<PAGE>   1

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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

                                   FORM 10-Q

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

                FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2000

                                       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: 1-13845

                           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>
                                                              OUTSTANDING AT
                    CLASS                                    JANUARY 31, 2001
                    -----                                    ----------------
<S>                                            <C>
        Common Stock, $.001 par value                           34,172,847
</TABLE>

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<PAGE>   2

                           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 December 31, 2000 and
     June 30, 2000..........................................    3
  Consolidated Statements of Operations for the three months
     ended December 31, 2000 and 1999.......................    4
  Consolidated Statements of Operations for the six months
     ended December 31, 2000 and 1999.......................    5
  Consolidated Statements of Changes in Stockholders' Equity
     for the six months ended December 31, 2000.............    6
  Consolidated Statements of Cash Flows for the six months
     ended December 31, 2000 and 1999.......................    7
  Notes to Consolidated Financial Statements................    8
ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
  AND RESULTS OF OPERATIONS.................................   17
ITEM 3:
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
  RISK......................................................   29
ITEM 5:
OTHER EVENTS................................................   29

                   PART II -- OTHER INFORMATION
ITEM 6:
EXHIBITS AND REPORTS ON FORM 8-K............................   30
  (A) Exhibits
  (B) Reports on Form 8-K
</TABLE>

                                        2
<PAGE>   3

                        PART I -- FINANCIAL INFORMATION

ITEM 1:  FINANCIAL STATEMENTS

                   BALANCED CARE CORPORATION AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS
                        (IN THOUSANDS EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                              DECEMBER 31,    JUNE 30,
                                                                  2000          2000
                                                              ------------    --------
                                                              (UNAUDITED)
<S>                                                           <C>             <C>
ASSETS
Current assets:
  Cash and cash equivalents.................................    $  3,088      $  5,722
  Receivables (net of allowance for doubtful receivables)...       5,588         5,085
  Development contracts in process..........................          --           336
  Prepaid expenses and other current assets.................       1,614         2,329
                                                                --------      --------
          Total current assets..............................      10,290        13,472
  Restricted investments....................................       2,993         3,879
  Property and equipment, net...............................      80,964        79,878
  Goodwill, net.............................................      14,183        14,469
  Purchase option deposits..................................       4,545         4,296
  Other assets..............................................       1,660         4,000
                                                                --------      --------
          Total assets......................................    $114,635      $119,994
                                                                ========      ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Current portion of long-term debt.........................    $ 83,594      $  8,888
  Accounts payable..........................................       1,471         2,664
  Accrued payroll...........................................       1,393         1,045
  Accrued expenses..........................................       5,024         4,423
                                                                --------      --------
          Total current liabilities.........................      91,482        17,020
Long-term debt, net of current portion......................       2,257        60,881
Straight-line lease liability...............................       2,312         2,784
Deferred revenue and other liabilities......................         992         3,003
                                                                --------      --------
          Total liabilities.................................      97,043        83,688
                                                                --------      --------
Commitments and contingencies
Stockholders' equity:
  Preferred stock, $.001 par value; 5,000,000 authorized;
     none outstanding.......................................          --            --
  Preferred stock, Series A, $.001 par value; 1,150,958
     authorized; none outstanding...........................          --            --
  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 at
     December 31, 2000 and June 30, 2000....................          35            35
  Additional paid-in capital................................      83,333        83,333
  Accumulated deficit.......................................     (65,776)      (47,062)
                                                                --------      --------
          Total stockholders' equity........................      17,592        36,306
                                                                --------      --------
          Total liabilities and stockholders equity.........    $114,635      $119,994
                                                                ========      ========
</TABLE>

          See accompanying notes to consolidated financial statements.
                                        3
<PAGE>   4

                   BALANCED CARE CORPORATION AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                        (IN THOUSANDS EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                                  THREE MONTHS ENDED
                                                                     DECEMBER 31,
                                                              --------------------------
                                                                 2000           1999
                                                              -----------    -----------
                                                              (UNAUDITED)    (UNAUDITED)
<S>                                                           <C>            <C>
Revenues:
  Resident services.........................................   $ 12,987        $ 7,032
  Patient services..........................................      2,357         11,145
  Development fees..........................................         17            142
  Management fees...........................................         52             76
  Other revenues............................................        112             70
                                                               --------        -------
          Total revenues....................................     15,525         18,465
                                                               --------        -------
Operating expenses:
  Facility operating expenses:
     Salaries, wages and benefits...........................      7,466          8,713
     Other operating expenses...............................      4,521          5,587
  General and administrative expenses.......................      2,653          2,576
  Provision for losses under shortfall funding agreements...      1,764            750
  Loss on financial restructuring...........................      4,388             --
  Lease expense.............................................      2,995          3,463
  Depreciation and amortization.............................      1,420            774
                                                               --------        -------
          Total operating expenses..........................     25,207         21,863
                                                               --------        -------
     Loss from operations...................................     (9,682)        (3,398)
Other income (expense):
  Interest and other income.................................        134            115
  Interest expense..........................................     (1,940)          (423)
                                                               --------        -------
     Loss before income taxes...............................    (11,488)        (3,706)
Provision for income taxes..................................         --              3
                                                               --------        -------
          Net loss..........................................   $(11,488)       $(3,709)
                                                               ========        =======
Basic loss per share........................................   $  (0.34)       $ (0.18)
                                                               ========        =======
Diluted loss per share......................................   $  (0.34)       $ (0.18)
                                                               ========        =======
Weighted average shares -- basic............................     34,173         21,166
                                                               ========        =======
Weighted average shares -- diluted..........................     34,173         21,166
                                                               ========        =======
</TABLE>

          See accompanying notes to consolidated financial statements.
                                        4
<PAGE>   5

                   BALANCED CARE CORPORATION AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                        (IN THOUSANDS EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                                   SIX MONTHS ENDED
                                                                     DECEMBER 31,
                                                              --------------------------
                                                                 2000           1999
                                                              -----------    -----------
                                                              (UNAUDITED)    (UNAUDITED)
<S>                                                           <C>            <C>
Revenues:
  Resident services.........................................   $ 24,419        $13,927
  Patient services..........................................      4,714         22,190
  Development fees..........................................         38            538
  Management fees...........................................         97            175
  Other revenues............................................        222            111
                                                               --------        -------
          Total revenues....................................     29,490         36,941
                                                               --------        -------
Operating expenses:
  Facility operating expenses:
     Salaries, wages and benefits...........................     13,966         17,534
     Other operating expenses...............................      8,241         11,016
  General and administrative expenses.......................      5,283          5,169
  Provision for losses under shortfall funding agreements...      3,864          1,550
  Loss on financial restructuring...........................      4,388             --
  Lease expense.............................................      6,161          6,902
  Depreciation and amortization.............................      2,787          1,514
                                                               --------        -------
          Total operating expenses..........................     44,690         43,685
                                                               --------        -------
     Loss from operations...................................    (15,200)        (6,744)
Other income (expense):
  Interest and other income.................................        236            172
  Interest expense..........................................     (3,750)          (822)
                                                               --------        -------
     Loss before income taxes and extraordinary charge......    (18,714)        (7,394)
Provision for income taxes..................................         --              5
                                                               --------        -------
     Loss before extraordinary charge.......................    (18,714)        (7,399)
     Extraordinary loss on extinguishment of debt...........         --           (739)
                                                               --------        -------
          Net loss..........................................   $(18,714)       $(8,138)
                                                               ========        =======
Basic loss per share:
     Loss before extraordinary charge.......................   $  (0.55)       $ (0.39)
                                                               ========        =======
          Net loss..........................................   $  (0.55)       $ (0.43)
                                                               ========        =======
Diluted loss per share:
     Loss before extraordinary charge.......................   $  (0.55)       $ (0.39)
                                                               ========        =======
          Net loss..........................................   $  (0.55)       $ (0.43)
                                                               ========        =======
Weighted average shares -- basic............................     34,173         18,945
                                                               ========        =======
Weighted average shares -- diluted..........................     34,173         18,945
                                                               ========        =======
</TABLE>

          See accompanying notes to consolidated financial statements.
                                        5
<PAGE>   6

                   BALANCED CARE CORPORATION AND SUBSIDIARIES

           CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
                 SIX MONTHS ENDED DECEMBER 31, 2000 (UNAUDITED)
                      (IN THOUSANDS OF DOLLARS AND SHARES)

<TABLE>
<CAPTION>
                                            COMMON STOCK
                                           ---------------    ADDITIONAL
                                           ISSUED     PAR      PAID-IN      ACCUMULATED
                                           SHARES    VALUE     CAPITAL        DEFICIT       TOTAL
                                           ------    -----    ----------    -----------    --------
<S>                                        <C>       <C>      <C>           <C>            <C>
Balance at June 30, 2000.................  34,173     $35      $83,333       $(47,062)     $ 36,306
Net Loss.................................                                     (18,714)      (18,714)
                                           ------     ---      -------       --------      --------
Balance at December 31, 2000.............  34,173     $35      $83,333       $(65,776)     $ 17,592
                                           ======     ===      =======       ========      ========
</TABLE>

          See accompanying notes to consolidated financial statements.
                                        6
<PAGE>   7

