<PAGE>

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

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-Q

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



             FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 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
</Table>

                        COMMISSION FILE NUMBER: 1-13845

                           BALANCED CARE CORPORATION
             (Exact name of registrant as specified in its charter)

<Table>
<S>                                            <C>
                   DELAWARE                                      25-1761898
       (State or other jurisdiction of                        (I.R.S. Employer
        Incorporation or organization)                      Identification No.)

     1215 MANOR DRIVE, MECHANICSBURG, PA                           17055
   (Address of principal executive offices)                      (Zip Code)
</Table>

                                 (717) 796-6100
              (Registrant's telephone number, including area code)

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

     Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.

<Table>
<Caption>
                    CLASS                             OUTSTANDING AT NOVEMBER 13, 2001
                    -----                             --------------------------------
<S>                                            <C>
        Common Stock, $.001 par value                            34,172,847
</Table>

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>

                           BALANCED CARE CORPORATION
                               TABLE OF CONTENTS

<Table>
<Caption>
                                                              PAGE
                                                              ----
<S>                                                           <C>
                 PART I -- FINANCIAL INFORMATION
ITEM 1:
CONDENSED FINANCIAL STATEMENTS (unaudited)
  Consolidated Balance Sheets as of September 30, 2001 and
     June 30, 2001..........................................    2
  Consolidated Statements of Operations for the three months
     ended
     September 30, 2001 and 2000............................    3
  Consolidated Statements of Changes in Stockholders'
     Deficit for the three Months ended September 30,
     2001...................................................    4
  Consolidated Statements of Cash Flows for the three months
     ended
     September 30, 2001 and 2000............................    5
  Notes to Consolidated Financial Statements................    6
ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
  AND RESULTS OF OPERATIONS.................................    9
ITEM 3:
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
  RISK......................................................   18

                   PART II -- OTHER INFORMATION
ITEM 1:
LEGAL PROCEEDINGS...........................................   19
ITEM 3:
DEFAULTS UPON SENIOR SECURITIES.............................   19
ITEM 5:
OTHER INFORMATION...........................................   19
ITEM 6:
EXHIBITS AND REPORTS ON FORM 8-K............................   20
(A) Exhibits
(B) Reports on Form 8-K
</Table>

                                        1
<PAGE>

                        PART I -- FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

                   BALANCED CARE CORPORATION AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS

<Table>
<Caption>
                                                              SEPTEMBER 30,   JUNE 30,
                                                                  2001          2001
                                                              -------------   --------
                                                               (UNAUDITED)
                                                                   (IN THOUSANDS
                                                                 EXCEPT SHARE DATA)
<S>                                                           <C>             <C>
ASSETS
Current assets:
  Cash and cash equivalents.................................    $  2,283      $  2,471
  Receivables (net of allowance for doubtful receivables)...       2,961         2,842
  Prepaid expenses and other current assets.................       1,799         1,644
                                                                --------      --------
          Total current assets..............................       7,043         6,957
Restricted investments......................................       2,749         3,052
Property and equipment, net.................................      74,787        75,754
Goodwill, net...............................................       7,688         7,831
Purchase option deposits....................................       2,024         2,589
Other assets................................................       1,945           975
                                                                --------      --------
          Total assets......................................    $ 96,236      $ 97,158
                                                                ========      ========

LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
  Current portion of long-term debt.........................    $ 95,439      $ 91,757
  Accounts payable..........................................       1,761         1,513
  Accrued payroll...........................................         517         1,139
  Accrued expenses..........................................       9,164         7,459
                                                                --------      --------
          Total current liabilities.........................     106,881       101,868
Long-term debt, net of current portion......................       1,404         1,322
Straight-line lease liability...............................       2,726         2,800
Deferred revenue and other liabilities......................         824           830
                                                                --------      --------
          Total liabilities.................................     111,835       106,820
                                                                --------      --------
Commitments and contingencies
Stockholders' deficit:
  Preferred stock, $.001 par value; 5,000,000 authorized;
     none outstanding.......................................          --            --
  Preferred stock, Series A, $.001 par value; 1,150,958.....
  Preferred stock, Series B, $.001 par value; 5,009,750
     authorized; none outstanding...........................          --            --
  Common stock, $.001 par value; authorized -- 50,000,000
     shares; issued and Outstanding -- 34,172,847 shares....          35            35
  Additional paid-in capital................................      83,450        83,450
  Accumulated deficit.......................................     (99,084)      (93,147)
                                                                --------      --------
          Total stockholders' deficit.......................     (15,599)       (9,662)
                                                                --------      --------
          Total liabilities and stockholders deficit........    $ 96,236      $ 97,158
                                                                ========      ========
</Table>

          See accompanying notes to consolidated financial statements.

                                        2
<PAGE>

                   BALANCED CARE CORPORATION AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS

<Table>
<Caption>
                                                                 THREE MONTHS ENDED
                                                                    SEPTEMBER 30,
                                                              -------------------------
                                                                 2001          2000
                                                              -----------   -----------
                                                              (UNAUDITED)   (UNAUDITED)
                                                                    (IN THOUSANDS
                                                                 EXCEPT SHARE DATA)
<S>                                                           <C>           <C>
Revenues:
  Resident services.........................................    $11,141       $11,432
  Patient services..........................................      2,509         2,357
  Other revenues............................................        125           176
                                                                -------       -------
          Total revenues....................................     13,775        13,965
                                                                -------       -------
Operating expenses:
  Facility operating expenses:
     Salaries, wages and benefits...........................      6,255         6,500
     Other operating expenses...............................      3,540         3,720
  General and administrative expenses.......................      2,077         2,630
  Lease expense.............................................      2,367         3,166
  Depreciation and amortization expense.....................      1,444         1,367
  Provision for losses under shortfall funding agreements...        848         2,100
  Loss on financial restructuring...........................        525            --
                                                                -------       -------
          Total operating expenses..........................     17,056        19,483
                                                                -------       -------
     Loss from operations...................................     (3,281)       (5,518)
Other income (expense):
  Interest and other income.................................         58           102
  Interest expense..........................................     (2,714)       (1,810)
                                                                -------       -------
     Net loss...............................................    $(5,937)      $(7,226)
                                                                =======       =======
Basic and diluted loss per share............................    $ (0.17)      $ (0.21)
                                                                =======       =======
Weighted average shares -- basic and diluted................     34,173        34,173
                                                                =======       =======
</Table>

          See accompanying notes to consolidated financial statements.

                                        3
<PAGE>

                   BALANCED CARE CORPORATION AND SUBSIDIARIES
           CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT

<Table>
<Caption>
                                                COMMON STOCK
                                               --------------   ADDITIONAL
                                               ISSUED    PAR     PAID-IN     ACCUMULATED
                                               SHARES   VALUE    CAPITAL       DEFICIT      TOTAL
                                               ------   -----   ----------   -----------   --------
                                                THREE MONTHS ENDED SEPTEMBER 30, 2001 (UNAUDITED)
                                                       (IN THOUSANDS OF DOLLARS AND SHARES)
<S>                                            <C>      <C>     <C>          <C>           <C>
Balance at June 30, 2001.....................  34,173    $35     $83,450      $(93,147)    $ (9,662)
Net Loss.....................................      --     --          --        (5,937)      (5,937)
                                               ------    ---     -------      --------     --------
Balance at September 30, 2001................  34,173    $35     $83,450      $(99,084)    $(15,599)
                                               ======    ===     =======      ========     ========
</Table>

          See accompanying notes to consolidated financial statements.

