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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20459

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FORM 10-Q

(Mark One)

|/x/ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
|--- | ---------------------------------------------------------------------------------------

For the quarterly period ended June 30, 2001

OR

|/ / | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
|--- | ----------------------------------------------------------------------------------------

For the Transition period from  to

Commission file number 1-14151

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LTC HEALTHCARE, INC.(Exact name of Registrant as specified in its charter)

Nevada(State or other jurisdiction of
incorporation or organization)

91-1895305(I.R.S. Employer
Identification No.)


300 Esplanade Drive, Suite 1865
Oxnard, California 93030(Address of principal executive offices)

(805) 981-8659(Registrant's telephone number, including area code)

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Indicate
by check mark whether Registrant (1) has filed all reports to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes /x/  No / /

Shares
of Registrant's common stock, $.01 par value, outstanding at August 10, 2001 - 2,079,326 (excludes Treasury Shares of 1,256,556)

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LTC HEALTHCARE, INC.  FORM 10-Q  June 30, 2001  INDEX

|                             |  |                                                                                       |  | Page
|---------------------------- |  | ------------------------------------------------------------------------------------- |  | ----
|PART IFinancial Information |  |                                                                                      
|Item 1.                      |  | Financial Statements                                                                  |  |     
|                             |  | Consolidated Balance Sheets                                                           |  | 3   
|                             |  | Consolidated Statement of Operations                                                  |  | 4   
|                             |  | Consolidated Statement of Cash Flows                                                  |  | 5   
|                             |  | Notes to Consolidated Financial Statements                                            |  | 6   
|Item 2.                      |  | Management's Discussion and Analysis of Financial Condition and Results of Operations |  | 11  
|PART IIOther Information    |  |                                                                                      
|Item 6.                      |  | Exhibits and Reports on Form 8-K                                                      |  | 14  

2

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LTC HEALTHCARE, INC.  CONSOLIDATED BALANCE SHEETS(In thousands, except share amounts)

|                                      |                                                                                                           | June 30,
2001               |        | December 31,
2000 |        
|------------------------------------- | --------------------------------------------------------------------------------------------------------- | --------------------------- | ------ | ----------------- | -------
|
|ASSETS                                |                                                                                                           |                             |        |                   |        
|Current Assets:                       |                                                                                                           |                             |        |                   |        
|                                      | Cash and cash equivalents                                                                                 |                             | $      | 904               |        
|                                      | Accounts receivable, net of allowance for doubtful accounts: 2001$6,279; 2000$5,682                     |                             |        | 9,365             |        
|                                      | Prepaid expenses and other current assets                                                                 |                             |        | 1,915             |        
|                                      |                                                                                                           |                             |        |                   |        
|                                      |                                                                                                           | Total current assets        |        |                   | 12,184 
|Property and Equipment:               |                                                                                                           |                             |        |                   |        
|                                      | Buildings, improvements and equipment                                                                     |                             |        | 41,526            |        
|                                      | Land                                                                                                      |                             |        | 1,669             |        
|                                      | Accumulated depreciation                                                                                  |                             |        | (5,480            | )      
|                                      |                                                                                                           |                             |        |                   |        
|Property and equipment, net           |                                                                                                           |                             | 37,715 |                   |        
|Other Assets:                         |                                                                                                           |                             |        |                   |        
|                                      | Equity securities                                                                                         |                             |        | 887               |        
|                                      | Debt securities                                                                                           |                             |        | 9,325             |        
|                                      | Other assets                                                                                              |                             |        | 329               |        
|                                      |                                                                                                           |                             |        |                   |        
|                                      |                                                                                                           | Total other assets          |        |                   | 10,541 
|                                      |                                                                                                           |                             |        |                   |        
|                                      | Total assets                                                                                              |                             | $      | 60,440            |        
|                                      |                                                                                                           |                             |        |                   |        
|LIABILITIES AND STOCKHOLDERS' DEFICIT |                                                                                                           |                             |        |                   |        
|Current Liabilities:                  |                                                                                                           |                             |        |                   |        
|                                      | Accounts payable                                                                                          |                             | $      | 4,998             |        
|                                      | Accrued salaries and benefits                                                                             |                             |        | 4,847             |        
|                                      | Deposits from residents                                                                                   |                             |        | 570               |        
|                                      | Current portion of mortgage loans payable                                                                 |                             |        | 462               |        
|                                      | Other accrued liabilities                                                                                 |                             |        | 10,400            |        
|                                      |                                                                                                           |                             |        |                   |        
|                                      |                                                                                                           | Total current liabilities   |        |                   | 21,277 
|Mortgage Loans Payable                |                                                                                                           |                             | 32,596 |                   |        
|Line of Credit from LTC Properties    |                                                                                                           |                             | 17,335 |                   |        
|                                      |                                                                                                           |                             |        |                   |        
|                                      | Total liabilities                                                                                         |                             |        | 71,208            |        
|Minority Interest                     |                                                                                                           |                             | 3,518  |                   |        
|Commitments and Contingencies         |                                                                                                           |                             |        |                   |        
|Stockholders' Deficit:                |                                                                                                           |                             |        |                   |        
|                                      | Preferred stock $0.01 par value; 10,000,000 shares authorized                                             |                             |        |                  |        
|                                      | Common stock $0.01 par value; 40,000,000 shares authorized; shares issued: 20013,335,882; 20003,335,882 |                             |        | 33                |        
|                                      | Capital in excess of par value                                                                            |                             |        | 10,224            |        
|                                      | Treasury stock: shares 20011,256,556; 20001,397,356                                                     |                             |        | (2,702            | )      
|                                      | Unearned stock compensation                                                                               |                             |        | (183              | )      
|                                      | Accumulated deficit                                                                                       |                             |        | (21,025           | )      
|                                      | Accumulated comprehensive loss                                                                            |                             |        | (633              | )      
|                                      |                                                                                                           |                             |        |                   |        
|                                      |                                                                                                           | Total stockholders' deficit |        |                   | (14,286
|                                      |                                                                                                           |                             |        |                   |        
|                                      | Total liabilities and stockholders' deficit                                                               |                             | $      | 60,440            |        
|                                      |                                                                                                           |                             |        |                   |        

