care liability
costs; and (2) allegations that certain defendants sold
Company stock while purportedly in possession of material
non-public information. While this case is in its preliminary
stages, we do not believe there is any merit to this lawsuit.

On August 16, 2002, August 26, 2002,
and September 26, 2002, respectively, Ernest
Baer v. Beverly Enterprises, Inc., et. al. (CIV.
No. 02-2190) (the Baer Case), Stanley V.
Kensic v. Beverly Enterprises, Inc., et.al. (CIV.
No. 02-2193) (the Kensic Case) and Charles
Krebs v. Beverly Enterprises, Inc., et. al. (CIV.
No. 02-2222) (the Krebs Case) were filed in the
United States District Court, Western District of Arkansas,
Fort Smith Division. The Baer Case, the Kensic Case and the
Krebs Case were filed as purported securities fraud class
actions under Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934 and Rule 10b-5 promulgated thereunder.

Each of the Baer Case, the Kensic Case and the
Krebs Case separately named Beverly Enterprises, Inc. as a
defendant along with various current officers and our
independent auditors. In all three cases, the purported class
period runs from October 16, 2000 to and including
July 19, 2002. Plaintiffs claim that the defendants, during
the purported class period, made multiple false and misleading
statements. Due to the preliminary state of the Baer Case, the
Kensic Case and the Krebs Case and the fact that none of these
cases alleges damages with any specificity, we are unable at
this time to assess the probable outcome of the cases. We
believe that plaintiffs allegations that the defendants
acted unlawfully are without merit and the defendants will
vigorously defend the Baer Case, the Kensic Case and the Krebs
Case. 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.

As previously reported, on October 2, 1998,
a purported class action lawsuit was filed in the United States
District Court for the Eastern District of Arkansas by Jack
Kushner against the Company and certain of its officers (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 judgment 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). On January 23, 2003, the Eighth Circuit
entered an

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##### Table of Contents



BEVERLY ENTERPRISES, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Years ended December 31, 2002, 2001 and
2000




9.     Commitments
and Contingencies  (Continued)


order affirming the district courts order
dismissing the case with prejudice. The plaintiffs appealed the
order of the Eighth Circuit en banc, but, on
February 27, 2003, the Eighth Circuit denied the petition.
The Eighth Circuit is obligated to issue a mandate within seven
days of the date of the order denying the petition, thereby
ordering the district court to enforce its ruling and dismiss
the case. If the plaintiffs decide to petition for a writ of
certiorari to the United States Supreme Court within
90 days, plaintiffs may move to stay the mandate pending
the filing of this petition.

In addition, since July 29, 1999, several
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.

We are party to various legal matters relating to
patient care, including claims that our services have resulted
in injury or death to residents of our facilities. We have
experienced an increasing trend in the number and severity of
the claims asserted against us. We believe that there has been,
and will continue to be, an increase in governmental
investigations of long-term care providers. Adverse
determinations in legal proceedings or governmental
investigations, whether currently asserted or arising in the
future, could have a material adverse effect on us.

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.

10. 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, and the
repurchase of, our Common Stock. During 2002 and 2001, we did
not pay any cash dividends on, or repurchase any of, our Common
Stock. We have 25,000,000 shares of authorized $1 par
value preferred stock, all of which remains 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, are entitled to the immediate
vesting of their restricted stock. In conjunction with ongoing
operational reorganizations (as discussed in Note 4),
669,754 shares of Common Stock under the Stock Grant Plan
have been issued to various officers in exchange for shares of
restricted stock held by them, which have been cancelled.
Pre-tax workforce reduction charges of $500,000 and
$4.5 million were recorded in 2002 and 2001, respectively,
in connection with the issuance of these shares.

62



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##### Table of Contents



BEVERLY ENTERPRISES, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Years ended December 31, 2002, 2001 and
2000




10. Stockholders Equity 
(Continued)


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
remains 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, 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
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 remains 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
non-employee 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. These 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
2.4 million shares of restricted stock, which vest four
years after the grant date, in exchange for options to purchase
approximately 4.8 million shares of our Common Stock.

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, 2002, 2001 and 2000 related to these
restricted stock grants were approximately $1.3 million,
$1.7 million and $1.1 million, respectively.

63



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##### Table of Contents



BEVERLY ENTERPRISES, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Years ended December 31, 2002, 2001 and
2000




10. 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:

|                                                  |           |           |           |            |   |           |      |           |  |           |           |            |   |   |      |      |  |  |           |            |   |   |      |      | 
|------------------------------------------------- | --------- | --------- | --------- | ---------- | - | --------- | ---- | --------- |  | --------- | --------- | ---------- | - | - | ---- | ---- |  |  | --------- | ---------- | - | - | ---- | ---- | 
|                                                  |           |           |           |            |   |          
|                                                  |           | 2002      |           | 2001       |   | 2000     
|                                                  |           |           |           |            |   |          
|                                                  |           |           |           | Weighted-  |   |           |      | Weighted- |  |           |           | Weighted- 
|                                                  |           |           |           | Average    |   |           |      | Average   |  |           |           | Average   
|                                                  |           | Number of |           | Exercise   |   | Number of |      | Exercise  |  | Number of |           | Exercise  
|                                                  |           | shares    |           | Price      |   | shares    |      | Price     |  | shares    |           | Price     
|                                                  |           |           |           |            |   |           |      |           |  |           |           |           
|Options outstanding at beginning of year          |           |           | 5,808,260 |            |   | $         | 6.46 |           |  |           | 3,790,326 |            |   | $ | 5.02 |      |  |  | 7,307,459 |            |   | $ | 9.08 |     
|Changes during the year:                          |           |           |           |            |   |           |      |           |  |           |           |            |   |   |      |      |  |  |           |            |   |   |      |     
|                                                  | Granted   |           |           | 4,749,460  |   |           |      | 6.43      |  |           |           | 3,914,323  |   |   |      | 7.77 |  |  |           | 2,569,325  |   |   |      | 3.32 | 
|                                                  | Exercised |           |           | (512,612   | ) |           |      | 3.72      |  |           |           | (943,608   | ) |   |      | 3.93 |  |  |           | (134,035   | ) |   |      | 3.52 | 
|                                                  | Cancelled |           |           | (1,162,473 | ) |           |      | 6.30      |  |           |           | (952,781   | ) |   |      | 8.59 |  |  |           | (5,952,423 | ) |   |      | 9.31 | 
|                                                  |           |           |           |            |   |           |      |           |  |           |           |            |   |   |      |      |  |  |           |            |   |   |      |     
|Options outstanding at end of year                |           |           | 8,882,635 |            |   |           | 6.62 |           |  |           | 5,808,260 |            |   |   | 6.46 |      |  |  | 3,790,326 |            |   |   | 5.02 |     
|                                                  |           |           |           |            |   |           |      |           |  |           |           |            |   |   |      |      |  |  |           |            |   |   |      |     
|Options exercisable at end of year                |           |           | 2,274,231 |            |   |           | 7.09 |           |  |           | 1,289,677 |            |   |   | 7.19 |      |  |  | 1,104,815 |            |   |   | 7.30 |     
|                                                  |           |           |           |            |   |           |      |           |  |           |           |            |   |   |      |      |  |  |           |            |   |   |      |     
|Options available for grant at end of year        |           |           | 2,933,703 |            |   |           |      |           |  |           | 6,465,204 |            |   |   |      |      |  |  | 3,438,154 |            |   |   |      |     
|                                                  |           |           |           |            |   |           |      |           |  |           |           |            |   |   |      |      |  |  |           |            |   |   |      |     
|Restricted stock outstanding at beginning of year |           |           | 1,290,572 |            |   |           |      |           |  |           | 2,354,873 |            |   |   |      |      |  |  | 67,519    |            |   |   |      |     
|Changes during the year:                          |           |           |           |            |   |           |      |           |  |           |           |            |   |   |      |      |  |  |           |            |   |   |      |     
|                                                  | Granted   |           |           | 175,000    |   |           |      |           |  |           |           | 205,360    |   |   |      |      |  |  |           | 2,453,832  |   |   |      |      | 
|                                                  | Vested    |           |           | (112,684   | ) |           |      |           |  |           |           | (75,709    | ) |   |      |      |  |  |           | (90,181    | ) |   |      |      | 
|                                                  | Forfeited |           |           | (230,486   | ) |           |      |           |  |           |           | (1,193,952 | ) |   |      |      |  |  |           | (76,297    | ) |   |      |      | 
|                                                  |           |           |           |            |   |           |      |           |  |           |           |            |   |   |      |      |  |  |           |            |   |   |      |     
|Restricted stock outstanding at end of year       |           |           | 1,122,402 |            |   |           |      |           |  |           | 1,290,572 |            |   |   |      |      |  |  | 2,354,873 |            |   |   |      |     
|                                                  |           |           |           |            |   |           |      |           |  |           |           |            |   |   |      |      |  |  |           |            |   |   |      |     

Exercise prices for options outstanding as of
December 31, 2002 ranged from $2.33 to $14.38. The
weighted-average remaining contractual life of these options is
approximately eight years. The following table provides certain
information with respect to stock options outstanding and
exercisable at December 31, 2002:

|                         |  |                     |           |                     |  |                  |       |             |  |                |      |  |  |  |           |  |  |   |       | 
|------------------------ |  | ------------------- | --------- | ------------------- |  | ---------------- | ----- | ----------- |  | -------------- | ---- |  |  |  | --------- |  |  | - | ----- | 
|                         |  |                     |           |                    
|                         |  | 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
|                         |  |                     |           |                     |  |                  |       |             |  |               
|$ 2.33  $ 6.85          |  |                     | 4,542,242 |                     |  | $                | 5.24  |             |  |                | 8.50 |  |  |  | 854,705   |  |  | $ | 4.26  | 
|$ 7.00  $ 9.80          |  |                     | 3,925,058 |                     |  |                  | 7.70  |             |  |                | 8.23 |  |  |  | 1,022,380 |  |  |   | 7.70  | 
|$10.46  $11.76          |  |                     | 364,710   |                     |  |                  | 11.29 |             |  |                | 8.28 |  |  |  | 346,521   |  |  |   | 11.29 | 
|$12.88  $14.38          |  |                     | 50,625    |                     |  |                  | 13.58 |             |  |                | 5.17 |  |  |  | 50,625    |  |  |   | 13.58 | 
|                         |  |                     |           |                     |  |                  |       |             |  |                |      |  |  |  |           |  |  |   |       | 
|$ 2.33  $14.38          |  |                     | 8,882,635 |                     |  |                  | 6.62  |             |  |                | 8.36 |  |  |  | 2,274,231 |  |  |   | 7.09  | 
|                         |  |                     |           |                     |  |                  |       |             |  |                |      |  |  |  |           |  |  |   |       | 

SFAS No. 148, issued on
December 31, 2002, provides companies alternative methods
of transitioning to SFAS No. 123s fair value
method of accounting for stock-based employee compensation, and
amends certain disclosure requirements. SFAS No. 148
does not mandate fair value accounting for stock-based employee

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##### Table of Contents



BEVERLY ENTERPRISES, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Years ended December 31, 2002, 2001 and
2000




10. Stockholders Equity 
(Continued)


compensation, but does require all companies to
meet the disclosure provisions. We currently do not recognize
compensation expense for our stock option grants, which are
issued at fair market value on the date of grant, and accounted
for under the intrinsic value method. In order to adopt the
recognition provisions of SFAS No. 148 on a
prospective basis, we must make this election during the year
ending December 31, 2003 and change to fair value
accounting for stock options. We are continuing to evaluate the
transition provisions of SFAS No. 148.

