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UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, DC 20549


Form 10-K


|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                             
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934    
|          
|           |  | For the fiscal year ended December 31, 2004                                                 
|          
|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.beverlycorp.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, and attached
    Rights to Purchase Series A Junior Participating Preferred
    Stock, $1.00 par value |  | New York Stock Exchange
    and Pacific Exchange

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


þ o


o


þ o




108,787,095


(Number of shares of common stock outstanding, net of
treasury shares, as of February 28, 2005)












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|                                                                           |                                                                                                          |  |  |  |  |  |  | 
|-------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|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.                                       
|REPORT OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|REPORT OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|                                                                           | ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.           
|                                                                           | ITEM 9A. CONTROLS AND PROCEDURES.                                                                       
|                                                                           | ITEM 9B. OTHER INFORMATION.                                                                             
|PART III                                                                  
|                                                                           | ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.                                               
|                                                                           | ITEM 11. EXECUTIVE COMPENSATION.                                                                        
|                                                                           | ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
|                                                                           | ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.                                                
|                                                                           | ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.                                                        
|PART IV                                                                   
|                                                                           | ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.                               
|SIGNATURES                                                                
|1st Amendment to 1997 LTIP                                                
|Non-Employee Directors' Stock Option Plan                                 
|Amendment to Employment Agreement-William R Floyd                         
|Amendment to Employment Agreement-Douglas J Babb                          
|Amendment to Employment Agreement-Jeffrey P Freimark                      
|Employment Contract                                                       
|Employee Stock Purchase Plan                                              
|1st Amendment to the ESPP                                                 
|Subsidiaries of Registrant                                                
|Consent of Ernst & Young LLP                                              
|Certification of Chief Executive Officer                                  
|Certification of Chief Financial Officer                                  
|Certification of Chief Executive Officer                                  
|Certification of Chief Financial Officer                                  



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FORWARD-LOOKING STATEMENTS






2



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PART I







|        |          
|------- | ---------
|ITEM 1. | BUSINESS.

Operations and Services






Nursing Facilities.


Aegis.


AseraCare.


Revenue Sources




| |         
| | --------
| | Overview





| |   |                                                                                                  
| | - | -------------------------------------------------------------------------------------------------
| |  | 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 and other payors, including commercial insurers and
    managed care payors.             

3



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| |   |                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------
| |  | nursing facility patient days, derived from the indicated
    sources of payment, as a percentage of total nursing facility
    patient days; and
|
| |  | nursing facility revenues, derived from the indicated sources of
    payment, as a percentage of total revenues.                                 

|                  |  |          |    |   |          |  |         |                   |  |  |          |         |  |      |    |   |          |  |    |   |  |  |    |  
|----------------- |  | -------- | -- | - | -------- |  | ------- | ----------------- |  |  | -------- | ------- |  | ---- | -- | - | -------- |  | -- | - |  |  | -- | -
|                  |  | Medicaid |    |   | Medicare |  |         | Private and Other | 
|                  |  |          |    |   |          |  |         |                   | 
|                  |  | Patient  |    |   |          |  | Patient |                   |  |  |          | Patient |  |      |   
|                  |  | Days     |    |   | Revenues |  |         | Days              |  |  | Revenues |         |  | Days |    |   | Revenues | 
|                  |  |          |    |   |          |  |         |                   |  |  |          |         |  |      |    |   |          | 
|Years Ended:      |  |          |    |   |          |  |         |                   |  |  |          |         |  |      |    |   |          |  |    |   |  |  |    |  
|December 31, 2004 |  |          | 71 | % |          |  | 55      | %                 |  |  | 12       | %       |  |      | 28 | % |          |  | 17 | % |  |  | 17 | %
|December 31, 2003 |  |          | 70 | % |          |  | 56      | %                 |  |  | 12       | %       |  |      | 26 | % |          |  | 18 | % |  |  | 18 | %
|December 31, 2002 |  |          | 70 | % |          |  | 55      | %                 |  |  | 11       | %       |  |      | 27 | % |          |  | 19 | % |  |  | 18 | %







| |                                   
| | ----------------------------------
| | Reimbursement by Medicaid Programs











4



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| |                          
| | -------------------------
| | Reimbursement by Medicare







| |   |                                                                    
| | - | -------------------------------------------------------------------
| |  | a 20% add-on for 12 high acuity non-therapy RUG
    categories; and
|
| |  | a 6.7% add-on for all 14 rehabilitation RUG categories.            





5



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Government Regulation




| |                                    
| | -----------------------------------
| | Survey, Certification and Licensure



6



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| |   |                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.                                                                                               





| |   |                                                                                                                                                                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | installation of temporary management;                                                                                                                                                                                                                                                                         
|
| |  | denial of payment for new admissions;                                                                                                                                                                                                                                                                         
|
| |  | denial of payment for all patients;                                                                                                                                                                                                                                                                           
|
| |  | civil money penalties of $50 to $3,000 per day for
    deficiencies that do not put a resident in immediate jeopardy
    and $3,050 to $10,000 per day for deficiencies that have
    caused or are likely to cause serious injury or death or
    alternatively, penalties of $1,000 to $10,000 per instance;
|
| |  | closure of facility and/or transfer of patients in emergencies;                                                                                                                                                                                                                                               
|
| |  | directed plans of correction; and                                                                                                                                                                                                                                                                             
|
| |  | directed in-service training.                                                                                                                                                                                                                                                                                 





| |   |                                                                                
| | - | -------------------------------------------------------------------------------
| |  | the imposition of fines;                                                       
|
| |  | temporary suspension of admission of new patients to the
    facility;         
|
| |  | decertification from participation in the Medicare or Medicaid
    programs; or
|
| |  | in extreme circumstances, revocation of a facilitys
    license.              





7



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| |                                    
| | -----------------------------------
| | Nursing Facility Quality Initiative









| |                                                 
| | ------------------------------------------------
| | Regulations Governing Healthcare Fraud and Abuse





8



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| |   |                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------
| |  | denial of payment for services provided;                                                                                            
|
| |  | civil money penalties of $15,000 for each item or service
    claimed;                                                              
|
| |  | refunds of any amounts collected;                                                                                                   
|
| |  | assessments of up to twice the amount claimed for each service;                                                                     
|
| |  | civil money 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.                                                                                  







9



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| |   |                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | an August 1995 alert which relates to the provision of medical
    supplies to nursing facilities, fraudulent billing for medical
    supplies and equipment and fraudulent supplier transactions;
|
| |  | a May 1996 alert which focuses on the provision of fraudulent
    professional services to nursing facility residents; and                                                                        
|
| |  | a March 1998 alert which addresses the interrelationship between
    hospice services and the nursing facility industry, and
    potentially illegal practices and arrangements.                  

qui tam








| |                                                                                
| | -------------------------------------------------------------------------------
| | Regulation Governing the Privacy and Transmission of
    Healthcare Information





| |   |                                                                                             
| | - | --------------------------------------------------------------------------------------------
| |  | standardization of certain electronic patient health,
    administrative and financial data;
|
| |  | unique health identifiers for employers, health plans and
    healthcare providers;         

10



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







Competitive Conditions






| |   |                                                             
| | - | ------------------------------------------------------------
| |  | the number of competitors in the local market;              
|
| |  | the types of services available;                            
|
| |  | quality of care;                                            
|
| |  | reputation, age and appearance of each nursing facility; and
|
| |  | the cost of care in each locality.                          





| |   |                                               
| | - | ----------------------------------------------
| |  | the number of competitors in the local market;
|
| |  | price relative to perceived value;            
|
| |  | employee retention and training;              
|
| |  | quality of care; and                          
|
| |  | referral sources.                             

11



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Employees and Labor Relations








Risks Relating to Our Company




| |                                                                              
| | -----------------------------------------------------------------------------
| | Our substantial indebtedness could adversely affect our
    financial health.







| |   |                                                                                                                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | increase our vulnerability to general adverse economic and
    industry conditions;                                                                                                                                                                                    
|
| |  | 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;                                                                                                                                                                               
|
| |  | limit our ability to pursue business opportunities that may be
    in our best interest; and                                                                                                                                                                           
|
| |  | limit our ability to borrow additional funds.                                                                                                                                                                                                                          



12



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| |                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Despite current indebtedness levels, we and our
    subsidiaries may still be able to incur substantially more debt.
    This could further increase the risks associated with our
    substantial leverage.





| |                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | To service our indebtedness, we will require a significant
    amount of cash. Our ability to generate cash depends on many
    factors, some of which are beyond our control.









| |                                                               
| | --------------------------------------------------------------
| | The price of our common stock may fluctuate
    significantly.





| |   |                                                          
| | - | ---------------------------------------------------------
| |  | future announcements concerning us or our competitors;   
|
| |  | quarterly variations in operating results;               
|
| |  | business acquisitions or divestitures;                   
|
| |  | changes in earnings estimates;                           
|
| |  | changes in third-party reimbursement practices;          
|
| |  | regulatory developments;                                 
|
| |  | changes in the number of outstanding shares; or          
|
| |  | fluctuations in the economy or general market conditions.



13



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The Effect of Contingently Convertible Debt on
Diluted Earnings per Share.




| |                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We rely on reimbursement from governmental programs for a
    majority of our revenues and we cannot assure you that
    reimbursement levels will not decrease in the future.



 Reimbursement by Medicaid Programs Reimbursement by Medicare).




| |                                                                                                               
| | --------------------------------------------------------------------------------------------------------------
| | Our industry is heavily regulated by the government, which
    requires our compliance with a variety of laws.



14



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 Survey, Certification and
Licensure






| |                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We face periodic reviews, audits and investigations by
    federal and state government agencies, and these audits could
    have adverse findings that may negatively impact our
    business.





| |   |                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------
| |  | refunding amounts we have been paid pursuant to the Medicare or
    Medicaid programs or from private payors;       
|
| |  | state or federal agencies imposing fines, penalties and other
    sanctions on us;                                  
|
| |  | loss of our right to participate in the Medicare or Medicaid
    programs or one or more private payor networks; and
|
| |  | damage to our reputation in various markets.                                                                        





| |   |                                                                 
| | - | ----------------------------------------------------------------
| |  | cost reporting and billing practices;                           
|
| |  | Medicare hospice reimbursement caps;                            
|
| |  | quality of care;                                                
|
| |  | average length of stay in hospice locations;                    
|
| |  | financial relationships with referral sources; and              
|
| |  | proper documentation of medical necessity for services provided.







| |                                                                                                      
| | -----------------------------------------------------------------------------------------------------
| | We are required to comply with laws governing the
    transmission and privacy of health information.



15



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| |                                                                     
| | --------------------------------------------------------------------
| | Healthcare reform legislation may adversely affect our
    business.





| |                                                                                            
| | -------------------------------------------------------------------------------------------
| | We are subject to expensive and unpredictable general and
    professional liability costs.





| |                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Insurance coverage may become expensive and difficult to
    obtain for long-term care companies, and our insurance carriers
    could become insolvent and unable to reimburse us.





16



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| |                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our Nursing Facilities segment is capital intensive and
    has significant cash requirements to maintain current
    operations, to complete projects underway and to achieve our
    long-term strategic plan.





| |                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------
| | Efforts to regulate the construction or expansion of
    healthcare providers could impair our ability to expand our
    operations.





| |   |                                                                                             
| | - | --------------------------------------------------------------------------------------------
| |  | the purchase, construction or expansion of healthcare
    facilities, agencies or locations;
|
| |  | capital expenditures exceeding a prescribed amount; or                                      
|
| |  | changes in services or bed capacity.                                                        





| |                                                                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our civil settlement agreement with the United States
    Government with respect to alleged violations of cost
    allocations under Medicare negatively impacts our cash flows and
    subjects us to a Corporate Integrity Agreement.







17



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| |                                       
| | --------------------------------------
| | We are subject to material litigation.





| |                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we fail to cultivate new, or maintain existing,
    relationships with the physicians or other referral sources in
    the communities in which we operate, our patient base may
    decrease.





| |                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Changes in the acuity of the patients and the mix of our
    patient population among the Medicare, Medicaid and private
    categories may significantly affect our nursing facility
    revenues and profitability.





| |                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------
| | Certain trends in the healthcare industry are putting
    pressure on our ability to maintain nursing facility
    census.





| |   |                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------
| |  | overbuilding of nursing facilities in states that have
    eliminated the CON process for new construction;             
|
| |  | creation of nursing facilities by acute-care hospitals to keep
    discharged patients within their complex;            
|
| |  | rapid growth of assisted living centers, which sometimes are
    more attractive to less medically complex patients; and
|
| |  | the availability of eldercare services delivered to the home.                                                           





| |                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------
| | Our executive officers and other key personnel are
    critical to our business, and if they choose to leave, it could
    harm our business.



18



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| |                                                                                                                                                                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | A group including Arnold Whitman, the Chief Executive
    Officer of Formation Capital, LLC and Appaloosa Management, LP,
    a New Jersey based hedge fund, among others, has expressed an
    interest in purchasing all or a part of our Company. This
    interest could be disruptive to our business and could threaten
    to adversely affect our operations and results.





| |                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Provisions in our charter documents, under Delaware law,
    and in our stockholder rights plan could discourage a takeover
    that stockholders may consider favorable.





| |   |                                                                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | authorize the issuance by the Board of Directors of preferred
    stock without the requirement of stockholder approval, which
    could make it more difficult for a third party to acquire a
    majority of our outstanding voting stock;
|
| |  | prohibit cumulative voting in the election of directors;                                                                                                                                                                                    
|
| |  | prohibit our stockholders from acting by written consent;                                                                                                                                                                                   
|
| |  | limit the persons who may call special meetings of stockholders;                                                                                                                                                                            
|
| |  | establish advance notice requirements for nominations for
    election to the Board of Directors or for proposing matters to
    be approved by stockholders at stockholder meetings; and                                                   
|
| |  | require an 80% vote to approve certain business combinations
    with persons holding 10% or more of our common stock, unless
    certain conditions are met.                                                                               







19



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Available Information


www.beverlycorp.com,


http: //www.sec.gov.


20



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|        |            
|------- | -----------
|ITEM 2. | PROPERTIES.





|                     |  |                    |     |          |                 |  |             |        |       |      |       |        |  |           |            |  |         |  |    |  |  |  |    | 
|-------------------- |  | ------------------ | --- | -------- | --------------- |  | ----------- | ------ | ----- | ---- | ----- | ------ |  | --------- | ---------- |  | ------- |  | -- |  |  |  | -- | 
|                     |  | Nursing Facilities |     |          |                 |  |             |        |      
|                     |  |                    |     |          | Assisted Living |  |             |        |       |     
|                     |  |                    |     | Centers  |                 |  | Hospice and |        |       |     
|                     |  |                    |     | Total    |                 |  |             |        |       | Home |       |        | 
|                     |  |                    |     | Licensed |                 |  |             |        | Total |      |       | Health |  |           | Outpatient | 
|Location             |  | Number             |     |          | Beds            |  |             | Number |       |      | Units |        |  | Locations |            |  | Clinics | 
|                     |  |                    |     |          |                 |  |             |        |       |      |       |        |  |           |            |  |         | 
|Alabama              |  |                    | 14  |          |                 |  | 1,692       |        |       |      |      |        |  |           |           |  |         |  | 11 |  |  |  |   | 
|Arkansas             |  |                    | 19  |          |                 |  | 2,270       |        |       |      | 1     |        |  |           | 16         |  |         |  |   |  |  |  |   | 
|California           |  |                    | 24  |          |                 |  | 2,306       |        |       |      |      |        |  |           |           |  |         |  | 2  |  |  |  |   | 
|District of Columbia |  |                    | 1   |          |                 |  | 355         |        |       |      |      |        |  |           |           |  |         |  |   |  |  |  |   | 
|Georgia              |  |                    | 13  |          |                 |  | 1,595       |        |       |      | 2     |        |  |           | 72         |  |         |  | 1  |  |  |  |   | 
|Illinois             |  |                    | 3   |          |                 |  | 275         |        |       |      |      |        |  |           |           |  |         |  |   |  |  |  |   | 
|Indiana              |  |                    | 26  |          |                 |  | 3,064       |        |       |      |      |        |  |           |           |  |         |  | 1  |  |  |  |   | 
|Iowa                 |  |                    |    |          |                 |  |            |        |       |      |      |        |  |           |           |  |         |  | 1  |  |  |  |   | 
|Kansas               |  |                    | 19  |          |                 |  | 1,175       |        |       |      |      |        |  |           |           |  |         |  |   |  |  |  |   | 
|Kentucky             |  |                    | 8   |          |                 |  | 1,039       |        |       |      |      |        |  |           |           |  |         |  |   |  |  |  |   | 
|Maryland             |  |                    | 4   |          |                 |  | 585         |        |       |      | 1     |        |  |           | 19         |  |         |  |   |  |  |  |   | 
|Massachusetts        |  |                    | 18  |          |                 |  | 2,048       |        |       |      |      |        |  |           |           |  |         |  | 1  |  |  |  |   | 
|Minnesota            |  |                    | 28  |          |                 |  | 2,324       |        |       |      | 1     |        |  |           | 16         |  |         |  |   |  |  |  |   | 
|Mississippi          |  |                    | 10  |          |                 |  | 1,148       |        |       |      |      |        |  |           |           |  |         |  | 7  |  |  |  |   | 
|Missouri             |  |                    | 18  |          |                 |  | 1,723       |        |       |      | 3     |        |  |           | 109        |  |         |  | 2  |  |  |  |   | 
|Nebraska             |  |                    | 24  |          |                 |  | 2,037       |        |       |      | 1     |        |  |           | 16         |  |         |  | 4  |  |  |  |   | 
|New Jersey           |  |                    | 1   |          |                 |  | 140         |        |       |      |      |        |  |           |           |  |         |  |   |  |  |  |   | 
|North Carolina       |  |                    | 10  |          |                 |  | 1,278       |        |       |      |      |        |  |           |           |  |         |  | 1  |  |  |  | 10 | 
|Ohio                 |  |                    | 9   |          |                 |  | 1,252       |        |       |      |      |        |  |           |           |  |         |  |   |  |  |  |   | 
|Pennsylvania         |  |                    | 41  |          |                 |  | 4,659       |        |       |      | 3     |        |  |           | 72         |  |         |  | 9  |  |  |  |   | 
|South Dakota         |  |                    | 17  |          |                 |  | 1,165       |        |       |      | 1     |        |  |           | 36         |  |         |  |   |  |  |  |   | 
|Tennessee            |  |                    | 5   |          |                 |  | 555         |        |       |      | 2     |        |  |           | 55         |  |         |  | 5  |  |  |  |   | 
|Texas                |  |                    |    |          |                 |  |            |        |       |      |      |        |  |           |           |  |         |  | 4  |  |  |  |   | 
|Virginia             |  |                    | 13  |          |                 |  | 1,720       |        |       |      | 3     |        |  |           | 84         |  |         |  |   |  |  |  |   | 
|West Virginia        |  |                    | 3   |          |                 |  | 310         |        |       |      |      |        |  |           |           |  |         |  |   |  |  |  |   | 
|Wisconsin            |  |                    | 23  |          |                 |  | 2,280       |        |       |      |      |        |  |           |           |  |         |  | 3  |  |  |  |   | 
|                     |  |                    |     |          |                 |  |             |        |       |      |       |        |  |           |            |  |         | 
|                     |  |                    | 351 |          |                 |  | 36,995      |        |       |      | 18    |        |  |           | 495        |  |         |  | 52 |  |  |  | 10 | 
|                     |  |                    |     |          |                 |  |             |        |       |      |       |        |  |           |            |  |         | 
|Classification       |  |                    |     |          |                 |  |             |        |       |      |       |        |  |           |            |  |         |  |    |  |  |  |    | 
|Owned                |  |                    | 264 |          |                 |  | 27,448      |        |       |      | 17    |        |  |           | 426        |  |         |  |   |  |  |  |   | 
|Leased               |  |                    | 87  |          |                 |  | 9,547       |        |       |      | 1     |        |  |           | 69         |  |         |  | 52 |  |  |  | 10 | 
|                     |  |                    |     |          |                 |  |             |        |       |      |       |        |  |           |            |  |         | 
|                     |  |                    | 351 |          |                 |  | 36,995      |        |       |      | 18    |        |  |           | 495        |  |         |  | 52 |  |  |  | 10 | 
|                     |  |                    |     |          |                 |  |             |        |       |      |       |        |  |           |            |  |         | 

21



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|        |                   
|------- | ------------------
|ITEM 3. | LEGAL PROCEEDINGS.

Chaya Perlstein v. William R. Floyd, et.
al Robert
Strougo v. Beverly Enterprises, Inc., et. al In
re Beverly Shareholders Litigation, Floyd


Paul Dunne and Helene
Dunne, derivatively on behalf of nominal defendant Beverly
Enterprises, Inc. v. Beryl F. Anthony, Jr., et. al. Holcombe v.
Floyd, et. al. and Flowers v. Floyd, et. al. Holcomb v. Beverly
Enterprises, Inc.




22



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##### Table of Contents














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



23



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##### Table of Contents






PART II







|        |                                                                            
|------- | ---------------------------------------------------------------------------
|ITEM 5. | MARKET FOR THE COMPANYS COMMON EQUITY AND RELATED
    STOCKHOLDER MATTERS.



|     |                                 |        |   |       |     |  |   |      | 
|---- | ------------------------------- | ------ | - | ----- | --- |  | - | ---- | 
|     |                                 | Prices |  
|     |                                 |        |  
|     |                                 | High   |   |       | Low | 
|     |                                 |        |   |       |     | 
|2003 |                                 |        |   |       |     |  |   |     
|     | First Quarter                   |        | $ | 3.00  |     |  | $ | 1.63 | 
|     | Second Quarter                  |        |   | 4.30  |     |  |   | 1.80 | 
|     | Third Quarter                   |        |   | 6.99  |     |  |   | 3.71 | 
|     | Fourth Quarter                  |        |   | 8.60  |     |  |   | 5.06 | 
|2004 |                                 |        |   |       |     |  |   |     
|     | First Quarter                   |        | $ | 8.96  |     |  | $ | 5.84 | 
|     | Second Quarter                  |        |   | 8.92  |     |  |   | 5.83 | 
|     | Third Quarter                   |        |   | 8.70  |     |  |   | 6.78 | 
|     | Fourth Quarter                  |        |   | 9.41  |     |  |   | 7.49 | 
|2005 |                                 |        |   |       |     |  |   |     
|     | First Quarter (through March 7) |        | $ | 12.32 |     |  | $ | 8.33 | 







24



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##### Table of Contents








|        |                         
|------- | ------------------------
|ITEM 6. | SELECTED FINANCIAL DATA.



|                                                                                                                                            |                                                                                                |                                                                                               |                           |           |         |           |           |           |         |           |           |           |         |           |           |           |         |           |           |           |         |           |  
|------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------- | ------------------------- | --------- | ------- | --------- | --------- | --------- | ------- | --------- | --------- | --------- | ------- | --------- | --------- | --------- | ------- | --------- | --------- | --------- | ------- | --------- | -
|                                                                                                                                            |                                                                                                | At or For the Years Ended December 31,                                                        |                          
|                                                                                                                                            |                                                                                                |                                                                                               |                          
|                                                                                                                                            |                                                                                                | 2004(1)                                                                                       |                           |           | 2003(1) |           |           | 2002(1)   |         |           | 2001(1)   |           |         | 2000(1)   |          
|                                                                                                                                            |                                                                                                |                                                                                               |                           |           |         |           |           |           |         |           |           |           |         |           |          
|                                                                                                                                            |                                                                                                | (Dollars in thousands, except per share data)                                                 |                          
|Consolidated Statement of Operations Data:                                                                                                  |                                                                                                |                                                                                               |                           |           |         |           |           |           |         |           |           |           |         |           |           |           |         |           |           |          
|Revenues                                                                                                                                    |                                                                                                | $                                                                                             | 1,988,852                 |           |         | $         | 1,802,026 |           |         | $         | 1,766,726 |           |         | $         | 1,953,084 |           |         | $         | 1,908,173 |          
|Costs and expenses:                                                                                                                         |                                                                                                |                                                                                               |                           |           |         |           |           |           |         |           |           |           |         |           |           |           |         |           |           |          
|                                                                                                                                            | Wages and related                                                                              |                                                                                               |                           | 1,147,743 |         |           |           | 1,078,548 |         |           |           | 1,068,629 |         |           |           | 1,203,932 |         |           |           | 1,188,908 |        
|                                                                                                                                            | Provision for insurance and related items                                                      |                                                                                               |                           | 127,653   |         |           |           | 109,377   |         |           |           | 84,161    |         |           |           | 75,385    |         |           |           | 102,237   |        
|                                                                                                                                            | Other operating and administrative                                                             |                                                                                               |                           | 522,603   |         |           |           | 462,144   |         |           |           | 458,311   |         |           |           | 503,951   |         |           |           | 542,539   |        
|                                                                                                                                            | Depreciation and amortization                                                                  |                                                                                               |                           | 62,166    |         |           |           | 58,807    |         |           |           | 62,906    |         |           |           | 63,549    |         |           |           | 70,667    |        
|                                                                                                                                            | Florida insurance reserve adjustment                                                           |                                                                                               |                           |          |         |           |           |          |         |           |           | 22,179    |         |           |           |          |         |           |           |          |        
|                                                                                                                                            | Special charge and adjustment related to California
    investigation settlement               |                                                                                               |                           |          |         |           |           | (925      | )       |           |           | 6,300     |         |           |           |          |         |           |           |          |        
|                                                                                                                                            | Special charge and adjustments related to settlements of federal
    government investigations |                                                                                               |                           |          |         |           |           |          |         |           |           | (9,441    | )       |           |           | 77,495    |         |           |           |          |        
|                                                                                                                                            | Asset impairments, workforce reductions and other unusual items                                |                                                                                               |                           | 448       |         |           |           | 3,825     |         |           |           | 46,287    |         |           |           | 180,000   |         |           |           | 16,895    |        
|                                                                                                                                            |                                                                                                |                                                                                               |                           |           |         |           |           |           |         |           |           |           |         |           |          
|                                                                                                                                            |                                                                                                |                                                                                               | Total costs and expenses  |           |         | 1,860,613 |           |           |         | 1,711,776 |           |           |         | 1,739,332 |           |           |         | 2,104,312 |           |           |         | 1,921,246 |  
|                                                                                                                                            |                                                                                                |                                                                                               |                           |           |         |           |           |           |         |           |           |           |         |           |          
|Income (loss) before other income (expenses)                                                                                                |                                                                                                |                                                                                               | 128,239                   |           |         |           | 90,250    |           |         |           | 27,394    |           |         |           | (151,228  | )         |         |           | (13,073   | )        
|                                                                                                                                            | Other income (expenses):                                                                       |                                                                                               |                           |           |         |           |           |           |         |           |           |           |         |           |           |           |         |           |           |           |        
|                                                                                                                                            |                                                                                                | Interest expense                                                                              |                           |           | (45,637 | )         |           |           | (63,314 | )         |           |           | (62,652 | )         |           |           | (74,447 | )         |           |           | (75,119 | )        
|                                                                                                                                            |                                                                                                | Costs related to early extinguishments of debt                                                |                           |           | (40,935 | )         |           |           | (6,634  | )         |           |           |        |           |           |           |        |           |           |           | (354    | )        
|                                                                                                                                            |                                                                                                | Interest income                                                                               |                           |           | 5,485   |           |           |           | 5,363   |           |           |           | 4,688   |           |           |           | 2,911   |           |           |           | 2,485   |          
|                                                                                                                                            |                                                                                                | Net gains on dispositions                                                                     |                           |           | 396     |           |           |           | 422     |           |           |           | 2,142   |           |           |           | 988     |           |           |           | 2,433   |          
|                                                                                                                                            |                                                                                                | Gains on sales of equity investments                                                          |                           |           |        |           |           |           | 6,686   |           |           |           |        |           |           |           | 256     |           |           |           | 1,477   |          
|                                                                                                                                            |                                                                                                |                                                                                               |                           |           |         |           |           |           |         |           |           |           |         |           |          
|                                                                                                                                            |                                                                                                |                                                                                               | Total other expenses, net |           |         | (80,691   | )         |           |         | (57,477   | )         |           |         | (55,822   | )         |           |         | (70,292   | )         |           |         | (69,078   | )
|                                                                                                                                            |                                                                                                |                                                                                               |                           |           |         |           |           |           |         |           |           |           |         |           |          
|Income (loss) before provision for income taxes, discontinued
    operations and cumulative effect of change in accounting for
    goodwill |                                                                                                |                                                                                               | 47,548                    |           |         |           | 32,773    |           |         |           | (28,428   | )         |         |           | (221,520  | )         |         |           | (82,151   | )        
|Provision for (benefit from) income taxes                                                                                                   |                                                                                                |                                                                                               | 4,890                     |           |         |           | 5,069     |           |         |           | 6,085     |           |         |           | 60,432    |           |         |           | (25,791   | )        
|                                                                                                                                            |                                                                                                |                                                                                               |                           |           |         |           |           |           |         |           |           |           |         |           |          
|Income (loss) before discontinued operations and cumulative
    effect of change in accounting for goodwill                                 |                                                                                                |                                                                                               | 42,658                    |           |         |           | 27,704    |           |         |           | (34,513   | )         |         |           | (281,952  | )         |         |           | (56,360   | )        
|Discontinued operations, net of taxes of 2004  $55;
    2003  $3,378; 2002  $0; 2001 
    $956; and 2000  $3,529                       |                                                                                                |                                                                                               | (14,637                   | )         |         |           | 52,764    |           |         |           | (34,406   | )         |         |           | (19,320   | )         |         |           | 1,858     |          
|Cumulative effect of change in accounting for goodwill, net of
    income taxes of $0(2)                                                    |                                                                                                |                                                                                               |                          |           |         |           |          |           |         |           | (77,171   | )         |         |           |          |           |         |           |          |          
|                                                                                                                                            |                                                                                                |                                                                                               |                           |           |         |           |           |           |         |           |           |           |         |           |          
|Net income (loss)                                                                                                                           |                                                                                                | $                                                                                             | 28,021                    |           |         | $         | 80,468    |           |         | $         | (146,090  | )         |         | $         | (301,272  | )         |         | $         | (54,502   | )        
|                                                                                                                                            |                                                                                                |                                                                                               |                           |           |         |           |           |           |         |           |           |           |         |           |          
|Net income (loss) per share of common stock:                                                                                                |                                                                                                |                                                                                               |                           |           |         |           |           |           |         |           |           |           |         |           |           |           |         |           |           |          
|                                                                                                                                            | Basic:                                                                                         |                                                                                               |                           |           |         |           |           |           |         |           |           |           |         |           |           |           |         |           |           |           |        
|                                                                                                                                            |                                                                                                | Before discontinued operations and cumulative effect of change
    in accounting for goodwill |                           | $         | 0.40    |           |           | $         | 0.26    |           |           | $         | (0.33   | )         |           | $         | (2.71   | )         |           | $         | (0.55   | )        
|                                                                                                                                            |                                                                                                | Discontinued operations, net of taxes                                                         |                           |           | (0.14   | )         |           |           | 0.49    |           |           |           | (0.32   | )         |           |           | (0.19   | )         |           |           | 0.02    |          
|                                                                                                                                            |                                                                                                | Cumulative effect of change in accounting for goodwill, net of
    taxes                      |                           |           |        |           |           |           |        |           |           |           | (0.74   | )         |           |           |        |           |           |           |        |          
|                                                                                                                                            |                                                                                                |                                                                                               |                           |           |         |           |           |           |         |           |           |           |         |           |          
|                                                                                                                                            |                                                                                                | Net income (loss) per share of common stock                                                   |                           | $         | 0.26    |           |           | $         | 0.75    |           |           | $         | (1.39   | )         |           | $         | (2.90   | )         |           | $         | (0.53   | )        
|                                                                                                                                            |                                                                                                |                                                                                               |                           |           |         |           |           |           |         |           |           |           |         |           |          
|                                                                                                                                            |                                                                                                | Shares used to compute per share amounts                                                      |                           |           | 107,749 |           |           |           | 106,582 |           |           |           | 104,726 |           |           |           | 104,037 |           |           |           | 102,452 |          
|                                                                                                                                            |                                                                                                |                                                                                               |                           |           |         |           |           |           |         |           |           |           |         |           |          
|                                                                                                                                            | Diluted:(3)                                                                                    |                                                                                               |                           |           |         |           |           |           |         |           |           |           |         |           |           |           |         |           |           |           |        
|                                                                                                                                            |                                                                                                | Before discontinued operations and cumulative effect of change
    in accounting for goodwill |                           | $         | 0.37    |           |           | $         | 0.26    |           |           | $         | (0.33   | )         |           | $         | (2.71   | )         |           | $         | (0.55   | )        
|                                                                                                                                            |                                                                                                | Discontinued operations, net of taxes                                                         |                           |           | (0.12   | )         |           |           | 0.48    |           |           |           | (0.32   | )         |           |           | (0.19   | )         |           |           | 0.02    |          
|                                                                                                                                            |                                                                                                | Cumulative effect of change in accounting for goodwill, net of
    taxes                      |                           |           |        |           |           |           |        |           |           |           | (0.74   | )         |           |           |        |           |           |           |        |          
|                                                                                                                                            |                                                                                                |                                                                                               |                           |           |         |           |           |           |         |           |           |           |         |           |          
|                                                                                                                                            |                                                                                                | Net income (loss) per share of common stock                                                   |                           | $         | 0.25    |           |           | $         | 0.74    |           |           | $         | (1.39   | )         |           | $         | (2.90   | )         |           | $         | (0.53   | )        
|                                                                                                                                            |                                                                                                |                                                                                               |                           |           |         |           |           |           |         |           |           |           |         |           |          
|                                                                                                                                            |                                                                                                | Shares used to compute per share amounts                                                      |                           |           | 124,334 |           |           |           | 109,922 |           |           |           | 104,726 |           |           |           | 104,037 |           |           |           | 102,452 |          
|                                                                                                                                            |                                                                                                |                                                                                               |                           |           |         |           |           |           |         |           |           |           |         |           |          

