UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549

                                    FORM 10-K

(Mark One)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
    OF 1934 For the fiscal year ended December 31, 1998

                                       OR

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

                          Commission file number 0-8187

                             Greenbriar Corporation
             (Exact name of Registrant as specified in its charter)

              Nevada                                            75-2399477
  (State or other jurisdiction of                            (IRS Employer
  Incorporation or organization)                             Identification No.)

    4265 Kellway Circle, Addison, Texas                          75001
 (Address of principal executive offices)                     (Zip Code)

Registrant's telephone number, including area code: (972) 407-8400

Securities registered pursuant to Section 12(b) of the Act:

                                                     Name of Each Exchange
       Title of Each Class                            on Which Registered 
       -------------------                           -----------------------
  Common Stock, $.01 par value                       American Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

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

                                 YES [X] NO [ ]

Indicate  by check  mark if there  is no  disclosure  of  delinquent  filers  in
response to Item 405 of Regulation S-B contained in this form, and no disclosure
will be contained,  to the best of issuer's  knowledge,  in definitive  proxy or
information  statements  incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]

The  aggregate  market value of the voting stock held by  non-affiliates  of the
issuer,  computed by reference to the closing sales price on March 31, 1999, was
approximately $5,218,000.

At March 31, 1999, the issuer had outstanding  approximately 7,355,000 shares of
par value $.01 Common Stock.

Documents Incorporated by Reference:
Part III of this Annual Report on Form 10-K incorporates  certain information by
reference  from the  definitive  Proxy  Statement  for the  registrant's  Annual
Meeting of Stockholders to be held on June 4, 1999.



<PAGE>

<TABLE>

<CAPTION>

                                                     
                             GREENBRIAR CORPORATION
                       Index to Annual Report on Form 10-K
                       Fiscal year ended December 31, 1998

<S>                                                                             <C>                      <C>


Part I.....................................................................................................3

   ITEM 1: DESCRIPTION OF BUSINESS.........................................................................3
   ITEM 2: DESCRIPTION OF PROPERTIES......................................................................15
   ITEM 3: LEGAL PROCEEDINGS..............................................................................15
   ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................................15

Part II...................................................................................................16

   ITEM 5: MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.......................................16
   ITEM 6: SELECTED FINANCIAL DATA........................................................................16
   ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION......................................17
   ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK....................................22
   ITEM 8: FINANCIAL STATEMENTS...........................................................................22
   ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...........22

Part III..................................................................................................23

   ITEMS 10-13:...........................................................................................23

Part IV...................................................................................................24

   ITEM 14: EXHIBITS AND REPORTS ON FORM 8-K..............................................................24


</TABLE>

                                       2

<PAGE>


                                     PART I

ITEM 1: DESCRIPTION OF BUSINESS
-------------------------------


Overview and Background of Assisted Living Operations

Greenbriar  Corporation  (the  "Company")  is an assisted  living  company  that
operates assisted and full service  independent living  communities  designed to
serve the needs of the elderly  population.  Assisted living residents generally
comprise  frail elderly  persons who require  assistance  with the activities of
daily living such as ambulation, bathing, eating, personal hygiene, grooming and
dressing,  but who do not generally require more expensive skilled nursing care.
Independent  living residents  typically require only occasional  assistance but
receive  other  support  services.  In addition,  the Company also  develops and
operates  communities for residents suffering from Alzheimer's or other forms of
dementia, a growing specialty within the assisted living industry.

As of March 31, 1999, the Company  operated 31 communities in 11 states,  with a
capacity of 2,830 residents,  consisting of 20 communities that are owned and 11
that are leased from third parties.  One of the Company's  leased  properties is
managed by a third party.

The Company existed from 1974 until 1989 as a real estate  investment  trust. In
late 1989, control of the Company changed to current  management,  who undertook
to dispose of its REIT  properties  and establish a new focus on services to and
products  for  the  elderly.  In 1991  the  REIT  was  reorganized  as a  Nevada
Corporation.  Until 1994, the Company's business was the acquisition,  operation
and sale of retirement,  nursing and other  healthcare  communities,  as well as
commercial  real  estate  and the  manufacture  and sale or  lease  of  mobility
assistance  equipment.  In 1994 the  Company  decided  to  change  its  business
emphasis  to the  assisted  living  industry  and by early  1996 it had sold its
existing  nursing homes and  retirement  centers,  most of its  commercial  real
estate and its mobility equipment subsidiaries.

Beginning in 1995 the Company began developing and constructing  assisted living
communities;   however,   the  significant  growth  that  occurred  was  through
acquisitions that were completed in 1996 and 1997.


The Assisted Living Industry

The  Company  believes  that the  assisted  living  industry  is  emerging  as a
preferred alternative to meet the growing demand for a cost-effective setting in
which to care for the  elderly who do not  require  the more  intensive  medical
attention provided by a skilled nursing center but who cannot live independently
due to physical or cognitive frailties. In general, assisted living represents a
combination of housing, general support services and 24-hour a day personal care
services  designed to aid elderly  residents with the activities of daily living
("ADLs") on a scheduled and unscheduled  basis. Many assisted living communities
may also provide  assistance to residents  with low acuity  medical needs or may
offer  higher  levels  of  personal  assistance  for  incontinent  residents  or
residents with  Alzheimer's  disease or other forms of dementia.  There are some
assisted  living  communities,  and this seems to be a growing trend who provide
care for higher levels of acuity.  Generally,  assisted  living  residents  have
higher levels of need than residents of independent  retirement  communities but
lower than residents in skilled  nursing  centers.  Annual  expenditures  in the
assisted  living industry have been estimated to be  approximately  $13 billion,
including  communities  ranging from "board and care" to  full-service  assisted
living communities such as those operated by the Company.

The Company believes that assisted living is one of the fastest growing segments
of elderly care and will  continue to experience  significant  growth due to the
following:

         Consumer  Preference - The Company  believes  that  assisted  living is
         increasingly  becoming the setting  preferred by prospective  residents
         and their  families  in which to care for the frail  elderly.  Assisted
         living offers residents greater  independence in a residential  setting
         which the  Company  believes  results in a higher  quality of life than
         that  experienced in more  institutional  or clinical  settings such as
         skilled nursing centers.

         Demographic  & Social  Trends - The  target  market  for the  Company's
         services is  generally  persons 75 years and older,  one of the fastest
         growing segments of the U.S.  population (the average age of a resident
         in Assisted  Living is typically  aged 83 or older and that resident is


                                       3

<PAGE>

         either widowed or single).  According to the U.S.  Census  Bureau,  the
         portion of the U.S. population age 75 and older is expected to increase
         by 28.7%, from  approximately 13.0 million in 1990 to over 16.8 million
         by the  year  2000,  and the  number  of  persons  age 85 and  older is
         expected  to  increase  39.3%  during  the  1990s.  This  age  group is
         projected to increase by 33.2%  between the years 2000 and 2010.  It is
         estimated by the United States Bureau of census that  approximately 50%
         of the population of seniors over age 85 need  assistance with ADLs and
         approximately 50% of such seniors develop  Alzheimer's disease or other
         forms of dementia. According to Claritas, Inc., a nationally recognized
         demographics  provider,  over 54 % of those individuals 80 years of age
         and older in 1997 had  incomes of $15,000  and above and 35 percent had
         incomes of $25,000 and above.  Accordingly,  the Company  believes that
         the number of seniors who are able to afford  high-quality  residential
         environments,  such as those  offered by the Company,  has increased in
         recent years.

         Lower Average Cost - The Company  believes that the average annual cost
         to  residents   receiving   assisted   living  care  in  the  Company's
         communities is  significantly  less than the cost of receiving  similar
         care in a skilled nursing  center.  According to the Marion Merrell Dow
         Inc. Managed Care Digest Series, Institutional Digest 1995, the average
         annual cost per person in 1994 in the United States for private nursing
         home care was approximately $36,000.

         Changing  Supply of  Long-term  Care Beds - Most of the states in which
         the Company currently operates have enacted certificate of need ("CON")
         or similar  legislation  that restricts the supply of licensed  nursing
         center beds.  These laws generally  limit the  construction  of nursing
         centers  and the  addition  of beds or  services  to  existing  nursing
         centers,  and hence tend to limit the available  supply of  traditional
         nursing  home beds.  In  addition,  some  long-term  care  centers have
         started to convert  traditional  nursing home beds into sub-acute beds.
         The Company also  believes that high  construction  costs and limits on
         government reimbursement for the full cost of construction and start-up
         expenses  also will  constrain  the growth  and  supply of  traditional
         nursing home centers and beds. The Company expects that this tightening
         supply of nursing beds coupled with the aging population will create an
         increased demand for assisted living communities.


Business Strategy

The Company  believes that  significant  growth  opportunities  exist to provide
assisted living services to the rapidly growing elderly population.  The Company
has expanded its operations  through the  acquisition of individual  communities
and assisted living  companies.  The Company also seeks to improve the operating
performance  of  its  communities  through  the  continued  enhancement  of  its
operations.

The majority of the Company's current communities are operated and marketed on a
private-pay, single occupancy basis. Most double occupancy is non-related people
who are state-assisted residents. Most of the Company's state-assisted residents
are in Texas and North Carolina communities. Texas is one of several states that
has a Medicaid waiver program currently operating. North Carolina has one of the
best reimbursement  rates in the nation for assisted living and was a pioneer in
supporting the  development of assisted living as one way of containing the cost
of caring for the state's aging population.

As  America  ages,   the  Company   believes  that  more  states  will  adopt  a
reimbursement  policy  similar  to those of Texas and North  Carolina,  which is
primarily  a double  occupancy  approach.  Some,  however,  may  stress a single
occupancy approach.  The Company believes that the assisted living industry will
continue as a private-pay  industry for the foreseeable  future,  but may become
more  price-sensitive as more people need assisted living for longer periods due


                                       4

<PAGE>

to increased life spans. Costs of caring for an aging America may become more of
a  private-pay,  state-assisted  partnership  than  currently  exists.  However,
although  Medicaid  coverage  is common,  participation  is not.  Texas had only
approximately 1,300 people participating in its Medicaid assisted living program
in 1998.

The  Company  uses the same  development  strategy  for  special  care  units in
combined  Alzheimer's and assisted living communities and dedicated special care
communities.  The units and common space are designed  for  flexibility  so that
they can be primarily  single  occupancy but also be used as double  occupancy -
again, based on market demand.

The Company  believes  that this  occupancy-flexible  development  strategy will
provide a competitive  advantage over its  competitors who do not have units and
common space large enough to readily accommodate double occupancy.

The Company's top management has extensive  acquisition  experience and contacts
in the assisted  living and long-term care industry.  The Company  believes that
building by acquisition  is the best way to meet its growth goals.  Full service
retirement and assisted living industry is very fragmented and still primarily a
single proprietor business.

Acquisition Strategy - The Company may acquire one or more communities or entire
assisted living companies as a means of entry into new markets and may also make
acquisitions  within its  existing  regions  to gain  further  market  share and
leverage  its  existing  operating  infrastructure.   In  reviewing  acquisition
opportunities,  the Company  considers,  among  other  things,  the  competitive
climate, the current reputation of the community or its operator, the quality of
its  management,  the  need  and  costs  to  reposition  the  community  in  the
marketplace,  the  construction  quality  and any  need for  renovations  of the
community and the opportunity to improve or enhance its operating  results.  The
Company also sells some of the  communities it acquires when they don't fit with
the Company's long range strategy.

Operating Strategy - The Company's  operating strategy is to achieve and sustain
a strong  competitive  position within its chosen markets as well as to continue
to enhance the  performance  of its  operations.  The Company  will also seek to
enhance its current operations by (i) maintaining and improving  occupancy rates
at its communities;  (ii) opportunistically increasing resident service fees and
(iii) improving operating efficiencies.

Offer Residents  Customized Care and Service Packages - The Company  continually
seeks  to  expand  its  range of  services  to meet  the  evolving  needs of its
residents.  The Company  offers each of its  residents a  personalized  assisted
living  service plan which may include any  combination  of basic  support care,
personal  care,  supplemental  services,   wellness  services  and,  if  needed,
Alzheimer's  and  special  care  services,  all subject to the level of services
allowed to be offered by the licensing in place at each  community.  By offering
services in an  "unbundled"  manner,  charging only for the services  needed and
involving  the active  participation  of the  resident,  the  Company is able to
customize its service plans to meet the specific  needs of each  resident.  As a
result,  the Company believes that it is able to maximize customer  satisfaction
while avoiding the high cost of delivering all services to all residents without
regard  to need or  choice.  The care  plan for each  resident  is  periodically
reviewed and updated by the Company, the resident, the resident's family and the
resident's  physician.  The Company also uses preferred home health  agencies in
many of its  communities  to  increase  the  level of  services  it can  provide
residents.

Maintain  and Improve  Occupancy  Rates - The Company also seeks to maintain and
improve  occupancy  rates by  continuing  to (i) attract new  residents  through
marketing  programs  directed  towards  family  decision  makers,  namely  adult
children and potential  residents,  (ii) actively seek referrals from hospitals,
rehabilitation hospitals, physicians clinics, home healthcare agencies and other
acute and sub-acute  healthcare  providers in the markets  served by the Company
and (iii)  develop new market  niches such as respite  care,  adult day care and
other specialty care programs sought by caregivers.

Selectively  Increase  Service  Pricing Levels - The Company  regularly  reviews
opportunities  to increase  resident  service fees within its existing  markets,
while maintaining  competitive market positions.  In keeping with this strategy,
the Company will  continue to offer high  quality  assisted  living  services at
average to above average prices and generally target private-pay residents.  The
Company's  private-pay residents are typically seniors who can afford to pay for
services  from  both  their  own and  their  family  financial  resources.  Such
resources may include social security, investments,  proceeds from the sale of a
residence,  contributions  from  family  members  and  insurance  proceeds  from
long-term care insurance policies.


                                       5

<PAGE>

Improve  Operating  Efficiencies  - The Company  seeks to improve the  operating
results of its  communities  by actively  monitoring  and managing its operating
costs. In addition,  the Company believes that concentrating  communities within
selected  geographic  regions  may  enable  the  Company  to  achieve  operating
efficiencies  through  economies  of  scale,  reducing  corporate  and  regional
overhead and providing for more effective  management  supervision and financial
controls.  The Company is also able to obtain volume discounts  through enhanced
purchasing  power for a variety of items  including food,  supplies,  insurance,
equipment and other items.

Offer  Alzheimer's  and Other Dementia  Services - As of March 1999, the Company
had 12 communities  with distinct  special care wings  specifically  designed to
serve the needs of  individuals  with  Alzheimer's  disease  and other  forms of
dementia.  In some of its existing  communities,  the Company plans to convert a
portion of its existing units into a distinct  Alzheimer's wing which will allow
the Company to offer  services to the elderly  with this disease and other forms
of dementia, will create an opportunity for residents to age in place within the
same  community  and will allow  special  security  and  support of  Alzheimer's
residents. The Company believes this will allow it to continue serving residents
for a  longer  period  of time  and  provide  a  desirable  alternative  for its
residents and their  families.  The Company's  experience and research  indicate
that Alzheimer's  residents often respond better by sharing a suite with another
Alzheimer's   resident   rather  than  being  in  a  single   occupancy   suite.
Consequently,  the Company's  Alzheimer's  programs are designed to allow double
occupancy, although rooms are available on a single occupancy basis.


Assisted Living Services

The Company offers a wide range of full service  retirement and assisted  living
care and services to its  residents.  The  residents are allowed to select among
the services  offered beyond basic support services and are charged only for the
services  they need.  Management  believes  this  provides  the  Company  with a
competitive  advantage over other industry service  providers who offer discrete
levels of  services  and base  their  charges on the level of  services  offered
regardless of whether a resident requires or uses all of the services  available
at a particular level.

The services offered by the Company can generally be categorized as follows:

         Basic Support Services - These services  include  providing up to three
         meals  per day in a  common  dining  room,  special  dietary  planning,
         laundry,  general housekeeping,  organized social and other activities,
         transportation, maintenance, utilities (except telephone), security and
         24-hour emergency call monitoring.

         Supplemental Services - These services include performing, coordinating
         or   assisting   with  bill   paying,   banking,   personal   shopping,
         transportation, appointments, pet care and reminder services.

         Personal Care Services - These services  include  providing  assistance
         with  activities  of  daily  living  (the  ADL's)  such as  ambulation,
         bathing, eating, dressing, personal hygiene and grooming.

         Wellness  Services  -  These  services  include   assistance  with  the
         administration  of medication and health  monitoring by a nurse,  which
         are provided as permitted by government regulation.

         Alzheimer's  and  Special  Care  Services - The  Company has a distinct
         Alzheimer's  special  care  wing  in 12 of  its  existing  communities.
         Alzheimer's  care  includes  a higher  24-hour  staff  ratio to provide
         oversight and around-the-clock  scheduled  activities.  The Alzheimer's
         care wing is secured from the rest of the building.


Properties

Operating  Communities - The following table sets forth certain information with
respect to communities  that were operated by the Company at March 31, 1999. The
Company owns, or leases these communities. The Company considers its communities
to be in good  operating  condition  and suitable for the purpose for which they
are being used.



