<PAGE>   1

                       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 March 31, 1999

                                       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)

           DELAWARE                                     25-1761898
           --------                                     ----------
(State of other jurisdiction of           (I.R.S. Employer Identification No.)
 incorporation or organization)


              5021 LOUISE DRIVE, SUITE 200, MECHANICSBURG, PA 17055
              -----------------------------------------------------
               (Address of principal executive offices) (Zip Code)


                                 (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.

              CLASS                                OUTSTANDING AT MAY 12, 1999
              -----                                ---------------------------
  Common Stock, $.001 par value                             16,722,847

<PAGE>   2

                            BALANCED CARE CORPORATION

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                     PART I - FINANCIAL INFORMATION


ITEM 1:

     FINANCIAL STATEMENTS                                                                           Page
                                                                                                    ----

<S>                                                                                                 <C>
          Consolidated Balance Sheets as of March 31, 1999                                            3
               and June 30, 1998

          Consolidated Statements of Operations for the three months ended                            4
               March 31, 1999 and 1998

          Consolidated Statements of Operations for the nine months ended                             5
               March 31, 1999 and 1998

          Consolidated Statement of Stockholders' Equity for the nine months                          6
               ended March 31, 1999

          Consolidated Statements of Cash Flows for the nine months ended                             7
               March 31, 1999 and 1998

          Notes to Consolidated Financial Statements                                                  8

ITEM 2:

     MANAGEMENT'S DISCUSSION AND ANALYSIS OF                                                         13
     FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 3:

     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT                                                  24
     MARKET RISK



                                      PART II - OTHER INFORMATION

ITEM 6:

     EXHIBITS AND REPORTS ON FORM 8-K                                                                25
     (A)      Exhibits
     (B)      Reports on Form 8-K
</TABLE>



                                       2
<PAGE>   3


ITEM 1: FINANCIAL STATEMENTS

                            BALANCED CARE CORPORATION
                           CONSOLIDATED BALANCE SHEETS
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                            March 31           June 30
                                                                                1999              1998
                                                                         (unaudited)
                                                                         -----------           -------
<S>                                                                      <C>                   <C>   
                         ASSETS
Current assets:
     Cash and cash equivalents                                              $ 15,132            15,481
     Accounts receivable  (net of allowance for doubtful
       accounts of $1,067 and $916, respectively)                             14,798            19,630
     Development contracts in process (net of allowance for losses)            6,893             2,534
     Prepaid expenses and other current assets                                 1,621             1,203
     Assets held for sale                                                         --             2,800
                                                                            --------          --------
               Total current assets                                           38,444            41,648

Restricted investments                                                         1,668             1,596
Property and equipment, net                                                   21,014            27,862
Goodwill, net                                                                 15,448            13,466
Other assets                                                                   7,011             1,400
                                                                            --------          --------
               Total assets                                                 $ 83,585            85,972
                                                                            ========          ========

               LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities:
     Current portion of long-term debt                                      $    209               177
     Accounts payable                                                          6,057             7,982
     Accrued payroll                                                           2,160             2,243
     Accrued expenses                                                          5,884             4,864
                                                                            --------          --------
               Total current liabilities                                      14,310            15,266

Deferred income taxes                                                             --               638
Long-term debt, net of current portion                                         8,820             3,376
Straight-line lease liability                                                  2,934             3,053
Deferred revenues and other liabilities                                        1,518             1,780
                                                                            --------          --------
               Total liabilities                                              27,582            24,113
                                                                            --------          --------

Stockholders' equity:
     Preferred stock, $.001 par value; 5,000,000 shares
        authorized; none issued and outstanding                                   --                --
     Common stock, $.001 par value - authorized - 50,000,000
        shares; issued and outstanding - 16,722,847 shares at
        March 31, 1999 and 16,695,343 shares at June 30, 1998                     17                17
     Additional paid-in capital                                               63,814            63,678
     Deficit                                                                  (7,828)           (1,836)
                                                                            --------          --------
               Total stockholders' equity                                     56,003            61,859
                                                                            --------          --------
               Total liabilities and stockholders' equity                   $ 83,585            85,972
                                                                            ========          ========
</TABLE>


See accompanying notes to consolidated financial statements.

                                       3
<PAGE>   4

                            BALANCED CARE CORPORATION
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                             Three months ended March 31
                                                                                  1999              1998
                                                                           (unaudited)       (unaudited)
                                                                           -----------       -----------
<S>                                                                        <C>               <C>   
Revenues:
     Patient services                                                         $ 10,993            14,848
     Resident services                                                           5,000             5,202
     Development fees                                                              258             4,162
     Management fees                                                               354               877
     Other revenues                                                                132               197
                                                                              --------          --------
          Total revenues                                                        16,737            25,286
                                                                              --------          --------

Operating expenses:
     Facility operating expenses:
          Salaries, wages and benefits                                           7,820             8,753
          Other operating expenses                                               5,163             8,584
     Development, general and administrative expense                             3,143             3,042
     Provision for losses under shortfall funding agreements (note 9)            1,400                --
     Provision for losses under severance agreements (note 8)                      600                --
     Lease expense                                                               2,581             2,258
     Depreciation and amortization expense                                         570               538
                                                                              --------          --------
          Total operating expenses                                              21,277            23,175
                                                                              --------          --------
     Income (loss) from operations:                                             (4,540)            2,111
Other income (expense):
          Interest and other income                                                154               235
          Interest expense                                                        (127)             (727)
          Loss on sale of assets (note 6)                                         (102)               --
                                                                              --------          --------
     Income (loss) before income taxes                                          (4,615)            1,619
Provision for income taxes (benefit)                                            (1,846)              272
                                                                              --------          --------
     Net income (loss)                                                        $ (2,769)            1,347
                                                                              ========          ========

Basic earnings (loss) per share                                               $  (0.17)             0.11
                                                                              ========          ========
Diluted earnings (loss) per share                                             $  (0.17)             0.10
                                                                              ========          ========
Weighted average shares - basic                                                 16,722            12,554
                                                                              ========          ========
Weighted average shares - diluted                                               16,722            13,897
                                                                              ========          ========
</TABLE>


See accompanying notes to consolidated financial statements.

                                        4
<PAGE>   5

                            BALANCED CARE CORPORATION
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)


<TABLE>
<CAPTION>
                                                                                  Nine months ended March 31
                                                                                      1999              1998
                                                                               (unaudited)       (unaudited)
                                                                               -----------       -----------
<S>                                                                            <C>               <C>   
Revenues:
     Patient services                                                             $ 35,615            43,999
     Resident services                                                              16,517            12,769
     Development fees                                                                5,932             7,724
     Management fees                                                                   960               898
     Other revenues                                                                    266               289
                                                                                  --------          --------
          Total revenues                                                            59,290            65,679
                                                                                  --------          --------

Operating expenses:
     Facility operating expenses:
          Salaries, wages and benefits                                              24,457            23,438
          Other operating expenses                                                  16,696            24,713
     Development, general and administrative expense                                10,103             8,664
     Provision for losses on termination of development projects (note 7)            2,400                --
     Provision for losses under shortfall funding agreements (note 9)                3,760                --
     Provision for losses under severance agreements (note 8)                          600                --
     Lease expense                                                                   7,377             7,162
     Depreciation and amortization expense                                           1,613             1,543
                                                                                  --------          --------
          Total operating expenses                                                  67,006            65,520
                                                                                  --------          --------
     Income (loss) from operations:                                                 (7,716)              159
Other income (expense):
          Interest and other income                                                    633               410
          Interest expense                                                            (345)           (1,579)
          Gain (loss) on sale of assets                                               (302)            2,858
                                                                                  --------          --------
     Income (loss) before income taxes                                              (7,730)            1,848
Provision for income taxes (benefit)                                                (1,738)              309
                                                                                  --------          --------
     Net income (loss)                                                            $ (5,992)            1,539
                                                                                  ========          ========

Basic earnings (loss) per share                                                   $  (0.36)             0.16
                                                                                  ========          ========
Diluted earnings (loss) per share                                                 $  (0.36)             0.14
                                                                                  ========          ========
Weighted average shares - basic                                                     16,709             9,929
                                                                                  ========          ========
Weighted average shares - diluted                                                   16,709            11,187
                                                                                  ========          ========
</TABLE>


See accompanying notes to consolidated financial statements.