25



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##### Table of Contents



|                                          |  |                                               |           |   |         |   |           |         |  |   |           |   |  |         |           |    |  |   |           |  
|----------------------------------------- |  | --------------------------------------------- | --------- | - | ------- | - | --------- | ------- |  | - | --------- | - |  | ------- | --------- | -- |  | - | --------- | -
|                                          |  | At or For the Years Ended December 31,        |          
|                                          |  |                                               |          
|                                          |  | 2004(1)                                       |           |   | 2003(1) |   |           | 2002(1) |  |   | 2001(1)   |   |  | 2000(1) |          
|                                          |  |                                               |           |   |         |   |           |         |  |   |           |   |  |         |          
|                                          |  | (Dollars in thousands, except per share data) |          
|Other Financial Data:                     |  |                                               |           |   |         |   |           |         |  |   |           |   |  |         |           |    |  |   |           |  
|Cash flows from operations                |  | $                                             | 75,660    |   |         | $ | 69,861    |         |  | $ | 116,633   |   |  | $       | 220,897   |    |  | $ | 37,010    |  
|EBITDA(4)                                 |  |                                               | 190,801   |   |         |   | 156,165   |         |  |   | 92,442    |   |  |         | (86,435   | )  |  |   | 61,504    |  
|EBITDA Margin %(4)                        |  |                                               | 9.59      | % |         |   | 8.67      | %       |  |   | 5.23      | % |  |         | (4.43     | )% |  |   | 3.22      | %
|Capital expenditures                      |  |                                               | 62,718    |   |         |   | 43,984    |         |  |   | 100,103   |   |  |         | 89,401    |    |  |   | 76,027    |  
|Consolidated Balance Sheet Data:          |  |                                               |           |   |         |   |           |         |  |   |           |   |  |         |           |    |  |   |           |  
|Total assets                              |  | $                                             | 1,361,385 |   |         | $ | 1,346,421 |         |  | $ | 1,349,895 |   |  | $       | 1,681,070 |    |  | $ | 1,875,993 |  
|Current portion of long-term debt         |  |                                               | 12,240    |   |         |   | 13,354    |         |  |   | 41,463    |   |  |         | 64,231    |    |  |   | 227,111   |  
|Long-term debt, excluding current portion |  |                                               | 545,943   |   |         |   | 552,873   |         |  |   | 588,714   |   |  |         | 677,442   |    |  |   | 564,247   |  
|Total stockholders equity                |  |                                               | 272,413   |   |         |   | 238,186   |         |  |   | 153,472   |   |  |         | 296,497   |    |  |   | 583,993   |  
|Other Data:                               |  |                                               |           |   |         |   |           |         |  |   |           |   |  |         |           |    |  |   |           |  
|Average occupancy(5)                      |  |                                               | 88.9      | % |         |   | 88.2      | %       |  |   | 88.2      | % |  |         | 86.6      | %  |  |   | 86.5      | %






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The operations of Matrix, MK Medical, Care Focus, 125 nursing
    facilities and eight assisted living centers have been
    reclassified as discontinued operations for all periods
    presented, including 27 nursing facilities and 10 outpatient
    clinics classified as held for sale during the year ended
    December 31, 2004, since they met the applicable criteria
    under Statement of Financial Accounting Standards No. 144,
    Accounting for the Impairment or Disposal of Long-Lived
    Assets (see Item 8  Note 6).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   
|(2) | Includes a $77.2 million goodwill impairment charge
    relating to the 2002 adoption of Statement of Financial
    Accounting Standards No. 142, Goodwill and Other
    Intangible Assets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|(3) | Assumes the conversion of our 2.75% convertible
    subordinated notes since their issuance in October 2003, on an
    if-converted basis, in accordance with Emerging Issues Task
    Force Issue No. 04-8, The Effect of Contingently
    Convertible Debt on Diluted Earnings per Share(see
    Item 8.  Note 1  Earnings Per
    Share).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   
|(4) | We define EBITDA as earnings from continuing operations before
    interest expense (including costs related to early
    extinguishments of debt), interest income, income taxes,
    depreciation and amortization. EBITDA margin is EBITDA as a
    percentage of revenues. EBITDA is commonly used by our lenders
    and investors to assess our leverage capacity, debt service
    ability and liquidity, and we use EBITDA to evaluate financial
    performance and to design incentive compensation for management.
    EBITDA is not considered a measure of financial performance
    under U.S. generally accepted accounting principles
    (GAAP), and the items excluded from EBITDA are
    significant components in understanding and assessing our
    financial performance. EBITDA should not be considered as an
    alternative to net income, cash flows provided by or used in
    operating, investing or financing activities or other financial
    statement data presented in our consolidated financial
    statements as an indicator of financial performance or
    liquidity. Since EBITDA is not a measure determined in
    accordance with GAAP and is thus susceptible to varying
    calculations, EBITDA, as presented, may not be comparable to
    other similarly titled measures of other companies.



| |                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | EBITDA has limitations as an analytical tool, and you should not
    consider it in isolation or as a substitute for analysis of our
    results as reported under GAAP. Some of these limitations are:



| |   |                                                                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | EBITDA does not reflect our cash expenditures, or future
    requirements, for capital expenditures or contractual
    commitments;                                                                                                       
|
| |  | EBITDA does not reflect changes in, or cash requirements for,
    our working capital needs;                                                                                                                                              
|
| |  | EBITDA does not reflect interest expense, or the cash
    requirements necessary to service interest or principal
    payments, on our debt; and                                                                                          
|
| |  | although depreciation and amortization are non-cash charges, the
    assets being depreciated and amortized will often have to be
    replaced in the future, and EBITDA does not reflect any cash
    requirements for such replacements.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Because of these limitations, EBITDA should not be considered as
    a measure of discretionary cash available to us to invest in the
    growth of our business. We compensate for these limitations by
    relying primarily on our GAAP results and using EBITDA only
    supplementally. See our Consolidated Statements of Cash Flows
    included in Item 8. The following table provides a
    reconciliation from our pre-tax income (loss) from continuing
    operations, which is the most directly comparable financial
    measure presented in accordance with GAAP for the periods
    indicated (in thousands):

|                                                                                                                                            |                               |      |         |        |      |   |         |        |  |   |         |        |  |      |          |        |  |   |         |        | 
|------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------- | ---- | ------- | ------ | ---- | - | ------- | ------ |  | - | ------- | ------ |  | ---- | -------- | ------ |  | - | ------- | ------ | 
|                                                                                                                                            |                               | 2004 |         |        | 2003 |   |         | 2002   |  |   | 2001    |        |  | 2000 |         
|                                                                                                                                            |                               |      |         |        |      |   |         |        |  |   |         |        |  |      |         
|Income (loss) before provision for income taxes, discontinued
    operations and cumulative effect of change in accounting for
    goodwill |                               | $    | 47,548  |        |      | $ | 32,773  |        |  | $ | (28,428 | )      |  | $    | (221,520 | )      |  | $ | (82,151 | )     
|Plus:                                                                                                                                       |                               |      |         |        |      |   |         |        |  |   |         |        |  |      |          |        |  |   |         |       
|                                                                                                                                            | Depreciation and amortization |      |         | 62,166 |      |   |         | 58,807 |  |   |         | 62,906 |  |      |          | 63,549 |  |   |         | 70,667 | 
|                                                                                                                                            | Interest expense(a)           |      |         | 86,572 |      |   |         | 69,948 |  |   |         | 62,652 |  |      |          | 74,447 |  |   |         | 75,473 | 
|Minus:                                                                                                                                      |                               |      |         |        |      |   |         |        |  |   |         |        |  |      |          |        |  |   |         |       
|                                                                                                                                            | Interest income               |      |         | 5,485  |      |   |         | 5,363  |  |   |         | 4,688  |  |      |          | 2,911  |  |   |         | 2,485  | 
|                                                                                                                                            |                               |      |         |        |      |   |         |        |  |   |         |        |  |      |         
|EBITDA                                                                                                                                      |                               | $    | 190,801 |        |      | $ | 156,165 |        |  | $ | 92,442  |        |  | $    | (86,435  | )      |  | $ | 61,504  |       
|                                                                                                                                            |                               |      |         |        |      |   |         |        |  |   |         |        |  |      |         






| |     |                                                                                                                                                                                     
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) | Includes $40.9 million, $6.6 million and $354,000,
    respectively, for the years ended December 31, 2004, 2003
    and 2000 of costs related to the early extinguishments of debt.



|    |                                                                                                                                                                                                                                                                              
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(5) | Calculated by dividing the nursing facilities actual
    patient days by available patient days from continuing
    operations. Available patient days are calculated by multiplying
    total calendar days by the number of beds that are operationally
    ready for use.

26



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##### Table of Contents








|        |                                                                                           
|------- | ------------------------------------------------------------------------------------------
|ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
    CONDITION AND RESULTS OF OPERATIONS.



Overview






| |   |                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------
| |  | decreased our balance sheet debt from $791 million to less
    than $560 million;                                           
|
| |  | eliminated off-balance sheet debt of $184 million;                                                                          
|
| |  | increased our cash balance from $26 million to
    $216 million; and                                                        
|
| |  | cut our Nursing Facilities patient receivables by 64% to
    $179 million and less than 35 days sales
    outstanding; and
|
| |  | substantially completed the divestiture program begun in 2001.                                                              







| |                                                   
| | --------------------------------------------------
| | Strengthen and grow our Nursing Facilities segment



| |   |                                                                                             
| | - | --------------------------------------------------------------------------------------------
| |  | 6.8% revenue growth;                                                                        
|
| |  | 45.9% pre-tax income growth; and                                                            
|
| |  | divested 18 non-strategic facilities, substantially completing
    our divestiture strategy.

27



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##### Table of Contents





| |                                                
| | -----------------------------------------------
| | Accelerate the growth of our service businesses



| |   |                                 
| | - | --------------------------------
| |  | 61.4% revenue growth, including:



| |                      
| | ---------------------
| | 58.2% from Aegis and 
|
| | 67.5% from AseraCare;



| |   |                                                                         
| | - | ------------------------------------------------------------------------
| |  | 75 new Aegis customers, net;                                            
|
| |  | 70% growth in hospice average daily census; and                         
|
| |  | 30 new hospice locations (including the acquisition of Hospice
    USA).



| |                             
| | ----------------------------
| | Lead innovation in eldercare



| |   |                                                                        
| | - | -----------------------------------------------------------------------
| |  | completed construction on 29 Alzeheimers
    units; and               
|
| |  | Aegis Freedom Through Functionality program added in 33
    locations.



| |                                    
| | -----------------------------------
| | Continually re-engineer our Company



| |   |                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | $17.7 million or 27.9% drop in interest expense; and                                                                                                                                                         
|
| |  | new technologies implemented to improve the documentation of
    resident care and to effectively manage labor costs at the local
    level (resulting in a weighted average wage rate increase of
    3.7%).



|                                                  |          |       |   |     |       |  |   |       |   |  |       |     |   |       |   |     |   |  |   |       |  
|------------------------------------------------- | -------- | ----- | - | --- | ----- |  | - | ----- | - |  | ----- | --- | - | ----- | - | --- | - |  | - | ----- | -
|                                                  |          | Qtr 1 |   |     | Qtr 2 |  |   | Qtr 3 |   |  | Qtr 4 |     |   | Total |  
|                                                  |          |       |   |     |       |  |   |       |   |  |       |     |   |       |  
|Revenues:                                         |          |       |   |     |       |  |   |       |   |  |       |     |   |       |   |     |   |  |   |      
|                                                  | 2004     |       | $ | 481 |       |  | $ | 488   |   |  | $     | 503 |   |       | $ | 517 |   |  | $ | 1,989 |  
|                                                  | 2003     |       | $ | 433 |       |  | $ | 442   |   |  | $     | 457 |   |       | $ | 470 |   |  | $ | 1,802 |  
|                                                  | % change |       |   | 11  | %     |  |   | 10    | % |  |       | 10  | % |       |   | 10  | % |  |   | 10    | %
|Pre-tax income (loss) from continuing operations: |          |       |   |     |       |  |   |       |   |  |       |     |   |       |   |     |   |  |   |      
|                                                  | 2004     |       | $ | 23  |       |  | $ | (14   | ) |  | $     | 22  |   |       | $ | 17  |   |  | $ | 48    |  
|                                                  | 2003     |       | $ | 4   |       |  | $ | 7     |   |  | $     | 10  |   |       | $ | 12  |   |  | $ | 33    |  
|                                                  | % change |       |   | 475 | %     |  |   |      |   |  |       | 120 | % |       |   | 42  | % |  |   | 45    | %

Results of Operations 
Continuing Operations




| |   |                                                                                                   
| | - | --------------------------------------------------------------------------------------------------
| |  | increasing the maturities on 36% of our long-term debt by more
    than five years;               
|
| |  | providing greater covenant flexibility;                                                           
|
| |  | lowering our interest rate 175 basis points on that layer
    of debt; and                        
|
| |  | providing additional financing capacity and flexibility by
    refinancing with subordinated debt.

Transfers of
Financial Assets


28



---



##### Table of Contents





Critical Accounting Policies






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





Revenue Assumptions and Approach Used.




Allowance Assumptions and Approach Used.


29



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|                                     |  |      |        |   |      |   |        |      |  |   |        |  
|------------------------------------ |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                     |  | 2004 |        |   | 2003 |   |        | 2002 | 
|                                     |  |      |        |   |      |   |        |      | 
|Allowance for doubtful accounts      |  | $    | 26,320 |   |      | $ | 31,615 |      |  | $ | 44,536 |  
|As a % of accounts receivable        |  |      | 10.1   | % |      |   | 16.1   | %    |  |   | 20.2   | %
|As a % of accounts over 180 days old |  |      | 190.5  | % |      |   | 119.6  | %    |  |   | 115.5  | %
|Provision for doubtful accounts      |  | $    | 8,898  |   |      | $ | 22,743 |      |  | $ | 54,558 |  
|As a % of revenues                   |  |      | 0.4    | % |      |   | 1.3    | %    |  |   | 3.1    | %

Sensitivity Analysis.




| |                                                                   
| | ------------------------------------------------------------------
| | General and Professional Liabilities and Other Insurance
    Risks





Assumptions and Approach Used.


30



---



##### Table of Contents





Sensitivity Analysis.




| |                        
| | -----------------------
| | Tax Valuation Allowance



Assumptions and Approach Used. Accounting for Income Taxes


Sensitivity Analysis.






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

Long-Lived Assets. Accounting for the
Impairment or Disposal of Long-Lived Assets




| |   |                                                               
| | - | --------------------------------------------------------------
| |  | a history of operating losses, with expected future losses;   
|
| |  | changes in the regulatory environment affecting reimbursement;

31



---



##### Table of Contents





| |   |                                                               
| | - | --------------------------------------------------------------
| |  | decreases 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.

SFAS No. 144 Assumptions and Approach Used.






| |   |                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | estimating the undiscounted cash flows to be generated by each
    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 carrying value of the facility or property.



SFAS No. 144 Sensitivity Analysis.


Indefinite-Lived Intangible Assets. Goodwill and Other Intangible Assets


SFAS No. 142 Assumptions and Approach Used.


SFAS No. 142 Sensitivity Analysis.


Off-Balance Sheet Arrangements




32



---



##### Table of Contents



Transfer of
Financial Assets


Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others


Operating Results




| |        
| | -------
| | General





| |                 
| | ----------------
| | Reclassification





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



|                                                                            |  |      |        |  |      |  |        |      |  |  |        |  
|--------------------------------------------------------------------------- |  | ---- | ------ |  | ---- |  | ------ | ---- |  |  | ------ | -
|                                                                            |  | 2004 |        |  | 2003 |  |        | 2002 | 
|                                                                            |  |      |        |  |      |  |        |      | 
|Costs related to early extinguishments of debt                              |  |      | 40,935 |  |      |  | 6,634  |      |  |  |       |  
|Florida insurance reserve adjustment                                        |  |      |       |  |      |  |       |      |  |  | 22,179 |  
|Charge and adjustment related to California investigations                  |  |      |       |  |      |  | (925   | )    |  |  | 6,300  |  
|Adjustments related to settlements of federal government
    investigations |  |      |       |  |      |  |       |      |  |  | (9,441 | )
|Asset impairments, workforce reductions and other unusual items             |  |      | 448    |  |      |  | 3,825  |      |  |  | 46,287 |  
|Gain on sale of equity investment                                           |  |      |       |  |      |  | (6,686 | )    |  |  |       |  

33



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##### Table of Contents







| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | $40.9 million for costs related to the early
    extinguishments of debt. During the second quarter 2004, we
    issued $215.0 million of
    77/8% senior
    subordinated notes. The proceeds from the senior subordinated
    notes, together with cash on hand, were used to purchase
    $190.6 million of our
    95/8% senior
    notes and to pay related fees and expenses. In conjunction with
    these transactions, we paid a prepayment premium of
    $36.1 million, wrote off $3.7 million of related
    deferred financing costs and paid $681,000 in fees and expenses
    related to the early extinguishment of the
    95/8% senior
    notes. We also wrote off $505,000 of deferred financing costs
    related to early extinguishments of certain other debt;
|
| |  | $3.5 million for asset impairments, primarily related to
    seven nursing facilities (see Asset Impairmentsin our
    Critical Accounting Policies above);                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | $422,000 for net workforce reduction charges, including
    $1.3 million resulting from operational reorganizations,
    net of a $536,000 reversal of workforce reduction charges which
    were no longer needed. The charge is partially offset by
    $362,000 primarily due to the cancellation of restricted stock.
    During 2004, we notified 53 associates that their positions
    would be eliminated. The $1.3 million for workforce
    reductions was an all cash expense, $500,000 of which was paid
    during the year ended December 31, 2004; partially offset by                                                                                                                                                                                                  
|
| |  | $3.4 million gain due to the sale or settlement of
    previously impaired assets above carrying value.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | $6.6 million for costs related to the early extinguishment
    of debt. During the fourth quarter of 2003, we entered into a
    $210.0 million senior credit facility and issued
    $115.0 million of 2.75% convertible subordinated
    notes. The net proceeds from these transactions were used to pay
    off our 9% senior notes and certain mortgages, bonds and
    other debt obligations. In conjunction with these transactions,
    we wrote off $3.9 million of deferred financing costs and
    paid a prepayment premium of $2.7 million;
|
| |  | $2.1 million for asset impairments, primarily related to
    three nursing facilities (see Asset Impairmentsin our
    Critical Accounting Policies above);                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | $2.5 million for net workforce reduction charges, including
    $2.9 million resulting from operational reorganizations,
    net of a $395,000 reversal of workforce reduction charges which
    were no longer needed. During 2003, we notified
    67 associates that their positions would be eliminated. The
    charge included the following:                                                                                                                                                                                                      



| |   |                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | $2.8 million of cash expenses, $1.8 million and
    $900,000 of which was paid during the years ended
    December 31, 2003 and 2004, respectively; and                                                                       
|
| |  | non-cash expenses of approximately $84,000 related to the
    issuance of 108,230 shares under our Stock Grant Plan (the
    Stock Grant Plan), less approximately $400,000 due
    to the cancellation of restricted stock;



| |   |                                                                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | partially offset by a $6.7 million gain on the sale of a
    publicly traded equity security that was acquired in 1995;                                                                                                                    
|
| |  | a $1.0 million reversal of previously recorded exit costs
    and $447,000 primarily resulting from the settlement of a
    previously impaired asset above carrying value; and                                                            
|
| |  | the reversal of $925,000 of costs originally accrued for the
    settlement, recorded in 2002, related to the investigation of
    patient care issues at certain California nursing homes (the
    California investigation settlement).

34



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##### Table of Contents







| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | $41.4 million for the write-down of property and equipment
    on certain assets of the Nursing Facilities segment (see
    Asset Impairmentsin our Critical Accounting Policies
    above);                                                                                                                                                                                                                                                       
|
| |  | $22.2 million for an insurance reserve adjustment related
    to Florida facilities sold in 2002;                                                                                                                                                                                                                                                                                                                                                  
|
| |  | $7.9 million of net workforce reduction charges, including
    $8.5 million resulting from an operational reorganization
    required to support the implementation of our three-year
    strategic plan, net of a $585,000 reversal of workforce
    reduction charges recorded in 2001, which were no longer needed.
    During 2002, we notified 133 associates that their positions
    would be eliminated. The charge included the following:



| |   |                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | $8.0 million of cash expenses, $4.1 million,
    $2.8 million and $1.1 million of which was paid during
    the years ended December 31, 2002, 2003 and 2004,
    respectively; and
|
| |  | non-cash expenses of approximately $500,000 related to the
    issuance of 124,212 shares under our Stock Grant Plan;                                                              



| |   |                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | $6.3 million for the California investigation settlement
    and related costs (see Item 8.  Note 3);
    partially offset by                                       
|
| |  | $9.4 million adjustment to reserves established in
    conjunction with previous settlements of federal government
    investigations (see Item 8. 
    Note 4); and
|
| |  | $3.0 million gain primarily related to the sale of
    previously impaired assets above carrying value.                                                              



|                                   |  |            |        |   |            |   |           |            |  |   |            |           |  |            |         |   |            |   |        |   |  |   |         |  
|---------------------------------- |  | ---------- | ------ | - | ---------- | - | --------- | ---------- |  | - | ---------- | --------- |  | ---------- | ------- | - | ---------- | - | ------ | - |  | - | ------- | -
|                                   |  | 2004       |        |   | 2003       |   |           | 2002       | 
|                                   |  |            |        |   |            |   |           |            | 
|                                   |  | Workforce  |        |   |            |   | Workforce |            |  |   |            | Workforce |  |            |        
|                                   |  | Reductions |        |   | Exit Costs |   |           | Reductions |  |   | Exit Costs |           |  | Reductions |         |   | Exit Costs |  
|                                   |  |            |        |   |            |   |           |            |  |   |            |           |  |            |         |   |            |  
|Balance beginning of year          |  | $          | 3,029  |   |            | $ | 7,270     |            |  | $ | 5,418      |           |  | $          | 4,991   |   |            | $ | 7,631  |   |  | $ | 15,030  |  
|Charged to continuing operations   |  |            | 1,320  |   |            |   | 185       |            |  |   | 2,902      |           |  |            | (884    | ) |            |   | 8,454  |   |  |   |        |  
|Charged to discontinued operations |  |            |       |   |            |   | 4,251     |            |  |   |           |           |  |            | 26,599  |   |            |   |       |   |  |   | 2,633   |  
|Cash payments                      |  |            | (2,647 | ) |            |   | (7,134    | )          |  |   | (4,896     | )         |  |            | (22,579 | ) |            |   | (9,074 | ) |  |   | (10,313 | )
|Stock transactions                 |  |            |       |   |            |   |          |            |  |   |           |           |  |            |        |   |            |   | (1,008 | ) |  |   |        |  
|Reversals                          |  |            | (536   | ) |            |   |          |            |  |   | (395       | )         |  |            | (857    | ) |            |   | (585   | ) |  |   | (2,359  | )
|                                   |  |            |        |   |            |   |           |            |  |   |            |           |  |            |         |   |            |  
|Balance end of year                |  | $          | 1,166  |   |            | $ | 4,572     |            |  | $ | 3,029      |           |  | $          | 7,270   |   |            | $ | 5,418  |   |  | $ | 4,991   |  
|                                   |  |            |        |   |            |   |           |            |  |   |            |           |  |            |         |   |            |  



35



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##### Table of Contents





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



|                   |                |      |           |           |      |   |           |               |  |   |               |           |  |   |         |         |   |  |       |       |  |   |        |        |  |  |       |      | 
|------------------ | -------------- | ---- | --------- | --------- | ---- | - | --------- | ------------- |  | - | ------------- | --------- |  | - | ------- | ------- | - |  | ----- | ----- |  | - | ------ | ------ |  |  | ----- | ---- | 
|                   |                |      |           |           |      |   |           | Change        | 
|                   |                |      |           |           |      |   |           |               | 
|                   |                |      |           |           |      |   |           | 2004 vs. 2003 |  |   | 2003 vs. 2002 |          
|                   |                |      |           |           |      |   |           |               |  |   |               |          
|                   |                | 2004 |           |           | 2003 |   |           | 2002          |  |   | $             |           |  | % |         |         | $ |  |       | %     | 
|                   |                |      |           |           |      |   |           |               |  |   |               |           |  |   |         |         |   |  |       |       | 
|Nursing Facilities |                | $    | 1,794,471 |           |      | $ | 1,680,420 |               |  | $ | 1,677,892     |           |  | $ | 114,051 |         |   |  | 6.8%  |       |  | $ | 2,528  |        |  |  | 0.2%  |     
|Aegis              |                |      | 121,846   |           |      |   | 77,007    |               |  |   | 52,871        |           |  |   | 44,839  |         |   |  | 58.2% |       |  |   | 24,136 |        |  |  | 45.7% |     
|AseraCare          |                |      | 65,604    |           |      |   | 39,164    |               |  |   | 34,315        |           |  |   | 26,440  |         |   |  | 67.5% |       |  |   | 4,849  |        |  |  | 14.1% |     
|Other              |                |      | 6,931     |           |      |   | 5,435     |               |  |   | 1,648         |           |  |   | 1,496   |         |   |  | 27.5% |       |  |   | 3,787  |        |  |  |      |     
|                   |                |      |           |           |      |   |           |               |  |   |               |           |  |   |         |         |   |  |       |       | 
|                   | Total revenues |      | $         | 1,988,852 |      |   | $         | 1,802,026     |  |   | $             | 1,766,726 |  |   | $       | 186,826 |   |  |       | 10.4% |  |   | $      | 35,300 |  |  |       | 2.0% | 
|                   |                |      |           |           |      |   |           |               |  |   |               |           |  |   |         |         |   |  |       |       | 

2004 Compared to 2003.




| |                    
| | -------------------
| | Nursing Facilities:



| |   |                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------
| |  | an increase of $57.8 million, $33.9 million and
    $11.4 million in Medicaid, Medicare and private payment
    rates, respectively;          
|
| |  | an increase of $18.1 million due to Medicare Part B
    revenues, primarily due to increased therapy-related services;                        
|
| |  | an increase of $4.4 million due to one additional calendar
    day during 2004 as compared to the same period in 2003;
    partially offset by
|
| |  | a decrease of $11.8 million due to a decline in census;                                                                                       



| |       
| | ------
| | Aegis:



| |   |                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | an increase of $44.8 million from growth in Aegis
    external therapy business, including a 14.7% increase in the
    number of contracts and a 28% growth in average revenue per
    contract;



| |           
| | ----------
| | AseraCare:



| |   |                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------
| |  | an increase of $19.5 million due to the Hospice USA
    acquisition (see Item 8.  Note 7) and the
    opening of 14 hospice locations; and
|
| |  | an increase of $6.9 million primarily due to a 29% increase
    in average daily census in our core AseraCare business.                    

2003 Compared to 2002.




| |                    
| | -------------------
| | Nursing Facilities:



| |   |                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------
| |  | an increase of $41.3 million and $12.0 million in
    Medicaid and private payment rates, respectively;                   
|
| |  | an increase of $7.7 million due to adjustments related to
    favorable prior year cost report settlements;               
|
| |  | an increase of $6.8 million due to a shift in our patient
    mix, primarily from private to Medicare; partially offset by
|
| |  | a decrease of $47.3 million due to 2002 dispositions;                                                                     

36



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##### Table of Contents





| |   |                                                                
| | - | ---------------------------------------------------------------
| |  | a decrease of $11.4 million due to a decline in
    census; and
|
| |  | a decrease of $6.6 million due to various other items;         



| |       
| | ------
| | Aegis:



| |   |                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------
| |  | an increase of $24.1 million from growth in Aegis
    external therapy business, including a 32.5% increase in the
    number of contracts;



| |           
| | ----------
| | AseraCare:



| |   |                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------
| |  | an increase of $3.6 million primarily due to a 21% increase
    in average daily census in our core AseraCare business; and
|
| |  | an increase of $1.2 million due to the opening of three
    hospice locations.                                             



| |                   
| | ------------------
| | Costs and Expenses



|                                          |                                                                              |      |           |           |      |   |           |               |  |   |               |           |  |   |        |         |   |  |      |     |   |   |        |        |  |  |      |     |  
|----------------------------------------- | ---------------------------------------------------------------------------- | ---- | --------- | --------- | ---- | - | --------- | ------------- |  | - | ------------- | --------- |  | - | ------ | ------- | - |  | ---- | --- | - | - | ------ | ------ |  |  | ---- | --- | -
|                                          |                                                                              |      |           |           |      |   |           | Change        | 
|                                          |                                                                              |      |           |           |      |   |           |               | 
|                                          |                                                                              |      |           |           |      |   |           | 2004 vs. 2003 |  |   | 2003 vs. 2002 |          
|                                          |                                                                              |      |           |           |      |   |           |               |  |   |               |          
|                                          |                                                                              | 2004 |           |           | 2003 |   |           | 2002          |  |   | $             |           |  | % |        |         | $ |  |      | %   |  
|                                          |                                                                              |      |           |           |      |   |           |               |  |   |               |           |  |   |        |         |   |  |      |     |  
|Wages and related                         |                                                                              | $    | 1,147,743 |           |      | $ | 1,078,548 |               |  | $ | 1,068,629     |           |  | $ | 69,195 |         |   |  | 6.4  | %   |   | $ | 9,919  |        |  |  | 0.9  | %  
|Provision for insurance and related items |                                                                              |      | 127,653   |           |      |   | 109,377   |               |  |   | 84,161        |           |  |   | 18,276 |         |   |  | 16.7 | %   |   |   | 25,216 |        |  |  | 30.0 | %  
|Other operating and administrative        |                                                                              |      | 522,603   |           |      |   | 462,144   |               |  |   | 458,311       |           |  |   | 60,459 |         |   |  | 13.1 | %   |   |   | 3,833  |        |  |  | 0.8  | %  
|Depreciation and amortization             |                                                                              |      | 62,166    |           |      |   | 58,807    |               |  |   | 62,906        |           |  |   | 3,359  |         |   |  | 5.7  | %   |   |   | (4,099 | )      |  |  | (6.5 | )% 
|                                          |                                                                              |      |           |           |      |   |           |               |  |   |               |           |  |   |        |         |   |  |      |     |  
|                                          | Total costs and expenses excluding special pre-tax charges
    (adjustments) |      | $         | 1,860,165 |      |   | $         | 1,708,876     |  |   | $             | 1,674,007 |  |   | $      | 151,289 |   |  |      | 8.9 | % |   | $      | 34,869 |  |  |      | 2.1 | %
|                                          |                                                                              |      |           |           |      |   |           |               |  |   |               |           |  |   |        |         |   |  |      |     |  

2004 Compared to 2003.




| |   |                                                                                                                                                                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | an increase of $34.1 million related to Aegis wages and
    related expenses due to increased staffing related to the
    increased volume of new contracts. This increase also includes a
    $5.6 million, or 49%, increase in Aegis contract therapy
    cost;                                                                                                               
|
| |  | an increase of $32.6 million related to our Nursing
    Facilities wages and related expenses, primarily due to a 3.7%
    increase in our weighted average wage rate and an increase in
    nursing hours per patient day, partially offset by an adjustment
    in reserves related to revised employee benefit programs;                                                     
|
| |  | an increase of $12.6 million in contracted services,
    primarily due to outsourcing certain dietary and laundry
    services in our Nursing Facilities segment;                                                                                                                                                                                                               
|
| |  | an increase in our provision for insurance and related items. We
    adjust our reserves for current and prior year general,
    professional, and workers compensation liabilities based
    primarily on actuarial studies conducted twice per year.
    Adjustments to premiums and other costs are recorded as
    incurred. The provision increase included the following:



| |   |                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | $12.3 million due to an increase in the estimate of
    outstanding general, professional and workers compensation
    liabilities, net of a decrease in insurance premiums and related
    program costs; and

37



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| |   |                                                                                                                                                                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | $6.0 million due to a change in the discount rate used to
    estimate the present value of our insurance liabilities (from
    10% to 8.5%) due to a decrease in our incremental borrowing rate
    resulting from changes in our capital structure and the overall
    interest rate environment;



| |   |                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------
| |  | an increase of $17.1 million due to the Hospice USA
    acquisition, the opening of 14 hospice locations and two
    start-up businesses;            
|
| |  | an increase of $10.0 million in state-imposed provider
    taxes in our Nursing Facilities segment; and                                              
|
| |  | an increase in depreciation and amortization expense, primarily
    due to an increase in capital expenditures in our Nursing
    Facilities segment.

2003 Compared to 2002.




| |   |                                                                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | an increase in our provision for insurance and related items due
    to an increase in the estimate of outstanding general,
    professional and workers compensation liabilities and
    increased insurance premiums and related program costs;                    
|
| |  | an increase of $18.3 million related to Aegis wages and
    related expenses, which includes a $2.6 million, or 29%,
    increase in Aegis contract therapy cost;                                                                                                     
|
| |  | an increase of $21.6 million related to Nursing Facilities
    wages and related expenses, primarily due to a 4.6% increase in
    our weighted average wage rate and an increase in nursing hours
    per patient day;                                               
|
| |  | an increase of $14.5 million in contracted services,
    primarily due to outsourcing certain housekeeping, laundry and
    dietary services in our Nursing Facilities segment;                                                                                       
|
| |  | an increase of $3.5 million due to the opening of three
    hospice locations and two start-up businesses; partially offset
    by                                                                                                                                    
|
| |  | a decrease of $21.4 million in our provision for reserves
    on accounts and notes receivable due to improvements in the
    timing and amount of account collections, as well as the
    collection of certain accounts that had previously been fully
    reserved;
|
| |  | a decrease of $22.7 million primarily due to 2002
    dispositions; and                                                                                                                                                                                               
|
| |  | a decrease in depreciation and amortization expense, primarily
    due to the impact of asset impairments recorded in the fourth
    quarter of 2002.                                                                                                                 



| |                               
| | ------------------------------
| | Other Income and Expenses, Net



|                                                  |  |      |         |   |      |   |         |               |  |   |               |   |  |   |         |   |   |  |       |    |  |   |        |   |  |  |       |   
|------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ------------- |  | - | ------------- | - |  | - | ------- | - | - |  | ----- | -- |  | - | ------ | - |  |  | ----- | --
|                                                  |  |      |         |   |      |   |         | Change        | 
|                                                  |  |      |         |   |      |   |         |               | 
|                                                  |  |      |         |   |      |   |         | 2004 vs. 2003 |  |   | 2003 vs. 2002 |  
|                                                  |  |      |         |   |      |   |         |               |  |   |               |  
|                                                  |  | 2004 |         |   | 2003 |   |         | 2002          |  |   | $             |   |  | % |         |   | $ |  |       | %  | 
|                                                  |  |      |         |   |      |   |         |               |  |   |               |   |  |   |         |   |   |  |       |    | 
|Other income (expenses):                          |  |      |         |   |      |   |         |               |  |   |               |   |  |   |         |   |   |  |       |    |  |   |        |   |  |  |       |   
|Interest expense                                  |  | $    | (45,637 | ) |      | $ | (63,314 | )             |  | $ | (62,652       | ) |  | $ | 17,677  |   |   |  | (27.9 | )% |  | $ | (662   | ) |  |  | 1.1   | % 
|Costs related to early extinguishments of debt(1) |  |      | (40,935 | ) |      |   | (6,634  | )             |  |   |              |   |  |   | (34,301 | ) |   |  |      |    |  |   | (6,634 | ) |  |  |      |   
|Interest income                                   |  |      | 5,485   |   |      |   | 5,363   |               |  |   | 4,688         |   |  |   | 122     |   |   |  | 2.3   | %  |  |   | 675    |   |  |  | 14.4  | % 
|Net gains on dispositions                         |  |      | 396     |   |      |   | 422     |               |  |   | 2,142         |   |  |   | (26     | ) |   |  | (6.2  | )% |  |   | (1,720 | ) |  |  | (80.3 | )%
|Gain on sale of equity investment(1)              |  |      |        |   |      |   | 6,686   |               |  |   |              |   |  |   | (6,686  | ) |   |  |      |    |  |   | 6,686  |   |  |  |      |   






|    |                                                                                                                    
|--- | -------------------------------------------------------------------------------------------------------------------
|(1) | See Results of Operations  Continuing Operationsfor a discussion of special pre-tax charges for 2004 and
    2003.