Pro forma information regarding net loss and
diluted net loss per share has been determined as if we
accounted for our stock option grants under the fair market
value method described in SFAS No. 123. 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, 2002, 2001 and 2000, respectively:



| |   |                                                                                                 
| | - | ------------------------------------------------------------------------------------------------
| |  | risk-free interest rates of 4.8%, 4.3% and 5.1%;                                                
|
| |  | volatility factors of the expected market price
    of our Common Stock of .74, .59 and .57; 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
estimated fair market value of options granted during 2002, 2001
and 2000 of $3.55 per share, $4.25 per share and
$1.80 per share, respectively.

The Black-Scholes option valuation model was
developed for use in estimating the fair market value of traded
options that 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 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 (in thousands, except per share amounts):

|                                          |  |      |         |      |  |      |         |  |  |   |        |  
|----------------------------------------- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | ------ | -
|                                          |  | 2002 |         | 2001 |  | 2000
|                                          |  |      |         |      |  |     
|Reported net loss                         |  | $    | 146,090 |      |  | $    | 301,272 |  |  | $ | 54,502 |  
|Stock grant compensation expense (income) |  |      | 6,218   |      |  |      | 2,708   |  |  |   | (4,418 | )
|                                          |  |      |         |      |  |      |         |  |  |   |        |  
|Pro forma net loss                        |  | $    | 152,308 |      |  | $    | 303,980 |  |  | $ | 50,084 |  
|                                          |  |      |         |      |  |      |         |  |  |   |        |  
|Reported diluted net loss per share       |  | $    | 1.39    |      |  | $    | 2.90    |  |  | $ | 0.53   |  
|                                          |  |      |         |      |  |      |         |  |  |   |        |  
|Pro forma diluted net loss per share      |  | $    | 1.45    |      |  | $    | 2.92    |  |  | $ | 0.49   |  
|                                          |  |      |         |      |  |      |         |  |  |   |        |  

The pro forma amounts for 2000 reflect the impact
of the cancellation of approximately 4.8 million stock
options in exchange for approximately 2.4 million shares of
restricted stock (as discussed above). The pro forma effects are
not necessarily indicative of the effects on future years.

65



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##### Table of Contents



BEVERLY ENTERPRISES, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Years ended December 31, 2002, 2001 and
2000




10. Stockholders Equity 
(Continued)


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. During 2002, 2001, and 2000 we
matched 15%, 15% and 30%, respectively, of each
participants contribution. Effective January 1, 2003,
we eliminated our matching contributions to this plan. Each
participant specifies the amount to be withheld from earnings
per pay period, subject to certain limitations. The total
charges to our consolidated statements of operations for the
years ended December 31, 2002, 2001 and 2000 related to
this plan were approximately $300,000, $500,000 and
$1.2 million, respectively.

11. Income Taxes

The provision for (benefit from) income taxes,
including taxes (benefits) allocated to discontinued operations,
consists of the following for the years ended December 31
(in thousands):

|         |          |      |       |       |  |      |        |        |   |   |         |         |  
|-------- | -------- | ---- | ----- | ----- |  | ---- | ------ | ------ | - | - | ------- | ------- | -
|         |          | 2002 |       | 2001  |  | 2000
|         |          |      |       |       |  |     
|Federal: |          |      |       |       |  |      |        |        |   |   |         |        
|         | Current  |      | $     | 2,102 |  |      | $      | 1,487  |   |   | $       |        |  
|         | Deferred |      |       |      |  |      |        | 56,831 |   |   |         | (26,962 | )
|State:   |          |      |       |       |  |      |        |        |   |   |         |        
|         | Current  |      |       | 3,983 |  |      |        | 5,000  |   |   |         | 4,000   |  
|         | Deferred |      |       |      |  |      |        | (1,930 | ) |   |         | 700     |  
|         |          |      |       |       |  |      |        |        |   |   |         |        
|         |          | $    | 6,085 |       |  | $    | 61,388 |        |   | $ | (22,262 | )      
|         |          |      |       |       |  |      |        |        |   |   |         |        

A reconciliation of our income tax provision
(benefit), including taxes (benefits) allocated to
discontinued operations, 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):

|                                   |  |      |         |      |  |      |         |   |  |   |         |  
|---------------------------------- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                   |  | 2002 |         | 2001 |  | 2000
|                                   |  |      |         |      |  |     
|Tax (benefit) at statutory rate    |  | $    | (49,002 | )    |  | $    | (83,959 | ) |  | $ | (26,868 | )
|General business tax credits       |  |      | (2,090  | )    |  |      | (5,987  | ) |  |   | (2,138  | )
|State tax provision (benefit), net |  |      | 2,593   |      |  |      | (10,666 | ) |  |   | 3,055   |  
|Impairment charges                 |  |      | 12,685  |      |  |      | 7,090   |   |  |   | 4,358   |  
|Increase in valuation allowance    |  |      | 45,520  |      |  |      | 153,697 |   |  |   |        |  
|Other                              |  |      | (3,621  | )    |  |      | 1,213   |   |  |   | (669    | )
|                                   |  |      |         |      |  |      |         |   |  |   |         |  
|                                   |  | $    | 6,085   |      |  | $    | 61,388  |   |  | $ | (22,262 | )
|                                   |  |      |         |      |  |      |         |   |  |   |         |  

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

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BEVERLY ENTERPRISES, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Years ended December 31, 2002, 2001 and
2000




|    |                               
|--- | ------------------------------
|11. | Income
    Taxes  (Continued)

temporary differences giving rise to our deferred
tax assets and liabilities at December 31, 2002 and 2001
are as follows (in thousands):

|                                             |         |                           |         |           |         |       |         |           |         |   |         |          |         |   |         |   |         | 
|-------------------------------------------- | ------- | ------------------------- | ------- | --------- | ------- | ----- | ------- | --------- | ------- | - | ------- | -------- | ------- | - | ------- | - | ------- | 
|                                             |         |                           |         |          
|                                             |         | 2002                      |         | 2001     
|                                             |         |                           |         |          
|                                             |         | Asset                     |         | Liability |         | Asset |         | Liability
|                                             |         |                           |         |           |         |       |         |          
|Insurance reserves                           |         | $                         | 79,071  |           |         | $     |        |           |         | $ | 74,878  |          |         | $ |        |  
|General business tax credit carryforwards    |         |                           | 28,742  |           |         |       |        |           |         |   | 21,137  |          |         |   |        |  
|Alternative minimum tax credit carryforwards |         |                           | 19,124  |           |         |       |        |           |         |   | 18,608  |          |         |   |        |  
|Provision for dispositions                   |         |                           | 66,768  |           |         |       | 8,387   |           |         |   | 57,605  |          |         |   | 2,791   |  
|Provision for Medicare repayment             |         |                           | 31,735  |           |         |       |        |           |         |   | 69,812  |          |         |   |        |  
|Depreciation and amortization                |         |                           | 28,399  |           |         |       | 113,228 |           |         |   | 15,513  |          |         |   | 127,005 |  
|Operating supplies                           |         |                           |        |           |         |       | 11,489  |           |         |   |        |          |         |   | 12,099  |  
|Federal net operating loss carryforwards     |         |                           | 55,659  |           |         |       |        |           |         |   | 30,772  |          |         |   |        |  
|Other                                        |         |                           | 29,279  |           |         |       | 6,456   |           |         |   | 27,254  |          |         |   | 19,987  |  
|                                             |         |                           |         |           |         |       |         |           |         |   |         |          |         |   |         |  
|                                             |         |                           | 338,777 |           |         |       | 139,560 |           |         |   | 315,579 |          |         |   | 161,882 |  
|Valuation allowances:                        |         |                           |         |           |         |       |         |           |         |   |         |          |         |   |         |  
|                                             | Federal |                           |         | (179,625  | )       |       |         |          |         |   |         | (134,219 | )       |   |         |  |        
|                                             | State   |                           |         | (19,592   | )       |       |         |          |         |   |         | (19,478  | )       |   |         |  |        
|                                             |         |                           |         |           |         |       |         |           |         |   |         |          |         |   |         |  
|                                             |         | Net deferred tax balances |         | $         | 139,560 |       |         | $         | 139,560 |   |         | $        | 161,882 |   |         | $ | 161,882 | 
|                                             |         |                           |         |           |         |       |         |           |         |   |         |          |         |   |         |  

At December 31, 2002, for federal income tax
purposes, we had federal net operating loss carryforwards of
$164.7 million that expire in years 2017 through 2022;
general business tax credit carryforwards of $28.7 million
that expire in years 2008 through 2022; and alternative minimum
tax credit carryforwards of $19.1 million that do not
expire. Under the guidance of SFAS No. 109 and based
upon our operating results in recent years, our reported
cumulative losses, and the inherent uncertainty associated with
the realization of future income, we have provided a valuation
allowance on our net deferred tax assets as of December 31,
2002 and 2001.

12. Fair Values of Financial
Instruments

Financial Accounting Standards Statement
No. 107, Disclosures about Fair Value of Financial
Instruments, (SFAS No. 107) 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. SFAS 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.

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BEVERLY ENTERPRISES, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Years ended December 31, 2002, 2001 and
2000




|    |                                                       
|--- | ------------------------------------------------------
|12. | Fair Values of Financial
    Instruments  (Continued)



| |                                                      
| | -----------------------------------------------------
| | 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.



| |                                                               
| | --------------------------------------------------------------
| | 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 included an anticipated cash
payment of $35.0 million, which was included in the
consolidated balance sheet caption Federal government
settlement obligations at December 31, 2001. This
payment was made during 2002. The carrying amounts of these
obligations approximate their fair values.

