<PAGE>
 
                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION

                                  FORM 10-KSB
 
(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, 1996
 
                                      OR
[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
     EXCHANGE ACT OF 1934
     
                For the transition period from ______ to ______
 
                         Commission file number 0-8187
                            GREENBRIAR CORPORATION
                (Name of Small Business Issuer in its charter)
 
                NEVADA                                           75-2399477
     (State or other jurisdiction of                          (I.R.S. Employer
     Incorporation or organization)                          Identification No.)
 
    4265 KELLWAY CIRCLE, DALLAS, TEXAS                              75244
 (Address of principal executive offices)                         (Zip Code)

Issuer'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

Check 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 [   ]

Check 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-KSB or any amendment to
this Form 10-KSB.  [X]

The issuer's revenues for its most recent fiscal year were:  $29,785,000.

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 26, 1997, was
approximately $35,400,000.

At March 26, 1997, the issuer had outstanding approximately 6,550,000 shares of
par value $.01 Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

Part III of this Annual Report on Form 10-KSB incorporates certain information
by reference from the definitive Proxy Statement for the registrant's Annual
Meeting of Stockholders to be held on May 22, 1997.

Transitional Small Business Disclosure Format (check one):

                     YES [ ]  NO [X] 
<PAGE>
 
                            GREENBRIAR CORPORATION
                     Index to Annual Report on Form 10-KSB
                      Fiscal year ended December 31, 1996



<TABLE>
<CAPTION>
 
PART I                                                                                 PAGE
                                                                                       ----
<S>         <C>                                                                        <C>
 
Item 1:     Description of Business                                                      3
Item 2:     Description of Properties                                                   16
Item 3:     Legal Proceedings                                                           17
Item 4:     Submission of Matters to a Vote of Security Holders                         18
 
PART II
 
Item 5:     Market for Common Equity and Related Stockholder Matters                    18
Item 6:     Management's Discussion and Analysis or Plan of Operation                   18
Item 7:     Financial Statements                                                        23
Item 8:     Changes in and Disagreements with Accountants on
            Accounting and Financial Disclosure                                         23
 
PART III
 
Item 9:     Directors, Executive Officers, Promoters and Control Persons; Compliance
            With Section 16(a) of the Exchange Act                                      24
Item 10:    Executive Compensation                                                      24
Item 11:    Security Ownership of Certain Beneficial Owners and
            Management                                                                  24
Item 12:    Certain Relationships and Related Transactions                              24
 
PART IV
 
Item 13:    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, including its acquired subsidiaries Wedgwood Retirement
Inns, Inc. and American Care Communities, Inc., (the "Company") is an
established assisted living company that operates assisted and 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 related dementia, a growing specialty within
the assisted living industry.

As of March 1997, the Company operated 34 communities in 11 states, with a
capacity of 2,700 residents, consisting of 31 communities in which the Company
has ownership or leasehold interests and two communities managed for third
parties.  In addition, the Company leases one community that is managed by a
third party.  The Company plans to pursue an aggressive growth strategy through
development and construction and, when opportunities arise, to acquire other
communities and assisted living companies through strategic acquisitions.  As of
March 1997, the Company had four assisted living communities with capacity for
368 residents under construction or development.

The Company existed from 1981 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 and
products to 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.

During 1995 and 1996 the Company began developing and constructing assisted
living communities; however, the significant growth that occurred was through
two acquisitions that were completed in 1996.  In March 1996 the Company
acquired Wedgwood Retirement Inns, Inc., a Vancouver, Washington based company
with 16 communities in six states.  In December 1996 the Company acquired
American Care Communities, Inc., a Cary, North Carolina based company with 16
communities in three states.

ACQUISITION OF WEDGWOOD RETIREMENT INNS, INC.
 
Effective March 31, 1996, Greenbriar acquired (the "Wedgwood Acquisition")
Wedgwood Retirement Inns, Inc. ("Wedgwood"), which along with its principals
owned various interests in 15 predecessor entities, each of which owned, leased
or managed at least one assisted or independent living community.

Wedgwood was one of the first builders and management companies in the
retirement and assisted living industry.  At the time of the acquisition
Wedgwood owned and managed 1,292 units of full-service retirement and assisted
living, including some that provide Alzheimer's care. The communities were
located in six states: Washington, Oregon, California, Idaho, New Mexico and
Texas. As of March 1996, Wedgwood had three communities under construction,
containing 225 assisted living units and Alzheimer's beds.

Wedgwood was purchased from 23 individuals, all of whom were unrelated to
Greenbriar.

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 property was valued at its current independently appraised
value of  $3,375,000.  Consideration given was 675,000 shares of Series D
Preferred Stock.  Greenbriar issued 1,949,950 shares  ($14,000,000) of Series E
Preferred Stock and $220,000 in cash and notes to the 

                                       3
<PAGE>
 
Wedgwood shareholders. Both classes of stock, which are unregistered and would
have no trading market unless converted to Common Stock, will be entitled to one
vote per share on all matters to come before a meeting of stockholders. The
Series D Preferred Stock will bear a cumulative quarterly dividend of 9.5% per
year.

At a stockholders' meeting held in September 1996, the stockholders of
Greenbriar voted to allow both series of preferred stock to convert into
unregistered shares of Greenbriar Common Stock, with the Series E convertible at
1.2 shares for each share of Greenbriar Common Stock and Series D convertible at
two shares for each share of Greenbriar Common Stock.  As such, the Series D
would convert into 337,500 shares and the Series E would be convertible into
1,624,958 shares. Immediately after the shareholder vote, the Series E
shareholders converted their holdings into unregistered Greenbriar Common Stock.

ACQUISITION OF AMERICAN CARE COMMUNITIES, INC.

Effective 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").  American Care owned or leased 15 assisted
living communities with approximately 1,350 units, located primarily in North
Carolina and managed one community for a third party.  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 accounts and
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 45,500 shares of the
Company's Common Stock acquired 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.

In addition to the charge to earnings noted above, both Greenbriar and American
Care incurred legal, accounting and other costs in completing the acquisition.
In accordance with the pooling of interest rules of accounting, these costs have
been charged to earnings in the period the combination occurred.

The acquisitions of American Care and Wedgwood provide the Company with the
opportunity for long term cost savings by consolidating the accounting, legal
and other administrative functions.

REAL ESTATE OPERATIONS

As of March 1997, the Company owned three shopping centers in Georgia and one
shopping center in North Carolina.  While all the centers are profitable, they
do not fit into the Company's long range strategic plans and commitment to the
assisted living industry. The Company is actively attempting to sell all the
centers and currently has a firm contract to sell its North Carolina center. The
transaction is scheduled to close in the second quarter of 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"). Certain 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. Generally, assisted living
residents have higher levels of need than those of residents of independent
retirement living communities but lower than those of residents in skilled
nursing centers. Annual expenditures in the assisted living industry have been
estimated to be approximately $14 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:

                                       4
<PAGE>
 
     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 and 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. According to the U.S. Census Bureau, the
     portion of the U.S. population age 75 and older is expected to increase by
     34%, from approximately 13.0 million in 1990 to over 17.4 million by the
     year 2000, and the number of persons age 85 and older, as a segment of the
     U.S. population, is expected to increase approximately 39% during the 1990s
     from 3.1 million to approximately 4.3 million. It is estimated that the
     total U.S. population will increase by approximately 11% during the same
     period. It is further estimated that approximately 57% 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 the United States Bureau of the Census, the median net worth of
     householders age 75 and older has increased from $61,491 in 1988 to $76,541
     in 1992. 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 assisted living
     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. During the three months ended March 31, 1997,
     the average annualized revenue per resident (independent and assisted 
     living) in the Company's communities was approximately $18,000.

     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 aggressively expanded its operations through the acquisition of
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 Company is developing and constructing communities in
markets where it already has its management infrastructure in place and in
markets that are under served.

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 the North Carolina communities. 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
costs of caring for the state's aging population.

As America ages, the Company believes that more states will adopt a
reimbursement policy similar to North Carolina, primarily a double occupancy
approach. Some, however, may stress a single occupancy approach. The Company
believes that the assisted living industry will primarily continue as a
private-pay industry for the foreseeable future, but may become more price-
sensitive as more people need assisted living and for longer periods due to
increased life spans. Costs of caring for an aging America may become more of
a private-pay, state-assisted partnership than currently exists.

                                       5
<PAGE>
 
The Company uses the same development strategy for special care units in
combined Alzheimer's and assisted living communities and in dedicated special
care communities. The units and common space are designed for flexibility so
that they can be primarily single occupancy or primarily 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.

To facilitate its construction and development strategy, the Company has entered
into a Construction Management Agreement with Victor L. Lund, the founder of
Wedgwood and a director of the Company, pursuant to which Mr. Lund agreed to
serve, for three years following closing of the Wedgwood Acquisition, as a
construction manager to oversee the Company's construction of up to 20 assisted
living communities, including those that provide Alzheimer's care.

The top management of the Company has extensive acquisition experience and
contacts in the assisted living and long-term care industry. The rapid growth
achieved this past year came from two major acquisitions. The Company believes
that acquisition is the best way to meet its growth goals. The assisted living
industry is very fragmented and still primarily a single proprietor business.

