<PAGE>
                                                                    EXHIBIT 10.1


                            BEVERLY ENTERPRISES, INC.
                              ANNUAL INCENTIVE PLAN
                        (Effective as of January 1, 1998)


<PAGE>
                            BEVERLY ENTERPRISES, INC.
                              ANNUAL INCENTIVE PLAN
                        (Effective as of January 1, 1998)

                                TABLE OF CONTENTS

<Table>

<S>                    <C>                                                          <C>
                       Article I.  Establishment and Purpose

     1.1               Establishment of Plan                                          1
     1.2               Purpose                                                        1
     1.3               Applicability of the Plan                                      1
     1.4               Effective Date                                                 1

                       Article II.  Definitions and Construction

     2.1               Definitions                                                    2
     2.2               Gender and Number; Headings                                    3

                       Article III.  Participation

     3.1               Participation                                                  4

                       Article IV.  Annual AIP Program; Administration of Plan

     4.1               Annual AIP Program                                             5
     4.2               Compensation Committee                                         6
     4.3               Expenses                                                       7
     4.4               Indemnification and Exculpation                                7

                       Article V.  AIP Awards; Payment of Awards

     5.1               AIP Awards                                                     8
     5.2               Eligibility for AIP Award                                      8
     5.3               Time and Form of Payment                                       9
     5.4               Death of Participant                                           9
     5.5               Award Payments in Stock                                        9

                       Article VI.  Funding of the Plan

     6.1               Funding                                                       10

                       Article VII.  Merger; Amendment; Termination

     7.1               Merger, Consolidation, or Acquisition                         11
     7.2               Amendment                                                     11
     7.3               Termination                                                   11
</Table>


                                      -i-

<PAGE>



                            BEVERLY ENTERPRISES, INC.
                              ANNUAL INCENTIVE PLAN
                        (Effective as of January 1, 1998)

                                TABLE OF CONTENTS
                                   (Continued)


<Table>
<S>                   <C>                                                         <C>
                       Article VIII.  Special Provisions
                       Applicable to Covered Participants

     8.1               Provisions Applicable to Covered Participants                 12

                       Article IX.  General Provisions

     9.1               Shareholder Approval                                          13
     9.2               Nonalienation                                                 13
     9.3               Beneficiary Designation                                       14
     9.4               Effect on Other Benefit Plans                                 14
     9.5               Employer-Employee Relationship                                14
     9.6               Incompetence                                                  15
     9.7               Binding on Employer, Participants and Their Successors        15
     9.8               Status Under ERISA                                            15
     9.9               Tax Liability                                                 15
     9.10              Severability                                                  15
     9.11              Applicable Law                                                16
</Table>

                                      -ii-

<PAGE>






                            BEVERLY ENTERPRISES, INC.
                              ANNUAL INCENTIVE PLAN
                        (Effective as of January 1, 1998)

                      Article I. Establishment and Purpose

         1.1 Establishment of Plan. BEVERLY ENTERPRISES, INC., a Delaware
corporation ("Company") hereby establishes this incentive award plan for
Participants, which plan as amended from time to time shall be known as the
"BEVERLY ENTERPRISES, INC. ANNUAL INCENTIVE PLAN" ("Plan").

         1.2 Purpose. The purpose of the Plan is to provide its Participants
with performance-based incentive awards where they have contributed to their
Employer's success, and to do so through an ongoing program designed to
reinforce such Employer's strategic plan and related financial and operating
objectives.

         1.3 Applicability of the Plan. The provisions of this Plan shall be
applicable only with respect to those Participants who are designated for
participation in this Plan from and after January 1, 1998, the effective date of
this Plan.

         1.4 Effective Date. This Plan shall be effective as of January 1, 1998,
subject to the approval of this Plan by the Company's shareholders, as provided
in this Section 1.4. To become effective, this Plan must be approved by the
affirmative vote of the holders of a majority of shares of the common stock of
the Company present, or represented, and entitled to vote at a meeting of the
Company's shareholders called for such purpose. Absent such approval prior to
January 1, 1999, this Plan shall terminate and cease to be of any further force
or effect and all awards hereunder shall be null and void.