                                       6

<PAGE>

<TABLE>

<CAPTION>

                              EXISTING COMMUNITIES
                                                                                        Community
                                                          Care               Resident   Operations
            Community                  Location           Level     Units   Capacity(1) Commenced     Ownership
  -----------------------------------------------------------------------------------------------------------------
<S>                             <C>                     <C>          <C>       <C>        <C>         <C>

  Berne Village                  New Bern, NC           S, FE, DC    153       186        Oct-93      Owned (2)
  Camelot                        Harlingen, TX              S         57        57        Sep-94      Owned (2)
  Camelot Assisted Living        Harlingen, TX           FE, DC       83       129        Jan-98      Leased (3)
  Country Oaks of Chiefland      Chiefland, FL             FE         37        73        Dec-95      Owned (2)
  Countrytime Inn                Kings Mountain, NC      FE, DC       31        62        Jun-95      Owned (2)
  Crown Pointe                   Corona, CA               S, FE      163       173        Jan-93      Owned (2,5)
  Graybrier                      Southern Pines, NC      FE, DC       55       110        Feb-94      Owned (2)
  Greenbriar at Denison          Denison, TX             FE, DC       44        75        May-96      Owned (2)
  Greenbriar at Muskogee         Muskogee, OK              FE         48        75        Mar-97      Owned (2)
  Greenbriar at Sherman          Sherman, TX               FE         48        75        Mar-98      Owned (2)
  La Villa                       Roswell, NM             FE, DC       82       121        Nov-96      Leased (3)
  Maranatha Manor                Spartanburg, SC          FE,DC       44       108         1997       Owned (2)
  Meadowbrook Place              Baker, OR                 FE         50        60        Dec-92      Owned (2)
  Neawanna by the Sea            Seaside, OR              S, FE       58        59        Jan-90      Leased (4,6)
  Oak Park, Ft Worth             Fort Worth, TX            FE        149       157        Jan-98      Leased (3)
  Pacific Pointe                 King City, OR              S        114       114        Jan-93      Leased (3)
  Palm House                     Fort Worth, TX             S        155       155         1985       Leased (3)
  Rose Garden Estates            Ritzville, WA             FE         21        23        Nov-95      Owned (2)
  Rose Tara Plantation           King, NC                  FE         38        65        Sep-94      Owned (2)
  Summer Hill                    Oak Harbor, WA            FE         59        59        Feb-94      Owned (2)
  Sweetwater Springs             Lithia Springs, GA      FE, DC       48        49        Oct-96      Leased (&)
  Tandy                          Fort Worth, TX            FE         84       164         1984       Leased (3)
  The Terrace                    Portland, OR              FE         65        73        May-91       Owned
  Villa del Rey Merced           Merced, CA                 S         92        92        Dec-79      Leased (3)
  Villa del Rey Roswell          Roswell, NM              S, FE      135       150        Oct-88      Leased (4,6)
  Villa del Rey Visalia          Visalia, CA                S         98        98        Dec-79      Leased (3)
  Villa del Sol                  Roswell, NM                S         12        12        Dec-95      Owned (2)
  Wedgwood Terrace               Lewiston, ID            FE, DC       40        55        Nov-95      Owned (2)
  Windsor House Florence         Florence, SC            FE, DC       26        41        Sep-98      Owned (2)
  Windsor House Greenville       Greenville, SC          FE, DC       31        50        Nov-97      Owned (2)
  Windsor House West             Spartanburg, SC         FE, DC       76       110         1991       Owned (2)
  -----------------------------------------------------------------------------------------------------------------
  Total                                                              2196     2830

</TABLE>

         Key:

         S basic support and supplemental services are offered.

         FE basic support, supplemental, personal care and wellness services are
         offered ("Frail Elderly").

         DC Alzheimer's and special care services are offered ("Dementia Care").



     (1)  Reflects  licensed  capacity for Assisted Living and Dementia Care and
          actual number of units for Independent Living.

     (2)  Subject to first mortgage.  Historically, each community has generally
          been  pledged  as  collateral  on a single  mortgage  or deed of trust
          securing a note payable to a bank, financial  institution,  individual
          or other lender.  The mortgages and deeds of trust mature between 1999
          and 2018 and  bear  interest  at fixed  and  variable  interest  rates
          ranging from 7.5% to 11.35% as of December 31, 1998.  The Crown Pointe
          community   is  subject  to  a  mortgage   and  note  payable  to  the
          Redevelopment  Agency of the City of  Corona,  California,  is payable
          into a sinking fund  semi-annually in increasing  amounts from $65,000
          to  $420,000  through  May 2015,  and  bears  interest  at a  variable
          interest rate equal to 5.4% at December 31, 1998.  Future  communities
          owned  and  mortgaged  by  the  Company  will  likely  be  pledged  as
          collateral  for mortgage  credit lines,  which relate to more than one
          community.  See Item 6. "Management's  Discussion and Analysis or Plan
          of Operation - Liquidity and Capital Resources."


                                       7

<PAGE>

     (3)  Leased from third party  individuals  or  partnership.  Initial  lease
          terms generally range from 10 to 20 years, and mature between 1999 and
          2011. The Company is responsible  for all costs  including  repairs to
          the community,  property taxes and other direct operating costs of the
          community.  Leases  generally  include  clauses that allow for rent to
          increase over time based on a specified  schedule or on an increase in
          the  consumer  price  index.  Generally,  the Company has an option to
          purchase the community after a specified  period,  or at expiration of
          the lease, at a price generally equal to market value.

     (4)  Community is leased from a Real Estate Investment Trust. The lease was
          part of a sale - leaseback  transaction.  The lease  commenced in 1994
          and  expires  in 2009.  The  Company  has an  option to  purchase  the
          community  in 2004 and in 2009 for an amount  equal to the  greater of
          the  sales  price  or  the  current   replacement   cost  less  actual
          depreciation.

     (5)  Company owns 60% of real estate and the lessee.

     (6)  Company owns 49% of lessee. Victor L. Lund, a director of the Company,
          owns the other 51%,  and the  Company  has an option to  purchase  his
          interests in these entities for $10,000.

     (7)  Leased from a REIT for 15 years expiring in 2011.



Plans for  Construction  - The Company  generally  retains  independent  general
contractors to construct its  communities.  The Company  approves all aspects of
development   including,   among  other  things,   site  selection,   plans  and
specifications,  the proposed construction budget and selection of the architect
and general  contractor.  The Company estimates the average  capitalized cost to
develop,   construct  and  open  a  community   (including   land   acquisition,
architectural and engineering, construction period interest and loan fees) to be
approximately  $75,000  per unit,  and average  construction  time for a typical
community to be  approximately  twelve to eighteen  months,  depending  upon the
number of units. The Company estimates that, once opened, it takes approximately
twelve to  eighteen  months  after  licensure  for each  community  to achieve a
stabilized  occupancy level of 92% or higher. The Company  anticipates that each
community  will  have  an  average  operating  loss  (before   depreciation)  of
approximately  $600,000  prior  to  reaching  stabilized  occupancy.   Expansion
projects generally cost less to build and to fully lease.

Development and Construction Risks - The Company's growth strategy is dependent,
in part,  on its  ability  to  develop  and  construct  additional  communities.
Development  projects generally are subject to various risks,  including zoning,
permitting,  healthcare  licensing  and  construction  delays that may result in
construction cost overruns, longer development periods and, accordingly,  higher
than anticipated start-up losses. Although the Company has extensive development
experience,  closely manages each development project and regularly monitors the
contractors  constructing  the  Company's  communities,  project  management  is
subject to a number of  contingencies  over which the  Company  has little or no
control and which might adversely affect project costs and completion time. Such
contingencies  include  shortages  of,  or the  inability  to  obtain,  labor or
materials,  the  inability  of  contractors  to perform  under their  contracts,
strikes,   adverse  weather   conditions  and  changes  in  applicable  laws  or
regulations or in the method of applying such laws and regulations.  The Company
intends to rely on third-party  developers to construct some of the new assisted
living  communities  planned by the Company.  There can be no assurance that the
Company will not experience  difficulties  in working with  developers,  project
managers,  general  contractors and  subcontractors,  any of which  difficulties
could result in increased  construction  costs and delays.  As a result of these
various factors,  there can be no assurance that the Company will not experience
construction  delays,  that it will be successful in developing and constructing
currently planned or additional communities or that any developed community will
be economically successful. If the Company's planned development is delayed, the
Company's business, operating results and financial condition could be adversely
affected.

Need for Additional Financing; Risk of Rising Interest Rates, Development Delays
and Cost  Overruns - To achieve its growth  objectives,  the  Company  will need
sufficient  financial  resources  to  fund  its  development,  construction  and
acquisition activities.  Accordingly, the Company's future growth will depend on
its ability to obtain additional  financing on acceptable terms. There can be no
assurance  that any newly  constructed  communities  will  achieve a  stabilized
occupancy  rate and attain a resident mix that meets the Company's  expectations
or generate sufficient positive cash flow to cover operating and financing costs
associated  with such  communities.  The Company will,  from time to time,  seek
additional funding through public or private financing, including equity or debt
financing.  If additional  funds are raised or acquisitions are made in exchange
for equity  securities,  stockholders  may experience  dilution.  Further,  such
equity securities may have rights,  preferences or privileges senior to those of
the Common  Stock.  To the extent the Company  finances its  activities  through

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<PAGE>


debt, sale/leaseback or leasing arrangements,  the Company may become subject to
certain  financial and other  covenants which may restrict its ability to pursue
its rapid growth strategy. There can be no assurance that adequate equity, debt,
sale/leaseback  or lease  financing  will be  available  as  needed  or on terms
acceptable to the Company.  A lack of available funds may require the Company to
delay,  scale back or eliminate all or some of its  development  and acquisition
projects and could have a material  adverse  effect on the  Company's  business,
financial  condition  and  results  of  operations.  See  Item 7.  "Management's
Discussion and Analysis or Plan of Operation - Liquidity and Capital Resources."

Repair and Maintenance - The Company  conducts  routine repairs and maintenance,
as needed,  of its  communities  on a regular  basis.  Several of the  Company's
communities acquired in the Wedgwood,  American Care and Villa acquisitions have
been in operation for ten years or more.  The Company has no other current plans
for significant expenditures relating to its existing communities, and considers
them to be in good repair and working order.


Community Description

The Company's existing communities as of March 1999 range in size from 12 to 163
units,  are from one to three  stories and from 10,000 to 148,000  square  feet.
Each  community has a large family room,  usually  equipped with a fireplace,  a
spacious open dining area, library, TV room,  commercial kitchen,  beauty salon,
laundry and indoor and outdoor recreational areas. Units generally range in size
from  approximately  330 to 400 square feet for a studio unit, 470 to 650 square
feet for a one bedroom  unit and 680 to 850 square feet for a two bedroom  unit.
Assisted  living  units  typically  include  a  private  bathroom,  kitchenette,
closets,  living and sleeping  areas,  a lockable  door,  emergency call system,
individual temperature controls and fire alarm and sprinkler system, among other
amenities.

Alzheimer's  care units are  approximately  the same size as studios and contain
only sleeping,  limited storage and, in some of the units,  bathroom areas. Most
do not have emergency call systems but do have sprinkler and fire alarm systems.


Operations

The day-to-day operations of each community are managed by an Executive Director
who is responsible for all operations of the community, including overseeing the
quality  of  care  and  services,  marketing,  coordinating  social  activities,
monitoring  financial  performance and ensuring  appropriate  maintenance of the
grounds and building. The Company also consults with outside providers,  such as
pharmacists and dieticians,  to assist  residents with medication  review,  menu
planning and  response to any special  dietary  needs.  Personal  care,  dietary
services,  housekeeping  and laundry  services are  performed  primarily by line
staff who are either  part or  full-time  employees  of the  Company and who are
trained  to  perform a  variety  of such  services.  Most  building  maintenance
services are  performed by part or full-time  employees,  while  elevator,  HVAC
maintenance  and  landscaping  services are  generally  performed by third party
contractors.

The Company's  senior  management and other  personnel,  located at the Addison,
Texas home office, provide support services to each of the Company's regions and
its communities,  including  development of operational  standards,  budgets and
quality assurance  programs,  recruiting,  training and financial and accounting
services  such  as  data  processing,  accounts  payable,  billing  and  payroll
services.  Corporate  personnel,  regional  and  community  Executive  Directors
collaborate with respect to the establishment of community goals and strategies,
quality  assurance  oversight,  development of Company  policies and procedures,
development and implementation of new programs, cash management,  human resource
management and community development.

The Company has attracted and  continues to seek highly  dedicated,  experienced
personnel.  The Company has created  formal  training  programs  accompanied  by
review and evaluation  procedures to help ensure quality care for its residents.
The Company  believes  that  education,  training  and  development  enhance the
effectiveness of its employees.  All employees are required to complete training
programs which include a core curriculum  comprised of personal care basics, job
related  specific  training,  Alzheimer's  disease  processes,  first aid,  fire
safety, nutrition,  infection control and customer service.  Executive Directors
receive  training in all of these areas,  plus marketing,  community  relations,
healthcare  management,  life  skills  programming  and  fiscal  management.  In

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<PAGE>

addition to some  classroom  training,  the  Company's  communities  provide new
employees with on the job training,  utilizing experienced staff as trainers and
mentors.


Quality Assurance

The Company  coordinates  quality assurance  programs at each of its communities
through its  corporate  headquarters  staff and through its regional  operations
staff.  The Company's  commitment to quality  assurance is designed to achieve a
high  degree  of  resident  and  family  member  satisfaction  with the care and
services  provided  by  the  Company.   In  addition  to  ongoing  training  and
performance  reviews of all employees,  the Company's  quality control  measures
include:

The Greenbriar Way - At Greenbriar the foremost mission is excellence in service
to  residents.  To that  end,  the  Company's  leadership  dedicates  itself  to
excellence in the  supervision and  professional  development of employees whose
day-to-day duty is to provide that service.

The Company's  philosophy of  management  is to  demonstrate  by its actions and
require from its employees  high standards of personal  integrity;  to develop a
climate of openness and trust; to demonstrate respect for human dignity in every
circumstance;  to be supportive  in all  relationships;  to promote  teamwork by
involving  employees in the management of their own work and to promote the free
expression of ideas and opinions.

The  Greenbriar  Chaplaincy  Program - The Company has  employed a Chaplain as a
consultant and he has established a  "Spirituality  in Aging" program that helps
the  Company's  goal  of  meeting  the  emotional  and  spiritual  needs  of its
residents,  their  families,  and the employees of  Greenbriar.  The Chaplain is
available for  immediate  support on a toll free number and visits the Company's
communities  on a scheduled  basis to conduct  training  seminars for residents,
families, employees and the public.

Family and Resident  Feedback - The Company surveys residents on an annual basis
to monitor  the  quality of  services  provided  to  residents  and the level of
satisfaction  of  residents  and  their  families.   The  Company  is  presently
implementing  surveys of family  members of  residents to monitor the quality of
services.  The Company  also plans to  establish a toll free  customer  response
telephone line to encourage feedback from residents,  family members,  and other
visitors in its communities.

Regular Community Inspections - Community inspections are conducted by corporate
personnel  (including the vice president of construction  and  maintenance,  the
director of  nutritional  services  and the  director of medical  services)  and
regional staff on a regular basis. These inspections cover the appearance of the
exterior and grounds,  the  appearance  and  cleanliness  of the  interior,  the
professionalism  and friendliness of staff,  resident care plans, the quality of
activities and the dining program, observance of residents in their daily living
activities and compliance with governmental  regulations.  A detailed  community
audit program is used to ensure the  inspections  are thorough and to facilitate
required corrective action.


Marketing

The Company's marketing and sales efforts are undertaken at corporate,  regional
and local levels.  This effort is intended to create  awareness of the community
and  its  services  among  prospective  residents,  their  families,  other  key
decision-makers and professional referral sources. The corporate marketing staff
develops overall  strategies for promoting the community  throughout its markets
and continuously  assesses the success of its efforts. Most communities have, on
staff,  a  community  relations  coordinator  dedicated  to sales and  marketing
activities  who is guided and  trained by  corporate  marketing  personnel.  For
smaller  communities  who do not have a  community  relations  coordinator,  the
Executive Director performs the sales and marketing functions.

Prior to opening new communities,  the Company commences an aggressive marketing
campaign  by opening a sales  office in close  proximity  to the new  community.
During this  pre-opening  marketing  period,  the Company's  personnel  actively
contact  local  referral  sources,  which  generally  account  for a majority of

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<PAGE>

resident  referrals.   In  addition,  the  Company  typically  engages  in  more
traditional  types of  marketing  activities,  such as  direct  mailings,  print
advertising,  signs and yellow page advertising.  These marketing activities and
media  advertisements  are  directed  to  potential  residents  and their  adult
children,  who often  comprise the primary  decision  makers for placing a frail
elderly relative in an assisted living setting.


Government Regulation

Healthcare is an area of extensive and frequent  regulatory change. The assisted
living  industry is relatively  new and,  accordingly,  the manner and extent to
which it is  regulated  at the federal and state  levels is evolving at a steady
pace.  Currently,  twenty-three states have a licensure category or statute that
uses the term "assisted living".  Several states have proposed regulations using
the term.  Twenty-two  states  have  specific  language  in  statute,  licensure
regulations  (including  states with draft  regulations) or Medicaid policy that
addresses the philosophy of assisted living. Several states, including Texas and
North  Carolina have or are reviewing the licensure  regulations  and increasing
the role of state  personnel in monitoring and  controlling  the assisted living
industry.

In the  states in which the  Company  operates,  a license  is not  required  to
provide basic support services.  Currently, assisted living and Alzheimer's care
communities are not  specifically  regulated as such by the federal  government.
However,  the Company's  communities  are subject to regulation and licensing by
state and  local  health  and  social  service  agencies  and  other  regulatory
authorities.  Although  regulatory  requirements vary from state to state, these
requirements  generally address,  among other things, staff education,  training
and records;  staffing levels; community services,  including administration and
assistance   with   self-administration   of  medication;   physical   community
specifications;  size and furnishing of community  units and common areas;  food
and housekeeping  services;  and emergency  evacuation plans and resident rights
and responsibilities.  Most of the Company's communities are required to possess
state  licenses in order to provide the levels and types of services  which they
offer. A limited number of the Company's communities are not required to possess
such licenses  because they do not supply care and/or  supervision  to an extent
requiring them to be licensed under their respective state's laws. The Company's
communities are also subject to various state and local building codes and other
ordinances, including safety codes. Management anticipates that the states which
are  establishing  regulatory  frameworks for assisted living  communities  will
require the licensing of assisted living  communities and will establish varying
requirements  with  respect to such  licensing.  The  Company has  obtained  all
required  licenses for each of its communities.  Each of the Company's  licenses
must be renewed annually.

Currently,  only  a  few  states  have  CON  requirements  for  assisted  living
communities.   If  federal  and  state  reimbursements   increase  or  there  is
overbuilding in the industry other states may initiate CON requirements. If this
occurs,  the  operators  who can grow rapidly in the next few years could have a
distinct advantage, in as much as this barrier to entry could limit overbuilding
and competition such as occurred in some nursing home markets in the past.

Like healthcare  centers,  assisted  living  communities are subject to periodic
survey  or  inspection  by  governmental  authorities.  From time to time in the
ordinary  course of  business,  the Company  receives  deficiency  reports.  The
Company reviews such reports and takes appropriate  corrective action.  Although
most  inspection  deficiencies  are resolved  through a plan of correction,  the
reviewing  agency  typically  is  authorized  to take action  against a licensed
community where  deficiencies are noted in the inspection  process.  Such action
may include  imposition of fines,  imposition of a  provisional  or  conditional
license or suspension or revocation of a license or other sanctions. Any failure
by the  Company to comply  with  applicable  requirements  could have a material
adverse  effect on the Company's  business,  financial  condition and results of
operations.  The  Company  believes  that  its  communities  are in  substantial
compliance with all applicable regulatory requirements.