Acquisition Strategy. The Company may acquire one or more communities or
assisted living companies as a means to enter 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 the operator, the quality of
the management, the need to reposition the community in the marketplace and
costs associated therewith, the construction quality and any need for
renovations of the community and the opportunity to improve or enhance operating
results.

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 also will 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.

Other 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, 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 and the resident's family and
the resident's physician.

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 their own and their families' financial resources.  Such resources
may include social security, investments, proceeds from the sale of their
residence, contributions from family members and insurance proceeds from long-
term care insurance policies.

                                       6
<PAGE>
 
Improve Operating Efficiencies. The Company seeks to improve 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, reduce corporate overhead and provide for more
effective management supervision and financial controls. The Company also
believes that it will be 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 Dedicated Communities. As of March 1997, the Company had
eleven communities with distinct special care wings specifically designed to
serve the needs of individuals with Alzheimer's disease and other forms of
dementia through the provision of a variety of specialty care services. The
Company plans to build a portion of its new communities with a distinct
Alzheimer's wing which will allow the Company to offer this service 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.
However, most of the new communities will be designed to be flexible enough to
allow the Alzheimer's wing to be used only for assisted living residents if
demand for Alzheimer's care is not adequate to justify maintaining a distinct
Alzheimer's program in a particular community. 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 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 service providers in the industry 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, communities maintenance, utilities (except telephone)
          and 24-hour security.

        . 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 eleven of its existing communities
          and generally plans to include a distinct Alzheimer's wing in the
          communities constructed and developed by the Company. Alzheimer's care
          includes a higher 24-hour staff ratio to provide oversight and
          activity programs scheduled around-the-clock in the Alzheimer's wing,
          which is secured from the rest of the building and includes secured
          outdoor walking paths.

PROPERTIES

Operating Communities. The following table sets forth the information with
respect to communities that were operated by the Company at March 31, 1997. The
Company owns, leases, holds equity interest in or manages, on 

                                       7
<PAGE>
 
behalf of third parties, these communities. The Company considers its
communities to be in good operating condition and suitable for the purpose for
which they are being used.


                             EXISTING COMMUNITIES

<TABLE>
<CAPTION>
                                                                                 COMPANY
                                                   CARE             RESIDENT    OPERATIONS                   % OCC. AT
COMMUNITY NAME:                LOCATION           LEVEL     UNITS  CAPACITY(1)  COMMENCED   OWNERSHIP         3/31/97
                               --------           -----     -----  -----------  ----------  ---------         -------
<S>                           <C>                 <C>       <C>    <C>          <C>         <C>              <C>
Owned or Leased and
MANAGED BY COMPANY:
Camelot (6)(8)                Harlingen, TX       S           171         171         9/94  Owned(2)              90%
Crown Pointe                  Corona, CA          S, FE       148         148         1/93  Owned(2)(5)           92
The Greenbriar at Denison     Denison, TX         FE, DC       44          65         5/96  Owned(2)              28
The Greenbriar at Muskogee    Muskogee, OK        FE           48          58         3/97  Owned(2)               7
Lincolnshire                  Lincoln City, OR    S, FE        64          64        11/95  Owned(2)              80
Meadowbrook Place             Baker City, OR      FE           50          50        12/92  Owned(2)              96
Pacific Pointe(6)             King City, OR       S           113         113         1/93  Leased(3)             98
Rose Garden Estates           Ritzville, WA       FE           21          21        11/95  Owned(2)              81
Summer Hill(6)                Oak Harbor, WA      FE           59          61         2/94  Owned(2)              87
Sweetwater Springs            Lithia Springs, GA  FE           49          49        10/96  Leased(9)             22
The Terrace(6)                Portland, OR        FE, DC       65          69         5/91  Owned(2)              94
Villa del Rey(6)              Merced, CA          S            92          92        12/79  Leased(3)             99
Villa del Rey                 Roswell, NM         S, FE       134         134        10/88  Leased(4)(7)          84
Villa del Rey(6)              Visalia, CA         S            98          98        12/79  Leased(3)             95
Villa del Sol                 Roswell, NM         S            12          12        12/95  Owned(2)              92
La Villa                      Roswell, NM         FE,DC        80          91        11/96  Owned(2)              36
Wedgwood Terrace(6)           Lewiston, ID        FE, DC       40          51        11/95  Leased(3)             88
Berne Village(6)              New Bern, NC        S,FE,DC     147         148        12/93  Owned(2)              93
Country Oaks(6)               Chiefland, FL       FE           41          58        12/95  Owned(2)              42
Country Time Inn(6)           Kings Mountain,NC   FE,DC        32          55         6/95  Owned(2)              71
Graybrier(6)                  Southern Pines, NC  FE,DC        61          88         2/94  Owned(2)              94
Oakridge(6)                   Sanford, NC         FE           43          85        12/95  Leased(3)             95
Red Oak(6)                    Greenville, NC      FE           32          58         2/95  Leased(3)             97
Rose Manor of Cary            Cary, NC            FE,DC        56          62        10/96  Owned(2)              45
Rose Tara Plantation(6)       King, NC            FE           35          65         9/94  Owned(2)              97
Rose Terrace(6)               Wendell, NC         FE,DC        51         100         5/94  Leased(3)            100
Rose Vista Village(6)         Fayetteville, NC    S,FE         65          94         2/95  Leased(3)             84
Rose Vista Village(6)         Goldsboro, NC       S,FE         65          94         2/95  Leased(3)             88
Rose Vista Village(6)         Kinston, NC         S,FE         65          94         2/95  Leased(3)             73
Rose Vista Village(6)         Wilson, NC          S,FE, DC     80         122         2/95  Leased(3)             98
Royal Oaks(6)                 Sanford, NC         FE           25          38        12/95  Leased(3)             71

Subtotal/Average                                            2,086       2,509                                     82
                                                            -----       -----                                     --

MANAGED, BUT OWNED
BY THIRD PARTY:
Timberhill Place(6)           Corvallis, OR       FE           60          60         5/95  Managed               95
Scarborough Terrace(6)        Scarborough, ME     FE,DC        57          75         1/96  Managed               38

LEASED,
MANAGED BY THIRD PARTY:
Neawanna by the Sea           Seaside, OR         S, FE        59          59         1/90  Leased(4)(7)          93

Total                                                       2,262       2,702                                     79
                                                            =====       =====                                     ==
</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)    Anticipated number of residents, although capacity exists for additional
       residents with double occupancy of more units.
(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 1997 and 2015 and
       bear interest at fixed and variable interest rates ranging from 7.5% to
       11.75% as of December 31, 1996. 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 4.75% at December 31, 1996.
       Future communities owned and mortgaged by the Company will likely be
       pledged as collateral

                                       8
<PAGE>
 
       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."
(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. As of December 31, 1996, the
       Company had available, subject to periodic review, commitments for
       approximately $60 million of lease credit lines for future communities.
       See Item 6. "Management's Discussion and Analysis or Plan of Operation -
       Liquidity and Capital Resources."
(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)    Community was not constructed by Wedgwood,  Greenbriar, or American Care
(7)    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.
(8)    Of these units, 113 have been sold to residents who then pay a reduced
       monthly fee. The Company agrees to repurchase the units that are sold at
       a price ranging from 65% to 80% of the fair market value at the date of
       repurchase, based upon the number of years the resident owned the unit.
(9)    Leased from a REIT for 15 years expiring in 2011.


Communities Under Construction.  As of March 31, 1997, the Company was in
various stages of construction of four assisted living communities (i.e.
construction activities have commenced and are ongoing).  Set forth below is
certain information with respect to communities under construction as of March
31, 1997.


                        COMMUNITIES UNDER CONSTRUCTION

<TABLE>
<CAPTION>
 
 
                                             CARE            RESIDENT  ANTICIPATED  ANTICIPATED
COMMUNITY NAME               LOCATION        LEVEL    UNITS  CAPACITY    OPENING     OWNERSHIP
--------------               --------        -----    -----  --------  -----------  -----------
<S>                       <C>              <C>        <C>    <C>       <C>          <C>
 
Greenbriar at Sherman     Sherman, TX      FE, DC       48       65       Q1-98        Own
Camelot                   Harlingen, TX    S, FE, DC   138      147       Q4-97        Own
Oak Park                  Clermont, FL     FE           60       60       Q3-97        Lease
Woodmark at Steel Lake    Federal Way, WA  FE, DC       89       96       Q2-97        Manage
                                                       ---      ---        
                                                       335      368
</TABLE>

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 $71,000 per unit, and average construction time for a typical
community to be approximately six to twelve months, depending upon the number of
units.  The Company estimates that, once opened, it takes approximately six to
twelve additional months after licensure for each community to achieve a
stabilized occupancy level of 95% or higher.  The Company anticipates that each
community will have an average operating loss (before depreciation) of
approximately $350,000 prior to reaching stabilized occupancy.

The Company believes quality independent general construction contractors are
readily available to build its communities at competitive prices.  The Company
has entered into a Construction Management Agreement with Victor L. Lund, the
founder of Wedgwood and a director of the Company, to oversee construction of up
to 20 communities through 1998.