                                        5

<PAGE>   6


                            BALANCED CARE CORPORATION
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
              FOR THE NINE MONTHS ENDED MARCH 31, 1999 (UNAUDITED)
                             (DOLLARS IN THOUSANDS)


<TABLE>
<CAPTION>
                                            COMMON STOCK  
                                     -------------------------          ADDTL.  
                                      ISSUED            PAR            PAID-IN
                                      SHARES           VALUE           CAPITAL           DEFICIT           TOTAL
                                      ------           -----           -------           -------           -----

<S>                                   <C>             <C>              <C>              <C>               <C>     
Balance at June 30, 1998               16,695         $     17         $ 63,678         $ (1,836)         $ 61,859

Exercise of options                        28               --              136               --               136

Net loss                                   --               --               --           (5,992)           (5,992)
                                       ------         --------         --------         --------          --------

Balance at December 31, 1998           16,723         $     17         $ 63,814         $ (7,828)         $ 56,003
                                       ======         ========         ========         ========          ========
</TABLE>




See accompanying notes to consolidated financial statements.

                                        6


<PAGE>   7

                            BALANCED CARE CORPORATION
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                             (DOLLARS IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                               Nine months ended March 31
                                                                                   1999              1998
                                                                            (unaudited)       (unaudited)
                                                                            -----------------------------
<S>                                                                         <C>               <C>     
Cash Flows from Operating Activities:
Net income (loss)                                                              $ (5,992)         $  1,539
Adjustments to reconcile net income (loss) to net cash used for
     operating activities:
     Depreciation and amortization                                                1,613             1,543
     Deferred income taxes                                                       (1,833)              274
     Loss (gain) on sale of assets                                                  302            (2,858)
     Changes in operating assets and liabilities, excluding
          effects of acquisitions:
          (Increase) decrease in receivables, net                                 4,854            (8,541)
          (Increase) decrease in development contracts in process, net           (4,359)              436
          Increase in prepaid expenses and other current assets                    (406)             (440)
          Increase in accounts payable, accrued payroll and
             accrued expenses                                                       608               858
                                                                               --------          --------
               Net cash used for operating activities                            (5,213)           (7,189)
                                                                               --------          --------
Cash Flows from Investing Activities:
     Proceeds from sale of assets                                                11,630             7,029
     Purchases of property and equipment                                         (3,154)           (2,402)
     Increase in restricted investments                                             (72)              (50)
     Increase in deferred financing costs                                            --            (1,108)
     Increase in other assets                                                    (4,416)              686
     Business acquisitions (note 11)                                             (4,355)          (30,678)
                                                                               --------          --------
               Net cash used for investing activities                              (367)          (26,523)
                                                                               --------          --------
Cash Flows from Financing Activities:
     Proceeds from issuance of long-term debt                                     5,682               174
     Payments on long-term debt                                                    (206)             (111)
     Proceeds from issuance of common stock                                         136            46,356
     Issuance of notes payable                                                       --            29,675
     Payments on notes payable                                                       --           (29,675)
     Decrease in other liabilities                                                 (381)             (304)
                                                                               --------          --------
               Net cash provided by financing activities                          5,231            46,115
                                                                               --------          --------
     Decrease in cash and cash equivalents                                         (349)           12,403
     Cash and cash equivalents at beginning of period                            15,481             7,908
                                                                               --------          --------
Cash and cash equivalents at end of period                                     $ 15,132          $ 20,311
                                                                               ========          ========

Supplemental Cash Flow Information:
     Cash paid during the period for interest                                  $    345          $  1,576  
                                                                               ========          ========  
     Cash paid during the period for income taxes                              $     86          $     85  
                                                                               ========          ========  
Supplemental Non-cash Investing and Financing Activities:                                                  
     Assets and lease obligations capitalized                                  $     --          $    238  
                                                                               ========          ========  
     Accretion of preferred B stock                                            $     --          $  1,253  
                                                                               ========          ========  
     Acquisitions:                                                                                         
             Fair value of assets acquired                                     $ (4,377)         $(30,821) 
             Liabilities assumed                                                     22               143  
                                                                               --------          --------
              Consideration paid for acquisitions                              $ (4,355)         $(30,678) 
                                                                               ========          ========  
</TABLE>

See accompanying notes to consolidated financial statements.

                                        7


<PAGE>   8



                            BALANCED CARE CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a)      Organization and Background

         Balanced Care Corporation (the "Company") was incorporated in April
1995 and is engaged in the operation, development and acquisition of assisted
living facilities and selective acquisitions of other operations which
facilitate implementation of the Company's balanced care continuum strategy,
such as medical rehabilitation, dementia and Alzheimer's services, home health
care and skilled nursing. As of March 31, 1999, the Company owned, leased or
managed 53 assisted and independent living communities and 13 skilled nursing
facilities. Also at March 31, 1999, the Company had 21 assisted living
communities under construction.

(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 intercompany accounts and transactions have
been eliminated in the consolidated financial statements.

         The financial statements as of and for the three and nine month periods
ended March 31, 1999 and 1998 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 nine month periods ended March 31, 1999 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,
1998 as contained in the Company's annual report on Form 10-K.

2.       INITIAL PUBLIC OFFERING

         On February 18, 1998, the Company closed its initial public offering
for 7,000,000 shares of its common stock, par value $.001 per share ("Common
Stock") at a price of $6.50 per share (the "Offering"). Concurrent with the
Offering, 5,009,750 shares of Series B Preferred Stock and 1,150,958 shares of
Series A Preferred Stock were converted into 4,620,532 shares of Common Stock
(reflective of the three-for-four reverse split of Common Stock effective
October 14, 1997).

         In connection with the Offering, the Company granted the underwriters
an option to purchase 1,050,000 additional shares of Common Stock at $6.50 per
share. The closing for this option was on March 17, 1998. After the consummation
of the Offering, the conversion of the preferred stock and the exercise of the
underwriters' option, the Company had 16,695,343 shares of Common Stock
outstanding. The Company's stock is traded on the American Stock Exchange under
the symbol BAL.

                                       8
<PAGE>   9

3.       INCOME STATEMENT

         Pursuant to Section 11(a) of the Securities Act of 1933 (the "Act") and
Rule 158 thereunder, the information contained herein, and similar statement of
income information contained in the Company's Quarterly Report on Form 10-Q for
the Quarter ended March 31, 1998, Annual Report on Form 10-K for the year ended
June 30, 1998, Quarterly Report on Form 10-Q for the quarters ended September
30, 1998 and December 31, 1998 collectively satisfies the "earning statement"
requirement of Section 11(a) under the Act and Rule 158 thereunder.

4.       PRO FORMA RESULTS OF OPERATIONS

         The following unaudited summary, prepared on a pro forma basis,
combines the results of operations of the acquired businesses with those of the
Company as if the acquisitions and leases had been consummated as of the
beginning of the period. The acquired businesses and their respective
acquisition dates were Heavenly Health Care, Inc. d/b/a Joe Clark Residential
Care Homes in August 1997, Feltrop's Personal Care Home and Butler Senior Care
in October 1997, Triangle Retirement Services, Inc. d/b/a Northridge Retirement
Center in December 1997, Gethsemane Affiliates in January 1998, Potomac Point in
June 1998 and Extended Care Operators of Harrisburg, LLC d/b/a Harrisburg
Outlook Pointe in March 1999. The pro forma results include the impact of
certain adjustments such as: amortization of goodwill, depreciation of assets
acquired, interest on acquisition financing and lease payments on the leased
facility (in thousands, except for per share amounts):


                                                         NINE MONTHS ENDED
                                                              MARCH 31
                                                     --------------------------
                                                       1999             1998
                                                       ----             ----
Revenue ....................................         $ 60,071          $ 70,159
Expense ....................................          (66,233)          (68,995)
                                                     --------          --------
Net income (loss) ..........................         $ (6,162)         $  1,164
                                                     ========          ========
Net income (loss) per common share - diluted         $  (0.37)         $   0.10
                                                     ========          ========

         The unaudited pro forma results are not necessarily indicative of what
actually might have occurred if the acquisitions had been completed as of July
1, 1998 and 1997. In addition, they are not intended to be a projection of
future results of operations.