                                      -1-
<PAGE>



                    Article II. Definitions and Construction

        2.1 Definitions. Whenever used as a capitalized term in the Plan,
the following terms shall have the respective meanings set forth below, unless
otherwise expressly provided:

          (a)  "Affiliate" means "affiliate" as defined in Rule 12b-2 under the
               Exchange Act.

          (b)  "AIP Award" means the annual incentive plan award approved by the
               Compensation Committee for an eligible Participant for a
               particular Plan Year, as provided in Section 5.1.

          (c)  "AIP Award Guidelines" means the standards, targets, performance
               measurement and evaluation criteria and guidelines to be used to
               determine AIP Awards for a particular Plan Year, as provided in
               Section 4.1.

          (d)  "AIP Program" means the program for determining the awarding of
               AIP Awards for a particular Plan Year, consisting of the AIP
               Award Guidelines for such Plan Year, as provided in Section 4.1.

          (e)  "Beneficiary" means the person, persons or trust designated by a
               Participant as provided in Section 9.3.

          (f)  "Board" or "Board of Directors" means the Board of Directors of
               the Company.

          (g)  "Code" means the Internal Revenue Code of 1986, as amended, and
               the regulations issued thereunder, as the same may be amended
               from time to time.

          (h)  "Company" means Beverly Enterprises, Inc., or any successor
               thereto.

          (i)  "Compensation Committee" means the Compensation Committee of the
               Board of Directors, which Committee is a standing committee of
               such Board and meets the definition of a committee composed
               solely of two or more outside directors under 162(m) of the Code,
               and, to the extent applicable, nonemployee directors under Rule
               16b promulgated under the Securities Exchange Act of 1934. The
               general powers, duties and responsibilities of the Compensation
               Committee as regards this Plan are described in Section 4.2.

                                      -2-
<PAGE>

          (j)  "Covered Participant" means a Participant who is a "covered
               employee" as defined in Section 162(m)(3) of the Code, or who the
               Compensation Committee believes will be such a covered employee
               for a Plan Year.

          (k)  "Employee" means an individual who is an employee of the Company
               or an Affiliate.

          (l)  "Employer" means the Company or any Affiliate which is
               participating under the Plan with the consent of the Board of
               Directors.

          (m)  "Exchange Act" means the Securities Exchange Act of 1934, as
               amended from time to time.

          (n)  "Long-Term Incentive Stock Plan" means the "Beverly Enterprises,
               Inc. 1997 Long-Term Incentive Plan", as amended from time to
               time.

          (o)  "Participant" means an Employee of an Employer who has been
               designated as a Participant under this Plan, as provided in
               Section 3.1.

          (p)  "Plan" means the "Beverly Enterprises, Inc. Annual Incentive
               Plan" as set forth in this document, and as the same may be
               amended from time to time.

          (q)  "Plan Year" means the 12-month period beginning each January 1
               and ending on December 31 of such year. The first Plan Year shall
               be the period beginning January 1, 1998 and ending December 31,
               1998.

         2.2 Gender and Number; Headings. Except when otherwise indicated by the
context, any masculine terminology when used in this Plan shall also include the
feminine gender, and the definition of any term in the singular shall also
include the plural. Headings of Articles and Sections herein are included solely
for convenience, and if there is any conflict between such headings and the text
of the Plan, the text shall control.



                                      -3-
<PAGE>



                                Article III.  Participation

         3.1 Participation. The Employees eligible to participate hereunder
include executives and other key employees of the Company. The Compensation
Committee shall designate the specific Employees of each participating Employer
within such eligible class who are to be the Participants under this Plan. Such
designations may be based on participation criteria established by the
Compensation Committee from time to time. The designation of Participants shall
be made for each Plan Year, and the Participants designated for a particular
Plan Year may be identified by reference to the subject Plan Year (e.g., the
Participants designated for the 1998 Plan Year may be referred to as "1998
Participants"). The Compensation Committee may establish such procedures as it
deems appropriate for notifying each Participant of his status as a Participant
under the Plan.