See accompanying notes

3

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LTC HEALTHCARE, INC.  CONSOLIDATED STATEMENTS OF OPERATIONS  (Unaudited)(In thousands, except share and per share amounts)

|                                       |                                                                  | Three Months Ended
June 30, |           | Six Months Ended
June 30, |       
|-------------------------------------- | ---------------------------------------------------------------- | --------------------------- | --------- | ------------------------- | ------
|
|Revenues:                              |                                                                  |                             |           |                           |       
|                                       | Net patient revenues                                             |                             | $         | 22,450                    |       
|                                       | Rental income                                                    |                             |           | 899                       |       
|                                       | Interest and other income                                        |                             |           | 292                       |       
|                                       |                                                                  |                             |           |                           |       
|                                       |                                                                  | Total revenues              |           |                           | 23,641
|Costs and Expenses:                    |                                                                  |                             |           |                           |       
|                                       | Salaries and benefits                                            |                             |           | 18,127                    |       
|                                       | Supplies                                                         |                             |           | 3,098                     |       
|                                       | RentLTC Properties, Inc.                                        |                             |           | 763                       |       
|                                       | Interest expense                                                 |                             |           | 676                       |       
|                                       | Interest expense on line of credit from LTC Properties, Inc.     |                             |           | 434                       |       
|                                       | Depreciation                                                     |                             |           | 434                       |       
|                                       | Minority interest                                                |                             |           | 86                        |       
|                                       | Provision for bad debts                                          |                             |           | 468                       |       
|                                       | Impairment charge                                                |                             |           | 1,691                     |       
|                                       | Other operating and administrative                               |                             |           | 4,191                     |       
|                                       |                                                                  |                             |           |                           |       
|                                       |                                                                  | Total expenses              |           |                           | 29,968
|Loss before provision for income taxes |                                                                  |                             | (6,327    | )                         |       
|Provision for income taxes             |                                                                  |                             |          |                           |       
|                                       |                                                                  |                             |           |                           |       
|Net loss                               |                                                                  | $                           | (6,327    | )                         | $     
|                                       |                                                                  |                             |           |                           |       
|Weighted average shares outstanding    |                                                                  |                             | 1,835,831 |                           |       
|Net Loss Per Common Share:             |                                                                  |                             |           |                           |       
|                                       | Basic and diluted net loss per share                             |                             | $         | (3.45                     | )     
|                                       |                                                                  |                             |           |                           |       
|Comprehensive loss:                    |                                                                  |                             |           |                           |       
|                                       | Net loss                                                         |                             | $         | (6,327                    | )     
|                                       | Unrealized income (loss) on available-for-sale equity securities |                             |           | 110                       |       
|                                       |                                                                  |                             |           |                           |       
|Total comprehensive loss               |                                                                  | $                           | (6,217    | )                         | $     
|                                       |                                                                  |                             |           |                           |       