The carrying amounts and estimated fair values of
our financial instruments at December 31, 2002 and 2001 are
as follows (in thousands):

|                                                               |  |          |         |            |  |          |         |            |  |   |         |  |  |   |         | 
|-------------------------------------------------------------- |  | -------- | ------- | ---------- |  | -------- | ------- | ---------- |  | - | ------- |  |  | - | ------- | 
|                                                               |  |          |         |           
|                                                               |  | 2002     |         | 2001      
|                                                               |  |          |         |           
|                                                               |  | Carrying |         |            |  | Carrying |         |           
|                                                               |  | Amount   |         | Fair Value |  | Amount   |         | Fair Value
|                                                               |  |          |         |            |  |          |         |           
|Cash and cash equivalents                                      |  | $        | 115,445 |            |  | $        | 115,445 |            |  | $ | 89,343  |  |  | $ | 89,343  | 
|Notes receivable, net (including current portion)              |  |          | 24,997  |            |  |          | 24,997  |            |  |   | 22,710  |  |  |   | 22,710  | 
|Beverly Indemnity funds                                        |  |          | 2,809   |            |  |          | 2,809   |            |  |   | 2,163   |  |  |   | 2,163   | 
|Long-term debt (including current portion)                     |  |          | 630,177 |            |  |          | 585,657 |            |  |   | 741,673 |  |  |   | 760,093 | 
|Federal government settlements (including current
    portion) |  |          | 73,891  |            |  |          | 73,891  |            |  |   | 119,859 |  |  |   | 119,859 | 

At December 31, 2002 and 2001, we had
outstanding defeased long-term debt with aggregate carrying
values of $4.6 million and $4.9 million, respectively.
The fair value of such defeased debt was approximately
$4.6 million and $5.1 million at December 31,
2002 and 2001, respectively. The fair value was estimated using
discounted cash flow analyses, based on our incremental
borrowing rates for similar types of borrowing arrangements.

68



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BEVERLY ENTERPRISES, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Years ended December 31, 2002, 2001 and
2000




|    |                                                       
|--- | ------------------------------------------------------
|12. | Fair Values of Financial
    Instruments  (Continued)

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 lessee. It is not practicable to estimate the fair value
of these off-balance sheet guarantees (see Note 9). 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, 2002 and 2001, we guaranteed
approximately $200,000 and $600,000, 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 $200,000 and $600,000 at
December 31, 2002 and 2001, respectively. The fair value
was estimated using discounted cash flow analyses, based on our
incremental borrowing rates for similar types of borrowing
arrangements.

13. 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.



| |                                                                                                
| | -----------------------------------------------------------------------------------------------
| | 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 a continuing effort to effectively implement
these strategies and operate our business units more
effectively, in the first quarter of 2002, we reorganized our
operations into four primary segments:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Nursing facilities, which provide long-term
    healthcare through the operation of nursing homes and assisted
    living centers;                                                                                                                                                                                                                                                                                 
|
| |  | AEGIS, which provides rehabilitation therapy
    services under contract to Beverly and non-Beverly facilities;                                                                                                                                                                                                                                                                                                    
|
| |  | Home Care, which provides home health, hospice
    and home medical equipment services. A portion of this segment,
    MK Medical, was held for sale as of December 31, 2002, and
    as such its operations are included in discontinued operations
    in the accompanying consolidated statements of
    operations; and                                                                                        
|
| |  | Matrix, which operates outpatient therapy and
    other clinics and a managed care network. This segment was held
    for sale as of December 31, 2002, and as such its
    operations are included in discontinued operations in the
    accompanying consolidated statements of operations. We sold the
    outpatient rehabilitation therapy clinic operations and the
    managed care network in January 2003.

69



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##### Table of Contents



BEVERLY ENTERPRISES, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Years ended December 31, 2002, 2001 and
2000




13. Segment
Information  (Continued)




| |                                                             
| | ------------------------------------------------------------
| | 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 financial
performance and allocate resources primarily 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.

70



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##### Table of Contents



BEVERLY ENTERPRISES, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Years ended December 31, 2002, 2001 and
2000




13. Segment
Information  (Continued)


The following table summarizes certain
information for each of our operating segments, based on our
first quarter 2002 reorganization (in thousands):

|                             |                                  |            |   |           |  |      |   |              |  |       |   |               |   |  |   |          |   |  |   |           |   |  |   |         |  
|---------------------------- | -------------------------------- | ---------- | - | --------- |  | ---- | - | ------------ |  | ----- | - | ------------- | - |  | - | -------- | - |  | - | --------- | - |  | - | ------- | -
|                             |                                  | Nursing    |   |           |  | Home |   |              |  |       |   | Discontinued 
|                             |                                  | Facilities |   | AEGIS     |  | Care |   | All Other(1) |  | Total |   | Operations(2)
|                             |                                  |            |   |           |  |      |   |              |  |       |   |              
|Year ended December 31, 2002 |                                  |            |   |           |  |      |   |              |  |       |   |               |   |  |   |          |   |  |   |           |   |  |   |        
|                             | Revenues from external customers |            | $ | 2,303,061 |  |      | $ | 52,967       |  |       | $ | 62,030        |   |  | $ | 1,865    |   |  | $ | 2,419,923 |   |  | $ | 82,388  |  
|                             | Intercompany revenues            |            |   |          |  |      |   | 165,321      |  |       |   |              |   |  |   | 626      |   |  |   | 165,947   |   |  |   |        |  
|                             | Interest income                  |            |   | 1,624     |  |      |   | 42           |  |       |   | 14            |   |  |   | 3,068    |   |  |   | 4,748     |   |  |   | 3       |  
|                             | Interest expense                 |            |   | 16,984    |  |      |   |             |  |       |   | 24            |   |  |   | 49,816   |   |  |   | 66,824    |   |  |   | 5       |  
|                             | Depreciation and amortization    |            |   | 72,198    |  |      |   | 710          |  |       |   | 998           |   |  |   | 7,218    |   |  |   | 81,124    |   |  |   | 7,819   |  
|                             | Pre-tax income (loss)            |            |   | 133,305   |  |      |   | 39,739       |  |       |   | (1,079        | ) |  |   | (198,000 | ) |  |   | (26,035   | ) |  |   | (36,799 | )
|                             | Goodwill                         |            |   | 48,942    |  |      |   |             |  |       |   | 14,594        |   |  |   | (159     | ) |  |   | 63,377    |   |  |   | 3,713   |  
|                             | Total assets                     |            |   | 1,132,880 |  |      |   | 15,966       |  |       |   | 32,314        |   |  |   | 139,013  |   |  |   | 1,320,173 |   |  |   | 29,722  |  
|                             | Capital expenditures             |            |   | 86,704    |  |      |   | 1,676        |  |       |   | 563           |   |  |   | 7,778    |   |  |   | 96,721    |   |  |   | 3,382   |  
|Year ended December 31, 2001 |                                  |            |   |           |  |      |   |              |  |       |   |               |   |  |   |          |   |  |   |           |   |  |   |        
|                             | Revenues from external customers |            | $ | 2,503,833 |  |      | $ | 17,366       |  |       | $ | 74,827        |   |  | $ | 3,937    |   |  | $ | 2,599,963 |   |  | $ | 113,983 |  
|                             | Intercompany revenues            |            |   |          |  |      |   | 180,661      |  |       |   |              |   |  |   | 11,360   |   |  |   | 192,021   |   |  |   |        |  
|                             | Interest income                  |            |   | 193       |  |      |   | 4            |  |       |   |              |   |  |   | 2,785    |   |  |   | 2,982     |   |  |   | 95      |  
|                             | Interest expense                 |            |   | 25,914    |  |      |   |             |  |       |   | 74            |   |  |   | 53,354   |   |  |   | 79,342    |   |  |   | 31      |  
|                             | Depreciation and amortization    |            |   | 71,550    |  |      |   | 278          |  |       |   | 2,464         |   |  |   | 6,916    |   |  |   | 81,208    |   |  |   | 11,793  |  
|                             | Pre-tax income (loss)            |            |   | 112,136   |  |      |   | 52,324       |  |       |   | (11,784       | ) |  |   | (332,521 | ) |  |   | (179,845  | ) |  |   | (60,039 | )
|                             | Goodwill                         |            |   | 47,517    |  |      |   |             |  |       |   | 22,832        |   |  |   | (224     | ) |  |   | 70,125    |   |  |   | 74,759  |  
|                             | Total assets                     |            |   | 1,346,901 |  |      |   | 8,575        |  |       |   | 56,950        |   |  |   | 144,121  |   |  |   | 1,556,547 |   |  |   | 124,523 |  
|                             | Capital expenditures             |            |   | 80,965    |  |      |   | 1,200        |  |       |   | 446           |   |  |   | 3,127    |   |  |   | 85,738    |   |  |   | 3,663   |  
|Year ended December 31, 2000 |                                  |            |   |           |  |      |   |              |  |       |   |               |   |  |   |          |   |  |   |           |   |  |   |        
|                             | Revenues from external customers |            | $ | 2,433,005 |  |      | $ | 5,632        |  |       | $ | 76,797        |   |  | $ | 7,831    |   |  | $ | 2,523,265 |   |  | $ | 107,796 |  
|                             | Intercompany revenues            |            |   |          |  |      |   | 139,024      |  |       |   |              |   |  |   | 11,695   |   |  |   | 150,719   |   |  |   |        |  
|                             | Interest income                  |            |   | 225       |  |      |   |             |  |       |   | 1             |   |  |   | 2,296    |   |  |   | 2,522     |   |  |   | 128     |  
|                             | Interest expense                 |            |   | 27,107    |  |      |   |             |  |       |   | 168           |   |  |   | 52,669   |   |  |   | 79,944    |   |  |   | 72      |  
|                             | Depreciation and amortization    |            |   | 78,987    |  |      |   | 270          |  |       |   | 2,213         |   |  |   | 6,308    |   |  |   | 87,778    |   |  |   | 12,283  |  
|                             | Pre-tax income (loss)            |            |   | 104,072   |  |      |   | 27,025       |  |       |   | (5,599        | ) |  |   | (145,291 | ) |  |   | (19,793   | ) |  |   | (56,971 | )
|                             | Goodwill                         |            |   | 36,013    |  |      |   |             |  |       |   | 39,713        |   |  |   | (110     | ) |  |   | 75,616    |   |  |   | 128,126 |  
|                             | Total assets                     |            |   | 1,504,123 |  |      |   | 3,004        |  |       |   | 91,013        |   |  |   | 104,551  |   |  |   | 1,702,691 |   |  |   | 173,302 |  
|                             | Capital expenditures             |            |   | 59,818    |  |      |   | 513          |  |       |   | 1,641         |   |  |   | 8,950    |   |  |   | 70,922    |   |  |   | 5,105   |  



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Consists of the operations of our corporate
    headquarters and related overhead, as well as certain
    non-operating revenues and expenses. These amounts also include
    pre-tax charges totaling approximately $98.5 million,
    $274.9 million and $61.7 million for 2002, 2001 and
    2000, respectively. These pre-tax charges primarily related to
    increasing reserves for patient care liability costs (in 2002
    and 2000), asset impairments, workforce reductions and other
    unusual items and special charges and adjustments related to
    federal government settlements.



| |     |                                                                                                                                                                                                                                                                                                                                                                                                   
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (2) | In accordance with the provisions of
    SFAS No. 144, the results of operations of Matrix and
    MK Medical have been reclassified, for all periods presented, as
    discontinued operations. (See Note 5.) The assets and
    liabilities of Matrix have been reclassified as held for sale
    and the assets of MK Medical have been reclassified as held for
    sale at December 31, 2002.