38



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| |                 
| | ----------------
| | Interest Expense



Results of
Operations  Discontinued Operations






|                                       |  |        |        |         |           |   |     |            |  |   |         |   |  |        |         |   |           |   |        |            |  |   |        |   |  |   |         |   |  |   |         |  
|-------------------------------------- |  | ------ | ------ | ------- | --------- | - | --- | ---------- |  | - | ------- | - |  | ------ | ------- | - | --------- | - | ------ | ---------- |  | - | ------ | - |  | - | ------- | - |  | - | ------- | -
|                                       |  | 2004   |        |         | 2003      |  
|                                       |  |        |        |         |           |  
|                                       |  |        |        | Nursing |           |   |     |            |  |   | Nursing |   |  |       
|                                       |  | Matrix |        |         | Home Care |   |     | Facilities |  |   | Total   |   |  | Matrix |         |   | Home Care |   |        | Facilities |  |   | Total  |  
|                                       |  |        |        |         |           |   |     |            |  |   |         |   |  |        |         |   |           |   |        |            |  |   |        |  
|Revenues                               |  | $      | 14,021 |         |           | $ | 148 |            |  | $ | 163,745 |   |  | $      | 177,914 |   |           | $ | 18,550 |            |  | $ | 20,395 |   |  | $ | 515,008 |   |  | $ | 553,953 |  
|                                       |  |        |        |         |           |   |     |            |  |   |         |   |  |        |         |   |           |   |        |            |  |   |        |  
|Operating income (loss)(1)             |  | $      | 1,106  |         |           | $ | 110 |            |  | $ | (10,335 | ) |  | $      | (9,119  | ) |           | $ | 749    |            |  | $ | (2,446 | ) |  | $ | (2,817  | ) |  | $ | (4,514  | )
|Gain (loss) on sales and exit costs    |  |        | (49    | )       |           |   | 369 |            |  |   | (1,441  | ) |  |        | (1,121  | ) |           |   | 11,120 |            |  |   | 1,557  |   |  |   | 67,113  |   |  |   | 79,790  |  
|Impairments and other unusual items(2) |  |        |       |         |           |   |    |            |  |   | (4,342  | ) |  |        | (4,342  | ) |           |   |       |            |  |   | (540   | ) |  |   | (18,594 | ) |  |   | (19,134 | )
|                                       |  |        |        |         |           |   |     |            |  |   |         |   |  |        |         |   |           |   |        |            |  |   |        |  
|Pre-tax income (loss)                  |  | $      | 1,057  |         |           | $ | 479 |            |  | $ | (16,118 | ) |  |        | (14,582 | ) |           | $ | 11,869 |            |  | $ | (1,429 | ) |  | $ | 45,702  |   |  |   | 56,142  |  
|                                       |  |        |        |         |           |   |     |            |  |   |         |   |  |        |         |   |           |   |        |            |  |   |        |  
|Provision for state income taxes       |  |        |        |         |           |   |     |            |  |   |         |   |  |        | 55      |   |           |   |        |            |  |   |        |   |  |   |         |   |  |   | 3,378   |  
|                                       |  |        |        |         |           |   |     |            |  |   |         |   |  |        |         |   |           |   |        |            |  |   |        |  
|Discontinued operations, net of taxes  |  |        |        |         |           |   |     |            |  |   |         |   |  | $      | (14,637 | ) |           |   |        |            |  |   |        |   |  |   |         |   |  | $ | 52,764  |  
|                                       |  |        |        |         |           |   |     |            |  |   |         |   |  |        |         |   |           |   |        |            |  |   |        |  

|                                       |  |        |        |         |           |   |         |            |  |   |         |   |  |   |         |  
|-------------------------------------- |  | ------ | ------ | ------- | --------- | - | ------- | ---------- |  | - | ------- | - |  | - | ------- | -
|                                       |  | 2002   |       
|                                       |  |        |       
|                                       |  |        |        | Nursing |           |   |        
|                                       |  | Matrix |        |         | Home Care |   |         | Facilities |  |   | Total   |  
|                                       |  |        |        |         |           |   |         |            |  |   |         |  
|Revenues(3)                            |  | $      | 86,109 |         |           | $ | 20,894  |            |  | $ | 644,811 |   |  | $ | 751,814 |  
|                                       |  |        |        |         |           |   |         |            |  |   |         |  
|Operating income (loss)(1)(3)          |  | $      | 810    |         |           | $ | (31,057 | )          |  | $ | 35,435  |   |  | $ | 5,188   |  
|Gain (loss) on sale and exit costs     |  |        | (1,001 | )       |           |   | (1,257  | )          |  |   | (107    | ) |  |   | (2,365  | )
|Impairments and other unusual items(4) |  |        | 230    |         |           |   | (4,239  | )          |  |   | (33,220 | ) |  |   | (37,229 | )
|                                       |  |        |        |         |           |   |         |            |  |   |         |  
|Pre-tax income (loss)                  |  | $      | 39     |         |           | $ | (36,553 | )          |  | $ | 2,108   |   |  |   | (34,406 | )
|                                       |  |        |        |         |           |   |         |            |  |   |         |  
|Provision for income taxes             |  |        |        |         |           |   |         |            |  |   |         |   |  |   |        |  
|                                       |  |        |        |         |           |   |         |            |  |   |         |  
|Discontinued operations, net of taxes  |  |        |        |         |           |   |         |            |  |   |         |   |  | $ | (34,406 | )
|                                       |  |        |        |         |           |   |         |            |  |   |         |  






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes net interest expense of $143,000, $2.8 million and
    $4.1 million for 2004, 2003 and 2002, respectively, and
    depreciation and amortization expense of $2.1 million,
    $10.9 million and $26.0 million for 2004, 2003 and
    2002, respectively. Also includes an $8.6 million charge in
    2004 primarily due to an increase in the estimate of outstanding
    general and professional liability reserves and related program
    costs.
|   
|(2) | Includes an accrual in 2003 for the purchase of incremental
    general and professional liability insurance on disposed nursing
    facilities.                                                                                                                                                                                                                                                                                                             
|   
|(3) | Includes an adjustment of $18.0 million in 2002 for
    estimated overpayments to MK Medical by government payors. MK
    Medical was part of our former Home Care segment.                                                                                                                                                                                                                                                                                  
|   
|(4) | Includes an accrual of $1.0 million in 2002 for legal and
    related fees associated with the MK Medical estimated
    overpayment issue, and asset impairment charges related to
    certain nursing facilities and MK Medical.                                                                                                                                                                                                                            

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

Tax Valuation Allowance






| |                                                                                                               
| | --------------------------------------------------------------------------------------------------------------
| | Cumulative Effect of Accounting Change (see Asset Impairments in our Critical Accounting
    Policies above.)



| |                        
| | -----------------------
| | New Accounting Standard

Share-Based Payment Statement of
Cash Flows,


Liquidity and Capital Resources




40



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##### Table of Contents



Cash Flows.


|                                                     |  |      |         |   |      |   |          |      |  |   |          |  
|---------------------------------------------------- |  | ---- | ------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                     |  | 2004 |         |   | 2003 |   |          | 2002 | 
|                                                     |  |      |         |   |      |   |          |      | 
|Net cash provided by operating activities            |  | $    | 75,660  |   |      | $ | 69,861   |      |  | $ | 116,633  |  
|Net cash provided by (used for) investing activities |  |      | (69,979 | ) |      |   | 219,188  |      |  |   | 62,335   |  
|Net cash used for financing activities               |  |      | (48,831 | ) |      |   | (145,679 | )    |  |   | (152,866 | )
|                                                     |  |      |         |   |      |   |          |      | 
|Net increase (decrease) in cash and cash equivalents |  | $    | (43,150 | ) |      | $ | 143,370  |      |  | $ | 26,102   |  
|                                                     |  |      |         |   |      |   |          |      | 



|                                                   |                                           |      |            |        |      |   |            |        |  |   |            |         | 
|-------------------------------------------------- | ----------------------------------------- | ---- | ---------- | ------ | ---- | - | ---------- | ------ |  | - | ---------- | ------- | 
|                                                   |                                           | 2004 |            |        | 2003 |   |            | 2002   | 
|                                                   |                                           |      |            |        |      |   |            |        | 
|Cash received from patients and third-party payors |                                           | $    | 2,094,684  |        |      | $ | 2,342,011  |        |  | $ | 2,526,436  |        
|Interest received                                  |                                           |      | 5,521      |        |      |   | 5,524      |        |  |   | 4,748      |        
|Cash paid to suppliers and employees               |                                           |      | (1,972,340 | )      |      |   | (2,217,620 | )      |  |   | (2,352,598 | )      
|Interest paid                                      |                                           |      | (46,356    | )      |      |   | (67,710    | )      |  |   | (65,658    | )      
|Income tax (paid) refunds received                 |                                           |      | (5,849     | )      |      |   | 7,656      |        |  |   | 3,705      |        
|                                                   |                                           |      |            |        |      |   |            |        | 
|                                                   | Net cash provided by operating activities |      | $          | 75,660 |      |   | $          | 69,861 |  |   | $          | 116,633 | 
|                                                   |                                           |      |            |        |      |   |            |        | 





Debt Transactions.


5 8 5 8 5 8 7 8


5 8


41



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5 8








|                     |  |                 |     |                   |                           |  |    | 
|-------------------- |  | --------------- | --- | ----------------- | ------------------------- |  | -- | 
|                     |  |                 |     | 2.75% Convertible |                          
|                     |  | Senior Implied/ |     |                   | Subordinated Notes and    | 
|                     |  | Corporate       |     |                   | 77/8% Senior Subordinated | 
|Rating Agency        |  | Rating          |     |                   | Notes                     | 
|                     |  |                 |     |                   |                           | 
|Standard & Poors(a) |  |                 | BB- |                   |                           |  | B  | 
|Moodys(a)           |  |                 | Ba3 |                   |                           |  | B2 | 
|Fitch(a)             |  |                 | BB- |                   |                           |  | B+ | 






|    |  |                           
|--- |  | --------------------------
|(a) |  | Ratings outlook is stable.

Acquisitions, Divestitures and Other.






42



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Summary.




To service our indebtedness, we will
require a significant amount of cash. Our ability to generate
cash depends on many factors, some of which are beyond our
control


Obligations and Commitments


Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others.


43



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|                         |                                           |                                    |   |         |           |  |   |           |         |  |           |         |         |            |   |         |         |  |   |         |         | 
|------------------------ | ----------------------------------------- | ---------------------------------- | - | ------- | --------- |  | - | --------- | ------- |  | --------- | ------- | ------- | ---------- | - | ------- | ------- |  | - | ------- | ------- | 
|                         |                                           | Payments Due by Period             |  
|                         |                                           |                                    |  
|                         |                                           | Total                              |   |         | 2005      |  |   | 2006-2007 |         |  | 2008-2009 |         |         | After 2009 |  
|                         |                                           |                                    |   |         |           |  |   |           |         |  |           |         |         |            |  
|Contractual obligations: |                                           |                                    |   |         |           |  |   |           |         |  |           |         |         |            |   |         |         |  |   |        
|                         | Long-term debt(a)                         |                                    | $ | 874,595 |           |  | $ | 48,287    |         |  | $         | 129,517 |         |            | $ | 175,824 |         |  | $ | 520,967 |        
|                         | Capital lease obligations                 |                                    |   | 7,799   |           |  |   | 530       |         |  |           | 906     |         |            |   | 820     |         |  |   | 5,543   |        
|                         | Operating leases                          |                                    |   | 95,488  |           |  |   | 37,362    |         |  |           | 30,315  |         |            |   | 14,913  |         |  |   | 12,898  |        
|                         | Federal government settlement obligations |                                    |   | 55,769  |           |  |   | 18,125    |         |  |           | 36,250  |         |            |   | 1,394   |         |  |   |        |        
|                         | Unconditional purchase obligations(b)     |                                    |   | 8,277   |           |  |   | 4,273     |         |  |           | 4,004   |         |            |   |        |         |  |   |        |        
|                         |                                           |                                    |   |         |           |  |   |           |         |  |           |         |         |            |  
|                         |                                           | Total contractual cash obligations |   | $       | 1,041,928 |  |   | $         | 108,577 |  |           | $       | 200,992 |            |   | $       | 192,951 |  |   | $       | 539,408 | 
|                         |                                           |                                    |   |         |           |  |   |           |         |  |           |         |         |            |  

|                              |                   |                              |   |                                            |        |  |   |           |        |  |           |     |     |            |   |       |       |  |   |       |       | 
|----------------------------- | ----------------- | ---------------------------- | - | ------------------------------------------ | ------ |  | - | --------- | ------ |  | --------- | --- | --- | ---------- | - | ----- | ----- |  | - | ----- | ----- | 
|                              |                   |                              |   | Amount of Commitment Expiration Per Period |       
|                              |                   | Total Amounts                |   |                                            |        | 
|                              |                   | Committed                    |   |                                            | 2005   |  |   | 2006-2007 |        |  | 2008-2009 |     |     | After 2009 |  
|                              |                   |                              |   |                                            |        |  |   |           |        |  |           |     |     |            |  
|Other commercial commitments: |                   |                              |   |                                            |        |  |   |           |        |  |           |     |     |            |   |       |       |  |   |      
|                              | Letters of credit |                              | $ | 33,455                                     |        |  | $ | 33,455    |        |  | $         |    |     |            | $ |      |       |  | $ |      |      
|                              | Guarantees        |                              |   | 11,822                                     |        |  |   |          |        |  |           | 950 |     |            |   | 2,002 |       |  |   | 8,870 |      
|                              |                   |                              |   |                                            |        |  |   |           |        |  |           |     |     |            |  
|                              |                   | Total commercial commitments |   | $                                          | 45,277 |  |   | $         | 33,455 |  |           | $   | 950 |            |   | $     | 2,002 |  |   | $     | 8,870 | 
|                              |                   |                              |   |                                            |        |  |   |           |        |  |           |     |     |            |  






|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | For variable-rate debt, we estimated future interest payments
    based on published forward yield curve analyses. The long-term
    debt amounts exclude $3.5 million of unamortized discounts
    related to our
    77/8% senior
    subordinated notes.                                                                                                                                                       
|   
|(b) |  | We have unconditional purchase obligations totaling
    $8.3 million primarily due to our outsourcing of certain
    information technology functions, as well as contracts relative
    to our frame relay network and certain office equipment. These
    contracts involve future minimum commitments that are
    noncancelable or impose a penalty if these agreements are
    cancelled prior to expiration.





44



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



|                         |                       |                         |   |        |              |  |   |              |   |  |      |        |   |      |   |        |            |  |   |        |   |  |      |         |   |      |   |         |  |  |   |         |  |  |   |         | 
|------------------------ | --------------------- | ----------------------- | - | ------ | ------------ |  | - | ------------ | - |  | ---- | ------ | - | ---- | - | ------ | ---------- |  | - | ------ | - |  | ---- | ------- | - | ---- | - | ------- |  |  | - | ------- |  |  | - | ------- | 
|                         |                       | Expected Maturity Dates |   |        | Fair Value   |  |   | Fair Value   |  
|                         |                       |                         |   |        | December 31, |  |   | December 31, |  
|                         |                       | 2005                    |   |        | 2006         |  |   | 2007         |   |  | 2008 |        |   | 2009 |   |        | Thereafter |  |   | Total  |   |  | 2004 |         |   | 2003 |  
|                         |                       |                         |   |        |              |  |   |              |   |  |      |        |   |      |   |        |            |  |   |        |   |  |      |         |   |      |  
|                         |                       | (Dollars in thousands)  |  
|Total long-term debt:(1) |                       |                         |   |        |              |  |   |              |   |  |      |        |   |      |   |        |            |  |   |        |   |  |      |         |   |      |   |         |  |  |   |         |  |  |   |        
|                         | Fixed rate            |                         | $ | 10,740 |              |  | $ | 8,755        |   |  | $    | 14,652 |   |      | $ | 8,057  |            |  | $ | 16,180 |   |  | $    | 368,757 |   |      | $ | 427,141 |  |  | $ | 503,776 |  |  | $ | 503,923 | 
|                         | Average interest rate |                         |   | 6.73   | %            |  |   | 6.74         | % |  |      | 6.73   | % |      |   | 6.69   | %          |  |   | 6.68   | % |  |      | 6.58    | % |      |   |         |  |  |   |         |  |  |   |         | 
|                         | Variable rate         |                         | $ | 1,500  |              |  | $ | 1,510        |   |  | $    | 33,583 |   |      | $ | 97,381 |            |  | $ | 193    |   |  | $    | 369     |   |      | $ | 134,536 |  |  | $ | 134,536 |  |  | $ | 136,800 | 
|                         | Average interest rate |                         |   | 5.98   | %            |  |   | 6.28         | % |  |      | 6.62   | % |      |   | 6.90   | %          |  |   | 8.36   | % |  |      | 8.86    | % |      |   |         |  |  |   |         |  |  |   |         | 
|Total notes receivable:  |                       |                         |   |        |              |  |   |              |   |  |      |        |   |      |   |        |            |  |   |        |   |  |      |         |   |      |   |         |  |  |   |         |  |  |   |        
|                         | Fixed rate            |                         | $ | 2,269  |              |  | $ | 427          |   |  | $    | 329    |   |      | $ | 208    |            |  | $ | 216    |   |  | $    | 1,709   |   |      | $ | 5,158   |  |  | $ | 5,158   |  |  | $ | 27,459  | 
|                         | Average interest rate |                         |   | 9.46   | %            |  |   | 9.42         | % |  |      | 9.67   | % |      |   | 9.73   | %          |  |   | 9.25   | % |  |      | 9.75    | % |      |   |         |  |  |   |         |  |  |   |         | 
|                         | Variable rate         |                         | $ | 38     |              |  | $ | 40           |   |  | $    | 43     |   |      | $ | 45     |            |  | $ | 48     |   |  | $    | 163     |   |      | $ | 377     |  |  | $ | 377     |  |  | $ | 414     | 
|                         | Average interest rate |                         |   | 6.25   | %            |  |   | 6.25         | % |  |      | 6.25   | % |      |   | 6.25   | %          |  |   | 6.25   | % |  |      | 6.25    | % |      |   |         |  |  |   |         |  |  |   |         | 






|    |                                                                                                                                                                                                                                                                                                                                  
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | See Item 8-Note 9 for a discussion of our 2004 and
    2003 refinancings. For variable-rate debt, we estimate future
    interest rates based on published forward yield curve analyses.
    The long-term debt amounts exclude $3.5 million of
    unamortized discounts related to our
    77/8% senior
    subordinated notes.

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|        |                                                          
|------- | ---------------------------------------------------------
|ITEM 8. | CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

|                                                                               |  |      |    | 
|------------------------------------------------------------------------------ |  | ---- | -- | 
|                                                                               |  | Page |   
|                                                                               |  |      |   
|Report of Ernst & Young LLP, Independent Registered
    Public Accounting Firm |  |      | 47 | 
|Report of Ernst & Young LLP, Independent Registered
    Public Accounting Firm |  |      | 48 | 
|Consolidated Balance Sheets                                                    |  |      | 49 | 
|Consolidated Statements of Operations                                          |  |      | 50 | 
|Consolidated Statements of Stockholders Equity                                |  |      | 51 | 
|Consolidated Statements of Cash Flows                                          |  |      | 52 | 
|Notes to Consolidated Financial Statements                                     |  |      | 53 | 
|Supplementary Data (Unaudited)  Quarterly Financial
    Data                  |  |      | 93 | 

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REPORT OF ERNST & YOUNG LLP,


INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


















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





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REPORT OF ERNST & YOUNG LLP,


INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




















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





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BEVERLY ENTERPRISES, INC.


CONSOLIDATED BALANCE SHEETS


|                                     |                                                                                                |                            |           |          |         |   |           |          |         | 
|------------------------------------ | ---------------------------------------------------------------------------------------------- | -------------------------- | --------- | -------- | ------- | - | --------- | -------- | ------- | 
|                                     |                                                                                                | December 31,               |          
|                                     |                                                                                                |                            |          
|                                     |                                                                                                | 2004                       |           |          | 2003    |  
|                                     |                                                                                                |                            |           |          |         |  
|                                     |                                                                                                | (Dollars in thousands)     |          
|ASSETS                              
|Current assets:                      |                                                                                                |                            |           |          |         |   |           |         
|                                     | Cash and cash equivalents                                                                      |                            | $         | 215,665  |         |   | $         | 258,815  |        
|                                     | Accounts receivable  less allowance for doubtful
    accounts: 2004  $26,320; 2003  $31,615 |                            |           | 235,477  |         |   |           | 164,635  |        
|                                     | Notes receivable, less allowance for doubtful notes:
    2004  $1,686 ; 2003  $3,336         |                            |           | 2,786    |         |   |           | 13,724   |        
|                                     | Operating supplies                                                                             |                            |           | 9,181    |         |   |           | 10,425   |        
|                                     | Assets held for sale                                                                           |                            |           | 14,898   |         |   |           | 3,498    |        
|                                     | Investment in Beverly Funding Corporation                                                      |                            |           |         |         |   |           | 31,342   |        
|                                     | Prepaid expenses and other                                                                     |                            |           | 37,266   |         |   |           | 33,377   |        
|                                     |                                                                                                |                            |           |          |         |  
|                                     |                                                                                                | Total current assets       |           |          | 515,273 |   |           |          | 515,816 | 
|Property and equipment, net          |                                                                                                |                            | 653,656   |          |         |   | 694,220   |         
|Other assets:                        |                                                                                                |                            |           |          |         |   |           |         
|                                     | Goodwill, net                                                                                  |                            |           | 124,066  |         |   |           | 57,102   |        
|                                     | Other, less allowance for doubtful accounts and notes:
    2004  $1,538; 2003  $2,120        |                            |           | 68,390   |         |   |           | 79,283   |        
|                                     |                                                                                                |                            |           |          |         |  
|                                     |                                                                                                | Total other assets         |           |          | 192,456 |   |           |          | 136,385 | 
|                                     |                                                                                                |                            |           |          |         |  
|                                     |                                                                                                | $                          | 1,361,385 |          |         | $ | 1,346,421 |         
|                                     |                                                                                                |                            |           |          |         |  
|                                    
|LIABILITIES AND STOCKHOLDERS EQUITY
|Current liabilities:                 |                                                                                                |                            |           |          |         |   |           |         
|                                     | Accounts payable                                                                               |                            | $         | 67,778   |         |   | $         | 67,572   |        
|                                     | Accrued wages and related liabilities                                                          |                            |           | 104,037  |         |   |           | 116,717  |        
|                                     | Accrued interest                                                                               |                            |           | 3,602    |         |   |           | 6,896    |        
|                                     | General and professional liabilities                                                           |                            |           | 54,216   |         |   |           | 93,736   |        
|                                     | Federal government settlement obligations                                                      |                            |           | 14,359   |         |   |           | 13,125   |        
|                                     | Liabilities held for sale                                                                      |                            |           | 676      |         |   |           | 672      |        
|                                     | Other accrued liabilities                                                                      |                            |           | 83,097   |         |   |           | 102,289  |        
|                                     | Current portion of long-term debt                                                              |                            |           | 12,240   |         |   |           | 13,354   |        
|                                     |                                                                                                |                            |           |          |         |  
|                                     |                                                                                                | Total current liabilities  |           |          | 340,005 |   |           |          | 414,361 | 
|Long-term debt                       |                                                                                                |                            | 545,943   |          |         |   | 552,873   |         
|Other liabilities and deferred items |                                                                                                |                            | 203,024   |          |         |   | 141,001   |         
|Commitments and contingencies        |                                                                                                |                            |           |          |         |   |           |         
|Stockholders equity:                |                                                                                                |                            |           |          |         |   |           |         
|                                     | Preferred stock, shares authorized: 25,000,000                                                 |                            |           |         |         |   |           |         |        
|                                     | Common stock, shares issued: 2004  116,621,715;
    2003  115,594,806                        |                            |           | 11,662   |         |   |           | 11,559   |        
|                                     | Additional paid-in capital                                                                     |                            |           | 902,053  |         |   |           | 895,950  |        
|                                     | Accumulated deficit                                                                            |                            |           | (532,804 | )       |   |           | (560,825 | )      
|                                     | Treasury stock, at cost: 8,283,316                                                             |                            |           | (108,498 | )       |   |           | (108,498 | )      
|                                     |                                                                                                |                            |           |          |         |  
|                                     |                                                                                                | Total stockholders equity |           |          | 272,413 |   |           |          | 238,186 | 
|                                     |                                                                                                |                            |           |          |         |  
|                                     |                                                                                                | $                          | 1,361,385 |          |         | $ | 1,346,421 |         
|                                     |                                                                                                |                            |           |          |         |  



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BEVERLY ENTERPRISES, INC.


CONSOLIDATED STATEMENTS OF OPERATIONS


|                                                                                                                                            |          |                                          |                                                                                               |                           |      |           |           |      |   |           |           |   |   |           |           |  
|------------------------------------------------------------------------------------------------------------------------------------------- | -------- | ---------------------------------------- | --------------------------------------------------------------------------------------------- | ------------------------- | ---- | --------- | --------- | ---- | - | --------- | --------- | - | - | --------- | --------- | -
|                                                                                                                                            |          | Years Ended December 31,                 |                                                                                              
|                                                                                                                                            |          |                                          |                                                                                              
|                                                                                                                                            |          | 2004                                     |                                                                                               |                           | 2003 |           |           | 2002 |  
|                                                                                                                                            |          |                                          |                                                                                               |                           |      |           |           |      |  
|                                                                                                                                            |          | (In thousands, except per share amounts) |                                                                                              
|Revenues                                                                                                                                    |          | $                                        | 1,988,852                                                                                     |                           |      | $         | 1,802,026 |      |   | $         | 1,766,726 |  
|Costs and expenses:                                                                                                                         |          |                                          |                                                                                               |                           |      |           |           |      |   |           |           |  
|                                                                                                                                            |          |                                          | Wages and related                                                                             |                           |      | 1,147,743 |           |      |   | 1,078,548 |           |   |   | 1,068,629 |          
|                                                                                                                                            |          |                                          | Provision for insurance and related items                                                     |                           |      | 127,653   |           |      |   | 109,377   |           |   |   | 84,161    |          
|                                                                                                                                            |          |                                          | Other operating and administrative                                                            |                           |      | 522,603   |           |      |   | 462,144   |           |   |   | 458,311   |          
|                                                                                                                                            |          |                                          | Depreciation and amortization                                                                 |                           |      | 62,166    |           |      |   | 58,807    |           |   |   | 62,906    |          
|                                                                                                                                            |          |                                          | Florida insurance reserve adjustment                                                          |                           |      |          |           |      |   |          |           |   |   | 22,179    |          
|                                                                                                                                            |          |                                          | Special charge and adjustment related to California
    investigation settlement              |                           |      |          |           |      |   | (925      | )         |   |   | 6,300     |          
|                                                                                                                                            |          |                                          | Adjustment related to settlements of federal government
    investigations                    |                           |      |          |           |      |   |          |           |   |   | (9,441    | )        
|                                                                                                                                            |          |                                          | Asset impairments, workforce reductions and other unusual items                               |                           |      | 448       |           |      |   | 3,825     |           |   |   | 46,287    |          
|                                                                                                                                            |          |                                          |                                                                                               |                           |      |           |           |      |  
|                                                                                                                                            |          |                                          |                                                                                               | Total costs and expenses  |      |           | 1,860,613 |      |   |           | 1,711,776 |   |   |           | 1,739,332 |  
|                                                                                                                                            |          |                                          |                                                                                               |                           |      |           |           |      |  
|Income before other income (expenses)                                                                                                       |          |                                          | 128,239                                                                                       |                           |      |           | 90,250    |      |   |           | 27,394    |  
|                                                                                                                                            |          | Other income (expenses):                 |                                                                                               |                           |      |           |           |      |   |           |           |   |   |          
|                                                                                                                                            |          |                                          | Interest expense                                                                              |                           |      | (45,637   | )         |      |   | (63,314   | )         |   |   | (62,652   | )        
|                                                                                                                                            |          |                                          | Costs related to early extinguishments of debt                                                |                           |      | (40,935   | )         |      |   | (6,634    | )         |   |   |          |          
|                                                                                                                                            |          |                                          | Interest income                                                                               |                           |      | 5,485     |           |      |   | 5,363     |           |   |   | 4,688     |          
|                                                                                                                                            |          |                                          | Net gains on dispositions                                                                     |                           |      | 396       |           |      |   | 422       |           |   |   | 2,142     |          
|                                                                                                                                            |          |                                          | Gain on sale of equity investment                                                             |                           |      |          |           |      |   | 6,686     |           |   |   |          |          
|                                                                                                                                            |          |                                          |                                                                                               |                           |      |           |           |      |  
|                                                                                                                                            |          |                                          |                                                                                               | Total other expenses, net |      |           | (80,691   | )    |   |           | (57,477   | ) |   |           | (55,822   | )
|                                                                                                                                            |          |                                          |                                                                                               |                           |      |           |           |      |  
|Income (loss) before provision for income taxes, discontinued
    operations and cumulative effect of change in accounting for
    goodwill |          |                                          | 47,548                                                                                        |                           |      |           | 32,773    |      |   |           | (28,428   | )
|Provision for income taxes                                                                                                                  |          |                                          | 4,890                                                                                         |                           |      |           | 5,069     |      |   |           | 6,085     |  
|                                                                                                                                            |          |                                          |                                                                                               |                           |      |           |           |      |  
|Income (loss) before discontinued operations and cumulative
    effect of change in accounting for goodwill                                 |          |                                          | 42,658                                                                                        |                           |      |           | 27,704    |      |   |           | (34,513   | )
|Discontinued operations, net of taxes: 2004  $55;
    2003  $3,378; 2002  $0                                                             |          |                                          | (14,637                                                                                       | )                         |      |           | 52,764    |      |   |           | (34,406   | )
|Cumulative effect of change in accounting for goodwill, net of
    income taxes of $0                                                       |          |                                          |                                                                                              |                           |      |           |          |      |   |           | (77,171   | )
|                                                                                                                                            |          |                                          |                                                                                               |                           |      |           |           |      |  
|Net income (loss)                                                                                                                           |          | $                                        | 28,021                                                                                        |                           |      | $         | 80,468    |      |   | $         | (146,090  | )
|                                                                                                                                            |          |                                          |                                                                                               |                           |      |           |           |      |  
|Net income (loss) per share of common stock:                                                                                                |          |                                          |                                                                                               |                           |      |           |           |      |   |           |           |  
|                                                                                                                                            | Basic:   |                                          |                                                                                               |                           |      |           |           |      |   |           |           |   |  
|                                                                                                                                            |          |                                          | Before discontinued operations and cumulative effect of change
    in accounting for goodwill |                           | $    | 0.40      |           |      | $ | 0.26      |           |   | $ | (0.33     | )        
|                                                                                                                                            |          |                                          | Discontinued operations, net of taxes                                                         |                           |      | (0.14     | )         |      |   | 0.49      |           |   |   | (0.32     | )        
|                                                                                                                                            |          |                                          | Cumulative effect of change in accounting for goodwill, net of
    taxes                      |                           |      |          |           |      |   |          |           |   |   | (0.74     | )        
|                                                                                                                                            |          |                                          |                                                                                               |                           |      |           |           |      |  
|                                                                                                                                            |          |                                          | Net income (loss) per share of common stock                                                   |                           | $    | 0.26      |           |      | $ | 0.75      |           |   | $ | (1.39     | )        
|                                                                                                                                            |          |                                          |                                                                                               |                           |      |           |           |      |  
|                                                                                                                                            |          |                                          | Shares used to compute basic net income (loss) per share                                      |                           |      | 107,749   |           |      |   | 106,582   |           |   |   | 104,726   |          
|                                                                                                                                            |          |                                          |                                                                                               |                           |      |           |           |      |  
|                                                                                                                                            | Diluted: |                                          |                                                                                               |                           |      |           |           |      |   |           |           |   |  
|                                                                                                                                            |          |                                          | Before discontinued operations and cumulative effect of change
    in accounting for goodwill |                           | $    | 0.37      |           |      | $ | 0.26      |           |   | $ | (0.33     | )        
|                                                                                                                                            |          |                                          | Discontinued operations, net of taxes                                                         |                           |      | (0.12     | )         |      |   | 0.48      |           |   |   | (0.32     | )        
|                                                                                                                                            |          |                                          | Cumulative effect of change in accounting for goodwill, net of
    taxes                      |                           |      |          |           |      |   |          |           |   |   | (0.74     | )        
|                                                                                                                                            |          |                                          |                                                                                               |                           |      |           |           |      |  
|                                                                                                                                            |          |                                          | Net income (loss) per share of common stock                                                   |                           | $    | 0.25      |           |      | $ | 0.74      |           |   | $ | (1.39     | )        
|                                                                                                                                            |          |                                          |                                                                                               |                           |      |           |           |      |  
|                                                                                                                                            |          |                                          | Shares used to compute diluted net income (loss) per share                                    |                           |      | 124,334   |           |      |   | 109,922   |           |   |   | 104,726   |          
|                                                                                                                                            |          |                                          |                                                                                               |                           |      |           |           |      |  



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BEVERLY ENTERPRISES, INC.


CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY


|                              |                                                                                  |                                                                         |        |            |         |   |         |             |               |   |          |        |          |          |       |   |        |   |          |     |   |   |         |          |          |  
|----------------------------- | -------------------------------------------------------------------------------- | ----------------------------------------------------------------------- | ------ | ---------- | ------- | - | ------- | ----------- | ------------- | - | -------- | ------ | -------- | -------- | ----- | - | ------ | - | -------- | --- | - | - | ------- | -------- | -------- | -
|                              |                                                                                  |                                                                         |        |            |         |   |         | Accumulated |               |   |          |        |         
|                              |                                                                                  |                                                                         |        |            |         |   |         | Other       |               |   |          |        |         
|                              |                                                                                  |                                                                         |        | Additional |         |   |         |             | Comprehensive |   |          |        |          |         
|                              |                                                                                  | Common                                                                  |        |            | Paid-In |   |         | Accumulated |               |   | Income   |        |          | Treasury |       |   |       
|                              |                                                                                  | Stock                                                                   |        |            | Capital |   |         | Deficit     |               |   | (Loss)   |        |          | Stock    |       |   | Total  |  
|                              |                                                                                  |                                                                         |        |            |         |   |         |             |               |   |          |        |          |          |       |   |        |  
|                              |                                                                                  | (Dollars in thousands)                                                  |       
|Balances at January 1, 2002   |                                                                                  | $                                                                       | 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 income (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 |         
|                              | Employee stock transactions related to 2,345,465 shares of
    common stock, net |                                                                         |        | 234        |         |   |         | 4,274       |               |   |          |       |          |          |       |  |        |   |          |    |   |   |         | 4,508    |         
|                              | Reissuance of 108,230 shares of common stock from treasury                       |                                                                         |        |           |         |   |         | (106        | )             |   |          |       |          |          |       |  |        |   |          | 361 |   |   |         | 255      |         
|                              | Comprehensive income (loss):                                                     |                                                                         |        |            |         |   |         |             |               |   |          |        |          |          |       |   |        |   |          |     |   |   |         |          |         
|                              |                                                                                  | Unrealized losses on securities, net of income taxes of $0              |        |            |        |   |         |             |              |   |          |        |         |          |       |   | (512   | ) |          |     |  |   |         |          | (512     | )
|                              |                                                                                  | Foreign currency translation adjustments, net of income taxes of
    $0 |        |            |        |   |         |             |              |   |          |        |         |          |       |   | (5     | ) |          |     |  |   |         |          | (5       | )
|                              |                                                                                  | Net income                                                              |        |            |        |   |         |             |              |   |          |        | 80,468   |          |       |   |       |   |          |     |  |   |         |          | 80,468   |  
|                              |                                                                                  |                                                                         |        |            |         |   |         |             |               |   |          |        |          |          |       |   |        |  
|                              | Total comprehensive income                                                       |                                                                         |        |            |         |   |         |             |               |   |          |        |          |          |       |   |        |   |          |     |   |   |         | 79,951   |         
|                              |                                                                                  |                                                                         |        |            |         |   |         |             |               |   |          |        |          |          |       |   |        |  
|Balances at December 31, 2003 |                                                                                  |                                                                         | 11,559 |            |         |   | 895,950 |             |               |   | (560,825 | )      |          |          |      |   |        |   | (108,498 | )   |   |   | 238,186 |         
|                              | Employee stock transactions related to 1,026,909 shares of
    common stock, net |                                                                         |        | 103        |         |   |         | 6,103       |               |   |          |       |          |          |       |  |        |   |          |    |   |   |         | 6,206    |         
|                              | Net income and total comprehensive income                                        |                                                                         |        |           |         |   |         |            |               |   |          | 28,021 |          |          |       |  |        |   |          |    |   |   |         | 28,021   |         
|                              |                                                                                  |                                                                         |        |            |         |   |         |             |               |   |          |        |          |          |       |   |        |  
|Balances at December 31, 2004 |                                                                                  | $                                                                       | 11,662 |            |         | $ | 902,053 |             |               | $ | (532,804 | )      |          | $        |      |   |        | $ | (108,498 | )   |   | $ | 272,413 |         
|                              |                                                                                  |                                                                         |        |            |         |   |         |             |               |   |          |        |          |          |       |   |        |  



51



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BEVERLY ENTERPRISES, INC.


CONSOLIDATED STATEMENTS OF CASH FLOWS


|                                                     |                                                                                                                                 |                                                                                                   |                                                      |                                           |          |         |         |        |          |          |         |          |          |          |         | 
|---------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------- | ---------------------------------------------------- | ----------------------------------------- | -------- | ------- | ------- | ------ | -------- | -------- | ------- | -------- | -------- | -------- | ------- | 
|                                                     |                                                                                                                                 | Years Ended December 31,                                                                          |                                                     
|                                                     |                                                                                                                                 |                                                                                                   |                                                     
|                                                     |                                                                                                                                 | 2004                                                                                              |                                                      |                                           | 2003     |         |         | 2002   |         
|                                                     |                                                                                                                                 |                                                                                                   |                                                      |                                           |          |         |         |        |         
|                                                     |                                                                                                                                 | (In thousands)                                                                                    |                                                     
|Cash flows from operating activities:                |                                                                                                                                 |                                                                                                   |                                                      |                                           |          |         |         |        |          |          |         |         
|                                                     | Net income (loss)                                                                                                               |                                                                                                   | $                                                    | 28,021                                    |          |         | $       | 80,468 |          |          | $       | (146,090 | )       
|                                                     | Adjustments to reconcile net income (loss) to net cash provided
    by operating activities, including discontinued operations: |                                                                                                   |                                                      |                                           |          |         |         |        |          |          |         |          |         
|                                                     |                                                                                                                                 | Depreciation and amortization                                                                     |                                                      |                                           | 64,301   |         |         |        | 69,663   |          |         |          | 88,943   |         
|                                                     |                                                                                                                                 | Provision for reserves on patient, notes and other receivables,
    net                           |                                                      |                                           | 8,815    |         |         |        | 21,605   |          |         |          | 55,570   |         
|                                                     |                                                                                                                                 | Amortization of deferred financing costs                                                          |                                                      |                                           | 2,754    |         |         |        | 4,474    |          |         |          | 3,096    |         
|                                                     |                                                                                                                                 | Florida insurance reserve adjustment                                                              |                                                      |                                           |         |         |         |        |         |          |         |          | 22,179   |         
|                                                     |                                                                                                                                 | Special charge and adjustment related to California
    investigation settlement                  |                                                      |                                           |         |         |         |        | (925     | )        |         |          | 6,300    |         
|                                                     |                                                                                                                                 | Adjustment related to settlements of federal government
    investigations                        |                                                      |                                           |         |         |         |        |         |          |         |          | (9,441   | )       
|                                                     |                                                                                                                                 | Asset impairments, workforce reductions and other unusual items                                   |                                                      |                                           | 4,790    |         |         |        | 7,459    |          |         |          | 85,773   |         
|                                                     |                                                                                                                                 | Costs related to early extinguishments of debt                                                    |                                                      |                                           | 40,935   |         |         |        | 6,634    |          |         |          |         |         
|                                                     |                                                                                                                                 | Cumulative effect of change in accounting for goodwill                                            |                                                      |                                           |         |         |         |        |         |          |         |          | 77,171   |         
|                                                     |                                                                                                                                 | Losses (gains) on dispositions of facilities and other
    assets, net                            |                                                      |                                           | 725      |         |         |        | (81,508  | )        |         |          | (1,855   | )       
|                                                     |                                                                                                                                 | Insurance related accounts                                                                        |                                                      |                                           | 6,523    |         |         |        | (32,727  | )        |         |          | 8,411    |         
|                                                     |                                                                                                                                 | Changes in operating assets and liabilities, net of acquisitions
    and dispositions:            |                                                      |                                           |          |         |         |        |          |          |         |          |          |         
|                                                     |                                                                                                                                 |                                                                                                   | Accounts receivable                                  |                                           |          | (72,082 | )       |        |          | (13,968  | )       |          |          | 7,896    |        
|                                                     |                                                                                                                                 |                                                                                                   | Operating supplies                                   |                                           |          | 352     |         |        |          | 1,467    |         |          |          | 3,081    |        
|                                                     |                                                                                                                                 |                                                                                                   | Prepaid expenses and other receivables               |                                           |          | 5,155   |         |        |          | (2,502   | )       |          |          | 988      |        
|                                                     |                                                                                                                                 |                                                                                                   | Accounts payable and other accrued expenses          |                                           |          | (8,584  | )       |        |          | 117      |         |          |          | (85,335  | )      
|                                                     |                                                                                                                                 |                                                                                                   | Income taxes payable                                 |                                           |          | (904    | )       |        |          | 16,103   |         |          |          | 9,790    |        
|                                                     |                                                                                                                                 |                                                                                                   | Other, net                                           |                                           |          | (5,141  | )       |        |          | (6,499   | )       |          |          | (9,844   | )      
|                                                     |                                                                                                                                 |                                                                                                   |                                                      |                                           |          |         |         |        |         
|                                                     |                                                                                                                                 |                                                                                                   |                                                      | Total adjustments                         |          |         | 47,639  |        |          |          | (10,607 | )        |          |          | 262,723 | 
|                                                     |                                                                                                                                 |                                                                                                   |                                                      |                                           |          |         |         |        |         
|                                                     |                                                                                                                                 |                                                                                                   |                                                      | Net cash provided by operating activities |          |         | 75,660  |        |          |          | 69,861  |          |          |          | 116,633 | 
|Cash flows from investing activities:                |                                                                                                                                 |                                                                                                   |                                                      |                                           |          |         |         |        |          |          |         |         
|                                                     |                                                                                                                                 | Capital expenditures                                                                              |                                                      |                                           | (62,718  | )       |         |        | (43,984  | )        |         |          | (100,103 | )       
|                                                     |                                                                                                                                 | Proceeds from dispositions of facilities and other assets, net                                    |                                                      |                                           | 15,557   |         |         |        | 275,039  |          |         |          | 169,471  |         
|                                                     |                                                                                                                                 | Payments for acquisitions, net of cash acquired                                                   |                                                      |                                           | (71,352  | )       |         |        | (459     | )        |         |          |         |         
|                                                     |                                                                                                                                 | Collections on notes receivable                                                                   |                                                      |                                           | 38,089   |         |         |        | 8,689    |          |         |          | 1,616    |         
|                                                     |                                                                                                                                 | Payments for designated funds, net                                                                |                                                      |                                           | (1,009   | )       |         |        | (5,183   | )        |         |          | (260     | )       
|                                                     |                                                                                                                                 | Proceeds from Beverly Funding Corporation investment                                              |                                                      |                                           | 28,956   |         |         |        |         |          |         |          |         |         
|                                                     |                                                                                                                                 | Other, net                                                                                        |                                                      |                                           | (17,502  | )       |         |        | (14,914  | )        |         |          | (8,389   | )       
|                                                     |                                                                                                                                 |                                                                                                   |                                                      |                                           |          |         |         |        |         
|                                                     |                                                                                                                                 |                                                                                                   | Net cash provided by (used for) investing activities |                                           |          | (69,979 | )       |        |          | 219,188  |         |          |          | 62,335   |        
|Cash flows from financing activities:                |                                                                                                                                 |                                                                                                   |                                                      |                                           |          |         |         |        |          |          |         |         
|                                                     |                                                                                                                                 | Proceeds from issuance of long-term debt                                                          |                                                      |                                           | 211,384  |         |         |        | 250,000  |          |         |          | 5,000    |         
|                                                     |                                                                                                                                 | Repayments of long-term debt                                                                      |                                                      |                                           | (219,428 | )       |         |        | (313,352 | )        |         |          | (116,496 | )       
|                                                     |                                                                                                                                 | Repayments of off-balance sheet financing                                                         |                                                      |                                           |         |         |         |        | (69,456  | )        |         |          | (42,901  | )       
|                                                     |                                                                                                                                 | Proceeds from exercise of stock options                                                           |                                                      |                                           | 3,592    |         |         |        | 1,108    |          |         |          | 1,699    |         
|                                                     |                                                                                                                                 | Deferred financing and other costs (including those related to
    early extinguishments of debt) |                                                      |                                           | (44,379  | )       |         |        | (13,979  | )        |         |          | (168     | )       
|                                                     |                                                                                                                                 |                                                                                                   |                                                      |                                           |          |         |         |        |         
|                                                     |                                                                                                                                 |                                                                                                   | Net cash used for financing activities               |                                           |          | (48,831 | )       |        |          | (145,679 | )       |          |          | (152,866 | )      
|                                                     |                                                                                                                                 |                                                                                                   |                                                      |                                           |          |         |         |        |         
|Net increase (decrease) in cash and cash equivalents |                                                                                                                                 |                                                                                                   | (43,150                                              | )                                         |          |         | 143,370 |        |          |          | 26,102  |         
|Cash and cash equivalents at beginning of year       |                                                                                                                                 |                                                                                                   | 258,815                                              |                                           |          |         | 115,445 |        |          |          | 89,343  |         
|                                                     |                                                                                                                                 |                                                                                                   |                                                      |                                           |          |         |         |        |         
|Cash and cash equivalents at end of year             |                                                                                                                                 | $                                                                                                 | 215,665                                              |                                           |          | $       | 258,815 |        |          | $        | 115,445 |         
|                                                     |                                                                                                                                 |                                                                                                   |                                                      |                                           |          |         |         |        |         
|Supplemental schedule of cash flow information:      |                                                                                                                                 |                                                                                                   |                                                      |                                           |          |         |         |        |          |          |         |         
|Cash paid (received) during the year for:            |                                                                                                                                 |                                                                                                   |                                                      |                                           |          |         |         |        |          |          |         |         
|                                                     | Interest, net of amounts capitalized                                                                                            |                                                                                                   | $                                                    | 46,356                                    |          |         | $       | 67,710 |          |          | $       | 65,658   |         
|                                                     | Income tax payments (refunds), net                                                                                              |                                                                                                   |                                                      | 5,849                                     |          |         |         | (7,656 | )        |          |         | (3,705   | )       



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BEVERLY ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Years ended December 31, 2004, 2003, and 2002




|   |                                           
|-- | ------------------------------------------
|1. | Summary of Significant Accounting Policies



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







| |            
| | -----------
| | Restatement

Earnings Per Share The Effect of
Contingently Convertible Debt on Diluted Earnings Per Share




| |                 
| | ----------------
| | Use of Estimates





| |   |                                                                                                
| | - | -----------------------------------------------------------------------------------------------
| |  | 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.                 





| |                          
| | -------------------------
| | Cash and Cash Equivalents





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



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BEVERLY ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Years ended December 31, 2004, 2003, and 2002




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







| |                            
| | ---------------------------
| | Property and Equipment, net





| |                  
| | -----------------
| | Intangible Assets



|                                         |  |            |         |             |              |   |        |                |  |   |        |  |  |      |        |  |      |   |         |  |  |   |        | 
|---------------------------------------- |  | ---------- | ------- | ----------- | ------------ | - | ------ | -------------- |  | - | ------ |  |  | ---- | ------ |  | ---- | - | ------- |  |  | - | ------ | 
|                                         |  |            |         | Accumulated |              |   |       
|                                         |  | Cost Basis |         |             | Amortization |   |        | Carrying Value | 
|                                         |  |            |         |             |              |   |        |                | 
|                                         |  | 2004       |         |             | 2003         |   |        | 2004           |  |   | 2003   |  |  | 2004 |        |  | 2003 |  
|                                         |  |            |         |             |              |   |        |                |  |   |        |  |  |      |        |  |      |  
|Goodwill                                 |  | $          | 145,430 |             |              | $ | 78,609 |                |  | $ | 21,364 |  |  | $    | 21,507 |  |      | $ | 124,066 |  |  | $ | 57,102 | 
|Other indefinite-lived intangible assets |  |            | 10,020  |             |              |   | 9,546  |                |  |   | 4,569  |  |  |      | 4,547  |  |      |   | 5,451   |  |  |   | 4,999  | 
|                                         |  |            |         |             |              |   |        |                |  |   |        |  |  |      |        |  |      |  
|                                         |  | $          | 155,450 |             |              | $ | 88,155 |                |  | $ | 25,933 |  |  | $    | 26,054 |  |      | $ | 129,517 |  |  | $ | 62,101 | 
|                                         |  |            |         |             |              |   |        |                |  |   |        |  |  |      |        |  |      |  



Goodwill and Other Intangible Assets




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BEVERLY ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Years ended December 31, 2004, 2003, and 2002




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







|                              |  |            |       |             |              |   |       |                |  |   |      |  |  |      |     |  |      |   |       |  |  |   |       | 
|----------------------------- |  | ---------- | ----- | ----------- | ------------ | - | ----- | -------------- |  | - | ---- |  |  | ---- | --- |  | ---- | - | ----- |  |  | - | ----- | 
|                              |  |            |       | Accumulated |              |   |      
|                              |  | Cost Basis |       |             | Amortization |   |       | Carrying Value | 
|                              |  |            |       |             |              |   |       |                | 
|                              |  | 2004       |       |             | 2003         |   |       | 2004           |  |   | 2003 |  |  | 2004 |     |  | 2003 |  
|                              |  |            |       |             |              |   |       |                |  |   |      |  |  |      |     |  |      |  
|Operating rights and licenses |  | $          | 3,091 |             |              | $ | 1,801 |                |  | $ | 451  |  |  | $    | 203 |  |      | $ | 2,640 |  |  | $ | 1,598 | 
|Leasehold interests           |  |            | 349   |             |              |   | 439   |                |  |   | 349  |  |  |      | 389 |  |      |   |      |  |  |   | 50    | 
|                              |  |            |       |             |              |   |       |                |  |   |      |  |  |      |     |  |      |  
|                              |  | $          | 3,440 |             |              | $ | 2,240 |                |  | $ | 800  |  |  | $    | 592 |  |      | $ | 2,640 |  |  | $ | 1,648 | 
|                              |  |            |       |             |              |   |       |                |  |   |      |  |  |      |     |  |      |  







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







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

Accounting for Income Taxes


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BEVERLY ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Years ended December 31, 2004, 2003, and 2002




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





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

Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities




|                            |  |      |         |   |      |   |         |      |  |   |         |  
|--------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                            |  | 2004 |         |   | 2003 |   |         | 2002 | 
|                            |  |      |         |   |      |   |         |      | 
|New receivables sold        |  | $    | 119,360 |   |      | $ | 824,475 |      |  | $ | 867,772 |  
|Cash collections remitted   |  |      | 197,123 |   |      |   | 830,457 |      |  |   | 857,731 |  
|Fees received for servicing |  |      | 658     |   |      |   | 2,142   |      |  |   | 2,119   |  
|Loss on sale of receivables |  |      | (1,194  | ) |      |   | (8,245  | )    |  |   | (8,678  | )







56



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BEVERLY ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Years ended December 31, 2004, 2003, and 2002




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



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







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

Accounting for Stock-Based
Compensation  Transition and Disclosure Accounting for Stock-Based Compensation Interim Financial Reporting




Share-Based
Payment Statement of Cash


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BEVERLY ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Years ended December 31, 2004, 2003, and 2002




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

Flows,




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

Accounting for the
Impairment or Disposal of Long-Lived Assets




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





| |   |                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the long-lived asset (disposal group) will be measured and
    reported 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.                    



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BEVERLY ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Years ended December 31, 2004, 2003, and 2002




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



| |                   
| | ------------------
| | Earnings Per Share



|             |                                                                                                                                                   |                                                                                 |   |         |        |  |   |         |       |  |   |         |   | 
|------------ | ------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------- | - | ------- | ------ |  | - | ------- | ----- |  | - | ------- | - | 
|             |                                                                                                                                                   | 2004                                                                            |   |         | 2003   |  |   | 2002    |      
|             |                                                                                                                                                   |                                                                                 |   |         |        |  |   |         |      
|Numerator:   |                                                                                                                                                   |                                                                                 |   |         |        |  |   |         |       |  |   |        
|             | Numerator for basic net income (loss) per share from continuing
    operations                                                                    |                                                                                 | $ | 42,658  |        |  | $ | 27,704  |       |  | $ | (34,513 | )
|             | Effect of dilutive securities:                                                                                                                    |                                                                                 |   |         |        |  |   |         |       |  |   |         |  
|             |                                                                                                                                                   | Interest on 2.75% convertible subordinated notes, net of
    income taxes of $0 |   |         | 3,301  |  |   |         | 633   |  |   |         |  | 
|             |                                                                                                                                                   |                                                                                 |   |         |        |  |   |         |      
|             | Numerator for diluted net income (loss) per share from
    continuing operations                                                                  |                                                                                 | $ | 45,959  |        |  | $ | 28,337  |       |  | $ | (34,513 | )
|             |                                                                                                                                                   |                                                                                 |   |         |        |  |   |         |      
|Denominator: |                                                                                                                                                   |                                                                                 |   |         |        |  |   |         |       |  |   |        
|             | Denominator for basic net income (loss) per share from
    continuing operations  weighted average shares                                        |                                                                                 |   | 107,749 |        |  |   | 106,582 |       |  |   | 104,726 |  
|             | Effect of dilutive securities:                                                                                                                    |                                                                                 |   |         |        |  |   |         |       |  |   |         |  
|             |                                                                                                                                                   | Employee stock options                                                          |   |         | 1,153  |  |   |         | 338   |  |   |         |  | 
|             |                                                                                                                                                   | 2.75% convertible subordinated notes                                            |   |         | 15,432 |  |   |         | 3,002 |  |   |         |  | 
|             |                                                                                                                                                   |                                                                                 |   |         |        |  |   |         |      
|             | Denominator for diluted net income (loss) per share from
    continuing operations  adjusted weighted average
    shares and assumed conversions |                                                                                 |   | 124,334 |        |  |   | 109,922 |       |  |   | 104,726 |  
|             |                                                                                                                                                   |                                                                                 |   |         |        |  |   |         |      
|             | Basic net income (loss) per share from continuing operations                                                                                      |                                                                                 | $ | 0.40    |        |  | $ | 0.26    |       |  | $ | (0.33   | )
|             |                                                                                                                                                   |                                                                                 |   |         |        |  |   |         |      
|             | Diluted net income (loss) per share from continuing operations                                                                                    |                                                                                 | $ | 0.37    |        |  | $ | 0.26    |       |  | $ | (0.33   | )
|             |                                                                                                                                                   |                                                                                 |   |         |        |  |   |         |      

,




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



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BEVERLY ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Years ended December 31, 2004, 2003, and 2002




|   |          
|-- | ---------
|2. | Insurance







60



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BEVERLY ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Years ended December 31, 2004, 2003, and 2002




|   |                        
|-- | -----------------------
|2. | Insurance  (Continued)



|                                                 |                                         |      |         |         |      |   |         |         |  |   |         |        | 
|------------------------------------------------ | --------------------------------------- | ---- | ------- | ------- | ---- | - | ------- | ------- |  | - | ------- | ------ | 
|                                                 |                                         | 2004 |         |         | 2003 |   |         | 2002    | 
|                                                 |                                         |      |         |         |      |   |         |         | 
|General and professional liability:              |                                         |      |         |         |      |   |         |         |  |   |         |       
|                                                 | Continuing operations(1)                |      | $       | 80,514  |      |   | $       | 55,910  |  |   | $       | 41,002 | 
|                                                 | Florida insurance reserve adjustment(2) |      |         |        |      |   |         |        |  |   |         | 22,179 | 
|                                                 | Discontinued operations(3)              |      |         | 23,696  |      |   |         | 50,749  |  |   |         | 29,375 | 
|                                                 |                                         |      |         |         |      |   |         |         | 
|                                                 |                                         | $    | 104,210 |         |      | $ | 106,659 |         |  | $ | 92,556  |       
|                                                 |                                         |      |         |         |      |   |         |         | 
|Workers compensation:                           |                                         |      |         |         |      |   |         |         |  |   |         |       
|                                                 | Continuing operations                   |      | $       | 36,052  |      |   | $       | 39,988  |  |   | $       | 35,545 | 
|                                                 | Discontinued operations                 |      |         | 3,727   |      |   |         | 11,873  |  |   |         | 12,349 | 
|                                                 |                                         |      |         |         |      |   |         |         | 
|                                                 |                                         | $    | 39,779  |         |      | $ | 51,861  |         |  | $ | 47,894  |       
|                                                 |                                         |      |         |         |      |   |         |         | 
|Other insurance:                                 |                                         |      |         |         |      |   |         |         |  |   |         |       
|                                                 | Continuing operations                   |      | $       | 11,087  |      |   | $       | 13,479  |  |   | $       | 7,614  | 
|                                                 | Discontinued operations                 |      |         | 347     |      |   |         | 876     |  |   |         | 1,107  | 
|                                                 |                                         |      |         |         |      |   |         |         | 
|                                                 |                                         | $    | 11,434  |         |      | $ | 14,355  |         |  | $ | 8,721   |       
|                                                 |                                         |      |         |         |      |   |         |         | 
|Total provision for insurance and related items: |                                         |      |         |         |      |   |         |         |  |   |         |       
|                                                 | Continuing operations(1)                |      | $       | 127,653 |      |   | $       | 109,377 |  |   | $       | 84,161 | 
|                                                 | Florida insurance reserve adjustment(2) |      |         |        |      |   |         |        |  |   |         | 22,179 | 
|                                                 | Discontinued operations(3)              |      |         | 27,770  |      |   |         | 63,498  |  |   |         | 42,831 | 
|                                                 |                                         |      |         |         |      |   |         |         | 
|                                                 |                                         | $    | 155,423 |         |      | $ | 172,875 |         |  | $ | 149,171 |       
|                                                 |                                         |      |         |         |      |   |         |         | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes a $5.7 million adjustment in 2004 to change the
    discount rate from 10% to 8.5% and $18.9 million in 2004
    primarily due to increases in the estimate of prior years
    outstanding general and professional liability reserves and
    related program costs.                                                                                                                                        
|   
|(2) | Based on the results of the 2002 mid-year actuarial study, we
    recorded a pre-tax charge of $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 general and professional liability claims and other
    costs for those facilities through the date of sale, subject to
    insurance.
|   
|(3) | Includes an accrual in 2003 for the purchase of incremental
    general and professional liability insurance on divested nursing
    facilities.                                                                                                                                                                                                                                                                       





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BEVERLY ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Years ended December 31, 2004, 2003, and 2002




|   |                        
|-- | -----------------------
|2. | Insurance  (Continued)





|                                      |  |      |         |  |      |   |         | 
|------------------------------------- |  | ---- | ------- |  | ---- | - | ------- | 
|                                      |  | 2004 |         |  | 2003 |  
|                                      |  |      |         |  |      |  
|Accrued wages and related liabilities |  | $    | 488     |  |      | $ | 2,528   | 
|General and professional liabilities  |  |      | 54,216  |  |      |   | 93,736  | 
|Other accrued liabilities             |  |      |        |  |      |   | 10,678  | 
|Other liabilities and deferred items  |  |      | 117,962 |  |      |   | 52,954  | 
|                                      |  |      |         |  |      |  
|                                      |  | $    | 172,666 |  |      | $ | 159,896 | 
|                                      |  |      |         |  |      |  





|   |                                                                       
|-- | ----------------------------------------------------------------------
|3. | California Investigation Settlement, Related Costs and
    Adjustments

nolo contendere






|   |                                                                                      
|-- | -------------------------------------------------------------------------------------
|4. | Special Charge and Adjustments Related to Settlements with
    the Federal Government



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BEVERLY ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Years ended December 31, 2004, 2003, and 2002




|   |                                                                                                    
|-- | ---------------------------------------------------------------------------------------------------
|4. | Special Charge and Adjustments Related to Settlements with
    the Federal Government  (Continued)







|                                          |  |      |        |  |      |   |        | 
|----------------------------------------- |  | ---- | ------ |  | ---- | - | ------ | 
|                                          |  | 2004 |        |  | 2003 |  
|                                          |  |      |        |  |      |  
|Federal government settlement obligations |  | $    | 14,359 |  |      | $ | 13,125 | 
|Other liabilities and deferred items      |  |      | 34,402 |  |      |   | 48,763 | 
|                                          |  |      |        |  |      |  
|                                          |  | $    | 48,761 |  |      | $ | 61,888 | 
|                                          |  |      |        |  |      |  



|   |                                                                    
|-- | -------------------------------------------------------------------
|5. | Asset Impairments, Workforce Reductions and Other Unusual
    Items



|                                          |  |      |        |   |      |   |       |      |  |   |        |  
|----------------------------------------- |  | ---- | ------ | - | ---- | - | ----- | ---- |  | - | ------ | -
|                                          |  | 2004 |        |   | 2003 |   |       | 2002 | 
|                                          |  |      |        |   |      |   |       |      | 
|Asset impairments                         |  | $    | 3,507  |   |      | $ | 2,076 |      |  | $ | 41,385 |  
|Workforce reductions                      |  |      | 422    |   |      |   | 2,507 |      |  |   | 7,869  |  
|Other unusual items, including exit costs |  |      | (3,481 | ) |      |   | (758  | )    |  |   | (2,967 | )
|                                          |  |      |        |   |      |   |       |      | 
|                                          |  | $    | 448    |   |      | $ | 3,825 |      |  | $ | 46,287 |  
|                                          |  |      |        |   |      |   |       |      | 



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









| |   |                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 is
    less than the current book value of the long-lived tangible
    assets.