See accompanying notes

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LTC HEALTHCARE, INC.  CONSOLIDATED STATEMENTS OF CASH FLOWS  (Unaudited)(In thousands)

|                                                  |                                                                             | Six Months Ended
June 30,                          |                                                    
|------------------------------------------------- | --------------------------------------------------------------------------- | -------------------------------------------------- | ---------------------------------------------------
|
|OPERATING ACTIVITIES:                             |                                                                             |                                                    |                                                    
|                                                  | Net loss                                                                    |                                                    | $                                                  
|                                                  | Adjustments to reconcile net loss to net cash used in Operating activities: |                                                    |                                                    
|                                                  |                                                                             | Depreciation                                       |                                                    
|                                                  |                                                                             | Non-cash impairment charge                         |                                                    
|                                                  |                                                                             | Other non-cash items                               |                                                    
|                                                  |                                                                             | (Increase) decrease in accounts receivable, net    |                                                    
|                                                  |                                                                             | (Increase) in prepaid expenses and other assets    |                                                    
|                                                  |                                                                             | Increase in accounts payable                       |                                                    
|                                                  |                                                                             | Increase in accrued salaries and benefits          |                                                    
|                                                  |                                                                             | Increase in accrued expenses and other liabilities |                                                    
|                                                  |                                                                             |                                                    |                                                    
|                                                  |                                                                             |                                                    | Net cash used in operating activities              
|INVESTING ACTIVITIES:                             |                                                                             |                                                    |                                                    
|                                                  | Redemption (purchase) of LTC Properties bonds                               |                                                    |                                                    
|                                                  | Property and equipment additions                                            |                                                    |                                                    
|                                                  | Other                                                                       |                                                    |                                                    
|                                                  |                                                                             |                                                    |                                                    
|                                                  |                                                                             |                                                    | Net cash provided by (used in) investing activities
|                                                  |                                                                             |                                                    |                                                    
|FINANCING ACTIVITIES:                             |                                                                             |                                                    |                                                    
|                                                  | Advances under line of credit from LTC Properties                           |                                                    |                                                    
|                                                  | Payments on line of credit from LTC Properties                              |                                                    |                                                    
|                                                  | Principal payments on notes and mortgage loans payable                      |                                                    |                                                    
|                                                  | Issue of restricted common stock                                            |                                                    |                                                    
|                                                  | Repurchase of common stock                                                  |                                                    |                                                    
|                                                  |                                                                             |                                                    |                                                    
|                                                  |                                                                             |                                                    | Net cash provided by financing activities          
|                                                  |                                                                             |                                                    |                                                    
|Increase (decrease) in cash and cash equivalents  |                                                                             |                                                    | 261                                                
|Cash and cash equivalents, beginning of period    |                                                                             |                                                    | 643                                                
|                                                  |                                                                             |                                                    |                                                    
|Cash and cash equivalents, end of period          |                                                                             | $                                                  | 904                                                
|                                                  |                                                                             |                                                    |                                                    
|Supplemental disclosure of cash flow information: |                                                                             |                                                    |                                                    
|                                                  |                                                                             | Interest paid                                      |                                                    
|Non-cash investing and financing activities:      |                                                                             |                                                    |                                                    
|                                                  | Non-cash acquisition of working capital                                     |                                                    | $                                                  

See accompanying notes

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LTC HEALTHCARE, INC.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Unaudited)

1.  The Company

LTC Healthcare, Inc. (the "Company"), a Nevada corporation, was incorporated on March 20, 1998, and began operations on March 25, 1998.
The Company was originally a preferred stock subsidiary of LTC Properties, Inc. ("LTC Properties"), a real estate investment trust. On September 30, 1998, concurrently with the
conversion of all shares of Company non-voting common stock held by LTC Properties into voting common stock of the Company, LTC Properties completed the spin-off of Company
stock through a taxable dividend to holders of LTC Properties common stock, convertible subordinated debentures and Series C Preferred Stock (the "Distribution"). Upon completion of the
Distribution, the Company began operating as a separate public company.