                                        4
<PAGE>

                   BALANCED CARE CORPORATION AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<Table>
<Caption>
                                                                 THREE MONTHS ENDED
                                                                    SEPTEMBER 30,
                                                              -------------------------
                                                                 2001          2000
                                                              -----------   -----------
                                                              (UNAUDITED)   (UNAUDITED)
                                                                    (IN THOUSANDS
                                                                 EXCEPT SHARE DATA)
<S>                                                           <C>           <C>
Cash Flows from Operating Activities:
  Net loss..................................................   $ (5,937)     $ (7,226)
  Adjustments to reconcile net loss to net cash used for
     operating
     Activities:
     Depreciation and amortization..........................      1,444         1,367
     Provision for losses under shortfall funding
      agreements............................................        848         2,100
     Non-cash loss on financial restructuring...............        147            --
     Non cash interest -- convertible debt..................         --           223
     Changes in operating assets and liabilities, excluding
      effects of
       Acquisitions:
       Increase in receivables, net.........................       (967)       (4,047)
       Increase in development contracts in process, net....         --            (2)
       Increase in prepaid expenses and other current
        assets..............................................       (155)         (264)
       Increase in accounts payable, accrued payroll and
        accrued expenses....................................      1,331           517
                                                               --------      --------
          Net cash used for operating activities............     (3,289)       (7,332)
                                                               --------      --------
Cash Flows from Investing Activities:
  Purchases of property and equipment.......................        (52)          (98)
  Decrease (increase) in restricted investments.............        303           (46)
  Restricted investment available for current liabilities...         --        (2,500)
  Increase in purchase option deposits and other assets.....       (834)           (4)
                                                               --------      --------
          Net cash used for investing activities............       (583)       (2,648)
                                                               --------      --------
Cash Flows from Financing Activities:
  Proceeds from issuance of debt............................     52,943         5,000
  Payments on debt..........................................    (49,179)      (11,087)
  Proceeds from issuance of convertible debentures..........         --        14,000
  Decrease in straight-line lease liability.................        (74)           --
  Decrease in other liabilities.............................         (6)         (132)
                                                               --------      --------
          Net cash provided by financing activities.........      3,684         7,781
                                                               --------      --------
  Decrease in cash and cash equivalents.....................       (188)       (2,199)
Cash and cash equivalents at beginning of period............      2,471         5,722
                                                               --------      --------
Cash and cash equivalents at end of period..................   $  2,283      $  3,523
                                                               ========      ========
Supplemental Cash Flow Information:
  Cash paid for interest....................................   $  2,714      $    366
                                                               ========      ========
</Table>

          See accompanying notes to consolidated financial statements.

                                        5
<PAGE>

                   BALANCED CARE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

  (a) ORGANIZATION AND BACKGROUND

     Balanced Care Corporation ("BCC" or the "Company") was incorporated in
April 1995 and utilizes assisted living facilities as its primary service
platform to provide an array of healthcare and hospitality services, including
preventive care and wellness, medical rehabilitation, Alzheimer's/dementia care
and, in certain markets, extended care. As of September 30, 2001, the Company
owned, leased or managed 55 assisted living communities and three skilled
nursing facilities. The Company's operations are located in Pennsylvania,
Arkansas, Virginia, Ohio, North Carolina, Tennessee, West Virginia and Indiana.
These facilities have a capacity for 3,837 assisted living residents, 169
skilled nursing patients and 57 independent living residents.

     On December 21, 1999 the Company closed on an equity transaction with IPC
Advisor S.a.r.l. ("IPC") in which IPC purchased 16,700,000 shares of Common
Stock at a price per share of $1.25, for an aggregate purchase price of
$20,875,000. As a result of subsequent open market purchases, IPC directly owns
18,212,100 shares of Common Stock of the Company, representing approximately
53.3% of the issued and outstanding shares of the Company's Common Stock.

     The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The Company has
suffered recurring losses in each of the years in the three year period ended
June 30, 2001, and the quarter ended September 30, 2001, and as of September 30,
2001, has a stockholders' deficit of $15,599,000 and a working capital deficit
of $99,838,000. Also, the Company is in default on most of its debt and lease
agreements. Accordingly, such debt has been classified as a current obligation
at September 30, 2001 and the lessors now have various remedies, including
termination of the leases. These matters, among others, raise substantial doubt
about the Company's ability to continue as a going concern. In response to these
conditions, management of the Company has developed a financial recapitalization
plan which contemplates the renegotiation of its leases, the purchase of certain
facilities now leased with financing provided by lessor-REIT's, the sale of
certain facilities, a significant capital investment by IPC Advisors S.a.r.l.
(IPC) (the owner of approximately 53% of the Company's outstanding common stock)
and/or its affiliates, and additional loans from commercial lenders.

     In May 2001 the Company announced that the Company's Board of Directors had
approved a recapitalization plan, including a rights offering. Management
believes the proceeds of the proposed recapitalization will be used to provide
the Company with the funds necessary to (i) complete a restructuring of certain
lease obligations, (ii) purchase certain leased assets, (iii) repay short-term
and sub-debt, (iv) complete certain SPE takeouts, and (v) provide working
capital. The proposed recapitalization plan is expected to be submitted to the
Company's stockholders for approval as soon as practicable. IPC, the Company's
majority shareholder, has agreed to vote in favor of the proposed
recapitalization plan at such time as the plan is submitted to the Company's
stockholders for approval, subject to certain approvals and conditions,
including the successful negotiation of satisfactory agreements with the
Company's landlords to complete the Company's lease restructuring plan. Also in
May 2001, the Company entered into a non-binding letter agreement with IPC under
which IPC agreed to provide the Company with interim financing in an amount of
up to approximately $54,000,000 (the "Bridge Loan"). IPC's commitment to fund
the Bridge Loan is subject to the Company reaching satisfactory agreements with
its landlords to complete the Company's lease restructuring plan.

     The proposed $54.0 million bridge loan is still subject to negotiation of
definitive documentation. Subject to necessary approvals, the proposed bridge
loan is expected to be secured by (i) subordinated security interests in certain
of the Company's encumbered assets and/or (ii) the pledge of stock of certain of
the Company's subsidiaries. The Company is expected to use the proceeds of the
bridge loan to complete its lease-

                                        6
<PAGE>
                   BALANCED CARE CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

restructuring. The Company is in the final stages of negotiations with certain
of its landlords to obtain purchase options, rent reductions and/or deferrals in
consideration for certain payments to the landlords.

     Although the Company believes it will reach agreement with the applicable
landlords in connection with the lease restructuring and will be able to obtain
the proposed bridge loan from IPC, there can be no assurance that the Company
will be able to do so until such time as the applicable parties have entered
into definitive agreements and all applicable conditions to closing have been
satisfied or waived. Continuation of the Company's business is dependent on the
Company's ability to successfully complete the financial recapitalization plan
and, ultimately, to achieve profitable future operations. The consolidated
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that might result from the outcome of these
uncertainties.

  (b) BASIS OF PRESENTATION

     The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries from their respective acquisition
dates. All significant inter-company accounts and transactions have been
eliminated in the consolidated financial statements.