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 

                                       9
<PAGE>
 
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.  The Company
expects to experience negative cash flow from operations for at least 12 to 18
months following March 1997 as it continues to develop and construct assisted
living communities.  There can be no assurance that any newly constructed
communities will achieve a stabilized occupancy rate and attain a resident mix
that meet 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 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 leasing
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 6. "Management's Discussion and Analysis or
Plan of Operation - Liquidity and Capital Resources."

Repair and Maintenance.  The Company conducts routine repairs and maintenance of
its communities on a regular basis, as needed.  Several of the Company's
communities acquired in the Wedgwood and American Care Acquisitions have been in
operation for ten years or more.  The Company has reviewed each community and
plans to spend up to approximately $1.5 million in repairs, maintenance and
improvements to certain of these communities over the next 12 months.  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 1997 range in size from 12 to 171
units, are from one to three stories, and from 10,000 to 148,000 square feet.
Most of the new communities to be constructed by the Company will have 44 to 60
units, one or two stories and 35,000 to 70,000 square feet. Each community has
or will have 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, to 470 to 650 square
feet for a one bedroom unit, and to 680-850 square feet for a two bedroom unit.
Assisted living units typically include a private bathroom, kitchenette,
closets, living and sleeping areas, as well as a lockable door, emergency call
system, individual temperature controls, 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.

                                       10
<PAGE>
 
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 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
staffs 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 Dallas, Texas
executive office and King City, Oregon and Cary, North Carolina regional offices
provide support services to each of the Company's 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
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 has a national learning center at its Dallas corporate headquarters
to provide training for community Executive Directors and other personnel. The
Company believes that education, training and development enhance the
effectiveness of its employees. All employees are required to complete the
Company's training program, which includes 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 addition to 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:

Advisory Board. The Company has assembled an Advisory Board of five experts to
advise the Company with regard to design criteria, internal and external
decoration and enhancing the functioning of individuals with Alzheimer's disease
who can benefit from assisted living.

The Advisory Board will (i) review and recommend policies concerning programs
and services, (ii) serve as a resource to the Company in program development and
evaluation, (iii) identify trends and gaps in service, (iv) design and
participate in education and training programs for staff, family members and
caregivers, (v) interpret implications of legislation affecting the elderly,
(vi) provide extra-organizational viewpoints, (vii) study, evaluate and document
the effectiveness of services and recommend changes needed in programs, (viii)
review proposals for research and (ix) help establish standards. However, the
Advisory Board has no executive authority, only advisory.


The current members of the Advisory Board are:

     Herbert Shore, Ed.D. is president of Shore & Associates Geriatric and
     Elderly Services, Dallas, Texas. Dr Shore Serves as Chairman of the
     Greenbriar Advisory Board. He has been a long term care administrator and
     has previously taught at the Center for Studies in Aging at the University
     of North Texas.

                                       11
<PAGE>
 
     Dee Carlson, M.A. is President of Alzheimer's Care, Consultation, Education
     and Training ("A.C.C.E.T."), which provides consulting services for
     communities and organizations servicing individuals with dementia and their
     families. A.C.C.E.T. is located in Lexington, Kentucky. Prior to forming
     A.C.C.E.T., Ms. Carlson was Education and Family Services Director for the
     Alzheimer's Disease Center, Mayo Clinic, Rochester, Minnesota.

     Robert Ellis Rousch, Jr., Ed.D. is affiliated with the Huffington Center on
     Aging, Baylor College of Medicine, Houston, Texas. Dr. Rousch is an
     Educator and Administrator, and he previously directed the Texas Consortium
     for Geriatric Research and Education Centers.

     Audrey S. Weiner; DSW is the Senior Vice-President/Administrator of the
     Sarah Neuman Home in Mamaroneck, New York. A practitioner, Dr. Weiner has
     had extensive experience designing programs, services and communities for
     Alzheimer patients. She worked at the Brookdale Institute on Aging in New
     York City.

     Donald R. Benton, D. Hum. and D.Min. is President of The Kindness
     Foundation of Dallas, Texas. He retired from the Methodist Ministry after
     44 years of service.

The Advisory Board will meet as a group at least quarterly and spend 20 to 30
hours per quarter on Advisory Board related activities. Each member will receive
$2000 for attending each official meeting. All expenses related to meeting
attendance will also be paid by the Company. In recognition for the service of
the Advisory Board, each member will be awarded 100 shares of Common Stock for
the initial year of service and an additional 100 shares for each year of
service thereafter.

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.

Regular Community Inspections. Community inspections are conducted by regional
vice presidents and other 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 assure the inspections are
thorough and to facilitate corrective action if required.

MARKETING

The Company's marketing and sales efforts are undertaken on regional and local
levels. This effort is intended to create awareness of the Company 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 Company 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 with no community relations coordinator, the Executive Director
performs these 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 community. During
this pre-opening marketing period, the Company's personnel actively contact
local referral sources, which generally account for a majority of 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.

                                       12
<PAGE>
 
GOVERNMENT REGULATION

Healthcare is an area of extensive and frequent regulatory change. In contrast,
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.

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; 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 they provide
in the states in which they operate. A limited number of the Company's
communities are not required to possess such licenses, however, 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 or 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 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 and expects that it will obtain all required licenses for each new
community. Each of the Company's licenses must be renewed annually.

Currently, only eight states (Kentucky, Connecticut, New York, Illinois,
Georgia, Missouri, New Jersey and South Dakota) have certificate of need ("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, inasmuch 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 seeks to take 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. No actions are currently
pending against any of the Company's communities nor have any of the Company's
communities been cited in the past for any significant non-compliance with
regulatory requirements.

Twelve 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 have 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.

The Company participates in federal and state reimbursement programs. However,
the Company expects the bulk of its revenues to come from private-payment.
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 and to be built 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 have a major effect on the full service residential retirement and
assisted living industry. The communities developed or acquired by the Company

                                       13
<PAGE>
 
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 the ADA.
Regulation of the industry is likely to increase, particularly for those
providers accepting Medicaid reimbursements.

In compliance with the 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.  The Company has not
experienced any denials of requested rents or rent increases.

COMPETITION

The long-term care industry generally is highly competitive and it is
anticipated that the assisted living and Alzheimer's care businesses in
particular will 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 health 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. While there are currently few
assisted living and Alzheimer's care communities in some of the markets where
the Company operates and plans to operate, the Company expects that, as assisted
living receives increased attention and the number of states which participate
in MHCCOA increases, 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.

As noted, the Company competes with other providers of long-term care with
respect 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.

The Company is seeking sites and acquisition candidates primarily in non-
metropolitan communities located in the western, southern and southeast regions
of the United States that are not currently served or are under served. It 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

                                       14
<PAGE>
 
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 such 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 such property or to borrow using such 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 such person. 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 of all of the sites
currently under construction or development, as well as twenty-one 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, nor is the Company aware of
any such environmental liability. Wedgwood has operated, for periods ranging
from one year to 18 years, nine communities for which environmental assessments
have not been 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, 1997, the Company's officers and directors and entities with
which they are affiliated beneficially owned approximately 71.5% of the
outstanding shares of Common Stock; Mr. James R. Gilley, Chairman of the Board
of the Company, a corporation wholly owned by him, and his spouse and adult
children (as individuals or as trustees for various family trusts), beneficially
owned an aggregate of approximately 35.2% of the outstanding Common Stock of the
Company, Mr. Victor Lund, a director of the Company and the founder of Wedgwood,
beneficially owned approximately 18.9% of the outstanding shares of Common
Stock, and Floyd B. Rhoades, President and Chief Executive Officer of the
Company and a founder of American Care, beneficially owned approximately 13.3%
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 558,000 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.

                                       15
<PAGE>
 
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 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.

Shares Eligible for Future Sale.  The Company presently has a total of 6,557,000
shares of Common Stock outstanding. Of these shares, 1,189,000 shares are freely
tradable without restriction or limitation under the Securities act, except for
shares owned by "affiliates" (as that term is defined under the rules and
regulations under the Securities Act) of the Company. The remaining 5,368,000
shares are "restricted" securities within the meaning of Rule 144 under the
Securities Act. Unless registered under the Securities Act prior thereto, these
restricted shares will not become eligible to be sold publicly until future
periods. There are also shares of Common Stock issuable upon the exercise of
stock options and conversion of Preferred Stock. No prediction can be made as to
the effect, if any, that future sales of shares, or the availability of shares
for future shares, will have on the market price of the Common Stock from time
to time. The sale of substantial amounts of Common Stock, or the perception that
such sales could occur, could adversely affect prevailing market prices for the
Common Stock.

EMPLOYEES

At March 1997, the Company employed approximately 1,384 employees, including 920
full-time and 464 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.

CORPORATE OFFICES

The Company's principal office is a 27,500 square feet building that it owns in
Dallas, Texas. Wedgwood's principal executive offices were located in Vancouver,
Washington, where Wedgwood leased approximately 6,000 square feet of office
space for $6,194 per month. This lease expired during December 1996, but
Wedgwood has an agreement to continue to lease the space through April 30, 1997.
American Care's principal executive offices are located in Cary, North Carolina.
American Care leases 5,300 square feet for $3,065 per month. The lease expires
September, 1998.