5.       ASSETS HELD FOR SALE

         In December 1998, the Company completed the sale of the assets of its
Wisconsin assisted living facilities for net proceeds of approximately
$2,726,000. The Wisconsin facilities had been classified as an asset held for
sale since June 30, 1997. The sale resulted in a loss of $200,000 in the period
ended December 31, 1998.

6.       SALE/LEASE-BACK

         In March 1999, the Company completed the sale and subsequent leaseback
of two of its facilities in Bloomsburg and Saxonburg, Pennsylvania with an
unrelated third party (the "Purchaser"). The net proceeds from the sale of the
two facilities was $8,901,000, which was paid to the Company in cash. In
connection with the sale, the Company entered into "triple net leases" with the
Purchaser to lease the facilities, under which the Company is responsible for
all expenses incurred in the use and maintenance 




                                       9
<PAGE>   10

of the buildings including property taxes and insurance. The leases have an
initial term of 15 years, with three renewal terms: two for five years and one
for four years, 11 months. The annual lease rate is 10.25%. The sale to
Purchaser resulted in a loss of $102,000.

7.       PROVISION FOR TERMINATION OF DEVELOPMENT PROJECTS

         As discussed in the prior quarterly report, the Company's development
activities are significantly affected by volatility in the capital markets and
specific transaction terms which affect the Company's ability to utilize
non-binding financing commitments from real estate investment trusts ("REITs")
and other lenders. More specifically, the availability of REIT financing has
become substantially limited for new assisted living construction. Furthermore,
the ability of the Company to negotiate acceptable transaction terms and to
currently recognize income on development fees has become increasingly difficult
due to accounting pronouncements and guidance issued by the Emerging Issues Task
Force ("EITF") and the Securities and Exchange Commission staff. Finally, the
Company's leverage (i.e. debt and other financial commitments in relation to
equity) has increased due to its extensive use of operating leases to finance
the construction of its Outlook Pointe(R) signature series assisted living
facilities.

         As a direct result of the foregoing, in the quarter ended December 31,
1998, the Company was not able to obtain financing on acceptable terms to
continue development of its Outlook Pointe(R) signature series assisted living
facilities. In recognition of the aforementioned events and circumstances
occurring in the second fiscal quarter, the Company: (i) concluded that
development fees on new projects scheduled to close in the second fiscal quarter
did not qualify for income recognition under contract terms considered
acceptable by management; (ii) decided to emphasize the focus of management's
efforts on the operations of existing facilities and facilities which are now
under construction; (iii) decided to substantially reduce its development
activities with respect to new sites and projects; and (iv) recorded a provision
for losses on termination of development projects of $2,400,000. This provision
is based on management's evaluation of capitalized costs, including land option
payments, on various projects that are not now consistent with the Company's
future plans.

8.       PROVISION FOR SEVERANCE

         Due to the downscaling of development activities related to the
Company's Outlook Pointe(R) signature series assisted living facilities
discussed above, management adopted a corporate restructuring plan affecting
certain departments and staff positions. This restructuring plan, which was
enacted in February 1999 resulted in a one-time charge of approximately $600,000
in the Company's third fiscal quarter ended March 31, 1999, representing the
estimated costs of employee terminations and related costs.

9.       WORKING CAPITAL SHORTFALL OBLIGATIONS

         As previously disclosed, the Company manages certain assisted living
facilities owned by REITs and leased to special purpose entities owned by
independent third parties (the "Operator/Lessees"). As part of these
transactions, the Company has entered into shortfall funding agreements, whereby
the Company has agreed to make loans to the Operator/Lessees if the equity and
working capital loans provided to the Operator/Lessees are depleted by negative
cash flows from start-up operations of the facilities.



                                       10
<PAGE>   11

         During the three and nine months ended March 31, 1999, the Company
recorded losses of $1,400,000 and $3,760,000, respectively, related to its
obligations under the shortfall funding agreements to fund the additional
working capital needs of these managed facilities. This amount has been charged
to operations as a provision for losses under the shortfall funding agreements
and recorded as an allowance against receivables on advances to
Operator/Lessees. The Company records its losses on shortfall funding agreements
using the "modified equity accounting" approach. Under this approach, the
operating losses of the Operator/Lessees are allocated first to the capital of
the investors, and the losses in excess of such capital are allocated to the
Company to the extent of the Company's commitment under the shortfall funding
agreement.

10.      BUSINESS ACQUISITIONS

         In March 1999, the Company purchased the equity interests of Extended
Care Operators of Harrisburg, LLC d/b/a Outlook Pointe at Harrisburg, a 57-bed
assisted living facility located in Harrisburg, Pennsylvania, for net cash of
approximately $516,000 including transaction costs. This facility was previously
developed and managed by the Company. The acquisition has been accounted for
using the purchase method of accounting and the related lease acquisition costs
of approximately $436,000 is being amortized over the estimated term of the
lease.

11.      BUSINESS ACQUISITIONS - STATEMENT OF CASH FLOWS

         The $4,355,000 cash used for business acquisitions in the statement of
cash flows for the nine months ended March 31, 1999 consists of the following:

<TABLE>
<CAPTION>
                                  DATE OF                                 DATE RECORDED       DATE 
        ACQUISITIONS            ACQUISITION          DESCRIPTION           AS GOODWILL        PAID         AMOUNT
        ------------            -----------          -----------           -----------        ----         ------

<S>                             <C>            <C>                        <C>               <C>           <C>       
Gethsemane Affiliates              1/98        Contingent purchase              3/98           7/98       $ 1,200,000
                                               price payment
Butler Senior Care                 10/97       Contingent purchase              6/98           7/98           372,000
                                               price payment
Potomac Point                      6/98        Additional transaction           9/98           9/98            45,000
                                               costs
Butler Senior Care                 10/97       Contingent purchase              1/99         2/99 &         2,222,000
                                               price payment                                   3/99
Outlook Pointe at                  3/99        Purchase price payment           3/99           3/99           516,000
Harrisburg Leasehold                                                                                      -----------

Interest                                                                                                  $ 4,355,000
                                                                                                          ===========
</TABLE>

12.      EARNINGS PER SHARE

         Earnings (loss) per share ("EPS") is computed using the weighted
average number of common shares and common equivalent shares outstanding (using
the treasury stock method). For the three and nine month periods ended March 31,
1999, common equivalent shares from stock options and warrants are excluded from
the computation, as their effect is antidilutive.

         A reconciliation of the weighted average shares used in the computation
of earnings per share follows (in thousands):



                                       11
<PAGE>   12

<TABLE>
<CAPTION>
                                                           THREE MONTHS ENDED                    NINE MONTHS ENDED
                                                               MARCH 31,                             MARCH 31,
                                                          1999              1998              1999              1998
                                                          ----              ----              ----              ----

<S>                                                      <C>               <C>               <C>                <C>  
Weighted average common shares outstanding               16,722            12,554            16,709             9,929

Stock options and warrants computed using the
     Treasury stock method                                   --             1,343                --             1,258
                                                         ------            ------            ------            ------

Shares used for diluted EPS                              16,722            13,897            16,709            11,187
                                                         ======            ======            ======            ======
</TABLE>

13.      CREDIT FACILITY/SUBSEQUENT EVENT

         In April 1999, the Company entered into a $15 million revolving line of
credit (the "Line of Credit"), which will be used for working capital and other
general corporate purposes. The Line of Credit is secured by the real estate of
five of the Company's owned assisted living facilities, four located in
Pennsylvania and one located in North Carolina and the eligible accounts
receivable of 10 of the Company's skilled nursing facilities located in
Missouri. The Line of Credit is for a term of three years, and outstanding
borrowings will bear interest at a rate per annum of prime plus 2.75%.