     The financial statements as of and for the three month periods ended
September 30, 2001 and 2000 are unaudited but, in the opinion of management,
have been prepared on the same basis as the audited financial statements and
reflect all adjustments, consisting of normal recurring accruals necessary for a
fair presentation of the information set forth therein. The results of
operations for the three-month period ended September 30, 2001 are not
necessarily indicative of the operating results to be expected for the full year
or any other period. These financial statements and notes should be read in
conjunction with the financial statements and notes included in the audited
consolidated financial statements of the Company for the year ended June 30,
2001 as contained in the Company's Annual Report on Form 10-K.

2.  DEBT

     On September 28, 2001, the Company refinanced two existing Heller
Healthcare Finance loans into a single loan with the same lender in the amount
of $50,737,000 (the "Heller Loan"), which loan has a maturity date of December
31, 2002. The Heller Loan has an interest rate of LIBOR plus 4.25% subject to a
7% floor. Interest is payable monthly in arrears. Principal payments of $50,000
are due and payable monthly. The Heller Loan is secured by the real estate of
seventeen of the Company's owned assisted living facilities.

3.  PROMISSORY NOTES

     The Company increased its borrowings under a loan agreement dated April 4,
2001 among the Company, HR Investments Limited ("HR"), RH Investments Limited
("RH"), and VXM Investments Limited ("VXM") (together, the "VXM Loan").
Borrowings for the fiscal year to date total $4,497,035 bringing the total
current principal balance to $33,600,559. The VXM Loan is subordinated to the
Heller Loan.

4.  PRO FORMA RESULTS OF OPERATIONS

     The following unaudited summary, prepared on a pro forma basis, combines
the results of operations of acquired and divested businesses with those of the
Company as if the acquisitions and divestitures had been consummated as of the
beginning of the respective periods and after considering the impact of certain
adjustments such as: amortization of goodwill, depreciation on assets acquired,
interest on acquisition financing and lease payments on the leased facility (in
thousands of dollars except EPS). The pro forma results include six businesses
acquired in October 2000, and exclude operations transferred to another manager
in fiscal year 2001 as a result of certain lease terminations with two of the
Company's lenders -- Nationwide Health Properties, Inc. and Health Care Property
Investors, Inc. Such businesses acquired were SPE lessees of facilities
previously managed by the Company.

                                        7
<PAGE>
                   BALANCED CARE CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<Table>
<Caption>
                                                              THREE MONTHS ENDED
                                                                 SEPTEMBER 30,
                                                              -------------------
                                                                2001       2000
                                                              --------   --------
<S>                                                           <C>        <C>
Revenue.....................................................  $13,770    $12,863
Expenses....................................................   19,713     18.660
                                                              -------    -------
Net Loss....................................................   (5,943)    (5,797)
Net Loss per common share...................................     (.17)      (.17)
</Table>

     The unaudited pro forma results are not necessarily indicative of what
actually might have occurred if the acquisitions and transfers had been
completed as of July 1, 2001 and 2000, respectively. In addition, they are not
intended to be a projection of future results of operations.

5.  LOSS PER SHARE

     Loss per share is computed using the weighted average number of common
shares outstanding. For the three-month periods ended September 30, 2001 and
2000, common equivalent shares from stock options and warrants are excluded from
the computation, as their effect is anti-dilutive.

6.  LOSS ON FINANCIAL RESTRUCTURING

     The loss on financial restructuring includes losses incurred in connection
with financing efforts and rent restructuring, in the amount of $525,000,
consisting of $275,000 in unamortized exit fees and a prepayment fee for debt
which was refinanced, $145,000 of unamortized deferred financing costs on debt
which was refinanced, and $105,000 of legal, consulting and accounting fees
relating to financial restructuring services.

7.  SUBSEQUENT EVENT

     On October 31, 2001, the Company and Health Care Property Investors, Inc.
(HCPI) the landlord for the Company's facility located in Jackson, TN, entered
into an Agreement for Termination of Lease, Guaranties, and Ancillary Documents
under which (i) HCPI conditionally agreed to terminate the Company's lease
agreement and guarantees as of October 31, 2001 for the Jackson, TN property,
(ii) HCPI conditionally agreed to release the Company from its obligations under
the leases, the guarantees and other lease documents, and (iii) the Company
agreed to transfer to a designated new operator all rights, title, and interest
to the Jackson, TN property. The annual lease obligation for this property was
approximately $470,000.

     On October 31, 2001, the Company exercised its options to purchase 2 SPEs
which it had managed located in the states of Indiana and Tennessee. The Company
continues to manage 14 properties and is negotiating purchase arrangements with
SPE owners in conjunction with its rent restructuring.

8.  SEGMENT REPORTING

     In Fiscal 2002 and 2001, the Company had three primary reportable segments:
(i) Resident Services which includes all assisted living and independent living
services, and the management of assisted living facilities, (ii) Patient
Services which includes skilled nursing services, home health services, and
medical rehabilitation services, and (iii) General and Administrative. No other
individual business segment exceeds the 10% quantitative thresholds of SFAS No.
131.

     The Company's management evaluates the performance of its operating
segments on the basis of income from continuing operations before non-recurring
items (representing provisions for losses on financial restructuring), lease
expense, interest (net), taxes, depreciation and amortization.

                                        8
<PAGE>
                   BALANCED CARE CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<Table>
<Caption>
                                                             QUARTER ENDED SEPTEMBER 30, 2001
                                                    ---------------------------------------------------
                                                    RESIDENT   PATIENT     GENERAL AND
                                                    SERVICES   SERVICES   ADMINISTRATIVE   CONSOLIDATED
                                                    --------   --------   --------------   ------------
<S>                                                 <C>        <C>        <C>              <C>
Revenues..........................................  $11,201     $2,511       $    63         $13,775
Facility Operating expenses.......................    7,796      1,999            --           9,795
                                                    -------     ------       -------         -------
Contribution Margin...............................    3,405        512            63           3,980
General and administrative expenses...............       --         --         2,077           2,077
Provision for losses under shortfall funding
  agreements......................................      848         --            --             848
                                                    -------     ------       -------         -------
Income (loss) before non-recurring items, lease
  expense, Interest (net), taxes, depreciation and
  amortization....................................  $ 2,557     $  512       $(2,014)        $ 1,055
                                                    =======     ======       =======         =======
Total Assets......................................  $91,557     $3,587       $ 1,092         $96,236
                                                    =======     ======       =======         =======
</Table>

<Table>
<Caption>
                                                            QUARTER ENDED SEPTEMBER 30, 2000
                                                   ---------------------------------------------------
                                                   RESIDENT   PATIENT     GENERAL AND
                                                   SERVICES   SERVICES   ADMINISTRATIVE   CONSOLIDATED
                                                   --------   --------   --------------   ------------
<S>                                                <C>        <C>        <C>              <C>
Revenues.........................................  $ 11,587    $2,357       $    21         $ 13,965
Facility Operating expenses......................     8,320     1,900            --           10,220
                                                   --------    ------       -------         --------
Contribution Margin..............................     3,267       457            21            3,745
General and administrative expenses..............        --        --         2,630            2,630
Provision for losses under shortfall funding
  agreements.....................................     2,100        --            --            2,100
                                                   --------    ------       -------         --------
Income (loss) before non-recurring items, lease
  expense, Interest (net), taxes, depreciation
  and amortization...............................  $  1,167    $  457       $(2,609)        $   (985)
                                                   ========    ======       =======         ========
Total Assets.....................................  $108,682    $3,992       $ 8,546         $121,220
                                                   ========    ======       =======         ========
</Table>

ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

     The following discussion and analysis addresses the Company's results of
operations on a historical basis for the quarters ended September 30, 2001 and
2000 and liquidity and capital resources of the Company. This information should
be read in conjunction with the Company's consolidated financial statements, and
related notes thereto, contained elsewhere in this report. This report contains,
in addition to historical information, forward-looking statements that involve
risks and uncertainties. The Company's actual results could differ notes
thereto, contained elsewhere in this report. This report contains, in addition
to historical information, forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially. Factors
that could cause or contribute to such differences include, but are not limited
to, those disclosed in the "Risk Factors" section in the Company's Annual Report
on Form 10-K for the year ended June 30, 2001.