As noted  earlier,  many  states  have  already  elected to  participate  in the
Medicaid  Home and  Community  Care Options Act of 1990  ("MHCCOA")  and several
other  states  are  studying   the   program.   Texas,   where  the  Company  is
headquartered,  is one of the states that has already  elected to participate in
the program.  Under MHCCOA,  states now have the option to use Medicaid funds to
support  services for low income,  frail older  persons,  in places of residence
other than nursing  centers.  The program allows the state to amend its Medicaid
statutes to use funds in this manner,  thus  avoiding  the  repeated  process of
obtaining a Medicaid waiver. Any community participating in this payment program
must meet all applicable state and federal rules and regulations.


                                       11

<PAGE>

The Company participates in federal and state reimbursement  programs.  However,
the Company  expects the bulk of its  revenues  to come from  private  payments.
Conversely,  if the  proposed  Medicaid  block  grants are signed into law,  the
Company could  experience a dramatic  increase in revenues  from these  sources,
particularly  with respect to its double occupancy units.  Many of the Company's
existing  communities  can  accommodate  double  occupancy  and still  provide a
quality lifestyle.

The Americans with Disabilities Act ("ADA"),  enacted July 26, 1990, has had and
will continue to have a major effect on the full service residential  retirement
and  assisted  living  industry.  The  communities  developed or acquired by the
Company must be in compliance with this act. The Fair Housing  Amendments Act of
1988 also prohibits discrimination against the handicapped in the sale or rental
of a dwelling, or in the provision of services or communities in connection with
such a  dwelling.  This  intensifies  the  need to be in  compliance  with  ADA.
Regulation  of the  industry  is  likely  to  increase,  particularly  for those
providers accepting Medicaid reimbursements.

Federal  and  state  governments  regulate  various  aspects  of  the  Company's
business.  The Company is subject to federal and state  anti-remuneration  laws,
such as the federal health care program  anti-kickback law which governs various
types of financial  arrangements  among health care providers and others who may
be in a position to refer or  recommend  patients to these  providers.  This law
prohibits direct and indirect  payments that are intended to induce the referral
of  patients  to,  the  arranging  of  services  by,  or the  recommending  of a
particular  provider of health care items or services.  The federal  health care
program  anti-kickback  law has been  interpreted  to apply to some  contractual
relationships  between  health care  providers and sources of patient  referral.
Similar state laws vary from state to state, are sometimes vague and have rarely
been interpreted by courts or regulatory  agencies.  Violation of these laws can
result in loss of licensure, civil or criminal penalties and exclusion of health
care  providers  or  suppliers  from  furnishing  covered  items or  services to
beneficiaries  of the federal  health care program.  The Company  cannot be sure
that these laws will be interpreted consistently with its practices.

In compliance  with underlying  state bond financing,  rents at one community in
Oregon  must be  approved  by an agency  of the  state.  Two  other  communities
financed  with  loans   guaranteed  by  the  Department  of  Housing  and  Urban
Development ("HUD") have rents requiring approval by HUD.


Competition

The long-term care industry is highly  competitive  and the assisted  living and
Alzheimer's  care  businesses  in  particular  have and will  continue to become
increasingly competitive in the future. The Company competes with other assisted
living companies and numerous other companies  providing  similar long-term care
alternatives such as home healthcare agencies, community-based service programs,
retirement  communities and convalescent  centers (nursing homes).  In addition,
the Company competes with a number of tax-exempt  nonprofit  organizations which
can finance  capital  expenditures on a tax-exempt  basis or receive  charitable
contributions  unavailable  to the Company and which are  generally  exempt from
income tax. In most markets  where the Company  operates or plans to operate the
level of competition  is rapidly  increasing  both from  regional,  national and
local providers. The Company expects this trend to continue and some markets may
be  overbuilt  and  more  will be  overbuilt  in the  future.  If  reimbursement
programs,  such  as  the  Medicaid  waiver  program,  increase  assisted  living
competition  will grow from  existing and new  companies  focusing  primarily on
assisted living.  Nursing home centers that provide  long-term care services are
also a source of  competition  for the  Company,  particularly  with  respect to
Alzheimer's  care  services.   Many  of  the  Company's  present  and  potential
competitors have, or may have access to, greater financial, management and other
resources than those of the Company.  There can be no assurance that competitive
pressures will not have a material adverse effect on the Company.

The Company  competes with other  providers of elderly  residential  care on the
basis of the breadth and quality of its services, the quality of its communities
and price. The Company believes that it competes favorably in these areas and in
its recruitment and retention of qualified  healthcare  personnel and reputation
among local referral sources.  The Company also competes with other providers of
long-term care in the acquisition and development of additional communities.

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<PAGE>


As noted, the Company competes with other providers of long-term care. This also
applies to attracting and retaining  qualified and skilled personnel.  In recent
years,  the  healthcare   industry  has  experienced  a  shortage  of  qualified
healthcare  professionals.  The Company's  operations require few professionally
certified (RN or LPN) staff,  primarily for supervision of care staff. While the
Company  has  been  able  to  retain  the  services  of an  adequate  number  of
professionals to staff its communities  appropriately and maintain its standards
of quality care,  there can be no assurance  that  continued  shortages will not
affect the ability of the Company to maintain the desired  staffing  levels.  In
some  markets,   non-licensed   staff  have  become  a  recruitment   challenge.
Unemployment  rates  are  significantly  below  the  national  average  in a few
markets.

The  Company  is  seeking  sites  and   acquisition   candidates   primarily  in
non-metropolitan  communities located in the western,  southern and southeastern
regions of the United States that are not currently  served or are under served.
The Company is identifying these markets and intends to provide premier services
and amenities at average to above average prices.  It is also providing  special
care  services  in  a  residential  setting  for  those  with  memory  loss  and
Alzheimer's,  the primary  cause of memory loss.  These  residents are not mixed
with other assisted living residents. The Company believes that this combination
of target  markets  and  services  may  improve  its  ability  to  compete  with
non-specialized assisted living communities and nursing homes.


Insurance

The provision of personal and  healthcare  services  entails an inherent risk of
liability  compared to more institutional  long-term care communities,  assisted
living communities of the type operated by the Company,  especially its dementia
care  communities,  offer  residents a greater degree of  independence  in their
daily lives.  This increased  level of  independence,  however,  may subject the
resident  and the  Company  to  certain  risks  that  would be  reduced  in more
institutionalized  settings. The Company currently maintains liability insurance
intended to cover such claims which it believes is adequate  based on the nature
of the risks, its historical experience and industry standards. The Company also
carries  property  insurance on each community in amounts that it believes to be
adequate and standard in the industry.


Environmental Matters

Under  various  federal,  state and local  environmental  laws,  ordinances  and
regulations,  a current or  previous  owner or  operator  of real  estate may be
required to investigate and clean up hazardous or toxic  substances or petroleum
product  releases  at the  property,  and may be held  liable to a  governmental
entity or to third parties for property damage and for  investigation  and clean
up costs  incurred by such parties in connection  with the  contamination.  Such
laws typically impose clean up  responsibility  and liability  without regard to
whether the owner or operator knew of or caused the presence of the contaminants
and the liability  under such laws has been  interpreted to be joint and several
unless the harm is divisible and there is a reasonable  basis for  allocation of
responsibility.  The costs of  investigation,  remediation  or  removal  of such
substances  may be  substantial  and the  presence  of such  substances,  or the
failure to remediate  properly such  property may  adversely  affect the owner's
ability  to sell or lease the  property  or to  borrow  using  the  property  as
collateral.   In  addition,  some  environmental  laws  create  a  lien  on  the
contaminated  site in favor of the government for damages and costs it incurs in
connection  with the  contamination.  Persons who  arrange  for the  disposal or
treatment of hazardous or toxic  substances  also may be liable for the costs of
removal or redemption of such substances at the disposal or treatment community,
whether  or  not  such  community  is  owned  or  operated  by  that  person  or
corporation.  Finally,  the owner or operator of a site may be subject to common
law  claims  by  third  parties  based  on  damages  and  costs  resulting  from
environmental contamination emanating from a site.

The Company has  conducted  environmental  assessments  on most of its  existing
communities  that it operates plus one community it leases that is operated by a
third party.  These  assessments have not revealed any  environmental  liability
that the Company  believes would have a material adverse effect on the Company's
business,  assets or results of  operations  or is the Company aware of any such
environmental  liability.  Wedgwood  operated,  for periods ranging from 2 to 19
years,  nine  communities  for  which  environmental  assessments  have not been

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<PAGE>

obtained.  The Company believes that all of its communities are in compliance in
all material  respects with all federal,  state and local laws,  ordinances  and
regulations  regarding hazardous or toxic substances or petroleum products.  The
Company  has  not  been  notified  by  any  governmental  authority,  and is not
otherwise aware, of any material non-compliance,  liability or claim relating to
hazardous or toxic  substances or petroleum  products in connection  with any of
its communities.


Control by Insiders

As of March 31, 1999, the Company's officers,  directors and affiliated entities
owning more than 5% of the Company's outstanding stock owned approximately 61.1%
of the outstanding shares of Common Stock. Mr. James R. Gilley, President, Chief
Executive Officer and Chairman of the Board of the Company, a corporation wholly
owned by him and his spouse,  beneficially  owned an aggregate of  approximately
30.9% of the  outstanding  Common  Stock of the Company.  Mr.  Victor L. Lund, a
director  of the  Company  and  the  founder  of  Wedgwood,  beneficially  owned
approximately 15.9% of the outstanding shares of Common Stock. Floyd B. Rhoades,
a director  of the Company and  founder of  American  Care,  beneficially  owned
approximately 10.7% of the outstanding shares of Common Stock. In addition,  the
Gilley family owns series D Voting Preferred Stock,  which for stockholder votes
is the equivalent of 675,000 Common Shares.  Accordingly,  such individuals will
have the ability, by voting their shares in concert, to control or significantly
influence (i) the election of the Company's  Board of Directors  and,  thus, the
direction  and future  operations  of the  Company,  and (ii) the outcome of all
other  matters  submitted  to the  Company's  stockholders,  including  mergers,
consolidations and the sale of all or substantially all of the Company's assets.
In addition,  the Company's  officers and directors,  including James R. Gilley,
currently  hold  options or  conversion  rights to acquire  1,594,990  shares of
Common Stock, certain of which options are subject to vesting requirements.  The
issuance of additional  shares of Common Stock pursuant to the exercise of these
stock options granted to management  under the Company's stock option plan would
increase  the number of shares  held by the  Company's  executive  officers  and
directors in the future.


Anti-Takeover Provisions

The Company's Articles of Incorporation and Bylaws contain,  among other things,
provisions  (i)  establishing a classified  board of directors (ii)  authorizing
shares of preferred  stock with respect to which the Board of Directors  has the
power to fix the rights,  preferences,  privileges and restrictions  without any
further vote or action by the stockholders  (iii) requiring  holders of at least
80% of the  outstanding  Common Stock to join  together in  requesting a special
meeting of stockholders  and (iv)  prohibiting  removal of a director other than
for  "cause"  and then only if the  holders  of at least 80% of the  outstanding
Common  Stock vote for such  removal.  The  Company is also  subject to Sections
78.411-78.444  of the Nevada  Revised  Statutes  (the  "Control  Act")  which in
general  prohibits any business  combination  involving the Company and a person
that  beneficially  owns  10% or  more of the  outstanding  Common  Stock  or an
affiliate  or  associate  of the Company who within the past three years was the
beneficial  owner,  directly or  indirectly,  or 10% or more of the  outstanding
Common Stock, except under certain circumstances. The application of the Control
Act and/or the provisions of the Company's  Articles of Incorporation and Bylaws
could  delay,  deter or prevent a merger,  consolidation,  tender offer or other
business  combination or change of control  involving the Company that some or a
majority of the Company's  stockholders  might  consider to be in their personal
best  interests,  including  offers or attempted  takeovers that might otherwise
result in such  stockholders  receiving a premium  over the market  price of the
Common  Stock and may  adversely  affect the market  price of and the voting and
other rights of, the holders of Common Stock.


Employees

At March 31, 1999, the Company employed 1184 employees,  including 754 full-time
and  430  part-time   employees.   The  Company   believes  it  maintains   good
relationships  with  its  employees.   None  of  the  Company's   employees  are
represented by a collective bargaining group.



                                       14

<PAGE>


Corporate Offices

The Company's  principal office is a 27,500 square foot building that it owns in
Addison,  Texas. The Company's  Addison office will meet the Company's needs for
the foreseeable future.


ITEM 2: DESCRIPTION OF PROPERTIES
---------------------------------

See Item 1 for a discussion of properties owned or leased by the Company.


ITEM 3: LEGAL PROCEEDINGS
-------------------------

The  Company  is  involved  from  time to time in  legal  proceedings  that  are
incidental to its business.  The  following are the legal  proceedings  that are
pending at March 1999.


Southern Care Corp. vs Greenbriar, et al.

In Southern Care Corp. v. Medical Resource Companies of America, (former name of
Greenbriar)  Civil  Action No.  94-1132-K,  Superior  Court of  Chatham  County,
Georgia,  the  plaintiff  seeks  damages  exceeding  $1,500,000  relating to the
management  and  operation of four nursing  homes the Company sold to plaintiff.
The  Company  has filed a  counterclaim  for breach of the  management  contract
between the homes and a Company subsidiary.

The  Company  does not  believe it has  breached  any  obligation  to  Plaintiff
regarding  management of the nursing homes and does not believe  Plaintiff  will
prevail on the merits, although there can be no assurance in this regard. At the
same  time  that  Plaintiff  unilaterally  and  without  notice  terminated  the
management   contract,   the  Plaintiff  also  claimed  that   indebtedness   of
approximately $6.7 million assigned to the Company was discharged.

In 1995 the  plaintiff  and the  Company  each filed  cross  motions for summary
judgment on the issue of whether the indebtedness was discharged. On December 3,
1997 the  Georgia  Court of Appeals  granted  Greenbriar's  motion  for  summary
judgment where they determined  that the  indebtedness  was not  discharged.  In
February 1998 the Georgia  Supreme Court refused to hear the matter.  The amount
of indebtedness,  including accrued interest,  is approximately $11 million. The
Company's basis for financial  statement  purposes in the  indebtedness,  net of
related deferred gains, is approximately $ 4.2 million.

The Company has been named as defendant in other lawsuits in the ordinary course
of business.  Management  is of the opinion that these  lawsuits will not have a
material effect on the financial condition of the Company.


ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
-----------------------------------------------------------

No  matters  were  submitted  to a vote of  security  holders  during the fourth
quarter of the year ended December 31, 1998.








                                       15

<PAGE>


                                     PART II

ITEM 5: MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
----------------------------------------------------------------

The Company's Common Stock is traded under the symbol "GBR" and is listed on the
American Stock Exchange.  The high and low closing sales prices of the Company's
Common Stock on the American Stock Exchange during the last two fiscal years:

                                      1998                       1997
                                 High        Low            High        Low
                              ----------- ----------     ----------- ----------

         First Quarter         $17.38     $13.75          $19.25     $13.88
         Second Quarter         12.88       8.94           23.00      18.13
         Third Quarter           8.75       1.63           23.25      19.50
         Fourth Quarter          3.94       1.37           21.00      17.63

The Company has not paid cash  dividends on its Common Stock during at least the
last ten fiscal years and, for the  foreseeable  future,  the Company expects to
retain all  earnings  to finance the future  expansion  and  development  of its
business.  Any  determination to pay cash dividends in the future will be at the
discretion  of the Board of Directors  and will be  dependent  on the  Company's
financial condition,  results of operations,  contractual restrictions,  capital
requirements,  business  prospects  and  such  other  factors  as the  Board  of
Directors deems relevant.  The Company's  ability to pay dividends in the future
may be limited by the terms of future debt financing and other arrangements.

No dividends  can be paid on the  Company's  common  stock if  dividends  are in
arrears on the Company's preferred stock.

The closing price on the Company's common stock on March 31, 1999, was $2.19 per
share. As of March 31, 1999, there were 2,953 holders of record of the Company's
common stock.


ITEM 6: SELECTED FINANCIAL DATA
--------------------------------

<TABLE>

<CAPTION>

                                                          (Amounts in thousands, except per share data)
                                                                 For the Years Ended December 31,

                                                  1998           1997          1996          1995          1994
                                              -------------- ------------- ------------- ------------- --------------
<S>                                           <C>            <C>           <C>           <C>           <C>     

Operating revenue                             $    53,521    $    38,979   $    29,785   $     7,964   $    11,840
Operating expenses                                 55,216         39,958        34,719         9,568        12,176
                                              -------------- ------------- ------------- ------------- --------------
Operating income (loss)                            (1,695)          (979)       (4,934)       (1,604)         (336)

Income (loss) from continuing operations
before income taxes                           $   (10,602)   $   (10,297)  $    (7,995)  $     5,286   $       (78)

Basic and diluted income (loss) per common
share                                         $     (1.86)   $      (.92)  $      (.99)  $      1.04   $       .24

BALANCE SHEET DATA:
Total assets                                  $   130,353    $   151,243   $   116,701   $    47,756   $    45,224
Long-term debt                                $    58,154    $    54,851   $    54,717   $    16,485   $     1,110
Total liabilities                             $    78,516    $    88,726   $    80,549   $    23,131   $    23,080
Preferred stock redemption obligation         $    21,748         -             -             -              -
Total stockholders equity                     $    30,089    $    62,517   $    36,152   $    24,625   $    22,144
</TABLE>


                                       16

<PAGE>


ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
-----------------------------------------------------------------


Overview

During  1994 the  Company  began a series of steps to focus its  business on the
development,  management  and  ownership  of  assisted  living  properties.  The
Company's  historical  businesses  during  the past  five  years  have  included
ownership and operation of skilled nursing and retirement  centers,  real estate
investments  and manufacture  and leasing of electric  convenience  vehicles and
wheelchairs.   The  nursing  and  retirement  centers  and  convenience  vehicle
businesses have been sold and the real estate  investments are being liquidated.
During 1994,  the Company  began  independently  to develop its assisted  living
business,  began  construction  of its first assisted  living  community in July
1995,  and opened that  community to residents on May 30, 1996. By July 1, 1996,
the Company (not  including the  communities  of Wedgwood and American Care) had
three additional  assisted living  communities under  construction.  In order to
increase  the  Company's  presence  in  the  assisted  living  industry,  create
geographic  diversity and obtain  experienced  personnel,  the Company  acquired
Wedgwood in March 1996,  American Care in December 1996, Windsor in October 1997
and Villa in December 1997. The acquisitions of Wedgwood, Windsor and Villa have
been accounted for as purchases,  and the historical financial statements of the
Company do not include any  revenues or earnings  (losses)  attributed  to those
operations  prior to the  acquisition.  The American Care  acquisition  has been
accounted  for  as a  pooling  of  interests  and,  accordingly,  the  Company's
financial  statements  have been restated to include the accounts and operations
of American Care for all periods prior to the acquisition.  At December 31, 1997
the Company  operated  55  communities  which were owned,  leased or managed for
third parties.