                                      -4-
<PAGE>



             Article IV. Annual AIP Program; Administration of Plan

        4.1 Annual AIP Program. For each Plan Year, the Compensation
Committee shall establish the AIP Program for that Plan Year. Subject to Section
8.1, such AIP Program for the particular Plan Year shall consist of such
standards, targets, performance measurement and evaluation criteria and
guidelines as the Compensation Committee determines to be applicable in awarding
AIP Awards for the relevant Plan Year, all of which shall collectively be known
as the "AIP Award Guidelines" for that Plan Year. Subject to Section 8.1, the
AIP Program established for a particular Plan Year may include any of the
following elements, as determined in the sole discretion of the Compensation
Committee:

          (a)  An incentive award pool for purposes of determining the dollar
               amount which shall be available for AIP Awards and other benefits
               under the Plan for the Plan Year, provided that the sum of the
               individual benefit percentages payable under the pool do not
               exceed 100%;

          (b)  Financial and strategic performance goals for each participating
               Employer;

          (c)  Performance measurement and weighting criteria and guidelines for
               each Employer, including corporate-wide performance, where
               applicable;

          (d)  Individual target and maximum incentive opportunities for
               Participants or groups of Participants;

          (e)  Performance measurement and weighting criteria and guidelines for
               Participants or groups of Participants;

          (f)  Guidelines and requirements for the development of Participant
               goals and objectives; and

          (g)  Such other standards, criteria, measurements, requirements and
               guidelines as the Compensation Committee may from time to time
               determine shall be applicable with respect to the subject Plan
               Year.

The AIP Program established for each Plan Year, including the AIP Award
Guidelines applicable thereto, may be identified by reference to the subject
Plan Year (e.g., the AIP Program for 1998 may be referred to as the "1998 AIP
Program"). The AIP Program so established for each Plan


                                      -5-
<PAGE>

Year shall be communicated to such Company and other participating Employer
personnel as the Compensation Committee deems necessary to assist in the
maintenance of the AIP Program for such Plan Year. The AIP Program for each Plan
Year (including the AIP Award Guidelines included therein) shall be maintained
with the records of the Plan for reference purposes. The Compensation Committee
may change or modify the AIP Program established for a particular Plan Year in
any respect, and at any time.

        4.2  Compensation Committee. The Plan shall be administered by the
Compensation Committee. The Compensation Committee shall have the full general
power, authority and discretion to administer the Plan and construe, interpret
and apply its provisions. Without limiting the generality thereof, the
Compensation Committee shall have the following powers, duties and authorities
as regards its administration and activities with respect to the Plan:

          (a)  To establish an AIP Program for each Plan Year, as provided in
               Section 4.1;

          (b)  To approve AIP Awards or other benefit payments for Participants
               for each Plan Year, as provided in Section 5.1;

          (c)  To establish, maintain and interpret such rules, regulations and
               requirements as it deems necessary or advisable as regards the
               administration and maintenance of the Plan, including the
               amendment and modification of such rules, regulations and
               requirements;

          (d)  To resolve all questions relating to the eligibility of
               Participants;

          (e)  To resolve all questions relating to a Participant's right to
               receive any AIP Award payment or other benefits under the Plan;

          (f)  To determine the time, manner and form of payment with respect to
               any AIP Award payments or other benefits under the Plan;

          (g)  To engage any administrative, legal, consulting, clerical or
               other services it deems appropriate in administering the Plan;

          (h)  To construe and interpret the Plan, and any administrative rules
               relating thereto, as necessary and to carry out the purposes of
               this Plan;

          (i)  To resolve all questions of fact relating to any questions or
               determinations relating to the administration of the Plan;



                                      -6-
<PAGE>

          (j)  To compile and maintain all records it determines to be
               necessary, appropriate and convenient in connection with the
               administration of the Plan;

          (k)  To delegate or appoint such other parties as it determines to be
               necessary to carry out a general or specific function as regards
               the administration of the Plan; and

          (l)  To take all such other actions, and to make such determinations,
               as are necessary to administer the Plan and carry out its
               purposes.