                   BALANCED CARE CORPORATION AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                        (IN THOUSANDS EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                                   SIX MONTHS ENDED
                                                                     DECEMBER 30,
                                                              --------------------------
                                                                 2000           1999
                                                              -----------    -----------
                                                              (UNAUDITED)    (UNAUDITED)
<S>                                                           <C>            <C>
Cash Flows from Operating Activities:
  Net loss..................................................   $(18,714)      $ (8,138)
  Adjustments to reconcile net loss to net cash used for
     operating activities:
     Depreciation and amortization..........................      2,787          1,514
     Provision for losses under shortfall funding
      agreements............................................      3,864          1,550
     Loss on financial restructuring........................      4,388             --
     Non cash interest -- convertible debt..................        566             --
     Extraordinary charge for early retirement of debt......         --            739
     Changes in operating assets and liabilities, excluding
      effects of acquisitions:
     (Increase) in receivables, net.........................     (6,376)        (3,554)
     Decrease in development contracts in process, net......        336          1,311
     (Increase) decrease in prepaid expenses and other
      current assets........................................        676            (74)
     Increase (decrease) in accounts payable, accrued
      payroll and accrued expenses..........................        331         (2,878)
                                                               --------       --------
          Net cash used for operating activities............    (12,142)        (9,530)
                                                               --------       --------
Cash Flows from Investing Activities:
  Purchases of property and equipment.......................     (1,067)       (55,886)
  (Increase) decrease in restricted investments.............     (1,149)         1,361
  Increase in purchase option deposits and other assets.....       (674)        (2,894)
  Business acquisitions.....................................     (4,608)        (2,457)
                                                               --------       --------
          Net cash used for investing activities............     (7,498)       (59,876)
                                                               --------       --------
Cash Flows from Financing Activities:
  Proceeds from issuance of debt............................     29,775         53,640
  Payments on debt (including extinguishment costs of $707
     in 1999)...............................................    (13,816)        (6,499)
  Proceeds from issuance of common stock....................         --         19,537
  Increase in straight-line lease liability.................      1,200             --
  Decrease in other liabilities.............................       (153)          (600)
                                                               --------       --------
          Net cash provided by financing activities.........     17,006         66,078
                                                               --------       --------
  Decrease in cash and cash equivalents.....................     (2,634)        (3,328)
Cash and cash equivalents at beginning of year..............      5,722          8,160
                                                               --------       --------
Cash and cash equivalents at end of year....................   $  3,088       $  4,832
                                                               ========       ========
Supplemental Cash Flow Information:
  Cash paid for interest....................................   $  2,918       $    822
                                                               ========       ========
  Cash paid for income taxes................................   $     --       $      5
                                                               ========       ========
Acquisitions:
  Fair value of assets acquired.............................     (5,396)        (3,482)
  Liabilities assumed.......................................        788          1,025
                                                               --------       --------
  Consideration paid for acquisitions.......................   $ (4,608)      $ (2,457)
                                                               ========       ========
</TABLE>

          See accompanying notes to consolidated financial statements.
                                        7
<PAGE>   8

                   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 the 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 December 31, 2000, the Company
owned, leased or managed 67 assisted living communities and three skilled
nursing facilities (combined, "the opened facilities") and had one assisted
living community under a development contract. The Company's operations are
located in Pennsylvania, Arkansas, Virginia, Ohio, North Carolina, Tennessee,
West Virginia, Florida, Maryland and Indiana. These opened facilities have a
capacity for 4,555 assisted living residents, 169 skilled nursing patients, and
86 independent living residents (See Note 8).

  (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 and six-month periods
ended December 31, 2000 and 1999 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 and six-month periods ended December 31,
2000 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, 2000 as contained in the Company's Annual Report on Form 10-K.

2. CONVERTIBLE DEBENTURES

     On July 31, 2000, HR Investments Limited ("HR"), RH Investments Limited
("RH"), and VXM Investments Limited ("VXM" and together with HR and RH,
collectively, the "Holders," each purchased at par from the Company, 9.5%
unsecured convertible grid debentures, as amended by Amendment No. 1 to 9.5%
Unsecured Convertible Grid Debentures dated as of July 31, 2000 (as amended,
collectively, the "Debentures"), in an aggregate principal amount equal to
$14,000,000. The Debentures were purchased in accordance with the terms and
conditions of three purchase agreements dated as of June 30, 2000 between the
Company and each of the Holders. Under the Debentures, the Holders have the
right, at any time up to and including the earlier to occur of the Early
Termination Date and the Maturity Date (as such terms are defined below), to
convert all or any part of the Debentures into Common Stock of the Company at
the conversion rate of $2.00 per share (subject to adjustment as provided in the
Debentures, the "Conversion Rate"). The Debentures mature on July 1, 2005 (the
"Maturity Date"). Interest under the Debentures accrues at an annual rate of
9.5% and is due and payable quarterly. The Company, at its option, may pay the
interest in cash or in lieu of payment, may add the interest amount payable to
the outstanding principal amount of the Debentures, subject to certain
conditions precedent. The Company may terminate, on 30 days' written notice, the
Holders' conversion rights at any time after December 31, 2002 if the average
closing price per share of Common Stock of the Company for the 20 consecutive
trading days ending five trading days preceding the date on which the notice of
termination is given to the Holders by the Company is not less than 200% of the
Conversion Rate (the "Early Termination Date"). The Holders have no rights with
respect to the election of the Company's board of directors unless and until all
or any portion of the Debentures are converted into Common Stock, at which time
the Holders will have the same rights, powers and privileges as the other
holders of the Company's Common Stock. Depending on when (and if) the Debentures
are converted and how the Company elects to pay interest, the Holders could have
the right to

                                        8
<PAGE>   9
                   BALANCED CARE CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

convert the Debentures into shares of Common Stock equal to approximately 17% to
24.7% of the issued and outstanding shares of the Company after giving effect to
the transactions.

     The Holders and IPC Advisors S.a.r.l., a Luxembourg company ("IPC") may be
deemed to be an affiliated group within the meaning of Section 13 (d)(3) of the
Exchange Act. As of November 6, 2000, IPC owned 18,212,100 shares of Common
Stock of the Company, representing approximately 53.3% of the outstanding shares
of the Company. On a combined basis, the Holders and IPC (directly or
indirectly) may be deemed to beneficially own approximately 61.2% to 64.8% of
the Common Stock of the Company depending on when (and if) the Debentures are
converted and how the Company elects to pay interest.

     For each of the quarters ended September 30 and December 31, 2000, the
Company elected to pay the interest payable for the quarter-ended in the form of
an increase to the principal balance outstanding for the Debentures.

     Events of default have occurred and are continuing under the Debentures and
as a result in accordance with the provisions of the Debentures they have become
due and payable. Notwithstanding the foregoing, the Holders have each notified
the Company in writing that they do not intend to take any action to enforce
their rights to receive payment of the outstanding Obligations under the
Debentures prior to April 6, 2001.

3. PROMISSORY NOTE

     On November 6, 2000, the Company entered into a Letter Agreement (as
defined below), under which the Company requested that HR, RH and VXM make loans
to the Company in the aggregate amount of $8,000,000. On November 6, 2000,
$6,500,000 of the $8,000,000 was loaned to the Company (the "$6.5M Loan") and on
December 7, 2000, the remaining $1,500,000 was loaned to the Company (the "$1.5M
Loan"). The $6.5M Loan and the $1.5M Loan are evidenced by six promissory notes
made by the Company, as follows: (1) a $2,166,667 note and a $500,000 note in
favor of HR, (2) a $2,166,667 note and a $500,000 note in favor of RH and (3) a
$2,166,666 note and a $500,000 note in favor of VXM (collectively, the "Notes").
Interest accrues under the Notes at an annual rate of 12%, and is due and
payable monthly in arrears. The Notes had a maturity date of January 31, 2001.
The Company has not made the payments required under the Notes and therefore
events of default have occurred and are continuing under the Notes. In
accordance with the provisions of the Notes, all outstanding amounts are
currently due and payable. Notwithstanding the foregoing, HR, RH and VXM have
agreed in writing to extend the maturity of the Notes until April 6, 2001. The
Notes are secured by a pledge of the stock of 12 of the Company's subsidiaries
(collectively, the "Subsidiaries") pursuant to a Stock Pledge Agreement dated as
of April 18, 2000, as amended on November 6, 2000 and December 7, 2000. In
addition, the Company, the Subsidiaries, IPC, FRR, HR, RH, VXM and Heller
entered into an Amended and Restated Subordination Agreement dated November 6,
2000 (the "Subordination Agreement"). Under the Subordination Agreement, IPC,
FRR, HR, RH and VXM (collectively, the "Junior Lender") agreed to subordinate
their respective rights and interests in and to the "Junior Debt" and the
"Junior Loan Documents" (as such terms are defined in the Subordination
Agreement) in favor of Heller, including the Junior Lender's rights under the
Stock Pledge Agreement and the Notes. Except for the payment of interest on the
Notes, the Junior Lender has agreed to refrain from taking any action or from
receiving any payment with respect to the Junior Debt and the Junior Loan
Documents until the Company's obligations to Heller are paid in full. As of
December 31, 2000, the Company's outstanding obligations to Heller include (1) a
$37,000,000 loan having a maturity date of December 31, 2001 and (2) the
Company's $12,000,000 revolving line of credit, having a maturity date of July
29, 2002. The proceeds from the Notes were used to repay a note payable to
Heller in the amount of $2,500,000 and for other working capital needs.

                                        9
<PAGE>   10
                   BALANCED CARE CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

4. BUSINESS ACQUISITIONS AND PRO FORMA RESULTS OF OPERATIONS

  Business Acquisitions

     Acquisitions and the method of payment are summarized as follows (dollars
in thousands):

<TABLE>
<CAPTION>
                                                                   COMMON
                          LEASED                           CASH    STOCK    LIABILITIES   TOTAL    GOODWILL
TRANSACTION DESCRIPTION  OR OWNED   BUSINESS   LOCATION    PAID    ISSUED    INCURRED      COST    RECORDED    MONTH
-----------------------  --------   --------   --------   ------   ------   -----------   ------   --------   -------
<S>                      <C>        <C>        <C>        <C>      <C>      <C>           <C>      <C>        <C>
Stock of 6 Leased
  Special Purpose
  Entities(1).........    Leased      ALF      Various    $4,608     $--        $--       $4,608      $--     October
</TABLE>

---------------
(1) Represents the acquisition under a purchase option agreement in which the
    Company had the right to acquire the stock of the Operator/Lessee of managed
    facilities.

     In Fiscal 2001, the Company exercised its purchase options and acquired the
equity interests of certain Operator/Lessees, representing primarily the
leasehold interests of the special purpose entities formed to lease and operate
assisted living facilities in six locations in Fiscal 2001. The company borrowed
$4,678 in connection with this transaction in the form of two promissory notes
payable to the lessor at an annual interest rate of 12% and 14%. Interest only
is payable monthly for four years, at which time principal and interest is
payable monthly based on a four-year amortization period.

     These facilities were developed and previously managed by the Company. The
total cost of $4,608,000 for Fiscal 2001 (including prior purchase option
deposits of $189,000) has been allotted to the assets acquired and liabilities
assumed of the acquired entities, based on estimated fair values, as follows
(dollars in thousands):

<TABLE>
<CAPTION>
                                                               2001
                                                              ------
<S>                                                           <C>
Current assets (less cash acquired of $264).................  $  653
Property and equipment......................................      23
Leasehold interests and other intangibles...................   4,720
Other assets................................................      --
Current liabilities.........................................    (712)
Long-term liabilities.......................................     (76)
                                                              ------
                                                              $4,608
                                                              ======
</TABLE>

     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 seven businesses
acquired in December 1999, six businesses acquired in October 2000, the
divestiture of the NHP Facilities in December 2000 and the divestiture of its
Missouri operations in January 2000. Such businesses acquired were the SPE
lessees of facilities previously managed by the Company.