OVERVIEW

     The Company was incorporated in April 1995 and utilizes assisted living
facilities as its primary service platform to provide an array of healthcare and
hospitality services, including preventive care and wellness, medical
rehabilitation, Alzheimer's/dementia care and, in certain markets, extended
care.

                                        9
<PAGE>
                   BALANCED CARE CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The Company has grown primarily by designing, developing, operating and
managing its Outlook Pointe(R) signature series assisted living facilities and
through acquisitions. The following table summarizes the Company's operating
facilities at September 30, 2001 and 2000 (excluding transferred operations).

<Table>
<Caption>
                                                                  SEPTEMBER 30,
                                       -------------------------------------------------------------------
                                                     2001                               2000
                                       --------------------------------   --------------------------------
                                       OWNED   LEASED   MANAGED   TOTAL   OWNED   LEASED   MANAGED   TOTAL
                                       -----   ------   -------   -----   -----   ------   -------   -----
<S>                                    <C>     <C>      <C>       <C>     <C>     <C>      <C>       <C>
Developed Assisted Living
  Facilities.........................   12        7       22       41      12        1       26       39
Acquired Assisted Living
  Facilities.........................    5        9       --       14       5        8       --       13
Skilled Nursing Facilities...........   --        3       --        3      --        3       --        3
                                        --       --       --       --      --       --       --       --
                                        17       19       22       58      17       12       26       55
                                        ==       ==       ==       ==      ==       ==       ==       ==
</Table>

     As of September 30, 2001, the Company owned, leased or managed 55 assisted
living communities and three skilled nursing facilities. The Company's
operations are located in Pennsylvania, Arkansas, Virginia, Ohio, North
Carolina, Tennessee, West Virginia, and Indiana. These operating facilities have
a capacity for 3,837 assisted living residents, 169 skilled nursing patients and
57 independent living residents.

     The Company generates revenue from two primary sources: resident services
and patient services. Resident services include all revenues earned from
services provided to assisted living facility residents. Patient services
revenues include charges for room and board, rehabilitation therapies, pharmacy,
medical supplies, sub acute care, home health, and other programs provided to
patients in skilled nursing facilities.

     The Company classifies its operating expenses into the following
categories: (i) facility operating expenses which include labor, food,
marketing, rehabilitation therapy costs and other direct facility expenses; (ii)
general and administrative expenses, which primarily include corporate office
expenses, regional office expenses and other overhead costs; (iii) provisions
for losses, which include losses relating to working capital advances made under
shortfall funding agreements and losses on financial restructuring; (v) lease
expense, which includes rent for the facilities operated by the Company as well
as corporate office and other rent; and (vi) depreciation and amortization.

RECAPITALIZATION PLAN

     On May 8, 2001, the Company announced that its board of directors approved
a proposed recapitalization plan, including a rights offering (the "Rights
Offering"). Proceeds of the proposed recapitalization are expected to be applied
to (i) complete restructuring of the Company's lease obligations, (ii) purchase
leased assets, (iii) repay short-term debt and sub-debt, (iv) complete certain
SPE takeouts, (v) provide working capital and (vi) pay transaction costs. IPC
Advisors S.a.r.l. ("IPC"), the Company's 53% stockholder, has agreed to vote in
favor of the proposed recapitalization plan at such time as the plan is
submitted to the Company's stockholders for approval, subject to the successful
negotiation of satisfactory agreements with the Company's landlords to complete
its lease restructuring plan.

     Common stockholders who participate in the proposed Rights Offering and
exercise their rights in full will preserve their proportionate equity ownership
and voting power of the Company on a fully diluted basis. Stockholders who do
not exercise their rights in full may experience a decrease in their
proportionate equity ownership and voting power. The rights issuable in
connection with the Rights Offering are expected to be transferable. In
addition, all participating stockholders are expected to have the right, but not
the obligation, to purchase their pro rata share of any portion of the Rights
Offering not subscribed for the other Company stockholders. IPC has agreed to
subscribe for rights in an amount sufficient to complete the proposed
recapitalization plan, subject to the successful negotiation of satisfactory
agreements with the Company's landlords to complete its lease restructuring
plan.

                                        10
<PAGE>
                   BALANCED CARE CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     In order to complete the proposed Rights Offering, the Company's
stockholders may be asked to approve an amendment to the Company's Certificate
of Incorporation to effect a reverse stock split of the Company's issued and
outstanding shares of Common Stock. The reverse stock split would not change the
number of authorized shares of Common Stock or the par value of the shares of
Common Stock.

     In May 2001, the Company entered into a non-binding letter agreement with
IPC, under which IPC has agreed to provide the Company with interim financing in
an amount of up to approximately $54,000,000 ("Bridge Loan"). IPC's commitment
to fund the Bridge Loan is subject to the Company reaching satisfactory
agreements with its landlords to complete the Company's lease restructuring
plan. Subject to necessary approvals, the Bridge Loan is expected to be secured
by (i) subordinated security interests in certain of the Company's encumbered
assets and/or (ii) the pledge of stock of certain of the Company's subsidiaries.
The Company is expected to use the proceeds of the Bridge Loan, in part, to
complete its lease restructuring. The Company continues to be in negotiations
with certain of its landlords to obtain covenant waivers, purchase options, rent
reductions, rent abatements and/or rent deferrals in consideration for certain
payments to the landlords. The remainder of the Bridge Loan is expected to be
used to (i) retire existing short-term debt owed to IPC and (ii) provide working
capital. As consideration for proving the Bridge Loan, the Company will pay a
commitment fee.

     The Company intends to hold a Special Meeting where the stockholders will
be asked to approve, among other things, (i) the proposed recapitalization plan
(including the Bridge Loan), (ii) a reverse stock split and (iii) the proposed
Rights Offering. IPC, the Company's 53% stockholder, has agreed to vote in favor
of each of the proposals at the Special Meeting, subject to the successful
negotiation of satisfactory agreements with the Company's landlords to complete
its lease restructuring plan. However, although the Company believes it will
reach agreement with the applicable landlords in connection with the lease
restructuring plan and will be able to obtain the Bridge Loan from IPC, there
can be no assurance that the Company will be able to do so until such time as
the applicable parties have entered into definitive agreements and applicable
conditions to closing have been satisfied or waived. Unless and until such
closings occur, there can be no assurance that the Company's landlords or
lenders will not take action against the Company with respect to the Company's
defaulted obligations.

TERMINATION OF LEASE

     On October 31, 2001, Health Care Property Investors, Inc. ("HCPI"), the
landlord for the Company's ALF located in Jackson, TN, reached an agreement with
the Company and entered into an Agreement for Termination of Lease, Guaranties,
and Ancillary Documents under which (i) HCPI conditionally agreed to terminate
the Company's lease agreement and guarantees as of October 31, 2001 for the
Jackson property, (ii) HCPI conditionally agreed to release the Company from its
obligations under the leases, the guarantees and other lease documents, (iii)
the Company agreed to transfer to a designated new operator all right, title,
and interest to the Jackson, TN property. The annual lease obligation for this
property was approximately $470,000.