The
principal business of the Company is providing long-term healthcare services through the operation of nursing facilities. As of December 31, 2000, the Company
operated 30 nursing facilities with 3,332 licensed beds. On March 1, 2001, the Company began operating one additional nursing facility with 129 licensed beds under a short-term
management agreement with LTC Properties. On April 1, 2001, the Company began operating a 135 bed nursing facility under a management agreement with LTC Properties. On April 24, 2001,
the Company ceased operating and closed a 284 bed nursing facility in Texas. On May 25, 2001, the Company ceased operating and closed a 144 bed nursing facility in Texas. On June 20,
2001, the Company ceased operating and closed a 90 bed nursing facility in Texas. At June 30, 2001, the Company operated 28 nursing facilities with 2,994 licensed beds and one rehabilitation
hospital with 84 beds, which are collectively referred to herein as nursing facilities. The facilities operated by the Company at June 30, 2001, are located in seven states (Florida, Georgia,
Illinois, Iowa, Kansas, Texas and Virginia). In addition to the operation of nursing facilities, as of June 30, 2001, the Company owned four nursing facilities and four assisted living
facilities that were leased to third party operators under triple net leases. On July 24, 2001, the Company ceased operations and closed a 71 bed nursing facility in Illinois.

The
consolidated financial statements included herein have been prepared by the Company without audit and in the opinion of management include all adjustments (all of which were
normal and re-occurring) necessary for a fair presentation of the results of operations for the three and six months ended June 30, 2001 and 2000 pursuant to the rules and
regulations of the Securities and Exchange Commission. The accompanying consolidated financial statements include the accounts of the
Company, its wholly owned subsidiaries and controlled partnerships. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain reclassifications have been
made to the prior periods, including the period ended June 30, 2000, to conform with the reporting for the three and six months ended June 30, 2001. Certain information and footnote
disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations;
however, the Company believes that the disclosures in the accompanying financial statements are adequate to make the information presented not misleading. These consolidated financial statements
should be read along with the Company's 2000 Annual Report on Form 10-K filed with the Securities and Exchange Commission. The results of operations for the six months ended
June 30, 2001 are not necessarily indicative of the results for a full year.

2.  Segment Reporting

The Company has one operating segment, nursing operations. Nursing operations include revenues generated by providing long-term healthcare services
in nursing facilities operated by the Company and

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rental income generated by leasing long-term healthcare facilities owned by the Company to third party operators.

3.  Related Parties

The Company and LTC Properties entered into a Second Amended and Restated Promissory Note ("Note") in June 2001. The Note operates as a line of credit
and provides for a $20,000,000 secured line of credit that bears interest payable quarterly at a rate of 10% and matures April 1, 2008. Additionally the Note contains a waiver until
June 30, 2002 of payment of unpaid interest of $1,367,000 through April 30, 2001. LTC Properties also agreed to forbear through June 30, 2001, default rights under leases for the
non-payment of rents totaling $3,746,000. Previous to entering into this Note, LTC Properties had provided the Company with a $20,000,000 unsecured line of credit bearing interest at 10%
and maturing in March 2008. As of June 30, 2001 and December 31, 2000, $17,335,000 and $16,582,000, respectively, were outstanding under the Note or line of credit. On
July 20, and August 6, 2001, the Company drew an additional $750,000 and $500,000, respectively, under the Note.

The
Company is dependent upon LTC Properties for capital and financing. LTC Properties' Senior Secured Revolving Credit Agreement (the "Secured Revolving Credit") permits LTC
Properties to loan the Company up to $25,000,000. The Company and LTC Properties have not increased the unsecured line of credit between the companies. Should any such amendment be proposed, it would
need approval of the independent board members of each company's board. There can be no assurance that
such an increase in the line will be offered, at what terms it may be offered and if offered, approved by the Company's independent board members.

For
the three months ended June 30, 2001 and 2000, the Company recorded interest expense related to the line of credit of $434,000 and $475,000, respectively. For the six
months ended June 30, 2001 and 2000, the Company recorded interest expense related to the line of credit of $872,000 and $768,000, respectively. LTC Properties has granted a waiver through
June 30, 2001 for unpaid interest of $290,000 for May and June 2001.

As
of June 30, 2001, the Company operated 26 nursing facilities that are owned by LTC Properties. The Company recorded rental expense of approximately $1,615,000 for properties
owned by LTC Properties during the six months ended June 30, 2001. These properties are leased from LTC Properties, in general, on a short-term basis, and the leases have been
renewed for one year, ending June 30, 2002. Annual rental to LTC Properties under these leases is approximately $2,900,000.

