<PAGE>   1

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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

                                   FORM 10-Q

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

                 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000

                                       OR

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

          FOR THE TRANSITION PERIOD FROM             TO             .

                        COMMISSION FILE NUMBER: 1-13845

                           BALANCED CARE CORPORATION
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S>                                                    <C>
                      DELAWARE                                              25-1761898
           (STATE OF OTHER JURISDICTION OF                               (I.R.S. EMPLOYER
           INCORPORATION OR ORGANIZATION)                               IDENTIFICATION NO.)

         1215 MANOR DRIVE, MECHANICSBURG, PA                                   17055
      (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                              (ZIP CODE)
</TABLE>

                                 (717) 796-6100
              (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

     Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

                            Yes [X]          No [ ]

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

<TABLE>
<CAPTION>
                    CLASS                               OUTSTANDING AT MAY 11, 2000
                    -----                               ---------------------------
<S>                                            <C>
        Common Stock, $.001 par value                           34,172,847
</TABLE>

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<PAGE>   2

                           BALANCED CARE CORPORATION

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
                 PART I -- FINANCIAL INFORMATION
ITEM 1:
CONDENSED FINANCIAL STATEMENTS
  Consolidated Balance Sheets as of March 31, 2000 and June
     30, 1999...............................................    3
  Consolidated Statements of Operations for the three months
     ended March 31, 2000 and 1999..........................    4
  Consolidated Statements of Operations for the nine months
     ended March 31, 2000 and 1999..........................    5
  Consolidated Statement of Stockholders' Equity for the
     nine months ended March 31, 2000.......................    6
  Consolidated Statements of Cash Flows for the nine months
     ended March 31, 2000 and 1999..........................    7
  Notes to Consolidated Financial Statements................    8
ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
  AND RESULTS OF OPERATIONS.................................   13
ITEM 3:
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
  RISK......................................................   26
                   PART II -- OTHER INFORMATION
ITEM 6:
EXHIBITS AND REPORTS ON FORM 8-K............................   27
  (A) Exhibits
  (B) Reports on Form 8-K
</TABLE>

                                        2
<PAGE>   3

PART I -- FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

                           BALANCED CARE CORPORATION

                          CONSOLIDATED BALANCE SHEETS
                        (IN THOUSANDS EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                               MARCH 31      JUNE 30
                                                                 2000          1999
                                                              -----------    --------
                                                              (UNAUDITED)
<S>                                                           <C>            <C>
ASSETS
Current assets:
  Cash and cash equivalents.................................   $  3,565      $  8,160
  Receivables (net of allowance for doubtful receivables)...      9,134        11,912
  Development contracts in process..........................      1,118         2,559
  Prepaid expenses and other current assets.................      1,303           973
                                                               --------      --------
     Total current assets...................................     15,120        23,604
Restricted investments......................................      1,264         2,714
Property and equipment, net.................................     75,784        24,075
Goodwill, net...............................................     14,612        15,293
Purchase option deposits....................................      5,028         2,974
Other assets................................................      6,532         2,395
                                                               --------      --------
     Total assets...........................................   $118,340      $ 71,055
                                                               ========      ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Current portion of long-term debt.........................   $  8,512      $    450
  Accounts payable..........................................      1,424        10,016
  Accrued payroll...........................................      2,183         1,339
  Accrued expenses..........................................      3,663         4,357
                                                               --------      --------
     Total current liabilities..............................     15,782        16,162
Long-term debt, net of current portion......................     52,577        11,773
Straight-line lease liability...............................      1,135         3,537
Deferred revenue and other liabilities......................      2,894         1,225
                                                               --------      --------
     Total liabilities......................................     72,388        32,697
                                                               --------      --------
Stockholders' equity:
Common stock, $.001 par value; authorized -- 50,000,000
  Shares; issued and outstanding -- 34,172,847 shares at
  March 31, 2000 and 16,722,847 shares at June 30, 1999.....         35            17
Additional paid-in capital..................................     83,333        63,814
Accumulated deficit.........................................    (37,416)      (25,473)
                                                               --------      --------
     Total stockholders' equity.............................     45,952        38,358
                                                               --------      --------
     Total liabilities and stockholders' equity.............   $118,340      $ 71,055
                                                               ========      ========
</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
                                                              --------------------------
                                                                 2000           1999
                                                              -----------    -----------
                                                              (UNAUDITED)    (UNAUDITED)
<S>                                                           <C>            <C>
Revenues:
  Resident services.........................................    $ 8,491        $ 5,000
  Patient services..........................................      3,375         10,993
  Development fees..........................................         54            258
  Management fees...........................................         70            354
  Other revenues............................................         80            132
                                                                -------        -------
Total revenues..............................................     12,070         16,737
                                                                -------        -------
Operating expenses:
  Facility operating expenses:
     Salaries, wages and benefits...........................      5,619          7,820
     Other operating expenses...............................      2,872          5,163
  Development, general and administrative expenses..........      2,298          3,143
  Provision for losses under shortfall funding agreements...        700          1,400
  Provision for losses under severance agreements...........         --            600
  Lease expense.............................................      1,599          2,581
  Depreciation and amortization.............................      1,255            570
                                                                -------        -------
Total operating expenses....................................     14,343         21,277
                                                                -------        -------
     Loss from operations...................................     (2,273)        (4,540)
Other income (expense):
  Interest and other income.................................        108            154
  Interest expense..........................................     (1,349)          (127)
  Loss on purchase options..................................       (291)            --
  Loss on sale of assets....................................         --           (102)
                                                                -------        -------
     Loss before income taxes...............................     (3,805)        (4,615)
Provision for income tax benefit............................         --         (1,846)
                                                                -------        -------
     Net loss...............................................    $(3,805)       $(2,769)
                                                                =======        =======
Basic loss per share........................................    $ (0.11)       $ (0.17)
                                                                =======        =======
Diluted loss per share......................................    $ (0.11)       $ (0.17)
                                                                =======        =======
Weighted average shares -- basic............................     34,173         16,722
                                                                =======        =======
Weighted average shares -- diluted..........................     34,173         16,722
                                                                =======        =======
</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
                                                              --------------------------
                                                                 2000           1999
                                                              -----------    -----------
                                                              (UNAUDITED)    (UNAUDITED)
<S>                                                           <C>            <C>
Revenues:
  Resident services.........................................   $ 22,418        $16,517
  Patient services..........................................     25,565         35,615
  Development fees..........................................        592          5,932
  Management fees...........................................        245            960
  Other revenues............................................        191            266
                                                               --------        -------
  Total revenues............................................     49,011         59,290
                                                               --------        -------
Operating expenses:
  Facility operating expenses:
     Salaries, wages and benefits...........................     23,153         24,457
     Other operating expenses...............................     13,888         16,696
  Development, general and administrative expenses..........      7,466         10,103
  Provision for losses on development activities............         --          2,400
  Provision for losses under shortfall funding agreements...      2,250          3,760
  Provision for losses under severance agreements...........         --            600
  Lease expense.............................................      8,501          7,377
  Depreciation and amortization.............................      2,769          1,613
                                                               --------        -------
Total operating expenses....................................     58,027         67,006
                                                               --------        -------
     Loss from operations...................................     (9,016)        (7,716)
Other income (expense):
  Interest and other income.................................        280            633
  Interest expense..........................................     (2,172)          (345)
  Loss on purchase options..................................       (291)            --
  Loss on sale of assets....................................         --           (302)
                                                               --------        -------
     Loss before income taxes and extraordinary item........    (11,199)        (7,730)
Provision for income taxes (benefit)........................          5         (1,738)
                                                               --------        -------
     Loss before extraordinary item.........................    (11,204)        (5,992)
Extraordinary loss on extinguishment of debt................       (739)            --
                                                               --------        -------
     Net loss...............................................   $(11,943)       $(5,992)
                                                               ========        =======
Basic loss per share:
  Loss before extraordinary item............................   $  (0.47)       $ (0.36)
                                                               ========        =======
  Net loss..................................................   $  (0.50)       $ (0.36)
                                                               ========        =======
Diluted loss per share:
  Loss before extraordinary item............................   $  (0.47)       $ (0.36)
                                                               ========        =======
  Net loss..................................................   $  (0.50)       $ (0.36)
                                                               ========        =======
Weighted average shares -- basic............................     23,984         16,709
                                                               ========        =======
Weighted average shares -- diluted..........................     23,984         16,709
                                                               ========        =======
</TABLE>

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

                           BALANCED CARE CORPORATION

                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                  NINE MONTHS ENDED MARCH 31, 2000 (UNAUDITED)
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                             COMMON STOCK
                                            ---------------    ADDITIONAL
                                            ISSUED     PAR      PAID-IN
                                            SHARES    VALUE     CAPITAL      DEFICIT      TOTAL
                                            ------    -----    ----------    --------    --------
<S>                                         <C>       <C>      <C>           <C>         <C>
Balance at June 30, 1999..................  16,723     $17      $63,814      $(25,473)   $ 38,358
Issuance of common stock, less costs of
  issuance................................  16,700     $17      $19,519            --    $ 19,536
Exercise of common stock purchase
  warrants................................     750       1           --            --           1
Net loss..................................      --      --           --       (11,943)    (11,943)
                                            ------     ---      -------      --------    --------
Balance at March 31, 2000.................  34,173     $35      $83,333      $(37,416)   $ 45,952
                                            ======     ===      =======      ========    ========
</TABLE>