OTHER FINANCING

     On September 28, 2001, the Company refinanced two existing Heller
Healthcare Finance loans into a single loan with the same lender in the amount
of $50,737,000 (the "Heller Loan"), which loan has a maturity date of December
31, 2002. The Heller Loan has an interest rate of LIBOR plus 4.25% subject to a
7% floor. Interest is payable monthly in arrears. Principal payments of $50,000
are due and payable monthly. The Heller Loan is secured by the real estate of
seventeen of the Company's owned assisted living facilities.

     The Company increased its borrowings under a loan agreement dated April 4,
2001 among the Company, HR, RH, and VXM (the "VXM Loan"). Borrowings for the
fiscal year to date total $4,497,035 bringing the total current principal
balance to $33,600,559. The VXM Loan is subordinated to the Heller Loan. It is

                                        11
<PAGE>
                   BALANCED CARE CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

anticipated that the Company will use a portion of the proceeds of the $54M
Bridge Loan to pay off the VXM Loan.

OPERATING AND CENSUS TRENDS

     The following table sets forth, for the periods indicated, certain resident
capacity and occupancy data for the periods indicated for the Company's 58
owned, leased or managed facilities at September 30, 2001 and the Company's 55
owned, leased and managed facilities at September 30, 2000 (excluding the
Company's transferred operations):

<Table>
<Caption>
                                             SEPTEMBER 30, 2001                SEPTEMBER 30, 2000
                                       -------------------------------   -------------------------------
                                          STABLE       STABLE    TOTAL      STABLE       STABLE    TOTAL
                                       FACILITIES(1)   BEDS(1)   BEDS    FACILITIES(1)   BEDS(1)   BEDS
                                       -------------   -------   -----   -------------   -------   -----
<S>                                    <C>             <C>       <C>     <C>             <C>       <C>
End of Period Capacity:
  Owned..............................       17          1,042    1,042        17          1,052    1,052
  Leased.............................       16          1,023    1,313        12            782      782
  Managed............................       18          1,303    1,708        16            987    1,869
                                            --          -----    -----        --          -----    -----
Total................................       51          3,368    4,063        45          2,821    3,703
                                            ==          =====    =====        ==          =====    =====
End of Period Occupancy:
  Owned..............................                      88%      88%                      93%      93%
  Leased.............................                      90%      82%                      93%      93%
  Managed............................                      77%      69%                      83%      64%
                                                        -----    -----                    -----    -----
Total................................                      84%      78%                      90%      79%
                                                        =====    =====                    =====    =====
</Table>

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

(1) Represents communities or expansions thereof that have (i) achieved 90%
    occupancy; (ii) have been opened at least 15 months for 75 bed or less
    communities; 18 months for 75 to 100 bed communities; and 24 months for 100+
    bed communities; or (iii) were acquired as mature properties. The above data
    does not include divested communities.

     To provide information on facility operating performance, the following
table summarizes the operations of all Balanced Care facilities in operation as
of the dates indicated, including facilities owned, leased and managed for
special purpose entities and excluding transferred operations:

<Table>
<Caption>
                                     SEPTEMBER 30,   DECEMBER 31,   MARCH 31,   JUNE 30,   SEPTEMBER 30,
                                         2000            2000         2001        2001         2001
                                     -------------   ------------   ---------   --------   -------------
<S>                                  <C>             <C>            <C>         <C>        <C>
At quarter end:
  Facilities in Operation..........          55             57            57         57            58
  Resident Capacity................       3,703          3,866         3,866      3,961         4,063
  Census...........................       2,910          3,023         3,094      3,158         3,166
For the three month period ended:
  Revenue..........................     $18,051        $18,956       $19,291    $19,995       $20,678
  EBITDAR..........................     $ 4,631        $ 4,590       $ 3,988    $ 4,944       $ 5,657
</Table>

     The above summary is presented for the purpose of demonstrating the
operating trends of the Company's overall portfolio of facilities and is not
necessarily indicative of the Company's reported consolidated results of
operations under Generally Accepted Accounting Principles (GAAP). The results of
operations for the

                                        12
<PAGE>
                   BALANCED CARE CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

managed facilities are included in the data above but are not included in the
Company's consolidated financial statements presented in this Quarterly Report.

     See also "Liquidity and Capital Resources -- Operations."

RESULTS OF OPERATIONS

     The following table sets forth, for the periods indicated, certain data as
a percentage of total revenue:

<Table>
<Caption>
                                                               THREE MONTHS
                                                                  ENDED
                                                              SEPTEMBER 30,
                                                              --------------
                                                              2001     2000
                                                              -----    -----
<S>                                                           <C>      <C>
Statement of Operations Data:
Resident services...........................................   81.0%    81.8%
Patient services............................................   18.2     16.9
Other Revenue...............................................    0.8      1.3
                                                              -----    -----
Total revenue...............................................  100.0%   100.0%
                                                              -----    -----
Operating expenses:
  Facility operating expenses...............................   71.1     73.2
  Development, general and administrative expenses..........   15.1     18.8
  Provision for losses on shortfall funding agreements......    6.1     15.0
  Lease expense.............................................   17.2     22.7
  Depreciation and amortization.............................   10.5      9.8
  Loss on financial restructuring...........................    3.8       --
                                                              -----    -----
Total operating expenses....................................  123.8%   139.5%
                                                              -----    -----
Loss from operations........................................  (23.8)   (39.5)
Other income (expense)......................................  (19.3)   (12.2)
                                                              -----    -----
Net loss....................................................  (43.1)%  (51.7)%
                                                              =====    =====
</Table>

THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2000

     Total Revenue.  Total revenue for the three months ended September 30, 2001
decreased by $190,000 to $13,775,000 compared to $13,965,000 for the three
months ended September 30, 2001. The decrease primarily resulted from revenue of
$2,500,000 relating to transferred operations and was partially offset by
increased revenue of $2,182,000 from SPE and other operations acquired during
fiscal year 2001. Resident services comprised 81% and 82% of total revenues for
three months ended September 30, 2001 and 2000, respectively.

     Operating Expenses.  Total operating expenses decreased by $2,427,000 to
$17,056,000 for three months ended September 30, 2001 from $19,483,000 for the
three months ended September 30, 2000. This decrease was the result of (i) a
decrease of $2,123,000 from transferred operations, (ii) a decrease in the
provision for losses under shortfall fundings of $1,252,000 and (iii) decreased
general and administrative expenses of $553,000 and (iv) decreased lease expense
of $799,000. These decreases were partially offset by (i) an increase of
$1,799,000 for SPE facilities acquired in fiscal year 2001 and (ii) a loss on
financial restructuring of $525,000.

     Facility operating expenses for the three months ended September 30, 2001
decreased by $425,000 to $9,795,000 from $10,220,000 for three months ended
September 30, 2000. This decrease was a primarily the

                                        13
<PAGE>
                   BALANCED CARE CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

net result of a decrease of $2,123,000 for transferred operations, and was
partially offset by an increase of $1,799,000 from SPE facilities acquired in
fiscal year 2001.

     General and administrative expenses decreased by $553,000 to $2,077,000 for
the three months ended September 30, 2001 from $2,630,000 for three months ended
September 301, 2000. The decrease was primarily a result of reduction in
corporate staffing.