         The Company made an initial draw in the amount of $5,225,000 under the 
Line of Credit and used the proceeds to repay all of the outstanding principal 
and interest due under an interim $5 million bridge loan consummated with the 
Line of Credit lender in March 1999. The bridge loan was evidenced by a 60-day
secured term note that accrued interest at a floating rate per annum equal to
prime plus 4%. The bridge loan was secured by real estate of four of the
Company's owned assisted living facilities and the eligible accounts receivable
of 12 of the Company's skilled nursing facilities. The Company has no 
outstanding obligations under the bridge loan.

         In a separate transaction effective as of April 30, 1999, the Company
completed the acquisition of the equity interests of the Operator/Lessees for
two of its managed assisted living operations in Mountain Home and Sherwood,
Arkansas. As a result of this transaction, the Company transitioned from manager
to Operator/Lessee for these assisted living operations. The purchase price for
the equity interests of Mountain Home and Sherwood was approximately $748,000
and $920,000, respectively. A portion of the purchase price (the "Working
Capital Component") was financed by the REIT that owns and leases the Arkansas
facilities. The Working Capital Component for Mountain Home and Sherwood was
approximately $742,000 and $565,000, respectively. Under the financing
arrangement, the lease base for each facility was increased by the respective
amount of the Working Capital Component. The Company will recognize
approximately $172,000 of lease acquisition costs from this transaction.




                                       12
<PAGE>   13



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 three and nine month periods ended
March 31, 1999 and 1998, and the Company's liquidity and capital resources. This
information should be read in conjunction with the Company's consolidated
financial statements 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 "Risk Factors" in the Company's Annual Report on
Form 10-K for the year ended June 30, 1998.

OVERVIEW

         The Company was formed in April 1995 to develop senior care continuums
which meet the needs of upper middle, middle and moderate income populations in
non-urban, secondary markets. The Company intends to utilize assisted living
facilities in selected markets as the primary entry point and service platform
to develop the balanced care continuums consisting of various health care and
hospitality services, including, where appropriate, rehabilitation therapies,
physical, occupational and speech therapy, home health care services on an
intermittent basis, dementia and Alzheimer's services and skilled care delivered
in a skilled nursing setting.

         On February 18, 1998, the Company completed its initial public offering
for 7,000,000 shares of its Common Stock, par value $.001 per share at a price
of $6.50 per share (the "Offering"). Concurrent with the Offering, 5,009,750
shares of Series B Preferred Stock and 1,150,958 shares of Series A Preferred
Stock were converted into 4,620,532 shares of Common Stock (reflective of the
three-for-four reverse split of Common Stock effective October 14, 1997). In
connection with the Offering, the Company granted the underwriters an option to
purchase 1,050,000 additional shares of Common Stock at $6.50 per share. The
closing for this option was on March 17, 1998. After the Offering, the
conversion of the preferred stock and the exercise of the underwriters' option,
the Company had 16,695,343 shares of Common Stock outstanding. The Offering,
including the exercise of the underwriters' option, generated proceeds to the
Company of approximately $46,357,000, net of costs and underwriting discounts
and commissions. The proceeds were used to repay indebtedness of approximately
$29,675,000 incurred to fund the purchase of four acquisitions (seven
facilities) completed from October 1997 through January 1998, and to pay off
indebtedness of $5,019,000 related to the Company's Wisconsin assisted living
facilities in anticipation of their sale. The balance of the Offering has been
used for general corporate purposes.

         The Company has grown primarily through acquisitions and by designing,
developing, operating and managing its Outlook Pointe(R) signature series
assisted living facilities. The following table summarizes the Company's
operating facilities at March 31, 1999 and 1998:




                                       13
<PAGE>   14



<TABLE>
<CAPTION>
                                                                      MARCH 31,
                                   ---------------------------------------------------------------------------------
                                                    1999                                      1998
                                   ---------------------------------------    --------------------------------------
                                         Owned  Leased    Managed    Total      Owned    Leased    Managed   Total
<S>                                     <C>     <C>       <C>     <C>           <C>      <C>        <C>       <C>
Developed Assisted Living Facilities       --       2         29      31           --        1          9      10
Acquired Assisted Living Facilities         5      13         --      18           13       11         --      24
Skilled Nursing Facilities                  2      11         --      13            3       10         --      13
Independent Living Facilities              --       4         --       4           --        4         --       4
                                          ---     ---        ---     ---          ---      ---        ---     ---
                                            7      30         29      66           16       26          9      51
                                          ===     ===        ===     ===          ===      ===        ===     ===
</TABLE>

         In December 1998, the Company sold its seven owned assisted living
facilities in Wisconsin, which had been carried as an asset held for sale since
June 30, 1997. As of March 31, 1999, the Company has operations in Pennsylvania,
Missouri, Arkansas, Ohio, Virginia, North Carolina, Tennessee and West Virginia.
These operating facilities have a capacity for 3,028 assisted living residents,
1,294 skilled nursing patients and 117 independent living residents. The Company
also operates a home health care agency in Missouri and rehabilitation therapy
operations in Pennsylvania and Arkansas.

         In addition to the 31 Outlook Pointe(R) signature series assisted
living facilities opened as of March 31, 1999, the Company has signed agreements
to develop and manage an additional 21 assisted living facilities currently
under construction (excluding 2 previously reported projects for which the
construction has been temporarily postponed), which are scheduled to open
through December 1999. In addition to increasing the depth of the Company's
operations in existing states, the construction will add operations in Indiana,
Florida, and Maryland. At March 31, 1999, the Company had land options to
acquire an additional 22 sites after terminating or allowing 15 land options to
expire during the third quarter. The land options generally give the Company, or
its assignee, the right to purchase the land at an agreed-upon price for a
specified period of time in exchange for option payments. In general, the option
payments are credited towards the purchase price if the option is exercised. A
portion of the option payments (usually $15-$30,000 or less) may be
non-refundable if the option is not exercised. In general, the land options may
be assigned by the Company to a third party without the land owners' consent.
(See "Liquidity and Capital Resources.") Of the remaining 22 land options under
control by the Company, the Company intends to pursue financing on acceptable
terms to complete the projects or selectively divest the projects to third
parties.

         The Company generates revenues from four primary sources: patient
services, resident services, development fees and management fees. Patient
services revenues include charges for room and board, rehabilitation therapies,
pharmacy, medical supplies, subacute 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. 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 are included in patient
services revenues. Development fees and management fees are earned for
developing and managing assisted living facilities for REITs and other owners or
lessees. As the Company implements its business plan, management believes that
the mix of the Company's revenues will continue to change and that revenues from
assisted living resident services will increase as a percentage of total
revenues.

         The Company classifies its recurring operating expenses into the
following categories: (i) facility operating expenses which include labor, food,
marketing, rehabilitation therapy costs and other direct facility expenses; (ii)
development, general and administrative expenses, which primarily include
corporate office expenses, regional office expenses, development expenses and
other overhead costs; (iii) 




                                       14
<PAGE>   15

lease expense, which includes rent for the facilities operated by the Company as
well as corporate office and other rent; and (iv) depreciation and amortization.

CENSUS TRENDS

         Operationally, the Company has begun to see the results of the
Company's emphasis on operations and marketing implemented in February 1999.
During the quarter, the Company improved its average quarterly census absorption
rate at the Outlook Pointe(R) signature series assisted living communities from
6.28 residents per building for the September 30, 1998, quarter to 8.89
residents per building for the December 31, 1998 quarter, to 10.75 residents per
building for the March 31, 1999 quarter. We attribute this improvement to the
Company's increased investment in marketing, a new professionally trained and
managed sales team, and a focused community outreach initiative over the past 6
months. We believe the positive effects of the marketing and sales training
program and the refined positioning of the product in the marketplace will
continue to increase the Company's average quarterly census absorption rate.