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

                           BALANCED CARE CORPORATION

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                  NINE MONTHS ENDED
                                                                       MARCH 31
                                                              --------------------------
                                                                 2000           1999
                                                              -----------    -----------
                                                              (UNAUDITED)    (UNAUDITED)
<S>                                                           <C>            <C>
Cash Flows from Operating Activities:
Net loss....................................................   $(11,943)       $(5,992)
Adjustments to reconcile net loss to net cash used for
  operating activities:
  Depreciation and amortization.............................      2,769          1,613
  Deferred income taxes.....................................         --         (1,833)
  Loss on sale of assets....................................         --            302
  Provision for losses on development activities............         --          2,400
  Provision for losses under shortfall funding agreement....      2,250          3,760
  Provision for losses under severance agreements...........         --            600
  Extraordinary loss on extinguishment of debt..............        739             --
  Changes in operating assets and liabilities, excluding
     effects of acquisitions:
     Decrease in receivables, net...........................        879          1,094
     Decrease (increase) in development contracts in
      process, net..........................................      1,441         (6,759)
     Increase in prepaid expenses and other current
      assets................................................       (473)          (406)
     Decrease (increase) in accounts payable, accrued
      payroll and accrued expenses..........................    (11,606)             8
                                                               --------        -------
       Net cash used for operating activities...............    (15,944)        (5,213)
                                                               --------        -------
Cash Flows from Investing Activities:
  Proceeds from sale of assets..............................      6,675         11,630
  Purchases of property and equipment.......................    (56,561)        (3,154)
  Decrease (increase) in restricted investments.............      1,315            (72)
  Increase in purchase option deposits and other assets.....     (4,479)        (4,416)
  Business acquisitions.....................................     (2,457)        (4,355)
                                                               --------        -------
       Net cash used for investing activities...............    (55,507)          (367)
                                                               --------        -------
Cash Flows from Financing Activities:
  Proceeds from issuance of long-term debt..................     54,658          5,682
  Payments on long-term debt (including extinguishment costs
     of $707 in 2000).......................................     (6,499)          (206)
  Proceeds from issuance of common stock....................     19,537            136
  Increase in other liabilities.............................       (840)          (381)
                                                               --------        -------
       Net cash provided by financing activities............     66,856          5,231
  Decrease in cash and cash equivalents.....................     (4,595)          (349)
  Cash and cash equivalents at beginning of period..........      8,160         15,481
                                                               --------        -------
Cash and cash equivalents at end of period..................   $  3,565        $15,132
                                                               ========        =======
Supplemental Cash Flow Information:
  Cash paid for interest....................................   $  1,789        $   345
                                                               ========        =======
  Cash paid for income taxes................................   $      5        $    86
                                                               ========        =======
  Acquisitions:
     Fair value of assets acquired..........................     (3,482)        (4,377)
     Liabilities assumed....................................      1,025             22
                                                               --------        -------
     Consideration paid for acquisitions....................   $ (2,457)       $(4,355)
                                                               ========        =======
</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 primarily in the operation, development and selective acquisition
of assisted living facilities. At March 31, 2000, the Company owned, leased or
managed 61 assisted living communities and 3 skilled nursing facilities. Also at
March 31, 2000, the Company had 4 assisted living communities under
construction. The Company's operations are located in Pennsylvania, Arkansas,
Virginia, Ohio, North Carolina, Tennessee, West Virginia, Florida, Maryland and
Indiana.

(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, 2000 and 1999 are unaudited, but in the opinion of management,
have been prepared on the same basis as the audited financial statements and
reflect all adjustments, consisting of normal recurring accruals, necessary for
a fair presentation of the information set forth therein. The results of
operations for the three and nine-month periods ended March 31, 2000 are not
necessarily indicative of the operating results to be expected for the full year
or any other period. These financial statements and notes should be read in
conjunction with the financial statements and notes included in the audited
consolidated financial statements of the Company for the year ended June 30,
1999 as contained in the Company's Annual Report on Form 10-K (as amended).

2. ACQUISITIONS

     Acquisitions and the manner of payment are summarized as follows:

<TABLE>
<CAPTION>
                                                         LEASED                          CASH PAID/
    MONTH              TRANSACTION DESCRIPTION          OR OWNED  BUSINESS  LOCATION     TOTAL COST
    -----              -----------------------          --------  --------  --------  ----------------
                                                                                      ($ IN THOUSANDS)
<S>            <C>                                      <C>       <C>       <C>       <C>
December 1999  Stock of Black Box of Martinsburg, Inc.   Owned      ALF        WV          $  141
December 1999  Stock of Black Box of Peckville, Inc.     Owned      ALF        PA             322
December 1999  Stock of TC Realty of Maumelle, Inc.      Owned      ALF        AR             499
December 1999  Stock of TC Realty of Scranton, Inc.      Owned      ALF        PA             524
December 1999  Stock of TC Realty of Berwick, Inc.       Owned      ALF        PA             140
December 1999  Stock of TC Realty of Lewistown, Inc.     Owned      ALF        PA             400
December 1999  Stock of TC Realty of Mansfield, Inc.     Owned      ALF        OH             431
                                                                                           ------
                                                                                           $2,457
                                                                                           ======
</TABLE>

     Before acquiring the operations of these special purpose entities ("SPEs")
in the transactions detailed above, the Company managed the operations for the
prior Operator/Lessee. Subsequent to these transactions, the Company then
acquired the real estate assets from the REIT owner in a separate transaction.
Refer to the descriptions of these transactions in the "Recent Developments"
section ("Property Acquisition") and the "Liquidity" section ("Operation") of
Item 2 of this Quarterly Report.

     The following unaudited summary, prepared on a pro forma basis, combines
the results of operations of the acquired operations 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
Extended Care Operators of Harrisburg, LLC d/b/a/ Harrisburg Outlook Pointe in
March 1999, TC Realty of

                                        8
<PAGE>   9
                           BALANCED CARE CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Sherwood, Inc. d/b/a Sherwood Outlook Pointe in April 1999, TC Realty of
Mountain Home, Inc. d/b/a/ Mountain Home Outlook Pointe in April 1999, TC Realty
of Altoona, Inc. d/b/a/ Altoona Outlook Pointe in May 1999 and TC Realty of
Reading, Inc. d/b/a/ Reading Outlook Pointe in May 1999. Also, Black Box of
Peckville d/b/a Outlook Pointe Keepsakes at Mid Valley, Black Box of
Martinsburg, Inc. d/b/a Outlook Pointe at Martinsburg, Inc., TC Realty at
Mansfield, Inc. d/b/a Outlook Pointe at Ontario, TC Realty at Maumelle, Inc.
d/b/a Outlook Pointe at Maumelle, TC Realty at Berwick, Inc. d/b/a Outlook
Pointe Commons at Berwick, TC Realty at Scranton, Inc. d/b/a Outlook Pointe
Commons at Scranton, and TC Realty at Lewistown, Inc. d/b/a Outlook Pointe at
Lewistown, Inc., were acquired in December 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):

<TABLE>
<CAPTION>
                                                               NINE MONTHS ENDED
                                                                   MARCH 31
                                                              -------------------
                                                                2000       1999
                                                              --------    -------
<S>                                                           <C>         <C>
Revenue.....................................................  $ 52,615    $64,524
                                                              ========    =======
Loss before extraordinary items.............................  $(10,929)   $(9,591)
                                                              ========    =======
Loss before extraordinary items per common
  share -- diluted..........................................  $  (0.46)   $ (0.57)
                                                              ========    =======
</TABLE>

     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, 1999 and 1998. In addition, they are not intended to be a projection of
future results of operations.

3. LOSS PER SHARE

     Loss per share 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, 2000 and 1999,
common equivalent shares from stock options and warrants are excluded from the
computation, as their effect is anti-dilutive.

4. LINE OF CREDIT AMENDMENTS AND LOSS ON EARLY EXTINGUISHMENT OF DEBT

     In April 1999, the Company entered into a $15 million revolving Line of
Credit with HCFP Funding, Inc. ("HCFP"). The Line of Credit is for a term of
three years, and outstanding borrowings bear interest at a rate per annum of
prime plus 2.75%. In July 1999, the Line of Credit was increased to $20 million.
Prior to July 1999, the Line of Credit was 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.), and the eligible accounts receivable of
the Company's 10 Missouri skilled nursing facilities (the "Accounts Receivable
Borrowers"). In July 1999, the real estate of BCC at Republic Park Care Center,
Inc. and BCC at Nevada Park Care Center, Inc. (the "Skilled Nursing Facility
Borrowers") was added as security to collateralize the Line of Credit. In order
to mortgage the Skilled Nursing Facility Borrowers' real estate in favor of
HCFP, the Company repaid its $3.1 million loan to Meditrust to satisfy the
existing mortgage on this real estate. As a result of this transaction, the
Company reported a loss on the extinguishment of debt of $739,000 in the first
quarter of Fiscal 2000.

     On January 12, 2000, the Company completed the sale of its Missouri assets
(see "Divestiture of Missouri Operations" discussed below), which included the
real estate, leasehold interests and operations of the Skilled Nursing Facility
Borrowers and the Accounts Receivable Borrowers (the "Missouri Borrowers"). In
order for HCFP to release the Missouri Borrowers and their respective liens and
security interests under the Line of Credit, the Company agreed to (i) repay
$5.4 million on the Line of Credit attributable to the

                                        9
<PAGE>   10
                           BALANCED CARE CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Missouri Borrowers, (ii) pay a prepayment fee of approximately $75,000, (iii)
reset the availability under the Line of Credit to $12.0 million as of December
31, 1999 and (iv) provide a cross-default on its obligations under the Line of
Credit with any future obligations with HCFP.

     The primary component of the borrowing base for the Line of Credit consists
of 85% of the product of 8.0 to 8.5 times EBITDA of the Real Estate Borrowers
(as defined in the Line of Credit Agreement). At March 31, 2000, the borrowing
base available under the Line of Credit was approximately $10.4 million and
$10.4 million was borrowed thereunder.

5. EQUITY TRANSACTION

     In October 1999, the Company entered into a Subscription Agreement (the
"Subscription Agreement") with IPC Advisors S.A.R.L., a Luxembourg company
("IPC"), under which IPC agreed to make an equity investment of approximately
$21.0 million in the Company (the "Transaction"). Under the first tranche of the
Transaction, which closed on October 11, 1999, the Company issued to IPC
3,300,000 shares of Series C Convertible Preferred Stock, par value $.001 (the
"Series C Preferred Stock"), at a price per share of $1.25, for an aggregate
purchase price of $4,125,000. Under the second tranche of the Transaction, which
was approved by the stockholders on December 15, 1999 and closed on December 21,
1999, the Company issued to IPC 13,400,000 shares of common stock, par value
$.001 (the "Common Stock"), at a price per share of $1.25, for an aggregate
purchase price of $16,750,000, and the outstanding shares of Series C Preferred
Stock automatically converted into 3,300,000 shares of Common Stock. At March
31, 2000, IPC owned approximately 49.9% of the outstanding shares of Common
Stock of the Company.