All actions taken or determinations made by the Compensation Committee as
regards the Plan shall be final, binding and conclusive upon all parties. The
membership of the Compensation Committee, and the rules relating to its conduct,
voting and actions, shall be governed by the rules establishing the Compensation
Committee as a standing committee of the Board of Directors. Members of the
Compensation Committee shall not participate directly in any action or
determination regarding their own interests under the Plan.

         4.3 Expenses. Any expenses relating to the administration of this Plan
shall be borne by the Employers as may be determined by the Compensation
Committee.

         4.4 Indemnification and Exculpation. The members of the Compensation
Committee, its agents, and officers, directors, and employees of the Company or
any other Employer shall be indemnified and held harmless by the Company against
and from any and all loss, cost, liability, or expense that may be imposed upon
or reasonably incurred by them in connection with or resulting from any claim,
action, suit, or proceeding to which they may be a party or in which they may be
involved by reason of any action taken or failure to act under this Plan and
against and from any and all amounts paid by them in settlement (with the
Company's written approval) or paid by them in satisfaction of a judgment in any
such action, suit, or proceeding. The foregoing provision shall not be
applicable to any person if the loss, cost, liability, or expense is due to such
person's gross negligence or willful misconduct.



                                      -7-
<PAGE>



                    Article V. AIP Awards; Payment of Awards

         5.1 AIP Awards. Each Plan Year, the Compensation Committee shall
approve such individual AIP Awards for the Participants covered under the Plan
for the Plan Year as the Compensation Committee in its sole discretion shall
deem appropriate. Company personnel acting at the direction of the Compensation
Committee shall prepare such preliminary calculations and reports regarding
proposed AIP Award amounts as the Compensation Committee may request. Such
information shall be prepared in accordance with the Compensation Committee's
AIP Award Guidelines for the subject Plan Year, and in accordance with such
other performance measurement standards as the Compensation Committee may direct
from time to time. The Compensation Committee shall provide that each
Participant for a Plan Year be notified of the amount and terms of his AIP Award
for the subject Plan Year. Such notification shall be at such time and in such
manner as determined by the Compensation Committee.

         5.2 Eligibility for AIP Award. To be eligible to receive any AIP Award
as may be approved for the Participant for a particular Plan Year, as provided
in Section 5.1, such Participant must satisfy one of the following eligibility
conditions:

          (a)  He must be employed as an Employee on the last day of the Plan
               Year;

          (b)  He must have retired, died or incurred a disability during the
               Plan Year if he is not employed as an Employee on the last day of
               the Plan Year; or

          (c)  He must have terminated employment as an Employee before the last
               day of the Plan Year for another reason as recognized by the
               Compensation Committee in its sole discretion.

Unless the Compensation Committee otherwise specifically provides, a Participant
who does not meet one of the foregoing employment eligibility conditions for a
particular Plan Year shall not be eligible to receive payment of an AIP Award
for such Plan Year.



                                      -8-
<PAGE>

         5.3 Time and Form of Payment. All AIP Awards for a particular Plan Year
shall be paid to or with respect to the eligible Participants for such Plan Year
at such time or times as the Compensation Committee may determine, following the
close of the particular Plan Year to which such AIP Awards relate. Normally, all
AIP Award payments shall be in a lump sum; however, the Compensation Committee
may from time to time direct the payment of any AIP Award in a different payment
form. The Compensation Committee shall designate whether an AIP Award is to be
paid in cash, Company stock, other form of property or benefit, or any
combination thereof.