<TABLE>
<CAPTION>
                                                            SIX MONTHS ENDED
                                                              DECEMBER 31,
                                                           ------------------
                                                            2000       1999
                                                           -------    -------
<S>                                                        <C>        <C>
Revenue..................................................  $26,112    $21,172
Expenses.................................................   40,204     27,983
                                                           -------    -------
Loss before extraordinary items..........................  (14,092)    (6,811)
Loss before extraordinary items per common share.........     (.41)      (.20)
</TABLE>

                                       10
<PAGE>   11
                   BALANCED CARE CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The unaudited pro forma results are not necessarily indicative of what
actually might have occurred if the acquisitions and divestitures had been
completed as of July 1, 2000 and 1999, 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 and six-month periods ended December 31, 2000
and 1999, common equivalent shares from stock options and warrants are excluded
from the computation, as their effect is anti-dilutive.

6. CHANGE IN CONTROL

     On July 31, 2000, the Holders (as defined in Note 2) purchased the
Debentures (as defined in Note 2) at par in an aggregate principal amount equal
to $14,000,000. The Debentures were purchased in accordance with the terms and
conditions of three Purchase Agreements dated as of June 30, 2000 between the
Company and each of the Holders. The Purchase Agreements and the form of the
Debentures were filed as exhibits to the Company's Current Report on Form 8-K
dated June 30, 2000.

     Under the Debentures, the Holders have the right, at any time up to and
including the earlier to occur of the Early Termination Date (as defined in Note
2) and the Maturity Date (as defined in Note 2), to convert all or any part of
the Debentures into Common Stock of the Company at the conversion rate of $2.00
per share (subject to adjustment as provided in the Debentures, the "Conversion
Rate"). Interest under the Debentures accrues at an annual rate of 9.5% and is
due and payable quarterly. The Company, at its option, may pay the interest in
cash or in lieu of payment, may add the interest amount payable to the
outstanding principal amount of the Debentures, subject to certain conditions
precedent. The Company may terminate, on 30 days' written notice, the Holders'
conversion rights at any time after December 31, 2002 if the average closing
price per share of Common Stock of the Company on the American Stock Exchange
for the 20 consecutive trading days ending five trading days preceding the date
on which the notice of termination is given to the Holders by the Company is not
less than 200% of the Conversion Rate.

     Depending on when (and if) the Debentures are converted and how the Company
elects to pay interest, the Holders could have the right to convert the
Debentures into shares of Common Stock equal to approximately 17% to 24.7% of
the issued and outstanding shares of Common Stock of the Company (see Note 2).

     The Holders and IPC (as defined in Note 2) may be deemed to be an
affiliated group within the meaning of Section 13 (d)(3) of the Exchange Act. In
December 1999, IPC acquired 49.8% of the issued and outstanding shares of Common
Stock of the Company. As a result of the foregoing transaction and certain open
market purchases, IPC presently beneficially owns 18,212,100 shares of Common
Stock of the Company, representing approximately 53.3% of the outstanding shares
of Common Stock of the Company. Pursuant to Schedule 13D (Amendment No. 2) filed
with the SEC and dated November 6, 2000, on a combined basis, IPC and the
Holders (directly or indirectly) may be deemed to beneficially own 61.2% of the
Common Stock of the Company. If the Debentures are outstanding until the
Maturity Date and the Company elects, in lieu of payment, to add the interest
amount payable to the outstanding principal amount of the Debentures until the
Maturity Date, on a combined basis, IPC and the Holders (directly or indirectly)
may be deemed to beneficially own 64.8% of the Common Stock of the Company.

     On November 6, 2000, IPC and the Company, based on the considerations of a
special committee of certain of the independent directors of the Board of
Directors of the Company (the "Special Committee"), entered into a letter
agreement (the "Letter Agreement") pursuant to which IPC agreed to consider
making an offer of $1.00 per common share in cash for the entire equity interest
in the Company not already owned by IPC, subject to the completion of due
diligence satisfactory to IPC in its sole discretion, and to the negotiation and
execution of mutually satisfactory definitive documentation (the "Proposed
Offer").

                                       11
<PAGE>   12
                   BALANCED CARE CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Under the Letter Agreement, in consideration of HR, RH and VXM's
willingness to make loans to the Company in the aggregate amount of $8,000,000,
and in further consideration of IPC incurring time and expense in conducting due
diligence, the Company agreed to amend Section 6.8 of the Subscription Agreement
dated as of October 8, 1999 between the Company and IPC to permit IPC to make
the Proposed Offer. In addition, the Company agreed, subject to the fiduciary
duties of the Company's board of directors, not to solicit, participate in
discussions or negotiations concerning or furnish information to any person
other than IPC until January 15, 2001. In the event the Company received an
unsolicited request for information or an unsolicited acquisition proposal, if
the Special Committee determined in its good faith judgment (after receiving the
advice of counsel) that if the Company failed to participate in such discussions
or negotiations with or provide such information to, the person making the
acquisition proposal or requesting information, there was a reasonable
probability that the Board of Directors would be in violation of its fiduciary
duties under applicable law, then the Company was required to notify IPC and
keep IPC fully informed of the status and details of any such acquisition
proposal or inquiry. If such an acquisition proposal would have been approved by
the Board of Directors prior to January 31, 2000, the Company was required to
reimburse IPC for its documented costs and expenses (including, without
limitation, reasonable attorneys' fees), in connection with the transactions
contemplated by the Letter Agreement, up to an aggregate of $500,000.

     The Special Committee received an opinion dated November 6, 2000 from
Raymond James & Associates, Inc., its financial advisors, to the effect that,
subject to certain assumptions, limitations and qualifications, cash
consideration of $1.00 per share was fair to the stockholders of the Company
from a financial point of view. In addition, the Special Committee of the Board
of Directors of the Company confirmed that it had determined that the
consideration of $1.00 per share in cash for each share of the Company's
outstanding common stock not owned by IPC and its affiliates was advisable and
fair to the stockholders of the Company and, subject to negotiation of
definitive agreements relating to the Proposed Offer acceptable to the Special
Committee, the Special Committee would recommend that the Board of Directors of
the Company approve and adopt such definitive agreements and the Special
Committee would then recommend that stockholders of the Company tender into
and/or vote to approve and adopt such definitive agreements as applicable, and
once recommended, the Special Committee would not modify, amend or withdraw such
recommendations, unless the Special Committee determined, in its good faith
judgment (after receiving the advice of counsel), that if the Special Committee
failed to modify, amend or withdraw such recommendations, there was a reasonable
probability that the Special Committee would be in violation of its fiduciary
duties under applicable law. In the Letter Agreement, the Company acknowledged
that IPC would not be under any obligation to make such Proposed Offer.

     On December 5, 2000, IPC advised the Company and the Special Committee that
IPC would not proceed with the Proposed Offer. Accordingly, the non-solicitation
provisions of the Letter Agreement terminated.

     On November 15, 2000, the Company received a complaint filed in the Court
of Chancery of the State of Delaware. The complaint was filed by a stockholder
of the Company and alleges, among other things, that the Letter Agreement and
the Proposed Offer that IPC would be willing to consider, as described in the
Letter Agreement, are unfair to the public stockholders of the Company because
the transaction would purportedly deny the Company's stockholders the right to
share proportionately in the true value of the Company's business and future
prospects and, further, that the directors of the Company have breached their
fiduciary duties to the stockholders of the Company. The complaint seeks
alternative forms of relieve including, (i) preliminary and permanently
enjoining the Defendants from proceeding with, consummating or closing a
proposed transaction with IPC, (ii) in the event that a proposed transaction is
consummated, rescinding it and setting it aside, (iii) awarding rescissory
and/or compensatory damages in an unspecified amount, and (iv) awarding the
Plaintiff the costs of the action including attorneys' and experts' fees. The
Plaintiff has also requested that the action be maintained as a class action and
that the Plaintiff be certified as the class representative. The Company has
evaluated the complaint and believes it is without merit and intends to defend
it vigorously. On December 7, 2000, the Plaintiff's counsel granted Defendants
an indefinite extension of time to move, answer or otherwise respond to the
complaint. There has been no further action in connection with the pending
complaint.
                                       12
<PAGE>   13
                   BALANCED CARE CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7. LOSS ON FINANCIAL RESTRUCTURING

     The loss on financial restructuring includes losses incurred on the
termination of the NHP leases described in Note 9 ($2,132,000), costs incurred
in connection with financing efforts and rent restructuring ($1,586,000), and a
reserve against notes receivable ($670,000).

8. RENT RESTRUCTURING

     Many of the facilities operated or managed by the Company are leased under
long-term operating leases with real estate investment trusts, or REITs (the
landlords), with annual lease obligations aggregating approximately $19,000,000
(excluding the divested NHP operations) at December 31, 2000. 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 the financial covenants set
forth in clauses (i) and (ii) at December 31, 2000 under its leases with four of
its landlords. To date, the Company has not received any default notices from
any of the affected landlords for the Company's failure to comply with the
financial covenants for the quarter ended December 31, 2000. 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.

     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, OH. The Meditrust
notices stated that Meditrust had elected to apply the cash 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 the 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 cash collateral from the remaining Outlook Pointe facility lease in
the amount of $108,821 towards the prepayment of a promissory note made by the
Company and IPC in favor of Meditrust in the principal amount of $7,811,054.

     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
(hereinafter, the Xenia/Lima Notes, the Lewisburg Note, the Chippewa Note, and
the Dillsburg Note shall be collectively referred to as the "Notes").

                                       13
<PAGE>   14
                   BALANCED CARE CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     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.

     In December 2000, the Company defaulted on the rent payments to five of its
six landlords and initiated negotiations regarding the restructuring of certain
of its facility rental obligations and implemented a plan to reduce rent
payments for certain facilities. It is the Company's goal to negotiate
restructured financial arrangements that reflect the current economics of many
of these 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 rent reductions constitute
monetary defaults under the Company's facility leases, and provide 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 landlords or lenders.