6. PROPERTY ACQUISITION

     In December 1999, the Company acquired the real property, improvements,
furniture, fixtures and equipment of 12 assisted living facilities. The
aggregate purchase price was $52,073,054. The purchase price was paid from the
following sources: a $7,811,054 promissory note due to the seller, New Meditrust
Company LLC ("Meditrust"), a $32,000,000 loan from Heller Healthcare Finance,
Inc ("Heller"), a $7,000,000 discount note due to FRR Investments Limited
("FRR"), and $5,262,000 in cash from the Company. The Company has an option to
purchase 12 additional assisted living facilities from Meditrust by October 31,
2000. On April 27, 2000, the Company increased its existing $32 million loan
from Heller by $5 million to $37 million, on the same terms and conditions, and
using the same collateral, as the existing loan.

7. DIVESTITURE OF MISSOURI OPERATIONS

     On January 12, 2000, the Company completed the sale of its Missouri assets
to Christian Health Care of Missouri, Inc. and certain of its affiliates
(collectively, "CHM") pursuant to an Asset Purchase Agreement dated October 15,
1999 (as amended, the "Asset Purchase Agreement"). The Company sold its
leasehold interests in eight skilled nursing facilities and nine assisted and
independent living facilities, together with the operations of those facilities.
The Company sold its real property interests and operations in two skilled
nursing facilities. The aggregate consideration paid by CHM to the Company for
the assets was (i) $51,000,000 in assumed lease obligations, (ii) $6,675,000 in
cash, and (iii) $2,525,000 in notes. The Company has guaranteed the payments of
the lease obligations of the buyer until the occurrence of certain events. For a
more detailed description of these transactions, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Recent
Developments."

8. SUBSEQUENT EVENT

     The Company has exercised its options to purchase 10 SPEs currently managed
by the Company in the fourth quarter and expects to close on the transactions by
May 31, 2000. The capital required to exercise the

                                       10
<PAGE>   11
                           BALANCED CARE CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

options is approximately $10 million and will be funded by the property owners,
Nationwide Health Properties, Inc. and its affiliates ("NHP"), through an
increase in the lease base for each of the 10 properties.

9. SEGMENT REPORTING

     Statement of Financial Accounting Standards No. 131, Disclosures about
Segments of an Enterprise and Related Information (SFAS No. 131) established
standards for the way public business enterprises are to report information
about operating segments in annual and interim financial statements issued to
shareholders. It also established standards for related disclosures about
products and services, geographic areas and major customers.

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

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

<TABLE>
<CAPTION>
                                                          THREE MONTHS ENDED MARCH 31, 2000
                                                ------------------------------------------------------
                                                                         DEVELOPMENT
                                                RESIDENT    PATIENT      GENERAL AND
                                                SERVICES    SERVICES    ADMINISTRATIVE    CONSOLIDATED
                                                --------    --------    --------------    ------------
<S>                                             <C>         <C>         <C>               <C>
Revenues......................................   $8,631     $ 3,385        $    54          $12,070
Operating expenses............................    5,625       2,866             --            8,491
Development, general and administrative
  expenses....................................       --          --          2,298            2,298
Provision for losses under shortfall funding
  agreements..................................      700          --             --              700
                                                 ------     -------        -------          -------
Income (loss) from continuing operations
  before non-recurring items, lease expense,
  interest (net), taxes, depreciation and
  amortization................................   $2,306     $   519        $(2,244)         $   581
                                                 ======     =======        =======          =======
</TABLE>

<TABLE>
<CAPTION>
                                                          THREE MONTHS ENDED MARCH 31, 1999
                                                ------------------------------------------------------
                                                                         DEVELOPMENT
                                                RESIDENT    PATIENT      GENERAL AND
                                                SERVICES    SERVICES    ADMINISTRATIVE    CONSOLIDATED
                                                --------    --------    --------------    ------------
<S>                                             <C>         <C>         <C>               <C>
Revenues......................................   $5,392     $11,087        $   258          $16,737
Operating expenses............................    3,228       9,755             --           12,983
Development, general and administrative
  expenses....................................       --          --          3,143            3,143
Provision for losses under shortfall funding
  agreements..................................    1,400          --             --            1,400
                                                 ------     -------        -------          -------
Income (loss) from continuing operations
  before non-recurring items, lease expense,
  interest (net), taxes, depreciation and
  amortization................................   $  764     $ 1,332        $(2,885)         $  (789)
                                                 ======     =======        =======          =======
</TABLE>

                                       11
<PAGE>   12
                           BALANCED CARE CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
                                                           NINE MONTHS ENDED MARCH 31, 2000
                                                  ---------------------------------------------------
                                                                         DEVELOPMENT
                                                  RESIDENT   PATIENT     GENERAL AND
                                                  SERVICES   SERVICES   ADMINISTRATIVE   CONSOLIDATED
                                                  --------   --------   --------------   ------------
<S>                                               <C>        <C>        <C>              <C>
Revenues........................................  $ 22,833   $25,586       $   592         $ 49,011
Operating expenses..............................    14,584    22,457            --           37,041
Development, general and administrative
  expenses......................................        --        --         7,466            7,466
Provision for losses under shortfall funding
  agreements....................................     2,250        --            --            2,250
                                                  --------   -------       -------         --------
Income (loss) from continuing operations before
  non-recurring items, lease expense, interest
  (net), taxes, depreciation and amortization...  $  5,999   $ 3,129       $(6,874)        $  2,254
                                                  ========   =======       =======         ========
Total Assets....................................  $102,295   $ 2,996       $13,049         $118,340
                                                  ========   =======       =======         ========
</TABLE>

<TABLE>
<CAPTION>
                                                           NINE MONTHS ENDED MARCH 31, 1999
                                                  ---------------------------------------------------
                                                                         DEVELOPMENT
                                                  RESIDENT   PATIENT     GENERAL AND
                                                  SERVICES   SERVICES   ADMINISTRATIVE   CONSOLIDATED
                                                  --------   --------   --------------   ------------
<S>                                               <C>        <C>        <C>              <C>
Revenues........................................  $ 17,587   $35,771       $ 5,932         $ 59,290
Operating expenses..............................    10,432    30,721            --           41,153
Development, general and administrative
  expenses......................................        --        --        10,103           10,103
Provision for losses under shortfall funding
  agreements....................................     3,760        --            --            3,760
                                                  --------   -------       -------         --------
Income (loss) from continuing operations before
  non-recurring items, lease expense, interest
  (net), taxes, depreciation and amortization...  $  3,395   $ 5,050       $(4,171)        $  4,274
                                                  ========   =======       =======         ========
Total Assets....................................  $ 36,135   $12,985       $34,465         $ 83,585
                                                  ========   =======       =======         ========
</TABLE>

                                       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, 2000 and 1999, and the Company's liquidity and capital resources. This
information should be read in conjunction with the Company's consolidated
condensed 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, 1999, as amended.

OVERVIEW

     The Company is engaged primarily in the operation, development and
selective acquisition of assisted living facilities. 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, 2000
and 1999 (excluding the former Missouri facilities):

<TABLE>
<CAPTION>
                                                                       MARCH 31
                                          -------------------------------------------------------------------
                                                        2000                               1999
                                          --------------------------------   --------------------------------
                                          OWNED   LEASED   MANAGED   TOTAL   OWNED   LEASED   MANAGED   TOTAL
                                          -----   ------   -------   -----   -----   ------   -------   -----
<S>                                       <C>     <C>      <C>       <C>     <C>     <C>      <C>       <C>
Developed Assisted Living Facilities....   12        1       35       48      --        2       29       31
Acquired Assisted Living Facilities.....    5        8       --       13       5        8       --       13
Skilled Nursing Facilities..............   --        3       --        3      --        3       --        3
                                           --       --       --       --      --       --       --       --
                                           17       12       35       64       5       13       29       47
                                           ==       ==       ==       ==      ==       ==       ==       ==
</TABLE>

     As of March 31, 2000, the Company had operations in Pennsylvania, Arkansas,
Virginia, Ohio, North Carolina, Tennessee, West Virginia, Florida, Maryland and
Indiana. In January 2000, the Company divested its Missouri assets, consisting
of ten skilled nursing facilities with 1,135 beds and nine assisted and
independent living facilities with 245 beds. As of March 31, 2000, the Company's
operating facilities have a capacity for 4,075 assisted living residents and 169
skilled nursing patients. The Company has discontinued its own rehabilitation
agencies and now exclusively utilizes independent agencies to provide therapy
services.

     In addition to the 48 Outlook Pointe(R) signature series assisted living
facilities opened as of March 31, 2000, the Company has signed agreements to
develop and manage an additional four assisted living facilities, which were
under construction at March 31, 2000. Three of the remaining four facilities are
scheduled to open in May. The fourth facility is scheduled to open in September
2000. This will conclude the Company's initial round of development activity
initiated nearly three years ago. Future development will be conducted on a
project-by-project basis.

     The Company generates revenue from four primary sources: resident services,
patient services, development fees and management fees. Resident services
include all revenue earned from services provided in the Company's assisted
living facilities except for medical rehabilitation services provided by the
Company's licensed agencies which are included in patient services revenues.
Patient services revenues include charges for room and board, rehabilitation
therapies, pharmacy, medical supplies, sub-acute care, home healthcare, and
other programs provided to patients in skilled nursing facilities as well as
rehabilitation and home health services provided to assisted living facility
residents. Development fees and management fees are earned for developing and
managing assisted living facilities for REITs and other owners or lessees. As a
result of the divestiture of the Missouri operations and the acquisition of the
operations of developed facilities (both discussed under "Recent Developments"
below), the mix of the Company's revenues is expected to change, with revenues
from assisted living resident services increasing as a percentage of total
revenues.

                                       13
<PAGE>   14

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

RECENT DEVELOPMENTS

  Equity Transaction

     In October 1999, the Company entered into a Subscription Agreement (the
"Subscription Agreement") with IPC Advisors S.A.R.L., a Luxembourg company
("IPC"), under which IPC agreed to make an equity investment of approximately
$21.0 million in the Company (the "Transaction"). Under the first tranche of the
Transaction, which closed on October 11, 1999, the Company issued to IPC
3,300,000 shares of Series C Convertible Preferred Stock, par value $.001 (the
"Series C Preferred Stock"), at a price per share of $1.25, for an aggregate
purchase price of $4,125,000. Under the second tranche of the Transaction, which
was approved by the stockholders on December 15, 1999 and closed on December 21,
1999, the Company issued to IPC 13,400,000 shares of common stock, par value
$.001 (the "Common Stock"), at a price per share of $1.25, for an aggregate
purchase price of $16,750,000, and the outstanding shares of Series C Preferred
Stock automatically converted into 3,300,000 shares of Common Stock. At March
31, 2000, IPC owned approximately 49.9% of the outstanding shares of Common
Stock of the Company.