LTC
Properties had appointed the Company as exclusive sales agent for all LTC Properties' skilled nursing facilities. This agreement expired by its terms March 31, 2001 and was
not renewed. During the first six months of 2000, the Company recorded other income under this agreement of $225,000 and recorded total income of $1,600,000 for all of 2000.

As
of June 30, 2001, the Company had mortgage loans secured by six nursing facilities with total outstanding principal of $16,353,000 and a weighted average interest rate of
9.2% payable to LTC Properties' REMIC pools. Two of the nursing facilities securing the mortgage loans payable to LTC Properties' REMIC pools are operated by the Company, and the remaining four
nursing facilities are leased to third party operators.

As
of June 30, 2001, the Company owned 194,100 shares of LTC Properties common stock. As of December 31, 2000, the Company owned $560,000 face amount of LTC Properties
8.5% convertible subordinated debentures with a maturity date of January 1, 2001. On January 1, 2001, LTC Properties redeemed these securities for the face value.

7

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4.  Debt and Equity Securities

The Company has Regent Assisted Living, Inc. ("Regent") Debentures with face value of $8,500,000 that mature on April 1, 2008 and bear interest
at 7.5% and are convertible at $6.75 per share. As of
June 30, 2001 and December 31, 2000, based on management's estimates, the fair value of the Regent Debentures was approximately $5,100,000.

On
March 19, 2001, Regent announced that it had asked three real estate investment trusts to negotiate new terms underlying their leases. On July 30, 2001, Regent
announced it had hired Cohen & Steers Capital Advisors, LLC to assist Regent in obtaining equity capital, evaluating strategic alternatives and facilitate new corporate opportunities. Regent
disclosed in its December 31, 2000 annual Report it anticipates that its cash requirements during 2001 will exceed its cash provided by operations. Accordingly, Regent has begun the process of
preparing and implementing a plan to address its liquidity issues. To date, Regent has not formally requested any concessions relating to Regent's obligations under the convertible subordinated
debentures owned by the Company and Regent is current in all interest payments to the Company. The Company cannot predict what, if any, impairment charge may be required in the future as Regent
proceeds with the restructuring of its business.

On,
March 22, 2001, Assisted Living Concepts, Inc. ("ALC") announced it had engaged Jeffries & Company, Inc. as a financial advisor to explore
restructuring ALC's obligations to both its convertible subordinated debenture holders and lessors of certain under-performing leases. The Company has joined a Bondholders Committee formed to discuss
with ALC and ALC's financial advisors their proposals regarding ALC's convertible subordinated debentures.

At
June 30, 2001, the Company owned $3,000,000 face amount of ALC 5.625% convertible subordinated debentures due May 2003 at a purchase price of $2,160,000.

During
the first six months of 2001, the Company ceased recording accretion of the discount related to its investment in ALC debentures and ceased accruing interest due on these
debentures. As of June 30, 2001, ALC was current on payment to the Company for interest due on these debentures.

As
of June 30, 2001 and December 31, 2000, the fair value of the ALC convertible debentures owned by the Company based on quoted market prices, was approximately
$840,000 and $1,357,000 respectively. During the three months ended March 31, 2001 and June 30, 2001, the Company recorded impairment charges relating to these debentures of $150,000 and
$1,841,000, respectively. The impairment charges were to write-down the carrying value to $825,000, the estimated net realizable value of the Company's investment in the convertible
debentures of ALC, which also is comparable to the market price of these securities at June 30, 2001. At this time, the Company and ALC have not reached an agreement on the restructuring of
these debentures but believes the ultimate offer will include other forms of debt securities and equity in ALC. It is possible that ultimately the value received from these debentures will be less
than $825,000 but at this time the Company has recorded an impairment charge based on information currently available.

As
of June 30, 2001 and December 31, 2000, the Company owned 30,847 shares of ALC common stock, which was recorded at its fair value of $4,000 and $10,000, respectively.
Unrealized holding losses on
changes in the fair value of the Company's investment in ALC common stock of $6,000 is included in comprehensive loss for the six months ended June 30, 2001.

At
June 30, 2001 and December 31, 2000, the Company's investment in LTC Properties common stock was recorded at its fair value of $883,000 and $691,000, respectively, in
the accompanying balance sheets. Unrealized holding gains on changes in the fair value of the Company's investment in LTC Properties common stock of $192,000 are included in the comprehensive loss for
the six months ended June 30, 2001.