71



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##### Table of Contents



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, 2002
and 2001:

|                                                                                                                                              |                   |                                                                                  |         |       |         |     |         |       |         |       |         |      |         |     |         |       |         |     |           |       |         |   |         |       |         |   |         |       |         |   |         |       |         |   |          |       |         |   |           |       |         |  
|--------------------------------------------------------------------------------------------------------------------------------------------- | ----------------- | -------------------------------------------------------------------------------- | ------- | ----- | ------- | --- | ------- | ----- | ------- | ----- | ------- | ---- | ------- | --- | ------- | ----- | ------- | --- | --------- | ----- | ------- | - | ------- | ----- | ------- | - | ------- | ----- | ------- | - | ------- | ----- | ------- | - | -------- | ----- | ------- | - | --------- | ----- | ------- | -
|                                                                                                                                              |                   |                                                                                  |         |      
|                                                                                                                                              |                   | 2002                                                                             |         | 2001 
|                                                                                                                                              |                   |                                                                                  |         |      
|                                                                                                                                              |                   | 1st                                                                              |         | 2nd   |         | 3rd |         | 4th   |         | Total |         | 1st  |         | 2nd |         | 3rd   |         | 4th |           | Total
|                                                                                                                                              |                   |                                                                                  |         |       |         |     |         |       |         |       |         |      |         |     |         |       |         |     |           |      
|Total revenues                                                                                                                                |                   | $                                                                                | 597,023 |       |         | $   | 610,457 |       |         | $     | 606,372 |      |         | $   | 610,819 |       |         | $   | 2,424,671 |       |         | $ | 629,956 |       |         | $ | 651,140 |       |         | $ | 664,674 |       |         | $ | 657,175  |       |         | $ | 2,602,945 |      
|                                                                                                                                              |                   |                                                                                  |         |       |         |     |         |       |         |       |         |      |         |     |         |       |         |     |           |       |         |   |         |       |         |   |         |       |         |   |         |       |         |   |          |       |         |   |           |      
|Income (loss) before provision for (benefit from)
    income taxes, discontinued operations and cumulative effect of
    change in accounting |                   | $                                                                                | 27,470  |       |         | $   | (9,555  | )     |         | $     | 19,732  |      |         | $   | (63,682 | )     |         | $   | (26,035   | )     |         | $ | (93,184 | )     |         | $ | 17,879  |       |         | $ | 25,531  |       |         | $ | (130,071 | )     |         | $ | (179,845  | )    
|Provision for (benefit from) income taxes                                                                                                     |                   |                                                                                  | 1,079   |       |         |     | 1,331   |       |         |       | 1,021   |      |         |     | 2,654   |       |         |     | 6,085     |       |         |   | (37,151 | )     |         |   | 10,178  |       |         |   | 15,498  |       |         |   | 69,049   |       |         |   | 57,574    |      
|                                                                                                                                              |                   |                                                                                  |         |       |         |     |         |       |         |       |         |      |         |     |         |       |         |     |           |       |         |   |         |       |         |   |         |       |         |   |         |       |         |   |          |       |         |   |           |      
|Income (loss) before discontinued operations and
    cumulative effect of change in accounting                                                |                   |                                                                                  | 26,391  |       |         |     | (10,886 | )     |         |       | 18,711  |      |         |     | (66,336 | )     |         |     | (32,120   | )     |         |   | (56,033 | )     |         |   | 7,701   |       |         |   | 10,033  |       |         |   | (199,120 | )     |         |   | (237,419  | )    
|Discontinued operations, net of taxes                                                                                                         |                   |                                                                                  | (5,887  | )     |         |     | (3,128  | )     |         |       | (3,133  | )    |         |     | (24,651 | )     |         |     | (36,799   | )     |         |   | 3,759   |       |         |   | (2,133  | )     |         |   | 2,040   |       |         |   | (67,519  | )     |         |   | (63,853   | )    
|Cumulative effect of change in accounting, net of
    taxes                                                                                   |                   |                                                                                  | (77,171 | )     |         |     |        |       |         |       |        |      |         |     |        |       |         |     | (77,171   | )     |         |   |        |       |         |   |        |       |         |   |        |       |         |   |         |       |         |   |          |      
|                                                                                                                                              |                   |                                                                                  |         |       |         |     |         |       |         |       |         |      |         |     |         |       |         |     |           |       |         |   |         |       |         |   |         |       |         |   |         |       |         |   |          |       |         |   |           |      
|Net income (loss)                                                                                                                             |                   | $                                                                                | (56,667 | )     |         | $   | (14,014 | )     |         | $     | 15,578  |      |         | $   | (90,987 | )     |         | $   | (146,090  | )     |         | $ | (52,274 | )     |         | $ | 5,568   |       |         | $ | 12,073  |       |         | $ | (266,639 | )     |         | $ | (301,272  | )    
|                                                                                                                                              |                   |                                                                                  |         |       |         |     |         |       |         |       |         |      |         |     |         |       |         |     |           |       |         |   |         |       |         |   |         |       |         |   |         |       |         |   |          |       |         |   |           |      
|Income (loss) per share of common stock:                                                                                                      |                   |                                                                                  |         |       |         |     |         |       |         |       |         |      |         |     |         |       |         |     |           |       |         |   |         |       |         |   |         |       |         |   |         |       |         |   |          |       |         |   |           |      
|                                                                                                                                              | Basic:            |                                                                                  |         |       |         |     |         |       |         |       |         |      |         |     |         |       |         |     |           |       |         |   |         |       |         |   |         |       |         |   |         |       |         |   |          |       |         |   |           |       |        
|                                                                                                                                              |                   | Before discontinued operations and cumulative
    effect of change in accounting |         | $     | 0.25    |     |         |       | (0.10   | )     |         | $    | 0.18    |     |         | $     | (0.63   | )   |           | $     | (0.31   | ) |         | $     | (0.54   | ) |         | $     | 0.07    |   |         | $     | 0.10    |   |          | $     | (1.91   | ) |           | $     | (2.28   | )
|                                                                                                                                              |                   | Discontinued operations                                                          |         |       | (0.06   | )   |         |       | (0.03   | )     |         |      | (0.03   | )   |         |       | (0.24   | )   |           |       | (0.35   | ) |         |       | 0.04    |   |         |       | (0.02   | ) |         |       | 0.02    |   |          |       | (0.65   | ) |           |       | (0.61   | )
|                                                                                                                                              |                   | Cumulative effect of change in accounting                                        |         |       | (0.74   | )   |         |       |        |       |         |      |        |     |         |       |        |     |           |       | (0.74   | ) |         |       |        |   |         |       |        |   |         |       |        |   |          |       |        |   |           |       |        |  
|                                                                                                                                              |                   |                                                                                  |         |       |         |     |         |       |         |       |         |      |         |     |         |       |         |     |           |       |         |   |         |       |         |   |         |       |         |   |         |       |         |   |          |       |         |   |           |      
|                                                                                                                                              |                   | Net income (loss)                                                                |         | $     | (0.54   | )   |         | $     | (0.13   | )     |         | $    | 0.15    |     |         | $     | (0.87   | )   |           | $     | (1.39   | ) |         | $     | (0.50   | ) |         | $     | 0.05    |   |         | $     | 0.12    |   |          | $     | (2.56   | ) |           | $     | (2.90   | )
|                                                                                                                                              |                   |                                                                                  |         |       |         |     |         |       |         |       |         |      |         |     |         |       |         |     |           |       |         |   |         |       |         |   |         |       |         |   |         |       |         |   |          |       |         |   |           |      
|                                                                                                                                              |                   | Shares used to compute per share amounts                                         |         |       | 104,441 |     |         |       | 104,731 |       |         |      | 104,865 |     |         |       | 104,861 |     |           |       | 104,726 |   |         |       | 103,705 |   |         |       | 103,884 |   |         |       | 104,264 |   |          |       | 104,286 |   |           |       | 104,037 |  
|                                                                                                                                              |                   |                                                                                  |         |       |         |     |         |       |         |       |         |      |         |     |         |       |         |     |           |       |         |   |         |       |         |   |         |       |         |   |         |       |         |   |          |       |         |   |           |      
|                                                                                                                                              | Diluted:          |                                                                                  |         |       |         |     |         |       |         |       |         |      |         |     |         |       |         |     |           |       |         |   |         |       |         |   |         |       |         |   |         |       |         |   |          |       |         |   |           |       |        
|                                                                                                                                              |                   | Before discontinued operations and cumulative
    effect of change in accounting |         | $     | 0.25    |     |         |       | (0.10   | )     |         | $    | 0.18    |     |         | $     | (0.63   | )   |           | $     | (0.31   | ) |         | $     | (0.54   | ) |         | $     | 0.07    |   |         | $     | 0.09    |   |          | $     | (1.91   | ) |           | $     | (2.28   | )
|                                                                                                                                              |                   | Discontinued operations                                                          |         |       | (0.06   | )   |         |       | (0.03   | )     |         |      | (0.03   | )   |         |       | (0.24   | )   |           |       | (0.35   | ) |         |       | 0.04    |   |         |       | (0.02   | ) |         |       | 0.02    |   |          |       | (0.65   | ) |           |       | (0.61   | )
|                                                                                                                                              |                   | Cumulative effect of change in accounting                                        |         |       | (0.74   | )   |         |       |        |       |         |      |        |     |         |       |        |     |           |       | (0.74   | ) |         |       |        |   |         |       |        |   |         |       |        |   |          |       |        |   |           |       |        |  
|                                                                                                                                              |                   |                                                                                  |         |       |         |     |         |       |         |       |         |      |         |     |         |       |         |     |           |       |         |   |         |       |         |   |         |       |         |   |         |       |         |   |          |       |         |   |           |      
|                                                                                                                                              | Net income (loss) |                                                                                  | $       | (0.54 | )       |     | $       | (0.13 | )       |       | $       | 0.15 |         |     | $       | (0.87 | )       |     | $         | (1.39 | )       |   | $       | (0.50 | )       |   | $       | 0.05  |         |   | $       | 0.11  |         |   | $        | (2.56 | )       |   | $         | (2.90 | )      
|                                                                                                                                              |                   |                                                                                  |         |       |         |     |         |       |         |       |         |      |         |     |         |       |         |     |           |       |         |   |         |       |         |   |         |       |         |   |         |       |         |   |          |       |         |   |           |      
|                                                                                                                                              |                   | Shares used to compute diluted net income (loss)
    per share                   |         |       | 105,466 |     |         |       | 104,731 |       |         |      | 104,937 |     |         |       | 104,861 |     |           |       | 104,726 |   |         |       | 103,705 |   |         |       | 105,691 |   |         |       | 106,572 |   |          |       | 104,286 |   |           |       | 104,037 |  
|                                                                                                                                              |                   |                                                                                  |         |       |         |     |         |       |         |       |         |      |         |     |         |       |         |     |           |       |         |   |         |       |         |   |         |       |         |   |         |       |         |   |          |       |         |   |           |      
|Common stock price range:                                                                                                                     |                   |                                                                                  |         |       |         |     |         |       |         |       |         |      |         |     |         |       |         |     |           |       |         |   |         |       |         |   |         |       |         |   |         |       |         |   |          |       |         |   |           |      
|                                                                                                                                              | High              |                                                                                  | $       | 9.50  |         |     | $       | 9.18  |         |       | $       | 7.95 |         |     | $       | 3.89  |         |     |           |       |         |   | $       | 8.50  |         |   | $       | 10.73 |         |   | $       | 12.10 |         |   | $        | 10.69 |         |   |           |       |        
|                                                                                                                                              | Low               |                                                                                  | $       | 5.66  |         |     | $       | 6.95  |         |       | $       | 1.90 |         |     | $       | 1.60  |         |     |           |       |         |   | $       | 5.94  |         |   | $       | 5.20  |         |   | $       | 8.50  |         |   | $        | 6.50  |         |   |           |       |        