CHARGES TO OPERATIONS

         Due to the downscaling of development activity of the Company's Outlook
Pointe(R) signature series assisted living facilities (as reported in the second
fiscal quarter), management adopted a corporate restructuring plan affecting
certain departments and staff positions. This restructuring plan, which was
enacted in February 1999, resulted in a one-time charge of approximately
$600,000 in the Company's third fiscal quarter, representing the estimated costs
of employee terminations and related costs to exit these activities. The Company
expects this plan to reduce development, general and administrative expenses by
approximately $2,000,000 annually. The cost savings will be partially offset by
incremental increases in development, general and administrative expenses
related to the Company's increased investment in marketing and regional
operating positions.

         Of the 52 Outlook Pointe(R) signature series assisted living facilities
under construction, managed or leased by the Company at March 31, 1999 (21 under
construction and 31 opened ), the Company estimates it may be required to make
future working capital shortfall contributions in connection with 26 managed
projects. In addition to the $1,400,000 of shortfall contributions incurred
during the third fiscal quarter and the $3,760,000 of cumulative shortfalls
funded through March 31, 1999, the Company estimates that it may be required to
fund an additional $4 million of shortfall contributions through June 30, 2000
(a reduction from the $8 to $12 million total previously estimated in the second
fiscal quarter report). This estimate is based on the conservative assumption
that the ramp-up timetable experienced with initial projects will continue on
all projects currently open and under construction. The additional working
capital needs relate primarily to projects that closed on construction financing
on or before March 31, 1998.

RESULTS OF OPERATIONS

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




                                       15
<PAGE>   16

<TABLE>
<CAPTION>
                                                               THREE MONTHS ENDED                NINE MONTHS ENDED
                                                                    MARCH 31,                         MARCH 31,
                                                           ----------------------------       ---------------------
STATEMENT OF OPERATIONS DATA:                                   1999           1998             1999           1998
                                                                ----           ----             ----           ----
<S>                                                             <C>             <C>             <C>             <C>  
Patient services                                                65.7%           58.7%           60.1%           67.0%
Resident services                                               29.9            20.6            27.9            19.4
Development fees                                                 1.5            16.4            10.0            11.8
Management fees                                                  2.1             3.5             1.6             1.4
Other                                                            0.8             0.8             0.4             0.4
                                                               -----           -----           -----           -----
Total revenue                                                  100.0           100.0           100.0           100.0
Operating expenses:
     Facility operating expenses                                77.6            68.6            69.4            73.3
     Development, general and administrative expense            18.8            12.0            17.1            13.2
     Charge for termination of development projects               --              --             4.1              --
     Charges under shortfall funding agreements                  8.3              --             6.3              --
     Charges for severance losses                                3.6              --             1.0              --
     Lease expense                                              15.4             8.9            12.4            10.9
     Depreciation and amortization expense                       3.4             2.1             2.7             2.4
                                                               -----           -----           -----           -----
Income (loss) from operations                                  (27.1)            8.4           (13.0)             .2
Other income (expense)                                          (0.4)           (2.0)             --             2.6
                                                               -----           -----           -----           -----
Income (loss) before income taxes                              (27.5)            6.4           (13.0)            2.8
Provision for income taxes (benefit)                           (11.0)            1.1            (2.9)            0.5
                                                               -----           -----           -----           -----
Net income (loss)                                              (16.5)            5.3           (10.1)            2.3
                                                               =====           =====           =====           =====
</TABLE>

THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
1998

         Total Revenue. Total revenue for the three months ended March 31, 1999
decreased by $8,549,000 to $16,737,000 compared to $25,286,000 for the three
months ended March 31, 1998. This decrease is primarily attributable to: (i)
decreased patient service revenues of $3,855,000 resulting from a combination of
the new Medicare reimbursement methodology and rates, the Prospective Payment
System ("PPS") and a lower census at many of the Company's skilled nursing
facilities; and (ii) a $3,904,000 decrease in development fees due to the
Company's decision to reduce its development activities. Patient services
comprised 66% and 59% of total revenues for the three months ended March 31,
1999 and 1998, respectively.

         Operating Expenses. Total operating expenses decreased by $1,898,000 to
$21,277,000 for the three months ended March 31, 1999 from $23,175,000 for the
three months ended March 31, 1998. This decrease is primarily attributable to:
(i) decreased operating expenses of $3,386,000 at the Company's skilled nursing
facilities as a result of cost reduction efforts primarily in the area of
therapy delivery; (ii) decreased expenses of $682,000 at the Company's managed
facilities primarily due to a change in accounting procedures relating to the
recognition of expenses for pass-through costs; and (iii) decreased expenses of
$633,000 related to the sale of the Wisconsin assisted living facilities in the
December 31, 1998 quarter. These decreases were partially offset by: (i) the
previously discussed provision for losses under the shortfall funding agreements
of $1,400,000 and the provision for severance losses of $600,000; (ii) increased
facility operating expenses of $378,000 from facilities acquired subsequent to
the three months ended March 31, 1998; and (iii) rent increases of $323,000.

         Facility operating expenses for the three months ended March 31, 1999
decreased by $4,354,000 to $12,983,000 from $17,337,000 for the three months
ended March 31, 1998. This decrease is primarily attributable to: (i) a cost
reduction program and a patient acuity management system put in place at the
Company's skilled nursing facilities, which resulted in cost reductions of
approximately $3,406,000, primarily in the area of therapy delivery; (ii) The
previously discussed change in accounting procedures relating to the recognition
of expenses for pass-through costs which resulted in a decrease of $784,000; 




                                       16
<PAGE>   17

and (iii) the sale of the Wisconsin assisted living facilities in the December
1998 quarter. The decrease was partially offset by the increase to facility
expenses of $424,000 from facilities acquired subsequent to the three months
ended March 31, 1998. As a percentage of total revenue, facility operating
expenses were 77.6% for the three months ended March 31, 1999, and 68.6% for the
three months ended March 31, 1998. This percentage increase was due to the lower
revenue base.

         Development, general and administrative expenses increased by $101,000
to $3,143,000 for the three months ended March 31, 1999 from $3,042,000 for the
three months ended March 31, 1998. As a percentage of total revenue, these
expenses increased to 18.8% for the three months ended March 31, 1999 from 12.0%
for the three months ended March 31, 1998. The increase in expense was
attributable to the Company's facility growth. The disproportionate increase in
the expense as a percentage of revenue was due to the lower revenue base.

         Information concerning the provision for losses under shortfall funding
agreements of $1,400,000 and the provision for severance losses of $600,000
during the three months ended March 31, 1999 are discussed above under the
heading "Charges to Operations".

         Lease expense increased to $2,581,000 for the three months ended March
31, 1999 from $2,258,000 for the three months ended March 31, 1998, an increase
of $323,000. This increase was primarily the result of additional lease expense
from facilities acquired subsequent to March 31, 1998 and as a result of
additional rent provisions in the Company's leases. As a percentage of total
revenue, these expenses totaled 15.4% for the three months ended March 31, 1999
and 8.9% for the three months ended March 31, 1998.

         Depreciation and amortization increased by $32,000 to $570,000 for the
three months ended March 31, 1999 from $538,000 for the three months ended March
31, 1998. This increase resulted from depreciation and amortization related to
the purchase of fixed assets for managed communities in the development stage of
$80,000. This increase was offset by depreciation and amortization of $61,000
related to the sale of the Wisconsin assisted living facilities, which were sold
in the December 1998 quarter.

         Other Income (Expense). Interest and other income for the three months
ended March 31, 1999 decreased by $81,000 to $154,000 from $235,000 in the three
months ended March 31, 1998. Interest expense for the three months ended March
31, 1999 decreased by $600,000 to $127,000 from $727,000 for the three months
ended March 31, 1998. This was primarily due to the repayment of debt with
proceeds of the Offering in February 1998.