         5.4 Death of Participant. In the event a Participant who is eligible to
receive an AIP Award dies before payment thereof is made to him, the payment of
such AIP Award shall be made to his designated Beneficiary.

         5.5 Award Payments in Stock. To the extent any AIP Award (or portion
thereof) or other benefit under the Plan is paid in Company stock, as may be
directed under Section 5.3, such payment shall be considered to be an award
under Article IX of the Company's 1997 Long-Term Incentive Plan ("Stock Plan").
Any Participant receiving such award under this Plan and Article IX of such
Stock Plan shall be subject to any applicable sale, transfer, exercise, or
vesting restrictions, and to such other terms and provisions under such Stock
Plan or award agreements issued pursuant thereto, as regards such stock and the
award, exercise and payment thereof. Any such term, condition or provisions in
such Stock Plan or award agreement as regards such stock, or the Participant's
rights thereto, shall control over any provision in this Plan to the contrary.




                                      -9-
<PAGE>



                         Article VI. Funding of the Plan

         6.1 Funding. All amounts paid under this Plan shall be paid from the
general assets of the participating Employers. AIP Award payments and other
benefit payments under this Plan shall be reflected on the accounting records of
the Employers, but neither this Plan nor the maintenance of such accounting
records shall be construed to create, or require the creation of, a trust,
custodial account, or escrow account with respect to any Participant. No
Participant shall have any right, title, or interest whatsoever in or to any
investment reserves, accounts, or funds, that the Employers may purchase,
establish, or accumulate to aid in providing the unfunded AIP Award payments or
other benefits described in the Plan. Nothing contained in this Plan, and no
action taken pursuant to its provisions, shall create, or be construed to
create, a trust or fiduciary relationship of any kind between an Employer, the
Compensation Committee and a Participant or any other person. Participants shall
not acquire any interest under the Plan greater than that of an unsecured
general creditor of an Employer.




                                      -10-
<PAGE>



                   Article VII. Merger; Amendment; Termination

         7.1 Merger, Consolidation, or Acquisition. In the event of a merger,
consolidation, or acquisition where an Employer is not the surviving
organization, unless the successor or acquiring organization shall elect to
continue and carry on the Plan, this Plan shall terminate with respect to such
Employer, and no additional benefits shall accrue for the Participants of such
organization. Unpaid AIP Award payments or other benefits shall continue to be
paid as scheduled unless the successor or acquiring organization elects to
accelerate payment.

         7.2 Amendment. The Compensation Committee may amend or modify this Plan
at any time, for any reason, and in any manner. Such actions by the Compensation
Committee shall be binding upon all Employers. Any such amendment or
modification of the Plan shall not require shareholder approval, except to the
extent that such approval is required pursuant to the rules under Section 16 of
the Exchange Act, by any national securities exchange or system on which the
Company's stock is listed or reported, or under any other applicable Federal or
state law. Notice of any amendment or modification of the Plan shall be given to
Participants and other interested parties in such manner and at such time as
provided by the Compensation Committee.

         7.3 Termination. The Board of Directors may terminate this Plan at any
time, for any reason, and in any manner. In the event of the termination of the
Plan pursuant to this Section 7.3, no further AIP Award payments or other
benefits shall accrue under this Plan, and amounts which are then payable with
respect to a prior Plan Year shall continue to be an obligation of the Employer
and shall be paid as scheduled. No AIP Award payments or other payments shall be
made with respect to the Plan Year in which the Plan is terminated, unless
otherwise provided by the Board of Directors.