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5.  Long-term Debt

LTC Properties has provided the Company with a $20,000,000 secured line of credit that bears interest payable quarterly at 10% and matures on April 1,
2008. As of June 30, 2001 and December 31, 2000, $17,335,000 and $16,582,000, respectively, was outstanding under the line of credit. Additionally, the Company has unpaid interest due
LTC Properties of $1,657,000 as of June 30, 2001. See Note 3Related Parties.

At
June 30, 2001 and December 31, 2001, the Company had total outstanding mortgage loans of $33,058,000 and $33,277,000, respectively, with a weighted average interest
rate of 8.24%.

6.  Contingencies

The Company is not party to any legal proceedings, which in the opinion of management, would have a material adverse effect on the Company's financial
position, results of operations or liquidity. The Company has recorded a reserve, based on historical data, related to the nursing facilities in Texas and Florida which currently carry no professional
liability insurance and to its other nursing facilities that have claims made coverage for claims arising in fiscal 2001.

7.  Stockholders' Deficit

In June 2001, the Company's Board approved under the 1998 Equity Participation Plan a grant of 332,000 restricted shares to twelve individuals. Twenty
thousand of these shares vested immediately and 312,000 shares vest one-third immediately and one-third each anniversary date of the date of grant in
2003 and 2004. In the three months ended June 30, 2001, the Company record compensation expense related to the restricted stock of $15,900.

During
the six months ended June 30, 2001 and 2000, the Company repurchased 191,200 shares and 354,400 shares, respectively, of the Company's common stock for an aggregate
respective purchase price of approximately $246,000 and $362,000, respectively.

8.  Concentration of Credit Risks

The Company has significant accounts receivable whose collectibility or realizability is dependent upon the performance of certain government programs,
primarily Medicare and Medicaid.

As
of June 30, 2001 and December 31, 2000, the Company's investment of $8,500,000 in Regent's convertible subordinated debentures represented 14% and 13%, respectively,
of the Company's total assets.

The
Company's financial position, results of operations and liquidity could be adversely affected by financial difficulties experienced by Regent, including bankruptcy, insolvency or
general downturn in business. The Company does not believe there are significant credit risks associated with the government programs. The Company believes that an adequate provision has been made for
the possibility of accounts receivable proving uncollectible and continually monitors and adjusts these reserves as necessary.

The
following table contains summary information for Regent that was extracted from public reports on file with the Securities and Exchange Commission for December 31, 1999 and
from Regent's

9

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audited annual financial statements for December 31, 2000. Regent is a publicly traded company, and as such is subject to the filing requirements of the Securities and Exchange Commission.

|       |                             |  |   |         |   | Twelve Months
Ended
December 31, |       
|------ | --------------------------- |  | - | ------- | - | -------------------------------- | ------
|
|
|
|Regent |                             |  |   |         |   |                                  |       
|       | Total assets                |  | $ | 93,057  |   | $                                | 62,686
|       | Total debt                  |  | $ | 79,979  |   | $                                | 43,542
|       | Total stockholders' deficit |  | $ | (12,526 | ) | $                                | (5,311
|       | Total revenues              |  |   | N/A     |   |                                  | N/A   
|       | Loss before taxes           |  |   | N/A     |   |                                  | N/A   
|       | Net loss                    |  |   | N/A     |   |                                  | N/A   

9.  Income Taxes

SFAS No. 109 requires the reduction of the deferred tax assets by a valuation allowance if, based on the weight of available evidence, it is more likely
than not that a portion or all of the deferred tax asset will not be realized. Sufficient taxable income must be generated in future years to realize the tax benefit associated with the net deferred
tax asset. The Company believes that sufficient doubt exists as to whether future taxable income will be sufficient to realize such tax benefits and, accordingly, a valuation allowance was established
against the deferred tax asset and no tax benefit was recorded.

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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Operating Results

The Company was formed in March 1998 and was spun off by LTC Properties, Inc. ("LTC Properties") on September 30, 1998. At June 30,
2001, the Company operated 28 nursing facilities with a total of 2,994 licensed beds and one rehabilitation hospital with 84 beds and owned 4 nursing facilities and 4 assisted living facilities that
were leased to third party operators.

Three Months Ended June 30, 2001 Compared to the Three Months Ended June 30, 2000

Total revenues for the three months ended June 30, 2001 decreased from $24,281,000 to $23,641,000 for the same period in 2000. Rental income for the
three months ended June 30, 2001 decreased $400,000 due to the sale of two assisted living facilities to LTC Properties during the third quarter of 2000. Interest and other income decreased
$102,000 primarily due to the non-accrual of interest and no accretion of the discount on ALC debentures in 2001, and the lack of an LTC Properties dividend payment and interest from an
interest-bearing note receivable during 2000.