     The Company has received notices of default from four of the five affected
landlords. Nationwide Health Properties, Inc. ("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 has agreed to dismiss
all legal action against the Company (see Note 9). Another landlord has elected
to apply $251,550 under certain letters of credit maintained in favor of the
landlord by the Company towards the Company's rent obligations. Two other
landlords have demanded payment of the outstanding rent payments and the
remaining landlord has not taken any action. To date, other than the NHP
litigation that is being dismissed, 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 is actively negotiating with the affected landlords regarding
restructuring the lease obligations.

9. SUBSEQUENT EVENT

     As a result of the Company's failure to pay full rent to NHP under the
Company's master leases for the month of December 2000, NHP commenced legal
action against the Company to enforce its rights and remedies under the leases.
On January 12, 2001, the Company and NHP reached agreement and entered into a
Master Termination and Release Agreement under which (i) NHP agreed to terminate
the Company's master leases and lease guarantees as of December 31, 2000 with
respect to 10 operating properties and one undeveloped property located in
Akron, OH; (ii) NHP agreed to release the Company from its obligations under the
leases, the guarantees and the other lease documents, (iii) the Company agreed
to transfer to NHP all right, title and interest to the 11 properties, including
certain security deposits maintained in favor of NHP, (iv) NHP agreed to dismiss
all legal action against the Company, and (v) the Company agreed to manage the
10 operating properties for an interim period of time. The operating properties
are located in Bristol, Johnson City and Murfreesboro, TN; Pensacola and
Tallahassee, FL; Lakemont Farms and York, PA; Heritage Lakes, OH; Hagerstown,
MD; and Teay's Valley, WV. The aggregate annual lease obligation for the 11
properties was approximately $7,000,000. The Company recorded a loss on the
termination of leases in the amount of $2,132,000 at December 31, 2000 (See Note
7).

                                       14
<PAGE>   15
                   BALANCED CARE CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

10. SEGMENT REPORTING

     In Fiscal 2001 and 2000, 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) Development, General and
Administrative. No other individual business segment exceeds the 10%
quantitative thresholds of SFAS No. 131. The Company discontinued development
activities in the third quarter of its fiscal year ended June 30, 1999.

     Balanced Care Corporation 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 development
activities and severance agreements, other non-recurring operating charges, and
gains and losses on disposition of assets, including purchase options), lease
expense, interest (net), taxes, depreciation and amortization.

<TABLE>
<CAPTION>
                                                          QUARTER ENDED DECEMBER 31, 2000
                                               ------------------------------------------------------
                                               RESIDENT    PATIENT      GENERAL AND
                                               SERVICES    SERVICES    ADMINISTRATIVE    CONSOLIDATED
                                               --------    --------    --------------    ------------
<S>                                            <C>         <C>         <C>               <C>
Revenues.....................................  $13,111     $ 2,365        $    49          $15,525
Facility Operating expenses..................   10,051       1,936             --           11,987
                                               -------     -------        -------          -------
Contribution Margin..........................    3,060         429             49            3,538
General and administrative expenses..........       --          --          2,653            2,653
Provision for losses under shortfall funding
  agreements.................................    1,764          --             --            1,764
                                               -------     -------        -------          -------
Income (loss) before non-recurring items,
  lease expense, interest (net), taxes,
  depreciation and amortization..............  $ 1,296     $   429        $(2,604)         $  (879)
                                               =======     =======        =======          =======
</TABLE>

<TABLE>
<CAPTION>
                                                          QUARTER ENDED DECEMBER 31, 1999
                                               ------------------------------------------------------
                                               RESIDENT    PATIENT      GENERAL AND
                                               SERVICES    SERVICES    ADMINISTRATIVE    CONSOLIDATED
                                               --------    --------    --------------    ------------
<S>                                            <C>         <C>         <C>               <C>
Revenues.....................................  $ 7,178     $11,145        $   142          $18,465
Facility Operating expenses..................    4,533       9,767             --           14,300
                                               -------     -------        -------          -------
Contribution Margin..........................    2,645       1,378            142            4,165
General and administrative expenses..........       --          --          2,576            2,576
Provision for losses under shortfall funding
  agreements.................................      750          --             --              750
                                               -------     -------        -------          -------
Income (loss) before non-recurring items,
  lease expense, interest (net), taxes,
  depreciation and amortization..............  $ 1,895     $ 1,378        $(2,434)         $   839
                                               =======     =======        =======          =======
</TABLE>

                                       15
<PAGE>   16
                   BALANCED CARE CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
                                                        SIX MONTHS ENDED DECEMBER 31, 2000
                                              ------------------------------------------------------
                                              RESIDENT    PATIENT      GENERAL AND
                                              SERVICES    SERVICES    ADMINISTRATIVE    CONSOLIDATED
                                              --------    --------    --------------    ------------
<S>                                           <C>         <C>         <C>               <C>
Revenues....................................  $ 24,651    $ 4,737        $    102         $ 29,490
Facility Operating expenses.................    18,372      3,835              --           22,207
                                              --------    -------        --------         --------
Contribution Margin.........................     6,279        902             102            7,283
General and administrative expenses.........        --         --           5,283            5,283
Provision for losses under shortfall funding
  agreements................................     3,864         --              --            3,864
                                              --------    -------        --------         --------
Income (loss) before non-recurring and
  extraordinary items, lease expense,
  interest (net), taxes, depreciation and
  amortization..............................  $  2,415    $   902        $ (5,181)        $ (1,864)
                                              ========    =======        ========         ========
Total Assets................................  $104,171    $ 3,990        $  6,473         $114,634
                                              ========    =======        ========         ========
</TABLE>

<TABLE>
<CAPTION>
                                                        SIX MONTHS ENDED DECEMBER 31, 1999
                                              ------------------------------------------------------
                                              RESIDENT    PATIENT      GENERAL AND
                                              SERVICES    SERVICES    ADMINISTRATIVE    CONSOLIDATED
                                              --------    --------    --------------    ------------
<S>                                           <C>         <C>         <C>               <C>
Revenues....................................  $ 14,213    $22,190        $    538         $ 36,941
Facility Operating expenses.................     8,970     19,580              --           28,550
                                              --------    -------        --------         --------
Contribution Margin.........................     5,243      2,610             538            8,391
General and administrative expenses.........        --         --           5,169            5,169
Provision for losses under shortfall funding
  agreements................................     1,550         --              --            1,550
                                              --------    -------        --------         --------
Income (loss) before non-recurring and
  extraordinary items, lease expense,
  interest (net), taxes, depreciation and
  amortization..............................  $  3,693    $ 2,610        $ (4,631)        $  1,672
                                              ========    =======        ========         ========
Total Assets................................  $101,132    $11,325        $ 14,414         $126,871
                                              ========    =======        ========         ========
</TABLE>

                                       16
<PAGE>   17

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 December 31, 2000 and
1999 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 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, 2000.

OVERVIEW

     The Company was incorporated in April 1995 and utilizes assisted living
facilities as the 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.

     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 December 31, 2000 and 1999 (excluding the Company's former
Missouri facilities and including the NHP facilities referred to below):

<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                       -------------------------------------------------------------------
                                                     2000                               1999
                                       --------------------------------   --------------------------------
                                       OWNED   LEASED   MANAGED   TOTAL   OWNED   LEASED   MANAGED   TOTAL
                                       -----   ------   -------   -----   -----   ------   -------   -----
<S>                                    <C>     <C>      <C>       <C>     <C>     <C>      <C>       <C>
Developed Assisted Living
  Facilities.........................   12        6       33       51      12        1       33       46
Acquired Assisted Living
  Facilities.........................    5        9       --       14       5        8       --       13
Skilled Nursing Facilities...........   --        3       --        3      --        3       --        3
Other Managed Facilities.............   --       --        2        2      --       --       --       --
                                        --       --       --       --      --       --       --       --
                                        17       18       35       70      17       12       33       62
                                        ==       ==       ==       ==      ==       ==       ==       ==
</TABLE>

     On January 12, 2001, the Company and NHP entered into a Master Termination
and Release Agreement under which (i) NHP agreed to terminate the Company's
master leases and lease guarantees as of December 31, 2000 with respect to 10
operating properties and one undeveloped property located in Akron, OH, (ii) NHP
agreed to release the Company from its obligations under the leases, the
guarantees and the other lease documents, (iii) the Company agreed to transfer
to NHP all right, title and interest to the 11 properties, including certain
security deposits maintained in favor of NHP, (iv) NHP agreed to dismiss all
legal action against the Company, and (v) the Company agreed to manage the 10
operating properties for an interim period of time. The operating properties are
located in Bristol, Johnson City and Murfreesboro, TN; Pensacola and
Tallahassee, FL; Lakemont Farms and York, PA; Heritage Lakes, OH; Hagerstown,
MD; and Teay's Valley, WV. These 10 facilities have a resident capacity of 772.
The aggregate annual lease obligation for the 11 properties was approximately
$7,000,000.

     As of December 31, 2000, the Company owned, leased or managed 67 assisted
living communities and three skilled nursing facilities and had one assisted
living community under development. The Company's operations are located in
Pennsylvania, Arkansas, Virginia, Ohio, North Carolina, Tennessee, West
Virginia, Florida, Maryland and Indiana. These operating facilities have a
capacity for 4,555 assisted living residents, 169 skilled nursing patients and
86 independent living residents.

     In addition to the 41 Outlook Pointe(R) signature series assisted living
facilities opened as of December 31, 2000 (excluding the NHP facilities) the
Company has a signed agreement to manage one additional assisted living facility
currently in the final stages of construction. This facility under construction
is expected to open April 2001 and will conclude the Company's initial round of
development activity initiated three years ago.

                                       17
<PAGE>   18

     The Company generates revenue from three primary sources: resident
services, patient services and management fees. Resident services include all
revenues earned from services provided to assisted living facility residents
except revenues for therapies and home health care services provided by the
Company's licensed agencies which were, prior to the discontinuation of these
services in the September 30, 1999 quarter, included in patient services
revenues. 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 as
well as rehabilitation and home health services provided to assisted living
facility residents prior to discontinuation of these services. Management fees
are earned for managing assisted living facilities for other owners or lessees.
As a result of strategic changes made in the prior fiscal year including the
divestiture of the Company's Missouri operations, the acquisition of the
operations of developed facilities and the wind-down of development activity,
the mix of the Company's revenues has changed, and revenues from assisted living
resident services represent the predominant component of total revenues.

     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; (iv) non-recurring charges; (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.