An integral factor in the Company's decision to acquire American Care was the
belief that there would be cost saving in consolidating the operations of
Greenbriar, Wedgwood and American Care. The Company is in the process of closing
its corporate offices in Vancouver and Cary and transferring a significant
portion of those operations to the corporate offices in Dallas. The Company's
Dallas 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.

                                       16
<PAGE>
 
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 1997.



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.  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.  Plaintiff claims that the discharge occurred at
the time of the assignment despite the facts that (i) the assignment had
occurred 24 months prior to their claim of discharge, (ii) Plaintiff, at the
time of the assignment, had acknowledged in writing that the indebtedness was
due and owing, (iii) Plaintiff paid approximately $1.2 million toward the
indebtedness subsequent to the assignment, and (iv) Plaintiff apparently has
continued to accrue the indebtedness on its financial statements.  The Company
disputes this claim and has filed a counterclaim to confirm the indebtedness.
The Company plans to vigorously contest and defend and vigorously pursue its
counterclaims against Plaintiff.  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.  The Company also does not believe the approximately
$6.7 million of indebtedness was discharged, and believes that it will prevail
on this counterclaim, although there can be no assurance.  The amount of the
indebtedness, including accrued interest, is approximately $10 million.  The
Company's basis in the indebtedness, net of related deferred gains, is
approximately $4.2 million.

In 1995 the plaintiff and the Company each filed cross motions for summary
judgment on the issue of whether the indebtedness was discharged.  In October
1996 the trial court granted plaintiff's motion.  An appeal has been filed by
the Company on that ruling.  The Company does not believe that the court's
ruling is correct, and believes that it will prevail on its appeal, although
there can be no assurance.

In addition to other causes of action that the Company may file against the
plaintiff, the Company filed a negligence action against a law firm and against
a lawyer with that firm, relating to their involvement with the assignment,
described above.  The Company has been advised that these defendants carry a
professional liability policy with limits of $5 million.  These defendants deny
liability and have filed a cross-action against among others, a former officer
and director of the Company.  The Company believes should it not prevail against
Southern Care on the indebtedness issue, that it will prevail on this claim,
although there can be no assurance.

HEALTH CARE PROPERTY INVESTORS VS. GREENBRIAR, ET AL.

In October, 1996, Health Care Property Investors, Inc. filed a complaint for
unspecified damages against the Company, Victor Lund, a director of the Company,
and related entities and others.  Health Care Property Investors alleges that
entities related to the Company had breached terms of two leases of communities
through a transfer of control of the tenant without the payment of "transfer
consideration" called for in the leases.  In addition, Health Care Property
Investors alleges that the Company tortuously interfered with the leases because
of the transfer.

The Company believes that transfer consideration is not due, pursuant to the
leases, as Victor Lund continues to own a majority interest in the tenants and
that there has been no tortuous interference in the leases.

BENETIC FINANCIAL VS. WEDGWOOD ET AL.

The plaintiff seeks to collect in excess of $1,000,000 on an alleged loan
brokerage agreement. There is no signed loan brokerage agreement between
Wedgwood and the plaintiff in this action. Plaintiff alleges that he delivered a
loan brokerage agreement to Wedgwood, which they verbally accepted. The Company
understood that Plaintiff was acting as a potential partner and was not
providing services to the Company. This suit was filed after the statute of
limitations had expired for a verbal or an implied contract. If the Plaintiff
can

                                       17
<PAGE>
 
prove that there was verbal acceptance of the contract, a four-year statute of
limitations applies and has not expired. The Company believes that the statue of
limitations has expired on this action and there is little or no liability for
any of Plaintiff's services.

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 or results of operations of the
Company.

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

A special meeting of stockholders was held on December 30, 1996 solely for the
purpose of voting on the issuance of 1,300,000 shares in connection with the
merger of American Care into a subsidiary of Greenbriar.  The proposal was
approved by a vote of 4,362,123 shares for 0 shares against and 60 shares
abstaining.

                                    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.

<TABLE>
<CAPTION>
                                1996                1995
                           High       Low       High      Low
                 
<S>                        <C>       <C>       <C>      <C>
       First Quarter       $16 3/4   $ 9 7/16  $ 8 3/4  $ 5
       Second Quarter       17 5/8    14        10 5/16   5 5/16
       Third Quarter        17 3/8    15 5/8    13 7/16   9 1/16
       Fourth Quarter       16        12 3/8    13 7/16   7 3/16
</TABLE>

The above prices have been adjusted to reflect a one for five reverse split of
the Common Stock that occurred on December 1, 1995.

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 financings and other arrangements.

ITEM 6:   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 such 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 and American Care in December 1996.  The Wedgwood
Acquisition is accounted for as a purchase, and the historical financial
statements of the Company do not 

                                       18
<PAGE>
 
include any revenues or earnings (losses) attributed to Wedgwood 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.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 1996, the Company had a deficit in working capital of
$2,544,000.  During the first quarter of 1996, the Company sold American 
Mobility Group, Inc. ("AMI"), which was a continuation of the Company's program
of selling its non-strategic assets and using the proceeds to invest in existing
operations.  The sale of AMI did not have a material impact on the Company's
liquidity.  In March 1996, the Company acquired Wedgwood.  As of December 31,
1996, the Company had assets of $116,701,000, liabilities of $80,549,000 and
stockholders' equity of $36,152,000.  The Company has sufficient liquidity and
capital to meet its current obligations.

As of March 1997 the Company owned three shopping centers in Georgia and one
shopping center in North Carolina.  While all the centers are profitable, they
do not fit into the Company's long range strategic plans and commitment to the
assisted living industry.  The Company is actively attempting to sell all the
centers and currently has a firm contract to sell its North Carolina center.
The transaction is scheduled to close in the second quarter of 1997.  The
Company anticipates that the centers will be sold for an amount which at least
equals the book value of $5,379,000.

As of December 31, 1996, the Company has loans in place or has received
commitments for future financing, subject, in the case of the commitments, to
final documentation, as follows:



(i)     Health Care REIT, Inc. has issued a commitment to provide $60 million
        over three years to acquire and pay 100% of the construction costs of
        assisted living communities to be leased to the Company. The term of the
        leases will range from 11 years to 14 years plus two five-year renewal
        options, with lease payments based upon the interest rate on U.S.
        Treasury notes plus 3.75%, subject to inflation adjustments not to
        exceed .25% per year. A 1 % commitment fee is required, as each lease is
        entered into. The Company will have the option to purchase each
        community at the end of the term for its original cost plus 50% of the
        increase in its fair market value. As additional security to the lessor,
        the Company will provide a letter of credit for 5% of the amount
        financed, a first lien on personal property and receivables of the
        community, and subordination of management fees and rentals from
        subtenants.

        The commitment is in three segments of $20 million each, with approval
        of the REIT's Investment Committee before using the second and third
        segments. As of March 31, 1997, the Company had utilized $5.3 million of
        the commitment for funding the Oak Park property under construction in
        Clermont, Florida.

(ii)    In 1995 Health Care REIT, Inc. provided mortgage loan commitments for
        two communities totaling $16,891,000. Of that amount, $4,536,000 was
        used to refinance one of the communities (Camelot) and $5,625,000 was
        used to construct another community (La Villa) which opened in the
        fourth quarter of 1996. The balance includes $5,160,000 to fund
        construction of the Camelot Assisted Living community, which is under
        construction and $645,000 to fund certain improvements to the existing
        Camelot community that are almost complete along with $925,000 for the
        construction of a second phase of La Villa, which is not presently
        scheduled for development and is not included in the development and
        construction total. The construction loans convert to term loans upon
        completion of construction. The term loans mature in seven to ten years,
        initially bear interest at a rate of 4.5% over the corresponding U.S.
        Treasury Note rate and are secured by the communities, an assignment of
        leases, rents and management contract, letters of credit and an
        assignment of the communities licenses and permits.
 
(iii)   The Company has obtained commitments from First National Bank & Trust
        Co. of McAlester, Oklahoma of $5.2 million to provide mortgage financing
        for the two assisted living Communities under construction in Muskogee,
        Oklahoma and Sherman, Texas. Such loans require a 2% commitment fee and
        are payable in 10 years (but callable at the discretion of the bank in 5
        years) based on a 20 year amortization, with interest at a prime plus 2%
        (subject to a minimum interest rate of 8.70% and a maximum interest rate
        of 12.75%).
 

                                       19
<PAGE>
 
        The Community in Muskogee was completed in March 1997 and the Sherman
        Community is in the early stages of construction.
 
(iv)    In 1995 Investors Real Estate Trust ("IRET") issued a commitment to
        provide 100% of the construction costs up to $2,810,000 for Sweetwater
        Springs in Lithia Springs, Georgia that opened in October 1996. Upon
        completion the community was leased to the Company for a term of 15
        years. In 1996 the commitment was increased by $1,540,000 to a maximum
        of $4,350,000 in order to provide for the construction of a second phase
        of the community consisting of 16 Alzheimer's special care units. The
        monthly lease payments will be based on the funded amount and on annual
        interest rates of 11.0% for the first five years, 12.65% for the next
        five years and 14.55% for the last five years of the lease. The Company
        has an option to purchase the Community at fair market value during the
        first nine months of the fourteenth year of the lease. The lease is
        secured by the community.