                                      -11-
<PAGE>



                        Article VIII. Special Provisions
                       Applicable to Covered Participants

         8.1 Provisions Applicable to Covered Participants. Notwithstanding any
other provision of this Plan to the contrary, any AIP Awards and other benefits
paid to Covered Participants under this Plan shall be subject to the following
conditions:

          (a)  All AIP Guidelines or other performance measures, goals,
               standards, formulas, or criteria relating to Covered Participants
               ("Performance Measures") for a Plan Year shall be established by
               the Compensation Committee in writing no later than 90 days
               following the beginning of the Plan Year, provided that the
               outcome is substantially uncertain at the time the Compensation
               Committee actually establishes the goal, or by such other later
               date for such Plan Year as may be permitted under Section 162(m)
               of the Code. Performance Measures may include alternate and
               multiple Performance Measures, and may be based on one or more
               business criteria that apply to an individual, a business unit,
               or the Company as a whole. In establishing Performance Measures,
               the Compensation Committee shall consider one or more of the
               following: internal budget, earnings per share, stock price,
               return on equity, revenue growth, cash flow, income, operating
               margins, economic value added, and/or return on assets.

          (b)  The Performance Measures must be objective, must state, in terms
               of an objective formula or standard, the method for computing the
               amount of compensation payable to the Covered Participant if the
               Performance Measure is attained, and must satisfy the third party
               "objectivity" standards under Section 162(m) of the Code.

          (c)  The Performance Measures shall not allow for any discretion by
               the Compensation Committee as to an increase in any AIP Award or
               other benefit, but discretion to lower an AIP Award or other
               benefit is permissible, as long as such reduction does not result
               in an increase in the amount payable to another Covered
               Participant.

          (d)  The award and payment of any AIP Award or other benefit under
               this Plan to a Covered Participant with respect to a Plan Year
               shall be contingent upon the attainment of the Performance
               Measures that are applicable to such Covered Participant. The
               Compensation Committee shall certify in writing prior to the
               payment of any such AIP Award or other benefit that such
               applicable Performance Measures relating to the AIP Award or
               other benefit were satisfied. Approved


                                      -12-
<PAGE>

               minutes of a meeting of the Compensation Committee in which the
               certification is made may be used for this purpose.

          (e)  As provided in Sections 1.4 and 9.1, this Plan is subject to
               shareholder approval, and all AIP Awards or other benefits to
               Covered Participants under this Plan are expressly contingent on
               and subject to such shareholder approval.

          (f)  The maximum AIP Award or other benefit that may be paid to any
               Covered Participant under the Plan for any Plan Year is 150
               percent of the Covered Participant's base salary as of the first
               day of that Plan Year. If a Covered Participant's base salary is
               not fixed at the time the Performance Measures are established,
               then the Compensation Committee shall fix the maximum dollar
               amount that may be paid to any Covered Participant on or before
               the time it establishes such Performance Measures. In addition,
               in no event shall an AIP award or benefit to Participant for any
               Plan Year, exceed $1.2 Million.

          (g)  All AIP Awards or other benefits to Covered Participants under
               this Plan shall be further subject to such other conditions,
               restrictions, and requirements as the Compensation Committee may
               determine to be necessary to carry out the purposes of this
               Article VIII.

                         Article IX. General Provisions

         9.1 Shareholder Approval. The effectiveness of the Plan and the grant
of AIP awards or other benefits under this Plan are subject to shareholder
approval of the Plan as provided in Section 1.4.

         9.2 Nonalienation. No AIP Award or other benefit payable at any time
under the Plan shall be subject in any manner to alienation, sale, transfer,
assignment, pledge, attachment, garnishment, or encumbrance of any kind, and
shall not be subject to or reached by any legal or equitable process (including
execution, garnishment, attachment, pledge, or bankruptcy) in satisfaction of
any debt, liability, or obligation, prior to receipt. Any attempt to alienate,
sell, transfer, assign, pledge, or otherwise encumber any such benefit, whether
presently or thereafter payable, shall be void. Notwithstanding the foregoing
provisions of this Section 9.2, no AIP




                                      -13-
<PAGE>

Award or other benefit amount payable under the Plan shall be payable until and
unless any and all amounts representing debts or other obligations owed to the
Company or other Employer by the Participant with respect to whom such amount
would otherwise be payable shall have been fully paid.