During the third quarter of 1998 the Company made several strategic decisions as
to its future  direction.  It was decided that the Company  redirect itself with
the following objectives:

     o    Terminate  existing  management  contracts  whereby the Company  would
          manage  communities for a fee. As of January 1, 1998 the Company had 2
          such contracts.

     o    Reduce the  percentage of residents in the Company's  communities  who
          were dependent on direct  assistance  from  governmental  agencies for
          payment of their fees. As of January 1, 1998  approximately 50% of the
          residents at the Company's communities received government assistance.

     o    Move  toward  direct  ownership  of the  communities  operated  by the
          Company as opposed to long term lease  arrangements.  As of January 1,
          1998  approximately  50% of the  Company's  communities  were operated
          under long-term lease arrangements.

     o    Divest  of  communities   with  limited  future  profit  potential  or
          geographic locations that were isolated from other Company operations.

As of December 31, 1998 the Company had terminated  its management  contracts to
manage for others and reduced to 31 the number of Communities  that it operated.
The  Company  owns or has  current  options  to  purchase  all  but  five of its
communities.  The  percentage of residents who are private pay is  approximately
90%.


Fiscal 1998 as Compared to Fiscal 1997

Revenues and  Operating  Expenses  from  Assisted  Living  Operations.  Revenues
increased to $53,521,000  in 1998 as compared to $38,979,000 in 1997.  Community
operating  expenses,  which consist of assisted living community expense,  lease
expense and depreciation and amortization,  were $49,924,000 in 1998 as compared
to $34,306,000 in 1997. The primary reason for the increase was the acquisitions
of Windsor and Villa.  Windsor and Villa were acquired in the fourth  quarter of
1997 in  transactions  that were  accounted  for as  purchases.  The revenue and
related expenses for the communities acquired through these acquisitions are not
included in the amounts for 1997.  The revenues  and related  expenses for these
communities for 1998 were $12,651,000 and $9,746,000  respectively.  The balance
of the increase is due to the opening by the Company of new  communities  during
1998 and increased census at the existing communities.



                                       17

<PAGE>


Corporate General and Administrative Expenses. These expenses were $5,292,000 in
1998 as compared to $5,652,000 in 1997. The overall decrease, despite the growth
of the Company,  was due to the  reorganization  of the  regional and  corporate
office that  resulted in the  elimination  of one of the regional  offices and a
reduction in Corporate staff in the third quarter of 1998.

Interest and Dividend  Income.  Interest and dividend  income was  $1,094,000 in
1998 as compared to $479,000 in 1997. In the first quarter of 1998,  the Company
received proceeds from the sale of preferred stock of $22,000,000.  The increase
in interest  and  dividend  income is due to an increase in cash  available  for
investment purposes.

Interest Expenses. These expenses decreased to $6,432,000 in 1998 as compared to
$6,801,000 in 1997. The decrease is reflective of the sale of an owned community
in 1998 as well as the payoff of  approximately  $2,500,000 of debt in the first
quarter of 1998.

Other Income (Expense).  Other income (expense) for 1998 was ($3,569,000).  This
expense  is a  result  of the  divestiture  of 22  communities  in six  separate
transactions  with third parties and the  termination  of 3 agreements to manage
communities for third parties. Nine leased communities in North Carolina,  whose
primary  reimbursement source was Medicaid,  were transferred to a Florida based
company  for  no   consideration.   The  leases  on  two  other  North  Carolina
communities,  whose primary pay or source was  Medicaid,  were  terminated.  One
other  owned North  Carolina  community  was sold to a company  for  proceeds of
$5,800,000.  A leased community in Florida was sold to a Tennessee based company
for  proceeds of $375,000.  Eight leased  communities  in Texas,  whose  primary
reimbursement source was Medicaid were transferred to a Fort Worth based company
for no  consideration.  One other owned  community in Oregon was  subleased to a
local operator.

The transaction involving the transfer of the eight Texas leased communities was
a three party  transaction  since all of the eight  communities were leased from
one REIT. In this  transaction,  the Company  obtained an option to purchase the
remaining five communities leased from this REIT for $28,000,000.

The  loss on  these  divestitures  is a  result  of the  book  values  of  these
properties being in excess of any consideration received.

Discontinued  Operations.  Earnings from discontinued operations consist of real
estate operations that are classified for sale. The real estate operations had a
net operating loss of ($34,000) in 1998 and net operating  income of $153,000 in
1997.  The  decrease  in 1998 was the result of the sales of the North  Carolina
shopping center in April of 1997 and a Georgia  shopping center in June of 1998.
The sale in 1998 resulted in a loss of ($169,000) net of income tax.


Fiscal 1997 as Compared to Fiscal 1996

Revenues and  Operating  Expenses  from  Assisted  Living  Operations.  Revenues
increased to $38,979,000 in 1997 as compared to $29,785,000 in 1996. The primary
reasons for the increase  were the  acquisition  of Wedgwood  and the  continued
growth of Greenbriar. Wedgwood was acquired effective March 31, 1996 and as such
the financial  statements for 1996 reflect nine months of Wedgwood operations as
compared to twelve  months of  operations  in 1997.  In addition,  the Company's
total owned or leased  communities  increased from 32 at December 31, 1996 to 52
at December 31, 1997.  Community operating  expenses,  which consist of assisted
living community expenses, lease expense and depreciation and amortization, were
$34,306,000 in 1997 as compared to $25,152,000 in 1996. The primary  reasons for
these  increases,  as discussed  above,  are the acquisition of Wedgwood and the
continued growth of Greenbriar.





                                       18

<PAGE>

<TABLE>

<CAPTION>



                                                                            (Amounts in thousands)
                                                                        Year Ended, December 31, 1997
                                                                 Stabilized        Start-up
                                                               Communities(1)   Communities(2)        Total
                                                             -----------------------------------------------------
<S>                                                            <C>               <C>              <C>

     Assisted Living Community Income                          $   35,926        $    3,053       $   38,979
     Assisted Living Community Operating Expenses                  23,197             3,113           26,310
                                                             -----------------------------------------------------
     Gross Operating Income                                        12,730               (61)          12,669
     Lease Expense                                                  4,285               378            4,663
     Community Depreciation & Amortization                          2,614               719            3,333
                                                             -----------------------------------------------------
     Income (Loss) from Community Operations                   $    5,830        $   (1,157)      $    4,673

</TABLE>

     (1)  Stabilized  communities are those communities that have been operating
          for one year or have achieved stabilized occupancy of 92% or more.

     (2)  Start-up   communities  are  those  communities  that  have  not  been
          operating for one year or have not achieved a stabilized  occupancy of
          92% or more.

Corporate General and  Administrative  Expenses - These expenses were $5,652,000
in 1997 as compared to $6,731,000  in 1996.  The overall  decrease,  despite the
growth  of  the  Company,  was  due  to  the  consolidation  of  accounting  and
administrative  functions  into  the  Dallas  office.  During  1996  Greenbriar,
Wedgwood and  American  Care were  operated as three  separate  companies.  Each
company had its own  corporate  office,  executive  officers,  corporate  staff,
accounting  department and other related costs. In the first quarter of 1997 all
of these corporate functions were centralized in Dallas.

Interest and Dividend Income - Interest and dividend income was $479,000 in 1997
as  compared  to  $771,000  in 1996.  The  decrease is due to a decrease in cash
available for investment.

Interest Expense.  These expenses increased to $6,801,000 in 1997 as compared to
$4,457,000  in 1996.  The  increase  is due to the  increase  in the  number  of
communities the Company owned in 1997 as compared to in 1996.

<TABLE>
<CAPTION>

                             Other income (expenses)
                                                                       (Amounts in thousands)
                                                                      Year ended December 31,
                                                                        1997             1996
                                                                  ----------------- ---------------
<S>                                                                <C>               <C>

                Write-off of note receivable                       $     (2,000)     $          -
                Write-off of investment securities                       (2,100)                -
                Gain of settlement of litigation                          2,409                 -
                Prepayment penalty on mortgage payable                   (1,300)                -
                Other                                                        (5)              625
                                                                  ----------------- ---------------
                                                                   $     (2,996)     $        625
</TABLE>


In December 1997 management  determined that it was in the best interests of the
Company  to  exchange  its note  receivable  of  $2,000,000  for  certain of the
borrower's  trade  receivables.  Due to the  uncertainty  as to the value of the
trade  receivables  the Company has fully written off the note and has placed no
value on the trade  receivables.  Further,  the Company has  preferred  stock of
$2,300,000 in the above borrower.  Due to deteriorating  financial  condition of
the borrower the Company has fully written off its investment.

When the Company  acquired  Wedgwood  certain  representations  were made by the
seller.  Subsequent  to the  acquisition  two  lawsuits  were filed  against the
Company and the seller.  In October 1977 the Company and the seller entered into
an  agreement  whereby the Company  would  indemnify  the seller for any damages
resulting  from the lawsuits and agreed to assume  responsibility  for all legal
fees  associated  with the  lawsuits.  In return the  seller  agreed to give the
Company 125,000 shares of Greenbriar stock. Subsequent to the agreement both the
defendants  were awarded a summary  judgment and a directed  verdict,  including
legal fees,  by the  respective  courts.  The Company has recorded a gain on the
transaction of the fair market value of the stock, net of legal fees.


                                       19

<PAGE>


In  October  the  Company  agreed  to an early  payoff on a loan on three of its
communities.  The loan,  which was  refinanced at a lower rate of interest had a
prepayment penalty.

Discontinued  Operations - Earnings from discontinued  operations consist of the
real estate  operations that are classified for sale. The real estate operations
had net earnings of $153,000 in 1997 and $238,000 in 1996.  The decrease in 1997
was a result of the sale of the North  Carolina  shopping  center in April 1997.
The sale resulted in a gain of $322,000, net of income tax, in 1997.


Liquidity and Capital Resources

At December 31, 1998,  the Company had current  assets of $8,323,000 and current
liabilities of $7,802,000.

In  December  1997 the Company  sold Series F and Series G preferred  shares for
$22,000,000 less selling and offering costs of $453,000. Payment was received in
January 1998.

The Series F voting preferred stock has a liquidation  value of $10.00 per share
and each share is  convertible  into 5.7 shares of common stock.  The holder has
the option to convert  beginning  in  January  2000 and must  convert by January
2001. Cumulative dividends are payable in cash at a rate of 6%.

The Series G  preferred  stock has a  liquidation  value of $10.00 per share and
each share is  convertible  into 5.7 shares of common stock.  The holder has the
option to convert  beginning in January  2000 and must convert by January  2001.
Cumulative dividends are payable in cash at a rate of 6%.

In  connection  with the sale,  the  Company  entered  into an  agreement  which
provides that, on the date of conversion,  if the value of the Company's  common
stock has not increased at the annual rate of at least 14% during the period the
preferred shares are outstanding, the Company is required to make a cash payment
("Cash  Payment")  to the  preferred  stockholders  equal  to the  market  price
deficiency on the shares received upon conversion.

The 14% guaranteed return is being accreted by a charge to accumulated  deficit.
The amount of the Cash Payment  that would be required  assuming  conversion  at
each  balance  sheet  date  will be  transferred  from  stockholders  equity  to
temporary equity. At December 31, 1998, a Cash Payment of $21,748,000 would have
been due assuming conversion took place.

The Series F & G preferred  stockholders have the option to convert beginning in
January  2000.  The Company has no  information  as to whether or not such early
conversion will occur.  Further, any Cash Payment that might be required will be
determined by price of the Company's  common stock when such conversion  occurs.
Should the Series F & G preferred  stockholders elect to convert in January 2000
and should the price of the Company's  common stock remain the same as is was on
December  31,  1998,  the Cash  Payment  obligation  as of January 2000 would be
approximately $ 24,800,000.

The Company is  proceeding  with a plan to refinance  its existing  portfolio of
Communities.  At current interest rates and property values the Company believes
it can  refinance  its  existing  Communities  and  if  necessary  sell  certain
Communities  and obtain cash  sufficient to meet the potential Cash Payment.  In
addition the Company will seek out additional third party  financing.  While the
Company believes it will be able to meet any potential Cash Payment  requirement
there can be no assurance that the Company's plan will be successful.

At  December  31,  1998 and since  the date of  issuance  of the  Series F and G
preferred  stock,  the Company was not in  compliance  with one of the financial
ratio  covenants of the stock  purchase  agreement.  The Company  believes  this
situation  stems  from a  computational  mistake  that was made at the time this
particular ratio test was originally determined.

The Company has brought this mistake to the attention of the  representative  of
the preferred  shareholder  and  anticipates  that the ratio will be modified to
reflect the original  intentions of the parties.  The  representatives  have not
indicated  to the  Company  that  they  consider  that a default  has  occurred.
However, an event of default (1) permits the holder to elect a number of persons
to the board of directors that will  constitute 70% of the board,  (2) gives the
holder, upon giving the Company written notice of an event of default, the right

                                       20

<PAGE>

(Put  Right)  to  require  the  Company  to  repurchase,  "out of funds  legally
available  therefor,"  any or all of the preferred  stock for an amount equal to
the liquidation value ($22,000,000 in the aggregate) plus accumulated but unpaid
dividends,  plus a premium of 20%,  and (3)  entitles  the holder to  additional
dividends  of $1.20  per share (an  aggregate  of  $660,000  per  quarter).  Any
additional  dividends paid pursuant to this provision would reduce the amount of
the Cash Payment resulting from the aforementioned 14% guaranteed return.

Future  development  activities  of the Company  are  dependent  upon  obtaining
capital and financing through various means,  including  financing obtained from
sale/leaseback  transactions,   construction  financing,  long-term  state  bond
financing, debt or equity offerings and, to the extent available, cash generated
from  operations.  There can be no  assurance  that the Company  will be able to
obtain adequate capital to finance its projected growth.


Year 2000

The Company has assessed  the  potential  impact of Year 2000 ("Y2K")  issues as
regards its business,  results of operations and financial  condition.  Critical
information  systems and equipment  are  purchased  from third party vendors and
each has assured the Company that its  particular  component  is Y2K  compliant.
Internal tests have confirmed these assessments. The Company is evaluating other
Y2K  implications   associated  with  the   infrastructure   of  its  individual
communities  such as HVAC,  security,  elevator and community  specific  utility
systems and believes it will have substantially completed any remediation needed
by the end of the second quarter of 1999.

Y2K's  potential  impact on the Company's  operations is also dependent on third
party  vendors  for such  services  as  utilities,  banking  services  and food.
Communication  with  the  significant  providers  of  these  services  has  been
initiated  but it is not  possible,  at  present,  to project  the effect on the
Company if third party remediation efforts are not successful.

While the Company  expects to adequately  resolve all Y2K issues,  a "reasonably
likely worst case" scenario would include supplier  disruption,  potential delay
in state  reimbursement  programs  and minor  utility  disruptions.  The Company
intends  to  address  the  possible   consequences   of  these  issues   through
community-specific contingency plans and a prudent level of liquidity.

Although the Company cannot  quantify the potential  effect of Y2K issues on its
operating results, liquidity or financial position it is reasonably certain that
the total  cost of  compliance  will not be  material  and can  easily be funded
through operating cash flows as problems are incurred.


Effect of Inflation

The  Company's  principal  sources  of  revenues  are from  resident  fees  from
Company-owned  or leased  assisted  living  communities and management fees from
communities  operated by the Company for third  parties.  The  operation  of the
communities  is affected by rental rates that are highly  dependent  upon market
conditions and the  competitive  environment in the areas where the  communities
are located. Compensation to employees is the principal cost element relative to
the  operations of the  communities.  Although the Company has not  historically
experienced  any adverse  effects of  inflation  on salaries or other  operating
expenses,  there can be no  assurance  that such  trends  will  continue or that
should inflationary pressures arise that the Company will be able to offset such
costs by increasing rental rates or management fees.


Forward Looking Statements

Certain  statements  included in this  Management's  Discussion and Analysis are
forward looking  statements that predict the future  development of the Company.
The  realization  of these  predictions  will be subject to a number of variable
contingencies  and there is no assurance  that they will occur or be realized in
the time frame proposed.  The risks associated with the potential  actualization
of the Company's plans include:  contractor delays, the availability and cost of
financing,  availability of managerial  oversight and regulatory  approvals,  to
name a few.


                                       21

<PAGE>

ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
-------------------------------------------------------------------

The Company is subject to market risk from exposure to changes in interest rates
based on its financing,  investing, and cash management activities.  The Company
utilizes a  balanced  mix of debt  maturities  along  with both  fixed-rate  and
variable-rate  debt to manage its exposures to changes in interest  rates.  (See
Management's Discussion and Analysis - Liquidity and Capital Resources appearing
elsewhere  in this Form 10-K.) If market  interest  rates  average 1% (100 basis
points) more in 1999 than they did in 1998, the Company's interest expense would
increase  and  income  before  income  taxes  would  decrease  by  approximately
$400,000.  The  Company  does not  expect  changes in  interest  rates to have a
material effect on income or cash flows in fiscal 1999, although there can be no
assurances that interest rates will not significantly change.

The  Company is also  exposed to risks from  changes in the market  price of its
common stock. As discussed  above, the amount of the Cash Payment to the holders
of the Series F and G preferred  stock  fluctuates  with the market price of the
Company's  common  stock.  An increase in the market  price of $1 per share will
decrease  the amount of the Cash  Payment by  $1,257,000.  A decrease  of $1 per
share will increase the amount of the Cash Payment by $1,257,000.


ITEM 8: FINANCIAL STATEMENTS
----------------------------

        The financial statements required by this Item begin at page F-1 hereof.


ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND 
        FINANCIAL DISCLOSURE
------------------------------------------------------------------------
        None.



















                                       22


<PAGE>


                                    PART III

ITEMS 10-13:

The information  required by Items 9, 10, 11 and 12 is incorporated by reference
into this Form 10-K from the Company's definitive Proxy Statement for its Annual
Meeting  of  Stockholders  to be  held  June 4,  1999,  which  definitive  Proxy
Statement will be filed with the Securities and Exchange Commission on or before
April 30, 1999.
