        Construction of the second phase has been deferred indefinitely. Though
        some of the additional funding has been utilized, the remaining funds
        available are considered sufficient to complete the second phase.

In addition to development and construction financing, described above, Comerica
Bank-Texas has issued a commitment to provide $1,600,000 to finance buses and
other vehicles to transport residents of the Company's communities.  Each
vehicle will be financed at 90% of cost and the loan for each vehicle will be
amortized over 48 months.  The interest rate will be prime plus one percent.

The Company believes it has adequate resources to complete its communities
currently under construction and development and plans to use the balance of
such committed sources and its net working capital in excess of operating needs
for future development of assisted living communities.

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.

FISCAL 1996 AS COMPARED TO FISCAL 1995

Revenues and Operating Expenses from Assisted Living Operations.  Revenues
increased to $29,785,000 in 1996 as compared to 7,964,000 in 1995.  The
principal reasons for the increase were the acquisition of Wedgwood and the
growth of American Care.  Wedgwood was acquired effective March 31, 1996 and the
financial statements reflect nine months operations with respect to the 16
communities acquired in the Wedgwood acquisition.  American Care in December
1995 acquired the remaining 70% of five assisted living communities in which a
30% minority interest had been acquired in January 1995.  The increase was also
due to the acquisition by American Care of one assisted living community in June
1995 and three assisted living communities in December 1995.  Assisted living
community operations, lease expense, depreciation and amortization and interest
expense all increased substantially in 1996 as compared to 1995.  The primary
reason for these increases, as discussed above, is the acquisition of Wedgwood
and the growth of American Care.

                                       20
<PAGE>
 
The following table summarizes income (loss) from community operations.  This 
table does not include interest or corporate general and administrative 
expenses.

                         Year Ended, December 31, 1996
                            (Amounts in thousands)

<TABLE>
<CAPTION>
 
 
                                                       Stabilized      Start-up            
                                                       Communities   Communities    Total
                                                       -----------   -----------   -------
<S>                                                    <C>           <C>           <C>
                                                                                
Assisted Living Community Income                         $28,129        $1,544     $29,673
                                                                                
Assisted Living Community Operating                                                       
     Expenses                                             17,717         1,722      19,439
                                                         -------        ------     -------
                                                                                
Gross Operating Income                                    10,412          (178)     10,234
                                                                                
Lease Expense                                              3,510           202       3,712
                                                                                
Community Depreciation & Amortization                      1,616           385       2,001
                                                         -------        ------     -------
                                                                                
Income (Loss) from Community Operations                                                    
     before interest and taxes                           $ 5,286        $ (765)    $ 4,521 
</TABLE>

(1)  Stabilized communities are those communities that have been operating for
     one year or have achieved stabilized occupancy of 95% 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 95% or more.

General and Administrative Expenses.  These expenses were $6,731,000 in 1996 as
compared to $3,948,000 in 1995.  The increase in these costs was primarily due
to the acquisition of Wedgwood and American Care.  The increase in the size of
the Company, as well as the geographic dispersion of the properties being
managed requires additional general and administrative costs.  In addition,
during 1996, Greenbriar, American Care and Wedgwood were operated as three
separate companies.  Each company had its own corporate office, executive
officers, corporate staff, accounting department and other related costs (See
Merger and Transition Expenses).

Merger and Transition Expenses.  During 1996, both Greenbriar and American Care,
as separate companies, were attempting to raise money through the capital
markets.  On a combined basis, the costs of these efforts were $774,000, which
the companies expensed during 1996.

The acquisition of American Care has been accounted for as a pooling of
interests.  This method of accounting requires the companies to expense the cost
of the combination.  The cost of lawyers, accountants, investment bankers and
other expenses related to the combination that was incurred by both Greenbriar
and American Care was approximately $983,000.  These costs were expensed in
1996.

A key component of the acquisition of American Care was the opportunity it
provided for long-term cost savings by consolidating the accounting, legal and
other administrative functions of Greenbriar, American Care and Wedgwood.  In
the fourth quarter of 1996, the Company recorded a one-time charge to earnings
of $1,079,000 to reflect the anticipated cost of consolidating the three
companies.

Discontinued Operations.  Earnings from discontinued operations reflect the real
estate operations, which are currently held for sale.  In February 1996, the
Company's sale of American Mobility Inc. resulted in a gain on sale, net of tax,
of approximately $520,000.

                                       21
<PAGE>
 
Deferred Taxes.  At December 31, 1996, the Company had a deferred tax asset of
$868,000.  The asset is expected to be recovered within 2-3 years from earnings
of current operations as well as gains from sales of assets.

FISCAL 1995 AS COMPARED TO FISCAL 1994

Revenues.  Operating revenues decreased 32.7% to $7,964,000 in 1995 from
$11,840,000 in 1994.  The decrease was primarily due to the sale of The
Fountainview property in January 1995 and Rivermont Center in December 1994.
Revenues reflected in long term care for 1994 reflect the operations of both
properties for the entire year.  Excluding the above mentioned properties
operating revenues increased to $7,964,000 in 1995 from $3,901,000 in 1994.  The
increase was primarily attributable to the acquisition of five additional
assisted living communities during 1995 (including the community sold in August
1996) and to an improvement in the operating performance of the assisted living
communities acquired prior to 1995.

Operating Expenses.  Operating expenses decreased 37.8% to $4,731,000 from
$7,613,000 in 1994.  The decrease was due primarily to the sale of The
Fountainview and Rivermont Center noted above.  Operating expenses exclusive of
Fountainview and Rivermont increased to $4,394,000 in 1995 as compared to
$2,766,000 in 1994.  The increase was primarily due to the acquisitions in 1995.

General and Administrative Expense.  General and administrative expenses were
$3,948,000 in 1995 as compared to $4,118,000 in 1994.  The most significant
reason for this decrease was the sale of The Fountainview in January 1995.
Expenses for The Fountainview were $4,632,240 in 1994.  The decrease due to the
sale of The Fountainview was offset by increased costs at both Greenbriar and
American Care.  Both companies increased administrative costs, in particular
personnel, to prepare for growth.

Interest Income and expense.  Interest income was $1,119,000 in 1995 as compared
to $216,000 in 1994.  Interest expense was $1,548,000 in 1995 as compared to
$2,761,000 in 1994.  As the Company sells assets, it increases the cash it has
available for investments.  The increase in interest income reflects the
interest received on those investments.  The decrease in interest expense was
caused principally by two factors.  First, when the Company sold its assets it
was also relieved of the obligation to pay interest on liabilities associated
with those assets.  Second, the Company used certain of its available cash to
pay down corporate debt, which further reduced interest expense in 1995.

Gain on Sale of Assets.  During 1995 the Company continued its program of
selling assets that were not essential to its new business focus on assisted
living.  In January 1996, the Company sold its mobility products subsidiaries,
and the financial statements reflect the revenue and costs associated with this
operation as discontinued operations.  Gain on sales of assets for the year
ended December 31, 1995 was $6,950,000.  This compares to $2,803,000 for the
year ended December 31, 1994.  The majority of 1995's gain consists of
$5,149,000 from the sale of The Fountainview.

In April 1995 EquiVest sold a shopping center in Florida for $750,000 and
reported a gain of $100,000.

In June 1995 the Company sold its economic interest in a legal claim with
respect to Wespac Investors Trust III.  The sales price was $1,085,000 and the
Company recorded a gain of $654,000.  Separately, the Company acquired 49% of
the outstanding common stock of Wespac Investors Trust III in a private
transaction.  The Company immediately sold its economic interest in that stock
at no gain or loss.

As part of a larger transaction that occurred in 1992 the Company received the
rights to the interest on certain escrow funds in the year 2028.  At the time of
the transaction, for accounting purposes, the Company placed no value on that
right.  In August 1995 the Company sold its rights to the future interest for
$1,140,000 in cash.

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.

                                       22
<PAGE>
 
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.


ITEM 7:   FINANCIAL STATEMENTS
-------   --------------------


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


ITEM 8:   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
-------   ---------------------------------------------------------------
          FINANCIAL DISCLOSURE
          --------------------


     None.

                                       23
<PAGE>
 
                                   PART III
                                   --------
                                        

The information required by Items 9, 10, 11 and 12 is incorporated by reference
into this Form  10-KSB from the Company's definitive Proxy Statement for its
Annual Meeting of Stockholders to be held May 22, 1997, which definitive Proxy
Statement will be filed with the Securities and Exchange Commission on or before
April 30, 1997.


ITEM 13:  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 Exhibits
------    -----------------------

 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).

 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.

 4.3.2    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. 

                                       24
<PAGE>
 
          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).

 4.5.1    Stock Purchase Agreement dated May 7, 1993 for the purchase of
          Complete Corporation and Remuda Acquisition Corporation (filed as
          Exhibit 4.5.1 to Registrant's Form 10-KSB for the year ended December
          31, 1993).