  Property Acquisition

     On December 30, 1999, the Company and 12 of its subsidiaries (collectively
the "Subsidiaries"), IPC and New Meditrust Company LLC ("Meditrust"), entered
into a Memorandum of Understanding (the "Memorandum of Understanding"), under
which the Subsidiaries acquired the real property, improvements, furniture,
fixtures and equipment of twelve Outlook Pointe(R) assisted living facilities
located in Pennsylvania (7), Arkansas (3), Ohio (1) and West Virginia (1)
(collectively, the "Tranche One Properties"). Transaction costs of the
acquisition were paid by the Company.

     The aggregate purchase price for the Tranche One Properties was $52,073,054
(the "Tranche One Purchase Price"), which was determined based on arms' length
negotiations. The Tranche One Purchase Price was paid as follows: (a)
$44,262,000 in cash by the Company (the "Cash Portion") and (b) $7,811,054
pursuant to a Promissory Note dated as of December 30, 1999, as amended February
9, 2000 (the "Meditrust Note") made jointly by the Company and IPC in favor of
Meditrust.

     The Cash Portion of the Tranche One Purchase Price was funded as follows:
(a) $5,262,000 in cash by the Company, (b) $32,000,000 in the form of a loan
(the "Heller Loan") pursuant to a Loan Agreement dated as of December 30, 1999
(the "Heller Loan Agreement") entered into by and among the Subsidiaries and
Heller Healthcare Finance, Inc. ("Heller"), and (c) $7,000,000 pursuant to a
Series One 1999 BCC Discount Note (the "FRR Note") made by the Company in favor
of FRR Investments Limited ("FRR").

     On April 27, 2000, the Company requested and Heller agreed to increase the
$32 million Heller Loan by $5 million to $37 million (the "Heller Loan
Increase"). The Heller Loan Increase was made to the Company by Heller on the
same terms and conditions, and using the same collateral, as the original Heller
Loan. The proceeds from the Heller Loan Increase will provide the working
capital required for operations until the Company raises the additional capital
discussed in this section under the heading entitled "Liquidity and Capital
Resources."

     As an inducement for IPC to enter into the Meditrust Note, IPC, Meditrust
Mortgage Investments, Inc. ("MMI") and Meditrust Corporation ("MC", and together
with MMI, the "Meditrust Parties") entered into a Right of First Refusal
Agreement dated as of December 30, 1999 (the "Right of First Refusal
Agreement"). Under the Right of First Refusal Agreement, in the event the
Meditrust Parties desire to sell, give or otherwise

                                       14
<PAGE>   15

transfer the 1,081,312 shares of common stock of the Company (the "Stock") owned
by the Meditrust Parties to any party other than an entity that is a direct or
indirect subsidiary of MC, the Meditrust Parties are obligated to offer in
writing to sell the Stock to IPC on the same terms. The Right of First Refusal
Agreement, unless sooner terminated in accordance with the terms thereof, will
remain in effect until December 31, 2009.

     As a further inducement for IPC to enter into the Meditrust Note, the
Company entered into an Indemnification, Defense, Hold Harmless and
Reimbursement Agreement dated as of December 29, 1999 (the "Indemnification
Agreement") in favor of IPC, under which the Company has agreed to indemnify,
defend and hold harmless IPC and certain other Indemnified Parties (as defined
in the Indemnification Agreement") from any Losses (as defined in the
Indemnification Agreement") arising under or otherwise related to or in
connection with the Meditrust Note (including, without limitation, all payments
made or to be made by IPC under the Meditrust Note), except for any Losses that
arise as a result of the gross negligence or willful misconduct of any
Indemnified Party or a breach of a fiduciary duty of IPC or any affiliate of IPC
to the Company.

     As an inducement for FRR to accept the FRR Note and as additional security
for the Company's obligations under the Indemnification Agreement, the Company
and the Subsidiaries have entered into a Stock Pledge Agreement dated as of
April 18, 2000, (the "Stock Pledge Agreement") with IPC and FRR, under which the
Company pledged the stock of each of the Subsidiaries to IPC and FRR.

     Notwithstanding the foregoing, the Company, the Subsidiaries, IPC, FRR and
Heller have entered into a Subordination Agreement in favor of Heller. Under the
Subordination Agreement, IPC and FRR agreed to subordinate their respective
rights under the Stock Pledge Agreement, the FRR Note and the Indemnification
Agreement in favor of Heller and agreed to refrain from taking any action
against the collateral pledged under the Stock Pledge Agreement until the
obligations under the Heller Loan Agreement, as amended, are paid in full;
provided, however, the Subordination Agreement permits IPC, FRR and the Company,
so long as no event of default exists under the Heller Loan Agreement, as
amended, to pay and to collect such sums that are owed under the FRR Note and
the Indemnification Agreement in accordance with the respective terms thereof.

     In connection with the foregoing, the Company, IPC and Meditrust also
entered into an Option Agreement dated as of December 30, 1999, as amended
February 9, 2000 (the "Option Agreement"), pursuant to which the Company and IPC
have the right, but not the obligation (the "Option"), to designate various
nominees (each, a "Designee") to acquire the real property, improvements,
furniture, fixtures and equipment of an additional twelve Outlook Pointe(R)
assisted living facilities located in Pennsylvania (3), Arkansas (2), Ohio (2),
Virginia (2), and Tennessee (3) (collectively, the "Tranche Two Properties").
Hereinafter, the Company, IPC and their Designees may be referred to as the
"Buyer".

     The Option is jointly exercisable by the Company and IPC upon 30 days'
prior written notice to Meditrust (the "Option Notice") for the period
commencing on January 2, 2000 and continuing up through and including October 1,
2000. The Company and IPC may not exercise the Option with respect to any single
Tranche Two Property, but rather may only exercise the Option with respect to
groups of three or more Tranche Two Properties. Therefore, the acquisition of
the Tranche Two Properties may close in a series of transactions, with the final
closing on any of the Tranche Two Properties to occur no later than October 31,
2000.

     The aggregate purchase price for the Tranche Two Properties is $45,530,946
(the "Tranche Two Purchase Price"), which was determined based on arms' length
negotiations. The Tranche Two Purchase Price is allocated among the Tranche Two
Properties as more specifically set forth in the Option Agreement (each, a
"Facility Purchase Price"). The Facility Purchase Price for each Tranche Two
Property for which an Option Notice has been given shall be paid to Meditrust at
closing. The Company expects to exercise the Option on the Tranche Two
Properties with financing to be provided from one or a combination of several
sources, including several third party lenders with whom the Company is
currently negotiating financing, IPC or an affiliate, and Company funds.

                                       15
<PAGE>   16

  Divestiture of Missouri Assets

     On January 12, 2000, the Company completed the sale of its Missouri assets
to Christian Health Care of Missouri, Inc. and certain of its affiliates
(collectively, "CHM") pursuant to an Asset Purchase Agreement dated October 15,
1999 (as amended, the "Asset Purchase Agreement"). The Company sold its
leasehold interests in eight skilled nursing facilities and nine assisted and
independent living facilities, together with the operations of those facilities.
The Company sold its real property interests and operations in two skilled
nursing facilities.

     The aggregate consideration paid by CHM to the Company for the assets was
(i) $51,000,000 in assumed lease obligations, (ii) $6,675,000 in cash, (iii)
$525,000 pursuant to a First Promissory Note dated January 12, 2000 (the "First
Promissory Note"), and (iv) $2,000,000 pursuant to a Second Promissory Note
dated January 12, 2000 (the "Second Promissory Note"). The aggregate
consideration was determined based on arms' length negotiations.

     Due to the Company's existing commitments and guarantees as further
described below, the Company has recorded a net deferred gain on the Missouri
Divestiture in the amount of $2.4 million. The net deferred gain will be
amortized into revenue as the Company's continuing commitments in the
transaction, in the form of notes receivable and guaranties discussed below,
expire.

     In 1996, Meditrust Mortgage Investments, Inc. (together with its
affiliates, "MT") loaned $41,385,000 (the "Hawthorn Loan") to Hawthorn Health
Properties, Inc. and its subsidiaries (collectively, "HHP") pursuant to a Loan
Agreement dated August 30, 1996 (the "Hawthorn Loan Agreement") for HHP to
purchase seven skilled nursing facilities and three assisted/independent living
facilities (which constitute a portion of the facilities whose leasehold
interests were transferred to CHM). HHP simultaneously leased the facilities to
certain wholly-owned subsidiaries of the Company pursuant to those certain
Facility Lease Agreements dated August 30, 1996 (collectively, the "Facility
Lease Agreements").

     MT required the following as conditions to its consent to the transfer of
the leasehold interests in the HHP facilities to CHM:

     - The Company, CHM, HHP and MT enter into an Omnibus Assignment and
       Assumption Agreement, Amendment to Loan Documents, Amendment to Lease
       Documents, Termination of Lease Documents, Consent to Assignment and
       Confirmation of Guaranties dated as of January 12, 2000 (the "Omnibus
       Agreement").

     - The Company and Dixon Management, Inc., a wholly owned subsidiary of the
       Company ("DM"), remain as guarantors of CHM's lease obligations pursuant
       to the Guaranties previously given by the Company and DM in August 1996
       (the "Existing Guaranties") with respect to the Facility Lease
       Agreements.

     - The Company enter into a Guaranty dated as of January 12, 2000 (the "BCC
       Guaranty") in favor of MT to guaranty the obligations of HHP under the
       Hawthorn Loan.

     - The Company, Balanced Care at Stafford, Inc., a wholly-owned subsidiary
       of the Company ("Stafford"), and MT enter into a Cross-Default Agreement
       dated as of January 12, 2000 (the "Cross-Default Agreement") that
       provides that an "Event of Default" under the Hawthorn Loan Agreement
       will constitute an "Event of Default" under the Facility Lease Agreement
       dated June 30, 1998 (the "Stafford Facility Lease Agreement") between MT
       and Stafford.