         In March 1999, the Company sold and subsequently leased all the fixed
assets including land and buildings of two of its facilities: a skilled nursing
facility located in Bloomsburg, Pennsylvania and an assisted living facility
located in Saxonburg, Pennsylvania for net proceeds of approximately $8,901,000.
The sale leaseback resulted in a loss of $102,000 in the three months ended
March 1999.

         Provision for Income Taxes (Benefit). Income tax benefit of $1,846,000
for the three months ended March 31, 1999 is the result of the Company's
estimated fiscal 1999 tax position. Income tax expense of $272,000 for the March
31, 1998 quarter was based on the Company's estimated tax rate of 16% for the
1998 fiscal year.

         Net Income (Loss). The Company's net loss of ($2,769,000) for the three
months ended March 31, 1999 from net income of $1,347,000 for the three months
ended March 31, 1998, is a decrease of 



                                       17
<PAGE>   18

$4,116,000. This decrease was the result of: (i) decreased profitability from
development fees of $3,975,000; (ii) the provision for losses under shortfall
funding agreements of $1,400,000 and the provision for losses from severance
agreements of $600,000; and (iii) reduced profitability in the Company's skilled
nursing facilities of approximately $315,000, primarily due to the
implementation of PPS and a lower census. These amounts were partially offset by
decreased income taxes of $2,118,000.

         The Company continues to evaluate the impact of the Balanced Budget Act
of 1997 (the "Budget Act") upon future operating results. While the Budget Act
was passed in August 1997, specifics relating to each business line will
continue to be released until the year 2000. The assumptions used by the Company
to evaluate the impact of the Budget Act are based upon the most accurate
information available at this time. At present, the Company believes it is
responding to all of the known changes created by the Budget Act; however, it
cannot predict the impact of unforeseen reductions in anticipated rates issued
by the federal government.

         The Company is also evaluating the impact of the recent report issued
by the United States General Accounting Office in April, 1999 entitled
"Assisted Living Quality-of-Care and Consumer Protection Issues in Four States"
(the "GAO Report") on its methods of delivery. Generally, the GAO Report found
that assisted living facilities do not routinely provide prospective residents
with key information they need so they can compare what several facilities
offer and determine whether a facility is appropriate for their needs. The GAO
Report also found that some assisted living residents are encountering quality
of care and consumer protection problems. Due to the recent nature of the GAO
Report, the Company cannot predict the impact on its methods of delivery. On a
forward going basis, the Company will continue to evaluate the issues raised by
the GAO Report and will take what actions, if any, are required to provide
adequate quality of care and consumer protections to its residents.

NINE MONTHS ENDED MARCH 31, 1999 COMPARED TO THE NINE MONTHS ENDED MARCH 31,
1998

         Total Revenue. Total revenue for the nine months ended March 31, 1999
decreased by $6,389,000 to $59,290,000 compared to $65,679,000 for the nine
months ended March 31, 1998. This decrease was the result of: (i) decrease in
patient service revenues of $8,384,000, which was primarily the result of PPS
and a lower census at the Company's skilled nursing facilities, offset by a
$1,478,000 increase due to a skilled nursing facility acquisition on January 1,
1998; and (ii) decreased development fees of $1,792,000 related to the Company's
decision to reduce development activities. These decreases were partially offset
by additional resident service revenues of $3,748,000, primarily from facilities
acquired during, or subsequent to, the nine months ended March 31, 1998. Patient
services comprised 60% and 67% of total revenues for the nine months ended March
31, 1999 and 1998, respectively. The decrease in this percentage of total
revenues was due to the Company's implementation of its business plan which
focuses on assisted living development and operations, and the aforementioned
decrease due to PPS.

         Operating Expenses. Total operating expenses increased by $1,486,000 to
$67,006,000 for the nine months ended March 31, 1999 from $65,520,000 for the
nine months ended March 31, 1998. This increase was primarily attributable to:
(i) increased expenses of $4,966,000 at facilities acquired during or after the
nine months ended March 31, 1998; (ii) a $1,439,000 increase in development,
general and administrative expenses; (iii) the provision for losses on
termination of development projects of $2,400,000; (iv) the provision for losses
under shortfall funding agreements of $3,760,000; (v) the $600,000 provision for
severance losses; and (vi) a $473,000 increase in operating expenses related to
volume increases at the Company's rehabilitation therapy operations in
Pennsylvania and Arkansas. These increases were partially offset by: (i)
decreased operating expenses of $9,376,000 at the Company's skilled nursing
facilities as a result of cost reduction efforts primarily in the area of
therapy delivery; (ii) decreased operating expenses of $2,249,000 at newly
developed assisted living facilities that were leased during the three months
ended December 31, 1997, but managed effective January 1, 1998 as a result of
the sale of the leasehold interests to an independent Operator/Lessee and (iii)
a decrease in operating expenses of $541,000 for leased assisted living
operations primarily as the result of the divestiture of the Wisconsin
facilities in the December 1998 quarter.

         Facility operating expenses for the nine months ended March 31, 1999
decreased by $6,998,000 to $41,153,000 from $48,151,000 for the nine months
ended March 31, 1998. The decrease is the result of a cost reduction program and
a patient acuity management system put in place at the Company's 



                                       18
<PAGE>   19

skilled nursing facilities, which resulted in a reduction in costs of
approximately $9,420,000, primarily in the area of therapy delivery. Facility
operating expenses also decreased by approximately $1,770,000 at newly developed
assisted living facilities that were leased until December 31, 1997, but managed
subsequent to that date, as a result of the Company's sale of the leasehold
interests to an Operator/Lessee on January 1, 1998. These cost savings were
offset by increased costs of $4,280,000 at new assisted living facilities which
were acquired during, or after, the December 1997 quarter. As a percentage of
total revenue, facility operating expenses were 69.4% for the nine months ended
March 31, 1999, and 73.3% for the nine months ended March 31, 1998.

         Development, general and administrative expenses increased by
$1,439,000 to $10,103,000 for the nine months ended March 31, 1999 from
$8,664,000 for the nine months ended March 31, 1998. As a percentage of total
revenue, these expenses increased to 17.1% for the nine months ended March 31,
1999 from 13.2% for the nine months ended March 31, 1998. The increase was
attributable to the growth in the number of facilities owned, leased or managed.

         Information concerning the provision for losses on termination of
development projects of $2,400,000, the provision for losses under shortfall
funding agreements of $3,760,000 and the provision for severance losses of
$600,000 for the nine months ended March 31, 1999 are discussed above under the
heading "Charges to Operations".

         Lease expense increased by $215,000 to $7,377,000 for the nine months
ended March 31, 1999 from $7,162,000 for the nine months ended March 31, 1998.
This increase was primarily the result of rents at newly opened and acquired
facilities and rental increases under lease agreements at existing facilities.
As a percentage of total revenue, these expenses totaled 12.4% for the nine
months ended March 31, 1999 and 10.9% for the nine months ended March 31,1998.

         Depreciation and amortization increased by $70,000 to $1,613,000 for
the nine months ended March 31, 1999 from $1,543,000 for the nine months ended
March 31, 1998. The increase resulted from depreciation and amortization taken
on assets acquired during, and after, the three months ended December 31, 1997,
offset by the decrease as a result of the sale of the Wisconsin facilities in
the quarter ended December 1997.

         Other Income (Expense). Interest and other income for the nine months
ended March 31, 1999 increased by $223,000 to $633,000 from $410,000 in the nine
months ended March 31, 1998. The increase is primarily attributable to the
higher level of invested funds from the proceeds of the Offering in February
1998. Interest expense for the nine months ended March 31, 1999 decreased by
$1,234,000 to $345,000 from $1,579,000 for the nine months ended March 31, 1998.
This was primarily due to the repayment of $29,675,000 in bridge financing
borrowed for the purchase of six assisted living facilities and one nursing home
between October 1997 and January 1998, and the repayment of $5,019,000 in debt
on the Company's Wisconsin assisted living facilities in June 1998. Both loans
were repaid from proceeds of the Offering in February 1998.