---

We recorded provisions for income taxes,
including taxes (benefits) allocated to discontinued operations,
at 4% and 26% for the years ended December 31, 2002 and
2001, respectively, even though we had pre-tax losses, primarily
due to state income taxes in 2002 and the recording of a
valuation allowance on our deferred tax assets in 2001. 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.

The operations of Matrix and MK Medical have been
reclassified as discontinued operations for all periods
presented since they met the criteria under
SFAS No. 144 as assets held for sale at
December 31, 2002. In addition, we recorded a cumulative
effect for the change in accounting for goodwill as of
January 1, 2002.

Certain per share amounts will not add due to
rounding.

72



---



##### Table of Contents








|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|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 22, 2003, 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 22, 2003, 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 22, 2003, 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 22, 2003, to be filed pursuant to
Regulation 14A.






|         |                        
|-------- | -----------------------
|ITEM 14. | CONTROLS AND PROCEDURES

The Company maintains disclosure controls
and procedures, as such term is defined under Exchange Act
Rule 13a-14 (c). Disclosure controls and procedures are
designed to ensure that information required to be disclosed in
the Companys Exchange Act reports is recorded, processed,
summarized and reported within the time periods specified in the
SECs rules and forms. Such information is accumulated and
communicated to the Companys management, including its
Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls
and procedures, the Companys management recognized that
any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the
desired control objectives and the Companys management
necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
The Company has carried out an evaluation, within the
90 days prior to the date of filing of this report, under
the supervision and with the participation of the Companys
management, including the Companys Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design
and operation of the Companys disclosure controls and
procedures. Based upon their evaluation and subject to the
foregoing, the Chief Executive Officer and Chief Financial
Officer concluded that the Companys disclosure controls
and procedures were effective in ensuring that material
information relating to the Company is made known to the Chief
Executive Officer and Chief Financial Officer by others within
the Company during the period in which this report was being
prepared.

There have been no significant changes in the
Companys internal controls or in other factors that could
significantly affect these controls subsequent to the date the
Company completed its evaluation.

73



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PART IV






|         |                                                                     
|-------- | --------------------------------------------------------------------
|ITEM 15. | 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

On November 14, 2002, the Company filed a
report on Form 8-K, which included the transmittal letter
and certifications pursuant to 18 U.S.C. Section 1350
as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.

On October 31, 2002, the Company filed a
report on Form 8-K, which included a press release
announcing its earnings for the 2002 third quarter and certain
supplemental information.



| |             
| | ------------
| | (c) Exhibits

See the accompanying index to exhibits referenced
in Item 15(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 15(a)1 and 2, above.

74



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BEVERLY ENTERPRISES, INC.






INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND


FINANCIAL STATEMENT SCHEDULES


(Item 15(a))


|                                                                                                                                             |  |      |    | 
|-------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                                                                             |  | Page
|                                                                                                                                             |  |     
|1. Consolidated financial statements:                                                                                                        |  |      |    | 
|Report of Ernst & Young LLP, Independent
    Auditors                                                                                        |  |      | 36 | 
|Consolidated Balance Sheets at December 31,
    2002 and 2001                                                                                |  |      | 37 | 
|Consolidated Statements of Operations for each of
    the three years in the period ended December 31, 2002                                  |  |      | 38 | 
|Consolidated Statements of Stockholders
    Equity for each of the three years in the period ended
    December 31, 2002                    |  |      | 39 | 
|Consolidated Statements of Cash Flows for each of
    the three years in the period ended December 31, 2002                                  |  |      | 40 | 
|Notes to Consolidated Financial Statements                                                                                                   |  |      | 41 | 
|Supplementary Data (Unaudited) 
    Quarterly Financial Data                                                                                |  |      | 72 | 
|                                                                                                                                            
|2. Consolidated financial statement schedule
    for each of the three years in the period ended
    December 31, 2002:                      |  |      |    | 
|II  Valuation and Qualifying Accounts                                                                                                       |  |      | 76 | 
|                                                                                                                                            
|All other schedules are omitted because they are
    either not applicable or the items do not meet the various
    disclosure requirements. |  |      |    | 

75



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##### Table of Contents



BEVERLY ENTERPRISES, INC.






SCHEDULE II  VALUATION AND
QUALIFYING ACCOUNTS

Years ended December 31, 2002, 2001 and
2000


(In thousands)


|                              |                                            |                                  |        |            |        |              |        |                  |        |       |         |             |         |      |        |   |        |   |        |         |        |   |        |         |        |  
|----------------------------- | ------------------------------------------ | -------------------------------- | ------ | ---------- | ------ | ------------ | ------ | ---------------- | ------ | ----- | ------- | ----------- | ------- | ---- | ------ | - | ------ | - | ------ | ------- | ------ | - | ------ | ------- | ------ | -
|                              |                                            |                                  |        |            |        |              |        | Due to           |        |       |         |            
|                              |                                            |                                  |        | Charged    |        |              |        | acquisitions,    |        |       |         |            
|                              |                                            | Balance at                       |        | (credited) |        |              |        | dispositions and |        |       |         |            
|                              |                                            | beginning of                     |        | to         |        | (Write-offs) |        | discontinued     |        |       |         | Balance at 
|Description                   |                                            | year                             |        | operations |        | recoveries   |        | operations       |        | Other |         | end of year
|                              |                                            |                                  |        |            |        |              |        |                  |        |       |         |            
|Year ended December 31, 2002: |                                            |                                  |        |            |        |              |        |                  |        |       |         |             |         |      |        |   |        |   |        |         |        |   |        |        
|                              | Allowance for doubtful accounts:           |                                  |        |            |        |              |        |                  |        |       |         |             |         |      |        |   |        |   |        |         |        |   |        |         |       
|                              |                                            | Accounts receivable  patient    |        | $          | 51,400 |              |        | $                | 53,692 |       |         | $           | (59,385 | )    |        | $ | (4,207 | ) |        | $       | 1,689  |   |        | $       | 43,189 |  
|                              |                                            | Accounts receivable  nonpatient |        |            | 1,074  |              |        |                  | 866    |       |         |             | (615    | )    |        |   | (14    | ) |        |         | 166    |   |        |         | 1,477  | *
|                              |                                            | Notes receivable                 |        |            | 4,941  |              |        |                  | 1,012  |       |         |             | (39     | )    |        |   | 181    |   |        |         | 1,666  |   |        |         | 7,761  |  
|                              |                                            |                                  |        |            |        |              |        |                  |        |       |         |             |         |      |        |   |        |   |        |         |        |   |        |        
|                              |                                            | $                                | 57,415 |            |        | $            | 55,570 |                  |        | $     | (60,039 | )           |         | $    | (4,040 | ) |        | $ | 3,521  |         |        | $ | 52,427 |        
|                              |                                            |                                  |        |            |        |              |        |                  |        |       |         |             |         |      |        |   |        |   |        |         |        |   |        |        
|                              | Valuation allowance on deferred tax assets |                                  | $      | 153,697    |        |              | $      | 45,520           |        |       | $       |            |         |      | $      |  |        |   | $      |        |        |   | $      | 199,217 |       
|                              |                                            |                                  |        |            |        |              |        |                  |        |       |         |             |         |      |        |   |        |   |        |         |        |   |        |        
|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 |        
|                              |                                            |                                  |        |            |        |              |        |                  |        |       |         |             |         |      |        |   |        |   |        |         |        |   |        |        



---



|    |  |                                                                                                                                                                                                    
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(A) |  | Includes the write-off of $39.0 million of
    Medicare cost report related receivables against a related
    reserve established in conjunction with the OIG settlement (see
    Item 8  Note 3).
|   
|(B) |  | Represents a full valuation allowance on our net
    deferred tax assets.                                                                                                                          
|   
|*   |  | Includes amounts classified in long-term other
    assets as well as current assets.                                                                                                               

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BEVERLY ENTERPRISES, INC.