     Lease expense decreased by $799,000 to $2,367,000 for the three months
ended September 30, 2001 from $3,166,000 for the three months ended September
30, 2000. This decrease was primarily a result of decreased lease expense from
transferred operations and was partially offset by increased lease expense from
SPE facilities acquired in fiscal year 2001.

     Depreciation and amortization increased by $77,000 to $1,444,000 for the
three months ended September 30, 2001 from $1,367,000 for the three months ended
September 30, 2000.

     The provision for losses under shortfall funding agreements decreased by
$1,252,000 to $848,000 for three months ended September 30, 2001 from $2,100,000
for the three months ended September 30, 2000. The decrease is primarily the
result of (i) reduction in losses relating to transferred operations, which were
in the ramp-up stage in the prior year comparative quarter; and (ii) overall
improvement in operating performance. The Company reports its losses under these
shortfall-funding agreements using the modified equity accounting approach.
Information concerning the provision for losses under shortfall funding
agreements is discussed below under "Liquidity and Capital
Resources -- Operations."

     The loss on financial restructuring of $525,000 includes costs incurred in
connection with financing efforts and rent restructuring. No loss on financial
restructuring was incurred for the same period in the prior fiscal year.

     Other Income (Expense).  Interest and other income for the three months
ended September 30, 2001 decreased by $44,000 to $58,000 from $102,000 for the
three months ended September 30, 2000. Interest expense for the three months
ended September 30, 2001 increased by $904,000 to $2,714,000 from $1,810,000 for
the three months ended September 30, 2000. This was primarily due to the
additional accrued interest on the VXM Loan due to increased borrowing.

     Net Loss.  The Company's net loss of $5,937,000 for the three months ended
September 30, 2001 decreased by $1,289,000 from a net loss of $7,226,000 for the
three months ended September 30 2000. This decrease resulted primarily from (i)
a decrease in the provision for losses under shortfall funding agreements of
$1,252,000 (ii) decreased lease expense of $799,000 and (iii) decreased general
and administrative expenses of $553,000. The decrease was partially offset by an
increase in interest expense of $904,000.

LIQUIDITY AND CAPITAL RESOURCES

     Since the Company's announcement in 1999 that it was curtailing development
activities and focusing on operations, the Company has entered into various
financing and capital transactions to access liquidity in order to provide the
funds to support operations.

RECAPITALIZATION PLAN

     See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Recapitalization Plan."

                                        14
<PAGE>
                   BALANCED CARE CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

OTHER FINANCING TRANSACTIONS

     See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Other Financing."

OPERATIONS

     At September 30, 2001, the Company had opened 41 of its Outlook Pointe(R)
signature series assisted living facilities and operated and managed a total of
58 assisted and skilled nursing facilities (excluding transferred operations.)
The Company has concluded its initial round of development activity initiated
four years ago.

     The Company's development projects generally involved entering into
development agreements with third party owners, which are typically REITs (each,
an "Owner"). A third party special purpose entity ("SPE") Operator/Lessee leases
the assisted living facility from the Owner when construction has been completed
and provides funding for the working capital during the initial occupancy
period. The Company manages the assisted living facility pursuant to a
management agreement for a term of two to nine years in return for a management
fee approximating 6% of the net revenue of the facility. The foregoing is an
off-balance sheet financing structure.

     For development projects utilizing the off-balance sheet structure, the
Company has the option to purchase the equity or assets of the Operator/Lessee
at a purchase price based on a formula set forth in an Option Agreement and a
Shortfall Funding Agreement, respectively. As consideration for the option,
which is exercisable by the Company at any time during the term of the Option
Agreement, the Company pays option payments to the equity owner of the SPE (the
"Equity Owner"). Without the Owner's prior consent, the Equity Owner may not
sell the equity or assets of the SPE to any third party other than the Company.
The Company has closed 40 development projects for which the Company holds or
held the foregoing type of option (excluding the transferred operations). As of
September 30, 2001, the Company has exercised its option to purchase 18 SPEs
financed under the SPE structure for a total purchase price of approximately
$21.9 million, of which $6.4 million was paid in cash and $15.5 million was
financed by increasing the existing facility lease bases. In October 2001, the
Company exercised its options to purchase an additional 2 SPEs financed under
this structure. The Company continues to manage 20 properties under the SPE
structure. Management is continuing to negotiate purchase arrangements with SPE
owners in conjunction with its rent restructuring.

     Many of the facilities operated or managed by the Company are leased under
long-term operating leases. These lease obligations for the next twelve months
aggregate approximately $20,000,000. The Company's operations do not generate
sufficient cash flow to meet current or future rent obligations under the
Company's existing lease documents. Cash flows remaining after meeting the
Company's operating and general and administrative expenses are used to make
partial rent payments to certain landlords. The Company's ability to meet its
future lease obligations is discussed further in this section. The lease
documents with all of the REITS contain certain financial and/or performance
covenants and other restrictions which, unless waived in writing by the REIT,
(i) require the Company, on a consolidated basis, to meet certain financial
covenants, such as a tangible net worth covenant, a current ratio, a debt to
equity ratio and/or minimum cash requirements (measured on a quarterly and year
end basis), (ii) require the tenants, on a facility basis, to meet certain rent
coverage ratios (measured on a quarterly and year end basis), (iii) require the
Company and/or the tenants to maintain certain escrow funds, (iv) limit, among
other things, the ability of the Company, certain of its subsidiaries and/or the
tenants to borrow additional funds, encumber assets, dispose of assets or engage
in mergers or other business combinations, (v) cross-default certain of the
Company's other obligations and (vi) prohibit the Company and/or the tenants
from operating competing facilities within a designated radius of existing
facilities. The Company is not in compliance with financial covenants set forth
in clauses (i) and (ii) at September 30, 2001 under its leases with four of its
landlords. For the current quarter-
                                        15
<PAGE>
                   BALANCED CARE CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

end, the Company has not received any default notices from any of the affected
landlords specifically with respect to the Company's failure to comply with the
financial covenants; however, there can be no assurance that the Company will
not receive such notices or that the landlords will not take action to enforce
their rights and remedies under the leases. Management is negotiating revised
covenants in conjunction with the rent restructuring.

     On November 15, 2000, the Company received notices of events of default
from Meditrust with respect to the failure to meet certain financial covenants
under the Meditrust leases at September 30, 2000 and the failure to timely
complete construction of the facility located in Chesterfield, VA. The Meditrust
notices stated that Meditrust had elected to apply the collateral deposits from
nine of the 12 Outlook Pointe facility leases in the aggregate amount of
$1,187,988 towards repayment of two promissory notes made by TC Realty Holding
Company in favor of Meditrust in the aggregate principal amount of $1,420,000,
which notes had a maturity date of October 1, 2000 (collectively, the
"Xenia/Lima Notes"). The proceeds from Xenia/Lima Notes were used to provide
working capital for the Xenia and Lima Outlook Pointe facilities. On November
15, 2000, Meditrust also elected to apply the cash collateral deposits from two
more of the 12 Outlook Pointe facility leases in the aggregate amount of
$174,898 towards the prepayment of a promissory note made by Black Box Holding
Company in favor of Meditrust in the principal amount of $362,225, which note
had a maturity date of January 30, 2001 (the "Lewisburg Note"). The proceeds
from the Lewisburg Note were used to provide working capital for the Lewisburg
Outlook Pointe facility. Finally, on November 15, 2000, Meditrust elected to
apply the capital for the remaining Outlook Pointe facility in the amount of
$108,821 towards the outstanding obligation of the promissory note made by the
Company and IPC in favor of Meditrust in the principal amount of $7,811,054 (see
"Strategic Changes and Business Developments -- Property Acquisition").