 4.5.2    Registration Rights Agreement dated May 7, 1993 granted to the
          shareholders of Complete Corporation and Remuda Acquisition Corp.
          (filed as Exhibit 4.5.2 to Registrant's Form 10-KSB for the year ended
          December 31, 1993).
 
 4.5.3    Agreement and Plan of Merger dated June 30, 1994 with New Life
          Treatment Centers, Inc. relating to the disposition of Remuda Ranch
          Center for Anorexia and Bulimia, Inc. (filed as Exhibit 4.5.3 to
          Registrant's Form 10-KSB for the year ended December 31, 1994).
 
 4.5.4    Amended and Restated Certificate of Incorporation of New Life
          Treatment Centers, Inc. (filed as Exhibit 4.5.4 to Registrant's Form
          10-KSB for the year ended December 31, 1994).
 
 4.5.5    Registration Right Agreement dated July 29, 1994 re. New Life
          Treatment Centers, Inc. (filed as Exhibit 4.5.5 to Registrant's Form
          10-KSB for the year ended December 31, 1994).
 
 4.5.6    Restricted Stock Agreement dated July 29, 1994 re. New Life Treatment
          Centers, Inc. (filed as Exhibit 4.5.6 to Registrant's Form 10-KSB for
          the year ended December 31, 1994).
 
 4.6.1    Stock Purchase Agreement dated August 16, 1993 for the issuance of
          Series C Preferred Stock (filed as Exhibit 4.6.1 to Registrant's Form
          10-KSB for the year ended December 31, 1993).

 4.6.2    Stock Purchase Agreement dated August 16, 1993 between Clay Capital
          Corporation and Altman Nursing, Inc. (filed as Exhibit 4.6.2 to
          Registrant's Form 10-KSB for the year ended December 31, 1993).

 4.7.1    Stock Purchase Agreement dated January 30, 1996 between Joseph L.
          Durant, Innovative Health Services, Inc. and Medical Resource
          Companies of America (filed as Exhibit 4.7.1 to Registrant's Form 8-K,
          dated February 20, 1996, and incorporated herein by this reference).

 4.8.1    Stock Purchase Agreement dated March 15, 1996 between Wedgwood
          Retirement Inns, Inc., Victor L. Lund, Paul Dendy, Mark Hall, Frank R.
          Reeves, Doris Thornsbury, Teresa Waldroff and Medical Resource
          Companies of America (filed with Registrant's 8-K, dated March 15,
          1996, and incorporated herein by this reference).

 4.8.2    Amendment to Stock Purchase Agreement (dated March 15, 1996) dated
          March 15, 1996 between Wedgwood Retirement Inns, Inc., Victor L. Lund,
          Paul Dendy, Mark Hall, Frank R. Reeves, Doris Thornsbury, Teresa
          Waldroff and Medical Resource Companies of America (filed with
          Registrant's 8-K, dated March 15, 1996, and incorporated herein by
          this reference).

                                       25
<PAGE>
 
 4.9.1    Amendment to Agreement and Plan of Merger dated November 21, 1996,
          among Registrant and American Care Communities, Inc., Floyd B. Rhoades
          and Gary L. Smith (filed with Registrant's Form 8-K dated December 31,
          1966 and incorporated herein by reference).
 
 4.9.2    Amendment to Agreement and Plan of Merger dated December 30, 1996.

 4.9.3    Registration Rights Agreement dated December 30, 1996 between
          Registrant and Floyd B. Rhoades.

 4.9.4    Employment Agreement dated December 30, 1996 with Floyd B. Rhoades.

 10.1     Real Estate Lease of Alpha Mobility, Inc. (filed as Exhibit 10.1 to
          Registrant's Form S-4 Registration Statement, Registration No. 33-
          55968, and incorporated herein by this reference).

 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).

 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 (non-recourse) 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).

 10.4.1   Form of Stock Option to purchase 150,000 shares (30,000 post December
          1995 shares) of Registrant's Common Stock issued to Robert L. Griffis
          on October 12, 1992 (filed as Exhibit 10.4.1 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 (non-recourse) 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 (non-recourse) 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).

                                       26
<PAGE>
 
 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 (non-recourse) 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).

 10.8.3   Form of Security Agreement - Pledge (non-recourse) 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).

 10.9.1   Form of Stock Option to purchase 10,000 shares (2,000 post December
          1995 shares) of Registrant's Common Stock issued to Michael Merrell on
          October 12, 1992 (filed as Exhibit 10.9.1 to Registrant's Form S-4
          Registration Statement, Registration No. 33-55968, and incorporated
          herein by this reference).

 10.9.2   Form of $5,000 Promissory Note dated October 12, 1992 payable to
          Registrant by Michael Merrell representing the purchase price for
          10,000 shares (2,000 post December 1995 shares) of Registrant's Common
          Stock (filed as Exhibit 10.9.2 to Registrant's Form S-4 Registration
          Statement, Registration No. 33-55968, and incorporated herein by this
          reference).

 10.9.3   Form of Security Agreement - Pledge (non-recourse) between Registrant
          and Michael Merrell securing the Promissory Note referenced in Exhibit
          10.9.2 (filed as Exhibit 10.9.3 to Registrant's Form S-4 Registration
          Statement, Registration No. 33-55968, and incorporated herein by this
          reference).

 10.9.4   Form of $187,000 promissory note dated December 29, 1994, payable to
          Registrant by W. Michael Gilley representing the purchase price for
          150,000 shares (30,000 post December 1995 shares) of Registrant's
          Common Stock (filed as Exhibit 10.9.4 to Registrant's Form 10-KSB for
          the year ended December 31, 1994).

 10.9.5   Form of Security Agreement-Pledge between Registrant and W. Michael
          Gilley securing the promissory note referenced in Exhibit 10.9.4
          (filed as Exhibit 10.9.5 to Registrant's Form 10-KSB for the year
          ended December 31, 1994).

 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).

                                       27
<PAGE>
 
 10.9.7   For 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).

 10.11    Stock Exchange Agreement dated December 31, 1991 for the acquisition
          of CareAmerica, Inc. (filed as Exhibit 10.13 to Registrant's Annual
          Report on Form 10-KSB for the fiscal year ended December 31, 1991 and
          incorporated herein by reference).

 10.12    Employment Agreement and Agreement Not to Compete between Registrant
          and Dennis McGuire dated November 1, 1990 (filed as Exhibit 10.12 to
          Registrant's Form S-4 Registration Statement, Registration No. 33-
          55968, and incorporated herein by this reference).

 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).

 10.13.1  Amendment to Registrant's 1992 Stock Option Plan (filed as Exhibit
          10.13.1 to Registrant's Form 10-KSB for year ended December 31, 1994).

 10.20.2  Contract of Sale dated December 28, 1994 with Autumn America
          Retirement, Ltd. regarding the sale of Fountainview Retirement Center
          (filed as Exhibit 10.20.2 to Registrant's Form 10-KSB for year ended
          December 31, 1994).

 10.20.3  Exchange Agreement dated December 20, 1994 to settle the Fountainview
          second mortgage profit participation, (filed as Exhibit 10.20.3 to
          Registrant's Form 10-KSB for year ended December 31, 1994).
 
 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).

 10.21.2  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 Exhibit
          10.22.2 to Registrant's Form S-4 Registration Statement, Registration
          No. 33-55968, and incorporated herein by this reference).

 10.21.3  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).

 10.21.4  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).

 10.21.5  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).

 10.21.6  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).

                                       28
<PAGE>
 
 10.21.7  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).

 10.21.8  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).

 10.21.9  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).

 10.22    Purchase and Sale Agreement dated February 1, 1993 for the purchase of
          nursing homes in Houston and San Antonio, Texas (filed as Exhibit
          10.23 to Registrant's Form S-4 Registration Statement, Registration
          No. 33-55968, and incorporated herein by this reference).

 10.23.3  Assets Purchase Agreement dated December 13, 1994 with Hermann Park
          Manor and HCCI-Houston, Inc. for the Sale of Hermann Park manor (filed
          as Exhibit 10.23.3 to Registrant's Form 10-KSB for the year ended
          December 31, 1994).

 10.23.4  Assets Purchase Agreement dated December 13, 1994 with Alta Vista
          Nursing Center, Inc. and HCCI-Houston, Inc. for the Sale of Alta Vista
          Nursing Center (filed as Exhibit 10.23.4 to Registrant's Form 10-KSB
          for the year ended December 31, 1994).

 10.25.1  Agreement dated September 14, 1994 to terminate and settle Executive
          Employment Agreement with Arthur G. Weiss (filed as Exhibit 10.25.1 to
          Registrant's Form 10-KSB for the year ended December 31, 1994).

 10.30.2  Memorandum of Understanding amending Exhibit 10.30.1.  (Filed as
          Exhibit 10.30.2 to Registrant's Form 10-KSB for the year ended
          December 31, 1993).

 10.30.3  Letter dated January 6, 1995, terminating Stock Purchase Agreement
          relating to Bankers Protective Life Insurance Company.  (Filed as
          Exhibit 10.30.3 to Registrant's Form 10-KSB for the year ended
          December 31, 1994).

 10.33    Stock Option Agreement dated November 21, 1993 between Registrant and
          Arthur G. Weiss.  (Filed as Exhibit 10.33 to Registrant's Form 10-KSB
          for the year ended December 31, 1993).