                                       23
<PAGE>


                                     PART IV

ITEM 14: EXHIBITS AND REPORTS ON FORM 8-K
------------------------------------------

(a)  The following  exhibits  required to be filed by Item 601 of Regulation S-B
     are filed as part of this Annual Report on Form 10-KSB:

         Exhibit
         Number         Description of Exhibit
         -------------- --------------------------------------------------------
         2.1.1          Stock Purchase Agreement between Villa Residential  Care
                        Homes,  Inc.,  William A. Shirley, Jr.  and  Greenbriar 
                        Corporation  ("Registrant")  (filed as Exhibit 2.1.1  to
                        Registrant's Form 8-K Current Report on January 13, 1998
                        and incorporated herein by this reference).
         2.1.2          Exchange   Agreement   between  Villa  Residential  Care
                        Homes-Corpus   Christi   South,   L.P.  and   Greenbriar
                        Corporation  ("Registrant")  (filed as Exhibit  2.1.2 to
                        Registrant's Form 8-K Current Report on January 13, 1998
                        and incorporated herein by this reference).
         2.1.3          Exchange   Agreement   between  Villa  Residential  Care
                        Homes-Granbury,    L.P.   and   Greenbriar   Corporation
                        ("Registrant")  (filed as Exhibit 2.1.3 to  Registrant's
                        Form  8-K  Current   Report  on  January  13,  1998  and
                        incorporated herein by this reference).
         2.1.4          Exchange   Agreement   between  Villa  Residential  Care
                        Homes-Oak   Park,   L.P.  and   Greenbriar   Corporation
                        ("Registrant")  (filed as Exhibit 2.1.4 to  Registrant's
                        Form  8-K  Current   Report  on  January  13,  1998  and
                        incorporated herein by this reference).
         2.1.5          Exchange   Agreement   between  Villa  Residential  Care
                        Homes-Fort  Worth East, L.P. and Greenbriar  Corporation
                        ("Registrant")  (filed as Exhibit 2.1.5 to  Registrant's
                        Form  8-K  Current   Report  on  January  13,  1998  and
                        incorporated herein by this reference).
         2.1.6          Exchange Agreement between William A. Shirley, Jr., Lucy
                        M.  Brody  and  C.  Kent   Harrington   and   Greenbriar
                        Corporation  ("Registrant")  (filed as Exhibit  2.1.6 to
                        Registrant's Form 8-K Current Report on January 13, 1998
                        and incorporated herein by this reference).
         2.2.1          Stock Purchase  Agreement  between Lone Star Opportunity
                        Fund,  L.P. and  Greenbriar  Corporation  ("Registrant")
                        filed as Exhibit 2.2.1 of  Registrant's  Form 10-KSB for
                        the year ended December 31, 1997.
         2.2.4          Form of Registration Rights Agreement between Registrant
                        and  Lone  Star   Opportunity   Fund,  L.P.  as  regards
                        1,400,000   shares  of  Registrant's   Series  F  Senior
                        Convertible   Preferred  Stock  and  800,000  shares  of
                        Registrant's Series G Senior Non-Voting  Preferred Stock
                        filed as Exhibit 2.2.4 of  Registrant's  Form 10-KSB for
                        the year ended December 31, 1997.
         2.2.5          Agreement  between Lone Star Opportunity  Fund, L.P. and
                        Registrant   regarding   certain   minimum   values   of
                        Registrant's   stock   filed   as   Exhibit   2.2.5   of
                        Registrant's Form 10-KSB for the year ended December 31,
                        1997.
         2.2.6          Agreement on Form of Promissory Note between  Registrant
                        and Lone Star  Opportunity  Fund,  L.P filed as  Exhibit
                        2.2.6 of  Registrant's  Form  10-KSB  for the year ended
                        December 31, 1997.
         2.2.7          Form of Promissory Note agreed to by Registrant and Lone
                        Star  Opportunity  Fund,  L.P. filed as Exhibit 2.2.7 of
                        Registrant's Form 10-KSB for the year ended December 31,
                        1997.
         3.1            Articles of Incorporation of Medical Resource  Companies
                        of  America  ("Registrant")  (filed  as  Exhibit  3.1 to
                        Registrant's    Form   S-4    Registration    Statement,
                        Registration  No. 33-55968,  and incorporated  herein by
                        this reference).
         3.1.1          Restated Articles of Incorporation of Greenbriar 
                        Corporation.
         3.2            Bylaws of Registrant (filed as Exhibit 3.2 to 
                        Registrant's Form S-4 Registration Statement, 
                        Registration  No. 33-55968,  and  incorporated herein by
                        this reference).

                                       24

<PAGE>

         Exhibit                                                                
         Number         Description of Exhibit                                  
         -------------- --------------------------------------------------------
         3.2.1          Amendment to  Section 3.1 of  the  Bylaws  of Registrant
                        adopted upon approval of the Merger (filed as Exhibit 
                        3.2.1 to Registrant's Form S-4 Registration Statement, 
                        Registration No. 33-55968, and incorporated herein by 
                        this reference).
         3.3            Certificate of Decrease in Authorized and Issued Shares.
         4.1            Certificate of Designations, Preferences and Rights of 
                        Preferred Stock dated October 7,
                        1992 relating to Registrant's Series A Preferred Stock 
                        (filed as Exhibit 4.1 to Registrant's Form S-4 
                        Registration Statement, Registration No. 33-55968, and 
                        incorporated herein by this reference).
         4.1.2          Certificate of  Designations,  Preferences and Rights of
                        Preferred   Stock   dated  May  7,  1993,   relating  to
                        Registrant's  Series B Preferred Stock (filed as Exhibit
                        4.1.2 to Registrant's  Form S-3 Registration  Statement,
                        Registration  No. 33-64840,  and incorporated  herein by
                        this reference.
         4.1.3          Certificate of  Designations,  Preferences and Rights of
                        Preferred  Stock  dated  August 18,  1993,  relating  to
                        Registrants'  Series C Preferred Stock (filed as Exhibit
                        4.1.3 to  Registrant's  Form  10-KSB  for the year ended
                        December 31, 1993).
         4.1.3.1        Amendment to  Certificate of  Designations,  Preferences
                        and Rights of  Preferred  Stock dated  August 18,  1993,
                        relating to Registrants' Series C Preferred Stock.
         4.1.4          Certificate of  Designations,  Preferences and Rights of
                        Preferred  Stock  dated  March  15,  1996,  relating  to
                        Registrants' Series D Preferred Stock.
         4.1.5          Certificate of  Designations,  Preferences and Rights of
                        Preferred  Stock  dated  March  15,  1996,  relating  to
                        Registrants' Series E Preferred Stock.
         4.1.6          Certificate of Voting Powers, Designations,  Preferences
                        and Rights of Registrant's  Series F Senior  Convertible
                        Preferred  Stock  dated  December  31,  1997,  filed  as
                        Exhibit 2.2.2 of  Registrant's  Form 10-KSB for the year
                        ended December 31, 1997.
         4.1.7          Certificate of Voting Powers, Designations,  Preferences
                        and Rights of  Registrant's  Series G Senior  Non-Voting
                        Convertible  Preferred  Stock dated  December  31, 1997,
                        filed as Exhibit 2.2.3 of  Registrant's  Form 10-KSB for
                        the year ended December 31, 1997.
         4.3.2          Registration  Rights  Agreement  dated   April 27,  1990
                        between   Registrant's   predecessor  and  International
                        Health Products, Inc. (assumed by Registrant), which has
                        been  assigned  to  JRG Investments, Inc.,  relating  to
                        4,150,000 shares (830,000 post  December 1995 shares) of
                        Registrant's  Common  Stock,  the benefits of which were
                        further  assigned  to  Professional Investors Insurance,
                        Inc. as  to  600,000 shares (120,000 post  December 1995
                        shares) in November 1992 (filed on June 5, 1990, as an 
                        Exhibit to the Registrant's predecessor's Current Report
                        on Form 8-K and incorporated herein by reference).
          4.3.3         Form of  Assignment  of  Registration  Rights  Agreement
                        dated September 30, 1992 between JRG  Investments,  Inc.
                        and Professional  Investors Insurance,  Inc. relating to
                        600,000  shares  (120,000  post December 1995 shares) of
                        Registrant's  Common  Stock  (filed as Exhibit  4.3.3 to
                        Registrant's    Form   S-4    Registration    Statement,
                        Registration  No. 33-55968,  and incorporated  herein by
                        this reference).
          4.4           Form of Registration  Rights Agreement dated December 1,
                        1991 between  Registrant and W. Michael Gilley (filed as
                        Exhibit  4.4  to  Registrant's   Form  S-4  Registration
                        Statement,  Registration No. 33-55968,  and incorporated
                        herein by this reference).
         4.9.3          Registration Rights Agreement dated December 30, 1996
                        between Registrant and Floyd B. Rhoades.
         10.3.2         Form of $62,500  Promissory Note dated December 27, 1991
                        payable to Registrant  by Gene S. Bertcher  representing
                        the  purchase  price for  250,000  shares  (50,000  post
                        December  1995  shares)  of  Registrant's  Common  Stock
                        (filed  as  Exhibit  10.3.2  to  Registrant's  Form  S-4
                        Registration  Statement,  Registration No. 33-55968, and
                        incorporated herein by this reference).

                                       25

<PAGE>

         Exhibit                                                                
         Number         Description of Exhibit                                  
         -------------- --------------------------------------------------------
         10.3.3         Form of Renewal of  Promissory  Note dated  October  14,
                        1992 extending the maturity date of the Promissory  Note
                        referenced in Exhibit 10.3.2 (filed as Exhibit 10.3.3 to
                        Registrant's    Form   S-4    Registration    Statement,
                        Registration  No. 33-55968,  and incorporated  herein by
                        this reference).
         10.3.4         Form  of  Security  Agreement  -  Pledge   (Nonrecourse)
                        between  Gene S.  Bertcher and  Registrant  securing the
                        Promissory Note referenced in Exhibit 13.3.2.  (Filed as
                        Exhibit  10.3.4 to  Registrant's  Form S-4  Registration
                        Statement,  Registration No. 33-55968,  and incorporated
                        herein by this reference).
         10.4.2         Form of $75,000  Promissory  Note dated October 12, 1992
                        payable to Registrant by Robert L. Griffis  representing
                        the  purchase  price for  150,000  shares  (30,000  post
                        December  1995  shares)  of  Registrant's  Common  Stock
                        (filed  as  Exhibit  10.4.2  to  Registrant's  Form  S-4
                        Registration  Statement,  Registration No. 33-55968, and
                        incorporated herein by this reference).
         10.4.3         Form  of  Security  Agreement  -  Pledge   (Nonrecourse)
                        between  Registrant  and Robert L. Griffis  securing the
                        Promissory  Note  referenced in Exhibit 10.4.2 (filed as
                        Exhibit  10.4.3 to  Registrant's  Form S-4  Registration
                        Statement, Registration No. 33-55968, and incorporated
                        herein by this reference).
         10.6.1         Form of Stock Option to purchase  100,000 shares (20,000
                        post December 1995 shares) of Registrant's  Common Stock
                        issued  to Oscar  Smith on  October  1,  1992  (filed as
                        Exhibit  10.6.1 to  Registrant's  Form S-4  Registration
                        Statement,  Registration No. 33-55968,  and incorporated
                        herein by this reference).
         10.6.2         Form of $50,000  Promissory  Note dated  October 1, 1992
                        payable to  Registrant by Oscar Smith  representing  the
                        purchase  price for 100,000 shares (20,000 post December
                        1995  shares) of  Registrant's  Common  Stock  (filed as
                        Exhibit  10.6.2 to  Registrant's  Form S-4  Registration
                        Statement,  Registration No. 33-55968,  and incorporated
                        herein by this reference).
         10.6.3         Form  of  Security  Agreement  -  Pledge   (Nonrecourse)
                        between   Registrant   and  Oscar  Smith   securing  the
                        Promissory  Note  referenced in Exhibit 10.6.2 (filed as
                        Exhibit  10.6.3 to  Registrant's  Form S-4  Registration
                        Statement, Registration No. 33-55968, and incorporated
                        herein by this reference).
         10.7.1         Form of Stock Option to purchase  80,000 shares  (16,000
                        post December 1995 shares) of Registrant's  Common Stock
                        issued to Lonnie Yarbrough on October 12, 1992 (filed as
                        Exhibit  10.7.1 to  Registrant's  Form S-4  Registration
                        Statement,  Registration No. 33-55968,  and incorporated
                        herein by this reference).
         10.7.2         Form of $40,000  Promissory  Note dated October 12, 1992
                        payable to Registrant by Lonnie  Yarbrough  representing
                        the  purchase  price  for  80,000  shares  (16,000  post
                        December  1995  shares)  of  Registrant's  Common  Stock
                        (filed  as  Exhibit  10.7.2  to  Registrant's  Form  S-4
                        Registration  Statement,  Registration No. 33-55968, and
                        incorporated herein by this reference).
         10.7.3         Form  of  Security  Agreement  -  Pledge   (Nonrecourse)
                        between  Registrant  and Lonnie  Yarbrough  securing the
                        Promissory  Note  referenced in Exhibit 10.7.2 (filed as
                        Exhibit  10.7.3 to  Registrant's  Form S-4  Registration
                        Statement, Registration No. 33-55968, and incorporated
                        herein by this reference).
         10.8.1         Form of Stock Option to purchase  80,000 shares  (16,000
                        post December 1995 shares) of Registrant's  Common Stock
                        issued to Dennis  McGuire on  October 1, 1992  (filed as
                        Exhibit  10.8.1 to  Registrant's  Form S-4  Registration
                        Statement,  Registration No. 33-55968,  and incorporated
                        herein by this reference).
         10.8.2         Form of $40,000  Promissory  Note dated  October 1, 1992
                        payable to Registrant by Dennis McGuire representing the
                        purchase  price for 80,000 shares  (16,000 post December
                        1995  shares) of  Registrant's  Common  Stock  (filed as
                        Exhibit  10.8.2 to  Registrant's  Form S-4  Registration
                        Statement,  Registration No. 33-55968,  and incorporated
                        herein by this reference).


                                       26

<PAGE>


         Exhibit                                                                
         Number         Description of Exhibit                                  
         -------------- --------------------------------------------------------
         10.8.3         Form  of  Security  Agreement  -  Pledge   (Nonrecourse)
                        between  Registrant  and  Dennis  McGuire  securing  the
                        Promissory  Note  referenced in Exhibit 10.8.2 (filed as
                        Exhibit  10.8.3 to  Registrant's  Form S-4  Registration
                        Statement, Registration No. 33-55968, and incorporated
                        herein by this reference).
         10.9.6         Form of $62,500 promissory note dated December 29, 1994,
                        payable to Registrant by L.A.  Tuttle  representing  the
                        purchase  price of 50,000  shares  (10,000 post December
                        1995  shares) of  Registrant's  Common  Stock  (filed as
                        Exhibit 10.9.6 to Registrant's  Form 10-KSB for the year
                        ended December 31, 1994).
         10.9.7         Form of Security Agreement-Pledge between Registrant and
                        L.A.  Tuttle  securing the promissory  note reference in
                        Exhibit 10.9.6 (filed as Exhibit 10.9.7 to  Registrant's
                        Form 10-KSB for the year ended December 31, 1994).
         10.13          Registrant's 1992  Stock  Option  Plan (filed as Exhibit
                        10.13 to Registrant's Form S-4   Registration Statement,
                        Registration No. 33-55968, and  incorporated  herein  by
                        this reference).
         10.21.1        Extended  and  Consolidated  Promissory  Note  in  the 
                        principal amount  of  $5,700,000 dated effective May 23,
                        1992 payable by JRG Investment Co., Inc. to M.S. Holding
                        Co. Corp. (filed as Exhibit 10.22.1 to Registrant's Form
                        S-4 Registration Statement, Registration
                        No.33-55968, and incorporated herein by this reference).
         10.22.2        Extended and Consolidated Pledge Agreement dated 
                        effective May 23, 1992 between JRG Investment  Co., Inc.
                        and M.S. Holding Co. Corp. securing the Note  referenced
                        in  Exhibit  10.22.1   (filed  as E xhibit   10.22.2  to
                        Registrant's Form S-4 Registration Statement,
                        Registration No. 33-55968,  and  incorporated  herein by
                        this reference).
         10.22.3        Pledge Agreement dated as of May 23, 1992 between  James
                        R. Gilley and M.S. Holding Co. Corp.  (filed  as Exhibit
                        10.22.3 to Registrant's Form S-4 Registration Statement,
                        Registration No. 33-55968, and incorporated herein by 
                        this reference).
         10.22.4        Irrevocable Proxy from  James R. Gilley to M.S.  Holding
                        Co. Corp. relating to  shares  of capital  stock of  JRG
                        Investment  Co., Inc. (filed   as  Exhibit  10.22.4  to 
                        Registrant's  Form  S-4    Registration     Statement, 
                        Registration No. 33-55968, and incorporated herein by 
                        this reference).
         10.22.5        Blank  Assignment  and Power of  Attorney  signed by JRG
                        Investment  Co., Inc.  relating to 482,000  (96,400 post
                        December  1995  shares)  shares of  Registrant's  Common
                        Stock (filed as Exhibit 10.22.5 to Registrant's Form S-4
                        Registration Statement, Registration No.
                        33-55968, and incorporated herein by this reference).
         10.22.6        Blank  Assignment  and Power of  Attorney  signed by JRG
                        Investment  Co.,  Inc.   relating  to  1,268,000  shares
                        (236,600  post  December  1995  shares) of  Registrant's
                        Common Stock (filed as Exhibit  10.22.6 to  Registrant's
                        Form S-4 Registration Statement, Registration No.
                        33-55968, and incorporated herein by this reference).
         10.22.7        Three Blank Assignments and Powers of Attorney signed by
                        JRG  Investment  Co.,  Inc.,  each  relating  to 600,000
                        shares   (120,000   post   December   1995   shares)  of
                        Registrant's  Common Stock (filed as Exhibit  10.22.7 to
                        Registrant's    Form   S-4    Registration    Statement,
                        Registration  No. 33-55968,  and incorporated  herein by
                        this reference).
         10.22.8        Blank  Assignment  and Power of  Attorney  signed by JRG
                        Investment  Co.,  Inc.  relating to 2,281,818  shares of
                        Registrant's  Common Stock (filed as Exhibit  10.22.8 to
                        Registrant's    Form   S-4    Registration    Statement,
                        Registration  No. 33-55968,  and incorporated  herein by
                        this reference).
         10.22.9        Blank  Assignment  and Power of  Attorney  signed by JRG
                        Investment  Co.,  Inc.  relating  to  905,557  shares of
                        Registrant's  Series A Preferred Stock (filed as Exhibit
                        10.22.9 to Registrant's Form S-4 Registration Statement,
                        Registration  No. 33-55968,  and incorporated  herein by
                        this reference).