RECENT DEVELOPMENTS

  Rent Restructuring

     Many of the facilities operated or managed by the Company are leased under
long-term operating leases with real estate investment trusts, or REITs, with
annual lease obligations aggregating approximately $19,000,000 (excluding the
NHP leases) at December 31, 2000. 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 the financial covenants set forth in clauses (i) and (ii) at
December 31, 2000 under its leases with four of its landlords. To date, the
Company has not received any default notices from any of the affected landlords
for the Company's failure to comply with the financial covenants for the quarter
ended December 31, 2000. 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.

     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, OH. The Meditrust
notices stated that Meditrust had elected to apply the cash 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 the 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

                                       18
<PAGE>   19

capital for the Lewisburg Outlook Pointe facility. Finally, on November 15,
2000, Meditrust elected to apply the cash collateral from the remaining Outlook
Pointe facility in the amount of $108,821 towards the prepayment of a promissory
note made by the Company and IPC in favor of Meditrust in the principal amount
of $7,811,054.

     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
(hereinafter, the Xenia/Lima Notes, the Lewisburg Note, the Chippewa Note, and
the Dillsburg Note 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.

     In December 2000, the Company defaulted on the rent payments to five of its
six landlords and initiated negotiations regarding the restructuring of certain
of its facility rental obligations and implemented a plan to reduce rent
payments for certain facilities. It is the Company's goal to negotiate
restructured financial arrangements that reflect the current economics of many
of these 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 rent reductions constitute
monetary defaults under the Company's facility leases, and provide 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 landlords or lenders.

     The Company has received notices of default from four of 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
(see "Termination of Master Leases and Strategic Charges"). Another landlord has
elected to apply $251,550 under certain letters of credit maintained in favor of
the landlord by the Company towards the Company's rent obligations. Two other
landlords have demanded payment of the outstanding rent payments and the
remaining landlord has not taken any action. To date, other than the NHP
litigation that is being dismissed, 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 is actively negotiating with the affected landlords regarding
restructuring the lease obligations.

  Termination of Master Leases and Strategic Charges

     As a result of the Company's failure to pay full rent to NHP under the
Company's master leases for the month of December 2000, NHP commenced legal
action against the Company to enforce its rights and remedies under the leases.
On January 12, 2001, the Company and NHP reached agreement and entered into a
Master Termination and Release Agreement under which (i) NHP agreed to terminate
the Company's master leases and lease guarantees as of December 31, 2000 with
respect to 10 operating properties and one undeveloped property, (ii) NHP agreed
to release the Company from its obligations under the leases, the guarantees and
the other lease documents, (iii) the Company agreed to transfer to NHP all
right, title and interest to the 11 properties, including certain security
deposits maintained in favor of NHP, (iv) NHP agreed to dismiss all legal action
against the Company and (v) the Company agreed to manage the 10 operating
properties for an interim period of time. The operating properties are located
in Bristol, Johnson City and Murfreesboro, TN; Pensacola and Tallahassee, FL;

                                       19
<PAGE>   20

Lakemont Farms and York, PA; Heritage Lakes, OH; Hagerstown, MD; and Teay's
Valley, WV. The aggregate annual lease obligation for the 11 properties was
approximately $7,000,000. As a result of the termination of the NHP leases the
Company recorded a $2,132,000 at December 31, 2000. Such loss resulted from the
write-off of certain assets comprised primarily of lease acquisition costs and
collateral deposits.

     Due to the divestiture of certain of the Company's Outlook Pointe(R)
facilities, management has adopted a corporate restructuring plan affecting
certain departments and staff positions. This restructuring plan, which was
enacted in January 2001, is expected to result in a one-time charge of
approximately $800,000 in the Company's third fiscal quarter ending March 31,
2001, representing the estimated costs of employee terminations and related
costs. The Company expects these actions, along with other cost-cutting
measures, to reduce general and administrative expenses by approximately
$2,000,000 annually.

CHANGE IN CONTROL

     On July 31, 2000, HR Investments Limited, a Cayman Islands corporation
("HR"), RH Investments Limited, a Cayman Islands corporation ("RH"), and VXM
Investments Limited, a Cayman Islands corporation ("VXM" and together with HR
and RH, collectively, the "Holders"), each purchased at par from the Company,
9.5% Unsecured Convertible Grid Debentures, as amended by Amendment No. 1 to
9.5% Unsecured Convertible Grid Debentures dated as of July 31, 2000 (as
amended, the "Debentures"), in an aggregate principal amount equal to
$14,000,000. The Debentures were purchased in accordance with the terms and
conditions of three Purchase Agreements dated as of June 30, 2000 between the
Company and each of the Holders. The Purchase Agreements and the form of the
Debentures were filed as exhibits to the Company's Current Report on Form 8-K
dated June 30, 2000.

     Under the Debentures, the Holders have the right, at any time up to and
including the earlier to occur of the Early Termination Date (as defined below)
and July 1, 2005 (the "Maturity Date"), to convert all or any part of the
Debentures into Common Stock of the Company at the conversion rate of $2.00 per
share (subject to adjustment as provided in the Debentures, the "Conversion
Rate"). Interest under the Debentures accrues at an annual rate of 9.5% and is
due and payable quarterly. The Company, at its option, may pay the interest in
cash or in lieu of payment, may add the interest amount payable to the
outstanding principal amount of the Debentures, subject to certain conditions
precedent. The Company may terminate the Holders' conversion rights at any time
after December 31, 2002 if the average closing price per share of Common Stock
of the Company on the American Stock Exchange for the 20 consecutive trading
days ending five trading days preceding the date on which the notice of
termination is given to the Holders by the Company is not less than 200% of the
Conversion Rate (the "Early Termination Date").

     Depending on when (and if) the Debentures are converted and how the Company
elects to pay interest, the Holders could have the right to convert the
Debentures into shares of Common Stock equal to approximately 17% to 24.7% of
the issued and outstanding shares of Common Stock of the Company.

     Events of default have occurred and are continuing under the Debentures and
as a result in accordance with the provisions of the Debentures they have become
due and payable. Notwithstanding the foregoing, the Holders have each notified
the Company in writing that they do not intend to take any action to enforce
their rights to receive payment of the outstanding Obligations under the
Debentures prior to April 6, 2001.

     The Holders and IPC Advisors S.a.r.l., a Luxembourg company ("IPC"), may be
deemed to be an affiliated group within the meaning of Section 13 (d)(3) of the
Exchange Act. In December 1999, IPC acquired 49.8% of the issued and outstanding
shares of Common Stock of the Company. As a result of the foregoing transaction
and certain open market purchases, IPC presently beneficially owns 18,212,100
shares of Common Stock of the Company, representing approximately 53.3% of the
outstanding shares of Common Stock of the Company. Pursuant to Schedule 13D
(Amendment No. 2) filed with the SEC and dated November 6, 2000, on a combined
basis, IPC and the Holders (directly or indirectly) may be deemed to
beneficially own 61.2% of the Common Stock of the Company. If the Debentures are
outstanding until the Maturity Date and the Company elects, in lieu of payment,
to add the interest amount payable to the outstanding principal amount of the
Debentures until the Maturity Date, on a combined basis, IPC and the Holders
(directly or indirectly) may be deemed to beneficially own 64.8% of the Common
Stock of the Company.
                                       20
<PAGE>   21

     On November 6, 2000, IPC and the Company, based on the considerations of a
special committee of certain of the independent directors of the Board of
Directors of the Company (the "Special Committee"), entered into a letter
agreement (the "Letter Agreement") pursuant to which IPC agreed to consider
making an offer of $1.00 per common share in cash for the entire equity interest
in the Company not already owned by IPC, subject to the completion of due
diligence satisfactory to IPC in its sole discretion, and to the negotiation and
execution of mutually satisfactory definitive documentation (the "Proposed
Offer").

     Under the Letter Agreement, in consideration of HR, RH and VXM's
willingness to make loans to the Company in the aggregate amount of $8,000,000,
and in further consideration of IPC incurring time and expense in conducting due
diligence, the Company agreed to amend Section 6.8 of the Subscription Agreement
dated as of October 8, 1999 between the Company and IPC to permit IPC to make
the Proposed Offer. In addition, the Company agreed, subject to the fiduciary
duties of the Company's Board of Directors, not to solicit, participate in
discussions or negotiations concerning or furnish information to any person
other than IPC until January 15, 2001. In the event the Company received an
unsolicited request for information or an unsolicited acquisition proposal, if
the Special Committee determined in its good faith judgment (after receiving the
advice of counsel) that if the Company failed to participate in such discussions
or negotiations with or provide such information to, the person making the
acquisition proposal or requesting information, there was a reasonable
probability that the Board of Directors would be in violation of its fiduciary
duties under applicable law, then the Company was required to notify IPC and
keep IPC fully informed of the status and details of any such acquisition
proposal or inquiry. If such an acquisition proposal was approved by the Board
of Directors prior to January 31, 2000, the Company was required to reimburse
IPC for its documented costs and expenses (including, without limitation,
reasonable attorneys' fees), in connection with the transactions contemplated by
the Letter Agreement, up to an aggregate of $500,000.

     The Special Committee received an opinion dated November 6, 2000 from
Raymond James & Associates, Inc., its financial advisors, to the effect that,
subject to certain assumptions, limitations and qualifications, cash
consideration of $1.00 per share was fair to the stockholders of the Company
from a financial point of view. In addition, the Special Committee of the Board
of Directors of the Company confirmed that it had determined that the
consideration of $1.00 per share in cash for each share of the Company's
outstanding common stock not owned by IPC and its affiliates was advisable and
fair to the stockholders of the Company and, subject to negotiation of
definitive agreements relating to the Proposed Offer acceptable to the Special
Committee, the Special Committee would recommend that the Board of Directors of
the Company approve and adopt such definitive agreements and the Special
Committee would then recommend that stockholders of the Company tender into
and/or vote to approve and adopt such definitive agreements as applicable, and
once recommended, the Special Committee would not modify, amend or withdraw such
recommendations, unless the Special Committee determined, in its good faith
judgment (after receiving the advice of counsel), that if the Special Committee
failed to modify, amend or withdraw such recommendations, there was a reasonable
probability that the Special Committee would be in violation of its fiduciary
duties under applicable law. In the Letter Agreement, the Company acknowledged
that IPC would not be under any obligation to make such Proposed Offer.