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BEVERLY ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Years ended December 31, 2004, 2003, and 2002




|   |                                                                                  
|-- | ---------------------------------------------------------------------------------
|5. | Asset Impairments, Workforce Reductions and Other Unusual
    Items  (Continued)





| |                     
| | --------------------
| | Workforce Reductions







| |   |                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | $2.8 million of cash expenses, $1.8 million and
    $900,000 of which was paid during the years ended
    December 31, 2003 and 2004, respectively; and                                                                       
|
| |  | non-cash expenses of approximately $84,000 related to the
    issuance of 108,230 shares under our Stock Grant Plan (the
    Stock Grant Plan), less approximately $400,000 due
    to the cancellation of restricted stock.





| |   |                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | $8.0 million of cash expenses, $4.1 million,
    $2.8 million and $1.1 million of which was paid during
    the years ended December 31, 2002, 2003 and 2004,
    respectively; and
|
| |  | non-cash expenses of $500,000 related to the issuance of
    124,212 shares under our Stock Grant Plan.                                                                            

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BEVERLY ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Years ended December 31, 2004, 2003, and 2002




|   |                                                                                  
|-- | ---------------------------------------------------------------------------------
|5. | Asset Impairments, Workforce Reductions and Other Unusual
    Items  (Continued)



|                                   |  |            |        |   |            |   |           |            |  |   |            |           |  |            |         |   |            |   |        |   |  |   |         |  
|---------------------------------- |  | ---------- | ------ | - | ---------- | - | --------- | ---------- |  | - | ---------- | --------- |  | ---------- | ------- | - | ---------- | - | ------ | - |  | - | ------- | -
|                                   |  | 2004       |        |   | 2003       |   |           | 2002       | 
|                                   |  |            |        |   |            |   |           |            | 
|                                   |  | Workforce  |        |   |            |   | Workforce |            |  |   |            | Workforce |  |            |        
|                                   |  | Reductions |        |   | Exit Costs |   |           | Reductions |  |   | Exit Costs |           |  | Reductions |         |   | Exit Costs |  
|                                   |  |            |        |   |            |   |           |            |  |   |            |           |  |            |         |   |            |  
|Balance beginning of year          |  | $          | 3,029  |   |            | $ | 7,270     |            |  | $ | 5,418      |           |  | $          | 4,991   |   |            | $ | 7,631  |   |  | $ | 15,030  |  
|Charged to continuing operations   |  |            | 1,320  |   |            |   | 185       |            |  |   | 2,902      |           |  |            | (884    | ) |            |   | 8,454  |   |  |   |        |  
|Charged to discontinued operations |  |            |       |   |            |   | 4,251     |            |  |   |           |           |  |            | 26,599  |   |            |   |       |   |  |   | 2,633   |  
|Cash payments                      |  |            | (2,647 | ) |            |   | (7,134    | )          |  |   | (4,896     | )         |  |            | (22,579 | ) |            |   | (9,074 | ) |  |   | (10,313 | )
|Stock transactions                 |  |            |       |   |            |   |          |            |  |   |           |           |  |            |        |   |            |   | (1,008 | ) |  |   |        |  
|Reversals                          |  |            | (536   | ) |            |   |          |            |  |   | (395       | )         |  |            | (857    | ) |            |   | (585   | ) |  |   | (2,359  | )
|                                   |  |            |        |   |            |   |           |            |  |   |            |           |  |            |         |   |            |  
|Balance end of year                |  | $          | 1,166  |   |            | $ | 4,572     |            |  | $ | 3,029      |           |  | $          | 7,270   |   |            | $ | 5,418  |   |  | $ | 4,991   |  
|                                   |  |            |        |   |            |   |           |            |  |   |            |           |  |            |         |   |            |  



|   |                        
|-- | -----------------------
|6. | Discontinued Operations









|                                  |                            |            |        |        |        |   |       |       |  |   |        |        |  |   |       |       | 
|--------------------------------- | -------------------------- | ---------- | ------ | ------ | ------ | - | ----- | ----- |  | - | ------ | ------ |  | - | ----- | ----- | 
|                                  |                            | 2004       |        |        | 2003   |  
|                                  |                            |            |        |        |        |  
|                                  |                            | Nursing    |        |        |        |   |      
|                                  |                            | Facilities |        |        | Matrix |   |       | Total |  |   | Matrix |       
|                                  |                            |            |        |        |        |   |       |       |  |   |        |       
|Current assets                    |                            | $          | 479    |        |        | $ | 1,970 |       |  | $ | 2,449  |        |  | $ | 2,042 |      
|Property and equipment, net       |                            |            | 10,655 |        |        |   | 1,212 |       |  |   | 11,867 |        |  |   | 1,100 |      
|Goodwill                          |                            |            |       |        |        |   | 332   |       |  |   | 332    |        |  |   | 332   |      
|Other assets                      |                            |            | 222    |        |        |   | 28    |       |  |   | 250    |        |  |   | 24    |      
|                                  |                            |            |        |        |        |   |       |       |  |   |        |       
|                                  | Total assets held for sale |            | $      | 11,356 |        |   | $     | 3,542 |  |   | $      | 14,898 |  |   | $     | 3,498 | 
|                                  |                            |            |        |        |        |   |       |       |  |   |        |       
|Current liabilities held for sale |                            | $          |       |        |        | $ | 676   |       |  | $ | 676    |        |  | $ | 672   |      
|                                  |                            |            |        |        |        |   |       |       |  |   |        |       

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BEVERLY ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Years ended December 31, 2004, 2003, and 2002




|   |                                      
|-- | -------------------------------------
|6. | Discontinued Operations  (Continued)





| |   |                                                                                                                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 18 nursing facilities (2,065 beds) and one assisted living
    center (32 units) for net cash proceeds totaling
    $1.7 million, and a $11.5 million note receivable. The
    net cash proceeds are net of a $7.5 million lease buy-out
    of an Indiana facility; and
|
| |  | a home medical equipment business of our former Home Care
    segment for cash proceeds totaling $370,000.                                                                                                                                                              





| |   |                                                                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 80 nursing facilities (9,468 beds), seven assisted living
    centers (278 units) and certain other assets for cash
    proceeds totaling approximately $223.8 million and a
    $4.0 million note receivable;
|
| |  | the outpatient rehabilitation clinic operations and the managed
    care network of our former Matrix segment for cash proceeds of
    $36.0 million; and                                                     
|
| |  | the Care Focus and MK Medical business units and certain other
    assets of our former Home Care segment for cash proceeds
    totaling $11.0 million and a $1.0 million note
    receivable.                



|                                       |  |        |        |         |           |   |     |            |  |   |         |   |  |        |         |   |           |   |        |            |  |   |        |   |  |   |         |   |  |   |         |  
|-------------------------------------- |  | ------ | ------ | ------- | --------- | - | --- | ---------- |  | - | ------- | - |  | ------ | ------- | - | --------- | - | ------ | ---------- |  | - | ------ | - |  | - | ------- | - |  | - | ------- | -
|                                       |  | 2004   |        |         | 2003      |  
|                                       |  |        |        |         |           |  
|                                       |  |        |        | Nursing |           |   |     |            |  |   | Nursing |   |  |       
|                                       |  | Matrix |        |         | Home Care |   |     | Facilities |  |   | Total   |   |  | Matrix |         |   | Home Care |   |        | Facilities |  |   | Total  |  
|                                       |  |        |        |         |           |   |     |            |  |   |         |   |  |        |         |   |           |   |        |            |  |   |        |  
|Revenues                               |  | $      | 14,021 |         |           | $ | 148 |            |  | $ | 163,745 |   |  | $      | 177,914 |   |           | $ | 18,550 |            |  | $ | 20,395 |   |  | $ | 515,008 |   |  | $ | 553,953 |  
|                                       |  |        |        |         |           |   |     |            |  |   |         |   |  |        |         |   |           |   |        |            |  |   |        |  
|Operating income (loss)(1)             |  | $      | 1,106  |         |           | $ | 110 |            |  | $ | (10,335 | ) |  | $      | (9,119  | ) |           | $ | 749    |            |  | $ | (2,446 | ) |  | $ | (2,817  | ) |  | $ | (4,514  | )
|Gain (loss) on sales and exit costs    |  |        | (49    | )       |           |   | 369 |            |  |   | (1,441  | ) |  |        | (1,121  | ) |           |   | 11,120 |            |  |   | 1,557  |   |  |   | 67,113  |   |  |   | 79,790  |  
|Impairments and other unusual items(2) |  |        |       |         |           |   |    |            |  |   | (4,342  | ) |  |        | (4,342  | ) |           |   |       |            |  |   | (540   | ) |  |   | (18,594 | ) |  |   | (19,134 | )
|                                       |  |        |        |         |           |   |     |            |  |   |         |   |  |        |         |   |           |   |        |            |  |   |        |  
|Pre-tax income (loss)                  |  | $      | 1,057  |         |           | $ | 479 |            |  | $ | (16,118 | ) |  |        | (14,582 | ) |           | $ | 11,869 |            |  | $ | (1,429 | ) |  | $ | 45,702  |   |  |   | 56,142  |  
|                                       |  |        |        |         |           |   |     |            |  |   |         |   |  |        |         |   |           |   |        |            |  |   |        |  
|Provision for state income taxes       |  |        |        |         |           |   |     |            |  |   |         |   |  |        | 55      |   |           |   |        |            |  |   |        |   |  |   |         |   |  |   | 3,378   |  
|                                       |  |        |        |         |           |   |     |            |  |   |         |   |  |        |         |   |           |   |        |            |  |   |        |  
|Discontinued operations, net of taxes  |  |        |        |         |           |   |     |            |  |   |         |   |  | $      | (14,637 | ) |           |   |        |            |  |   |        |   |  |   |         |   |  | $ | 52,764  |  
|                                       |  |        |        |         |           |   |     |            |  |   |         |   |  |        |         |   |           |   |        |            |  |   |        |  

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BEVERLY ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Years ended December 31, 2004, 2003, and 2002




|   |                                      
|-- | -------------------------------------
|6. | Discontinued Operations  (Continued)

|                                       |  |        |        |         |           |   |         |            |  |   |         |   |  |   |         |  
|-------------------------------------- |  | ------ | ------ | ------- | --------- | - | ------- | ---------- |  | - | ------- | - |  | - | ------- | -
|                                       |  | 2002   |       
|                                       |  |        |       
|                                       |  |        |        | Nursing |           |   |        
|                                       |  | Matrix |        |         | Home Care |   |         | Facilities |  |   | Total   |  
|                                       |  |        |        |         |           |   |         |            |  |   |         |  
|Revenues(3)                            |  | $      | 86,109 |         |           | $ | 20,894  |            |  | $ | 644,811 |   |  | $ | 751,814 |  
|                                       |  |        |        |         |           |   |         |            |  |   |         |  
|Operating income (loss)(1)(3)          |  | $      | 810    |         |           | $ | (31,057 | )          |  | $ | 35,435  |   |  | $ | 5,188   |  
|Gain (loss) on sale and exit costs     |  |        | (1,001 | )       |           |   | (1,257  | )          |  |   | (107    | ) |  |   | (2,365  | )
|Impairments and other unusual items(4) |  |        | 230    |         |           |   | (4,239  | )          |  |   | (33,220 | ) |  |   | (37,229 | )
|                                       |  |        |        |         |           |   |         |            |  |   |         |  
|Pre-tax income (loss)                  |  | $      | 39     |         |           | $ | (36,553 | )          |  | $ | 2,108   |   |  |   | (34,406 | )
|                                       |  |        |        |         |           |   |         |            |  |   |         |  
|Provision for income taxes             |  |        |        |         |           |   |         |            |  |   |         |   |  |   |        |  
|                                       |  |        |        |         |           |   |         |            |  |   |         |  
|Discontinued operations, net of taxes  |  |        |        |         |           |   |         |            |  |   |         |   |  | $ | (34,406 | )
|                                       |  |        |        |         |           |   |         |            |  |   |         |  






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes net interest expense of $143,000, $2.8 million and
    $4.1 million for 2004, 2003 and 2002, respectively, and
    depreciation and amortization expense of $2.1 million,
    $10.9 million and $26.0 million for 2004, 2003 and
    2002, respectively. Also includes an $8.6 million charge
    due to an increase in the estimate of outstanding general and
    professional liability reserves and related program costs.
|   
|(2) | Includes an accrual in 2003 for the purchase of incremental
    general and professional liability insurance on disposed nursing
    facilities.                                                                                                                                                                                                                                                                                       
|   
|(3) | Includes an adjustment of $18.0 million in 2002 for
    estimated overpayments to MK Medical by government payors. MK
    Medical was part of our former Home Care segment.                                                                                                                                                                                                                                                            
|   
|(4) | Includes an accrual of $1.0 million in 2002 for legal and
    related fees associated with the MK Medical estimated
    overpayment issue, and asset impairment charges related to
    certain nursing facilities and MK Medical.                                                                                                                                                                                                      





|   |                              
|-- | -----------------------------
|7. | Acquisitions and Dispositions



67



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BEVERLY ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Years ended December 31, 2004, 2003, and 2002




|   |                                            
|-- | -------------------------------------------
|7. | Acquisitions and Dispositions  (Continued)



|                                                                                                                       |         |      |           |      |      |   |           |      |  |   |           |       |  
|---------------------------------------------------------------------------------------------------------------------- | ------- | ---- | --------- | ---- | ---- | - | --------- | ---- |  | - | --------- | ----- | -
|                                                                                                                       |         | 2004 |           |      | 2003 |   |           | 2002 | 
|                                                                                                                       |         |      |           |      |      |   |           |      | 
|Revenues                                                                                                               |         | $    | 2,007,627 |      |      | $ | 1,830,450 |      |  | $ | 1,786,052 |      
|Income (loss) before discontinued operations and cumulative
    effect of change in accounting for goodwill            |         |      | 45,431    |      |      |   | 35,028    |      |  |   | (30,948   | )    
|Income (loss) per share before discontinued operations and
    cumulative effect of change in accounting for goodwill: |         |      |           |      |      |   |           |      |  |   |           |      
|                                                                                                                       | Basic   |      |           | 0.42 |      |   |           | 0.33 |  |   |           | (0.30 | )
|                                                                                                                       | Diluted |      |           | 0.39 |      |   |           | 0.32 |  |   |           | (0.30 | )
|Net income (loss)                                                                                                      |         |      | 30,794    |      |      |   | 87,792    |      |  |   | (142,525  | )    
|Net income (loss) per share                                                                                            |         |      | 0.27      |      |      |   | 0.80      |      |  |   | (1.36     | )    







68



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BEVERLY ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Years ended December 31, 2004, 2003, and 2002




|   |                       
|-- | ----------------------
|8. | Property and Equipment



|                                               |  |       |           |  |       |   |           |        |  |   |           |  |  |      |           |  |      |   |       |  |  |   |        | 
|---------------------------------------------- |  | ----- | --------- |  | ----- | - | --------- | ------ |  | - | --------- |  |  | ---- | --------- |  | ---- | - | ----- |  |  | - | ------ | 
|                                               |  | Total |           |  | Owned |   |           | Leased | 
|                                               |  |       |           |  |       |   |           |        | 
|                                               |  | 2004  |           |  | 2003  |   |           | 2004   |  |   | 2003      |  |  | 2004 |           |  | 2003 |  
|                                               |  |       |           |  |       |   |           |        |  |   |           |  |  |      |           |  |      |  
|Land, buildings and improvements               |  | $     | 997,560   |  |       | $ | 1,038,702 |        |  | $ | 992,670   |  |  | $    | 1,029,657 |  |      | $ | 4,890 |  |  | $ | 9,045  | 
|Furniture and equipment                        |  |       | 239,122   |  |       |   | 241,412   |        |  |   | 237,009   |  |  |      | 239,071   |  |      |   | 2,113 |  |  |   | 2,341  | 
|Construction in progress                       |  |       | 21,157    |  |       |   | 8,091     |        |  |   | 21,157    |  |  |      | 8,091     |  |      |   |      |  |  |   |       | 
|                                               |  |       |           |  |       |   |           |        |  |   |           |  |  |      |           |  |      |  
|                                               |  |       | 1,257,839 |  |       |   | 1,288,205 |        |  |   | 1,250,836 |  |  |      | 1,276,819 |  |      |   | 7,003 |  |  |   | 11,386 | 
|Less accumulated depreciation and amortization |  |       | 604,183   |  |       |   | 593,985   |        |  |   | 599,752   |  |  |      | 585,995   |  |      |   | 4,431 |  |  |   | 7,990  | 
|                                               |  |       |           |  |       |   |           |        |  |   |           |  |  |      |           |  |      |  
|                                               |  | $     | 653,656   |  |       | $ | 694,220   |        |  | $ | 651,084   |  |  | $    | 690,824   |  |      | $ | 2,572 |  |  | $ | 3,396  | 
|                                               |  |       |           |  |       |   |           |        |  |   |           |  |  |      |           |  |      |  







69



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BEVERLY ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Years ended December 31, 2004, 2003, and 2002




|   |               
|-- | --------------
|9. | Long-term Debt



|                                                                                                                                                                                                                                                                                   |                                                                           |      |         |       |      |   |         |       | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------- | ---- | ------- | ----- | ---- | - | ------- | ----- | 
|                                                                                                                                                                                                                                                                                   |                                                                           | 2004 |         |       | 2003 |  
|                                                                                                                                                                                                                                                                                   |                                                                           |      |         |       |      |  
|Revolving credit facility, maturing October 22, 2007                                                                                                                                                                                                                               |                                                                           | $    |        |       |      | $ |        |      
|Term Loan, due October 22, 2008, secured by first priority
    liens on 78 nursing facilities (8,868 beds) with an aggregate
    carrying value of $181,913 at December 31, 2004                                                                                                   |                                                                           |      | 133,313 |       |      |   | 134,662 |      
|Notes and mortgages, less imputed interest; due in installments
    through the year 2016, at effective interest rates of 4.75% to
    12.50%, a portion of which is secured by property, equipment and
    other assets with a carrying value of $67,686 at
    December 31, 2004 |                                                                           |      | 48,685  |       |      |   | 63,584  |      
|Industrial development revenue bonds, due in installments
    through the year 2013, at effective interest rates of 5.21% to
    10.00%, a portion of which is secured by property and other
    assets with a carrying value of $49,439 at December 31, 2004                      |                                                                           |      | 36,515  |       |      |   | 48,565  |      
|95/8% Senior
    Notes due April 15, 2009, unsecured                                                                                                                                                                                                                               |                                                                           |      | 9,390   |       |      |   | 200,000 |      
|77/8% Senior
    Subordinated Notes due June 15, 2014                                                                                                                                                                                                                              |                                                                           |      | 211,506 |       |      |   |        |      
|2.75% Convertible Subordinated Notes due November 1,
    2033, unsecured                                                                                                                                                                                                           |                                                                           |      | 115,000 |       |      |   | 115,000 |      
|                                                                                                                                                                                                                                                                                   |                                                                           |      |         |       |      |  
|                                                                                                                                                                                                                                                                                   |                                                                           |      | 554,409 |       |      |   | 561,811 |      
|Present value of capital lease obligations, less imputed
    interest:                                                                                                                                                                                                             |                                                                           |      |         |       |      |   |         |      
|                                                                                                                                                                                                                                                                                   | 2004  $87; 2003  $95 at effective interest
    rates of 6.62% to 13.89% |      |         | 3,774 |      |   |         | 4,416 | 
|                                                                                                                                                                                                                                                                                   |                                                                           |      |         |       |      |  
|                                                                                                                                                                                                                                                                                   |                                                                           |      | 558,183 |       |      |   | 566,227 |      
|Less amounts due within one year                                                                                                                                                                                                                                                   |                                                                           |      | 12,240  |       |      |   | 13,354  |      
|                                                                                                                                                                                                                                                                                   |                                                                           |      |         |       |      |  
|                                                                                                                                                                                                                                                                                   |                                                                           | $    | 545,943 |       |      | $ | 552,873 |      
|                                                                                                                                                                                                                                                                                   |                                                                           |      |         |       |      |  



7 8 5 8




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BEVERLY ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Years ended December 31, 2004, 2003, and 2002




|   |                             
|-- | ----------------------------
|9. | Long-term Debt  (Continued)



5 8 5 8 7 8 5 8 5 8






| |   |                                                                                                                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | during any fiscal quarter, if the market price of our common
    stock is at least $8.94 for at least 20 consecutive trading-days
    during the 30 consecutive trading-day period ending on the last
    day of the preceding fiscal quarter;                                                                                                 
|
| |  | during the five business day period following any 10 consecutive
    trading-day period in which (a) the trading price of a note
    for each day of such period is less than 105% of the conversion
    value and (b) the conversion value for each day of such
    period is less than 95% of the principal amount of a Convertible
    Note;
|
| |  | if we call the Convertible Notes for redemption; or                                                                                                                                                                                                                                                                                            
|
| |  | upon the occurrence of certain corporate transactions specified
    in the agreement.                                                                                                                                                                                                                                                          



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BEVERLY ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Years ended December 31, 2004, 2003, and 2002




|   |                             
|-- | ----------------------------
|9. | Long-term Debt  (Continued)



|                                                   |  |      |        |   |      |   |        |      |  |   |        |   |  |      |         |   |            |   |        |       |  |   |         |   |  |   |         |  
|-------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | - |  | ---- | ------- | - | ---------- | - | ------ | ----- |  | - | ------- | - |  | - | ------- | -
|                                                   |  | 2005 |        |   | 2006 |   |        | 2007 |  |   | 2008   |   |  | 2009 |         |   | Thereafter |   |        | Total | 
|                                                   |  |      |        |   |      |   |        |      |  |   |        |   |  |      |         |   |            |   |        |       | 
|Future minimum lease payments                      |  | $    | 530    |   |      | $ | 474    |      |  | $ | 432    |   |  | $    | 411     |   |            | $ | 409    |       |  | $ | 5,543   |   |  | $ | 7,799   |  
|Less interest                                      |  |      | (326   | ) |      |   | (310   | )    |  |   | (296   | ) |  |      | (285    | ) |            |   | (274   | )     |  |   | (2,534  | ) |  |   | (4,025  | )
|                                                   |  |      |        |   |      |   |        |      |  |   |        |   |  |      |         |   |            |   |        |       | 
|Net present value of future minimum lease payments |  |      | 204    |   |      |   | 164    |      |  |   | 136    |   |  |      | 126     |   |            |   | 135    |       |  |   | 3,009   |   |  |   | 3,774   |  
|Notes, mortgages and
    bonds(1)                  |  |      | 12,036 |   |      |   | 10,101 |      |  |   | 48,099 |   |  |      | 105,312 |   |            |   | 16,238 |       |  |   | 366,117 |   |  |   | 557,903 |  
|                                                   |  |      |        |   |      |   |        |      |  |   |        |   |  |      |         |   |            |   |        |       | 
|                                                   |  | $    | 12,240 |   |      | $ | 10,265 |      |  | $ | 48,235 |   |  | $    | 105,438 |   |            | $ | 16,373 |       |  | $ | 369,126 |   |  | $ | 561,677 |  
|                                                   |  |      |        |   |      |   |        |      |  |   |        |   |  |      |         |   |            |   |        |       | 






|    |                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------
|(1) | Excludes $3.5 million of unamortized discounts related to
    our
    77/8%
    Senior Subordinated Notes.





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BEVERLY ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Years ended December 31, 2004, 2003, and 2002




|   |                             
|-- | ----------------------------
|9. | Long-term Debt  (Continued)



|                                     |                                                           |                            |         |           |              |      |           |                 |         |   |              |         |         |       |          |          |          |   |           |          |         | 
|------------------------------------ | --------------------------------------------------------- | -------------------------- | ------- | --------- | ------------ | ---- | --------- | --------------- | ------- | - | ------------ | ------- | ------- | ----- | -------- | -------- | -------- | - | --------- | -------- | ------- | 
|                                     |                                                           |                            |         |           |              | Non- |           |                 |         |   |             
|                                     |                                                           |                            |         | Guarantor |              |      | Guarantor |                 |         |   |              |        
|                                     |                                                           | Parent                     |         |           | Subsidiaries |      |           | Subsidiaries(a) |         |   | Eliminations |         |         | Total |         
|                                     |                                                           |                            |         |           |              |      |           |                 |         |   |              |         |         |       |         
|ASSETS                              
|Current assets:                      |                                                           |                            |         |           |              |      |           |                 |         |   |              |         |         |       |          |          |          |   |           |         
|                                     | Cash and cash equivalents                                 |                            | $       | 142,515   |              |      | $         | 5,237           |         |   | $            | 67,913  |         |       | $        |         |          |   | $         | 215,665  |        
|                                     | Accounts receivable, less allowance for doubtful accounts |                            |         | 8,160     |              |      |           | 183,920         |         |   |              | 43,397  |         |       |          |         |          |   |           | 235,477  |        
|                                     | Notes receivable, less allowance for doubtful notes       |                            |         | 18        |              |      |           | 2,768           |         |   |              |        |         |       |          |         |          |   |           | 2,786    |        
|                                     | Operating supplies                                        |                            |         | 101       |              |      |           | 9,080           |         |   |              |        |         |       |          |         |          |   |           | 9,181    |        
|                                     | Assets held for sale                                      |                            |         |          |              |      |           | 14,898          |         |   |              |        |         |       |          |         |          |   |           | 14,898   |        
|                                     | Prepaid expenses and other                                |                            |         | 10,952    |              |      |           | 10,285          |         |   |              | 16,029  |         |       |          |         |          |   |           | 37,266   |        
|                                     |                                                           |                            |         |           |              |      |           |                 |         |   |              |         |         |       |         
|                                     |                                                           | Total current assets       |         |           | 161,746      |      |           |                 | 226,188 |   |              |         | 127,339 |       |          |          |         |   |           |          | 515,273 | 
|Property and equipment, net          |                                                           |                            | 6,392   |           |              |      | 647,264   |                 |         |   |             |         |         |       |         |          |          |   | 653,656   |         
|Other assets:                        |                                                           |                            |         |           |              |      |           |                 |         |   |              |         |         |       |          |          |          |   |           |         
|                                     | Goodwill, net                                             |                            |         |          |              |      |           | 124,066         |         |   |              |        |         |       |          |         |          |   |           | 124,066  |        
|                                     | Other, less allowance for doubtful accounts and notes     |                            |         | 255,350   |              |      |           | 32,385          |         |   |              | 709     |         |       |          | (220,054 | )        |   |           | 68,390   |        
|                                     | Due from affiliates                                       |                            |         | 453,483   |              |      |           |                |         |   |              | 132,141 |         |       |          | (585,624 | )        |   |           |         |        
|                                     |                                                           |                            |         |           |              |      |           |                 |         |   |              |         |         |       |         
|                                     |                                                           | Total other assets         |         |           | 708,833      |      |           |                 | 156,451 |   |              |         | 132,850 |       |          |          | (805,678 | ) |           |          | 192,456 | 
|                                     |                                                           |                            |         |           |              |      |           |                 |         |   |              |         |         |       |         
|                                     |                                                           | $                          | 876,971 |           |              | $    | 1,029,903 |                 |         | $ | 260,189      |         |         | $     | (805,678 | )        |          | $ | 1,361,385 |         
|                                     |                                                           |                            |         |           |              |      |           |                 |         |   |              |         |         |       |         
|                                    
|LIABILITIES AND STOCKHOLDERS EQUITY
|Current liabilities:                 |                                                           |                            |         |           |              |      |           |                 |         |   |              |         |         |       |          |          |          |   |           |         
|                                     | Accounts payable                                          |                            | $       | 2,696     |              |      | $         | 65,082          |         |   | $            |        |         |       | $        |         |          |   | $         | 67,778   |        
|                                     | Accrued wages and related liabilities                     |                            |         | 28,240    |              |      |           | 75,797          |         |   |              |        |         |       |          |         |          |   |           | 104,037  |        
|                                     | Accrued interest                                          |                            |         | 2,618     |              |      |           | 875             |         |   |              | 109     |         |       |          |         |          |   |           | 3,602    |        
|                                     | General and professional liabilities                      |                            |         | 23,323    |              |      |           |                |         |   |              | 45,934  |         |       |          | (15,041  | )        |   |           | 54,216   |        
|                                     | Federal government settlement obligations                 |                            |         |          |              |      |           | 14,359          |         |   |              |        |         |       |          |         |          |   |           | 14,359   |        
|                                     | Liabilities held for sale                                 |                            |         |          |              |      |           | 676             |         |   |              |        |         |       |          |         |          |   |           | 676      |        
|                                     | Other accrued liabilities                                 |                            |         | 18,694    |              |      |           | 64,403          |         |   |              |        |         |       |          |         |          |   |           | 83,097   |        
|                                     | Current portion of long-term debt                         |                            |         | 1,350     |              |      |           | 10,890          |         |   |              |        |         |       |          |         |          |   |           | 12,240   |        
|                                     |                                                           |                            |         |           |              |      |           |                 |         |   |              |         |         |       |         
|                                     |                                                           | Total current liabilities  |         |           | 76,921       |      |           |                 | 232,082 |   |              |         | 46,043  |       |          |          | (15,041  | ) |           |          | 340,005 | 
|Long-term debt                       |                                                           |                            | 467,858 |           |              |      | 78,085    |                 |         |   |             |         |         |       |         |          |          |   | 545,943   |         
|Other liabilities and deferred items |                                                           |                            | 59,779  |           |              |      | 56,269    |                 |         |   | 86,976       |         |         |       |         |          |          |   | 203,024   |         
|Due to affiliates                    |                                                           |                            |        |           |              |      | 585,624   |                 |         |   |             |         |         |       | (585,624 | )        |          |   |          |         
|Commitments and contingencies        |                                                           |                            |         |           |              |      |           |                 |         |   |              |         |         |       |          |          |          |   |           |         
|Stockholders equity:                |                                                           |                            |         |           |              |      |           |                 |         |   |              |         |         |       |          |          |          |   |           |         
|                                     | Preferred stock                                           |                            |         |          |              |      |           |                |         |   |              |        |         |       |          |         |          |   |           |         |        
|                                     | Common stock                                              |                            |         | 11,662    |              |      |           | 5,908           |         |   |              | 121     |         |       |          | (6,029   | )        |   |           | 11,662   |        
|                                     | Additional paid-in capital                                |                            |         | 902,053   |              |      |           | 414,340         |         |   |              | 44,434  |         |       |          | (458,774 | )        |   |           | 902,053  |        
|                                     | Retained earnings (accumulated deficit)                   |                            |         | (532,804  | )            |      |           | (342,405        | )       |   |              | 82,615  |         |       |          | 259,790  |          |   |           | (532,804 | )      
|                                     | Treasury stock, at cost                                   |                            |         | (108,498  | )            |      |           |                |         |   |              |        |         |       |          |         |          |   |           | (108,498 | )      
|                                     |                                                           |                            |         |           |              |      |           |                 |         |   |              |         |         |       |         
|                                     |                                                           | Total stockholders equity |         |           | 272,413      |      |           |                 | 77,843  |   |              |         | 127,170 |       |          |          | (205,013 | ) |           |          | 272,413 | 
|                                     |                                                           |                            |         |           |              |      |           |                 |         |   |              |         |         |       |         
|                                     |                                                           | $                          | 876,971 |           |              | $    | 1,029,903 |                 |         | $ | 260,189      |         |         | $     | (805,678 | )        |          | $ | 1,361,385 |         
|                                     |                                                           |                            |         |           |              |      |           |                 |         |   |              |         |         |       |         






|    |  |                                                                                                                                                                          
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | See above for a discussion of our new LOC facility, which
    changed Beverly Funding Corporations financial position,
    results of operations and cash flows in 2004.

73



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BEVERLY ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Years ended December 31, 2004, 2003, and 2002




|   |                             
|-- | ----------------------------
|9. | Long-term Debt  (Continued)



|                                     |                                                           |                            |         |           |              |      |           |              |        |   |              |         |        |       |          |          |          |   |           |          |         | 
|------------------------------------ | --------------------------------------------------------- | -------------------------- | ------- | --------- | ------------ | ---- | --------- | ------------ | ------ | - | ------------ | ------- | ------ | ----- | -------- | -------- | -------- | - | --------- | -------- | ------- | 
|                                     |                                                           |                            |         |           |              | Non- |           |              |        |   |             
|                                     |                                                           |                            |         | Guarantor |              |      | Guarantor |              |        |   |              |        
|                                     |                                                           | Parent                     |         |           | Subsidiaries |      |           | Subsidiaries |        |   | Eliminations |         |        | Total |         
|                                     |                                                           |                            |         |           |              |      |           |              |        |   |              |         |        |       |         
|ASSETS                              
|Current assets:                      |                                                           |                            |         |           |              |      |           |              |        |   |              |         |        |       |          |          |          |   |           |         
|                                     | Cash and cash equivalents                                 |                            | $       | 223,575   |              |      | $         | 5,351        |        |   | $            | 29,889  |        |       | $        |         |          |   | $         | 258,815  |        
|                                     | Accounts receivable, less allowance for doubtful accounts |                            |         | 2,481     |              |      |           | 153,553      |        |   |              | 8,601   |        |       |          |         |          |   |           | 164,635  |        
|                                     | Notes receivable, less allowance for doubtful notes       |                            |         | 18        |              |      |           | 13,706       |        |   |              |        |        |       |          |         |          |   |           | 13,724   |        
|                                     | Operating supplies                                        |                            |         | 47        |              |      |           | 10,378       |        |   |              |        |        |       |          |         |          |   |           | 10,425   |        
|                                     | Assets held for sale                                      |                            |         |          |              |      |           | 3,498        |        |   |              |        |        |       |          |         |          |   |           | 3,498    |        
|                                     | Investment in Beverly Funding Corporation                 |                            |         | 31,342    |              |      |           |             |        |   |              |        |        |       |          |         |          |   |           | 31,342   |        
|                                     | Prepaid expenses and other                                |                            |         | 10,964    |              |      |           | 10,604       |        |   |              | 11,809  |        |       |          |         |          |   |           | 33,377   |        
|                                     |                                                           |                            |         |           |              |      |           |              |        |   |              |         |        |       |         
|                                     | Total current assets                                      |                            |         | 268,427   |              |      |           | 197,090      |        |   |              | 50,299  |        |       |          |         |          |   |           | 515,816  |        
|Property and equipment, net          |                                                           |                            | 7,134   |           |              |      | 687,086   |              |        |   |             |         |        |       |         |          |          |   | 694,220   |         
|Other assets:                        |                                                           |                            |         |           |              |      |           |              |        |   |              |         |        |       |          |          |          |   |           |         
|                                     | Goodwill, net                                             |                            |         |          |              |      |           | 57,102       |        |   |              |        |        |       |          |         |          |   |           | 57,102   |        
|                                     | Other, less allowance for doubtful accounts and notes     |                            |         | 170,762   |              |      |           | 45,446       |        |   |              |        |        |       |          | (136,925 | )        |   |           | 79,283   |        
|                                     | Due from affiliates                                       |                            |         | 372,097   |              |      |           |             |        |   |              | 145,240 |        |       |          | (517,337 | )        |   |           |         |        
|                                     |                                                           |                            |         |           |              |      |           |              |        |   |              |         |        |       |         
|                                     | Total other assets                                        |                            |         | 542,859   |              |      |           | 102,548      |        |   |              | 145,240 |        |       |          | (654,262 | )        |   |           | 136,385  |        
|                                     |                                                           |                            |         |           |              |      |           |              |        |   |              |         |        |       |         
|                                     |                                                           | $                          | 818,420 |           |              | $    | 986,724   |              |        | $ | 195,539      |         |        | $     | (654,262 | )        |          | $ | 1,346,421 |         
|                                     |                                                           |                            |         |           |              |      |           |              |        |   |              |         |        |       |         
|                                    
|LIABILITIES AND STOCKHOLDERS EQUITY
|Current liabilities:                 |                                                           |                            |         |           |              |      |           |              |        |   |              |         |        |       |          |          |          |   |           |         
|                                     | Accounts payable                                          |                            | $       | 8,123     |              |      | $         | 59,449       |        |   | $            |        |        |       | $        |         |          |   | $         | 67,572   |        
|                                     | Accrued wages and related liabilities                     |                            |         | 25,104    |              |      |           | 91,613       |        |   |              |        |        |       |          |         |          |   |           | 116,717  |        
|                                     | Accrued interest                                          |                            |         | 5,733     |              |      |           | 1,163        |        |   |              |        |        |       |          |         |          |   |           | 6,896    |        
|                                     | General and professional liabilities                      |                            |         | 41,370    |              |      |           |             |        |   |              | 70,425  |        |       |          | (18,059  | )        |   |           | 93,736   |        
|                                     | Federal government settlement obligations                 |                            |         |          |              |      |           | 13,125       |        |   |              |        |        |       |          |         |          |   |           | 13,125   |        
|                                     | Liabilities held for sale                                 |                            |         |          |              |      |           | 672          |        |   |              |        |        |       |          |         |          |   |           | 672      |        
|                                     | Other accrued liabilities                                 |                            |         | 16,502    |              |      |           | 85,787       |        |   |              |        |        |       |          |         |          |   |           | 102,289  |        
|                                     | Current portion of long-term debt                         |                            |         | 1,350     |              |      |           | 12,004       |        |   |              |        |        |       |          |         |          |   |           | 13,354   |        
|                                     |                                                           |                            |         |           |              |      |           |              |        |   |              |         |        |       |         
|                                     | Total current liabilities                                 |                            |         | 98,182    |              |      |           | 263,813      |        |   |              | 70,425  |        |       |          | (18,059  | )        |   |           | 414,361  |        
|Long-term debt                       |                                                           |                            | 448,313 |           |              |      | 104,560   |              |        |   |             |         |        |       |         |          |          |   | 552,873   |         
|Other liabilities and deferred items |                                                           |                            | 33,739  |           |              |      | 69,342    |              |        |   | 37,920       |         |        |       |         |          |          |   | 141,001   |         
|Due to affiliates                    |                                                           |                            |        |           |              |      | 517,337   |              |        |   |             |         |        |       | (517,337 | )        |          |   |          |         
|Commitments and contingencies        |                                                           |                            |         |           |              |      |           |              |        |   |              |         |        |       |          |          |          |   |           |         
|Stockholders equity:                |                                                           |                            |         |           |              |      |           |              |        |   |              |         |        |       |          |          |          |   |           |         
|                                     | Preferred stock                                           |                            |         |          |              |      |           |             |        |   |              |        |        |       |          |         |          |   |           |         |        
|                                     | Common stock                                              |                            |         | 11,559    |              |      |           | 5,908        |        |   |              | 120     |        |       |          | (6,028   | )        |   |           | 11,559   |        
|                                     | Additional paid-in capital                                |                            |         | 895,950   |              |      |           | 414,340      |        |   |              | 7,556   |        |       |          | (421,896 | )        |   |           | 895,950  |        
|                                     | Retained earnings (accumulated deficit)                   |                            |         | (560,825  | )            |      |           | (388,576     | )      |   |              | 79,518  |        |       |          | 309,058  |          |   |           | (560,825 | )      
|                                     | Treasury stock, at cost                                   |                            |         | (108,498  | )            |      |           |             |        |   |              |        |        |       |          |         |          |   |           | (108,498 | )      
|                                     |                                                           |                            |         |           |              |      |           |              |        |   |              |         |        |       |         
|                                     |                                                           | Total stockholders equity |         |           | 238,186      |      |           |              | 31,672 |   |              |         | 87,194 |       |          |          | (118,866 | ) |           |          | 238,186 | 
|                                     |                                                           |                            |         |           |              |      |           |              |        |   |              |         |        |       |         
|                                     |                                                           | $                          | 818,420 |           |              | $    | 986,724   |              |        | $ | 195,539      |         |        | $     | (654,262 | )        |          | $ | 1,346,421 |         
|                                     |                                                           |                            |         |           |              |      |           |              |        |   |              |         |        |       |         