     - CHM pay a $4,000,000 payment on the Hawthorn Loan on January 12, 2000
       (without any prepayment penalty or premium).

     - The Existing Guaranties, the BCC Guaranty and the Cross-Default Agreement
       will terminate in accordance with the Termination Agreement dated as of
       January 12, 2000 (the "Termination Agreement") entered into by and among
       the Company, HHP, MT and the other parties referred to therein. Subject
       to the provisions of the Termination Agreement:

                                       16
<PAGE>   17

     - The Existing Guaranties and the BCC Guaranty will terminate on the
       earlier to occur of (a) the complete payment and performance of the
       obligations under the Hawthorn Loan or (b) the Termination Date (as
       defined below).

     - The Cross-Default Agreement will terminate on the earlier to occur of (a)
       the Termination Date or (b) such time, if any, as the Leased Property (as
       defined in the Stafford Facility Lease Agreement) is transferred in
       accordance with the provisions of the Option Agreement dated as of
       December 30, 1999 by and among MT, the Company and the other parties
       thereto.

     As used herein, "Termination Date" means the later to occur of (a) December
31, 2000 or (b) the date upon which the HHP facilities have achieved a combined
Debt Coverage Ratio (as defined in the Termination Agreement) for the prior
fiscal quarter equal to or greater than 1.1 to 1. The Termination Date has not
yet occurred.

     In May and August 1997, the Company entered into Lease and Security
Agreements (collectively, the "Lease and Security Agreements") with Health Care
Realty Trust (together with its affiliates, "HCRT") for four
assisted/independent living facilities (which constitute a portion of the
facilities whose leasehold interests were transferred to CHM). In order to
induce HCRT to consent to the transfer of the leasehold interests of these four
facilities to CHM, the Company was required to remain as guarantor of CHM's
lease obligations pursuant to the Guaranties previously given by the Company in
1997 with respect to the Lease and Security Agreements.

OPERATING AND CENSUS TRENDS

     The Company's core business continues to improve as a result of operating
and marketing changes implemented in the fiscal year ended June 30, 1999.

     The following table sets forth, for the periods indicated, certain resident
capacity and occupancy data for the periods indicated (excluding the Missouri
facilities):

<TABLE>
<CAPTION>
                                            MARCH 31, 2000                    MARCH 31, 1999
                                    -------------------------------   -------------------------------
                                       STABLE       STABLE               STABLE       STABLE
                                    FACILITIES(1)   BEDS(1)   TOTAL   FACILITIES(1)   BEDS(1)   TOTAL
                                    -------------   -------   -----   -------------   -------   -----
<S>                                 <C>             <C>       <C>     <C>             <C>       <C>
End of Period Capacity Owned......       17          1,052    1,052         5            332      332
Leased............................       12            782      782        13            840      840
Managed...........................       10            607    2,496         7            395    1,891
                                         --          -----    -----        --          -----    -----
Total.............................       39          2,441    4,330        25          1,567    3,063
                                         ==          =====    =====        ==          =====    =====
End of Period Occupancy Owned.....                      92%      92%                      83%      83%
Leased............................                      93%      93%                      88%      88%
Managed...........................                      75%      51%                      73%      38%
                                                     -----    -----                    -----    -----
Total.............................                      88%      69%                      84%      57%
                                                     =====    =====                    =====    =====
</TABLE>

---------------
(1) Includes communities or expansions thereof that have (i) achieved 90%
    occupancy; (ii) have been opened at least 15 months for 75 bed or less
    communities; 18 months for 75 to 100 bed communities; and 24 months for 100+
    bed communities; or (iii) were acquired as mature properties.

     The above data does not contain divested communities.

                                       17
<PAGE>   18

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

<TABLE>
<CAPTION>
                                                JUNE 30    SEPTEMBER 30    DECEMBER 31    MARCH 31
                                                 1999          1999           1999          2000
                                                -------    ------------    -----------    --------
                                                              (DOLLARS IN THOUSANDS)
<S>                                             <C>        <C>             <C>            <C>
AT QUARTER END:
Facilities in Operation.......................       50           55              62           64
Resident Capacity.............................    3,297        3,609           4,118        4,330
Census........................................    1,946        2,278           2,655        2,972
FOR THE THREE MONTH PERIOD ENDED:
Revenue.......................................  $11,432      $13,209         $15,587      $17,321
EBITDAR.......................................  $   206      $ 1,624         $ 2,335      $ 2,888
</TABLE>

     Operating highlights of the quarter ended March 31, 2000 include: (i) a net
quarterly census increase of 317, a 12% improvement; (ii) revenue increase of
11% in owned, leased, and managed facilities; and (iii) an EBITDAR increase of
24% in owned, leased, and managed facilities.

     The above summary is presented for the purpose of demonstrating the
operating trends of the Company's overall portfolio of facilities and is not
necessarily indicative of the Company's reported consolidated results of
operations under Generally Accepted Accounting Principles (GAAP). The results of
operations for the managed facilities are not included in the Company's
consolidated financial statements presented in this Quarterly Report in
accordance with the guidance under GAAP.

     Although continued overall improvement in operating performance for the
Company's existing portfolio of owned, leased and managed facilities as of March
31, 2000 is anticipated for the fourth quarter ending June 30, 2000, there could
be a decline in the consolidated GAAP results for the fourth quarter. The
decline is expected as a result of the consolidation of the operating results
for the 10 special purpose entities ("SPEs") for which the Company has exercised
its option to purchase, with an expected closing date of May 31, 2000, as
further discussed in this section under the heading entitled "Liquidity and
Capital Resources." Seven of these 10 SPE operations are in various stages of
the lease-up phase and are currently incurring losses. The Company also could
incur additional GAAP losses due to increased shortfall losses in the fourth
quarter. This is the result of the timing of depletion of SPE working capital.
While the Company could incur increased shortfall losses in the fourth quarter,
management expects the amount of shortfalls to decrease significantly by the
December 31, 2000 fiscal quarter.

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                                       THREE MONTHS      NINE MONTHS
                                                          ENDED             ENDED
                                                         MARCH 31          MARCH 31
                                                      --------------    --------------
                                                      2000     1999     2000     1999
                                                      -----    -----    -----    -----
<S>                                                   <C>      <C>      <C>      <C>
Statement of Operations Data:
Resident services...................................   70.3%    29.9%    45.7%    27.9%
Patient services....................................   28.0     65.7     52.2     60.1
Development fees....................................    0.4      1.5      1.2     10.0
Management fees.....................................    0.6      2.1      0.5      1.6
Other...............................................    0.7      0.8      0.4      0.4
                                                      -----    -----    -----    -----
Total revenue.......................................  100.0    100.0    100.0    100.0
Operating expenses:
  Facility operating expenses.......................   70.3     77.6     75.7     69.4
  Development, general and administrative
     expenses.......................................   19.0     18.8     15.2     17.1
</TABLE>

                                       18
<PAGE>   19

<TABLE>
<CAPTION>
                                                       THREE MONTHS      NINE MONTHS
                                                          ENDED             ENDED
                                                         MARCH 31          MARCH 31
                                                      --------------    --------------
                                                      2000     1999     2000     1999
                                                      -----    -----    -----    -----
<S>                                                   <C>      <C>      <C>      <C>
  Provision for losses on development activities....     --       --       --      4.1
  Provision for losses on shortfall funding
     agreements.....................................    5.8      8.4      4.6      6.3
  Provision for losses under severance agreements...     --      3.6       --      1.0
  Lease expense.....................................   13.2     15.4     17.3     12.4
  Depreciation and amortization.....................   10.4      3.4      5.6      2.7
                                                      -----    -----    -----    -----
Loss from operations................................  (18.8)   (27.1)   (18.4)   (13.0)
Other income (expense)..............................  (12.7)    (0.4)    (4.5)      --
                                                      -----    -----    -----    -----
Loss before income taxes and extraordinary item.....  (31.5)   (27.5)   (22.9)   (13.0)
Provision for income taxes..........................     --    (11.0)      --     (2.9)
                                                      -----    -----    -----    -----
Loss before extraordinary item......................  (31.5)   (16.5)   (22.9)   (10.1)
Extraordinary loss on extinguishment of debt........     --       --     (1.5)      --
                                                      -----    -----    -----    -----
Net loss............................................  (31.5)   (16.5)   (24.4)   (10.1)
                                                      =====    =====    =====    =====
</TABLE>

THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999

     Total Revenue.  Total revenue for the three months ended March 31, 2000
decreased by $4,667,000 to $12,070,000 compared to $16,737,000 for the three
months ended March 31, 1999. This decrease is primarily attributable to
decreased patient service revenues of $7,618,000 resulting primarily from the
sale of the Company's Missouri operations. The decrease in revenue was partially
offset by an increase of resident services revenue of $3,491,000 primarily due
to the acquisition of special purpose entities.

     Facility Operating Expenses.  Facility operating expenses decreased by
$4,492,000 to $8,491,000 for the three months ended March 31, 2000 from
$12,983,000 for the three months ended March 31, 1999. This decrease is
primarily attributable to decreased facility-operating expenses of $6,905,000
relating to the divested Missouri operations. The decrease in facility operating
expense was partially offset by the increased facility operating expense of
$2,425,000 related to the acquisition of special purchase entities. As a
percentage of total revenue, facility-operating expenses were 70% for the three
months ended March 31, 2000 and 78% for the three months ended March 31, 1999.

     Development, general and administrative expenses decreased by $845,000 to
$2,298,000 for the three months ended March 31, 2000 from $3,143,000 for the
three months ended March 31, 1999. As a percentage of total revenue, these
expenses were 19% for the three months ended March 31, 2000 and 19% for the
three months ended March 31, 1999. The decrease in expenses is primarily a
result of divesting the Missouri operations and implementation of the Company's
restructuring plan.

     Provision for losses under shortfall funding agreements decreased by
$700,000 to $700,000 for the three months ended March 31, 2000 from $1,400,000
for the three months ended March 31, 1999. This decrease was primarily related
to improved financial results of managed communities with a shortfall funding
commitment by the Company.

     Provision for losses under severance agreements for the three months ended
March 31, 1999 were $600,000.