         9.3 Beneficiary Designation. A Participant may designate a Beneficiary
who upon his death is to receive an AIP Award payment that otherwise would have
been paid to him under the Plan. All Beneficiary designations shall be in
writing and on a form approved by the Compensation Committee for such purpose,
and any such designation shall only be effective if and when delivered to the
Compensation Committee or its representative during the lifetime of the
Participant. Absent any specific Beneficiary designation with respect to this
Plan, a Participant's designated Beneficiary for purposes of this Plan shall be
the same person or persons as designated as his beneficiary to receive life
insurance proceeds under the Employer's group term life insurance coverage for
such Participant. In the event there is not a Beneficiary designation on file
for the Participant, such Participant's Beneficiary shall be deemed to be the
Participant's surviving spouse, or if there is no such spouse, the Participant's
estate.

         9.4 Effect on Other Benefit Plans. AIP Award or other benefit amounts
paid under this Plan shall only be considered as compensation under the employee
benefit plans of the Employers as determined and provided under the provisions
of such plans.

         9.5 Employer-Employee Relationship. The establishment of this Plan
shall not be construed as conferring any legal or other rights upon any Employee
or any person for a continuation of employment, nor shall it interfere with the
rights of an Employer to discharge any Employee or otherwise act with relation
to the Employee. An Employer may take any action (including discharge) with
respect to any Employee or other person and may treat such person without regard
to the effect which such action or treatment might have upon such person as a
Participant under this Plan.




                                      -14-
<PAGE>



         9.6 Incompetence. Every person receiving or claiming AIP Award or other
benefit payments under the Plan shall be conclusively presumed to be mentally
competent until the date on which the Compensation Committee receives a written
notice, in a form and manner acceptable to the Compensation Committee, that such
person is incompetent, and that a guardian, conservator, or other person legally
vested with the care of such person's person or estate has been appointed;
provided, however, that if the Compensation Committee shall find that any person
to whom an AIP Award or other benefit payment is payable under the Plan is
unable to care for such person's affairs because of incompetency, any payment
due (unless a prior claim therefor shall have been made by a duly appointed
legal representative) may be paid in a manner as approved by the Compensation
Committee. Any such payment so made shall be a complete discharge of any
liability therefor under the Plan.

         9.7 Binding on Employer, Participants and Their Successors. This Plan
shall be binding upon and inure to the benefit of the Employers, their
successors and assigns and the Participants, their heirs, executors,
administrators and legal representatives. The provisions of this Plan shall be
applicable with respect to each Employer separately, and AIP Award or other
benefit amounts payable hereunder shall be paid by the Employer of the
particular Participant.

         9.8 Status Under ERISA. This Plan is not maintained as and is not
intended to be an "employee benefit plan" under the Employee Retirement Income
Security Act of 1974, as amended.

         9.9 Tax Liability. An Employer may withhold from any payment hereunder
any taxes required to be withheld and such sum as the Employer may reasonably
estimate to be necessary to cover any taxes for which the Employer may be liable
and which may be assessed with regard to such payment.

         9.10 Severability. In the event any provision of this Plan shall be
held invalid or illegal for any reason, any illegality or invalidity shall not
affect the remaining parts of this Plan, but this Plan shall be construed and
enforced as if the illegal or invalid provision had never been inserted,



                                      -15-
<PAGE>

and the Company shall have the privilege and opportunity to correct and remedy
such questions of illegality or invalidity by amendment as provided in this
Plan.

         9.11 Applicable Law. This Plan shall be governed by, construed, and
administered in accordance with the laws of the State of Arkansas, except to the
extent such laws are preempted by the laws of the United States.



                                      -16-
<PAGE>

        IN WITNESS WHEREOF, the Company has caused this instrument to be
executed by its duly authorized officers effective as of January 1, 1998.


                                                BEVERLY ENTERPRISES, INC.

                                                By:
                                                   -----------------------------
ATTEST:
                                                Its:
                                                    ----------------------------
By:
   --------------------------

   Its:
       ----------------------




                                      -17-