     On December 5, 2000, IPC advised the Company and the Special Committee that
IPC would not proceed with the Proposed Offer. Accordingly, the non-solicitation
provisions of the Letter Agreement terminated.

     On November 15, 2000, the Company received a complaint filed in the Court
of Chancery of the State of Delaware. The complaint was filed by a stockholder
of the Company and alleges, among other things, that the Letter Agreement and
the Proposed Offer that IPC would be willing to consider, as described in the
Letter Agreement, are unfair to the public stockholders of the Company because
the transaction would purportedly deny the Company's stockholders the right to
share proportionately in the true value of the Company's business and future
prospects and, further, that the directors of the Company have breached their
fiduciary duties to the stockholders of the Company. The complaint seeks
alternative forms of relieve including, (i) preliminary and permanently
enjoining the Defendants from proceeding with, consummating or closing a
proposed transaction with IPC advisors, (ii) in the event that a proposed
transaction is consummated, rescinding it and setting it aside, (iii) awarding
rescissory and/or compensatory damages in an unspecified amount, and (iv)
awarding the Plaintiff the costs of the action including attorneys' and experts'
fees. The Plaintiff has also requested that the action be maintained as a class
action and that the Plaintiff be certified as the class representative. The
Company has
                                       21
<PAGE>   22

evaluated the complaint and believes it is without merit and intends to defend
it vigorously. On December 7, 2000, the Plaintiff's counsel granted Defendants
an indefinite extension of time to move, answer or otherwise respond to the
complaint. There has been no further action in connection with the pending
complaint.

OTHER FINANCING

     Under the Letter of Agreement with the Company, HR, RH and VXM agreed to
make loans to the Company in the aggregate amount of $8,000,000. On November 6,
2000, $6,500,000 of the $8,000,000 was loaned to the Company (the "$6.5M Loan")
and on December 7, 2000, the remaining $1,500,000 was loaned to the Company (the
"$1.5M Loan"). The $6.5M Loan and the $1.5M Loan are evidenced by six promissory
notes made by the Company, as follows: (1) a $2,166,667 note and a $500,000 note
in favor of HR, (2) a $2,166,667 note and a $500,000 note in favor of RH and (3)
a $2,166,666 note and a $500,000 note in favor of VXM (collectively, the
"Notes"). The Notes had a maturity date of January 31, 2001. The Company has not
made the payments required under the Notes and therefore events of default have
occurred and are continuing under the Notes. In accordance with the provisions
of the Notes, all outstanding amounts are currently due and payable.
Notwithstanding the foregoing, HR, RH and VXM have agreed in writing to extend
the maturity of the Notes until April 6, 2001. Interest accrues under the Notes
at an annual rate of 12%, and is due and payable monthly in arrears. The Notes
are secured by a pledge of the stock of 12 of the Company's subsidiaries
(collectively, the "Subsidiaries") pursuant to a Stock Pledge Agreement dated as
of April 18, 2000, as amended November 6, 2000 and December 7, 2000. In
addition, the Company, the Subsidiaries, IPC, FRR, HR, RH, VXM and Heller
entered into an Amended and Restated Subordination Agreement dated November 6,
2000 (the "Subordination Agreement"). Under the Subordination Agreement, IPC,
FRR, HR, RH and VXM (collectively, the "Junior Lender") agreed to subordinate
their respective rights and interests in and to the "Junior Debt" and the
"Junior Loan Documents" (as such terms are defined in the Subordination
Agreement) in favor of Heller, including the Junior Lender's rights under the
Stock Pledge Agreement and the Notes. Except for the payment of interest on the
Notes, the Junior Lender has agreed to refrain from taking any action or from
receiving any payment with respect to the Junior Debt and the Junior Loan
Documents until the Company's obligations to Heller are paid in full. As of
December 31, 2000 the Company's outstanding obligations to Heller include (1) a
$37,000,000 loan having a maturity date of December 31, 2001 and (2) the
Company's $12,000,000 revolving line of credit, having a maturity date of July
29, 2002. The proceeds from the Notes were used to repay a note payable to
Heller in the amount of $2,500,000 and for other working capital needs.

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 December 31, 2000 and the Company's 52
owned, leased and managed facilities at December 31, 1999 (excluding the
Company's former Missouri facilities, the NHP facilities, and the two managed AL
facilities not developed by the Company):

<TABLE>
<CAPTION>
                                            DECEMBER 31, 2000                    DECEMBER 31, 1999
                                    ---------------------------------    ---------------------------------
                                       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           1,052     1,052         15             902     1,046
  Leased..........................       15             947     1,201         12             780       780
  Managed.........................       17           1,117     1,679          8             472     1,495
                                         --           -----     -----         --           -----     -----
Total.............................       49           3,116     3,932         35           2,154     3,321
                                         ==           =====     =====         ==           =====     =====
</TABLE>

                                       22
<PAGE>   23

<TABLE>
<CAPTION>
                                            DECEMBER 31, 2000                    DECEMBER 31, 1999
                                    ---------------------------------    ---------------------------------
                                       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 Occupancy:
  Owned...........................                       94%       94%                        91%       89%
  Leased..........................                       95%       84%                        90%       90%
  Managed.........................                       77%       63%                        70%       50%
                                                        ---                                  ---
                                                                   --                                   --
Total.............................                       88%                                  86%
                                                                   78%                                  72%
                                                        ---                                  ---
                                                                   --                                   --
                                                        ---                                  ---
                                                                   --                                   --
</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 the divested Missouri operations and the
NHP Facilities:

<TABLE>
<CAPTION>
                                 DECEMBER 31,    SEPTEMBER 30,    JUNE 30,    MARCH 31,    DECEMBER 31,
                                     2000            2000           2000        2000           1999
                                 ------------    -------------    --------    ---------    ------------
<S>                              <C>             <C>              <C>         <C>          <C>
At quarter end:
  Facilities in Operation......         58               56            56           54            52
  Resident Capacity............      3,932            3,769         3,769        3,558         3,321
  Census.......................      3,055            2,952         2,815        2,646         2,375
For the three month period
  ended:
  Revenue......................    $18,960          $18,356       $17,424      $15,417       $14,285
  EBITDAR......................    $ 4,623          $ 4,606       $ 3,411      $ 3,324       $ 2,617
</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 managed facilities are included in the data above but are not
included in the Company's consolidated financial statements presented in this
Quarterly Report.

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                                                SIX MONTHS
                                                                  ENDED
                                                               DECEMBER 31,
                                                              --------------
                                                              2000     1999
                                                              -----    -----
<S>                                                           <C>      <C>
STATEMENT OF OPERATIONS DATA:
Resident services...........................................   82.8%    37.7%
Patient services............................................   16.0     60.1
Development fees............................................    0.1      1.4
Management fees.............................................    0.3      0.5
Other.......................................................    0.8      0.3
                                                              -----    -----
Total revenue...............................................  100.0%   100.0%
                                                              =====    =====
</TABLE>

                                       23
<PAGE>   24

<TABLE>
<CAPTION>
                                                                SIX MONTHS
                                                                  ENDED
                                                               DECEMBER 31,
                                                              --------------
                                                              2000     1999
                                                              -----    -----
<S>                                                           <C>      <C>
Operating expenses:
  Facility operating expenses...............................   75.3     77.3
  General and administrative expenses.......................   17.9     14.0
  Provision for losses under shortfall funding agreements...   13.1      4.2
  Loss on financial restructuring...........................   14.9       --
  Lease expense.............................................   20.9     18.7
  Depreciation and amortization.............................    9.5      4.1
                                                              -----    -----
Total operating expenses....................................  151.6%   118.3%
                                                              =====    =====
Loss from operations........................................  (51.6)   (18.3)
Other income (expense)......................................  (11.9)    (1.9)
                                                              -----    -----
Loss before income taxes and extraordinary charge...........  (63.5)   (20.2)
Provision for income taxes..................................     --       --
                                                              -----    -----
  Loss before extraordinary charge..........................  (63.5)   (20.2)
  Extraordinary charge for early retirement of debt.........     --     (2.0)
                                                              -----    -----
Net loss....................................................  (63.5)%  (22.2)%
                                                              =====    =====
</TABLE>

THREE MONTHS ENDED DECEMBER 31, 2000 COMPARED TO THE THREE MONTHS ENDED DECEMBER
31, 1999

     Total Revenue.  Total revenue for the three months ended December 31, 2000
decreased by $2,940,000 to $15,525,000 compared to $18,465,000 for the three
months ended December 31, 1999. This decrease was primarily the result of a
decrease in patient service revenues of $8,788,000, which resulted primarily
from the divestiture of the Company's former Missouri operations. This decrease
was partially offset by additional resident service revenues of $5,955,000,
primarily from SPE facilities acquired during fiscal year 2000 and fiscal year
2001. Resident services comprised 84% and 38% of total revenues for three months
ended December 31, 2000 and 1999, respectively. The increase in this percentage
of total revenues was due to the Company's implementation of its business plan,
which focuses on assisted living operations and acquiring the operations of
assisted living facilities from the SPEs, coupled with the decrease in patient
service revenues in the three months ended December 31, 2000 compared to the
same period in the prior fiscal year due to the divestiture of the Missouri
operations in January 2000.

     Operating Expenses.  Total operating expenses increased by $3,344,000 to
$25,207,000 for three months ended December 31, 2000 from $21,863,000 for the
three months ended December 31, 1999. This increase was the result of (i)
increased expenses of $6,985,000 from SPE facilities acquired during fiscal year
2000 and fiscal year 2001; (ii) increased expenses of $227,000 from the
remaining SNF operations; (iii) an increase in the provision for losses under
shortfall fundings of $1,014,000; (iv) loss on financial restructuring of
$4,388,000 and (v) increased depreciation and amortization of $646,000. These
increases were substantially offset by the decrease in expenses of $10,386,000
resulting from the divestiture of the Missouri operations.

     Facility operating expenses for the three months ended December 31, 2000
decreased by $2,313,000 to $11,987,000 from $14,300,000 for three months ended
December 31, 1999. The decrease resulted from an $8,261,000 decrease in expenses
relating to the divestiture of the Missouri operations. This decrease was
partially offset by (i) an increase of $5,308,000 from SPE facilities acquired
during fiscal year 2000 and fiscal year 2001 and (ii) a $221,000 increase from
the remaining SNF operations.

     General and administrative expenses increased by $77,000 to $2,653,000 for
three months ended December 31, 2000 from $2,576,000 for three months ended
December 31, 1999.