INDEX TO EXHIBITS

(ITEM 15(a)(3))


|        |   |    |  |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                
|------- | - | -- |  | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |   |    |  |            
|Number  |   |    |  | Description
|        |   |    |  |            
|        | 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 (incorporated by
    reference to Exhibit 4.3 to Beverly Enterprises,
    Inc.s Annual Report on Form 10-K for the year ended
    December 31, 2001)                                                                       
|        | 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))                                                                                            

77



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|        |    |     |  |             |  |                                                                                                                                                                                                                                                                                                                                                                            
|------- | -- | --- |  | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |     |  |            
|Number  |    |     |  | Description
|        |    |     |  |            
|        | 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))                                                                                                                     
|        | 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
    (incorporated by reference to Exhibit 10.1 to Beverly
    Enterprises, Inc.s Annual Report on Form 10-K for the
    year ended December 31, 2001)                                                                                                                                                                     
|        | 10 | .2* |  |            |  | 1997 Long-Term Incentive Plan, as amended and
    restated as of June 1, 2001 (the 1997 LTIP)
    (incorporated by reference to Exhibit 10.2 to Beverly
    Enterprises, Inc.s Annual Report on Form 10-K for the
    year ended December 31, 2001)                                                                                                                     
|        | 10 | .3* |  |            |  | Beverly Enterprises, Inc. Non-Employee
    Directors Stock Option Plan, as amended and restated as of
    June 1, 2001 (the Directors Option Plan)
    (incorporated by reference to Exhibit 10.3 to Beverly
    Enterprises, Inc.s Annual Report on Form 10-K for the
    year ended December 31, 2001)                                                              
|        | 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))                                                                                                             

78



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|        |    |       |  |             |  |                                                                                                                                                                                                                                                                                                        
|------- | -- | ----- |  | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |       |  |            
|Number  |    |       |  | Description
|        |    |       |  |            
|        | 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)                                                      
|        | 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*  |  |            |  | Amendment Number One to the Beverly Enterprises,
    Inc. Supplemental Executive Retirement Plan (incorporated by
    reference to Exhibit 10.5 to Beverly Enterprises,
    Inc.s Quarterly Report on Form 10-Q for the quarter
    ended June 30, 2002)                                              
|        | 10 | .21*  |  |            |  | 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 | .22* |  |            |  | Beverly Enterprises, Inc. Executive Deferred
    Compensation Plan effective December 31, 2002                                                                                                                                                                                                         
|        | 10 | .23*  |  |            |  | 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 | .24*  |  |            |  | 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)                                                                  

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|        |    |       |  |             |  |                                                                                                                                                                                                                                                                                                                               
|------- | -- | ----- |  | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |       |  |            
|Number  |    |       |  | Description
|        |    |       |  |            
|        | 10 | .25*  |  |            |  | 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 | .26*  |  |            |  | 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 | .27*  |  |            |  | 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 | .28*  |  |            |  | 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 | .29*  |  |            |  | 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 | .30*  |  |            |  | Severance Agreement and Release of Claims between
    Beverly Enterprises, Inc. and David R. Banks (incorporated by
    reference to Exhibit 10.28 to Beverly Enterprises,
    Inc.s Annual Report on Form 10-K for the year ended
    December 31, 2001)                                                                    
|        | 10 | .31*  |  |            |  | Employment Contract, made as of April 10,
    2000, between Beverly Enterprises, Inc. and William R. Floyd
    (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 | .32* |  |            |  | Employment Contract, made as of December 6,
    2001, between Beverly Enterprises, Inc. and William R. Floyd                                                                                                                                                                                                                  
|        | 10 | .33* |  |            |  | Employment and Severance Agreement, made as of
    June 1, 2001, between Beverly Enterprises, Inc. and David
    R. Devereaux                                                                                                                                                                                                 
|        | 10 | .34* |  |            |  | Severance Agreement and Release of Claims made as
    of October 5, 2002, between Beverly Enterprises, Inc. and
    Bobby W. Stephens                                                                                                                                                                                         
|        | 10 | .35* |  |            |  | Employment Contract, made as of April 1,
    2000, between Beverly Enterprises, Inc. and Douglas J. Babb                                                                                                                                                                                                                      
|        | 10 | .36* |  |            |  | Severance Agreement and Release of Claims made as
    of October 11, 2002, between Beverly Enterprises, Inc. and
    Michael J. Matheny                                                                                                                                                                                       
|        | 10 | .37* |  |            |  | Severance Agreement and Release of Claims made as
    of December 31, 2001, between Beverly Enterprises, Inc. and
    T. Jerald Moore                                                                                                                                                                                         
|        | 10 | .38*  |  |            |  | 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 | .39*  |  |            |  | 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))

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|        |    |      |  |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|------- | -- | ---- |  | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |      |  |            
|Number  |    |      |  | Description
|        |    |      |  |            
|        | 10 | .40* |  |            |  | 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 | .41* |  |            |  | Retention Stock Option Agreement, effective as of
    June 1, 2001, between Beverly Enterprises, Inc. and David
    R. Devereaux (incorporated by reference to Exhibit 10.1 to
    Beverly Enterprises, Inc.s Quarterly Report on
    Form 10-Q for the quarter ended September 30, 2002)                                                                                                                                                                                                                                                                                                                                                                                    
|        | 10 | .42* |  |            |  | Description of Non-Employee Directors Group Term
    Life Insurance Plan (incorporated by reference to
    Exhibit 10.4 to Beverly Enterprises, Inc.s Quarterly
    Report on Form 10-Q for the quarter ended June 30,
    2002)                                                                                                                                                                                                                                                                                                                                                                                                                                             
|        | 10 | .43* |  |            |  | Performance based Stock Option Award to Jeffrey
    P. Freimark pursuant to Process Improvement Team Awards Program
    (incorporated by reference to Exhibit 10.6 to Beverly
    Enterprises, Inc.s Quarterly Report on Form 10-Q for
    the quarter ended June 30, 2002)                                                                                                                                                                                                                                                                                                                                                                                                  
|        | 10 | .44* |  |            |  | Performance based Stock Option Award to L.
    Darlene Burch pursuant to Process Improvement Team Awards
    Program (incorporated by reference to Exhibit 10.7 to
    Beverly Enterprises, Inc.s Quarterly Report on
    Form 10-Q for the quarter ended June 30, 2002)                                                                                                                                                                                                                                                                                                                                                                                                     
|        | 10 | .45* |  |            |  | Description of Long Term Disability Policy for
    William R. Floyd (incorporated by reference to Exhibit 10.8
    to Beverly Enterprises, Inc.s Quarterly Report on
    Form 10-Q for the quarter ended June 30, 2002)                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|        | 10 | .46* |  |            |  | Employment Agreement made as of December 31,
    2001 between Beverly Enterprises, Inc. and Jeffrey P. Freimark
    (incorporated by reference to Exhibit 10.9 to Beverly
    Enterprises, Inc.s Quarterly Report on Form 10-Q for
    the quarter ended June 30, 2002)                                                                                                                                                                                                                                                                                                                                                                                                      
|        | 10 | .47* |  |            |  | Demand Promissory Note made as of April 1,
    2002 by Richard D. Skelly, Jr. for the benefit of Beverly
    Enterprises, Inc. (incorporated by reference to
    Exhibit 10.10 to Beverly Enterprises, Inc.s Quarterly
    Report on Form 10-Q for the quarter ended June 30,
    2002)                                                                                                                                                                                                                                                                                                                                                                                      
|        | 10 | .48  |  |            |  | 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 | .49  |  |            |  | 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 | .50  |  |            |  | 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) (incorporated by reference
    to Exhibit 10.36 to Beverly Enterprises, Inc.s Annual
    Report on Form 10-K for the year ended December 31,
    2001)                                                                                                                                                                               

81



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|        |    |      |  |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|------- | -- | ---- |  | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |      |  |            
|Number  |    |      |  | Description
|        |    |      |  |            
|        | 10 | .51  |  |            |  | First Amendment to Florida Sale Agreement, dated
    as of August 30, 2001 (incorporated by reference to
    Exhibit 10.37 to Beverly Enterprises, Inc.s Annual
    Report on Form 10-K for the year ended December 31,
    2001)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|        | 10 | .52  |  |            |  | Second Amendment to Florida Sale Agreement, dated
    as of October 29, 2001 (incorporated by reference to
    Exhibit 10.38 to Beverly Enterprises, Inc.s Annual
    Report on Form 10-K for the year ended December 31,
    2001)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|        | 10 | .53  |  |            |  | 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 | .54  |  |            |  | 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 | .55  |  |            |  | 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 | .56  |  |            |  | 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 | .57  |  |            |  | Master Amendment No. 3 to Amended and
    Restated Participation Agreement, dated as of April 25,
    2001 (incorporated by reference to Exhibit 10.43 to Beverly
    Enterprises, Inc.s Annual Report on Form 10-K for the
    year ended December 31, 2001)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|        | 10 | .58  |  |            |  | Amendment No. 4 to Amended and Restated
    Participation Agreement, dated as of December 31, 2001
    (incorporated by reference to Exhibit 10.44 to Beverly
    Enterprises, Inc.s Annual Report on Form 10-K for the
    year ended December 31, 2001)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|        | 10 | .59 |  |            |  | Amendment No. 5 to Amended and Restated
    Participation Agreement, dated as of December 20, 2002                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|        | 10 | .60 |  |            |  | Amendment No. 6 to Amended and Restated
    Participation Agreement, dated as of February 28, 2003
    [Note: Confidential treatment has been requested for portions of
    this document.]                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

82



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|        |    |      |  |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|------- | -- | ---- |  | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |      |  |            
|Number  |    |      |  | Description
|        |    |      |  |            
|        | 10 | .61  |  |            |  | 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 | .62 |  |            |  | Fifth Amendment to Master Services Agreement,
    dated as of January 1, 2003, by and between Alltel
    Information Services, Inc. and Beverly Enterprises, Inc.                                                                                                                                                                                                                                                                                                                                                                   
|        | 10 | .63  |  |            |  | 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) (incorporated by reference to
    Exhibit 10.46 to Beverly Enterprises, Inc.s Annual
    Report on Form 10-K for the year ended December 31,
    2001)                                                                                                                              
|        | 10 | .64  |  |            |  | Amendment No. 1 to the Credit Agreement,
    dated as of December 31, 2001 (incorporated by reference to
    Exhibit 10.47 to Beverly Enterprises, Inc.s Annual
    Report on Form 10-K for the year ended December 31,
    2001)                                                                                                                                                                                                                                                                                                  
|        | 10 | .65 |  |            |  | Amendment No. 3 to the Credit Agreement,
    dated as of December 20, 2002                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|        | 10 | .66 |  |            |  | Amendment No. 4 to the Credit Agreement,
    dated as of February 28, 2003 [Note: Confidential treatment
    has been requested for portions of this document.]                                                                                                                                                                                                                                                                                                                                                                     
|        | 10 | .67  |  |            |  | 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 | .68  |  |            |  | 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 | .69  |  |            |  | 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 | .70  |  |            |  | 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 | .71  |  |            |  | 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)                                                                                                                                                                                                                                                                                            
|        | 10 | .72  |  |            |  | Settlement Agreement, effective October 15,
    2002, between the Centers for Medicare and Medicaid Services,
    United States Department of Health and Human Services and
    Beverly Enterprises, Inc. (incorporated by reference to
    Exhibit 10.2 to Beverly Enterprises, Inc.s Quarterly
    Report on Form 10-Q for the quarter ended
    September 30, 2002)                                                                                                                                                             
|        | 10 | .73  |  |            |  | Permanent Injunction and Final Judgment entered
    on August 1, 2002 in People of the State of
    California v. Beverly Enterprises, Inc.; Beverly Health and
    Rehabilitation Services, Inc.; Beverly Enterprises 
    California, Inc.; and Beverly Healthcare  California,
    Inc., Superior Court of the State of California For the County
    of Santa Barbara (incorporated by reference to
    Exhibit 10.1 to Beverly Enterprises, Inc.s Quarterly
    Report on Form 10-Q for the quarter ended June 30,
    2002)