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BEVERLY ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Years ended December 31, 2004, 2003, and 2002




|   |                             
|-- | ----------------------------
|9. | Long-term Debt  (Continued)



|                                                                         |                          |                                                                 |                                    |           |              |         |           |                 |           |           |              |   |        |        |         |   |         |         |           |   |           |           |  
|------------------------------------------------------------------------ | ------------------------ | --------------------------------------------------------------- | ---------------------------------- | --------- | ------------ | ------- | --------- | --------------- | --------- | --------- | ------------ | - | ------ | ------ | ------- | - | ------- | ------- | --------- | - | --------- | --------- | -
|                                                                         |                          |                                                                 |                                    |           |              | Non-    |           |                 |           |           |             
|                                                                         |                          |                                                                 |                                    | Guarantor |              |         | Guarantor |                 |           |           |              |  
|                                                                         |                          | Parent                                                          |                                    |           | Subsidiaries |         |           | Subsidiaries(a) |           |           | Eliminations |   |        | Total  |        
|                                                                         |                          |                                                                 |                                    |           |              |         |           |                 |           |           |              |   |        |        |        
|Revenues                                                                 |                          | $                                                               | 2,696                              |           |              | $       | 1,986,083 |                 |           | $         | 86,938       |   |        | $      | (86,865 | ) |         | $       | 1,988,852 |  
|Costs and expenses:                                                      |                          |                                                                 |                                    |           |              |         |           |                 |           |           |              |   |        |        |         |   |         |         |           |  
|                                                                         |                          | Wages and related                                               |                                    |           | 50,291       |         |           |                 | 1,097,452 |           |              |   |       |        |         |   |        |         |           |   | 1,147,743 |          
|                                                                         |                          | Provision for insurance and related items                       |                                    |           | 9,288        |         |           |                 | 118,365   |           |              |   | 90,323 |        |         |   | (90,323 | )       |           |   | 127,653   |          
|                                                                         |                          | Other operating and administrative                              |                                    |           | 30,017       |         |           |                 | 492,648   |           |              |   | 105    |        |         |   | (167    | )       |           |   | 522,603   |          
|                                                                         |                          | Overhead allocation                                             |                                    |           | (109,448     | )       |           |                 | 109,448   |           |              |   |       |        |         |   |        |         |           |   |          |          
|                                                                         |                          | Depreciation and amortization                                   |                                    |           | 6,526        |         |           |                 | 55,640    |           |              |   |       |        |         |   |        |         |           |   | 62,166    |          
|                                                                         |                          | Asset impairments, workforce reductions and other unusual items |                                    |           | (1,933       | )       |           |                 | 2,381     |           |              |   |       |        |         |   |        |         |           |   | 448       |          
|                                                                         |                          |                                                                 |                                    |           |              |         |           |                 |           |           |              |   |        |        |        
|                                                                         |                          |                                                                 | Total costs and expenses           |           |              | (15,259 | )         |                 |           | 1,875,934 |              |   |        | 90,428 |         |   |         | (90,490 | )         |   |           | 1,860,613 |  
|                                                                         |                          |                                                                 |                                    |           |              |         |           |                 |           |           |              |   |        |        |        
|Income (loss) before other income (expenses)                             |                          |                                                                 | 17,955                             |           |              |         | 110,149   |                 |           |           | (3,490       | ) |        |        | 3,625   |   |         |         | 128,239   |  
|                                                                         | Other income (expenses): |                                                                 |                                    |           |              |         |           |                 |           |           |              |   |        |        |         |   |         |         |           |   |          
|                                                                         |                          | Interest expense                                                |                                    |           |             |         |           |                 | (51,311   | )         |              |   | (178   | )      |         |   | 5,852   |         |           |   | (45,637   | )        
|                                                                         |                          | Costs related to early extinguishments of debt                  |                                    |           | (40,430      | )       |           |                 | (505      | )         |              |   |       |        |         |   |        |         |           |   | (40,935   | )        
|                                                                         |                          | Interest income                                                 |                                    |           | 2,493        |         |           |                 | 2,079     |           |              |   | 6,765  |        |         |   | (5,852  | )       |           |   | 5,485     |          
|                                                                         |                          | Net gains on dispositions                                       |                                    |           |             |         |           |                 | 396       |           |              |   |       |        |         |   |        |         |           |   | 396       |          
|                                                                         |                          | Equity in income of affiliates                                  |                                    |           | 52,893       |         |           |                 |          |           |              |   |       |        |         |   | (52,893 | )       |           |   |          |          
|                                                                         |                          |                                                                 |                                    |           |              |         |           |                 |           |           |              |   |        |        |        
|                                                                         |                          |                                                                 | Total other income (expenses), net |           |              | 14,956  |           |                 |           | (49,341   | )            |   |        | 6,587  |         |   |         | (52,893 | )         |   |           | (80,691   | )
|                                                                         |                          |                                                                 |                                    |           |              |         |           |                 |           |           |              |   |        |        |        
|Income before provision for income taxes and discontinued
    operations |                          |                                                                 | 32,911                             |           |              |         | 60,808    |                 |           |           | 3,097        |   |        |        | (49,268 | ) |         |         | 47,548    |  
|Provision for income taxes                                               |                          |                                                                 | 4,890                              |           |              |         |          |                 |           |           |             |   |        |        |        |   |         |         | 4,890     |  
|                                                                         |                          |                                                                 |                                    |           |              |         |           |                 |           |           |              |   |        |        |        
|Income before discontinued operations                                    |                          |                                                                 | 28,021                             |           |              |         | 60,808    |                 |           |           | 3,097        |   |        |        | (49,268 | ) |         |         | 42,658    |  
|Discontinued operations, net of taxes of $55                             |                          |                                                                 |                                   |           |              |         | (14,637   | )               |           |           |             |   |        |        |        |   |         |         | (14,637   | )
|                                                                         |                          |                                                                 |                                    |           |              |         |           |                 |           |           |              |   |        |        |        
|Net income                                                               |                          | $                                                               | 28,021                             |           |              | $       | 46,171    |                 |           | $         | 3,097        |   |        | $      | (49,268 | ) |         | $       | 28,021    |  
|                                                                         |                          |                                                                 |                                    |           |              |         |           |                 |           |           |              |   |        |        |        






|    |  |                                                                                                                                                                          
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | See above for a discussion of our new LOC facility, which
    changed Beverly Funding Corporations financial position,
    results of operations and cash flows in 2004.

75



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##### Table of Contents



BEVERLY ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Years ended December 31, 2004, 2003, and 2002




|   |                             
|-- | ----------------------------
|9. | Long-term Debt  (Continued)



|                                                                         |                          |                                                                 |                                    |           |              |        |           |              |           |           |              |  |        |        |          |   |         |         |           |  |           |           |  
|------------------------------------------------------------------------ | ------------------------ | --------------------------------------------------------------- | ---------------------------------- | --------- | ------------ | ------ | --------- | ------------ | --------- | --------- | ------------ |  | ------ | ------ | -------- | - | ------- | ------- | --------- |  | --------- | --------- | -
|                                                                         |                          |                                                                 |                                    |           |              | Non-   |           |              |           |           |             
|                                                                         |                          |                                                                 |                                    | Guarantor |              |        | Guarantor |              |           |           |              | 
|                                                                         |                          | Parent                                                          |                                    |           | Subsidiaries |        |           | Subsidiaries |           |           | Eliminations |  |        | Total  |         
|                                                                         |                          |                                                                 |                                    |           |              |        |           |              |           |           |              |  |        |        |         
|Revenues                                                                 |                          | $                                                               | (63                                | )         |              | $      | 1,802,089 |              |           | $         | 43,607       |  |        | $      | (43,607  | ) |         | $       | 1,802,026 | 
|Costs and expenses:                                                      |                          |                                                                 |                                    |           |              |        |           |              |           |           |              |  |        |        |          |   |         |         |           | 
|                                                                         |                          | Wages and related                                               |                                    |           | 53,350       |        |           |              | 1,025,198 |           |              |  |       |        |          |   |        |         |           |  | 1,078,548 |          
|                                                                         |                          | Provision for insurance and related items                       |                                    |           | 10,560       |        |           |              | 98,817    |           |              |  | 12,725 |        |          |   | (12,725 | )       |           |  | 109,377   |          
|                                                                         |                          | Other operating and administrative                              |                                    |           | 27,701       |        |           |              | 434,443   |           |              |  |       |        |          |   |        |         |           |  | 462,144   |          
|                                                                         |                          | Overhead allocation                                             |                                    |           | (104,409     | )      |           |              | 104,409   |           |              |  |       |        |          |   |        |         |           |  |          |          
|                                                                         |                          | Depreciation and amortization                                   |                                    |           | 6,952        |        |           |              | 51,855    |           |              |  |       |        |          |   |        |         |           |  | 58,807    |          
|                                                                         |                          | Adjustment related to California investigation settlement       |                                    |           |             |        |           |              | (925      | )         |              |  |       |        |          |   |        |         |           |  | (925      | )        
|                                                                         |                          | Asset impairments, workforce reductions and other unusual items |                                    |           |             |        |           |              | 3,825     |           |              |  |       |        |          |   |        |         |           |  | 3,825     |          
|                                                                         |                          |                                                                 |                                    |           |              |        |           |              |           |           |              |  |        |        |         
|                                                                         |                          |                                                                 | Total costs and expenses           |           |              | (5,846 | )         |              |           | 1,717,622 |              |  |        | 12,725 |          |   |         | (12,725 | )         |  |           | 1,711,776 |  
|                                                                         |                          |                                                                 |                                    |           |              |        |           |              |           |           |              |  |        |        |         
|Income (loss) before other income (expenses)                             |                          |                                                                 | 5,783                              |           |              |        | 84,467    |              |           |           | 30,882       |  |        |        | (30,882  | ) |         |         | 90,250    | 
|                                                                         | Other income (expenses): |                                                                 |                                    |           |              |        |           |              |           |           |              |  |        |        |          |   |         |         |           |  |          
|                                                                         |                          | Interest expense                                                |                                    |           |             |        |           |              | (71,679   | )         |              |  |       |        |          |   | 8,365   |         |           |  | (63,314   | )        
|                                                                         |                          | Costs related to early extinguishments of debt                  |                                    |           | (6,634       | )      |           |              |          |           |              |  |       |        |          |   |        |         |           |  | (6,634    | )        
|                                                                         |                          | Interest income                                                 |                                    |           | 1,658        |        |           |              | 3,105     |           |              |  | 8,965  |        |          |   | (8,365  | )       |           |  | 5,363     |          
|                                                                         |                          | Net gains on dispositions                                       |                                    |           |             |        |           |              | 422       |           |              |  |       |        |          |   |        |         |           |  | 422       |          
|                                                                         |                          | Gain on sale of equity investment                               |                                    |           |             |        |           |              | 6,686     |           |              |  |       |        |          |   |        |         |           |  | 6,686     |          
|                                                                         |                          | Equity in income of affiliates                                  |                                    |           | 84,730       |        |           |              |          |           |              |  |       |        |          |   | (84,730 | )       |           |  |          |          
|                                                                         |                          |                                                                 |                                    |           |              |        |           |              |           |           |              |  |        |        |         
|                                                                         |                          |                                                                 | Total other income (expenses), net |           |              | 79,754 |           |              |           | (61,466   | )            |  |        | 8,965  |          |   |         | (84,730 | )         |  |           | (57,477   | )
|                                                                         |                          |                                                                 |                                    |           |              |        |           |              |           |           |              |  |        |        |         
|Income before provision for income taxes and discontinued
    operations |                          |                                                                 | 85,537                             |           |              |        | 23,001    |              |           |           | 39,847       |  |        |        | (115,612 | ) |         |         | 32,773    | 
|Provision for income taxes                                               |                          |                                                                 | 5,069                              |           |              |        |          |              |           |           |             |  |        |        |         |   |         |         | 5,069     | 
|                                                                         |                          |                                                                 |                                    |           |              |        |           |              |           |           |              |  |        |        |         
|Income before discontinued operations                                    |                          |                                                                 | 80,468                             |           |              |        | 23,001    |              |           |           | 39,847       |  |        |        | (115,612 | ) |         |         | 27,704    | 
|Discontinued operations, net of taxes of $3,378                          |                          |                                                                 |                                   |           |              |        | 52,764    |              |           |           |             |  |        |        |         |   |         |         | 52,764    | 
|                                                                         |                          |                                                                 |                                    |           |              |        |           |              |           |           |              |  |        |        |         
|Net income                                                               |                          | $                                                               | 80,468                             |           |              | $      | 75,765    |              |           | $         | 39,847       |  |        | $      | (115,612 | ) |         | $       | 80,468    | 
|                                                                         |                          |                                                                 |                                    |           |              |        |           |              |           |           |              |  |        |        |         

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BEVERLY ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Years ended December 31, 2004, 2003, and 2002




|   |                             
|-- | ----------------------------
|9. | Long-term Debt  (Continued)



|                                                                                                                                            |                          |                                                                            |                          |                                    |              |      |           |              |           |           |              |   |         |         |          |   |          |          |           |   |           |           |         |  
|------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------ | -------------------------------------------------------------------------- | ------------------------ | ---------------------------------- | ------------ | ---- | --------- | ------------ | --------- | --------- | ------------ | - | ------- | ------- | -------- | - | -------- | -------- | --------- | - | --------- | --------- | ------- | -
|                                                                                                                                            |                          |                                                                            |                          |                                    |              | Non- |           |              |           |           |             
|                                                                                                                                            |                          |                                                                            |                          | Guarantor                          |              |      | Guarantor |              |           |           |              |  
|                                                                                                                                            |                          | Parent                                                                     |                          |                                    | Subsidiaries |      |           | Subsidiaries |           |           | Eliminations |   |         | Total   |         
|                                                                                                                                            |                          |                                                                            |                          |                                    |              |      |           |              |           |           |              |   |         |         |         
|Revenues                                                                                                                                    |                          | $                                                                          | (2,971                   | )                                  |              | $    | 1,769,697 |              |           | $         | 113,132      |   |         | $       | (113,132 | ) |          | $        | 1,766,726 |  
|Costs and expenses:                                                                                                                         |                          |                                                                            |                          |                                    |              |      |           |              |           |           |              |   |         |         |          |   |          |          |           |  
|                                                                                                                                            |                          | Wages and related                                                          |                          |                                    | 51,457       |      |           |              | 1,017,172 |           |              |   |        |         |          |   |         |          |           |   | 1,068,629 |          
|                                                                                                                                            |                          | Provision for insurance and related items                                  |                          |                                    | 4,989        |      |           |              | 79,172    |           |              |   | 121,233 |         |          |   | (121,233 | )        |           |   | 84,161    |          
|                                                                                                                                            |                          | Other operating and administrative                                         |                          |                                    | 28,607       |      |           |              | 429,704   |           |              |   |        |         |          |   |         |          |           |   | 458,311   |          
|                                                                                                                                            |                          | Overhead allocation                                                        |                          |                                    | (97,239      | )    |           |              | 97,239    |           |              |   |        |         |          |   |         |          |           |   |          |          
|                                                                                                                                            |                          | Depreciation and amortization                                              |                          |                                    | 6,992        |      |           |              | 55,914    |           |              |   |        |         |          |   |         |          |           |   | 62,906    |          
|                                                                                                                                            |                          | Florida insurance reserve adjustment                                       |                          |                                    |             |      |           |              | 22,179    |           |              |   |        |         |          |   |         |          |           |   | 22,179    |          
|                                                                                                                                            |                          | Special charge related to California investigation settlement              |                          |                                    |             |      |           |              | 6,300     |           |              |   |        |         |          |   |         |          |           |   | 6,300     |          
|                                                                                                                                            |                          | Adjustment related to settlements of federal government
    investigations |                          |                                    |             |      |           |              | (9,441    | )         |              |   |        |         |          |   |         |          |           |   | (9,441    | )        
|                                                                                                                                            |                          | Asset impairments, workforce reductions and other unusual items            |                          |                                    | 5,646        |      |           |              | 40,641    |           |              |   |        |         |          |   |         |          |           |   | 46,287    |          
|                                                                                                                                            |                          |                                                                            |                          |                                    |              |      |           |              |           |           |              |   |         |         |         
|                                                                                                                                            |                          |                                                                            | Total costs and expenses |                                    |              | 452  |           |              |           | 1,738,880 |              |   |         | 121,233 |          |   |          | (121,233 | )         |   |           | 1,739,332 |        
|                                                                                                                                            |                          |                                                                            |                          |                                    |              |      |           |              |           |           |              |   |         |         |         
|Income (loss) before other income (expenses)                                                                                                |                          |                                                                            | (3,423                   | )                                  |              |      | 30,817    |              |           |           | (8,101       | ) |         |         | 8,101    |   |          |          | 27,394    |  
|                                                                                                                                            | Other income (expenses): |                                                                            |                          |                                    |              |      |           |              |           |           |              |   |         |         |          |   |          |          |           |   |          
|                                                                                                                                            |                          | Interest expense                                                           |                          |                                    |             |      |           |              | (74,796   | )         |              |   |        |         |          |   | 12,144   |          |           |   | (62,652   | )        
|                                                                                                                                            |                          | Interest income                                                            |                          |                                    | 2,209        |      |           |              | 2,010     |           |              |   | 12,613  |         |          |   | (12,144  | )        |           |   | 4,688     |          
|                                                                                                                                            |                          | Net gains on dispositions                                                  |                          |                                    |             |      |           |              | 2,142     |           |              |   |        |         |          |   |         |          |           |   | 2,142     |          
|                                                                                                                                            |                          | Equity in income (loss) of affiliates                                      |                          |                                    | (138,791     | )    |           |              |          |           |              |   |        |         |          |   | 138,791  |          |           |   |          |          
|                                                                                                                                            |                          |                                                                            |                          |                                    |              |      |           |              |           |           |              |   |         |         |         
|                                                                                                                                            |                          |                                                                            |                          | Total other income (expenses), net |              |      | (136,582  | )            |           |           | (70,644      | ) |         |         | 12,613   |   |          |          | 138,791   |   |           |           | (55,822 | )
|                                                                                                                                            |                          |                                                                            |                          |                                    |              |      |           |              |           |           |              |   |         |         |         
|Income (loss) before provision for income taxes, discontinued
    operations and cumulative effect of change in accounting for
    goodwill |                          |                                                                            | (140,005                 | )                                  |              |      | (39,827   | )            |           |           | 4,512        |   |         |         | 146,892  |   |          |          | (28,428   | )
|Provision for income taxes                                                                                                                  |                          |                                                                            | 6,085                    |                                    |              |      |          |              |           |           |             |   |         |         |         |   |          |          | 6,085     |  
|                                                                                                                                            |                          |                                                                            |                          |                                    |              |      |           |              |           |           |              |   |         |         |         
|Income (loss) before discontinued operations and cumulative
    effect of change in accounting for goodwill                                 |                          |                                                                            | (146,090                 | )                                  |              |      | (39,827   | )            |           |           | 4,512        |   |         |         | 146,892  |   |          |          | (34,513   | )
|Discontinued operations, net of taxes of $0                                                                                                 |                          |                                                                            |                         |                                    |              |      | (34,406   | )            |           |           |             |   |         |         |         |   |          |          | (34,406   | )
|Cumulative effect of change in accounting for goodwill, net of
    income taxes of $0                                                       |                          |                                                                            |                         |                                    |              |      | (77,171   | )            |           |           |             |   |         |         |         |   |          |          | (77,171   | )
|                                                                                                                                            |                          |                                                                            |                          |                                    |              |      |           |              |           |           |              |   |         |         |         
|Net income (loss)                                                                                                                           |                          | $                                                                          | (146,090                 | )                                  |              | $    | (151,404  | )            |           | $         | 4,512        |   |         | $       | 146,892  |   |          | $        | (146,090  | )
|                                                                                                                                            |                          |                                                                            |                          |                                    |              |      |           |              |           |           |              |   |         |         |         

77



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##### Table of Contents



BEVERLY ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Years ended December 31, 2004, 2003, and 2002




|   |                             
|-- | ----------------------------
|9. | Long-term Debt  (Continued)



|                                                        |                                                                |                                                      |         |           |              |      |           |                 |         |   |              |        |        |       |   |         |         |   |         |          |         |  
|------------------------------------------------------- | -------------------------------------------------------------- | ---------------------------------------------------- | ------- | --------- | ------------ | ---- | --------- | --------------- | ------- | - | ------------ | ------ | ------ | ----- | - | ------- | ------- | - | ------- | -------- | ------- | -
|                                                        |                                                                |                                                      |         |           |              | Non- |           |                 |         |   |             
|                                                        |                                                                |                                                      |         | Guarantor |              |      | Guarantor |                 |         |   |              |       
|                                                        |                                                                | Parent                                               |         |           | Subsidiaries |      |           | Subsidiaries(a) |         |   | Eliminations |        |        | Total |  
|                                                        |                                                                |                                                      |         |           |              |      |           |                 |         |   |              |        |        |       |  
|Cash flows provided by (used for) operating activities: |                                                                |                                                      |         |           |              |      |           |                 |         |   |              |        |        |       |   |         |         |   |         |         
|                                                        |                                                                | $                                                    | (45,182 | )         |              | $    | 115,399   |                 |         | $ | 5,443        |        |        | $     |  |         |         | $ | 75,660  |         
|Cash flows from investing activities:                   |                                                                |                                                      |         |           |              |      |           |                 |         |   |              |        |        |       |   |         |         |   |         |         
|                                                        | Capital expenditures                                           |                                                      |         | (7,422    | )            |      |           | (55,296         | )       |   |              |       |        |       |   |        |         |   |         | (62,718  | )      
|                                                        | Proceeds from dispositions of facilities and other assets, net |                                                      |         | 1,324     |              |      |           | 14,233          |         |   |              |       |        |       |   |        |         |   |         | 15,557   |        
|                                                        | Payments for acquisitions, net of cash acquired                |                                                      |         |          |              |      |           | (71,352         | )       |   |              |       |        |       |   |        |         |   |         | (71,352  | )      
|                                                        | Collections on notes receivable                                |                                                      |         | 18        |              |      |           | 38,071          |         |   |              |       |        |       |   |        |         |   |         | 38,089   |        
|                                                        | Payments for designated funds, net                             |                                                      |         | (256      | )            |      |           | (753            | )       |   |              |       |        |       |   |        |         |   |         | (1,009   | )      
|                                                        | Proceeds from Beverly Funding Corporation investment           |                                                      |         | 32,273    |              |      |           |                |         |   |              |       |        |       |   | (3,317  | )       |   |         | 28,956   |        
|                                                        | Capital contribution to subsidiary                             |                                                      |         | (36,596   | )            |      |           |                |         |   |              |       |        |       |   | 36,596  |         |   |         |         |        
|                                                        | Other, net                                                     |                                                      |         | (4,660    | )            |      |           | (12,842         | )       |   |              |       |        |       |   |        |         |   |         | (17,502  | )      
|                                                        |                                                                |                                                      |         |           |              |      |           |                 |         |   |              |        |        |       |  
|                                                        |                                                                | Net cash used for investing activities               |         |           | (15,319      | )    |           |                 | (87,939 | ) |              |        |       |       |   |         | 33,279  |   |         |          | (69,979 | )
|Cash flows from financing activities:                   |                                                                |                                                      |         |           |              |      |           |                 |         |   |              |        |        |       |   |         |         |   |         |         
|                                                        | Proceeds from issuance of long-term debt                       |                                                      |         | 211,384   |              |      |           |                |         |   |              |       |        |       |   |        |         |   |         | 211,384  |        
|                                                        | Repayments of long-term debt                                   |                                                      |         | (191,960  | )            |      |           | (27,468         | )       |   |              |       |        |       |   |        |         |   |         | (219,428 | )      
|                                                        | Capital contribution to subsidiary                             |                                                      |         |          |              |      |           |                |         |   |              | 36,596 |        |       |   | (36,596 | )       |   |         |         |        
|                                                        | Return of capital investment to parent                         |                                                      |         |          |              |      |           |                |         |   |              | (3,317 | )      |       |   | 3,317   |         |   |         |         |        
|                                                        | Proceeds from exercise of stock options                        |                                                      |         | 3,592     |              |      |           |                |         |   |              |       |        |       |   |        |         |   |         | 3,592    |        
|                                                        | Deferred financing and other costs                             |                                                      |         | (43,575   | )            |      |           | (106            | )       |   |              | (698   | )      |       |   |        |         |   |         | (44,379  | )      
|                                                        |                                                                |                                                      |         |           |              |      |           |                 |         |   |              |        |        |       |  
|                                                        |                                                                | Net cash provided by (used for) financing activities |         |           | (20,559      | )    |           |                 | (27,574 | ) |              |        | 32,581 |       |   |         | (33,279 | ) |         |          | (48,831 | )
|                                                        |                                                                |                                                      |         |           |              |      |           |                 |         |   |              |        |        |       |  
|Net increase (decrease) in cash and cash equivalents    |                                                                |                                                      | (81,060 | )         |              |      | (114      | )               |         |   | 38,024       |        |        |       |  |         |         |   | (43,150 | )       
|Cash and cash equivalents at beginning of year          |                                                                |                                                      | 223,575 |           |              |      | 5,351     |                 |         |   | 29,889       |        |        |       |  |         |         |   | 258,815 |         
|                                                        |                                                                |                                                      |         |           |              |      |           |                 |         |   |              |        |        |       |  
|Cash and cash equivalents at end of year                |                                                                | $                                                    | 142,515 |           |              | $    | 5,237     |                 |         | $ | 67,913       |        |        | $     |  |         |         | $ | 215,665 |         
|                                                        |                                                                |                                                      |         |           |              |      |           |                 |         |   |              |        |        |       |  






|    |  |                                                                                                                                                                          
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | See above for a discussion of our new LOC facility, which
    changed Beverly Funding Corporations financial position,
    results of operations and cash flows in 2004.

78



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BEVERLY ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Years ended December 31, 2004, 2003, and 2002




|   |                             
|-- | ----------------------------
|9. | Long-term Debt  (Continued)



|                                                        |                                                                |                                                      |         |           |              |      |           |              |          |   |        |   |   |   |         |          |          |  
|------------------------------------------------------- | -------------------------------------------------------------- | ---------------------------------------------------- | ------- | --------- | ------------ | ---- | --------- | ------------ | -------- | - | ------ | - | - | - | ------- | -------- | -------- | -
|                                                        |                                                                |                                                      |         |           |              | Non- |           |              |         
|                                                        |                                                                |                                                      |         | Guarantor |              |      | Guarantor |              |          |  
|                                                        |                                                                | Parent                                               |         |           | Subsidiaries |      |           | Subsidiaries |          |   | Total  |  
|                                                        |                                                                |                                                      |         |           |              |      |           |              |          |   |        |  
|Cash flows provided by (used for) operating activities: |                                                                |                                                      |         |           |              |      |           |              |          |   |        |   |   |   |         |         
|                                                        |                                                                | $                                                    | 121,391 |           |              | $    | (60,946   | )            |          | $ | 9,416  |   |   | $ | 69,861  |         
|Cash flows from investing activities:                   |                                                                |                                                      |         |           |              |      |           |              |          |   |        |   |   |   |         |         
|                                                        | Capital expenditures                                           |                                                      |         | (6,115    | )            |      |           | (37,869      | )        |   |        |  |   |   |         | (43,984  | )       
|                                                        | Proceeds from dispositions of facilities and other assets, net |                                                      |         |          |              |      |           | 275,039      |          |   |        |  |   |   |         | 275,039  |         
|                                                        | Payments for acquisitions, net of cash acquired                |                                                      |         |          |              |      |           | (459         | )        |   |        |  |   |   |         | (459     | )       
|                                                        | Collections on notes receivable                                |                                                      |         | 24        |              |      |           | 8,665        |          |   |        |  |   |   |         | 8,689    |         
|                                                        | (Payments for) proceeds from designated funds, net             |                                                      |         | (5,723    | )            |      |           | 540          |          |   |        |  |   |   |         | (5,183   | )       
|                                                        | Other, net                                                     |                                                      |         | 940       |              |      |           | (15,854      | )        |   |        |  |   |   |         | (14,914  | )       
|                                                        |                                                                |                                                      |         |           |              |      |           |              |          |   |        |  
|                                                        |                                                                | Net cash provided by (used for) investing activities |         |           | (10,874      | )    |           |              | 230,062  |   |        |   |  |   |         |          | 219,188  |  
|Cash flows from financing activities:                   |                                                                |                                                      |         |           |              |      |           |              |          |   |        |   |   |   |         |         
|                                                        | Proceeds from issuance of long-term debt                       |                                                      |         | 250,000   |              |      |           |             |          |   |        |  |   |   |         | 250,000  |         
|                                                        | Repayments of long-term debt                                   |                                                      |         | (210,474  | )            |      |           | (102,878     | )        |   |        |  |   |   |         | (313,352 | )       
|                                                        | Repayments of off-balance sheet financing                      |                                                      |         |          |              |      |           | (69,456      | )        |   |        |  |   |   |         | (69,456  | )       
|                                                        | Proceeds from exercise of stock options                        |                                                      |         | 1,108     |              |      |           |             |          |   |        |  |   |   |         | 1,108    |         
|                                                        | Deferred financing and other costs                             |                                                      |         | (14,032   | )            |      |           | 53           |          |   |        |  |   |   |         | (13,979  | )       
|                                                        |                                                                |                                                      |         |           |              |      |           |              |          |   |        |  
|                                                        |                                                                | Net cash provided by (used for) financing activities |         |           | 26,602       |      |           |              | (172,281 | ) |        |   |  |   |         |          | (145,679 | )
|                                                        |                                                                |                                                      |         |           |              |      |           |              |          |   |        |  
|Net increase (decrease) in cash and cash equivalents    |                                                                |                                                      | 137,119 |           |              |      | (3,165    | )            |          |   | 9,416  |   |   |   | 143,370 |         
|Cash and cash equivalents at beginning of year          |                                                                |                                                      | 86,456  |           |              |      | 8,516     |              |          |   | 20,473 |   |   |   | 115,445 |         
|                                                        |                                                                |                                                      |         |           |              |      |           |              |          |   |        |  
|Cash and cash equivalents at end of year                |                                                                | $                                                    | 223,575 |           |              | $    | 5,351     |              |          | $ | 29,889 |   |   | $ | 258,815 |         
|                                                        |                                                                |                                                      |         |           |              |      |           |              |          |   |        |  

79



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BEVERLY ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Years ended December 31, 2004, 2003, and 2002




|   |                             
|-- | ----------------------------
|9. | Long-term Debt  (Continued)



|                                                     |                                                                |                                                      |        |           |              |      |           |              |          |   |        |   |   |   |         |          |          |  
|---------------------------------------------------- | -------------------------------------------------------------- | ---------------------------------------------------- | ------ | --------- | ------------ | ---- | --------- | ------------ | -------- | - | ------ | - | - | - | ------- | -------- | -------- | -
|                                                     |                                                                |                                                      |        |           |              | Non- |           |              |         
|                                                     |                                                                |                                                      |        | Guarantor |              |      | Guarantor |              |          |  
|                                                     |                                                                | Parent                                               |        |           | Subsidiaries |      |           | Subsidiaries |          |   | Total  |  
|                                                     |                                                                |                                                      |        |           |              |      |           |              |          |   |        |  
|Cash flows provided by operating activities:         |                                                                | $                                                    | 35,788 |           |              | $    | 70,132    |              |          | $ | 10,713 |   |   | $ | 116,633 |         
|Cash flows from investing activities:                |                                                                |                                                      |        |           |              |      |           |              |          |   |        |   |   |   |         |         
|                                                     | Capital expenditures                                           |                                                      |        | (8,053    | )            |      |           | (92,050      | )        |   |        |  |   |   |         | (100,103 | )       
|                                                     | Proceeds from dispositions of facilities and other assets, net |                                                      |        |          |              |      |           | 169,471      |          |   |        |  |   |   |         | 169,471  |         
|                                                     | Collections on notes receivable                                |                                                      |        | 60        |              |      |           | 1,556        |          |   |        |  |   |   |         | 1,616    |         
|                                                     | Payments for designated funds, net                             |                                                      |        |          |              |      |           | (260         | )        |   |        |  |   |   |         | (260     | )       
|                                                     | Other, net                                                     |                                                      |        | 2,760     |              |      |           | (11,149      | )        |   |        |  |   |   |         | (8,389   | )       
|                                                     |                                                                |                                                      |        |           |              |      |           |              |          |   |        |  
|                                                     |                                                                | Net cash provided by (used for) investing activities |        |           | (5,233       | )    |           |              | 67,568   |   |        |   |  |   |         |          | 62,335   |  
|Cash flows from financing activities:                |                                                                |                                                      |        |           |              |      |           |              |          |   |        |   |   |   |         |         
|                                                     | Proceeds from issuance of long-term debt                       |                                                      |        |          |              |      |           | 5,000        |          |   |        |  |   |   |         | 5,000    |         
|                                                     | Repayments of long-term debt                                   |                                                      |        | (15,136   | )            |      |           | (101,360     | )        |   |        |  |   |   |         | (116,496 | )       
|                                                     | Repayments of off-balance sheet financing                      |                                                      |        |          |              |      |           | (42,901      | )        |   |        |  |   |   |         | (42,901  | )       
|                                                     | Proceeds from exercise of stock options                        |                                                      |        | 1,699     |              |      |           |             |          |   |        |  |   |   |         | 1,699    |         
|                                                     | Deferred financing and other costs                             |                                                      |        | (2        | )            |      |           | (166         | )        |   |        |  |   |   |         | (168     | )       
|                                                     |                                                                |                                                      |        |           |              |      |           |              |          |   |        |  
|                                                     |                                                                | Net cash used for financing activities               |        |           | (13,439      | )    |           |              | (139,427 | ) |        |   |  |   |         |          | (152,866 | )
|                                                     |                                                                |                                                      |        |           |              |      |           |              |          |   |        |  
|Net increase (decrease) in cash and cash equivalents |                                                                |                                                      | 17,116 |           |              |      | (1,727    | )            |          |   | 10,713 |   |   |   | 26,102  |         
|Cash and cash equivalents at beginning of year       |                                                                |                                                      | 69,340 |           |              |      | 10,243    |              |          |   | 9,760  |   |   |   | 89,343  |         
|                                                     |                                                                |                                                      |        |           |              |      |           |              |          |   |        |  
|Cash and cash equivalents at end of year             |                                                                | $                                                    | 86,456 |           |              | $    | 8,516     |              |          | $ | 20,473 |   |   | $ | 115,445 |         
|                                                     |                                                                |                                                      |        |           |              |      |           |              |          |   |        |  



|    |                              
|--- | -----------------------------
|10. | Commitments and Contingencies



|                         |  |   |        | 
|------------------------ |  | - | ------ | 
|Year Ending December 31, |  |  
|                         |  |  
|2005                     |  | $ | 37,362 | 
|2006                     |  |   | 19,721 | 
|2007                     |  |   | 10,594 | 
|2008                     |  |   | 7,871  | 
|2009                     |  |   | 7,042  | 
|Thereafter               |  |   | 12,898 | 
|                         |  |   |       
|                         |  | $ | 95,488 | 
|                         |  |   |       

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BEVERLY ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Years ended December 31, 2004, 2003, and 2002




|    |                                            
|--- | -------------------------------------------
|10. | Commitments and Contingencies  (Continued)



|                                                               |  |      |        |  |      |   |        |      |  |   |        | 
|-------------------------------------------------------------- |  | ---- | ------ |  | ---- | - | ------ | ---- |  | - | ------ | 
|                                                               |  | 2004 |        |  | 2003 |   |        | 2002 | 
|                                                               |  |      |        |  |      |   |        |      | 
|Rent expense, net of sublease rent income                      |  | $    | 58,698 |  |      | $ | 70,132 |      |  | $ | 87,852 | 
|Sublease rent income                                           |  |      | 3,007  |  |      |   | 1,143  |      |  |   | 2,036  | 
|Estimated contingent rent expense, based primarily on revenues |  |      | 1,100  |  |      |   | 2,000  |      |  |   | 2,000  | 



Guarantors
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others


Chaya Perlstein v. William R. Floyd, et. al Robert
Strougo v. Beverly Enterprises, Inc., et. al In
re Beverly Shareholders Litigation, Floyd




81



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BEVERLY ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Years ended December 31, 2004, 2003, and 2002




|    |                                            
|--- | -------------------------------------------
|10. | Commitments and Contingencies  (Continued)









Paul Dunne and Helene Dunne, derivatively on behalf
of nominal defendant Beverly Enterprises, Inc. v. Beryl F.
Anthony, Jr., et. al. (Holcombe v.
Floyd, et. al. and Flowers v. Floyd, et. al.)