                                       27

<PAGE>

         10.36          Stock Option Agreement dated  December 31, 1996  between
                        Registrant and  James R. Gilley  covering 200,000 shares
                        of Common Stock.
         10.37          Employment Agreements dated December 31, 1996
         10.38          Stock Purchase Warrant dated December 31, 1996 between 
                        registrant and The April Trust
         21.1*          Subsidiaries of Registrant.
         23.1*          Consent of Grant Thornton.
         27.1*          Financial Data Schedule required by Item 601(c) of 
                        Regulation S-K.
          *             Filed herewith.

(b)      Reports on Form 8-K - none















                                       28

<PAGE>




SIGNATURES

In accordance  with Section 13 or 15(d) of the  Securities  Exchange Act of 1934
(the "Act"),  the Company has duly caused this Annual  Report on Form 10-K to be
signed on its behalf by the undersigned, thereunto duly authorized.


                                    GREENBRIAR CORPORATION



March 30, 1999                      By:  /s/ Gene S. Bertcher           
                                         ---------------------------------
                                             Gene S. Bertcher
                                             Executive Vice President and
                                             Chief Financial Officer
                                             (Principal Financial and
                                             Accounting Officer)











                                       29


<PAGE>



SIGNATURES

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


                     GREENBRIAR CORPORATION


March 30, 1999       By: /s/James R. Gilley                                  
                         -------------------------------------------------------
                         James R. Gilley, President, Chief Executive Officer and
                         Chairman of the Board of Directors


In accordance  with the  Securities  Exchange Act of 1934,  this report has been
signed below by the  following  persons on behalf of the  Registrant  and in the
capacities and on the dates indicated.



  March 30, 1999        /s/  James R. Gilley                                  
                        --------------------                               
                             James R. Gilley, President, Chief Executive Officer
                             and Chairman of the Board of Directors             
  March 30, 1999        /s/  Don C. Benton                                      
                        ------------------                                      
                             Don C. Benton, Director                            
  March 30, 1999        /s/  Paul G. Chrysson                                   
                        ---------------------                                   
                             Paul G. Chrysson, Director                         
  March 30, 1999        /s/  Matthew G. Gallins                                 
                        -----------------------                                 
                             Matthew G. Gallins, Director                       
  March 30, 1999        /s/  Victor L. Lund                                     
                        -------------------                                     
                             Victor L. Lund, Director                           
  March 30, 1999        /s/  Michael E. McMurray                                
                        ------------------------                                
                             Michael E. McMurray, Director                      
  March 30, 1999        /s/  Floyd B. Rhoades                                   
                        ---------------------                                   
                             Floyd B. Rhoades, Director                         
  March 30, 1999        /s/  William A. Shirley, Jr.                            
                        ----------------------------                            
                             William A. Shirley, Jr., Director                  
                                                                                
                         










                                       30

<PAGE>


                                                     






               Report of Independent Certified Public Accountants




Board of Directors and Stockholders
Greenbriar Corporation


We have  audited the  accompanying  consolidated  balance  sheets of  Greenbriar
Corporation  and  subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of operations,  changes in stockholders' equity and cash
flows for each of the three years in the period ended  December 31, 1998.  These
financial statements are the responsibility of the Company's management.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all  material  respects,  the  consolidated  financial  position  of  Greenbriar
Corporation  and  subsidiaries  as of  December  31,  1998  and  1997,  and  the
consolidated  results of their operations and their  consolidated cash flows for
each of the three years in the period ended  December 31,  1998,  in  conformity
with generally accepted accounting principles.




GRANT THORNTON LLP

Dallas, Texas
March 26, 1999



                                      F-1

<PAGE>




                                                      
                             Greenbriar Corporation

                           CONSOLIDATED BALANCE SHEETS
                             (Amounts in thousands)

                                  December 31,



                   ASSETS                     1998       1997 
                                            --------   --------

CURRENT ASSETS
    Cash and cash equivalents               $  6,024   $     23
    Accounts receivable - trade                  448      1,162
    Stock subscription receivable               --       22,000
    Other current assets                       1,851      1,317
                                            --------   --------

               Total current assets            8,323     24,502

REAL ESTATE OPERATIONS HELD FOR SALE,
    at lower of cost or market                 1,000      3,097

DEFERRED INCOME TAX BENEFIT                    4,750      2,632

INVESTMENT IN SECURITIES, AT COST              2,046      2,025

MORTGAGE NOTE RECEIVABLE, net of deferred
    gain of $3,083                             3,617      3,617

PROPERTY AND EQUIPMENT, AT COST
    Land and improvements                     11,651     12,114
    Buildings and improvements                84,097     80,758
    Equipment and furnishings                  5,996      5,898
    Construction in progress                    --        4,864
                                            --------   --------
                                             101,744    103,634
    Less accumulated depreciation              7,921      5,486
                                            --------   --------
                                              93,823     98,148

DEPOSITS                                       3,422      3,619

LEASE RIGHTS AND OTHER INTANGIBLES            12,511     12,129

OTHER ASSETS                                     861      1,474
                                            --------   --------

                                            $130,353   $151,243
                                            ========   ========



        The accompanying notes are an integral part of these statements.

                                      F-2

<PAGE>

 <TABLE>
 
<CAPTION>
   

                                                     
                             Greenbriar Corporation

                     CONSOLIDATED BALANCE SHEETS - CONTINUED
                (Amounts in thousands, except per share amounts)

                                  December 31,


    LIABILITIES AND STOCKHOLDERS' EQUITY                            1998         1997 
                                                                  ---------    ---------
<S>                                                               <C>          <C>

CURRENT LIABILITIES
    Current maturities of long-term debt                          $   2,278    $  13,403
    Notes payable - affiliate                                          --          1,479
    Accounts payable - trade                                          1,787        1,883
    Accrued expenses                                                  2,471        3,345
    Other current liabilities                                         1,266        1,798
                                                                  ---------    ---------

               Total current liabilities                              7,802       21,908

MORTGAGE NOTE COLLATERALIZED BY
    REAL ESTATE HELD FOR SALE                                           883          893

LONG-TERM DEBT                                                       58,154       54,851

FINANCING OBLIGATIONS                                                10,815       10,815

OTHER LONG-TERM LIABILITIES                                             862          259
                                                                  ---------    ---------

               Total liabilities                                     78,516       88,726


PREFERRED STOCK REDEMPTION OBLIGATION                                21,748         --   

STOCKHOLDERS' EQUITY
    Preferred stock                                                     289          289
    Common stock, $.01 par value; authorized, 20,000 shares;
       issued and outstanding, 7,514 in 1998 and 7,300 in 1997           76           73
    Additional paid-in capital                                       64,261       83,339
    Accumulated deficit                                             (32,170)     (18,669)
                                                                  ---------    ---------
                                                                     32,446       65,032
    Less stock purchase notes receivable (including $2,250 from
       related parties)                                              (2,367)      (2,515)
                                                                  ---------    ---------
                                                                     30,089       62,517
                                                                  ---------    ---------

                                                                  $ 130,353    $ 151,243
                                                                  =========    =========

</TABLE>


        The accompanying notes are an integral part of these statements.

                                      F-3

<PAGE>

<TABLE>

<CAPTION>
      
                                                       
                             Greenbriar Corporation

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                    (Amounts in thousands, except share data)

                             Year ended December 31,


                                                            1998        1997        1996 
                                                           --------    --------    --------
<S>                                                        <C>         <C>         <C>

Revenue
    Assisted living operations                             $ 53,428    $ 38,824    $ 29,673
    Other                                                        93         155         112
                                                           --------    --------    --------
                                                             53,521      38,979      29,785
Operating expenses
    Assisted living operations                               35,965      26,310      19,439
    Lease expense                                             9,552       4,663       3,712
    Facility depreciation and amortization                    4,407       3,333       2,001
    General and administrative                                5,292       5,652       6,731
    Merger and transition expense                              --          --         2,836
                                                           --------    --------    --------
                                                             55,216      39,958      34,719
                                                           --------    --------    --------
               Operating loss                                (1,695)       (979)     (4,934)

Other income (expense)
    Interest and dividend income                              1,094         479         771
    Interest expense                                         (6,432)     (6,801)     (4,457)
    Other income (expense), net                              (3,569)     (2,996)        625
                                                           --------    --------    --------
                                                             (9,110)     (9,318)     (3,061)
                                                           --------    --------    --------
               Loss from continuing operations
                   before income taxes                      (10,602)    (10,297)     (7,995)

Income tax benefit                                           (1,896)     (4,115)     (2,400)
                                                           --------    --------    --------

               Loss from continuing operations               (8,706)     (6,182)     (5,595)

Discontinued operations
    Earnings (loss) from operations, net of income taxes        (34)        153         238
    Gain (loss) on disposal, net of income taxes               (169)        322         520
                                                           --------    --------    --------

               NET LOSS                                      (8,909)     (5,707)     (4,837)

Preferred stock dividend requirement                         (4,600)       (334)       (365)
                                                           --------    --------    --------

Loss allocable to common stockholders                      $(13,509)   $ (6,041)   $ (5,202)
                                                           ========    ========    ========

Income (loss) per share - basic and diluted
    Continuing operations                                  $  (1.83)   $   (.99)   $  (1.13)
    Discontinued operations                                    (.03)        .07         .14
                                                           --------    --------    --------

    Net loss                                               $  (1.86)   $   (.92)   $   (.99)
                                                           ========    ========    ========

Weighted average number of common shares outstanding          7,275       6,582       5,259


</TABLE>

         The accompanying notes are an integral part of this statement.

                                      F-4

<PAGE>

       
<TABLE>

<CAPTION>
                                                     
                             Greenbriar Corporation

            CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
                             (Amounts in thousands)

                                                                                                                Stock 
                                                                                         Additional             purchase
                                                   Preferred stock      Common stock     paid in   Accumulated  notes 
                                                  Shares    Amount    Shares    Amount   capital     deficit    receivable Total 
                                                --------   --------  --------  --------  ---------  ---------   ---------- -------
<S>                                             <C>        <C>       <C>       <C>       <C>        <C>         <C>        <C>

Balances at January 1, 1996                           34   $      3     4,752  $     48  $ 34,565   $ (7,418)   $ (2,573)  $ 24,625
                                                                                                                                   
    Issuance of preferred stock                    2,625        264      --        --      15,938       --          --       16,202 
    Conversion of preferred stock                 (1,970)      (197)    1,731        17       180       --          --         --   
    Purchase of common stock                        --         --         (12)     --        (123)      --          --         (123)
    Dividends on preferred stock                       1       --        --        --          72       (387)       --         (315)
    Capital contribution                            --         --        --        --         600       --          --          600 
    Net loss                                        --         --        --        --        --       (4,837)       --       (4,837)
                                                --------   --------  --------  --------  --------   --------    --------   -------- 
                                                                                                                                    
Balances at December 31, 1996                        690         70     6,471        65    51,232    (12,642)     (2,573)    36,152
                                                                                                                                    
    Issuance of common stock under stock                                                                                           
       option plans                                 --         --          28      --         318       --          --          318 
    Issuance of common stock for acquisitions       --         --         851         8    12,919       --          --       12,927
    Issuance of preferred stock                    2,200        220      --        --      21,327       --          --       21,547 
    Purchase of common stock                        --         --        (125)       (1)   (2,408)      --          --       (2,409)
    Payments on stock purchase notes receivable     --         --        --        --        --         --            58         58 
    Conversion of preferred stock                    (14)        (1)       75         1      --         --          --         --   
    Dividends on preferred stock                    --         --        --        --        --         (320)       --         (320)
    Net loss                                        --         --        --        --        --       (5,707)       --       (5,707)
    Other                                           --         --        --        --         (49)      --          --          (49)
                                                --------   --------  --------  --------  --------   --------    --------   -------- 
                                                                                                                                    
Balances at December 31, 1997                      2,876        289     7,300        73    83,339    (18,669)     (2,515)    62,517 
                                                                                                                                    
    Issuance of common stock                        --         --         250         2       435       --          --          437 
    Purchase of common stock                        --         --         (36)        1      (472)      --          --         (471)
    Dividends on preferred stock, including                                                                                         
       accretion of $2,970                          --         --        --        --       2,970     (4,592)       --       (1,622)
    Issuance costs for preferred stock              --         --        --        --        (263)      --          --         (263)
    Redemption obligation - preferred stock         --         --        --        --     (21,748)      --          --      (21,748)
    Reduction of stock purchase notes receivable    --         --        --        --        --         --           148        148 
    Net loss                                        --         --        --        --        --       (8,909)       --       (8,909)
                                                --------   --------  --------  --------  --------   --------    --------   -------- 
                                                                                                                                    
Balance at December 31, 1998                       2,876   $    289     7,514  $     76  $ 64,261   $(32,170)   $ (2,367)  $ 30,089 
                                                ========   ========  ========  ========  ========   ========    ========   ======== 
</TABLE>
                                                                   
      

         The accompanying notes are an integral part of this statement.

                                      F-5

                                                                                
<PAGE>

<TABLE>

<CAPTION>
                                                       
                             Greenbriar Corporation

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Amounts in thousands)




                                                            Year ended December 31, 
                                                          --------------------------
                                                           1998      1997      1996 
                                                          ------    ------    ------
<S>                                                      <C>       <C>         <C>


Cash flows from operating activities
Net loss                                                 $(8,909)   $(5,707)   $(4,837)
Adjustments to reconcile net loss to net
   cash used in operating activities
      Discontinued operations                                203       (475)      (758)
      Depreciation and amortization                        4,407      3,333      2,001
      Gain on settlement of litigation                      --       (2,409)      --   
      Loss on sale of property                             2,924       --         --   
      Loss on sale of real estate held for sale             --         --           19
      Write down of property                                 560       --         --   
      Write-off of note receivable                          --        2,000       --   
      Write-off of investment securities                    --        2,100       --   
      Stock dividends on investment securities              --          (39)      (133)
      Capital contributions as payment for services         --         --          600
      Deferred income taxes                               (2,118)    (4,115)    (1,979)
      Changes in operating assets and liabilities,
         net of effect of acquisitions
            Accounts receivable                              714       (572)       255
            Other current and noncurrent assets           (3,206)     1,338        905
            Accounts payable and other liabilities          (312)    (2,007)     2,893
                                                         -------    -------    -------

              Net cash used in operating activities of
                  continuing operations                   (5,737)    (6,553)    (1,034)

Net cash provided by (used in) operating activities
   of discontinued operations                                 93         66        (85)
                                                         -------    -------    -------

              Net cash used in operating activities       (5,644)    (6,487)    (1,119)


</TABLE>






        The accompanying notes are an integral part of these statements.


                                      F-6

<PAGE>

<TABLE>

<CAPTION>
                                                 
                             Greenbriar Corporation

                CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
                             (Amounts in thousands)



                                                                 Year ended December 31, 
                                                            --------------------------------
                                                             1998         1997       1996 
                                                            --------    --------    --------
<S>                                                         <C>         <C>         <C>

Cash flows from investing activities
    Collections of notes receivable                         $   --      $    126    $    123
    Purchase of property and equipment                        (4,843)     (3,970)    (16,534)
    Additions to notes receivable                               --          --           (23)
    Investing activities of discontinued operations            1,500       2,941        --   
    Net cash received in acquisition of business                --          --           739
                                                            --------    --------    --------

                   Net cash used in investing activities      (3,343)       (903)    (15,695)

Cash flows from financing activities
    Proceeds from borrowings                                  18,539       4,705      15,461
    Payments on debt                                         (23,195)        (17)     (1,426)
    Dividends on preferred stock                              (1,622)       (320)       (315)
    Purchase and retirement of common stock                     (471)       --          (123)
    Deposits on financing obligations                           --          --        (1,622)
    Exercise of stock options                                   --           318        --   
    Financing activities of discontinued operations             --            (8)       --   
    Collection of stock subscription receivable               21,737        --          --   
    Other                                                       --           (49)       --   
                                                            --------    --------    --------

                Net cash provided by financing activities     14,988       4,629      11,975
                                                            --------    --------    --------

                NET INCREASE (DECREASE) IN CASH
                   AND CASH EQUIVALENTS                        6,001      (2,761)     (4,839)

Cash and cash equivalents at beginning of year                    23       2,784       7,623
                                                            --------    --------    --------

Cash and cash equivalents at end of year                    $  6,024    $     23    $  2,784
                                                            ========    ========    ========


</TABLE>


      The accompanying notes are an integral part of these statements.


                                      F-7


<PAGE>


                                                      
                             Greenbriar Corporation

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE A - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
         POLICIES

    Nature of Operations
    --------------------

    Greenbriar  Corporation's  business consists of development and operation of
    assisted  living  communities  located  throughout the United States,  which
    provide housing, hospitality and personal and healthcare services to elderly
    individuals.  At  December  31,  1998,  the Company  had 31  communities  in
    operation in 11 states with a total capacity for 2,830 residents.

    A summary of the significant  accounting policies applied in the preparation
    of the accompanying consolidated financial statements follows.

    Principles of Consolidation
    ---------------------------

    The  consolidated  financial  statements  include the accounts of Greenbriar
    Corporation and its majority-owned subsidiaries (collectively, the Company).
    All significant intercompany transactions and accounts have been eliminated.

    Assisted Living Community Revenue
    ---------------------------------

    Assisted  living  community   revenue  is  reported  at  the  estimated  net
    realizable value based upon expected amounts to be recovered from residents,
    third party payors, and others for services  rendered.  Services provided by
    certain of the  Company's  communities  are  reimbursed  under various state
    assistance plans.

    Depreciation
    ------------

    Depreciation  is provided  for in amounts  sufficient  to relate the cost of
    property and equipment to operations  over their  estimated  service  lives,
    ranging from 3 to 40 years.  Depreciation  is computed by the  straight-line
    method.

    Use of Estimates
    ----------------

    In preparing  financial  statements in conformity  with  generally  accepted
    accounting  principles,   management  is  required  to  make  estimates  and
    assumptions  that affect the reported  amounts of assets and liabilities and
    the  disclosure  of  contingent  assets and  liabilities  at the date of the
    financial  statements and revenues and expenses during the reporting period.
    Actual results could differ from those estimates.





                                      F-8



<PAGE>


                             Greenbriar Corporation

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED




NOTE A - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
         POLICIES - Continued

    Cash Equivalents
    ----------------

    The Company considers all short-term  deposits and money market  investments
    with a maturity of less than three months to be cash equivalents.

    Impairment of Notes Receivable
    ------------------------------

    A note  receivable  is  identified  as  impaired  when it is  probable  that
    interest and principal  will not be collected  according to the  contractual
    terms of the note agreement. The accrual of interest is discontinued on such
    notes,  and no income is recognized  until all past due amounts of principal
    and interest are recovered in full.