83



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|        |    |      |  |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                            
|------- | -- | ---- |  | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |      |  |            
|Number  |    |      |  | Description
|        |    |      |  |            
|        | 10 | .74  |  |            |  | Waiver of Constitutional Rights and Plea Form and
    Court Finding and Order dated August 1, 2002 in The People
    of California v. Beverly Enterprises 
    California, Inc., Superior Court of the State of California For
    the County of Santa Barbara (S.C. No. 1094923)
    (incorporated by reference to Exhibit 10.2 to Beverly
    Enterprises, Inc.s Quarterly Report on Form 10-Q for
    the quarter ended June 30, 2002)
|        | 10 | .75  |  |            |  | Investigation Conclusion letter dated
    August 1, 2002, from the State of California Department of
    Justice (incorporated by reference to Exhibit 10.3 to
    Beverly Enterprises, Inc.s Quarterly Report on
    Form 10-Q for the quarter ended June 30, 2002)                                                                                                                                                                      
|        | 10 | .76 |  |            |  | Loan Agreement dated as of December 24, 2002
    between Beverly Enterprises  Washington, Inc. and
    Bank of America, N.A.                                                                                                                                                                                                                                                                                                              
|        | 10 | .77 |  |            |  | Guaranty dated December 24, 2002 between
    Beverly Enterprises, Inc. and Bank of America, N.A.                                                                                                                                                                                                                                                                                                                                           
|        | 21 | .1  |  |            |  | Subsidiaries of Registrant                                                                                                                                                                                                                                                                                                                                                                                                                 
|        | 23 | .1  |  |            |  | Consent of Ernst & Young LLP,
    Independent Auditors                                                                                                                                                                                                                                                                                                                                                                                     



---



|  |                                                                                                                                                                            
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Exhibits 10.1 through 10.47 are management
    contracts, compensatory plans, contracts and arrangements in
    which any director or named executive officer participates.



|  |                
|- | ---------------
| | Filed herewith.

84



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##### Table of Contents






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 28, 2003

| |     |                     
| | --- | --------------------
| | 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 G. Arena, 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:

|                                                 |  |                                                                            |  |                |  | 
|------------------------------------------------ |  | -------------------------------------------------------------------------- |  | -------------- |  | 
|                                                
|/s/ WILLIAM R. FLOYDWilliam R. Floyd             |  | Chairman of the Board, President, Chief Executive
    Officer and Director |  | March 28, 2003
|                                                
|/s/ JEFFREY P. FREIMARKJeffrey P. Freimark       |  | Executive Vice President and Chief Financial and
    Information Officer   |  | March 28, 2003
|                                                
|/s/ PAMELA H. DANIELSPamela H. Daniels           |  | Senior Vice President, Controller and Chief
    Accounting Officer         |  | March 28, 2003
|                                                
|/s/ JOHNSTON C. ADAMS, JR.Johnston C. Adams, Jr. |  | Director                                                                   |  | March 28, 2003
|                                                
|/s/ JOHN D. FOWLER, JR.John D. Fowler, Jr.       |  | Director                                                                   |  | March 28, 2003
|                                                
|/s/ JAMES R. GREENEJames R. Greene               |  | Director                                                                   |  | March 28, 2003
|                                                
|/s/ EDITH E. HOLIDAYEdith E. Holiday             |  | Director                                                                   |  | March 28, 2003
|                                                
|/s/ JOHN P. HOWE, IIIJohn P. Howe, III           |  | Director                                                                   |  | March 28, 2003
|                                                
|/s/ JAMES W. MCLANEJames W. McLane               |  | Director                                                                   |  | March 28, 2003
|                                                
|/s/ DONALD L. SEELEYDonald L. Seeley             |  | Director                                                                   |  | March 28, 2003
|                                                
|/s/ MARILYN R. SEYMANNMarilyn R. Seymann         |  | Director                                                                   |  | March 28, 2003

85



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CERTIFICATIONS

Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002

I, William R. Floyd, Chairman of the Board,
President and Chief Executive Officer of Beverly Enterprises,
Inc., certify that:

1. I have reviewed this annual report on
Form 10-K of Beverly Enterprises, Inc.;

2. Based on my knowledge, this annual report
does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this
annual report;

3. Based on my knowledge, the financial
statements, and other financial information included in this
annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual
report;

4. The registrants other certifying
officers and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:



| |                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | (b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | (c) presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                

5. The registrants other certifying
officers and I have disclosed, based on our most recent
evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons
performing the equivalent functions):



| |                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | (b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    

6. The registrants other certifying
officers and I have indicated in this annual report whether
there were significant changes in internal controls or in other
factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies
and material weaknesses.



| |                                 
| | --------------------------------
| | /s/ WILLIAM R. FLOYD            
| |                                 
| | William R. Floyd                
| | Chairman of the Board, President
| | and Chief Executive Officer     

Date: March 28, 2003

86



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##### Table of Contents



CERTIFICATIONS

Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002

I, Jeffrey P. Freimark, Executive Vice President
and Chief Financial and Information Officer of Beverly
Enterprises, Inc., certify that:

1. I have reviewed this annual report on
Form 10-K of Beverly Enterprises, Inc.;

2. Based on my knowledge, this annual report
does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this
annual report;

3. Based on my knowledge, the financial
statements, and other financial information included in this
annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual
report;

4. The registrants other certifying
officers and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:



| |                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | (b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | (c) presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                

5. The registrants other certifying
officers and I have disclosed, based on our most recent
evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons
performing the equivalent functions):



| |                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | (b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    

6. The registrants other certifying
officers and I have indicated in this annual report whether
there were significant changes in internal controls or in other
factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies
and material weaknesses.



| |                                   
| | ----------------------------------
| | /s/ JEFFREY P. FREIMARK           
| |                                   
| | Jeffrey P. Freimark               
| | Executive Vice President and Chief
| | Financial and Information Officer 

Date: March 28, 2003

87



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##### Table of Contents






INDEX TO EXHIBITS

|        |   |    |  |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                
|------- | - | -- |  | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |   |    |  |            
|Number  |   |    |  | Description
|        |   |    |  |            
|        | 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 (incorporated by
    reference to Exhibit 4.3 to Beverly Enterprises,
    Inc.s Annual Report on Form 10-K for the year ended
    December 31, 2001)                                                                       
|        | 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)                                                    



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##### Table of Contents



|        |    |      |  |             |  |                                                                                                                                                                                                                                                                                                                        
|------- | -- | ---- |  | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |      |  |            
|Number  |    |      |  | Description
|        |    |      |  |            
|        | 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
    (incorporated by reference to Exhibit 10.1 to Beverly
    Enterprises, Inc.s Annual Report on Form 10-K for the
    year ended December 31, 2001)                                                                                                                 
|        | 10 | .2*  |  |            |  | 1997 Long-Term Incentive Plan, as amended and
    restated as of June 1, 2001 (the 1997 LTIP)
    (incorporated by reference to Exhibit 10.2 to Beverly
    Enterprises, Inc.s Annual Report on Form 10-K for the
    year ended December 31, 2001)                                                                 
|        | 10 | .3*  |  |            |  | Beverly Enterprises, Inc. Non-Employee
    Directors Stock Option Plan, as amended and restated as of
    June 1, 2001 (the Directors Option Plan)
    (incorporated by reference to Exhibit 10.3 to Beverly
    Enterprises, Inc.s Annual Report on Form 10-K for the
    year ended December 31, 2001)          
|        | 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)                                                                             



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##### Table of Contents



|        |    |       |  |             |  |                                                                                                                                                                                                                                                                                                        
|------- | -- | ----- |  | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |       |  |            
|Number  |    |       |  | Description
|        |    |       |  |            
|        | 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)                                                      
|        | 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*  |  |            |  | Amendment Number One to the Beverly Enterprises,
    Inc. Supplemental Executive Retirement Plan (incorporated by
    reference to Exhibit 10.5 to Beverly Enterprises,
    Inc.s Quarterly Report on Form 10-Q for the quarter
    ended June 30, 2002)                                              
|        | 10 | .21*  |  |            |  | 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 | .22* |  |            |  | Beverly Enterprises, Inc. Executive Deferred
    Compensation Plan effective December 31, 2002                                                                                                                                                                                                         
|        | 10 | .23*  |  |            |  | 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 | .24*  |  |            |  | 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 | .25*  |  |            |  | 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 | .26*  |  |            |  | 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)             