     On January 30, 2001 an additional note made by TC Realty Holding Company in
favor of Meditrust in the principal amount of $517,464 (the "Chippewa Note")
came due and payable and an additional note made by Black Box Holding Company in
the principal amount of $517,064 (the "Dillsburg Note") came due and payable.
The proceeds from the Chippewa Note and the Dillsburg Note were used to provide
working capital for the Chippewa and Dillsburg Outlook Pointe facilities.

     On February 9, 2001, two additional notes made by TC Realty Holding Company
in favor of Meditrust in the principal amounts of $948,000 and $813,751,
respectively (the "Pocahontas/Blytheville Notes") came due and payable. The
proceeds from the Pocahontas/Blytheville Notes were used to provide working
capital for the Pocahontas and Blytheville facilities.

     On July 31, 2001, four additional notes made by TC Realty Holding Company
in favor of Meditrust in the principal amounts of $1,167,000, $857,000, $824,000
and $1,984,000 (the "Chesterfield/Hendersonville/ Kingsport/Knoxville Notes")
came due and payable. The proceeds from the Chesterfield/Hendersonville/
Kingsport/Knoxville Notes were used to provide working capital for the
Chesterfield, Hendersonville, Kingsport, Knoxville facilities (herein after the
Xenia/Lima Notes, the Lewisburg Note, the Chippewa Note, the Dillsburg Note, the
Pocahontas/Blytheville Notes and the Chesterfield/Hendersonville/Kingsport/
Knoxville Notes shall be collectively referred to as the "Notes").

     Under certain Working Capital Assurance Agreements executed by the Company
in favor of Meditrust, the Company is obligated to advance such amounts as are
necessary to ensure that the obligations under the Notes are paid in a timely
fashion. Meditrust may seek payment from the Company for the outstanding
principal balance of the Notes, together with default interest and late charges,
at any time. To date, Meditrust has not commenced any legal action against the
Company for its obligations under the Working Capital Assurance Agreements;
however, there can be no assurance that Meditrust will not commence action to
enforce its rights and remedies against the Company. No provision has been made
for any loss in connection with this matter.

                                        16
<PAGE>
                   BALANCED CARE CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     In December 2000, the Company elected to withhold rent payments from five
of its six landlords. Since that date, the Company has negotiated and continues
to negotiate with all six of its landlords to obtain covenant modifications,
purchase options, rent reductions, rent abatements, rent deferrals and/or
facility transfers that reflect the current economics of the Company's
facilities. The negotiations are primarily related to newly constructed
facilities that are in various stages of lease-up and require significant
capital to reach maturity.

     With respect to the five affected landlords, the non-payment of rent
constitutes monetary defaults under the Company's facility leases, and provides
the landlords with various remedies, including, but not limited to, termination
of the leases. These monetary defaults could trigger defaults under other leases
with the same landlord or with the Company's other landlord or lenders.

     The Company received notices of default from the affected landlords. NHP
accelerated all rent and commenced legal action to enforce its rights and
remedies; however, on January 12, 2001, the Company and NHP reached an agreement
and NHP agreed to dismiss all legal actions against the Company. Ocwen Financial
("Ocwen") elected to apply $257,000 under certain letters of credit maintained
in favor of Ocwen by the Company towards the Company's rent obligations. On or
about May 31, 2001, Ocwen commenced legal action against the Company in an
action styled Centerville ALF, Inc. et al v. Balanced Care Corporation, in the
United States District Court for the Southern District of Ohio in Civil Action
No. C 3 01-233. In that action, Ocwen seeks a judicial determination that the
Company must unconditionally fund its obligations to advance rent and other
expenses under the Ocwen leases in accordance with the Company's Working Capital
Assurance Agreements. In Addition, Ocwen seeks damages in the amount of
$531,000, plus interest and costs. The other three landlords have demanded
payment of outstanding rent. To date no other legal action has been commenced
against the Company in connection with the foregoing payment defaults; however
there can be no assurance that the affected landlords will not take action to
enforce their rights and remedies under the leases.

     The Company's lease arrangements are generally for initial terms of 9 to 15
years with aggregate renewal terms ranging from 15 to 25 years and provide for
contractually fixed rent plus additional rent, subject to certain limits. The
additional rent is capped at 2% to 3% of the prior year's total rent and is
based on either the annual increase in gross revenues of the facility or the
increase in the consumer price index. The Company's lease arrangements generally
contain an option to purchase the facility at its fair market value at the end
of the initial lease term and each renewal term.

     The Company's operations do not generate sufficient cash flow to meet
current or future rent obligations under the Company's existing lease documents.
However, the operations do generate sufficient cash flow to cover facility
operating and general and administrative expenses. Cash flows remaining after
meeting the foregoing expenses are used to make partial rent payments to certain
landlords and interest payments to the Company's lenders. As of September 30,
2001, the Company had approximately $5,100,000 of accrued, unpaid rent for its
leased and managed facilities. As part of its finance-restructuring plan, the
Company is negotiating rent abatements, rent deferrals, and purchase options
with its landlords. Management is negotiating a proposed Rights Offering to meet
the current and future capital needs of the Company. IPC, the Company's 53%
stockholder, has agreed to vote its shares in favor of a Rights Offering at the
Company's Special Meeting, subject to the successful negotiation of satisfactory
agreements with the Company's landlords to complete its lease restructuring
plan. Although the Company anticipates that a Rights Offering will be completed
in due course, there can be no assurance this will be the case until definitive
documents have been prepared and the transactions contemplated thereunder have
been completed. The inability of the Company to close on a Rights Offering or an
alternative source of funding would have a material adverse effect on the
Company's business, results of operations and financial condition. If the
Company is unable to close on the proposed Rights Offering or find an
alternative financing source, the Company might ultimately need to seek
protection under applicable insolvency laws; however, the Company is not
pursuing this alternative at this time. The Company's ability to continue as a
going concern is dependent upon, among other things, the Company's ability to
restructure the terms of its debt and lease obligations, the Company's ability

                                        17
<PAGE>
                   BALANCED CARE CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

to generate sufficient cash from operations and close on the proposed Rights
Offering or an alternative source of funding.

OPERATING ACTIVITIES

     Cash used by operations decreased by $4,043,000 to $3,289,000 for the three
months ended September 30, 2001 from cash used by operations of $7,332,000 for
the three months ended September 30, 2000. The decrease in cash used was the
result of improved operating performance, thereby reducing the operating loss
and shortfall funding expense, and a reduction in the increase in receivables.

INVESTING AND FINANCING ACTIVITIES

     Cash used for investing activities decreased by $2,065,000 to $583,000 for
the three months ended September 30, 2001 from $2,648,000 for the three months
ended September 30, 2000. Cash provided by financing activities decreased by
$4,097,000 to $3,684,000 for the three months ended September 30, 2001 from
$7,781,000 for the three months ended September 30, 2000. Decreases in cash used
for investing activities resulted primarily from a reduction in cash used to
increase restricted investments in the prior year. Decreases in financing
activities resulted from the decreased funding from debt and capital sources.

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The Company did not have any securities subject to market risk as of, or
during, the three months ended at September 30, 2001.