 10.34    Stock Option Agreement dated November 21, 1993 between Registrant and
          Gene S. Bertcher.  (Filed as Exhibit 10.34 to Registrant's Form 10-KSB
          for the year ended December 31, 1993).

 10.35.1  Purchase Agreement dated December 6, 1994 with Arizona Baptist
          Retirement Centers, Inc. for the Sale of Rivermont at the Trails.
          (Filed as Exhibit 10.35.1 to Registrant's Form 10-KSB for the year
          ended December 31, 1994).

 **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

 **22.1   Subsidiaries of Registrant.

                                       29
<PAGE>
 
 **23.1   Consent of Grant Thornton.

 **27.1   Financial Data Schedule required by Item 601 of Regulation S-B.


**  Filed herewith.

      (b) Reports on Form 8-K  -  none

                                       30
<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-KSB to be
signed on its behalf by the undersigned, thereunto duly authorized.


                                   GREENBRIAR CORPORATION



April 10, 1997                     By:  /s/ Gene S. Bertcher
                                      ------------------------------------------
                                           Gene S. Bertcher
                                           Executive Vice President and
                                           Chief Financial Officer
                                           (Principal Financial and
                                           Accounting Officer)

                                       31
<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


April 10, 1997                     By: /s/ James R. Gilley
                                       -----------------------------------------
                                       James R. Gilley, Chairman

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.

April 10, 1997                /s/ James R. Gilley
                             ---------------------------------------------------
                             JAMES R. GILLEY, CHAIRMAN OF THE BOARD AND DIRECTOR
 
                              /s/ Floyd B. Rhoades
                             ---------------------------------------------------
April 10, 1997               FLOYD B. RHOADES, PRESIDENT, CHIEF EXECUTIVE
                             OFFICER AND DIRECTOR
 
April 10, 1997                /s/ Richards D. Barger
                             ---------------------------------------------------
                             RICHARDS D. BARGER, DIRECTOR
April 10, 1997
                              /s/ Don C. Benton
                             ---------------------------------------------------
April 10, 1997               DON C. BENTON, DIRECTOR
 
                              /s/ Paul G. Chrysson
April 10, 1997               ---------------------------------------------------
                             PAUL G. CHRYSSON, DIRECTOR
 
                              /s/ Matthew G. Gallins
April 10, 1966               ---------------------------------------------------
                             MATTHEW G. GALLINS, DIRECTOR
 
                              /s/ Steven R. Hague
April 10, 1966               ---------------------------------------------------
                             STEVEN R. HAGUE, DIRECTOR
 
                              /s/ Michael E. McMurray
April 10, 1966               ---------------------------------------------------
                             MICHAEL E. MCMURRAY, DIRECTOR
 
                              /s/ Victor L. Lund
                             ---------------------------------------------------
                             VICTOR L. LUND, DIRECTOR
 
 

                                       32
<PAGE>
 
               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS



Board of Directors and Stockholders
Greenbriar Corporation


We have audited the accompanying consolidated balance sheet of Greenbriar
Corporation and subsidiaries as of December 31, 1996, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the year then ended.  These financial statements are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audit.

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 audit provides 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, 1996, and the consolidated
results of their operations and their consolidated cash flows for the year then
ended, in conformity with generally accepted accounting principles.

We previously audited and reported on the consolidated balance sheet of
Greenbriar Corporation and subsidiaries as of December 31, 1995, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the two years in the period then ended, prior to their
restatement for the 1996 pooling of interests. The contribution of Greenbriar
Corporation and subsidiaries to total assets, revenues and net earnings
represented 62 percent, 7 percent and 110 percent of the respective restated
totals in 1995. The contribution of Greenbriar Corporation and subsidiaries to
revenues and net earnings represented 67 percent and 116 percent of the
respective restated totals in 1994. Separate financial statements of American
Care Communities, Inc. included in the 1995 restated consolidated balance sheet
and the 1995 and 1994 consolidated statements of operations, changes in
stockholders' equity and cash flows were audited and reported on separately by
other auditors.

                                      F-1
<PAGE>
 
We also have audited the combination of the accompanying consolidated balance
sheet as of December 31, 1995 and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for each of the two
years in the period then ended, after restatement for the 1996 pooling of
interests; in our opinion, such consolidated statements have been properly
combined on the basis described in Note B of the notes to the consolidated
financial statements.



/s/ GRANT THORNTON LLP

Dallas, Texas
March 27, 1997

                                      F-2
<PAGE>
 
                            GREENBRIAR CORPORATION

                          CONSOLIDATED BALANCE SHEETS
                            (Amounts in thousands)

                                 December 31,

<TABLE>
<CAPTION>
 
 
      ASSETS                                                1996         1995
                                                          --------      -------
<S>                                                       <C>           <C>
                                                                   
CURRENT ASSETS                                                     
 Cash and cash equivalents                                $  2,784      $ 7,623
 Accounts receivable - trade                                   561          259
 Deferred income tax benefit                                     -        2,150
 Real estate operations held for sale,                             
   at lower of cost or market                                5,379           -
 Other current assets                                          665        1,899
                                                          --------      -------
                                                                   
            TOTAL CURRENT ASSETS                             9,389       11,931
                                                                   
REAL ESTATE OPERATIONS HELD FOR SALE,                              
 AT LOWER OF COST OR MARKET                                     -         3,190
                                                                   
NET ASSETS OF MOBILITY GROUP                                    -         3,371
                                                                   
DEFERRED INCOME TAX BENEFIT                                    868            -

INVESTMENT IN SECURITIES, AT COST                            4,086        1,853
                                                                   
MORTGAGE NOTES RECEIVABLE                                    8,768        7,368
                                                                   
PROPERTY AND EQUIPMENT, AT COST                                    
 Land and improvements                                      10,566        2,394
 Buildings and improvements                                 69,369       10,773
 Equipment and furnishings                                   4,317        1,491
   Construction in progress                                  3,836        2,953
                                                          --------      -------
                                                            88,088       17,611
   Less accumulated depreciation                             2,635          834
                                                          --------      -------
                                                            85,453       16,777
                                                                   
DEPOSITS                                                     5,553        1,007
                                                                   
GOODWILL AND OTHER INTANGIBLES                               1,199        1,484
                                                                   
OTHER ASSETS                                                 1,385          775
                                                          --------      -------
                                                                   
                                                          $116,701      $47,756
                                                          ========      =======
</TABLE>

                                      F-3
<PAGE>
 
                            GREENBRIAR CORPORATION

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

                                 December 31,

<TABLE>
<CAPTION>
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY                                               1996          1995
                                                                                 ---------     ---------
<S>                                                                              <C>           <C>
                                                                                           
CURRENT LIABILITIES                                                                        
 Current maturities of long-term debt                                            $  1,588       $   826
 Notes payable - stockholder                                                          930            -
 Long-term debt collateralized by properties under                                         
   contract of sale                                                                   901            -
 Accounts payable - trade                                                           3,810         1,217
 Accrued expenses                                                                   3,482         1,032
 Other current liabilities                                                          1,223           130
                                                                                 --------       -------
                                                                                           
        TOTAL CURRENT LIABILITIES                                                  11,934         3,205
                                                                                           
LONG-TERM DEBT                                                                     54,717        16,485
                                                                                           
NOTES PAYABLE - STOCKHOLDER                                                            -            358
                                                                                           
FINANCING OBLIGATIONS                                                              10,815            -
                                                                                           
DEFERRED GAIN                                                                       3,083         3,083
                                                                                           
STOCKHOLDERS' EQUITY                                                                       
 Series B cumulative convertible preferred stock, $.10 par value;                          
   liquidation value of $310 and $1,330, respectively; authorized,                         
   100 shares; issued and outstanding, 3 shares and 13 shares,                             
   respectively                                                                         1             1
 Series C cumulative convertible preferred stock, $.10 par value;                          
   liquidation value of $1,000 and $2,000 respectively; authorized,                        
   issued and outstanding, 10 and 20 shares, respectively                               1             2
 Series D cumulative convertible preferred stock, $.10 par value; liquidation              
    value of $3,375; authorized, issued and outstanding, 675 shares in 1996            68            -
 Common stock, $.01 par value; authorized, 20,000 shares; issued and                       
   outstanding, 6,471 and 4,752 shares, respectively                                   65            48
 Additional paid-in capital                                                        51,232        34,565
 Accumulated deficit                                                              (12,642)       (7,418)
                                                                                 --------       -------
                                                                                   38,725        27,198
 Less stock purchase notes receivable (including $2,438                                    
   from related parties)                                                           (2,573)       (2,573)
                                                                                 --------       -------
                                                                                   36,152        24,625
                                                                                 --------       -------
                                                                                           
                                                                                 $116,701       $47,756
                                                                                 ========       =======
</TABLE>

       The accompanying notes are an integral part of these statements.