     The provision for losses under shortfall funding agreements increased by
$1,014,000 to $1,764,000 for three months ended December 31, 2000 from $750,000
for the three months ended December 31, 1999. The increase is

                                       24
<PAGE>   25

primarily the result of the depletion of SPE working capital for managed
operations. 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 includes losses incurred on the
termination of the NHP leases described in Note 9 ($2,132,000), costs incurred
in connection with financing efforts and rent restructuring ($1,586,000), and a
reserve against notes receivable ($670,000). No loss on financial restructuring
was incurred for the same period in the prior fiscal year.

     Lease expense decreased by $468,000 to $2,995,000 for the three months
ended December 31, 2000 from $3,463,000 for the three months ended December 31,
1999. This decrease was primarily the net result of: (i) decreased rents of
$1,517,000 for the divested Missouri operations and (ii) decreased rents of
$588,000 as a result of the purchase of the real estate of five facilities
previously leased in December 1999. These decreases were partially offset by
increased rents of $1,594,000 from SPEs acquired in 2000 and fiscal year 2001.

     Depreciation and amortization increased by $646,000 to $1,420,000 for the
three months ended December 31, 2000 from $774,000 for the three months ended
December 31, 1999. The increase resulted primarily from an increase of $583,000
relating to the properties purchased in December 2000.

     Other Income (Expense).  Interest and other income for the three months
ended December 31, 2000 increased by $19,000 to $134,000 from $115,000 for the
three months ended December 31, 1999. Interest expense for the three months
ended December 31, 2000 increased by $1,517,000 to $1,940,000 from $423,000 for
the three months ended December 31, 1999. This was primarily due to the interest
on the Line of Credit, the Heller Note, and the convertible debentures.

     Provision for Income Taxes.  The provision for income taxes was $3,000 for
the three months ended December 31, 1999. No provision for the three months
ended December 31, 2000 was reported.

     Net Loss.  The Company's net loss of $11,488,000 for the three months ended
December 31, 2000 increased by $7,779,000 from a net loss of $3,709,000 for the
three months ended December 31, 1999. This increase resulted primarily from (i)
an increase in the provision for losses under shortfall funding agreements of
$1,014,000; (ii) increased depreciation expense of $646,000; (iii) increased
interest expense of $1,517,000; and (iv) loss on financial restructuring of
$4,388,000.

SIX MONTHS ENDED DECEMBER 31, 2000 COMPARED TO THE SIX MONTHS ENDED DECEMBER 31,
1999

     Total Revenue.  Total revenue for the six months ended December 31, 2000
decreased by $7,451,000 to $29,490,000 compared to $36,941,000 for six months
ended December 31, 1999. This decrease was primarily the result of a decrease in
patient service revenues of $17,476,000, which resulted primarily from the
divestiture of the Company's former Missouri operations. This decrease was
partially offset by additional resident service revenues of $10,492,000,
primarily from SPE facilities acquired during fiscal year 2000 and fiscal year
2001. Resident services comprised 83% and 38% of total revenues for six months
ended December 31, 2000 and 1999, respectively. The increase in this percentage
of total revenues was due to the Company's implementation of its business plan,
which focuses on assisted living operations and acquiring the operations of
assisted living facilities from the SPEs, coupled with the decrease in patient
service revenues in the six months ended December 31, 2000 compared to the same
period in the prior fiscal year due to the divestiture of the Missouri
operations in January 2000.

     Operating Expenses.  Total operating expenses increased by $1,005,000 to
$44,690,000 for six months ended December 31, 2000 from $43,685,000 for the six
months ended December 31, 1999. This increase was attributed primarily to (i)
increased expenses of $12,782,000 from SPE facilities acquired during fiscal
year 2000 and fiscal year 2001; (ii) increased expenses of $422,000 from the
remaining SNF operations; (iii) increased provision for losses under shortfall
fundings of $2,314,000; (iv) loss on financial restructuring of $4,388,000 in
the current period; and (v) increased depreciation and amortization of
$1,273,000. The increases were partially offset by decreased expenses of
$20,573,000 resulting from the divestiture of the Missouri operations.

                                       25
<PAGE>   26

     Facility operating expenses for the six months ended December 31, 2000
decreased by $6,343,000 to $22,207,000 from $28,550,000 for six months ended
December 31, 1999. The decrease was the result of a decrease of $16,438,000
resulting from the divestiture of the Missouri operations. These decreases were
partially offset by (i) an increase of $9,186,000 from SPE facilities acquired
during fiscal year 2000 and fiscal year 2001; and (ii) a $408,000 increase from
the remaining SNF operations.

     General and administrative expenses increased by $114,000 to $5,283,000 for
six months ended December 31, 2000 from $5,169,000 for six months ended December
31, 1999.

     The provision for losses under shortfall funding agreements increased by
$2,314,000 to $3,864,000 for six months ended December 31, 2000 from $1,550,000
for the six months ended December 31, 1999. The increase is primarily the result
of the depletion of SPE working capital for managed operations. 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 includes losses incurred on the
termination of the NHP leases described in Note 9 ($2,132,000), costs incurred
in connection with financing efforts and rent restructuring ($1,586,000), and a
reserve against notes receivable ($670,000). No loss on financial restructuring
was incurred for the same period in the prior fiscal year.

     Lease expense decreased by $741,000 to $6,161,000 for the six months ended
December 31, 2000 from $6,902,000 for the six months ended December 31, 1999.
This decrease was primarily the net result of: (i) decreased rents of $3,001,000
for the divested Missouri operations and (ii) decreased rents of $1,190,000 as a
result of the purchase of the real estate of five facilities previously leased
in December 1999. These decreases were partially offset by increased rents of
$3,391,000 from SPEs acquired in 2000 and fiscal year 2001.

     Depreciation and amortization increased by $1,273,000 to $2,787,000 for the
six months ended December 31, 2000 from $1,514,000 for the six months ended
December 31, 1999. The increase resulted primarily from increase of $1,131,000
relating to the properties purchased in December 2000.

     Other Income (Expense).  Interest and other income for the six months ended
December 31, 2000 increased by $64,000 to $236,000 from $172,000 for the six
months ended December 31, 1999. Interest expense for the six months ended
December 31, 2000 increased by $2,928,000 to $3,750,000 from $822,000 for the
six months ended December 31, 1999. This was primarily due to the interest on
the Line of Credit, the Heller Note, and the convertible debentures.

     Provision for Income Taxes.  The provision for income taxes was $5,000 for
the six months ended December 31, 1999. No provision for the six months ended
December 31, 2000 was reported.

     Net Loss.  The Company's net loss of $18,714,000 for the six months ended
December 31, 2000 increased by $10,576,000 from a net loss of $8,138,000 for the
six months ended December 31, 1999. This increase resulted primarily from (i) an
increase in the provision for losses under shortfall funding agreements of
$2,314,000; (ii) increased depreciation expense of $1,273,000; (iii) increased
interest expense of $2,928,000; and (iv) loss on financial restructuring of
$4,388,000.

LIQUIDITY AND CAPITAL RESOURCES

     Since the Company re-directed its focus to operations from development the
Company's capital requirements and sources have also changed. Historically the
Company primarily sought development and acquisition capital, using development
fees to support operating losses and corporate overhead. Since the Company's
announcement in fiscal year 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.

                                       26
<PAGE>   27

RECENT DEVELOPMENTS

     See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Recent Developments -- Rent Restructuring and
Termination of Master Leases."

CHANGE IN CONTROL OF REGISTRANT

     See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Change in Control."

OTHER FINANCING TRANSACTIONS

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

OPERATIONS

     In October 2000, the Company assumed the lease for a 70 bed assisted living
facility in Merrillville, IN. At December 31, 2000, the Company had opened 41 of
its Outlook Pointe(R) signature series assisted living facilities and operated
and managed a total of 60 assisted and skilled nursing facilities (excluding the
10 NHP facilities). The Company has adequate financing to complete construction
on the one remaining facility currently under construction, which is expected to
open in April 2001. This will conclude the Company's initial round of
development activity initiated three years ago.

     The Company's development projects have 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 41 development projects for which the Company holds or
held the foregoing type of option (excluding the 10 NHP facilities). In October
2000, the Company exercised its options to purchase six SPEs financed under this
structure for a total purchase price of approximately $4.6 million that was
financed with a promissory note held by the owner/lessor. As of December 31,
2000, the Company has exercised its option to purchase 18 SPEs financed under
the SPE structure (excluding the 10 NHP Facilities) 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. The
Company continues to manage 23 properties under the SPE structure. Management is
negotiating 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 $19,000,000 (excluding the NHP leases). 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

                                       27
<PAGE>   28

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 December 31, 2000 under its leases with four of its landlords. To
date, the Company has not received any default notices from any of the affected
landlords for 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.

     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, OH. The Meditrust
notices stated that Meditrust had elected to apply the cash 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 the 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 cash collateral from the remaining Outlook Pointe facility lease in
the amount of $108,821 towards the prepayment of a promissory note made by the
Company and IPC in favor of Meditrust in the principal amount of $7,811,054.

     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
(hereinafter, the Xenia/Lima Notes, the Lewisburg Note, the Chippewa Note, and
the Dillsburg Note 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.

     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 rent obligations. However, the operations do generate sufficient cash
flow to cover facility operating and general and administrative expenses.
Therefore, as part of the Company's rent restructuring plan, cash flows
remaining after meeting the foregoing expenses are used to make certain rent and
interest payments. The Company does not have any present borrowing availability.
While management has actively sought additional capital to meet the Company's
business plan, capital has not been available to the Company. If additional
capital becomes available or is raised, there can be no assurance that the terms
will be acceptable, or that the terms will not be dilutive to existing
stockholders. The inability of the Company to raise additional capital or to
restructure its lease obligations could have a material adverse effect on the
Company's business, results of operations and financial condition. The Company's

                                       28
<PAGE>   29

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
and the Company's ability to generate sufficient cash from operations and
financing arrangements to meet its obligations.

OPERATING ACTIVITIES

     Cash used by operations increased by $2,612,000 to $12,142,000 for the six
months ended December 31, 2000 from cash used by operations of $9,530,000 for
the six months ended December 31, 1999. The increase in cash used was due to
funding losses and increase in receivables.