         In March 1999, the Company sold all the fixed assets including land and
buildings of two of its facilities: a skilled nursing facility in Bloomsburg,
Pennsylvania and an assisted living facility located in Saxonburg, Pennsylvania
for net proceeds of approximately $8,901,000 under a sale/leaseback transaction.
In December 1998, the Company completed the sale of the assets of its Wisconsin
assisted living facilities for net proceeds of approximately $2,726,000. The
Wisconsin facilities had been classified as an asset held for sale since June
30, 1997. The sale of the above assets resulted in a loss of $302,000 in the
nine months ended March 31, 1999. In October 1997 the Company sold the
inventory, 



                                       19
<PAGE>   20

furniture and equipment, certain prepaid assets and the operations of a pharmacy
for approximately $4,700,000, net of transaction costs. This resulted in a gain
of $2,858,000 during the nine months ended March 31, 1998.

         Provision for Income Taxes. Income tax benefit of $1,738,000 for the
nine months ended March 31, 1999 is the result of the Company's estimated fiscal
1999 tax position. Income tax expense of $309,000 for the nine months ended
March 31, 1998 was based on the Company's estimated tax rate of 16% for the 1998
fiscal year.

         Net Income (Loss). The Company's net loss of $(5,992,000) for the nine
months ended March 31, 1999 from a net income of $1,539,000 for the nine months
ended March 31, 1998, is a decrease of $7,531,000. This decrease in net income
resulted primarily from: (i) decreased gain on sale of assets of $3,160,000;
(ii) the provision for losses on termination of development projects, under
shortfall funding arrangements and severance provision of $6,760,000, (iii)
reduced profitability in the Company's skilled nursing facilities of
approximately $3,164,000, primarily due to the implementation of PPS and a lower
census; and (iv) reduced profitability from development activities of
$3,219,000. These amounts were partially offset by (i) the contribution of
$2,048,000 from the leased assisted living facilities; (ii) the reduction in
start up losses and increased management fees of $1,903,000 at assisted living
facilities where the Company manages or has sold the leasehold interests to an
independent Operator/Lessee on January 1, 1998; and (iii) reduced income taxes
of $2,047,000.

LIQUIDITY AND CAPITAL RESOURCES

GENERAL

         In March 1999, the Company received approximately $9 million in cash
through the sale/leaseback of two of its owned facilities located in Bloomsburg
and Saxonburg, Pennsylvania with an independent third party (the "Sale/Leaseback
Transaction") under a fifteen-year lease agreement at an annual lease rate of
10.25%.

         Also in March 1999, the Company secured a $5 million bridge loan from a
financing company to support working capital needs while the Sale/Leaseback
Transaction was being negotiated and until a permanent credit facility could be
obtained. The bridge loan was secured by real estate of four of the Company's
owned assisted living facilities and the accounts receivable of 12 of the
Company's skilled nursing facilities. The bridge loan was evidenced by a 60-day
secured term note with interest accruing at a floating rate per annum equal to
prime plus 4%. This bridge loan was repaid in full subsequent to the quarter-end
with the proceeds obtained from the first draw on the Company's Line of Credit
as discussed below.

         In April, 1999, the Company entered into a $15 million revolving Line
of Credit. The Line of Credit is secured by the real estate owned by five of the
Company's subsidiaries (BCC at Darlington, Inc., Balanced Care at Eyers Grove,
Inc., Balanced Care at Butler, Inc., Balanced Care at Sarver, Inc. and Balanced
Care at North Ridge, Inc. (collectively, the "Real Estate Borrowers")) and the
eligible accounts receivable of the Company's 10 Missouri skilled nursing
facilities. The Line of Credit is for a term of three years, and outstanding
borrowings will bear interest at a rate per 



                                       20
<PAGE>   21

         The primary component of the borrowing base for the Line of Credit
that the Company intends to utilize consists of 80% of the product of 8.0 times
EBITDA of the Real Estate Borrowers, which was approximately $8.5 million at
March 31, 1999. Under the Line of Credit, the Company has the ability to add
seven of its wholly-owned subsidiaries to the current Real Estate Borrowers,
and to pledge their respective leasehold interests in the facilities they
operate as additional collateral. The foregoing is contingent upon the Company
successfully negotiating an intercreditor agreement with the facilities' owner
and first lien holder. The Company is attempting to obtain the intercreditor
agreement to increase the borrowing base.

         The Company has opened 31 of its Outlook Pointe(R) signature series
assisted living facilities as of March 31, 1999. In addition, the Company had 21
Outlook Pointe(R) signature series assisted living facilities under construction
and 22 sites under land options. As previously discussed, the Company has
stopped seeking additional sites for Outlook Pointe(R) facilities. The Company
has adequate financing to complete construction on the 21 facilities under
construction at March 31, 1999. These facilities are expected to open by
December 31, 1999. With respect to the 22 sites under land option, the Company
is continuing to evaluate each site to determine its strategic benefit to the
Company's focus on clustering new projects. Those projects that meet these
criteria will be purchased under the land options and developed when, and if,
financing can be obtained under suitable terms. The land options for those
projects that do not meet the Company's long term objectives will be assigned or
left to expire. During the third fiscal quarter, the Company either terminated,
or allowed the expiration of, the land options on 15 previously secured sites.
The Company's costs associated with these cancelled land options are reflected
in the provisions for estimated losses on development projects. The Company had
previously disclosed its expectations to develop more than 40 facilities during
its June 30, 1999 fiscal year. As a result of the Company's revised development
strategy, and the ongoing difficulty in obtaining development and working
capital on acceptable terms, the Company has closed on construction financing
for six development projects as of March 31, 1999. If, and when, capital 
becomes available to the Company on acceptable terms, the Company will 
implement a program of limited development consisting of approximately four to
five projects per quarter that meet the Company's development standards.

         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 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 off-balance sheet financing structure
is referred to as the "Black-Box Structure".

         For development projects utilizing the Black-Box Structure that were
committed to prior to September 24, 1998, 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 Operator/Lessee. Without the Owner's prior consent, the
Operator/Lessee may not sell its equity or assets to any third party other than
the Company. The Company has closed 52 development projects for which the
Company holds the foregoing type of option. In March 1999, the Company exercised
its option to purchase the Operator/Lessee's equity interests in the Harrisburg,
Pennsylvania project financed under the Black Box Structure for a purchase price
of $516,000. The Company also acquired the equity interests in the Mountain Home
and Sherwood, Arkansas projects as of April 30, 1999 for a total purchase price
of approximately $1,668,000. The Company plans to exercise options to purchase
the equity interests on two additional projects through the end of its fiscal
year. The Company estimates it will require approximately $40 - $45 million to
buy the equity of the 49 Outlook Pointe facilities that remain 



                                       21
<PAGE>   22

under the Black Box Structure over the next three years. The Company has
obtained commitments from certain REITs that currently own and lease developed
properties under the Black Box Structure to finance the Company's capital
requirements to exercise its purchase options under the aforementioned option
agreements. Generally, this take-out financing will be structured as an increase
to the existing facility lease base at a blended annual lease rate. This
financing structure will provide approximately $30 million of the estimated $40
- $45 million capital requirement. The balance will be funded with cash raised
from financing transactions discussed above, possible asset divestitures and
cash to be provided from operations.

         As reported in the section titled "Charges to Operations," the Company
has incurred a cumulative charge of $3,760,000 representing advances made for
the operations of facilities financed under the Black Box Structure ($1,400,000
in the third fiscal quarter) under existing Shortfall Funding Agreements. The
Company has revised and reduced its estimate of additional shortfall funding
requirements through June 30, 2000 to be approximately $4 million (estimated in
the second fiscal quarter report to be approximately $8 to $12 million) as the
result of additional black box working capital financing.

         The Company believes with its current financing arrangements to
facilitate the acquisition of projects financed through the Black Box Structure
(the "Black Box Operations") and the potential sale of assets, that it will
generate the cash needed (i) to maintain existing operations; (ii) acquire all
Black Box Operations upon breakeven and (iii) make the required purchase option
payments under these commitments. Notwithstanding the foregoing, there can be no
assurance that any additional financing needed to fund the Company's liquidity
and growth will be available, should the Company not achieve its operational
forecasts.