     Lease expense decreased to $1,599,000 for the three months ended March 31,
2000 from $2,581,000 for the three months ended March 31, 1999, a decrease of
$982,000. This decrease was primarily the result of the sale of Missouri
operations of $1,276,000 and was partially offset by the rent attributed to an
acquired special purpose entity, additional contingent rents for assisted living
facilities and skilled nursing facilities and the rents attributed to the
sale/leaseback of two facilities. As a percentage of total revenue, these
expenses totaled 13% for the three months ended March 31, 2000 and 15% for the
three months ended March 31, 1999.

                                       19
<PAGE>   20

     Depreciation and amortization increased by $685,000 to $1,255,000 for the
three months ended March 31, 2000 from $570,000 for the three months ended March
31, 1999. This increase primarily resulted from depreciation and amortization of
$521,000 related to twelve purchased assisted living facilities and additional
depreciation and amortization related to leased or managed facilities.

     Other Income (Expense).  Interest and other income decreased by $46,000 to
108,000 for the three months ended March 31, 2000 from $154,000 for three months
ended March 31, 1999. Interest expense for the three months ended March 31, 2000
increased by $1,222,000 to $1,349,000 from $127,000 for the three months ended
March 31, 1999. The increase of $1,022,000 primarily resulted from interest
expense related to the twelve purchased assisted living facilities and interest
related to the Line of Credit. The Company incurred $291,0000 on the loss of
purchase options for the three months ended March 31, 2000.

     In March 1999, the Company sold and subsequently leased all the fixed
assets including land and buildings of two of its acquired 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.

     Net Loss.  The Company's net loss increased by $1,036,000 to $3,805,000 for
the three months ended March 31, 2000 from a net loss of $2,769,000 for the
three months ended March 31, 1999. The increase was primarily due to increased
interest expense of $1,222,000 and a decrease in the tax benefit of $1,846,000.
The increase was partially offset by: (i) a decrease in the provision for losses
for shortfall funding arrangements of $700,000; (ii) a decrease in the provision
for losses from severance agreements of $600,000; (iii) increased profitability
of acquired, leased, and owned assisted living facilities of $397,000; and (iv)
a $260,000 decrease in losses for the divested Missouri operations.

NINE MONTHS ENDED MARCH 31, 2000 COMPARED TO NINE MONTHS ENDED MARCH 31, 1999

     Total Revenue.  Total revenue for the nine months ended March 31, 2000
decreased by $10,279,000 to $49,011,000 compared to $59,290,000 for the nine
months ended March 31, 1999. This decrease was the result of: (i) a $5,340,000
decrease in development fees due to a reduction in development activities; (ii)
a $10,050,000 decrease in patient service revenues, due to the change in the
billing rates for Medicare Part B charges adopted by the Balance Budget Act,
lower census and decreased outpatient therapy revenues and the sale of the
Missouri operations. This decrease was partially offset by additional resident
service revenues of $5,901,000, primarily from special purpose entities acquired
subsequent to the nine months ended March 31, 1999. Patient services comprised
52% and 60% of total revenues for the nine months ended March 31, 2000 and 1999
respectively.

     Facility Operating Expenses.  Facility operating expenses for the nine
months ended March 31, 2000 decreased by $4,112,000 to $37,041,000 from
$41,153,000 for the nine months ended March 31, 1999. As a percentage of total
revenue, facility operating expenses were 76% for the nine months ended March
31, 2000 and 69% for the nine months ended March 31, 1999. The decrease resulted
from: (i) expenses of $6,905,000 related to the divested Missouri operations;
(ii) decreased costs for skilled nursing facilities of $1,312,000 due primarily
to cost reductions in the area of therapy delivery; and (iii) a reduced facility
expense of $507,000 from discontinuing the therapy rehab agencies. The decrease
was partially offset from increased operating expenses at assisted living
facilities of $5,291,000 primarily related to the acquired special purpose
entities.

     Development, general and administrative expenses decreased by $2,637,000 to
$7,466,000 for the nine months ended March 31, 2000 from $10,103,000 for the
nine months ended March 31, 1999. The decrease is primarily due to the
implementation of the Company's corporate restructuring plan and the sale of the
Company's Missouri operations. As a percentage of total revenue, these expenses
decreased to 15% for the nine months ended March 31, 2000 from 17% for the nine
months ended March 31, 1999.

     Provision for losses under shortfall funding agreements decreased by
$1,510,000 to $2,250,000 for the nine months ended March 31, 2000 from
$3,760,000 for the nine months ended March 31, 1999. This
                                       20
<PAGE>   21

decrease was primarily related to improved financial results of managed
communities with a shortfall funding commitment by the Company.

     Provision for losses on development activities and provision for losses
under severance agreements for the nine months ended March 31, 1999 were
$2,400,000 and $600,000, respectively.

     Lease expense increased to $8,501,000 for the nine months ended March 31,
2000 from $7,377,000 for the nine months ended March 31, 1999, an increase of
$1,124,000. This increase is attributed to the acquired special purpose
entities, additional contingent rents for assisted living facilities and skilled
nursing facilities and the sale/leaseback of two facilities and was partially
offset by the sale of the Missouri operations. As a percentage of total revenue,
these expenses totaled 17% for the nine months ended March 31, 2000 and 12% for
the nine months ended March 31, 1999.

     Depreciation and amortization increased by $1,156,000 to $2,769,000 for the
nine months ended March 31, 2000 from $1,613,000 for the nine months ended March
31, 1999. This increase resulted primarily from the additional depreciation and
amortization related to twelve purchased assisted living facilities and leased
or managed facilities.

     Other Income (Expense).  Interest and other income decreased by $353,000 to
$280,000 for the nine months ended March 31, 2000 from 633,000 for the nine
months ended March 31, 1999. Interest expense increased by $1,827,000 to
$2,172,000 for the nine months ended March 31, 2000 from $345,000 for the nine
months ended March 31, 1999. The increase primarily resulted from interest
expense related to the twelve purchased assisted living facilities and interest
related to the Line of Credit. The Company incurred $291,000 on the loss of
purchase options for the nine months ended March 31, 2000.

     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.

     Provision for Income Taxes (Benefit).  Income tax expense decreased by
$1,733,000 to $5,000 for the nine months ended March 31, 2000 from a $1,738,000
income tax benefit for the nine months ended March 31, 1999. The income taxes
result from taxable income reported on individual state corporate tax returns in
states that do not permit consolidated filings. Income tax benefit resulted from
the Company's estimated fiscal 1999 tax position.

     Net Loss.  The Company's net loss increased by $5,951,000 to a loss of
$11,943,000 for the nine months ended March 31, 2000 from a net loss of
$5,992,000 for the nine months ended March 31, 1999. The increase was the result
of: (i) a decrease in pretax contribution of $3,662,000 primarily related to
reduced development activities; (ii) decreased contribution of $911,000 from the
skilled nursing facilities primarily due to the change in billing rates for
Medicare Part B charges; (iii) a charge for the early extinguishment of debt of
$739,000; (iv) increased interest expense of $1,827,000 related primarily to
interest on the Line of Credit; (v) reduced management fees of $715,000; and
(vi) a decrease from the tax benefit of $1,743,000. The increase was partially
offset by a decrease in: (i) the provision for losses on termination of
development projects of $2,400,000; (ii) a decrease in the shortfall funding
arrangements of $1,510,000; and (iii) a decrease in losses from severance
agreements of $600,000.

LIQUIDITY AND CAPITAL RESOURCES

  Equity Transaction

     During its second fiscal quarter, the Company received approximately $19.5
million in cash (net of costs) from the $21 million Transaction with IPC. The
Company used $6.0 million to acquire the real estate of 12 of its Outlook
Pointe(R) signature series assisted living facilities from Meditrust (see
"Meditrust Transaction"

                                       21
<PAGE>   22

discussed below). The remaining $13.5 million has been used primarily to support
the Company's portfolio of assisted living facilities, including the acquisition
of the leasehold interests of seven of the assisted living facilities that the
Company managed for SPEs. A breakdown of the use of proceeds from the IPC
Transaction over the past six months follows (in millions of dollars):

<TABLE>
<S>                                           <C>
     - Meditrust Tranche One Property
       purchase.............................  $ 6.0
     - Closing costs on IPC equity..........    1.5
     - SPE take-out and option payments.....    2.0
     - Furniture and equipment at
       facilities...........................    2.5
     - collateral deposits..................    1.2
                                              -----
                                              $13.2
     - Cash for operations October-April....    7.8
                                              -----
                                              $21.0
</TABLE>

  Working Capital Line of Credit

     In April 1999, the Company entered into a $15 million revolving Line of
Credit with HCFP Funding, Inc ("HCFP"). The Line of Credit is for a term of
three years, and outstanding borrowings bear interest at a rate per annum of
prime plus 2.75%. In July 1999, the Line of Credit was increased to $20 million.
Prior to July 1999, the Line of Credit was 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.), and the eligible accounts receivable of
the Company's 10 Missouri skilled nursing facilities (the "Accounts Receivable
Borrowers"). In July 1999, the real estate of BCC at Republic Park Care Center,
Inc. and BCC at Nevada Park Care Center, Inc. (the "Skilled Nursing Facility
Borrowers") was added as security to collateralize the Line of Credit. In order
to mortgage the Skilled Nursing Facility Borrowers' real estate in favor of
HCFP, the Company repaid its $3.1 million loan to Meditrust to satisfy the
existing mortgage on this real estate. As a result of this transaction, the
Company reported a loss on the early extinguishment of debt of $739,000 in the
first quarter of Fiscal 2000.

     On January 12, 2000, the Company completed the sale of its Missouri assets
(see "Missouri Divestiture" discussed below), which included the real estate,
leasehold interests and operations of the Skilled Nursing Facility Borrowers and
the Accounts Receivable Borrowers (the "Missouri Borrowers"). In order for HCFP
to release the Missouri Borrowers and their respective liens and security
interests under the Line of Credit, the Company agreed to (i) repay $5.4 million
on the Line of Credit attributable to the Missouri Borrowers, (ii) pay a
prepayment fee of approximately $75,000, (iii) reset the availability under the
Line of Credit to $12.0 million as of December 31, 1999 and (iv) cross-default
its obligations under the Line of Credit with future obligations to HCFP,
including the Company's obligations under the Heller Loan (discussed under the
"Meditrust Transaction" section below).