82



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BEVERLY ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Years ended December 31, 2004, 2003, and 2002




|    |                                            
|--- | -------------------------------------------
|10. | Commitments and Contingencies  (Continued)

Holcomb v. Beverly
Enterprises, Inc.












|    |                     
|--- | --------------------
|11. | Stockholders Equity







83



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BEVERLY ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Years ended December 31, 2004, 2003, and 2002




|    |                                   
|--- | ----------------------------------
|11. | Stockholders Equity  (Continued)









84



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BEVERLY ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Years ended December 31, 2004, 2003, and 2002




|    |                                   
|--- | ----------------------------------
|11. | Stockholders Equity  (Continued)



|                                                            |           |           |           |            |          |   |      |           |           |  |           |           |   |           |      |      |          |  |           |            |   |   |      |      | 
|----------------------------------------------------------- | --------- | --------- | --------- | ---------- | -------- | - | ---- | --------- | --------- |  | --------- | --------- | - | --------- | ---- | ---- | -------- |  | --------- | ---------- | - | - | ---- | ---- | 
|                                                            |           | 2004      |           |            | 2003     |   |      | 2002      |          
|                                                            |           |           |           |            |          |   |      |           |          
|                                                            |           |           |           | 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                    |           |           | 7,780,203 |            |          | $ | 6.70 |           |           |  | 8,882,635 |           |   | $         | 6.62 |      |          |  | 5,808,260 |            |   | $ | 6.46 |     
|Changes during the year:                                    |           |           |           |            |          |   |      |           |           |  |           |           |   |           |      |      |          |  |           |            |   |   |      |     
|                                                            | Granted   |           |           | 2,750      |          |   |      | 6.34      |           |  |           | 103,000   |   |           |      | 3.96 |          |  |           | 4,749,460  |   |   |      | 6.43 | 
|                                                            | Exercised |           |           | (684,045   | )        |   |      | 5.96      |           |  |           | (234,850  | ) |           |      | 5.37 |          |  |           | (512,612   | ) |   |      | 3.72 | 
|                                                            | Cancelled |           |           | (666,381   | )        |   |      | 8.84      |           |  |           | (970,582  | ) |           |      | 5.98 |          |  |           | (1,162,473 | ) |   |      | 6.30 | 
|                                                            |           |           |           |            |          |   |      |           |           |  |           |           |   |           |      |      |          | 
|Options outstanding at end of year                          |           |           | 6,432,527 |            |          |   | 6.56 |           |           |  | 7,780,203 |           |   |           | 6.70 |      |          |  | 8,882,635 |            |   |   | 6.62 |     
|                                                            |           |           |           |            |          |   |      |           |           |  |           |           |   |           |      |      |          | 
|Options exercisable at end of year                          |           |           | 4,257,001 |            |          |   | 6.41 |           |           |  | 3,580,102 |           |   |           | 6.86 |      |          |  | 2,274,231 |            |   |   | 7.09 |     
|                                                            |           |           |           |            |          |   |      |           |           |  |           |           |   |           |      |      |          | 
|Restricted stock outstanding at beginning of year           |           |           | 3,141,006 |            |          |   |      |           |           |  | 1,122,402 |           |   |           |      |      |          |  | 1,290,572 |            |   |   |      |     
|Changes during the year:                                    |           |           |           |            |          |   |      |           |           |  |           |           |   |           |      |      |          |  |           |            |   |   |      |     
|                                                            | Granted   |           |           | 1,048,311  |          |   |      |           |           |  |           | 2,503,125 |   |           |      |      |          |  |           | 175,000    |   |   |      |      | 
|                                                            | Vested    |           |           | (1,347,349 | )        |   |      |           |           |  |           | (131,550  | ) |           |      |      |          |  |           | (112,684   | ) |   |      |      | 
|                                                            | Forfeited |           |           | (289,278   | )        |   |      |           |           |  |           | (352,971  | ) |           |      |      |          |  |           | (230,486   | ) |   |      |      | 
|                                                            |           |           |           |            |          |   |      |           |           |  |           |           |   |           |      |      |          | 
|Restricted stock outstanding at end of year                 |           |           | 2,552,690 |            |          |   |      |           |           |  | 3,141,006 |           |   |           |      |      |          |  | 1,122,402 |            |   |   |      |     
|                                                            |           |           |           |            |          |   |      |           |           |  |           |           |   |           |      |      |          | 
|Options/restricted stock available for grant at end of year |           |           | 7,572,030 |            |          |   |      |           |           |  | 1,967,432 |           |   |           |      |      |          |  | 2,933,703 |            |   |   |      |     
|                                                            |           |           |           |            |          |   |      |           |           |  |           |           |   |           |      |      |          | 



|                         |  |                     |           |           |                     |   |         |                  |  |  |             |           |  |                |           |  |  |   |      | 
|------------------------ |  | ------------------- | --------- | --------- | ------------------- | - | ------- | ---------------- |  |  | ----------- | --------- |  | -------------- | --------- |  |  | - | ---- | 
|                         |  | 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              |  |                     | 3,095,306 |           |                     | $ | 5.15    |                  |  |  | 6.60        |           |  |                | 2,062,164 |  |  | $ | 4.80 | 
|$7.00-$14.38             |  |                     | 3,337,221 |           |                     |   | 7.87    |                  |  |  | 6.31        |           |  |                | 2,194,837 |  |  |   | 7.93 | 
|                         |  |                     |           |           |                     |   |         |                  |  |  |             |           |  |                |          
|$2.33-$14.38             |  |                     | 6,432,527 |           |                     |   | 6.56    |                  |  |  | 6.47        |           |  |                | 4,257,001 |  |  |   | 6.41 | 
|                         |  |                     |           |           |                     |   |         |                  |  |  |             |           |  |                |          



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BEVERLY ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Years ended December 31, 2004, 2003, and 2002




|    |                                   
|--- | ----------------------------------
|11. | Stockholders Equity  (Continued)







| |   |                                                                                                 
| | - | ------------------------------------------------------------------------------------------------
| |  | risk-free interest rates of 4.6%, 3.0% and 4.8%;                                                
|
| |  | volatility factors of the expected market price of our common
    stock of .82, .81 and .74; and
|
| |  | expected option lives of five years.                                                            





|                                              |  |      |        |  |      |   |        |      |  |   |          |  
|--------------------------------------------- |  | ---- | ------ |  | ---- | - | ------ | ---- |  | - | -------- | -
|                                              |  | 2004 |        |  | 2003 |   |        | 2002 | 
|                                              |  |      |        |  |      |   |        |      | 
|Reported net income (loss)(a)                 |  | $    | 28,021 |  |      | $ | 80,468 |      |  | $ | (146,090 | )
|Stock option compensation expense             |  |      | 3,967  |  |      |   | 6,865  |      |  |   | 6,218    |  
|                                              |  |      |        |  |      |   |        |      | 
|Pro forma net income (loss)                   |  | $    | 24,054 |  |      | $ | 73,603 |      |  | $ | (152,308 | )
|                                              |  |      |        |  |      |   |        |      | 
|Reported basic net income (loss) per share    |  | $    | 0.26   |  |      | $ | 0.75   |      |  | $ | (1.39    | )
|                                              |  |      |        |  |      |   |        |      | 
|Pro forma basic net income (loss) per share   |  | $    | 0.22   |  |      | $ | 0.69   |      |  | $ | (1.45    | )
|                                              |  |      |        |  |      |   |        |      | 
|Reported diluted net income (loss) per share  |  | $    | 0.25   |  |      | $ | 0.74   |      |  | $ | (1.39    | )
|                                              |  |      |        |  |      |   |        |      | 
|Pro forma diluted net income (loss) per share |  | $    | 0.22   |  |      | $ | 0.68   |      |  | $ | (1.45    | )
|                                              |  |      |        |  |      |   |        |      | 






|    |  |                                                                                                                                                                                                                                          
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | Includes total charges to our consolidated statements of
    operations related to restricted stock grants of
    $3.9 million, $1.8 million and $1.3 million for
    the years ended December 31, 2004, 2003 and 2002,
    respectively.



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BEVERLY ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Years ended December 31, 2004, 2003, and 2002




|    |             
|--- | ------------
|12. | Income Taxes



|         |          |      |       |        |      |   |       |         |   |   |       |        |  
|-------- | -------- | ---- | ----- | ------ | ---- | - | ----- | ------- | - | - | ----- | ------ | -
|         |          | 2004 |       |        | 2003 |   |       | 2002    |  
|         |          |      |       |        |      |   |       |         |  
|Federal: |          |      |       |        |      |   |       |         |   |   |       |       
|         | Current  |      | $     | (2,320 | )    |   | $     | (11,122 | ) |   | $     | (8,345 | )
|         | Deferred |      |       | 3,085  |      |   |       | 12,702  |   |   |       | 10,447 |  
|State:   |          |      |       |        |      |   |       |         |   |   |       |       
|         | Current  |      |       | 2,688  |      |   |       | 6,867   |   |   |       | 3,835  |  
|         | Deferred |      |       | 1,492  |      |   |       |        |   |   |       | 148    |  
|         |          |      |       |        |      |   |       |         |  
|         |          | $    | 4,945 |        |      | $ | 8,447 |         |   | $ | 6,085 |       
|         |          |      |       |        |      |   |       |         |  



|                                           |  |      |         |   |      |   |         |      |  |   |         |  
|------------------------------------------ |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                           |  | 2004 |         |   | 2003 |   |         | 2002 | 
|                                           |  |      |         |   |      |   |         |      | 
|Tax (benefit) at statutory rate            |  | $    | 11,538  |   |      | $ | 31,121  |      |  | $ | (49,002 | )
|General business tax credits               |  |      | (105    | ) |      |   | (968    | )    |  |   | (2,090  | )
|State tax provision, net                   |  |      | 1,884   |   |      |   | 8,423   |      |  |   | 2,593   |  
|Impairment charges                         |  |      |        |   |      |   |        |      |  |   | 12,685  |  
|Increase (decrease) in valuation allowance |  |      | (10,792 | ) |      |   | (30,141 | )    |  |   | 45,520  |  
|Other                                      |  |      | 2,420   |   |      |   | 12      |      |  |   | (3,621  | )
|                                           |  |      |         |   |      |   |         |      | 
|                                           |  | $    | 4,945   |   |      | $ | 8,447   |      |  | $ | 6,085   |  
|                                           |  |      |         |   |      |   |         |      | 

87



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BEVERLY ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Years ended December 31, 2004, 2003, and 2002




|    |                           
|--- | --------------------------
|12. | Income Taxes  (Continued)



|                                             |         |                           |         |          |                   |   |        |       |        |   |           |          |        |   |        |   |        | 
|-------------------------------------------- | ------- | ------------------------- | ------- | -------- | ----------------- | - | ------ | ----- | ------ | - | --------- | -------- | ------ | - | ------ | - | ------ | 
|                                             |         | December 31, 2004         |         |          | December 31, 2003 |  
|                                             |         |                           |         |          |                   |  
|                                             |         | Asset                     |         |          | Liability         |   |        | Asset |        |   | Liability |         
|                                             |         |                           |         |          |                   |   |        |       |        |   |           |         
|Insurance reserves                           |         | $                         | 71,430  |          |                   | $ |       |       |        | $ | 70,838    |          |        | $ |       |  
|General business tax credit carryforwards    |         |                           | 38,999  |          |                   |   |       |       |        |   | 37,708    |          |        |   |       |  
|Alternative minimum tax credit carryforwards |         |                           | 23,042  |          |                   |   |       |       |        |   | 21,279    |          |        |   |       |  
|Provision for dispositions                   |         |                           | 6,838   |          |                   |   | 1,908  |       |        |   | 3,539     |          |        |   | 16,016 |  
|Provision for Medicare repayment             |         |                           | 19,602  |          |                   |   |       |       |        |   | 26,574    |          |        |   |       |  
|Depreciation and amortization                |         |                           | 1,877   |          |                   |   | 52,456 |       |        |   | 21,572    |          |        |   | 55,687 |  
|Operating supplies                           |         |                           |        |          |                   |   | 5,287  |       |        |   |          |          |        |   | 9,538  |  
|Federal net operating loss carryforwards     |         |                           | 22,853  |          |                   |   |       |       |        |   | 34,183    |          |        |   |       |  
|Other                                        |         |                           | 27,199  |          |                   |   | 21,779 |       |        |   | 29,767    |          |        |   | 18,440 |  
|                                             |         |                           |         |          |                   |   |        |       |        |   |           |         
|                                             |         |                           | 211,840 |          |                   |   | 81,430 |       |        |   | 245,460   |          |        |   | 99,681 |  
|Valuation allowances:                        |         |                           |         |          |                   |   |        |       |        |   |           |          |        |   |        |  
|                                             | Federal |                           |         | (143,618 | )                 |   |        |      |        |   |           | (155,692 | )      |   |        |  |       
|                                             | State   |                           |         | (14,666  | )                 |   |        |      |        |   |           | (13,384  | )      |   |        |  |       
|                                             |         |                           |         |          |                   |   |        |       |        |   |           |         
|                                             |         | Net deferred tax balances |         | $        | 53,556            |   |        | $     | 81,430 |   |           | $        | 76,384 |   |        | $ | 99,681 | 
|                                             |         |                           |         |          |                   |   |        |       |        |   |           |         







|    |                                     
|--- | ------------------------------------
|13. | Fair Values of Financial Instruments

Disclosures about Fair Value of Financial Instruments,


88



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BEVERLY ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Years ended December 31, 2004, 2003, and 2002




|    |                                                       
|--- | ------------------------------------------------------
|13. | Fair Values of Financial
    Instruments  (Continued)



|                                                                          |  |          |         |  |            |   |          |        |  |   |            |  |  |   |         | 
|------------------------------------------------------------------------- |  | -------- | ------- |  | ---------- | - | -------- | ------ |  | - | ---------- |  |  | - | ------- | 
|                                                                          |  | 2004     |         |  | 2003       |  
|                                                                          |  |          |         |  |            |  
|                                                                          |  | Carrying |         |  |            |   | Carrying |        |  |  
|                                                                          |  | Amount   |         |  | Fair Value |   |          | Amount |  |   | Fair Value | 
|                                                                          |  |          |         |  |            |   |          |        |  |   |            | 
|Cash and cash equivalents                                                 |  | $        | 215,665 |  |            | $ | 215,665  |        |  | $ | 258,815    |  |  | $ | 258,815 | 
|Cash investments greater than three months                                |  |          | 5,018   |  |            |   | 5,018    |        |  |   |           |  |  |   |        | 
|Notes receivable, net (including current portion)                         |  |          | 2,312   |  |            |   | 2,312    |        |  |   | 27,873     |  |  |   | 27,873  | 
|Beverly Indemnity funds                                                   |  |          | 16,006  |  |            |   | 16,006   |        |  |   | 11,809     |  |  |   | 11,809  | 
|Long-term debt (including current portion)                                |  |          | 558,183 |  |            |   | 638,312  |        |  |   | 566,227    |  |  |   | 640,723 | 
|Federal government settlement obligations (including current
    portion) |  |          | 48,761  |  |            |   | 48,761   |        |  |   | 61,888     |  |  |   | 61,888  | 









| |                          
| | -------------------------
| | Cash and Cash Equivalents





| |                                                                            
| | ---------------------------------------------------------------------------
| | Cash Investments with Original Maturity Dates Greater than
    Three Months





| |                                                      
| | -----------------------------------------------------
| | Notes Receivable, Net (Including Current
    Portion)





| |                        
| | -----------------------
| | Beverly Indemnity Funds



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BEVERLY ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Years ended December 31, 2004, 2003, and 2002




|    |                                                       
|--- | ------------------------------------------------------
|13. | Fair Values of Financial
    Instruments  (Continued)



| |                                           
| | ------------------------------------------
| | Long-term Debt (Including Current Portion)





| |                                                                          
| | -------------------------------------------------------------------------
| | Federal Government Settlement Obligations (Including
    Current Portion)





|    |                    
|--- | -------------------
|14. | Segment Information

Disclosures about Segments of an Enterprise and Related
Information,






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





| |   |                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------
| |  | Nursing Facilities, which provide long-term healthcare
    through the operation of skilled nursing homes and assisted
    living centers;    
|
| |  | Aegis, which provides rehabilitation therapy services
    under contract to our nursing facilities and third-party nursing
    facilities; and
|
| |  | AseraCare, which primarily provides hospice services.                                                                                         



| |                                                             
| | ------------------------------------------------------------
| | Measurement of Segment Income or Loss and Segment
    Assets





| |                                                               
| | --------------------------------------------------------------
| | Factors Management Used to Identify Our Operating
    Segments



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BEVERLY ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Years ended December 31, 2004, 2003, and 2002




|    |                                  
|--- | ---------------------------------
|14. | Segment Information  (Continued)



|                             |                                  |            |   |           |          |  |   |           |  |  |              |         |              |       |   |          |               |  |   |           |   |  |   |         |  
|---------------------------- | -------------------------------- | ---------- | - | --------- | -------- |  | - | --------- |  |  | ------------ | ------- | ------------ | ----- | - | -------- | ------------- |  | - | --------- | - |  | - | ------- | -
|                             |                                  | Nursing    |   |           |          |  |   |           |  |  |              |         | Discontinued |      
|                             |                                  | Facilities |   |           | Aegis(1) |  |   | AseraCare |  |  | All Other(2) |         |              | Total |   |          | Operations(3) | 
|                             |                                  |            |   |           |          |  |   |           |  |  |              |         |              |       |   |          |               | 
|Year ended December 31, 2004 |                                  |            |   |           |          |  |   |           |  |  |              |         |              |       |   |          |               |  |   |           |   |  |   |        
|                             | Revenues from external customers |            | $ | 1,794,471 |          |  | $ | 121,846   |  |  | $            | 65,604  |              |       | $ | 6,931    |               |  | $ | 1,988,852 |   |  | $ | 177,914 |  
|                             | Intercompany revenues            |            |   |          |          |  |   | 150,039   |  |  |              |        |              |       |   | 2,230    |               |  |   | 152,269   |   |  |   |        |  
|                             | Interest income                  |            |   | 2,079     |          |  |   | 21        |  |  |              |        |              |       |   | 3,385    |               |  |   | 5,485     |   |  |   | 36      |  
|                             | Interest expense                 |            |   | 7,731     |          |  |   | 1         |  |  |              |        |              |       |   | 37,905   |               |  |   | 45,637    |   |  |   | 179     |  
|                             | Depreciation and amortization    |            |   | 52,711    |          |  |   | 887       |  |  |              | 697     |              |       |   | 7,871    |               |  |   | 62,166    |   |  |   | 2,135   |  
|                             | Pre-tax income (loss)            |            |   | 96,722    |          |  |   | 45,849    |  |  |              | 8,782   |              |       |   | (103,805 | )             |  |   | 47,548    |   |  |   | (14,582 | )
|                             | Goodwill                         |            |   | 44,756    |          |  |   |          |  |  |              | 79,310  |              |       |   |         |               |  |   | 124,066   |   |  |   | 332     |  
|                             | Total assets                     |            |   | 846,253   |          |  |   | 33,664    |  |  |              | 101,441 |              |       |   | 349,250  |               |  |   | 1,330,608 |   |  |   | 30,777  |  
|                             | Capital expenditures             |            |   | 53,477    |          |  |   | 1,033     |  |  |              | 652     |              |       |   | 6,291    |               |  |   | 61,453    |   |  |   | 1,265   |  
|Year ended December 31, 2003 |                                  |            |   |           |          |  |   |           |  |  |              |         |              |       |   |          |               |  |   |           |   |  |   |        
|                             | Revenues from external customers |            | $ | 1,680,420 |          |  | $ | 77,007    |  |  | $            | 39,164  |              |       | $ | 5,435    |               |  | $ | 1,802,026 |   |  | $ | 553,953 |  
|                             | Intercompany revenues            |            |   |          |          |  |   | 153,140   |  |  |              |        |              |       |   | 1,322    |               |  |   | 154,462   |   |  |   |        |  
|                             | Interest income                  |            |   | 2,939     |          |  |   | 25        |  |  |              | 1       |              |       |   | 2,398    |               |  |   | 5,363     |   |  |   | 161     |  
|                             | Interest expense                 |            |   | 11,641    |          |  |   |          |  |  |              | 8       |              |       |   | 51,665   |               |  |   | 63,314    |   |  |   | 2,984   |  
|                             | Depreciation and amortization    |            |   | 49,722    |          |  |   | 831       |  |  |              | 547     |              |       |   | 7,707    |               |  |   | 58,807    |   |  |   | 10,856  |  
|                             | Pre-tax income (loss)            |            |   | 66,305    |          |  |   | 45,265    |  |  |              | 5,030   |              |       |   | (83,827  | )             |  |   | 32,773    |   |  |   | 56,142  |  
|                             | Goodwill                         |            |   | 44,745    |          |  |   |          |  |  |              | 11,723  |              |       |   | 269      |               |  |   | 56,737    |   |  |   | 697     |  
|                             | Total assets                     |            |   | 898,274   |          |  |   | 21,015    |  |  |              | 22,577  |              |       |   | 346,295  |               |  |   | 1,288,161 |   |  |   | 58,260  |  
|                             | Capital expenditures             |            |   | 26,917    |          |  |   | 1,434     |  |  |              | 387     |              |       |   | 9,785    |               |  |   | 38,523    |   |  |   | 5,461   |  
|Year ended December 31, 2002 |                                  |            |   |           |          |  |   |           |  |  |              |         |              |       |   |          |               |  |   |           |   |  |   |        
|                             | Revenues from external customers |            | $ | 1,677,892 |          |  | $ | 52,871    |  |  | $            | 34,315  |              |       | $ | 1,648    |               |  | $ | 1,766,726 |   |  | $ | 751,814 |  
|                             | Intercompany revenues            |            |   |          |          |  |   | 154,306   |  |  |              |        |              |       |   | 626      |               |  |   | 154,932   |   |  |   |        |  
|                             | Interest income                  |            |   | 1,565     |          |  |   | 42        |  |  |              | 13      |              |       |   | 3,068    |               |  |   | 4,688     |   |  |   | 60      |  
|                             | Interest expense                 |            |   | 12,813    |          |  |   |          |  |  |              | 23      |              |       |   | 49,816   |               |  |   | 62,652    |   |  |   | 4,177   |  
|                             | Depreciation and amortization    |            |   | 54,263    |          |  |   | 710       |  |  |              | 724     |              |       |   | 7,209    |               |  |   | 62,906    |   |  |   | 26,039  |  
|                             | Pre-tax income (loss)            |            |   | 108,142   |          |  |   | 35,569    |  |  |              | (1,633  | )            |       |   | (170,506 | )             |  |   | (28,428   | ) |  |   | (34,406 | )
|                             | Goodwill                         |            |   | 44,015    |          |  |   |          |  |  |              | 11,724  |              |       |   | 269      |               |  |   | 56,008    |   |  |   | 11,082  |  
|                             | Total assets                     |            |   | 892,283   |          |  |   | 15,966    |  |  |              | 20,873  |              |       |   | 138,413  |               |  |   | 1,067,535 |   |  |   | 282,360 |  
|                             | Capital expenditures             |            |   | 73,573    |          |  |   | 1,676     |  |  |              | 258     |              |       |   | 7,778    |               |  |   | 83,285    |   |  |   | 16,818  |  






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Pre-tax income includes profit on intercompany revenues which is
    eliminated in All Other.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   
|(2) | Consists of the operations of our corporate headquarters and
    related overhead, as well as certain non-operating revenues and
    expenses, including $40.9 million and $6.6 million of
    pre-tax charges in 2004 and 2003, respectively, related to the
    early extinguishments of debt. These amounts also include
    special pre-tax charges and adjustments totaling approximately
    $448,000, $2.9 million and $65.3 million for 2004,
    2003 and 2002, respectively, that primarily related to asset
    impairments, workforce reductions and other unusual items, a
    special charge and adjustment related to government
    investigation settlements and increasing reserves for general
    and professional liability costs in 2002.
|   
|(3) | The results of operations of 2004 and 2003 disposed facilities,
    clinics and other assets have been reported as discontinued
    operations for all periods presented, as well as the results of
    operations of held-for-sale assets at December 31, 2004.
    Pre-tax income (loss) includes net losses on sales, exit costs,
    asset impairments and other unusual items of $5.5 million
    in 2004; net gains on sales, exit costs, asset impairments and
    other unusual items of $60.7 million in 2003; and net
    losses on sales, exit costs, asset impairments and other unusual
    items of $39.6 million in 2002 (see Note 6).                                                                                                          

91



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BEVERLY ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Years ended December 31, 2004, 2003, and 2002




|    |                  
|--- | -----------------
|15. | Subsequent Events









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BEVERLY ENTERPRISES, INC.


SUPPLEMENTARY DATA (Unaudited)


QUARTERLY FINANCIAL DATA




|                                                                                |             |                                                                        |         |      |         |   |         |      |         |   |         |      |         |       |         |      |         |   |           |     |         |   |         |      |         |     |         |      |         |   |         |      |         |   |         |      |         |   |           |   |         | 
|------------------------------------------------------------------------------- | ----------- | ---------------------------------------------------------------------- | ------- | ---- | ------- | - | ------- | ---- | ------- | - | ------- | ---- | ------- | ----- | ------- | ---- | ------- | - | --------- | --- | ------- | - | ------- | ---- | ------- | --- | ------- | ---- | ------- | - | ------- | ---- | ------- | - | ------- | ---- | ------- | - | --------- | - | ------- | 
|                                                                                |             | 2004                                                                   |         |      | 2003    |  
|                                                                                |             |                                                                        |         |      |         |  
|                                                                                |             | 1st                                                                    |         |      | 2nd     |   |         | 3rd  |         |   | 4th     |      |         | Total |         |      | 1st     |   |           | 2nd |         |   | 3rd     |      |         | 4th |         |      | Total   |  
|                                                                                |             |                                                                        |         |      |         |   |         |      |         |   |         |      |         |       |         |      |         |   |           |     |         |   |         |      |         |     |         |      |         |  
|                                                                                |             | (In thousands, except per share data)                                  |        
|Revenues                                                                        |             | $                                                                      | 480,618 |      |         | $ | 488,229 |      |         | $ | 503,432 |      |         | $     | 516,573 |      |         | $ | 1,988,852 |     |         | $ | 433,231 |      |         | $   | 441,760 |      |         | $ | 456,788 |      |         | $ | 470,247 |      |         | $ | 1,802,026 |  
|                                                                                |             |                                                                        |         |      |         |   |         |      |         |   |         |      |         |       |         |      |         |   |           |     |         |   |         |      |         |     |         |      |         |  
|Income (loss) before provision for income taxes and discontinued
    operations |             | $                                                                      | 22,575  |      |         | $ | (13,833 | )    |         | $ | 22,079  |      |         | $     | 16,727  |      |         | $ | 47,548    |     |         | $ | 3,787   |      |         | $   | 6,562   |      |         | $ | 10,198  |      |         | $ | 12,226  |      |         | $ | 32,773    |  
|Provision for income taxes                                                      |             |                                                                        | 1,442   |      |         |   | 1,060   |      |         |   | 536     |      |         |       | 1,852   |      |         |   | 4,890     |     |         |   | 1,236   |      |         |     | 1,201   |      |         |   | 1,853   |      |         |   | 779     |      |         |   | 5,069     |  
|                                                                                |             |                                                                        |         |      |         |   |         |      |         |   |         |      |         |       |         |      |         |   |           |     |         |   |         |      |         |     |         |      |         |  
|Income (loss) before discontinued operations                                    |             |                                                                        | 21,133  |      |         |   | (14,893 | )    |         |   | 21,543  |      |         |       | 14,875  |      |         |   | 42,658    |     |         |   | 2,551   |      |         |     | 5,361   |      |         |   | 8,345   |      |         |   | 11,447  |      |         |   | 27,704    |  
|Discontinued operations, net of taxes                                           |             |                                                                        | 2,306   |      |         |   | (11,030 | )    |         |   | 2,857   |      |         |       | (8,770  | )    |         |   | (14,637   | )   |         |   | 9,637   |      |         |     | 12,130  |      |         |   | 1,638   |      |         |   | 29,359  |      |         |   | 52,764    |  
|                                                                                |             |                                                                        |         |      |         |   |         |      |         |   |         |      |         |       |         |      |         |   |           |     |         |   |         |      |         |     |         |      |         |  
|Net income (loss)                                                               |             | $                                                                      | 23,439  |      |         | $ | (25,923 | )    |         | $ | 24,400  |      |         | $     | 6,105   |      |         | $ | 28,021    |     |         | $ | 12,188  |      |         | $   | 17,491  |      |         | $ | 9,983   |      |         | $ | 40,806  |      |         | $ | 80,468    |  
|                                                                                |             |                                                                        |         |      |         |   |         |      |         |   |         |      |         |       |         |      |         |   |           |     |         |   |         |      |         |     |         |      |         |  
|Income (loss) per share of common stock:                                        |             |                                                                        |         |      |         |   |         |      |         |   |         |      |         |       |         |      |         |   |           |     |         |   |         |      |         |     |         |      |         |   |         |      |         |   |         |      |         |   |           |  
|                                                                                | Basic:      |                                                                        |         |      |         |   |         |      |         |   |         |      |         |       |         |      |         |   |           |     |         |   |         |      |         |     |         |      |         |   |         |      |         |   |         |      |         |   |           |   |        
|                                                                                |             | Before discontinued operations                                         |         | $    | 0.20    |   |         | $    | (0.14   | ) |         | $    | 0.20    |       |         | $    | 0.14    |   |           | $   | 0.40    |   |         | $    | 0.02    |     |         | $    | 0.05    |   |         | $    | 0.08    |   |         | $    | 0.11    |   |           | $ | 0.26    | 
|                                                                                |             | Discontinued operations, net of taxes                                  |         |      | 0.02    |   |         |      | (0.10   | ) |         |      | 0.03    |       |         |      | (0.08   | ) |           |     | (0.14   | ) |         |      | 0.10    |     |         |      | 0.11    |   |         |      | 0.01    |   |         |      | 0.27    |   |           |   | 0.49    | 
|                                                                                |             |                                                                        |         |      |         |   |         |      |         |   |         |      |         |       |         |      |         |   |           |     |         |   |         |      |         |     |         |      |         |  
|                                                                                |             | Net income (loss)                                                      |         | $    | 0.22    |   |         | $    | (0.24   | ) |         | $    | 0.23    |       |         | $    | 0.06    |   |           | $   | 0.26    |   |         | $    | 0.12    |     |         | $    | 0.16    |   |         | $    | 0.09    |   |         | $    | 0.38    |   |           | $ | 0.75    | 
|                                                                                |             |                                                                        |         |      |         |   |         |      |         |   |         |      |         |       |         |      |         |   |           |     |         |   |         |      |         |     |         |      |         |  
|                                                                                |             | Shares used to compute basic net income (loss) per share amounts       |         |      | 107,331 |   |         |      | 107,464 |   |         |      | 108,039 |       |         |      | 108,153 |   |           |     | 107,749 |   |         |      | 104,761 |     |         |      | 107,174 |   |         |      | 107,160 |   |         |      | 107,201 |   |           |   | 106,582 | 
|                                                                                |             |                                                                        |         |      |         |   |         |      |         |   |         |      |         |       |         |      |         |   |           |     |         |   |         |      |         |     |         |      |         |  
|                                                                                | Diluted:(1) |                                                                        |         |      |         |   |         |      |         |   |         |      |         |       |         |      |         |   |           |     |         |   |         |      |         |     |         |      |         |   |         |      |         |   |         |      |         |   |           |   |        
|                                                                                |             | Before discontinued operations                                         |         | $    | 0.18    |   |         | $    | (0.11   | ) |         | $    | 0.18    |       |         | $    | 0.13    |   |           | $   | 0.37    |   |         | $    | 0.02    |     |         | $    | 0.05    |   |         | $    | 0.08    |   |         | $    | 0.10    |   |           | $ | 0.26    | 
|                                                                                |             | Discontinued operations, net of taxes                                  |         |      | 0.02    |   |         |      | (0.09   | ) |         |      | 0.02    |       |         |      | (0.07   | ) |           |     | (0.12   | ) |         |      | 0.10    |     |         |      | 0.11    |   |         |      | 0.01    |   |         |      | 0.25    |   |           |   | 0.48    | 
|                                                                                |             |                                                                        |         |      |         |   |         |      |         |   |         |      |         |       |         |      |         |   |           |     |         |   |         |      |         |     |         |      |         |  
|                                                                                |             | Net income (loss)                                                      |         | $    | 0.20    |   |         | $    | (0.20   | ) |         | $    | 0.20    |       |         | $    | 0.06    |   |           | $   | 0.25    |   |         | $    | 0.12    |     |         | $    | 0.16    |   |         | $    | 0.09    |   |         | $    | 0.35    |   |           | $ | 0.74    | 
|                                                                                |             |                                                                        |         |      |         |   |         |      |         |   |         |      |         |       |         |      |         |   |           |     |         |   |         |      |         |     |         |      |         |  
|                                                                                |             | Shares used to compute diluted net income (loss) per share
    amounts |         |      | 123,888 |   |         |      | 123,930 |   |         |      | 124,493 |       |         |      | 125,031 |   |           |     | 124,334 |   |         |      | 104,761 |     |         |      | 107,180 |   |         |      | 107,618 |   |         |      | 119,999 |   |           |   | 109,922 | 
|                                                                                |             |                                                                        |         |      |         |   |         |      |         |   |         |      |         |       |         |      |         |   |           |     |         |   |         |      |         |     |         |      |         |  
|Common stock price range:                                                       |             |                                                                        |         |      |         |   |         |      |         |   |         |      |         |       |         |      |         |   |           |     |         |   |         |      |         |     |         |      |         |   |         |      |         |   |         |      |         |   |           |  
|                                                                                | High        |                                                                        | $       | 8.96 |         |   | $       | 8.92 |         |   | $       | 8.70 |         |       | $       | 9.41 |         |   |           |     |         |   | $       | 3.00 |         |     | $       | 4.30 |         |   | $       | 6.99 |         |   | $       | 8.60 |         |   |           |   |        
|                                                                                | Low         |                                                                        | $       | 5.84 |         |   | $       | 5.83 |         |   | $       | 6.78 |         |       | $       | 7.49 |         |   |           |     |         |   | $       | 1.63 |         |     | $       | 1.80 |         |   | $       | 3.71 |         |   | $       | 5.06 |         |   |           |   |        






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | In accordance with EITF 04-8, we have assumed the
    conversion of our 2.75% Convertible Notes issued in October
    2003, therefore, the number of shares used to compute diluted
    earnings per share differ from amounts previously reported in
    our Form 10-Qs. Using the if-converted method, we have also
    adjusted interest expense, net of income taxes of $0, by
    $825,000 for each quarter of 2004 and $633,000 for the fourth
    quarter of 2003 used in the calculations of diluted net income
    (loss) per share amounts.