                                        18
<PAGE>

                          PART II -- OTHER INFORMATION

ITEM 1:  LEGAL PROCEEDINGS

     The pending litigation captioned Harry Brukner v. Balanced Care
Corporation, et al, filed on or about November 15, 2000 in the Court of Chancery
of the State of Delaware, New Castle County at Civil Action No. 18490-NC, was
dismissed by the plaintiff without prejudice.

ITEM 3:  DEFAULTS UPON SENIOR SECURITIES

     On December 30, 1999, the Company and IPC (collectively, "Maker") made a
promissory note in the amount of $7,811,054 (the "Meditrust Note") in favor of
New Meditrust Corporation, as assigned to La Quinta TRS II, Inc. on March 28,
2001 ("Meditrust"). The Meditrust Note had a maturity date of April 3, 2001 (the
"Maturity Date"). On April 4, 2001, La Quinta sent a letter to the Company and
IPC, stating that the Company and IPC failed to pay the entire outstanding
principal amount and all accrued interest under the Meditrust Note on the
Maturity Date, and demanding payment thereof. On June 20, 2001, La Quinta sued
the Company and IPC in an action styled La Quinta TRS II, Inc. v. Balanced Care
Corporation, et al., in the Superior Court Department of the Trial Court of the
Commonwealth of Massachusetts at Civil Action No. 01-2810C. In that action, La
Quinta asserted that the Company's and IPC failure to pay the entire principal
amount and all outstanding interest under the Meditrust Note on the Maturity
Date was an event of default under the Meditrust Note, and that La Quinta is
entitled to damages equal to the principal amount of the Meditrust Note of
$7,811,054, together with late fees of $250 per month beginning in April 2001
and 18% interest per annum on the late charges and all costs and attorneys' fees
incurred in collecting on the Meditrust Note, plus 18% interest per annum. The
Company is currently defending this matter and is simultaneously negotiating
with Meditrust regarding the Meditrust Note as part of the lease restructuring.

     The Company entered into an Indemnification, Defense, Hold Harmless and
Reimbursement Agreement dated as of December 29, 1999 in favor of IPC (the
"Indemnification Agreement"), under which the Company agreed to indemnify IPC
for its obligations to Meditrust under the Meditrust Note. The Company's
obligations under the Indemnification Agreement are secured by a pledge of the
stock of certain of the Company's subsidiaries pursuant to a Stock Pledge
Agreement dated as of April 18, 2000, as the same has been amended from time to
time. IPC's rights and interests under the IPC Stock Pledge Agreement are also
subordinated to the rights of Heller. IPC has agreed to refrain from taking any
action or from receiving any payment arising under or with respect to the
Indemnification Agreement until the Heller Obligations are paid in full.

     See also, "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."

ITEM 5:  OTHER INFORMATION

     See Item 2, "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- For an update on the Company's financial
activities.

                                        19
<PAGE>

ITEM 6:  EXHIBITS AND REPORTS ON FORM 8-K

<Table>
<Caption>
EXHIBIT
NUMBER                                 DESCRIPTION
-------                                -----------
<C>       <S>  <C>
 10.1     --   Agreement for Termination of Lease, Guaranties and Ancillary
               Documents dated as of October 31, 2001 among Health Care
               Property Investors, Inc., Assisted Care Operators of
               Jackson, LLC, Assisted Care Operators, L.L.C., Oakhaven
               Assisted Living, Inc., Oakhaven Senior Living, Inc.,
               Balanced Care Corporation, BCC Development and Management Co
               and Balanced Care at Jackson, Inc. (filed herewith)
 10.2     --   Agreement for Assumption of Guaranty Obligations dated as of
               October 31, 2001 among Assisted Care Operators, LLC,
               Oakhaven Assisted Living, Inc., Oakhaven Senior Living,
               Inc., Balanced Care Corporation and Health Care Property
               Investors, Inc. (filed herewith)
 10.3     --   Operations Transfer Agreement dated as of October 31, 2001
               among Assisted Care Operators of Jackson, LLC, Balanced Care
               at Jackson, Inc. and Cheyenne Trace, L.L.C. (filed herewith)
 10.4     --   Fifth Amendment Agreement dated as of October 4, 2001 among
               Balanced Care Corporation, VXM Investments Limited, HR
               Investments Limited and RH Investments Limited (filed
               herewith)
 10.5     --   Note made by Balanced Care Corporation in favor of VXM
               Investments Limited, HR Investments Limited and RH
               Investments Limited in the amount of $1,200,000 dated as of
               October 4, 2001 (filed herewith)
 10.6     --   Sixth Amendment Agreement dated as of October 29, 2001 among
               Balanced Care Corporation, VXM Investments Limited, HR
               Investments Limited and RH Investments Limited (filed
               herewith)
 10.7     --   Note made by Balanced Care Corporation in favor of VXM
               Investments Limited, HR Investments Limited and RH
               Investments Limited in the amount of $900,000 dated as of
               October 29, 2001 (filed herewith)
</Table>

(B) Reports on Form 8-K

     None.

                                        20
<PAGE>

                                   SIGNATURES

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

                                          BALANCED CARE CORPORATION

                                          By:      /s/ CLINT T. FEGAN
                                            ------------------------------------
                                                       Clint T. Fegan
                                                  Chief Financial Officer

Date: November 14, 2001

                                        21
<PAGE>

                                 EXHIBIT INDEX

<Table>
<Caption>
EXHIBIT
NUMBER                                 DESCRIPTION
-------                                -----------
<C>       <S>  <C>
 10.1     --   Agreement for Termination of Lease, Guaranties and Ancillary
               Documents dated as of October 31, 2001 among Health Care
               Property Investors, Inc., Assisted Care Operators of
               Jackson, LLC, Assisted Care Operators, L.L.C., Oakhaven
               Assisted Living, Inc., Oakhaven Senior Living, Inc.,
               Balanced Care Corporation, BCC Development and Management Co
               and Balanced Care at Jackson, Inc. (filed herewith)
 10.2     --   Agreement for Assumption of Guaranty Obligations dated as of
               October 31, 2001 among Assisted Care Operators, LLC,
               Oakhaven Assisted Living, Inc., Oakhaven Senior Living,
               Inc., Balanced Care Corporation and Health Care Property
               Investors, Inc. (filed herewith)
 10.3     --   Operations Transfer Agreement dated as of October 31, 2001
               among Assisted Care Operators of Jackson, LLC, Balanced Care
               at Jackson, Inc. and Cheyenne Trace, L.L.C. (filed herewith)
 10.4     --   Fifth Amendment Agreement dated as of October 4, 2001 among
               Balanced Care Corporation, VXM Investments Limited, HR
               Investments Limited and RH Investments Limited (filed
               herewith)
 10.5     --   Note made by Balanced Care Corporation in favor of VXM
               Investments Limited, HR Investments Limited and RH
               Investments Limited in the amount of $1,200,000 dated as of
               October 4, 2001 (filed herewith)
 10.6     --   Sixth Amendment Agreement dated as of October 29, 2001 among
               Balanced Care Corporation, VXM Investments Limited, HR
               Investments Limited and RH Investments Limited (filed
               herewith)
 10.7     --   Note made by Balanced Care Corporation in favor of VXM
               Investments Limited, HR Investments Limited and RH
               Investments Limited in the amount of $900,000 dated as of
               October 29, 2001 (filed herewith)
</Table>

                                        22