Salaries
and benefits were $18,127,000, for the three months ended June 30, 2001 as compared to $15,202,000 for the same period in 2000. The increase in salaries and benefits
is primarily the result of an increase in in-house therapy staff, two additional nursing facilities and a fully staffed and operational corporate office.

Interest
expense decreased by $342,000 for the three months June 30, 2001 as compared to the same period in 2000 primarily as a result of $318,000 reduction of interest expense
related to the elimination of mortgage debt as a result of the sale of two assisted living facilities during the third quarter of 2000.

Interest
expense on the line of credit with LTC Properties decreased from $475,000 for the three months ended June 30, 2000 to $434,000 for the three months ended
June 30, 2001 due to the lower
average outstanding balance of the line of credit for the three months ended June 30, 2001 as compared to the same period in 2000.

For
the three months ended June 30, 2001, 22 of the nursing facilities operated by the Company were leased from LTC Properties and incurred rent expense of $763,000 under the
related operating leases. The rent expense for the same three months of 2000 was $2,045,000 and the decrease of $1,282,000 was attributable to a reduction in the operating lease rents and the closure
of two nursing facilities.

During
the three months ended June 30, 2001, the Company recorded an impairment charge relating to the write-down to estimated net realizable value of the Company's
investment in the convertible debentures of ALC as discussed in Note 4.

Other
operating and administrative expense for the three months ended June 30, 2001 decreased from $4,548,000 to $4,191,000 for the same period in 2000. The operating and
administrative expense increased approximately $600,000 primarily as a result of higher insurance expense, utilities, property taxes and travel and entertainment as the result of two additional
nursing facilities and a fully staffed and operational corporate office. The operating and administrative expense decreased approximately $900,000 primarily as a result of the elimination of both
contract therapy services and management fees paid to Lenox Healthcare.

No
benefit for income taxes was recorded for the three months ended June 30, 2001 and 2000 since the Company believes that it is more likely than not that future taxable income
will not be sufficient to realize tax benefits associated with net operating loss carry-forwards.

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Six Months Ended June 30, 2001 Compared to the Six Months Ended June 30, 2000

Total revenues for the six months ended June 30, 2001 decreased from $47,181,000 to $46,688,000 for the same period in 2000. Rental income for the six
months ended June 30, 2001 decreased $777,000 due to the sale of two assisted living facilities to LTC Properties during the third quarter of 2000. Interest and other income decreased $270,000
primarily due to the non-accrual of interest and no accretion of the discount on ALC debentures in 2001, and the lack of an LTC Properties dividend payment and interest from an interest
bearing-note receivable during 2000. Additionally, other income increased $282,000 as result the startup of an ancillary services company January 1, 2001.

Salaries
and benefits were $34,317,000, for the six months ended June 30, 2001 as compared to $30,276,000 for the same period in 2000. The increase in salaries and benefits is
primarily the result of an increase in in-house therapy staff, two additional nursing facilities and a fully staffed and operational corporate office.

Interest
expense decreased by $704,000 for the six months June 30, 2001 as compared to the same period in 2000 primarily as a result of $637,000 reduction of interest expense
related to the elimination of mortgage debt as a result of the sale of two assisted living facilities during the third quarter of 2000.

Interest
expense on the line of credit with LTC Properties increased from $768,000 for the six months ended June 30, 2000 to $872,000 for the six months ended June 30,
2001 due to the higher average outstanding balance of the line of credit for the six months ended June 30, 2001 as compared to the same period in 2000.

For
the six months ended June 30, 2001, 22 of the nursing facilities operated by the Company were leased from LTC Properties and incurred rent expense of $1,615,000 under the
related operating leases. The rent expense for the same six months of 2000 was $4,087,000 and the decrease of $2,472,000 was attributable to a reduction in the operating lease rents and the closure of
three nursing facilities.

For
the six months ended June 30, 2001, the Company recorded an impairment charge relating to the write-down to estimated net realizable value of the Company's
investment in the convertible debentures of ALC as discussed in Note 4.

Other
operating and administrative expense for the six months ended June 30, 2001 increased to $8,764,000 from $8,069,000 for the same period in 2000. The operating and
administrative expense increased $2,800,000 primarily as a result of higher insurance expense, utilities, property taxes and travel and entertainment as the result of two additional nursing
facilities, a fully staffed and operational corporate office and creation of ancillary services company. The operating and administrative expense decreased approximately $2,200,000 as a result of the
elimination of both contract therapy services and management fees paid to Lenox Healthcare.