    Impairment of Long-Lived Assets
    -------------------------------

    The  Company  reviews  its  long-lived   assets  and  certain   identifiable
    intangibles for impairment when events or changes in circumstances  indicate
    that the carrying amount of the assets may not be recoverable.  In reviewing
    recoverability,  the Company  estimates  the future  cash flows  expected to
    result from use of the assets and  eventually  disposing of them. If the sum
    of the  expected  future  cash  flows  (undiscounted  and  without  interest
    charges) is less than the carrying  amount of the asset,  an impairment loss
    is recognized based on the asset's fair value.

    Stock Options
    -------------

    The Company has elected to follow  Accounting  Principles  Board Opinion No.
    25,   Accounting  for  Stock  Issued  to  Employees  (APB  25)  and  related
    interpretations in accounting for its employee stock options.  Under APB 25,
    because the exercise price of employee stock options equals the market price
    of the underlying  stock on the date of grant,  no  compensation  expense is
    recorded.  The  Company  has  adopted  the  disclosure-only   provisions  of
    Statement  of  Financial  Accounting  Standards  No.  123,  "Accounting  for
    Stock-Based Compensation" (SFAS 123).

    Lease Rights and Other Intangibles
    ----------------------------------

    Lease rights are amortized by the straight-line method over the lives of the
    related leases. Goodwill is being amortized by the straight-line method over
    a period of fifteen years. Deferred financing costs are being amortized over
    the terms of the related  borrowings  under a method which  approximates the
    interest method.

    Earnings (Loss) Per Common Share
    --------------------------------

    Basic  earnings  (loss) per common  share is based on the  weighted  average
    number of common shares outstanding.  Diluted earnings per share is computed
    based on the weighted  average number of common shares  outstanding plus the
    number of  additional  common  shares  that would have been  outstanding  if
    dilutive  potential  common shares had been issued.  In 1998, 1997 and 1996,
    all potential common shares were anti-dilutive.


                                      F-9


<PAGE>



                             Greenbriar Corporation

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED






NOTE B - ACQUISITIONS AND DISPOSITIONS

    Acquisitions

    Wedgwood Retirement Inns, Inc. and Affiliates
    ---------------------------------------------

    In March 1996,  the  Company  acquired  substantially  all of the assets and
    liabilities  of a number of companies  under  common  control and managed by
    Wedgwood Retirement Inns, Inc.  (Wedgwood).  The business of these companies
    consists of the operation of 15 assisted living and Alzheimer's communities.
    To structure the Wedgwood  acquisition as a tax-free  exchange,  the Company
    also acquired a shopping  center in North  Carolina from James R. Gilley and
    members of his family  (the Gilley  Group).  Due to the fact that the Gilley
    Group is a majority  stockholder  of  Greenbriar  and owner of the  shopping
    center,  the  property was recorded at the Gilley  Group's  historical  cost
    basis of approximately $2,300,000. Consideration given was 675,000 shares of
    Series D preferred  stock.  Wedgwood's  assets  were valued at an  aggregate
    value of approximately  $58,000,000  ($54,000,000 of property and equipment)
    and  liabilities  assumed  were  approximately  $44,000,000.   In  exchange,
    Greenbriar  issued 1,949,950  shares of Series E preferred stock,  valued at
    approximately  $14,000,000,  to the  Wedgwood  shareholders.  In  1996,  the
    stockholders  of the  Company  granted  conversion  rights  to the  series E
    preferred stock and it was converted into approximately  1,600,000 shares of
    the Company's  common stock. The operations of Wedgewood have been reflected
    in the consolidated financial statements of the Company since April 1, 1996.

    Windsor Group LLC and Affiliates
    --------------------------------

    In October 1997, the Company  acquired all of the assets and  liabilities of
    Windsor Group LLC  (Windsor) and all of the common stock of three  companies
    who were affiliates of Windsor.  The business of these companies consists of
    the  operation  of three  assisted  living  communities  in South  Carolina.
    Consideration  given was 130,000 shares of the Company's common stock valued
    at approximately  $2,533,000.  Additionally,  upon completion of a community
    under  construction,  the Company will issue 28,531 additional shares of its
    common stock.  Assets acquired were valued at approximately  $12,100,000 and
    liabilities assumed were approximately $9,567,000. The operations of Windsor
    and affiliates have been reflected in the consolidated  financial statements
    of the Company since October 1, 1997.

    Villa Residential Care Homes, Inc.
    ----------------------------------

    On December 31, 1997,  the Company  acquired all of the  outstanding  common
    stock of Villa Residential Care Homes, Inc. (Villa). Additionally, through a
    newly created  partnership,  the Company  acquired  lease rights and assumed
    certain  liabilities  of a number of entities  affiliated  with  Villa.  The
    business of these entities  consists of the operation of 12  assisted-living
    communities throughout Texas.  Consideration given was 184,476 shares of the
    Company's  common stock and 10,464,321  units of the  partnership  valued at
    approximately  $10,394,000.  The operating partnership units are convertible
    after a one-year  holding period into 536,990 shares of the Company's common
    stock. For accounting  purposes,  the common shares into which the operating
    units will be converted  have been included in  outstanding  common  shares.
    Assets  acquired,  which consist  primarily of lease rights,  were valued at
    $11,100,000 and liabilities assumed were approximately $706,000.




                                      F-10

<PAGE>



                             Greenbriar Corporation

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED




NOTE B - ACQUISITIONS AND DISPOSITIONS - Continued

    The following  table presents pro forma  unaudited  consolidated  results of
    operations  for  the  year  ended  December  31,  1997,  assuming  that  the
    acquisitions  of Windsor  and Villa and  affiliates  had taken  place at the
    beginning of 1997 . The pro forma results are not necessarily  indicative of
    the results of operations that would have occurred had the acquisitions been
    made at the  beginning  of the periods  presented,  or of future  results of
    operations of the combined companies (in thousands, except per share data):

                                                                 Year ended 
                                                                December 31,
                                                                   1997 
                                                                ------------
       Revenue                                                     $49,701
       Loss from continuing operations                             $(6,801)
       Net loss                                                    $(6,326)
       Preferred stock dividend requirement                         $ (334)
       Loss from continuing operations allocable
          to common stockholders                                   $(7,135)
       Loss allocable to common stockholders                       $(6,660)
       Loss per share
          Continuing operations                                      $(.96)
          Net loss                                                   $(.90)

    American Care Communities, Inc.
    -------------------------------

    On December  31, 1996,  the Company  issued  1,300,000  shares of its common
    stock in exchange for all of the  outstanding  common stock of American Care
    Communities,  Inc.  (American  Care). At the date of  acquisition,  American
    Care,  owned or leased 15 assisted  living  communities  with  approximately
    1,350  units,  located  primarily  in North  Carolina.  The  merger has been
    accounted  for as a pooling of  interests  and  accordingly,  the  Company's
    consolidated   financial  statements  have  been  restated  to  include  the
    operations of American Care for all periods prior to the merger.

    In  connection  with the merger,  a  shareholder  of American  Care  settled
    certain of American Care's obligations in exchange for approximately  45,000
    shares of the Company's common stock received in the merger.  For accounting
    purposes,  this  transaction,  valued at $600,000,  has been  reflected as a
    contribution  of  capital  with  a   corresponding   charge  to  operations.
    Additionally,  the  Company  incurred  expenses  related  to the  merger  of
    $983,000,  expenses  related  to  attempted  capital  market  activities  of
    $774,000  and  accrued  severance  costs  related  to  the  closure  of  the
    administrative  offices of American Care and Wedgwood of  $1,079,000.  These
    amounts  have been  included in the  statement of  operations  as merger and
    transition expense.






                                      F-11


<PAGE>


NOTE B - ACQUISITIONS AND DISPOSITIONS - Continued

    Separate  results  of  operations  for the period  prior to the merger  with
    American Care are as follows (in thousands):

                                                                Year ended 
                                                              December 31, 1996
                                                              -----------------
       Revenue
          Greenbriar                                             $13,523
          American Care                                           16,262
                                                                 -------
          Combined                                               $29,785
                                                                 =======
       Earnings (loss) from continuing operations
          Greenbriar                                             $(3,483)
          American Care                                           (2,112)
                                                                 -------
          Combined                                               $(5,595)
                                                                 =======
       Net earnings (loss)
          Greenbriar                                             $(2,725)
          American Care                                           (2,112)
                                                                 -------
          Combined                                               $(4,837)
                                                                 =======
    Dispositions

     In 1998,  management  decided to reduce the  percentage of residents in the
     Company's   communities  who  were  dependent  on  direct  assistance  from
     government  agencies  for payment of their fees,  and to dispose of certain
     communities  that were not  profitable.  As a result,  the Company sold two
     communities  located in North  Carolina  and Florida for  consideration  of
     $6,175,000;  assigned the leases on seventeen  communities located in North
     Carolina and Texas to third parties for no  consideration,  terminated  the
     leases on two  communities  located in North  Carolina  and  subleased  one
     community located in Oregon to a third party. The aforementioned  sales and
     disposals resulted in an aggregate loss of $2,924,000.


NOTE C - DISCONTINUED OPERATIONS

    In 1995,  management  decided to sell the  mobility  products  segment.  The
    segment  was sold in  February  1996 for 8%  preferred  stock,  which is not
    marketable,  and notes valued at approximately  $4,300,000,  based upon fair
    value as  determined  by the  Board of  Directors.  A gain of  approximately
    $788,000, less applicable income taxes of $268,000 was recorded in 1996.

    In 1996,  the  Company  entered  into  negotiations  to sell  its  remaining
    non-assisted   living  real  estate  assets.   Accordingly,   the  Company's
    non-assisted   living  real  estate   operations   have  been  reflected  as
    discontinued operations. Management expects that the proceeds from the sales
    will be at least equal to the carrying value of the real estate  assets.  In
    1997,  the Company sold one of its real estate assets and recorded a gain of
    $491,000,  less  applicable  income taxes of $169,000.  In 1998, the company
    sold one of its real estate assets and recorded a loss of $255,370.



                                      F-12

<PAGE>



                             Greenbriar Corporation

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


NOTE C - DISCONTINUED OPERATIONS - Continued

    The  operations  of the  non-assisted  living real estate  segment have been
    presented  in  the   accompanying   financial   statements  as  discontinued
    operations.

    Summarized   operating   results  of  these  segments  are  as  follows  (in
thousands):

<TABLE>

                                                                                               Year ended
                                                                                              December 31,    
                                                                                    -------------------------------     
                                                                                      1998         1997       1996
                                                                                    -------      -------    ------- 
<S>                                                                                 <C>          <C>        <C>     

       Revenues                                                                       $170         $702        $864
                                                                                       ===          ===         ===

       Earnings (loss) before income taxes                                            $(34)        $235        $361

       Income tax expense                                                               -            82         123
                                                                                       ---          ---         ---

             Net earnings (loss)                                                      $(34)        $153        $238
                                                                                       ===          ===         ===


NOTE D - CASH FLOW INFORMATION

    Supplemental  information on cash flows and noncash  investing and financing
    transactions is as follows (in thousands):

                                                                                      Year ended December 31, 
                                                                                 ---------------------------------
                                                                                   1998         1997        1996 
                                                                                 -------      -------      --------
     Supplemental cash flow information
        Interest paid                                                            $ 6,333      $ 6,981      $  4,460
        Income taxes paid                                                             25           23            95

     Supplemental data on noncash investing and financing activities
           Dividend paid on preferred shares in stock                              1,597           -             72
           Preferred stock subscribed                                                 -        22,000            - 
           Purchase of common stock in exchange for
              assumption of liabilities                                               -         2,409            - 

           Sale of subsidiary
               Securities and note received                                      $    -       $    -       $ (4,300)

               Assets sold                                                            -            -          3,780
               Gain (loss) on sale                                                    -            -            520
                                                                                 -------      -------      --------         

                       Net cash effect of sale of subsidiary                     $    -       $    -       $     - 
                                                                                 =======      =======      ========

           Businesses acquired
               Fair value of assets acquired                                     $    -      $ 23,200      $ 59,890
               Cash received                                                          -            -            739
               Common stock issued                                                    -       (12,927)      (16,202)
                                                                                 -------     --------      --------      

                       Liabilities assumed                                       $    -      $ 10,273      $ 44,427
                                                                                 =======     ========      ========

</TABLE>


                                      F-13


<PAGE>

<TABLE>

<CAPTION>


                             Greenbriar Corporation

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED




NOTE E - DEBT

    Long-term debt is comprised of the following (in thousands):

                                                                                                   December 31,  
                                                                                             ---------------------   
                                                                                                1998          1997 
                                                                                             --------      --------
<S>                                                                                           <C>           <C>

       Notes payable to financial  institutions maturing through 2018; fixed and
          variable interest rates ranging from 7.5% to 11.75% ; collateralized
          by property, fixtures, equipment and the assignment of rents                        $32,176       $30,090

       Notes  payable  to  individuals  and  companies  maturing  through  2022;
          variable   and  fixed   interest   rates   ranging  from  7%  to  12%;
          collateralized  by  real  property,   personal   property,   fixtures,
          equipment and the assignment
          of rents                                                                              4,741         9,544

       Note  payable  to  the  Redevelopment  Agency  of  the  City  of  Corona,
          California,  payable into a sinking fund  semi-annually  in increasing
          amounts from $65 to $420 through May 1, 2015;  variable  interest rate
          of 5.4% at December 31, 1998; collateralized by personal
          property, land, fixtures and rents                                                    7,310         7,495

       Notes payable to related parties                                                            -            897

       Notes payable to financial institution                                                      -          8,023

       Mortgage note payable to a financial institution maturing in 2007;
          interest at 11.35%; collateralized by property and equipment                         14,028        11,413

       Other                                                                                    2,177           792
                                                                                               ------          ----
                                                                                               60,432        68,254
          Less current maturities                                                               2,278        13,403
                                                                                               ------        ------

                                                                                              $58,154       $54,851
                                                                                               ======        ======

</TABLE>






                                      F-14


<PAGE>


                             Greenbriar Corporation

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED




NOTE E - DEBT - Continued

    Aggregate annual principal maturities of long-term debt at December 31, 1998
are as follows (in thousands):

          1999                                                         $ 2,278
          2000                                                           1,722
          2001                                                           3,604
          2002                                                           9,003
          2003                                                          14,812
          Thereafter                                                    29,013
                                                                        ------

                                                                       $60,432
                                                                       =======

    Certain of the loan agreements contain various restrictive covenants,  which
    require,  among others things,  the maintenance of certain financial ratios,
    as defined.


NOTE F - FINANCING OBLIGATIONS

    The  Company   operates   two   communities   that  are   financed   through
    sale-leaseback obligations. At the end of the tenth year of the fifteen-year
    leases,  the Company  has  options to  repurchase  the  communities  for the
    greater  of the  sales  prices  or  their  current  replacement  costs  less
    depreciation  plus land at current fair market  values.  Accordingly,  these
    transactions  have been  accounted  for as  financings,  and the Company has
    recorded the proceeds  from the sales as financing  obligations,  classified
    the  lease  payments  as  interest   expense  and  continues  to  carry  the
    communities on its books and record  depreciation.  Payments under the lease
    agreements are $1,167 for each of the years 1998 through 2001.


NOTE G - OPERATING LEASES

    The Company leases certain  communities  under operating leases which expire
    through the year 2011 and has various equipment operating leases. The leases
    provide that the Company pay for property taxes, insurance, and maintenance.

    Future  minimum  payments  following  December  31,  1998 are as follows (in
thousands):

          1999                                                         $ 4,894
          2000                                                           4,232
          2001                                                           4,330
          2002                                                           4,304
          2003                                                           3,749
          Thereafter                                                    22,018
                                                                        ------

                                                                       $43,527
                                                                       =======

    Lease expense in 1998 and 1997 was $9,551,525 and $4,663,000,  respectively.
    Certain leases contain rent  escalation  clauses which are based upon future
    events or changes in indices.


                                      F-15


<PAGE>

                             Greenbriar Corporation

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED




NOTE H - INCOME TAXES

    At December 31, 1998,  the Company had net operating loss  carryforwards  of
    approximately  $30,800,000  which  expire  between  1999 and 2012.  However,
    approximately  $6,700,000 of these net  operating  loss  carryforwards  have
    limitations that restrict utilization to approximately  $600,000 for any one
    year. Also,  carryforwards of $900,000,  which expire between 2006 and 2008,
    may only be used to offset  future  taxable  income of the  subsidiaries  in
    which the losses were generated.

    The following is a summary of the components of income tax expense (benefit)
    from continuing operations (in thousands):

                                                Year ended December 31, 
                                           1998          1997           1996 
                                          -------       -------        -------
          Current                          $ 222        $     -        $    23
          Deferred                        (2,118)        (4,115)        (2,423)
                                          ------         ------         ------

                                         $(1,896)       $(4,115)       $(2,400)
                                          ======         ======         ======

    Deferred tax assets and  liabilities  were  comprised of the  following  (in
thousands):

<TABLE>

                                                                       December 31,        
                                                               -------------------------
                                                                 1998              1997 
                                                               -------           -------
<S>                                                            <C>               <C>

       Deferred tax assets:
          Net operating loss carryforwards                     $10,473           $ 7,501
          Note and accounts receivable                             920               845
          Investment in securities                                 651               651
          Alternative minimum tax credit carryforwards             235               207
          Accrued expenses                                         685               178
          Financing obligations                                  1,802             1,802
          Other                                                    780               719
                                                                ------            ------

                 Total deferred tax assets                      15,546            11,903

       Deferred tax liabilities - property and equipment        (9,276)           (9,271)
       Valuation allowance                                      (1,520)               - 
                                                                ------            ------ 

                 Net deferred tax asset                        $ 4,750           $ 2,632
                                                                ======            ======

</TABLE>



                                      F-16

<PAGE>

                             Greenbriar Corporation

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE H - INCOME TAXES - Continued

    Following  is  a  reconciliation  of  income  tax  expense  from  continuing
    operations with the amount of tax computed at the federal  statutory rate of
    34% (in thousands):
<TABLE>


                                                                                       Year ended December 31, 
                                                                                -----------------------------------
                                                                                  1998          1997          1996 
                                                                                -------       -------       -------
<S>                                                                             <C>           <C>           <C>

       Tax benefit at the statutory rate                                        $(3,605)      $(3,501)      $(2,718)
       Change in deferred tax asset valuation allowance, exclusive
          of additions for business purchased in 1996                             1,520          (418)          418
       Other                                                                        189          (196)         (100)
                                                                                 ------        ------        ------

       Tax benefit                                                              $(1,896)      $(4,115)      $(2,400)
                                                                                 ======        ======        ======
</TABLE>

    Changes in the deferred tax valuation allowance result from assessments made
    by the Company each year of its expected future taxable income  available to
    absorb  its  carryforwards.   In  the  third  quarter  of  1998,  management
    determined  that the  Company's  operating  results  were less than what was
    initially expected in its profitability model.  Accordingly,  effective July
    1, 1999, the Company began providing a valuation  allowance for the deferred
    tax benefits  resulting from losses  occurring  after that date. The Company
    believes  that it is more likely than not that the net deferred tax asset at
    December 31, 1998 of $4,750,000  will be recovered  from future  operations.
    However,  this evaluation is inherently  subjective as it requires estimates
    that are  susceptible to significant  revision as more  information  becomes
    available.