         In September 1998, the Company entered into management agreements,
option agreements and other transaction documents with six Operator/Lessees that
are owned by Financial Care Investors, LLC, a Delaware limited liability company
("FCI"). FCI is owned by Brad E. Hollinger, Chairman of the Board, President and
Chief Executive Officer of the Company. FCI and its six wholly owned
Operator/Lessees also entered into lease agreements with a REIT. The terms of
the agreements among the parties are similar to the terms of the agreements the
Company has entered into with independent third party Operator/Lessees. The
Company has not made any payments to the aforementioned parties in connection
with these transactions.

         Most of the facilities operated or managed by the Company are leased
under long-term operating leases. Lease obligations for the next 12 months are
approximately $11,000,000. The lease documents contain financial covenants and
other restrictions which: (i) require the Company to meet certain financial
tests and maintain certain escrow funds, (ii) limit, among other things, the
ability of the Company and certain of its subsidiaries to borrow additional
funds, dispose of assets or engage in mergers or other business combinations,
and (iii) prohibit the Company from operating competing facilities within a
designated radius of existing facilities. Management believes the Company is in
compliance with these lease covenants.

         The Company's lease arrangements are generally for initial terms of
nine 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.



                                       22
<PAGE>   23

Operating Activities

         Cash used by operations decreased by $1,976,000 to $5,213,000 for the
nine months ended March 31, 1999 from cash used by operations of $7,189,000 for
the nine months ended March 31, 1998. The decrease in the cash used was due to a
reduction in losses on the sale of assets and prepaids and other current assets,
offset by an increase in accounts payable accrued expenses, and reported losses
for the quarter increases in accounts receivable, and prepaid expenses and other
current assets and decreases in accounts payable and accrued liabilities.

Investing and Financing Activities

         Cash used for investing activities decreased by $26,156,000 to $367,000
for the nine months ended March 31, 1999 from $26,523,000 for the nine months
ended March 31, 1998. Cash provided by financing activities decreased by
$40,884,000 to $5,231,000 for the nine months ended March 31, 1999 from
$46,115,000 for the nine months ended March 31, 1998. The decreases in cash
provided by financing activities and cash used for investing activities from the
1998 quarter to the 1999 quarter was a result of the Offering in the 1998
quarter and a reduction in the Company's acquisition activities. During the nine
months ended March 31, 1999, the Company used the cash remaining from the
Offering for general corporate purposes.

YEAR 2000 READINESS DISCLOSURE

         Computer software and/or hardware that was designed to define the year
with a two digit date field rather than a four digit field may fail or
miscalculate data in the year 2000, causing disruption to the operations or
business activities of the Company.

         State of Readiness. The Company uses high quality hardware and
operating systems from current and proven technologies to ensure reliability and
optimum system performance. In order to evaluate these systems and other
electronic systems not related to information technology ("Non-IT Systems"), the
Company formed an oversight committee comprised of information systems,
operations, legal and accounting professionals.

         Phases. The committee has performed an inventory and risk assessment of
the Company's internal operating systems, as well as an inventory of third party
relationships and their impact on the Company. In response to requests, the
committee has already received certification of year 2000 readiness from key
hardware and software providers, including suppliers of critical data processing
and financial systems. Internal testing of all critical electronic systems began
in early 1999.

         The committee also oversees the testing of certain non-IT Systems. The
testing of these systems is under way. The testing is expected to be completed
by November 1, 1999. For those non-critical systems that cannot be readily
tested, the Company will inquire of third party vendors as to the status of year
2000 compliance within these systems.

         Material Third Parties. Based on the committee's review, the Company
has determined that third party relationships provide the highest risk related
to year 2000 issues. The third party relationships deemed most critical are the
Company's banking relationships and its relationships with third party
intermediaries for skilled nursing facility reimbursement under Medicare and
Medicaid programs. The Company's third party reimbursement intermediaries have
been proactive in testing for year 2000 compliance. Some intermediaries are
requiring the submission of test billings that demonstrate year 



                                       23
<PAGE>   24

2000 compatibility with their payment software. Where required, the Company
completed these tests by December 31, 1998. The committee's is continuing to
evaluate the year 2000 compliance of the Company's financial institutions to
gain assurance regarding their year 2000 readiness.

         Costs. Based upon the Company's progress to date in addressing year
2000 issues, management does not expect these issues to have a material impact
on financial position, results of operations or cash flows in future periods,
including the cost of remediation. Costs incurred to date are internal staff
costs of salary, benefits and nominal administrative expenses associated with
the activities of the oversight committee. The Company expects future costs to
be of a similar nature.

         Risks and Contingency Plans. At this time the Company is unable to
determine its most reasonably likely worst case scenarios as a result of year
2000 issues. The committee continues to analyze possible scenarios as part of
its inventory and risk assessment process, and will develop and modify its
contingency plans as more information becomes available. Based on the outcomes
of inquiries and testing, the oversight committee is currently coordinating the
preparation of contingency plans.

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

         The Company did not have any investment securities subject to market
risk as of, or during the nine months ended, March 31, 1999.



                                       24
<PAGE>   25
                           PART II - OTHER INFORMATION

ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
        (A)     Exhibits

<TABLE>
<CAPTION>
                Exhibit
                Number                        Description
                ------                        -----------

                <S>         <C>                                        
                10.1        Consulting Agreement between Pier C. Borra and
                            Balanced Care Corporation dated March 22, 1999,
                            effective December 8, 1998 (filed herewith)

                10.2        Employment Agreement between Clint T. Fegan and
                            Balanced Care Corporation dated February 11, 1999
                            (filed herewith)

                10.3        Lease Agreement between Pennsylvania BCC Properties,
                            Inc. and Balanced Care at Saxonburg, Inc.
                            (incorporated by reference to Exhibit 10.1 of the
                            Company's Current Report on Form 8-K dated March 18,
                            1999 [File No. 1-13845])

                10.4        Lease Agreement between Pennsylvania BCC Properties,
                            Inc. and Balanced Care at Bloomsburg II, Inc.
                            (incorporated by reference to Exhibit 10.2 of the
                            Company's Current Report on Form 8-K dated March 18,
                            1999 [File No. 1-3845]
</TABLE>

        (B)    Reports on Form 8-K

        The Company filed one current report on Form 8-K during the quarter
        ended March 31, 1999, as follows:

        (1) March 29, 1999, reporting certain Change in Control Agreements
        entered into between the Company and certain of its executive employees.

        (2) April 1, 1999, reporting (i) the sale-leaseback of two Pennsylvania
        properties to a subsidiary of Health Care REIT, Inc. and (ii) the
        execution of a $5,000,000 Secured Term Note in favor of HCFP Funding,
        Inc.


                                   SIGNATURES

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

                                        BALANCED CARE CORPORATION

Date:    May 14, 1999                   By: /s/ Clint T. Fegan       
                                        -------------------------
                                        Clint T. Fegan
                                        Chief Financial Officer



                                       25
<PAGE>   26



                                  EXHIBIT INDEX

                Exhibit
                Number                        Description
                ------                        -----------

                10.1        Consulting Agreement between Pier C. Borra and
                            Balanced Care Corporation dated March 22, 1999,
                            effective December 8, 1998 (filed herewith)

                10.2        Employment Agreement between Clint T. Fegan and
                            Balanced Care Corporation dated February 11, 1999
                            (filed herewith)

                10.3        Lease Agreement between Pennsylvania BCC Properties,
                            Inc. and Balanced Care at Saxonburg, Inc.
                            (incorporated by reference to Exhibit 10.1 of the
                            Company's Current Report on Form 8-K dated March 18,
                            1999 [File No. 1-13845])

                10.4        Lease Agreement between Pennsylvania BCC Properties,
                            Inc. and Balanced Care at Bloomsburg II, Inc.
                            (incorporated by reference to Exhibit 10.2 of the
                            Company's Current Report on Form 8-K dated March 18,
                            1999 [File No. 1-3845]



                                       26