     The primary component of the borrowing base for the Line of Credit consists
of 85% of the product of 8.0 to 8.5 times EBITDA of the Real Estate Borrowers
(as defined in the Line of Credit Agreement). At March 31, 2000, the borrowing
base available was approximately $10.4 million and $10.4 million was borrowed
thereunder.

  Meditrust Transaction

     On December 30, 1999 the Company completed the acquisition of the 12
Tranche One Properties from Meditrust. The Tranche One Properties had a cost
basis of approximately $52 million and were acquired for (i) approximately $44.3
million in cash (plus $2.2 million in closing costs) and (ii) approximately $7.8
million under the Meditrust Note, including transaction costs. The $46.5 million
(including closing costs) was funded by (i) the Heller Loan ($32 million), (ii)
the FRR Note ($7 million) and (iii) cash ($7.5 million) from the Company.

                                       22
<PAGE>   23

     The Meditrust Note has a maturity date of April 3, 2001. No interest will
accrue on the Meditrust Note unless the note is not prepaid in full on or before
October 31, 2000, at which time interest will accrue as follows: (i) 12% from
November 1, 2000 through December 31, 2000 and (ii) 14% from January 1, 2001
through April 3, 2001. Payments under the Meditrust Note are discussed below.

     The Heller Loan, together with the Heller Loan Increase (hereinafter, the
"Amended Heller Loan"), has a maturity date of December 31, 2001. Interest on
the Amended Heller Loan accrues at a floating rate per annum equal to the Base
Rate (as defined in the Heller Loan Agreement, as amended) plus 3.75%.
Commencing on February 1, 2000, the Company will pay interest monthly in
arrears. In addition, commencing on November 20, 2000, the Company will pay 100%
of the Excess Cash Flow (as defined in the Heller Loan Agreement, as amended),
which will be applied to the principal balance. (For a discussion on capital
requirements, refer to the heading entitled "Operations" below.) Although the
Amended Heller Loan has a two-year term, the exit fee due upon payoff increases
from 1% to 3% after September 30, 2000. The Company's obligations under the
Amended Heller Loan are cross-defaulted with its obligations under the Line of
Credit.

     The FRR Note has a maturity date of June 26, 2000. The FRR Note is a
discount note with an issue price of $7,000,000, a maturity value of $7,424,580,
and a yield of 12.6829% per annum. Except as otherwise provided in the FRR Note,
no interest accrues on the outstanding balance of the note.

     It is the Company's intention to refinance the Amended Heller Loan and the
FRR Note (collectively, the "Tranche One Debt") by June 30, 2000. Based on the
operational performance of the Tranche One Properties, management believes the
Tranche One Debt can be refinanced for approximately $45 -- $50 million.
Proceeds from the refinancing will be used to repay the Tranche One Debt, with
any remaining funds being used by the Company for the purposes discussed under
the "Equity Transaction" section above.

     As part of the Meditrust transaction, the Company obtained an Option to
purchase the real estate of an additional 12 Tranche Two Properties owned by
Meditrust and managed by the Company. The Option may not be exercised with
respect to any single Tranche Two Property, but rather only with respect to
groups of three or more Tranche Two Properties. Therefore, the acquisition of
the Tranche Two Properties may close in a series of transactions, with the final
closing to occur no later than October 31, 2000. If, after exercising the
Option, the Company fails to close, Meditrust may (i) accelerate the amount due
under the Meditrust Note, (ii) receive reimbursement of all reasonable
out-of-pocket expenses (including attorneys' fees and expenses) and (iii)
terminate the Option Agreement.

     The Tranche Two Properties have a cost basis of approximately $66 million
and an aggregate purchase price of approximately $46 million. Each time the
Option is exercised for a Tranche Two Property, a preset prepayment is required
under the Meditrust Note. If the Company exercises its Option and closes on all
12 of the Tranche Two Properties, the Meditrust Note will be fully repaid by the
prepayments. The Company expects to exercise the Option on the Tranche Two
Properties with financing to be provided from one or a combination of several
sources, including several third party lenders with whom the Company is
negotiating financing, IPC or an affiliate, and Company funds.

  Missouri Sale

     In January 2000 the Company sold certain of its Missouri assets to
Christian Health Care of Missouri Inc. and its affiliates for $6.7 million in
cash, $2.5 million in notes, and $51 million in assumed lease obligations. The
$6.7 million was used primarily to pay down debt and to pay closing and
severance costs associated with the Missouri facilities. The cash received on
the collection of receivables has offset the operating costs to wind down the
business operations, which was completed April 30, 2000. As the notes receivable
are collected, the proceeds are expected to be used for general corporate
purposes.

                                       23
<PAGE>   24

     To facilitate the understanding of the effect of the Missouri sale on the
continuing operations of the Company, the following table summarizes the results
of the Missouri operations over the first six months of the fiscal year while
owned by the Company:

<TABLE>
<CAPTION>
                                                                  THREE MONTHS ENDED
                                                              ---------------------------
                                                              DECEMBER 31    SEPTEMBER 30
                                                                 1999            1999
                                                              -----------    ------------
                                                                    (IN THOUSANDS)
<S>                                                           <C>            <C>
Revenues:
  Patient services..........................................    $ 8,959        $ 8,806
  Resident services.........................................        913            919
  Other revenues............................................         21             18
                                                                -------        -------
Total revenues..............................................      9,893          9,743
                                                                -------        -------
Operating expenses:
  Facility operating expenses...............................      8,262          8,177
  Development, general and administrative expense...........        537            425
  Lease expense.............................................      1,516          1,483
  Depreciation and amortization expense.....................         70            102
                                                                -------        -------
Total operating expenses....................................     10,385         10,187
                                                                -------        -------
Loss from operations........................................       (492)          (444)
                                                                =======        =======
</TABLE>

  Operations

     The Company has opened 48 of its Outlook Pointe(R) signature series
assisted living facilities as of March 31, 2000. The Company has adequate
financing to complete construction on the remaining four facilities currently
under construction. Three of these projects are expected to open in May 2000 and
the fourth is expected to open in September 2000. This will conclude the
Company's initial round of development activity initiated nearly three years
ago. Future development will be conducted on a project-by-project basis.

     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 SPE Operator/Lessee leases the assisted living
facility from the Owner when construction has been completed and provides
funding for the working capital during the initial occupancy period. The Company
manages the assisted living facility pursuant to a management agreement for a
term of two to nine years in return for a management fee approximating 6% of the
net revenue of the facility. The foregoing is an off-balance sheet financing
structure.

     For development projects utilizing the SPE structure, the Company has the
option to purchase the equity or assets of the Operator/Lessee at a purchase
price based on a formula set forth in an Option Agreement and a Shortfall
Funding Agreement, respectively. As consideration for the option, which is
exercisable by the Company at any time during the term of the Option Agreement,
the Company pays option payments to the equity owner of the SPE (the "Equity
Owner"). Without the Owner's prior consent, the Equity Owner may not sell the
equity or assets of the SPE to any third party other than the Company. The
Company has closed 51 development projects for which the Company holds or held
the foregoing type of option. To date, the Company has exercised its option to
purchase 12 SPEs financed under the SPE structure for a total purchase price of
approximately $11.9 million of which $5.4 million was paid in cash and the lease
base of the facilities was increased by $6.5 million. Eleven of the 12
facilities were part of the property acquisition discussed under "Recent
Developments" of this Quarterly Report. The Company estimates it will require
approximately $35 -- $40 million to buy the equity of the SPEs affiliated with
the 39 Outlook Pointe(R)facilities that remain under the SPE structure through
calendar 2002. The Company has obtained commitments from certain REITs that
currently own developed properties under the SPE 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

                                       24
<PAGE>   25

structure will provide approximately $20 million of the estimated $35-$40
million capital requirement. The balance will be funded with cash raised from
the financing transactions discussed above, new financing transactions, possible
asset divestitures and cash to be provided from operations.

     The Company has exercised its options to purchase 10 SPEs it currently
manages in the fourth quarter and expects to close on the transactions by May
31, 2000. The capital required to exercise the options for these ten SPEs is
approximately $10 million and will be funded by the property owners, Nationwide
Health Properties, Inc. and its affiliates ("NHP"), through an increase in the
lease base, as discussed above. Upon closing, the Company's obligation to pay a
27.5% return to the Equity Owners of the 10 SPEs automatically terminates. The
Company will be making option payments in future quarters or other managed
properties to maintain its purchase options for certain Outlook Pointe(R)
facilities utilizing the SPE structure.

     Based on current forecasts, management estimates an additional $15 million
in capital will be required to fully stabilize the Company's portfolio of
assisted living properties. This estimate assumes the Company exercises its
options to purchase the 11 SPE operations which are part of the 12 Meditrust
Tranche Two Properties (one property was an acquisition) and utilizes cash from
operations when available to acquire the remaining SPE operations. The Company
expects to generate the cash from operations to begin purchasing these remaining
operations by October 2001 and continuing through calendar year 2002. The
following table summarizes the Company's acquisitions, or planned acquisitions,
of black box operations:

<TABLE>
<S>  <C>                                                           <C>
-    Outlook Pointe operations currently owned by the Company....   13
-    NHP SPE Operations to be purchased by May 31, 2000..........   10
-    Meditrust SPE Operations to be purchased in conjunction with
     Tranche Two.................................................   11
-    Remaining SPE operations to be acquired with cash from owned
     operations (October 2001 through December 2002).............   18
                                                                   ---
                                                                    52
                                                                   ---
</TABLE>

     In addition to the $15 million in capital required to stabilize operations,
management estimates that an additional $5-10 million could be required to allow
the Company to purchase the real estate underlying the Tranche Two Properties
from Meditrust by October 31, 2000. The amount of capital required to purchase
the Tranche Two Properties is dependent upon the size of the loan that
management is successful in negotiating to finance this transaction.

     As discussed above, on April 27, 2000, the Company closed on the $5 million
Heller Loan Increase. The proceeds from the Heller Loan Increase will provide
the working capital required for operations until the Company raises the $15
million, discussed above. The total amount of debt outstanding from the purchase
of the Tranche One Properties is the $37 million Amended Heller Loan and the $7
million FRR Note. The Company is currently pursuing various financing
alternatives to refinance the Tranche One Debt. The alternatives under
consideration include permanent and mini-permanent financing that would yield
adequate funds to refinance 100% of the existing Tranch One Debt. Management
expects to close on this financing by June 30, 2000. To raise the approximately
$15 million that is estimated to be required to stabilize the existing portfolio
of assets, the Company is actively pursuing these alternatives: (i) a credit
facility; (ii) mezzanine financing on properties; (iii) real estate asset
sale/manage-back; (iv) asset sales; or (v) convertible securities.