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##### Table of Contents








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








|         |                         
|-------- | ------------------------
|ITEM 9A. | CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures






Managements Report on Internal Control Over Financial
Reporting




Internal Control-Integrated Framework




Changes in Internal Control Over Financial Reporting









|         |                   
|-------- | ------------------
|ITEM 9B. | OTHER INFORMATION.



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##### Table of Contents






PART III







|         |                                                 
|-------- | ------------------------------------------------
|ITEM 10. | DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.










|         |                        
|-------- | -----------------------
|ITEM 11. | EXECUTIVE COMPENSATION.








|         |                                                                                                    
|-------- | ---------------------------------------------------------------------------------------------------
|ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
    MANAGEMENT AND RELATED STOCKHOLDER MATTERS.








|         |                                                
|-------- | -----------------------------------------------
|ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.








|         |                                        
|-------- | ---------------------------------------
|ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES.



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##### Table of Contents






PART IV







|         |                                                                     
|-------- | --------------------------------------------------------------------
|ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
    8-K.

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.

Exhibits




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

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.

Financial Statement Schedule




| |                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------
| | See the accompanying index to consolidated financial statements
    and financial statement schedules referenced in Item 15(a)1
    and 2, above.

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BEVERLY ENTERPRISES, INC.


INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND


FINANCIAL STATEMENT SCHEDULES


(Item 15(a))


|                                                                                                                    |                                                                                                                       |      |  |    | 
|------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------- | ---- |  | -- | 
|                                                                                                                    |                                                                                                                       | Page | 
|                                                                                                                    |                                                                                                                       |      | 
|1. Consolidated financial statements:                                                                               |                                                                                                                       |      |  |   
|                                                                                                                    | Reports of Ernst & Young LLP, Independent Registered
    Public Accounting Firm                                       |      |  | 47 | 
|                                                                                                                    | Reports of Ernst & Young LLP, Independent Registered
    Public Accounting Firm                                       |      |  | 48 | 
|                                                                                                                    | Consolidated Balance Sheets at December 31, 2004 and 2003                                                             |      |  | 49 | 
|                                                                                                                    | Consolidated Statements of Operations for each of the three
    years in the period ended December 31, 2004           |      |  | 50 | 
|                                                                                                                    | Consolidated Statements of Stockholders Equity for each of
    the three years in the period ended December 31, 2004 |      |  | 51 | 
|                                                                                                                    | Consolidated Statements of Cash Flows for each of the three
    years in the period ended December 31, 2004           |      |  | 52 | 
|                                                                                                                    | Notes to Consolidated Financial Statements                                                                            |      |  | 53 | 
|                                                                                                                    | Supplementary Data (Unaudited)  Quarterly Financial
    Data                                                         |      |  | 93 | 
|2. Consolidated financial statement schedule for each of
    the three years in the period ended December 31, 2004: |                                                                                                                       |      |  |   
|                                                                                                                    | Schedule II  Valuation and Qualifying
    Accounts                                                                   |      |  | 98 | 



97



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BEVERLY ENTERPRISES, INC.


SCHEDULE II  VALUATION AND QUALIFYING
ACCOUNTS


Years ended December 31, 2004, 2003 and 2002


|                              |                                                |                     |        |         |            |   |        |            |        |                  |              |   |         |       |            |   |             |   |       |   |        |   |        |         |        |  
|----------------------------- | ---------------------------------------------- | ------------------- | ------ | ------- | ---------- | - | ------ | ---------- | ------ | ---------------- | ------------ | - | ------- | ----- | ---------- | - | ----------- | - | ----- | - | ------ | - | ------ | ------- | ------ | -
|                              |                                                |                     |        | Charged |            |   |        |            |        |                  |              |   |        
|                              |                                                | Balance at          |        |         | (Credited) |   |        |            |        | Due to           |              |   |         |       |           
|                              |                                                | Beginning           |        |         | to         |   |        |            |        | Acquisitions and |              |   |         |       | Balance at |  
|Description                   |                                                | of Year             |        |         | Operations |   |        | Write-offs |        |                  | Dispositions |   |         | Other |            |   | End of Year |  
|                              |                                                |                     |        |         |            |   |        |            |        |                  |              |   |         |       |            |   |             |  
|                              |                                                | (In thousands)      |       
|Year ended December 31, 2004: |                                                |                     |        |         |            |   |        |            |        |                  |              |   |         |       |            |   |             |   |       |   |        |   |        |        
|                              | Allowance for doubtful accounts:               |                     |        |         |            |   |        |            |        |                  |              |   |         |       |            |   |             |   |       |   |        |   |        |         |       
|                              |                                                | Accounts receivable |        | $       | 31,745     |   |        | $          | 8,898  |                  |              | $ | (17,896 | )     |            | $ | 3,732       |   |       | $ | (159   | ) |        | $       | 26,320 | *
|                              |                                                | Notes receivable    |        |         | 5,326      |   |        |            | (83    | )                |              |   | (1,746  | )     |            |   | (58         | ) |       |   | (216   | ) |        |         | 3,223  | *
|                              |                                                |                     |        |         |            |   |        |            |        |                  |              |   |         |       |            |   |             |  
|                              |                                                | $                   | 37,071 |         |            | $ | 8,815  |            |        | $                | (19,642      | ) |         | $     | 3,674      |   |             | $ | (375  | ) |        | $ | 29,543 |        
|                              |                                                |                     |        |         |            |   |        |            |        |                  |              |   |         |       |            |   |             |  
|                              | Valuation allowance on net deferred tax assets |                     | $      | 169,076 |            |   | $      | (10,792    | )      |                  | $            |  |         |       | $          |  |             |   | $     |  |        |   | $      | 158,284 | (A)   
|                              |                                                |                     |        |         |            |   |        |            |        |                  |              |   |         |       |            |   |             |  
|Year ended December 31, 2003: |                                                |                     |        |         |            |   |        |            |        |                  |              |   |         |       |            |   |             |   |       |   |        |   |        |        
|                              | Allowance for doubtful accounts:               |                     |        |         |            |   |        |            |        |                  |              |   |         |       |            |   |             |   |       |   |        |   |        |         |       
|                              |                                                | Accounts receivable |        | $       | 44,666     |   |        | $          | 22,743 |                  |              | $ | (30,307 | )     |            | $ | (3,482      | ) |       | $ | (1,875 | ) |        | $       | 31,745 | *
|                              |                                                | Notes receivable    |        |         | 7,761      |   |        |            | (1,138 | )                |              |   | (4,085  | )     |            |   | 682         |   |       |   | 2,106  |   |        |         | 5,326  | *
|                              |                                                |                     |        |         |            |   |        |            |        |                  |              |   |         |       |            |   |             |  
|                              |                                                | $                   | 52,427 |         |            | $ | 21,605 |            |        | $                | (34,392      | ) |         | $     | (2,800     | ) |             | $ | 231   |   |        | $ | 37,071 |        
|                              |                                                |                     |        |         |            |   |        |            |        |                  |              |   |         |       |            |   |             |  
|                              | Valuation allowance on net deferred tax assets |                     | $      | 199,217 |            |   | $      | (30,141    | )      |                  | $            |  |         |       | $          |  |             |   | $     |  |        |   | $      | 169,076 | (A)   
|                              |                                                |                     |        |         |            |   |        |            |        |                  |              |   |         |       |            |   |             |  
|Year ended December 31, 2002: |                                                |                     |        |         |            |   |        |            |        |                  |              |   |         |       |            |   |             |   |       |   |        |   |        |        
|                              | Allowance for doubtful accounts:               |                     |        |         |            |   |        |            |        |                  |              |   |         |       |            |   |             |   |       |   |        |   |        |         |       
|                              |                                                | Accounts receivable |        | $       | 52,474     |   |        | $          | 54,558 |                  |              | $ | (60,000 | )     |            | $ | (4,221      | ) |       | $ | 1,855  |   |        | $       | 44,666 | *
|                              |                                                | 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 net deferred tax assets |                     | $      | 153,697 |            |   | $      | 45,520     |        |                  | $            |  |         |       | $          |  |             |   | $     |  |        |   | $      | 199,217 | (A)   
|                              |                                                |                     |        |         |            |   |        |            |        |                  |              |   |         |       |            |   |             |  






|    |  |                                                                          
|--- |  | -------------------------------------------------------------------------
|(A) |  | Represents a full valuation allowance on our net deferred tax
    assets.



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

98



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##### Table of Contents



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 April 25, 2001, between Beverly
    Enterprises, Inc., and The Bank of New York, as Trustee, with
    respect to Beverly Enterprises, Inc.s
    95/8% Senior
    Notes due 2009 (the
    95/8% Senior
    Notes Indenture) (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  | .2   |  |            |  | First Supplemental Indenture, dated as of June 17, 2004, to
    the
    95/8% Senior
    Notes Indenture (incorporated by reference to
    Exhibit 4.2 to Beverly Enterprises, Inc.s Quarterly
    Report on Form 10-Q for the quarter ended June 30, 2004)                                                                                                                                                                                                                                                                                                      
|        | 4  | .3   |  |            |  | Subordinated Indenture, dated as of October 22, 2003,
    between Beverly Enterprises, Inc, as Issuer, and The Bank of New
    York, as Trustee, with respect to Beverly Enterprises,
    Inc.s 2.75% Convertible Subordinated Notes due 2033
    (the 2.75% Note Indenture) (incorporated by
    reference to Exhibit 4.2 to Beverly Enterprises,
    Inc.s Current Report on Form 8-K dated October 17,
    2003)                                                                                                                                           
|        | 4  | .4   |  |            |  | First Supplement, dated October 22, 2003, to the
    2.75% Note Indenture (incorporated by reference to
    Exhibit 4.3 to Beverly Enterprises, Inc.s Current
    Report on Form 8-K dated October 17, 2003)                                                                                                                                                                                                                                                                                                                                                     
|        | 4  | .5   |  |            |  | Indenture, dated as of June 25, 2004, by and among Beverly
    Enterprises, Inc., the subsidiary guarantors named therein, and
    BNY Midwest Trust Company, as Trustee, with respect to Beverly
    Enterprises, Inc.s
    77/8% Senior
    Subordinated Notes due 2014 (incorporated by reference to
    Exhibit 4.1 to Beverly Enterprises, Inc.s Quarterly
    Report on Form 10-Q for the quarter ended June 30, 2004)                                                                                                                                    
|        | 4  | .6   |  |            |  | Rights agreement, dated as of January 26, 2005, between
    Beverly Enterprises, Inc. and The Bank of New York, as Rights
    Agent, which includes the form of Certificate of Designations of
    the Series A Junior Participating Preferred Stock of
    Beverly Enterprises, Inc. as Exhibit A, the form of Right
    Certificate as Exhibit B and the Summary of Rights to
    Purchase Preferred Shares as Exhibit C (incorporated by
    reference to Exhibit 4.1 to Beverly Enterprises,
    Inc.s Current Report on Form 8-K dated January 26,
    2005)
|        | 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* |  |            |  | First Amendment, effective as of June 1, 2004, to the 1997
    LTIP                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|        | 10 | .4* |  |            |  | Beverly Enterprises, Inc. Non-Employee Directors Stock
    Option Plan (as amended and restated effective as of
    June 1, 2004)                                                                                                                                                                                                                                                                                                                                                                                                                                
|        | 10 | .5*  |  |            |  | 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 | .6*  |  |            |  | 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)                                                                                                                                                                                                                                                                                                                                                                           



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##### Table of Contents



|        |    |      |  |   |             |                                                                                                                                                                                                                                                                                                                                   
|------- | -- | ---- |  | - | ----------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |      |  |   |            
|Number  |    |      |  |   | Description
|        |    |      |  |   |            
|        | 10 | .7*  |  |  |             | 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 | .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
    Amended and Restated Deferred Compensation Plan (incorporated by
    reference to Exhibit 10.13 to Beverly Enterprises,
    Inc.s Registration Statement on Form S-4 filed on
    February 13, 1995 (File No. 33-57663))                                               
|        | 10 | .10* |  |  |             | Executive Retirement Plan (incorporated by reference to
    Exhibit 10.9 to Beverly Enterprises, Inc.s Annual
    Report on Form 10-K for the year ended December 31, 1987)                                                                                                                                                      
|        | 10 | .11* |  |  |             | Amendment No. 1, effective as of July 1, 1991, to the
    Executive Retirement Plan (incorporated by reference to
    Exhibit 10.8 to Beverly Enterprises, Inc.s Annual
    Report on Form 10-K for the year ended December 31, 1991)                                                                                            
|        | 10 | .12* |  |  |             | Amendment No. 2, effective as of December 12, 1991, to
    the Executive Retirement Plan (incorporated by reference to
    Exhibit 10.9 to Beverly Enterprises, Inc.s Annual
    Report on Form 10-K for the year ended December 31, 1991)                                                                                       
|        | 10 | .13* |  |  |             | Amendment No. 3, effective as of July 31, 1992, to the
    Executive Retirement Plan (incorporated by reference to
    Exhibit 10.10 to Beverly Enterprises, Inc.s Annual
    Report on Form 10-K for the year ended December 31, 1992)                                                                                          
|        | 10 | .14* |  |  |             | Amendment No. 4, effective as of January 1, 1993, to
    the Executive Retirement Plan (incorporated by reference to
    Exhibit 10.18 to Beverly Enterprises, Inc.s Annual
    Report on Form 10-K for the year ended December 31, 1994)                                                                                        
|        | 10 | .15* |  |  |             | Amendment No. 5, effective as of September 29, 1994,
    to the Executive Retirement Plan (incorporated by reference to
    Exhibit 10.19 to Beverly Enterprises, Inc.s Annual
    Report on Form 10-K for the year ended December 31, 1994)                                                                                     
|        | 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
    (the Supplemental Executive Retirement Plan)
    (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 No. 1, effective as of October 16, 2001, 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 (incorporated by reference to
    Exhibit 10.22 to Beverly Enterprises, Inc.s Annual
    Report on Form 10-K for the year ended December 31, 2002)                                                                                
|        | 10 | .23* |  |  |             | First Amendment, effective March 11, 2004, to Executive
    Deferred Compensation Plan (incorporated by reference to
    Exhibit 10.2 to Beverly Enterprises, Inc.s Quarterly
    Report on Form 10-Q for the quarter ended March 30, 2004)                                                                                      



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##### Table of Contents



|        |    |       |  |   |             |                                                                                                                                                                                                                                                                                                                               
|------- | -- | ----- |  | - | ----------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |       |  |   |            
|Number  |    |       |  |   | Description
|        |    |       |  |   |            
|        | 10 | .24*  |  |  |             | 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 | .25*  |  |  |             | 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 | .26*  |  |  |             | 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 | .27*  |  |  |             | 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 | .28*  |  |  |             | 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 | .29*  |  |  |             | 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 | .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 December 6, 2001, between
    Beverly Enterprises, Inc. and William R. Floyd (incorporated by
    reference to Exhibit 10.32 to Beverly Enterprises,
    Inc.s Annual Report on Form 10-K for the year ended
    December 31, 2002)                                                          
|        | 10 | .32* |  |  |             | Amendment, dated December 1, 2004, to Employment Agreement
    with William R. Floyd                                                                                                                                                                                                                                          
|        | 10 | .33*  |  |  |             | Employment and Severance Agreement, made as of June 1,
    2001, between Beverly Enterprises, Inc. and David R. Devereaux
    (incorporated by reference to Exhibit 10.33 to Beverly
    Enterprises, Inc.s Annual Report on Form 10-K for the year
    ended December 31, 2002)                                             
|        | 10 | .34*  |  |  |             | Severance Agreement and Release of Claims made as of
    October 5, 2002, between Beverly Enterprises, Inc. and
    Bobby W. Stephens (incorporated by reference to
    Exhibit 10.34 to Beverly Enterprises, Inc.s Annual
    Report on Form 10-K for the year ended December 31, 2002)                                     
|        | 10 | .35*  |  |  |             | Employment Contract, made as of April 1, 2000, between
    Beverly Enterprises, Inc. and Douglas J. Babb (incorporated by
    reference to Exhibit 10.35 to Beverly Enterprises,
    Inc.s Annual Report on Form 10-K for the year ended
    December 31, 2002)                                                              
|        | 10 | .36* |  |  |             | Amendment, dated December 1, 2004, to Employment Agreement
    between Beverly Enterprises, Inc. and Douglas J. Babb                                                                                                                                                                                                          
|        | 10 | .37*  |  |  |             | Severance Agreement and Release of Claims made as of
    October 11, 2002, between Beverly Enterprises, Inc. and
    Michael J. Matheny (incorporated by reference to
    Exhibit 10.36 to Beverly Enterprises, Inc.s Annual
    Report on Form 10-K for the year ended December 31, 2002)                                   
|        | 10 | .38*  |  |  |             | Severance Agreement and Release of Claims made as of
    December 31, 2001, between Beverly Enterprises, Inc. and T.
    Jerald Moore (incorporated by reference to Exhibit 10.37 to
    Beverly Enterprises, Inc.s Annual Report on Form 10-K for
    the year ended December 31, 2002)                                     
|        | 10 | .39*  |  |  |             | 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 | .40*  |  |  |             | 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 | .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)                                    



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##### Table of Contents



|        |    |       |  |   |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|------- | -- | ----- |  | - | ----------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |       |  |   |            
|Number  |    |       |  |   | Description
|        |    |       |  |   |            
|        | 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, dated June 6, 2002,
    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, dated June 6, 2002,
    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* |  |  |             | Amendment, dated December 1, 2004, to Employment Agreement
    between Beverly Enterprises, Inc. and Jeffrey P. Freimark                                                                                                                                                                                                                                                                                                                                                                     
|        | 10 | .48*  |  |  |             | 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 | .49*  |  |  |             | Enhanced Supplemental Executive Retirement Plan, effective as of
    January 1, 2004 (incorporated by reference to
    Exhibit 10.1 to Beverly Enterprises, Inc.s Quarterly
    Report on Form 10-Q for quarter ended March 30, 2004)                                                                                                                                                                                                                                                       
|        | 10 | .50*  |  |  |             | Form of Long-Term Incentive Plan Notice (incorporated by
    reference to Exhibit 10.2 to Beverly Enterprises,
    Inc.s Quarterly Report on Form 10-Q for the quarter ended
    September 30, 2004)                                                                                                                                                                                                                                                                                        
|        | 10 | .51*  |  |  |             | Form of Restricted Stock Agreement for Non-Employee Directors
    Stock Option Plan (incorporated by reference to
    Exhibit 10.3 to Beverly Enterprises, Inc.s Quarterly
    Report on Form 10-Q for the quarter ended September 30,
    2004)                                                                                                                                                                                                                                            
|        | 10 | .52*  |  |  |             | Form of Restricted Stock Agreement for the 1997 LTIP
    (incorporated by reference to Exhibit 10.4 to Beverly
    Enterprises, Inc.s Form 10-Q for the quarter ended
    September 30, 2004)                                                                                                                                                                                                                                                                                               
|        | 10 | .53*  |  |  |             | Form of Option Agreement for the Non-Employee Directors Stock
    Option Plan (incorporated by reference to Exhibit 10.5 to
    Beverly Enterprises, Inc.s Quarterly Report on Form 10-Q
    for the quarter ended September 30, 2004)                                                                                                                                                                                                                                                      
|        | 10 | .54*  |  |  |             | Form of Option Agreement for the 1997 LTIP (incorporated by
    reference to Exhibit 10.6 to Beverly Enterprises,
    Inc.s Quarterly Report on Form 10-Q for the quarter ended
    September 30, 2004)                                                                                                                                                                                                                                                                                     
|        | 10 | .55   |  |  |             | 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 | .56   |  |  |             | 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 | .57   |  |  |             | 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 | .58   |  |  |             | 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 | .59 |  |  |             | Amendment No. 5 to Amended and Restated Participation
    Agreement, dated as of December 20, 2002 (incorporated by
    reference to Exhibit 10.59 to Beverly Enterprises,
    Inc.s Annual Report on Form 10-K for the year ended
    December 31, 2002)                                                                                                                                                                                                                                                                        
|        | 10 | .60 |  |  |             | Amendment No. 6 to Amended and Restated Participation
    Agreement, dated as of February 28, 2003 (incorporated by
    reference to Exhibit 10.60 to Beverly Enterprises,
    Inc.s Annual Report on Form 10-K for the year ended
    December 31, 2002) [Note: Confidential treatment has been
    requested for portions of this document.]                                                                                                                                                                                   
|        | 10 | .61 |  |  |             | 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 Morgan 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 | .62 |  |  |             | Amendment No. 1 to the Morgan Credit Agreement, dated as of
    December 31, 2001 (incorporated by reference to
    Exhibit 10.47 to Beverly Enterprises, Inc.s Annual
    Report for the year ended December 31, 2001)                                                                                                                                                                                                                                                                                                          
|        | 10 | .63 |  |  |             | Amendment No. 3 to the Morgan Credit Agreement, dated as of
    December 20, 2002 (incorporated by reference to
    Exhibit 10.65 to Beverly Enterprises, Inc.s Annual
    Report on Form 10-K for the year ended December 31, 2002)                                                                                                                                                                                                                                                                                             
|        | 10 | .64 |  |  |             | Amendment No. 4 to the Morgan Credit Agreement, dated as of
    February 28, 2003 (incorporated by reference to
    Exhibit 10.66 to Beverly Enterprises, Inc.s Annual
    Report on Form 10-K for the year ended December 31, 2002)
    [Note: Confidential treatment has been requested for portions of
    this document.]                                                                                                                                                                                                    
|        | 10 | .65 |  |  |             | Corporate Integrity Agreement between the Office of Inspector
    General of the Department of Health and Human Services and
    Beverly Enterprises, Inc. (the Corporate Integrity
    Agreement) (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 | .66 |  |  |             | First Amendment to the Corporate Integrity Agreement
    (incorporated by reference to Exhibit 10.3 to Beverly
    Enterprises, Inc.s Quarterly Report on Form 10-Q for the
    quarter ended March 30, 2004)                                                                                                                                                                                                                                                                                                                    
|        | 10 | .67 |  |  |             | Second Amendment to the Corporate Integrity Agreement
    (incorporated by reference to Exhibit 10.4 to Beverly
    Enterprises, Inc.s Quarterly Report on Form 10-Q for the
    quarter ended March 30, 2004)                                                                                                                                                                                                                                                                                                                   
|        | 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)



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##### Table of Contents



|        |    |       |  |   |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|------- | -- | ----- |  | - | ----------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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. (incorporated by reference to Exhibit 10.76
    to Beverly Enterprises, Inc.s Annual Report on Form 10-K
    for the year ended December 31, 2002)                                                                                                                                                                                                          
|        | 10 | .77   |  |  |             | Guaranty, dated December 24, 2002, between Beverly
    Enterprises, Inc. and Bank of America, N.A. (incorporated by
    reference to Exhibit 10.77 to Beverly Enterprises,
    Inc.s Annual Report on Form 10-K for the year ended
    December 31, 2002)                                                                                                                                                                                                                                   
|        | 10 | .78   |  |  |             | Credit Agreement, dated as of October 22, 2003, (the
    Lehman Credit Agreement) among Beverly Enterprises,
    Inc., Lehman Brothers Inc., Lehman Commercial Paper Inc., Bank
    of Montreal and General Electric Capital Corporation [Note:
    Confidential treatment has been requested for portions of this
    document.] (incorporated by reference to Exhibit 10.1 to
    Beverly Enterprises, Inc.s Quarterly Report on Form 10-Q
    for the quarter ended September 30, 2003)
|        | 10 | .79   |  |  |             | Guaranty and Collateral Agreement, dated as of October 22,
    2003 (incorporated by reference to Exhibit 10.1 to Beverly
    Enterprises, Inc.s Quarterly Report on Form 10-Q for the
    quarter ended September 30, 2003)                                                                                                                                                                                                                                                                
|        | 10 | .80   |  |  |             | First Amendment, dated as of May 13, 2004, to the Lehman
    Credit Agreement (incorporated by reference to Exhibit 10.4
    to Beverly Enterprises, Inc.s Quarter Report on Form 10-Q
    for the quarter ended June 30, 2004)                                                                                                                                                                                                                                                             
|        | 10 | .81   |  |  |             | Second Amendment, dated as of June 17, 2004, to the Lehman
    Credit Agreement (incorporated by reference to Exhibit 10.5
    to Beverly Enterprises, Inc.s Quarter Report on Form 10-Q
    for the quarter ended June 30, 2004)                                                                                                                                                                                                                                                           
|        | 10 | .82   |  |  |             | Asset Purchase Agreement (Hospice USA Asset Purchase
    Agreement), dated as of May 27, 2004, by and among
    Hospice USA, LLC, the Affiliated Sellers named therein, and
    Hospice Preferred Choice, Inc. (incorporated by reference to
    Exhibit 10.6 to Beverly Enterprises, Inc.s Quarterly
    Report on Form 10-Q for the quarter ended June 30, 2004)                                                                                                                        
|        | 10 | .83   |  |  |             | First Amendment, dated as of July 30, 2004, to Hospice USA
    Asset Purchase Agreement (incorporated by reference to
    Exhibit 10.7 to Beverly Enterprises, Inc.s Quarterly
    Report on Form 10-Q for the quarter ended June 30, 2004)                                                                                                                                                                                                                                                 
|        | 10 | .84   |  |  |             | Purchase Agreement, dated as of June 18, 2004, by and among
    Beverly Enterprises, Inc., the subsidiary guarantors named
    therein and Lehman Brothers Inc. and J.P. Morgan Securities
    Inc., as the Initial Purchasers, with respect to Beverly
    Enterprises, Inc.s
    77/8% Senior
    Subordinated Notes (incorporated by reference to
    Exhibit 10.1 to Beverly Enterprises, Inc.s Quarterly
    Report on Form 10-Q for the quarter ended June 30, 2004)                 
|        | 10 | .85   |  |  |             | Registration Rights Agreement, dated as of June 25, 2004,
    by and among Beverly Enterprises, Inc., the subsidiary
    guarantors named therein and Lehman Brothers Inc. and
    J.P. Morgan Securities Inc. as the Initial Purchasers
    (incorporated by reference to Exhibit 10.2 to Beverly
    Enterprises, Inc.s Quarterly Report on Form 10-Q for the
    quarter ended June 30, 2004)                                                                                            
|        | 10 | .86   |  |  |             | Dealer Manager and Solicitation Agent Agreement, dated as of
    June 8, 2004, by and between Beverly Enterprises, Inc. and
    Lehman Brothers Inc. (incorporated by reference to
    Exhibit 10.3 to Beverly Enterprises, Inc.s Quarterly
    Report on Form 10-Q for the quarter ended June 30, 2004)                                                                                                                                                                                    
|        | 10 | .87   |  |  |             | Credit Agreement, dated as of October 6, 2004, among
    Beverly Funding Corporation, Merrill Lynch Capital (as agent and
    lender) and Additional Lenders From Time to Time Party Thereto
    (incorporated by reference to Exhibit 10.1 to Beverly
    Enterprises, Inc.s Current Report on Form 8-K dated
    October 6, 2004)                                                                                                                                                         
|        | 10 | .88* |  |  |             | Employment Contract, made as of December 4, 2003, between
    Beverly Enterprises, Inc. and Cindy Susienka                                                                                                                                                                                                                                                                                                                                                                                   



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##### Table of Contents



|        |    |       |  |   |             |                                                                                                                            
|------- | -- | ----- |  | - | ----------- | ---------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |       |  |   |            
|Number  |    |       |  |   | Description
|        |    |       |  |   |            
|        | 10 | .89* |  |  |             | Beverly Enterprises, Inc. Employee Stock Purchase Plan, as
    amended and restated effective July 1, 2000 (the
    ESPP)
|        | 10 | .90* |  |  |             | First Amendment to the ESPP, effective January 1, 2003                                                                     
|        | 21 | .1   |  |  |             | Subsidiaries of Registrant                                                                                                 
|        | 23 | .1   |  |  |             | Consent of Ernst & Young LLP, Independent Registered
    Public Accounting Firm                                            
|        | 31 | .1   |  |  |             | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer                                                          
|        | 31 | .2   |  |  |             | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer                                                          
|        | 32 | .1   |  |  |             | Section 1350 Certification of Chief Executive Officer                                                                      
|        | 32 | .2   |  |  |             | Section 1350 Certification of Chief Financial Officer                                                                      






|  |                                                                                                                                                      
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------
|* | Indicates management contracts, compensatory plans, contracts
    and arrangements in which any director or named executive
    officer participates.



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



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##### Table of Contents






SIGNATURES






| |                          
| | -------------------------
| | Beverly Enterprises, Inc.
| | Registrant               



| |     |                     
| | --- | --------------------
| | By: | /s/ William R. Floyd

| |                                     
| | ------------------------------------
| |                                     
| | William R. Floyd                    
| | Chairman of the Board, President,   
| | Chief Executive Officer and Director



|                                                         |  |                                                                            |  |                |  | 
|-------------------------------------------------------- |  | -------------------------------------------------------------------------- |  | -------------- |  | 
|                                                        
|/s/ William R. FloydWilliam
    R. Floyd                 |  | Chairman of the Board, President, Chief Executive Officer and
    Director |  | March 15, 2005
|                                                        
|/s/ Jeffrey P. FreimarkJeffrey
    P. Freimark           |  | Executive Vice President, Chief Financial and Information Officer          |  | March 15, 2005
|                                                        
|/s/ Pamela H. DanielsPamela
    H. Daniels               |  | Senior Vice President, Controller and Chief Accounting Officer             |  | March 15, 2005
|                                                        
|/s/ Melanie Creagan
    DreherMelanie
    Creagan Dreher |  | Director                                                                   |  | March 15, 2005
|                                                        
|/s/ John D. Fowler, Jr.John
    D. Fowler, Jr.           |  | Director                                                                   |  | March 15, 2005
|                                                        
|/s/ John P.
    Howe, IIIJohn
    P. Howe, III           |  | Director                                                                   |  | March 15, 2005
|                                                        
|/s/ James W. McLaneJames
    W. McLane                   |  | Director                                                                   |  | March 15, 2005
|                                                        
|/s/ Ivan R. SabelIvan
    R. Sabel                       |  | Director                                                                   |  | March 15, 2005
|                                                        
|/s/ Donald L. SeeleyDonald
    L. Seeley                 |  | Director                                                                   |  | March 15, 2005
|                                                        
|/s/ Marilyn R. SeymannMarilyn
    R. Seymann             |  | Director                                                                   |  | March 15, 2005