NOTE I - STOCKHOLDERS' EQUITY

    Preferred Stock

    Preferred stock consists of the following (amounts in thousands,  except per
share amounts):

<TABLE>

                                                                                                     Year ended
                                                                                                    December 31,  
                                                                                                ------------------- 
                                                                                                 1998         1997
                                                                                                ------       ------ 
<S>                                                                             <C>              <C>         <C>

      Series B cumulative convertible preferred stock, $.10 par value; liquidation
         value of $100; authorized, 100 shares; issued and outstanding, 1 share                  $  1          $  1

      Series D cumulative convertible preferred stock, $.10 par value; liquidation
         value of $3,375; authorized, issued ad outstanding, 675 shares                            68            68

      Series F voting cumulative convertible preferred stock, $.10 par value; liquidation
      value of $14,000; authorized, issued and outstanding, 1,400 shares                          140           140

      Series G cumulative convertible preferred stock, $.10 par value; liquidation
         value of $8,000; authorized, issued and outstanding, 800 shares                           80            80
                                                                                                  ---           ---

                                                                                                 $289          $289
                                                                                                  ===           ===

</TABLE>


                                      F-17

<PAGE>


                             Greenbriar Corporation

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED




NOTE I - STOCKHOLDERS' EQUITY - Continued

    The Series B preferred  stock has a liquidation  value of $100 per share and
    is convertible into common stock over a ten-year period at prices escalating
    from  $25.00 per share in 1993 to $55.55 per share by 2001.  Dividends  at a
    rate of 6% are  payable  in cash or  preferred  shares at the  option of the
    Company.

    The Series D preferred stock has a liquidation  value of $5 per share and is
    convertible into common stock at $10.00 per share.  Dividends are payable in
    cash at a rate of 9.5%.

    The Series F voting  preferred  stock has a liquidation  value of $10.00 per
    share and each share is  convertible  into .57 shares of common  stock.  The
    Series F shareholders  have the rights,  as a class,  to elect one member of
    the  Company's   board  of  directors  and  to  approve  or  reject  certain
    transactions,  including any mergers or spin-offs involving the Company. The
    holder has the option to convert  beginning in January 2000 and must convert
    by January 2001. Dividends are payable in cash at a rate of 6%.

    The Series G preferred stock has a liquidation value of $10.00 per share and
    each share is  convertible  into .57 shares of common stock.  The holder has
    the option to convert  beginning in January 2000 and must convert by January
    2001. Dividends are payable in cash at a rate of 6%.

    The Series F and Series G preferred  shares  were sold to  one  investor  in
    December 1997 for $22,000,000, less  selling and offering costs of $716,000.
    Payment was received in  January  1998.  In  connection  with the sale,  the
    Company  entered  into  an agreement  which  provides  that,  on the date of
    conversion, if the value of the Company's common stock has  not increased at
    an annual rate of at least 14% during  the period the  preferred  shares are
    outstanding,  the  Company is  required  to make a  Cash  Payment  (the Cash
    Payment) to the preferred stockholders equal to the market  price deficiency
    on the shares received upon conversion.

    The 14% guaranteed  return is accreted by a charge to  accumulated  deficit.
    The amount of the Cash Payment that would be required assuming conversion at
    each  balance  sheet  date  is  transferred  from  stockholders'  equity  to
    Preferred Stock Redemption Obligation.  At December 31, 1998, a Cash Payment
    of $21,748,000 would have been due assuming conversion took place.

    At  December  31,  1998 and since the date of issuance of the Series F and G
    preferred stock, the Company was not in compliance with one of the financial
    ratio convenants of the stock purchase agreement.  The Company believes this
    situation stems from a computational  mistake that was made at the time this
    particular ratio test was originally determined.

    The Company has brought this mistake to the attention of  representatives of
    the preferred shareholder and anticipates that the ratio will be modified to
    reflect the original intentions of the parties. The representatives have not
    indicated to the Company  that they  consider  that a default has  occurred,
    However,  an event of default  (1)  permits  the holder to elect a number of
    persons to the board of directors that will constitute 70% of the board, (2)
    gives the  holder,  upon giving the  Company  written  notice of an event of
    default, the right (Put Right) to require the Company to repurchase, "out of
    funds legally available  therefor," any or all of the preferred stock for an
    amount equal to the  liquidation  value  ($22,000,000 in the aggregate) plus
    accumulated  but unpaid  dividends,  plus a premium of 20%, and (3) entitles
    the  holder to  additional  dividends  of $1.20 per share (an  aggregate  of
    $660,000  per  quarter).  Any  additional  dividends  paid  pursuant to this
    provision  would  reduce the amount of the Cash Payment  resulting  from the
    aforementioned 14% guaranteed return.


                                      F-18


<PAGE>



                             Greenbriar Corporation

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


NOTE I - STOCKHOLDERS' EQUITY - Continued

    Stock Options
    -------------

    In 1993, the Company  established a long-term incentive plan (the 1993 Plan)
    for the benefit of certain key employees. Under the 1993 Plan, up to 217,500
    shares of the  Company's  common stock are reserved  for  issuance.  Options
    granted to employees under the 1993 Plan become exercisable over a period as
    determined  by the Company and may be  exercised up to a maximum of 10 years
    from date of grant. In 1997, the Company adopted the 1997 Stock Option Plan,
    under which up to 500,000  shares of the Company's  common stock are reserve
    for issuance.

    The Company has also granted options to officers during 1996, 1997, and 1998
    aggregating  1,000,000 shares not covered by either plan. These options were
    granted at market,  were exercisable  immediately,  and expire 10 years from
    date of grant.

    SFAS 123 requires  disclosure of pro forma net earnings (loss) and pro forma
    net  earnings  (loss) per share as if the fair value  based  method had been
    applied in measuring  compensation cost for stock-based awards granted after
    January 1, 1995. The pro forma amounts are not necessarily representative of
    the effects of stock-based  awards on future pro forma net income (loss) and
    pro forma  net  income  (loss)  per share  because  those pro forma  amounts
    exclude the pro forma compensation expense related to unvested stock options
    granted before 1995.

    Reported and pro forma net loss and net loss per share amounts are set forth
    below (in thousands, except per share data):

<TABLE>

                                                                                1998       1997       1997 
                                                                               ------     ------     ------
<S>                                                                          <C>         <C>        <C>

         Net loss allocable to common stockholders (amounts in thousands)
              As reported                                                    $(13,509)   $(6,041)   $(4,837)
              Pro forma                                                      $(13,937)   $(8,696)   $(8,153)

         Net loss per share
              As reported                                                     $(1.86)     $ (.92)    $ (.99)
              Pro forma                                                       $(1.92)     $(1.32)    $(1.55)

</TABLE>

    The fair value of these options was estimated at the date of grant using the
    Black-Scholes  option  pricing  model  with the  following  weighted-average
    assumptions:  expected  volatility  of 100 percent for 1998,  37 percent for
    1997 and 35 percent for 1996;  risk-free  interest  rates of 5.5 percent for
    1998, 5.9 percent for 1997 and 7.0 percent for 1996; no dividend yield;  and
    weighted average expected lives of 7.3 years.









                                      F-19


<PAGE>


                             Greenbriar Corporation

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


NOTE I - STOCKHOLDERS' EQUITY - Continued

    Additional  information with respect to options  outstanding at December 31,
    1998, and changes for the three years then ended was as follows:
<TABLE>

                                                                                                   1998     
                                                                                       ----------------------------       
<S>                                                                                    <C>               <C>

                                                                                                           Weighted
                                                                                                           average 
                                                                                                          exercise 
                                                                                          Shares             price 
                                                                                        ---------         ---------
       Outstanding at beginning of year                                                 1,000,000            $14.23
          Granted                                                                         216,000              2.96
          Exercised                                                                            -                 - 
                                                                                        ---------         ---------

       Outstanding at end of year                                                       1,216,000            $12.36
                                                                                        =========             =====

       Options exercisable at
          December 31, 1998                                                             1,199,333            $12.29
                                                                                        =========             =====

    Weighted  average  fair value per share of options  granted  during 1998 was
$2.14.

                                                                                                  1997     
                                                                                       ----------------------------
                                                                                                           Weighted
                                                                                                           average 
                                                                                                          exercise 
                                                                                          Shares             price 
                                                                                        ---------         ---------
       Outstanding at beginning of year                                                   587,500            $12.20
          Granted                                                                         440,000             17.52
          Exercised                                                                       (27,500)            11.59
                                                                                         --------             -----

       Outstanding at end of year                                                       1,000,000            $14.20
                                                                                        =========             =====

       Options exercisable at
          December 31, 1997                                                               992,000            $14.23
                                                                                         ========             =====

</TABLE>


Weighted average fair value per share of options granted during 1997 was $9.14.


                                      F-20

<PAGE>


                             Greenbriar Corporation

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



    NOTE I - STOCKHOLDERS' EQUITY - Continued

<TABLE>

                                                                                                   1996   
                                                                                          --------------------------         
<S>                                                                             <C>       <C>             <C>

                                                                                                           Weighted
                                                                                                            average 
                                                                                                           exercise 
                                                                                           Shares           price 
                                                                                          -------          --------
       Outstanding at beginning of year                                                   155,500            $12.83
          Granted                                                                         432,000             11.98
                                                                                          -------            ------

       Outstanding at end of year                                                         587,500            $12.20
                                                                                          =======             =====

       Weighted  average fair value per share of options granted during 1996 was
$7.72.

    Information  about  stock  options  outstanding  at  December  31,  1998  is
summarized as follows:

                                                                        Options outstanding  
                                                   -----------------------------------------------------------------        
                                                                        Weighted average
                                                       Number              remaining              Weighted average
       Range of exercise prices                     outstanding         contractual life            exercise price 
       ------------------------                    ------------         ----------------          ------------------
       $2.00 to $10.00                                 200,000                 1.0                      2.50
       $10.00 to $15.00                                558,000                 5.6                     11.58
       $15.00 to $17.75                                458,000                 8.4                     17.61
                                                      --------

                                                     1,216,000
                                                     =========
 
                                                                                       Options exercisable 
                                                                               ------------------------------------
                                                                                 Number            Weighted average
       Range of exercise prices                                                exercisable          exercise price 
                                                                               -----------         ----------------

       $2.00 to $10.00                                                           200,000                2.50
       $10.00 to $15.00                                                          552,000               11.58
       $15.00 to $17.75                                                          447,333               17.55
                                                                                --------

                                                                               1,199,333
                                                                               =========
</TABLE>




                                      F-21


<PAGE>

                             Greenbriar Corporation

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE J - OTHER INCOME (EXPENSE)

    Other income (expenses) consists of the following: (amounts in thousands)

<TABLE>

                                                                Year ended December 31, 
                                                           -----------------------------
                                                             1998        1997       1996
                                                           -------     -------    -------
<S>                                                        <C>          <C>       <C>

       Loss on sale of property (see Note B)               $(2,924)       $ -        $ - 
       Write-off of note receivable                             -       (2,000)        - 
       Write-off of investment securities                       -       (2,100)      (200)
       Gain on settlement of litigation                         -        2,409         - 
       Prepayment penalty on mortgage note payable              -       (1,300)        - 
       Write down of property                                 (560)         -          - 
       Other                                                   (85)         (5)       825
                                                              ----         ---        ---

                                                           $(3,569)    $(2,996)      $625
                                                            ======      ======        ===

</TABLE>

    In December 1997, management determined that it was in the best interests of
    the Company to exchange its note receivable of $2,000,000 for certain of the
    borrower's trade receivables.  Due to the uncertainty as to the value of the
    trade  receivables the Company has fully written off the note and has placed
    no value on the trade receivables.  Further, the Company has preferred stock
    of the borrower which was carried at $2,300. Due to deteriorating  financial
    condition of the borrower the Company has fully written off its investment.

    When the Company acquired Wedgwood certain  representations were made by the
    seller.  Subsequent to the  acquisition  two lawsuits were filed against the
    Company and the seller.  In October 1997, the Company and the seller entered
    into an agreement  whereby the Company  would  indemnify  the seller for any
    damages resulting from the lawsuits and agreed to assume  responsibility for
    all legal fees associated with the lawsuits. In return, the seller agreed to
    give the  Company  125,000  shares of its common  stock.  Subsequent  to the
    agreement,  both the  defendants  were  awarded  a  summary  judgment  and a
    directed  verdict,  including  legal fees,  by the  respective  courts.  The
    Company has recorded a gain on the  transaction  of the fair market value of
    the stock, net of legal fees.

    In October 1997, the Company agreed to an early payoff on a loan on three of
    its communities. The loan, which was refinanced at a lower rate of interest,
    had a prepayment penalty of $1,300,000.


NOTE K - CONTINGENCIES

    The  Company is  defendant  in  various  lawsuits  generally  arising in the
    ordinary  course of  business.  Management  of the Company is of the opinion
    that  these  lawsuits  will not have a material  effect on the  consolidated
    results of operations, cash flows or financial position of the Company.





                                      F-22



<PAGE>


                             Greenbriar Corporation

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE L - FAIR VALUE OF FINANCIAL INSTRUMENTS

    The following  methods and assumptions  were used to estimate the fair value
    of each  class of  financial  instruments  for  which it is  practicable  to
    estimate values at December 31, 1998, and 1997:

    Cash and cash  equivalents  - The carrying  amount  approximates  fair value
    because of the short maturity of these instruments.

    Investment  in  securities  -  The  investment  in  securities  consists  of
    convertible  preferred  stock of a private  company.  Fair  value,  based on
    estimated future discounted cash flows, approximates carrying value.

    Mortgage  note  receivable  - The  mortgage  note  receivable  consists of a
    $6,700,000 note with a stated interest rate of 14% due in 2021 from Southern
    Care Corp.  Although the note is in default due to  non-payment of interest,
    management  believes the value of the  underlying  collateral is adequate to
    recover the carrying value.

    Long-term debt - The fair value of the Company's long-term debt is estimated
    based on market rates for the same or similar issues.  The carrying value of
    long-term debt approximates its fair value.

    Accounts  receivable and payable - trade and note payable - affiliate - The 
    carrying amount approximates fair value because of their short maturity.


NOTE M - NOTES RECEIVABLE

    Stock Purchase Notes
    --------------------
<TABLE>

                                                                                     December 31,    
                                                                               -----------------------
                                                                                1998              1997 
                                                                               -----             -----
                                                                                     In thousands)
<S>                                                                            <C>               <C>


       Related party
          Note from James R. Gilley, chief executive officer, principal
              and interest at 5-1/2%, due November 2003                        $2,250            $2,250

       Other                                                                      117               265
                                                                                 ----              ----

                                                                               $2,367            $2,515
                                                                                =====             =====
</TABLE>

    All stock purchase notes are  collateralized  by common stock of the Company
    and are  presented in the balance  sheet as a deduction  from  stockholders'
    equity.





                                      F-23


<PAGE>

<TABLE>

<CAPTION>

                             Greenbriar Corporation

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE M - NOTES RECEIVABLE - Continued

    Mortgage Notes
    --------------     
                                                                                               December 31,  
                                                                                           -----------------------      
                                                                                            1998             1997 
                                                                                           ------           ------
<S>                                                                                        <C>              <C>

                                                                                                (In thousands)

       Mortgage notes receivable consist of amounts due from a corporation
          and bear interest at 14% per annum, payable annually.  The notes
          are due in 2021 and are collateralized by a third lien on real property          $6,700            $6,700
                                                                                            =====             =====

    In connection with certain litigation in which the Company is defendant, the
    maker of the  aforementioned  note  stopped  making  the  interest  payments
    required under the note. As a result,  the Company has ceased  recording the
    accrual of interest income.  Had the Company been accruing  interest on this
    note,  the amount  recognized  would have been  approximately  $900,000  per
    annum.

    Based on the value of the  underlying  collateral  at December 31, 1998,  no
    impairment reserve is required for this note.


NOTE N - LEASE RIGHTS AND OTHER INTANGIBLES

    Lease rights and other intangibles consist of the following:

                                                                                               December 31,   
                                                                                           ------------------------     
                                                                                            1998              1997 
                                                                                          -------          --------
       Lease rights, net of accumulated amortization of $798 in 1998                      $ 5,419           $11,276
       Lease buyout options                                                                 5,157                - 
       Other                                                                                1,935               853
                                                                                           ------              ----

                                                                                          $12,511           $12,129
                                                                                           ======            ======
</TABLE>

    In December 31, 1998,  the Company  exchanged its operating  lease rights on
    eight  assisted  living  communities  for options to purchase  five assisted
    living  communities  (the Option  Communities)  currently  being  leased and
    operated  by the  Company.  The  purchase  price  under the  options  is the
    lessor's  acquisition  cost, and the options are  exercisable  from December
    1998 through December 2001.

    The lease agreements on the Option  Communities have implicit interest rates
    of approximately 12%. The Company believes that financing of assisted living
    communities  can be obtained at this time at  interest  rates  substantially
    less than 12%.

    For financial statement purposes, the capitalized costs related to the eight
    leases  exchanged of $5,157,000 were allocated to the Option  Communities as
    Lease Buyout  Options.  No gain or loss was  recorded.  Upon exercise of the
    purchase options, these costs will be amortized over the term of the related
    debt.



                                      F-24


<PAGE>


                             Greenbriar Corporation

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE O - FOURTH QUARTER ADJUSTMENTS

    During the fourth  quarter  of 1998,  the  Company  wrote down  property  by
approximately $560,000.

    During the fourth quarter of 1997,  the Company wrote off a note  receivable
    and an investment in securities in the aggregate  amount of $4,100,000.  See
    Note J.

    During the fourth  quarter of 1996,  the Company wrote off certain  offering
    costs of  approximately  $670,000  and  notes  receivable  of  approximately
    $400,000. Additionally, the Company made other adjustments reducing earnings
    by approximately $200,000.























                                      F-25