     While management believes it can raise adequate capital to meet the
Company's business plan, there is no assurance that is the case, or that the
terms will not be dilutive to existing investors. The inability of the Company
to raise additional capital could have a material adverse effect on the
Company's business, results of operations and financial commitment.

     Many 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 $5,300,000. The lease documents contain financial covenants and
other restrictions which, unless waived by the REIT,: (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, (iii) cross-default certain of the Company's obligations
and (iv) prohibit the Company

                                       25
<PAGE>   26

from operating competing facilities within a designated radius of existing
facilities. Management believes the Company is either in compliance or has
obtained the necessary waivers with respect to these lease covenants.

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

  Operating Activities

     Cash used by operations increased by $10,731,000 to $15,944,000 for the
nine months ended March 31, 2000 from cash used by operations of $5,213,000 for
the nine months ended March 31, 1999. The increase in cash used was due to
increased operating losses, a decrease in accounts payable, accrued payroll and
accrued expenses, and partially offset by a decrease in development contracts in
process.

  Investing and Financing Activities

     Cash used for investing activities increased by $55,140,000 to $55,507,000
for the nine months ended March 31, 2000 from $367,000 for the nine months ended
March 31, 1999. Cash provided by financing activities increased by $61,625,000
to $66,856,000 for the nine months ended March 31, 2000 from $5,231,000 for the
nine months ended March 31, 1999. Cash used for financing activities and
provided by investing activities was the result of the property acquisitions,
the equity transaction, and the seven SPE acquisitions discussed above, and
repayment on the Line of Credit.

YEAR 2000 READINESS DISCLOSURE

     In response to concerns that computer software and/or hardware that was
designed to define the year with a two-digit date field rather than a four-digit
field might fail or miscalculate data in the year 2000, causing disruption to
the operations or business activities of the Company. The Company had previously
formed a committee to research and assess the potential risk to the Company's
internal operations systems and to test its hardware and software systems for
compliance. The costs incurred by the Company relating to this project were
immaterial. To date, no significant disruptions to the operations of the Company
or computer hardware and software systems have been experienced.

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES 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, 2000.

                                       26
<PAGE>   27

ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K

(A) Exhibits

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                            DESCRIPTION
-------                           -----------
<C>       <S>
     3.1  Certificate of Elimination of Series C Convertible Preferred
          Stock of Balanced Care Corporation dated April 14, 2000
          (filed herewith)
    10.1  Amendment to Loan Documents by and among Heller Healthcare
          Finance, Inc., Balanced Care Realty at Berwick, Inc.,
          Balanced Care Realty at Lewistown, Inc., Balanced Care
          Realty at Mansfield, Inc., Balanced Care Realty at
          Martinsburg, Inc., Balanced Care Realty at Maumelle, Inc,
          Balanced Care Realty at Mountain Home, Inc., Balanced Care
          Realty at Peckville, Inc., Balanced Care Realty at Reading,
          Inc., Balanced Care Realty at Scranton, Inc., Balanced Care
          Realty at Sherwood, Inc., and Balanced Care Realty at State
          College, Inc. dated as of April 27, 2000 (filed herewith)
    10.2  Amended and Restated Promissory Note A in favor of Heller
          Healthcare Finance, Inc., by Balanced Care Realty at
          Berwick, Inc., Balanced Care Realty at Lewistown, Inc.,
          Balanced Care Realty at Mansfield, Inc., Balanced Care
          Realty at Martinsburg, Inc., Balanced Care Realty at
          Maumelle, Inc, Balanced Care Realty at Mountain Home, Inc.,
          Balanced Care Realty at Peckville, Inc., Balanced Care
          Realty at Reading, Inc., Balanced Care Realty at Scranton,
          Inc., Balanced Care Realty at Sherwood, Inc., and Balanced
          Care Realty at State College, Inc. dated as of April 27,
          2000 (filed herewith)
    10.3  Amended and Restated Promissory Note B in favor of Heller
          Healthcare Finance, Inc., by Balanced Care Realty at
          Berwick, Inc., Balanced Care Realty at Lewistown, Inc.,
          Balanced Care Realty at Mansfield, Inc., Balanced Care
          Realty at Martinsburg, Inc., Balanced Care Realty at
          Maumelle, Inc, Balanced Care Realty at Mountain Home, Inc.,
          Balanced Care Realty at Peckville, Inc., Balanced Care
          Realty at Reading, Inc., Balanced Care Realty at Scranton,
          Inc., Balanced Care Realty at Sherwood, Inc., and Balanced
          Care Realty at State College, Inc. dated as of April 27,
          2000 (filed herewith)
    10.4  First Amendment to Promissory Note by and among IPC Advisors
          S.a.r.l., Balanced Care Corporation, and New Meditrust
          Company LLC dated February 9, 2000 (filed herewith)
    10.5  First Amendment to Option Agreement by and among IPC
          Advisors S.a.r.l., Balanced Care Corporation, and New
          Meditrust Company LLC dated February 9, 2000 (filed
          herewith)
    10.6  Subordination Agreement by and among FRR Investments
          Limited, IPC Advisors S.a.r.l., Heller Healthcare Finance,
          Inc., Balanced Care Corporation, and the entities listed on
          Exhibit A and Exhibit D thereto dated April 18, 2000 (filed
          herewith)
    10.7  Stock Pledge Agreement by and among FRR Investments Limited,
          IPC Advisors S.a.r.l., Balanced Care Corporation, and the
          parties listed on Schedule 1 and Schedule 2 thereto dated
          April 18, 2000 (filed herewith)
    27.1  Financial Data Schedule (filed herewith)
</TABLE>

(B)  Reports on Form 8-K

     1. Current Report on Form 8-K dated January 12, 2000 regarding the sale by
        the Company of its Missouri assets to certain affiliates of Christian
        Health Care of Missouri, Inc. including a pro forma Consolidated Balance
        Sheet as of September 30, 1999 and pro forma Consolidated Statements of
        Operations for the year ended June 30, 1999 and the three months ended
        September 30, 1999.

     2. Current Report on Form 8-K/A dated December 15, 1999 regarding the
        acquisition by the Company of the real property, improvements,
        furniture, fixtures and equipment of twelve Outlook Pointe(R) assisted
        living facilities that closed December 30, 1999 and the divestiture by
        the Company of its Missouri operations that closed January 12, 2000,
        including pro forma Consolidated Balance Sheet as of December 31, 1999
        and pro forma Consolidated Statements of Operations for the year ended
        June 30, 1999 and the six months ended December 31, 1999.

                                       27
<PAGE>   28

                                   SIGNATURES

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

                                          BALANCED CARE CORPORATION

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

Date: May 15, 2000

                                       28
<PAGE>   29

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                           DESCRIPTION
-------                          -----------
<S>      <C>
 3.1     Certificate of Elimination of Series C Convertible Preferred
         Stock of Balanced Care Corporation dated April 14, 2000
         (filed herewith)
10.1     Amendment to Loan Documents by and among Heller Healthcare
         Finance, Inc., Balanced Care Realty a Berwick, Inc.,
         Balanced Care Realty at Lewistown, Inc., Balanced Care
         Realty at Mansfield, Inc., Balanced Care Realty at
         Martinsburg, Inc., Balanced Care Realty at Maumelle, Inc,
         Balanced Care Realty at Mountain Home, Inc., Balanced Care
         Realty at Peckville, Inc., Balanced Care Realty at Reading,
         Inc., Balanced Care Realty at Scranton, Inc., Balanced Care
         Realty at Sherwood, Inc., and Balanced Care Realty at State
         College, Inc. dated as of April 27, 2000 (filed herewith)
10.2     Amended and Restated Promissory Note A in favor of Heller
         Healthcare Finance, Inc., by Balanced Care Realty at
         Berwick, Inc., Balanced Care Realty at Lewistown, Inc.,
         Balanced Care Realty at Mansfield, Inc., Balanced Care
         Realty at Martinsburg, Inc., Balanced Care Realty at
         Maumelle, Inc, Balanced Care Realty at Mountain Home, Inc.,
         Balanced Care Realty at Peckville, Inc., Balanced Care
         Realty at Reading, Inc., Balanced Care Realty at Scranton,
         Inc., Balanced Care Realty at Sherwood, Inc., and Balanced
         Care Realty at State College, Inc. dated as of April 27,
         2000 (filed herewith)
10.3     Amended and Restated Promissory Note B in favor of Heller
         Healthcare Finance, Inc., by Balanced Care Realty at
         Berwick, Inc., Balanced Care Realty at Lewistown, Inc.,
         Balanced Care Realty at Mansfield, Inc., Balanced Care
         Realty at Martinsburg, Inc., Balanced Care Realty at
         Maumelle, Inc, Balanced Care Realty at Mountain Home, Inc.,
         Balanced Care Realty at Peckville, Inc., Balanced Care
         Realty at Reading, Inc., Balanced Care Realty at Scranton,
         Inc., Balanced Care Realty at Sherwood, Inc., and Balanced
         Care Realty at State College, Inc. dated as of April 27,
         2000 (filed herewith)
10.4     First Amendment to Promissory Note by and among IPC Advisors
         S.a.r.l., Balanced Care Corporation, and New Meditrust
         Company LLC dated February 9, 2000 (filed herewith)
10.5     First Amendment to Option Agreement by and among IPC
         Advisors S.a.r.l., Balanced Care Corporation, and New
         Meditrust Company LLC dated February 9, 2000 (filed
         herewith)
10.6     Subordination Agreement by and among FRR Investments
         Limited, IPC Advisors S.a.r.l., Heller Healthcare Finance,
         Inc., Balanced Care Corporation, and the entities listed on
         Exhibit A and Exhibit D thereto dated April 18, 2000 (filed
         herewith)
10.7     Stock Pledge Agreement by and among FRR Investments Limited,
         IPC Advisors S.a.r.l., Balanced Care Corporation, and the
         parties listed on Schedule 1 and Schedule 2 thereto dated
         April 18, 2000 (filed herewith)
27.1     Financial Data Schedule (filed herewith)
</TABLE>