INVESTING AND FINANCING ACTIVITIES

     Cash used for investing activities decreased by $52,378,000 to $7,498,000
for the six months ended December 31, 2000 from $59,876,000 for the six months
ended December 31, 1999. Cash provided by financing activities decreased by
$49,072,000 to $17,006,000 for the six months ended December 31, 2000 from
$66,078,000 for the six months ended December 31, 1999. Decreases in cash used
for investing activities resulted from reduced purchases of property and
equipment and a reduction in purchase option deposits. 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 six months ended at December 31, 2000.

ITEM 5:  OTHER EVENTS

     See Item 2, "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Recent Developments."

                                       29
<PAGE>   30

                          PART II -- OTHER INFORMATION

ITEM 6:  EXHIBITS AND REPORTS ON FORM 8-K

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                             DESCRIPTION
-------    ------------------------------------------------------------
<S>        <C>
10.1       Note made by Balanced Care Corporation ("BCC") in favor of
           Health Care REIT, Inc. ("HCR") dated as of October 31, 2000
           (filed herewith)
10.2       Form of HCR Second Amended and Restated Loan Agreement dated
           as of October 31, 2000 (filed herewith)
10.3       Schedule to Form of HCR Second Amended and Restated Loan
           Agreement dated as of October 31, 2000 (filed herewith)
10.4       Form of HCR Amended and Restated Note dated as of October
           31, 2000 (filed herewith)
10.5       Schedule to Form of HCR Second Amended and Restated Note
           (filed herewith)
10.6       Form of HCR Unconditional and Continuing Guaranty dated as
           of October 31, 2000 (filed herewith)
10.7       Schedule to HCR form of Unconditional and Continuing
           Guaranty dated as of October 31, 2000 (filed herewith)
10.8       Form of HCR Leasehold Mortgage dated as of October 31, 2000
           (filed herewith)
10.9       Schedule to Form of HCR Leasehold Mortgage (filed herewith)
10.10      Form of HCR Leasehold Deed of Trust dated as of October 31,
           2000 (filed herewith)
10.11      Schedule to Form of HCR Leasehold Deed of Trust (filed
           herewith)
10.12      Master Lease Agreement by and between Balanced Care at
           Merrillville, Inc. ("BCM") and HCR dated as of October 1,
           2000 (filed herewith)
10.13      Amendment to Master Lease Agreement by and between BCM and
           HCR dated as of October 1, 2000 (filed herewith)
10.14      Unconditional and Continuing Guaranty in favor of HCR by BCC
           dated as of October 1, 2000 (filed herewith)
10.15      Leasehold Mortgage by BCM in favor of HCR dated as of
           October 1, 2000 (filed herewith)
10.16      Loan Agreement by and between BCM and HCR dated as of
           October 1, 2000 (filed herewith)
10.17      Note made by BCM in favor of HCR dated as of October 1, 2000
           (filed herewith)
10.18      Stock Pledge Agreement by and between BCC and HCR dated as
           of October 31, 2000 (filed herewith)
10.19      Collateral Assignment of Management Agreement by and between
           BCM and HCR dated as of October 1, 2000 (filed herewith)
10.20      Omnibus Amendment Agreement No. 1 to Development Agreement
           by and among Capstone Capital of Pennsylvania, Inc., HR
           Acquisition I Corporation, Capstone Capital of Virginia,
           Inc., BCC Development and Management Co., and BCC dated as
           October 25, 2000 (filed herewith)
10.21      Omnibus Amendment Agreement No. 1 to Lease Agreements by and
           among Capstone Capital of Pennsylvania, Inc., HR Acquisition
           I Corporation, Capstone Capital of Virginia, Inc., Extended
           Care Operators of Harrisburg, LLC, Extended Care Operators
           of Ravenna, LLC, Extended Care Operators of Greensboro, LLC,
           ALCO XI, ALCO VI, LLC, ALCO X, LLC, ALCO IX, BCC at
           Greensboro, Inc., and BCC dated as October 25, 2000 (filed
           herewith)
10.22      Promissory Note made by BCC in favor of HR Investments
           Limited dated December 7, 2000 (filed herewith)
10.23      Promissory Note made by BCC in favor of RH Investments
           Limited dated December 7, 2000 (filed herewith)
</TABLE>

                                       31
<PAGE>   31

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                             DESCRIPTION
-------    ------------------------------------------------------------
<S>        <C>
10.24      Promissory Note made by BCC in favor of VXM Investments
           Limited dated December 7, 2000 (filed herewith)
10.25      Second Amendment to Stock Pledge Agreement by and among BCC,
           the parties listed in Schedule 1, the parties listed in
           Schedule 2, FRR Investments Limited, IPC Advisors S.a.r.l.,
           HR Investments Limited, RH Investments Limited and VXM
           Investments Limited dated December 7, 2000 (filed herewith)
10.26      Second Amendment to Employment Agreement of Brad E.
           Hollinger dated December 4, 2000 (filed herewith)
</TABLE>

---------------
(B) Reports on Form 8-K

1. Current Report on Form 8-K dated November 13, 2000 regarding $8 million loan
   and IPC Proposed Offer.

2. Current Report on Form 8-K dated November 20, 2000 regarding Meditrust
   notices of events of default.

3. Current Report on Form 8-K dated November 28, 2000 regarding stockholder
   lawsuit.

4. Current Report on Form 8-K dated December 5, 2000 regarding IPC determination
   not to proceed with Proposed Offer.

5. Current Report on Form 8-K dated December 12, 2000 regarding BCC
   restructuring plan.

6. Current Report on Form 8-K dated December 20, 2000 regarding BCC
   restructuring plan.

7. Current Report on Form 8-K dated January 15, 2001 regarding lease termination
   and release with Nationwide Health Properties, Inc.

                                       32
<PAGE>   32

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                             DESCRIPTION
-------    ------------------------------------------------------------
<S>        <C>
10.1       Note made by Balanced Care Corporation ("BCC") in favor of
           Health Care REIT, Inc. ("HCR") dated as of October 31, 2000
           (filed herewith)
10.2       Form of HCR Second Amended and Restated Loan Agreement dated
           as of October 31, 2000 (filed herewith)
10.3       Schedule to Form of HCR Second Amended and Restated Loan
           Agreement dated as of October 31, 2000 (filed herewith)
10.4       Form of HCR Amended and Restated Note dated as of October
           31, 2000 (filed herewith)
10.5       Schedule to Form of HCR Second Amended and Restated Note
           (filed herewith)
10.6       Form of HCR Unconditional and Continuing Guaranty dated as
           of October 31, 2000 (filed herewith)
10.7       Schedule to HCR form of Unconditional and Continuing
           Guaranty dated as of October 31, 2000 (filed herewith)
10.8       Form of HCR Leasehold Mortgage dated as of October 31, 2000
           (filed herewith)
10.9       Schedule to Form of HCR Leasehold Mortgage (filed herewith)
10.10      Form of HCR Leasehold Deed of Trust dated as of October 31,
           2000 (filed herewith)
10.11      Schedule to Form of HCR Leasehold Deed of Trust (filed
           herewith)
10.12      Master Lease Agreement by and between Balanced Care at
           Merrillville, Inc. ("BCM") and HCR dated as of October 1,
           2000 (filed herewith)
10.13      Amendment to Master Lease Agreement by and between BCM and
           HCR dated as of October 1, 2000 (filed herewith)
10.14      Unconditional and Continuing Guaranty in favor of HCR by BCC
           dated as of October 1, 2000 (filed herewith)
10.15      Leasehold Mortgage by BCM in favor of HCR dated as of
           October 1, 2000 (filed herewith)
10.16      Loan Agreement by and between BCM and HCR dated as of
           October 1, 2000 (filed herewith)
10.17      Note made by BCM in favor of HCR dated as of October 1, 2000
           (filed herewith)
10.18      Stock Pledge Agreement by and between BCC and HCR dated as
           of October 31, 2000 (filed herewith)
10.19      Collateral Assignment of Management Agreement by and between
           BCM and HCR dated as of October 1, 2000 (filed herewith)
10.20      Omnibus Amendment Agreement No. 1 to Development Agreement
           by and among Capstone Capital of Pennsylvania, Inc., HR
           Acquisition I Corporation, Capstone Capital of Virginia,
           Inc., BCC Development and Management Co., and BCC dated as
           October 25, 2000 (filed herewith)
10.21      Omnibus Amendment Agreement No. 1 to Lease Agreements by and
           among Capstone Capital of Pennsylvania, Inc., HR Acquisition
           I Corporation, Capstone Capital of Virginia, Inc., Extended
           Care Operators of Harrisburg, LLC, Extended Care Operators
           of Ravenna, LLC, Extended Care Operators of Greensboro, LLC,
           ALCO XI, ALCO VI, LLC, ALCO X, LLC, ALCO IX, BCC at
           Greensboro, Inc., and BCC dated as October 25, 2000 (filed
           herewith)
10.22      Promissory Note made by BCC in favor of HR Investments
           Limited dated December 7, 2000 (filed herewith)
10.23      Promissory Note made by BCC in favor of RH Investments
           Limited dated December 7, 2000 (filed herewith)
10.24      Promissory Note made by BCC in favor of VXM Investments
           Limited dated December 7, 2000 (filed herewith)
10.25      Second Amendment to Stock Pledge Agreement by and among BCC,
           the parties listed in Schedule 1, the parties listed in
           Schedule 2, FRR Investments Limited, IPC Advisors S.a.r.l.,
           HR Investments Limited, RH Investments Limited and VXM
           Investments Limited dated December 7, 2000 (filed herewith)
10.26      Second Amendment to Employment Agreement of Brad E.
           Hollinger dated December 4, 2000 (filed herewith)
</TABLE>

---------------
(B) Reports on Form 8-K
<PAGE>   33

1. Current Report on Form 8-K dated November 13, 2000 regarding $8 million loan
   and IPC Proposed Offer.

2. Current Report on Form 8-K dated November 20, 2000 regarding Meditrust
   notices of events of default.

3. Current Report on Form 8-K dated November 28, 2000 regarding stockholder
   lawsuit.

4. Current Report on Form 8-K dated December 5, 2000 regarding IPC determination
   not to proceed with Proposed Offer.

5. Current Report on Form 8-K dated December 12, 2000 regarding BCC
   restructuring plan.

6. Current Report on Form 8-K dated December 20, 2000 regarding BCC
   restructuring plan.

7. Current Report on Form 8-K dated January 15, 2001 regarding lease termination
   and release with Nationwide Health Properties, Inc.