No
benefit for income taxes was recorded for the six months ended June 30, 2001 and 2000 since the Company believes that it is more likely than not that future taxable income
will not be sufficient to realize tax benefits associated with net operating loss carry-forwards.

Liquidity and Capital Resources

LTC Properties had provided the Company with a $20,000,000 unsecured line of credit that bears interest at an annual rate of 10% and matures in 2008. The
Company and LTC Properties entered into a Second Amended and Restated Promissory Note ("Note") in June 2001. The Note operates as a line of credit and provides for a $20,000,000 secured line of
credit that bears interest payable quarterly at a rate of 10% and matures April 1, 2008. As of June 30, 2001, the Company had borrowings outstanding under the secured line of credit of
$17,335,000. One July 20 and August 6, 2001, the Company drew an additional $750,000 and $500,000, respectively, under the Note. LTC Properties' Secured Revolving Credit permits LTC
Properties to loan the Company up to $25,000,000. The Company and LTC

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Properties have not increased the secured line of credit between the companies. Should such amendment be proposed, it would need approval of the independent board members of each company's board.
There can be no assurance that such an increase in the line will be offered, at what terms it may be offered and if offered, approved by the Company's independent Board members.

Net
cash used in operating activities for the six months ended June 30, 2001 was $44,000. The use of cash in operating activities is largely attributable to the Company's
operations of 29 nursing facilities during the six months ended June 30, 2001, partially offset by improvements in working capital.

Net
cash provided by investing activities for the six months ended June 30, 2001 was $2,000. The Company received proceeds of $560,000, the face amount of LTC Properties 8.5%
convertible subordinated debentures due January 1, 2001. The purchase of $558,000 of equipment for the six months ended June 30, 2001 was related primarily to the purchase of equipment
associated with the Company's management of the nursing operations.

Net
cash provided by financing activities for the three months ended June 30, 2001 was $303,000. During 2001, the Company utilized borrowings under the line of credit of
approximately $1,650,000 to fund the working capital requirements of the nursing facilities operated by the Company and to repurchase shares of its common stock. Payments of $219,000 and $897,000 were
made on notes and mortgage loans and the LTC Properties line of credit during the six months ended June 30, 2001, respectively.

The
Company anticipates that cash flow from operations and borrowings under its line of credit will be adequate to meet its short-term liquidity requirements. The ability
of the Company to satisfy its long term liquidity requirements will be dependent upon its future performance, which will be subject to prevailing economic conditions and to financial, business,
economic and other factors beyond the Company's control. There can be no assurance that future healthcare legislation or other efforts by governmental and private payors to reduce healthcare costs
will not have a material adverse effect on
the Company's results of operations, liquidity and financial position. Currently, the Company has no other external sources of financing and the Company has not received any other commitment with
respect to any funds needed in the future. The Company does not know when it could expect to be able to access capital markets or to seek other financing and there can be no assurance that it will be
able to do so at all or in amounts or on terms acceptable to the Company. If necessary, the Company could secure additional funds or financing using its debt and equity securities, which have an
estimated fair market value of $6,827,000 at June 30, 2001.

Statement Regarding Forward Looking Disclosure

Certain information contained in this report includes forward looking statements, which can be identified by the use of forward looking terminology such as
"may", "will", "expect", "should" or comparable terms or negatives thereof. These statements involve risks and uncertainties that could cause actual results to differ materially from those described
in the statements. These risks and uncertainties include (without limitation) the following: the effect of economic and market conditions and changes in interest rates, government policy relating to
the health care industry including changes in reimbursement levels under the Medicare and Medicaid programs, changes in reimbursement by other third party payors, the financial strength of the
Company's facilities as it affects the Company's continuing ability to meet the obligations under the terms of the Company's agreements with its lenders.

Currently,
the Company has no other external sources of financing and the Company has not received any commitment with respect to any funds needed in the future. The Company expects
to be able to access capital markets or to seek other financing, but there can be no assurance that it will be able to do so at all or in amounts or on terms acceptable to the Company.

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PART II  LTC HEALTHCARE, INC.  OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits



(b) Reports on Form 8-K



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SIGNATURES

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

|                       |  | LTC Healthcare, Inc.
Registrant
|---------------------- |  | -------------------------------
|                       |  |                                
|Dated: August 14, 2001 |  | By:                            

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