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##### Table of Contents



|        |    |       |  |             |  |                                                                                                                                                                                                                                                                                                                               
|------- | -- | ----- |  | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |       |  |            
|Number  |    |       |  | Description
|        |    |       |  |            
|        | 10 | .27*  |  |            |  | 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 | .28*  |  |            |  | 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 | .29*  |  |            |  | 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 | .30*  |  |            |  | Severance Agreement and Release of Claims between
    Beverly Enterprises, Inc. and David R. Banks (incorporated by
    reference to Exhibit 10.28 to Beverly Enterprises,
    Inc.s Annual Report on Form 10-K for the year ended
    December 31, 2001)                                                                    
|        | 10 | .31*  |  |            |  | Employment Contract, made as of April 10,
    2000, between Beverly Enterprises, Inc. and William R. Floyd
    (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 | .32* |  |            |  | Employment Contract, made as of December 6,
    2001, between Beverly Enterprises, Inc. and William R. Floyd                                                                                                                                                                                                                  
|        | 10 | .33* |  |            |  | Employment and Severance Agreement, made as of
    June 1, 2001, between Beverly Enterprises, Inc. and David
    R. Devereaux                                                                                                                                                                                                 
|        | 10 | .34* |  |            |  | Severance Agreement and Release of Claims made as
    of October 5, 2002, between Beverly Enterprises, Inc. and
    Bobby W. Stephens                                                                                                                                                                                         
|        | 10 | .35* |  |            |  | Employment Contract, made as of April 1,
    2000, between Beverly Enterprises, Inc. and Douglas J. Babb                                                                                                                                                                                                                      
|        | 10 | .36* |  |            |  | Severance Agreement and Release of Claims made as
    of October 11, 2002, between Beverly Enterprises, Inc. and
    Michael J. Matheny                                                                                                                                                                                       
|        | 10 | .37* |  |            |  | Severance Agreement and Release of Claims made as
    of December 31, 2001, between Beverly Enterprises, Inc. and
    T. Jerald Moore                                                                                                                                                                                         
|        | 10 | .38*  |  |            |  | 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 | .39*  |  |            |  | 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 | .40*  |  |            |  | 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 | .41*  |  |            |  | Retention Stock Option Agreement, effective as of
    June 1, 2001, between Beverly Enterprises, Inc. and David
    R. Devereaux (incorporated by reference to Exhibit 10.1 to
    Beverly Enterprises, Inc.s Quarterly Report on
    Form 10-Q for the quarter ended September 30, 2002)                                    
|        | 10 | .42*  |  |            |  | Description of Non-Employee Directors Group Term
    Life Insurance Plan (incorporated by reference to
    Exhibit 10.4 to Beverly Enterprises, Inc.s Quarterly
    Report on Form 10-Q for the quarter ended June 30,
    2002)                                                                                             



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##### Table of Contents



|        |    |      |  |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|------- | -- | ---- |  | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |      |  |            
|Number  |    |      |  | Description
|        |    |      |  |            
|        | 10 | .43* |  |            |  | Performance based Stock Option Award to Jeffrey
    P. Freimark pursuant to Process Improvement Team Awards Program
    (incorporated by reference to Exhibit 10.6 to Beverly
    Enterprises, Inc.s Quarterly Report on Form 10-Q for
    the quarter ended June 30, 2002)                                                                                                                                                                                                                                                                                                                                                                                                  
|        | 10 | .44* |  |            |  | Performance based Stock Option Award to L.
    Darlene Burch pursuant to Process Improvement Team Awards
    Program (incorporated by reference to Exhibit 10.7 to
    Beverly Enterprises, Inc.s Quarterly Report on
    Form 10-Q for the quarter ended June 30, 2002)                                                                                                                                                                                                                                                                                                                                                                                                     
|        | 10 | .45* |  |            |  | Description of Long Term Disability Policy for
    William R. Floyd (incorporated by reference to Exhibit 10.8
    to Beverly Enterprises, Inc.s Quarterly Report on
    Form 10-Q for the quarter ended June 30, 2002)                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|        | 10 | .46* |  |            |  | Employment Agreement made as of December 31,
    2001 between Beverly Enterprises, Inc. and Jeffrey P. Freimark
    (incorporated by reference to Exhibit 10.9 to Beverly
    Enterprises, Inc.s Quarterly Report on Form 10-Q for
    the quarter ended June 30, 2002)                                                                                                                                                                                                                                                                                                                                                                                                      
|        | 10 | .47* |  |            |  | Demand Promissory Note made as of April 1,
    2002 by Richard D. Skelly, Jr. for the benefit of Beverly
    Enterprises, Inc. (incorporated by reference to
    Exhibit 10.10 to Beverly Enterprises, Inc.s Quarterly
    Report on Form 10-Q for the quarter ended June 30,
    2002)                                                                                                                                                                                                                                                                                                                                                                                      
|        | 10 | .48  |  |            |  | 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 | .49  |  |            |  | 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 | .50  |  |            |  | 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) (incorporated by reference
    to Exhibit 10.36 to Beverly Enterprises, Inc.s Annual
    Report on Form 10-K for the year ended December 31,
    2001)                                                                                                                                                                               
|        | 10 | .51  |  |            |  | First Amendment to Florida Sale Agreement, dated
    as of August 30, 2001 (incorporated by reference to
    Exhibit 10.37 to Beverly Enterprises, Inc.s Annual
    Report on Form 10-K for the year ended December 31,
    2001)                                                                                                                                                                                                                                                                                                                                                                                                                                            
|        | 10 | .52  |  |            |  | Second Amendment to Florida Sale Agreement, dated
    as of October 29, 2001 (incorporated by reference to
    Exhibit 10.38 to Beverly Enterprises, Inc.s Annual
    Report on Form 10-K for the year ended December 31,
    2001)                                                                                                                                                                                                                                                                                                                                                                                                                                          



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##### Table of Contents



|        |    |      |  |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|------- | -- | ---- |  | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |      |  |            
|Number  |    |      |  | Description
|        |    |      |  |            
|        | 10 | .53  |  |            |  | 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 | .54  |  |            |  | 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 | .55  |  |            |  | 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 | .56  |  |            |  | 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 | .57  |  |            |  | Master Amendment No. 3 to Amended and
    Restated Participation Agreement, dated as of April 25,
    2001 (incorporated by reference to Exhibit 10.43 to Beverly
    Enterprises, Inc.s Annual Report on Form 10-K for the
    year ended December 31, 2001)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|        | 10 | .58  |  |            |  | Amendment No. 4 to Amended and Restated
    Participation Agreement, dated as of December 31, 2001
    (incorporated by reference to Exhibit 10.44 to Beverly
    Enterprises, Inc.s Annual Report on Form 10-K for the
    year ended December 31, 2001)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|        | 10 | .59 |  |            |  | Amendment No. 5 to Amended and Restated
    Participation Agreement, dated as of December 20, 2002                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|        | 10 | .60 |  |            |  | Amendment No. 6 to Amended and Restated
    Participation Agreement, dated as of February 28, 2003
    [Note: Confidential treatment has been requested for portions of
    this document.]                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|        | 10 | .61  |  |            |  | 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 | .62 |  |            |  | Fifth Amendment to Master Services Agreement,
    dated as of January 1, 2003, by and between Alltel
    Information Services, Inc. and Beverly Enterprises, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      



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##### Table of Contents



|        |    |      |  |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|------- | -- | ---- |  | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |      |  |            
|Number  |    |      |  | Description
|        |    |      |  |            
|        | 10 | .63  |  |            |  | 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) (incorporated by reference to
    Exhibit 10.46 to Beverly Enterprises, Inc.s Annual
    Report on Form 10-K for the year ended December 31,
    2001)                                                                                                                              
|        | 10 | .64  |  |            |  | Amendment No. 1 to the Credit Agreement,
    dated as of December 31, 2001 (incorporated by reference to
    Exhibit 10.47 to Beverly Enterprises, Inc.s Annual
    Report on Form 10-K for the year ended December 31,
    2001)                                                                                                                                                                                                                                                                                                  
|        | 10 | .65 |  |            |  | Amendment No. 3 to the Credit Agreement,
    dated as of December 20, 2002                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|        | 10 | .66 |  |            |  | Amendment No. 4 to the Credit Agreement,
    dated as of February 28, 2003 [Note: Confidential treatment
    has been requested for portions of this document.]                                                                                                                                                                                                                                                                                                                                                                     
|        | 10 | .67  |  |            |  | 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 | .68  |  |            |  | 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 | .69  |  |            |  | 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 | .70  |  |            |  | 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 | .71  |  |            |  | 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)                                                                                                                                                                                                                                                                                            
|        | 10 | .72  |  |            |  | Settlement Agreement, effective October 15,
    2002, between the Centers for Medicare and Medicaid Services,
    United States Department of Health and Human Services and
    Beverly Enterprises, Inc. (incorporated by reference to
    Exhibit 10.2 to Beverly Enterprises, Inc.s Quarterly
    Report on Form 10-Q for the quarter ended
    September 30, 2002)                                                                                                                                                             
|        | 10 | .73  |  |            |  | Permanent Injunction and Final Judgment entered
    on August 1, 2002 in People of the State of
    California v. Beverly Enterprises, Inc.; Beverly Health and
    Rehabilitation Services, Inc.; Beverly Enterprises 
    California, Inc.; and Beverly Healthcare  California,
    Inc., Superior Court of the State of California For the County
    of Santa Barbara (incorporated by reference to
    Exhibit 10.1 to Beverly Enterprises, Inc.s Quarterly
    Report on Form 10-Q for the quarter ended June 30,
    2002)
|        | 10 | .74  |  |            |  | Waiver of Constitutional Rights and Plea Form and
    Court Finding and Order dated August 1, 2002 in The People
    of California v. Beverly Enterprises 
    California, Inc., Superior Court of the State of California For
    the County of Santa Barbara (S.C. No. 1094923)
    (incorporated by reference to Exhibit 10.2 to Beverly
    Enterprises, Inc.s Quarterly Report on Form 10-Q for
    the quarter ended June 30, 2002)                                                                                         
|        | 10 | .75  |  |            |  | Investigation Conclusion letter dated
    August 1, 2002, from the State of California Department of
    Justice (incorporated by reference to Exhibit 10.3 to
    Beverly Enterprises, Inc.s Quarterly Report on
    Form 10-Q for the quarter ended June 30, 2002)                                                                                                                                                                                                                                                               
|        | 10 | .76 |  |            |  | Loan Agreement dated as of December 24, 2002
    between Beverly Enterprises  Washington, Inc. and
    Bank of America, N.A.                                                                                                                                                                                                                                                                                                                                                                                                       



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##### Table of Contents



|        |    |      |  |             |  |                                                                                                 
|------- | -- | ---- |  | ----------- |  | ------------------------------------------------------------------------------------------------
|Exhibit |    |      |  |            
|Number  |    |      |  | Description
|        |    |      |  |            
|        | 10 | .77 |  |            |  | Guaranty dated December 24, 2002 between
    Beverly Enterprises, Inc. and Bank of America, N.A.
|        | 21 | .1  |  |            |  | Subsidiaries of Registrant                                                                      
|        | 23 | .1  |  |            |  | Consent of Ernst & Young LLP,
    Independent Auditors                                          



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|  |                                                                                                                                                                            
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Exhibits 10.1 through 10.47 are management
    contracts, compensatory plans, contracts and arrangements in
    which any director or named executive officer participates.



|  |                
|- | ---------------
| | Filed herewith.