                                      F-4
<PAGE>
 
                             GREENBRIAR CORPORATION

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

                            Year ended December 31,
<TABLE>
<CAPTION>
 
                                                      1996      1995      1994
                                                    --------  --------  --------
<S>                                                 <C>       <C>       <C>
REVENUE
 Assisted living operations                         $29,673   $ 7,368   $11,647
 Other                                                  112       596       193
                                                    -------   -------   -------
                                                     29,785     7,964    11,840
 
OPERATING EXPENSES
 Assisted living operations                          19,439     4,731     7,613
 Lease expense                                        3,712       406       212
 Facility depreciation and amortization               2,001       483       233
 General and administrative                           6,731     3,948     4,118
 Merger and transition expense                        2,836        -         -
                                                    -------   -------   -------
                                                     34,719     9,568    12,176
                                                    -------   -------   -------
          Operating loss                             (4,934)   (1,604)     (336)
 
Other income (expense)
 Interest and dividend income                           771     1,199       216
 Interest expense                                    (4,457)   (1,548)   (2,761)
 Gain (loss) on sales of assets                         (21)    6,950     2,803
 Other                                                  646       289        -
                                                    -------   -------   -------
                                                     (3,061)    6,890       258
                                                    -------   -------   -------
 
          EARNINGS (LOSS) FROM CONTINUING
           OPERATIONS BEFORE INCOME TAXES            (7,995)    5,286       (78)
 
INCOME TAX EXPENSE (BENEFIT)                         (2,400)       94      (201)
                                                    -------   -------   -------
 
          EARNINGS (LOSS) FROM CONTINUING 
           OPERATIONS                                (5,595)    5,192       123
 
DISCONTINUED OPERATIONS
 Earnings from operations, net of income taxes          238        19       241
 Gain on disposal, net of income taxes                  520        61     1,178
                                                    -------   -------   -------
 
          NET EARNINGS (LOSS)                        (4,837)    5,272     1,542
 
Preferred stock dividend requirement                   (365)     (225)     (327)
                                                    -------   -------   -------
 
Earnings (loss) allocable to common stockholders    $(5,202)  $ 5,047   $ 1,215
                                                    =======   =======   =======
 
Earnings (loss) per share
 Continuing operations                               $(1.13)    $1.03     $(.04)
 Net earnings (loss)                                 $ (.99)    $1.04     $ .24
 
Weighted average number of common and
 equivalent shares outstanding                        5,259     4,839     4,979

</TABLE>

       The accompanying notes are an integral part of these statements.

                                      F-5
<PAGE>
 
                             GREENBRIAR CORPORATION

           CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
                             (Amounts in thousands)
<TABLE>
<CAPTION>
 
                                                                      
                                                                                                      Stock              
                                Preferred stock    Common stock         Additional                   purchase            
                               ------------------  -------------          paid in     Accumulated     notes      Treasury 
                               Shares   Amount    Shares    Amount        capital       deficit     receivable     stock    Total
                               -------  -------  --------  --------    -------------  -----------  ------------  --------- ---------
<S>                            <C>      <C>      <C>       <C>        <C>            <C>          <C>           <C>        <C>
 
Balances at January 1, 1994
 - as previously reported       1,075    $ 107    18,395     $ 183        $36,132     $(13,616)      $(2,250)    $   (7)   $20,549
 
 Merger with American Care
  Communities, Inc.                -        -      6,500        65            556          (63)          (57)        -         501
                               ------    -----   -------     -----        -------     --------       -------     ------    -------
 
Balances at January 1, 1994
 - restated                     1,075      107    24,895       248         36,688      (13,679)       (2,307)        (7)    21,050
 
 Issuance of shares                -        -        147         2            179           -           (188)         7         -
 Dividends on preferred
  stock, including
  imputed dividends of $42         44        4        -         -             131         (328)           -          -        (193)
 Net earnings                      -        -         -         -              -         1,542            -          -       1,542
                               ------    -----   -------     -----        -------     --------       -------     ------    -------
 
Balances at December 31, 1994   1,119      111    25,042       250         36,998      (12,465)       (2,495)        -      22,399
 
 Issuance of shares                -        -        116         1             77           -            (78)        -          -
 Conversion of preferred
  stock                            (1)      -         19        -              -            -             -          -          -
 Conversion of subordinated
  debt                             -        -         67         1            199           -             -          -         200
 Purchase of common stock          -        -     (1,226)      (12)        (1,998)          -             -          -      (2,010)
 Purchase of preferred stock   (1,085)    (108)       -         -            (976)          -             -          -      (1,084)
 Dividends on preferred stock       1       -         -         -              73         (225)           -          -        (152)
 One-for-five reverse stock
  split                            -        -    (19,266)     (192)           192           -             -          -          -
 Net earnings                      -        -         -         -              -         5,272            -          -       5,272
                               ------    -----   -------     -----        -------     --------       -------     ------    -------
 
Balances at December 31, 1995      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
                               ======    =====   =======     =====        =======     ========       =======     ======    =======
</TABLE>

       The accompanying notes are an integral part of these statements.

                                      F-6
<PAGE>
 
                             GREENBRIAR CORPORATION

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Amounts in thousands)

                            Year ended December 31,
<TABLE>
<CAPTION>
                                                          1996         1995          1994
                                                        --------     --------      --------
<S>                                                     <C>          <C>           <C>
                                                                             
CASH FLOWS FROM OPERATING ACTIVITIES                                         
 Net earnings (loss)                                    $(4,837)     $ 5,272       $ 1,542
 Adjustments to reconcile net earnings (loss) to net                         
   cash used in operating activities                                         
     Discontinued operations                               (758)         (80)       (1,419)
     Depreciation and amortization                        2,001          483           233
     (Gain) loss on sales of assets                          19       (7,043)       (4,633)
     Recognition of deferred gain                            -            -         (1,070)
     Stock dividends on investment securities              (133)        (175)           -
     Capital contributions as payment for services          600           -             -
     Deferred income taxes                               (1,979)          35           369
     Changes in operating assets and liabilities,
        net of effect of acquisition                             
       Accounts receivable                                  255        1,434           (92)
       Refundable income taxes                               -            -            945
       Other current and noncurrent assets                  905          154        (1,105)
       Accounts payable and other liabilities             2,893       (2,493)        1,217
                                                        -------      -------       -------
                                                                             
          NET CASH USED IN OPERATING ACTIVITIES                 
            OF CONTINUING OPERATIONS                     (1,034)      (2,413)       (4,013)
NET CASH PROVIDED BY (USED IN) OPERATING            
  ACTIVITIES OF DISCONTINUED OPERATIONS                     (85)         387           627
                                                        -------      -------       -------
                                                                             
          NET CASH USED IN OPERATING ACTIVITIES          (1,119)      (2,026)       (3,386)
</TABLE>


                                      F-7
<PAGE>
 
                             GREENBRIAR CORPORATION

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

                            Year ended December 31,
<TABLE>
<CAPTION>
                                                       1996         1995         1994
                                                     ---------    ---------    ---------
<S>                                                  <C>          <C>          <C>
CASH FLOWS FROM INVESTING ACTIVITIES                                       
 Proceeds from sales of assets                       $            $ 21,885     $ 32,196
 Collections of notes receivable                          123           -            -
 Proceeds from sales of discontinued operations            -            -         6,557
 Additions to real estate                                  -           (54)        (462)
 Purchase of property and equipment                   (16,534)      (9,178)      (5,298)
 Net cash effect of (sale) purchase of subsidiary          -            -          (273)
 Additions to notes receivable                            (23)        (668)          -
 Investing activities of discontinued operations           -          (348)        (344)
 Cash received in acquisition of business                 739           -            -
 Other                                                     -           (70)         (73)
                                                     --------     --------     --------
                                                                           
          NET CASH PROVIDED BY (USED IN)                                   
            INVESTING ACTIVITIES                      (15,695)      11,567       32,303
                                                                           
CASH FLOWS FROM FINANCING ACTIVITIES                                       
 Proceeds from borrowings                              15,461       18,455       16,008
 Payments on debt                                                          
   Affiliates                                                           -        (1,625)
   Other                                               (1,426)     (23,910)     (35,713)
 Dividends on preferred stock                            (315)        (152)        (193)
 Purchase of common and preferred stock                  (123)      (3,094)          -
 Deposits on financing obligations                     (1,622)      (1,000)          -
 Deferred financing and acquisition costs                  -          (782)         (32)
                                                     --------     --------     --------
                                                                           
         NET CASH PROVIDED BY (USED IN)                                    
           FINANCING ACTIVITIES                        11,975      (10,483)     (21,555)
                                                     --------     --------     --------
                                                                           
         NET INCREASE (DECREASE) IN CASH                                   
          AND CASH EQUIVALENTS                         (4,839)        (942)       7,362
                                                                           
Cash and cash equivalents at beginning of year          7,623        8,565        1,203
                                                     --------     --------     --------
                                                                           
Cash and cash equivalents at end of year             $  2,784     $  7,623     $  8,565
                                                     ========     ========     ========
</TABLE>
See Note D for supplemental disclosure of cash flows and noncash investing and
financing transactions.

        The accompanying notes are an integral part of these statements.

                                      F-8
<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 facilities located throughout the United States, which provide
 housing, hospitality and personal and healthcare services to elderly
 individuals.  At December 31, 1996, the Company had 31 facilities in operation,
 in 10 states with a total capacity for 2,509 residents.  Prior to 1996,
 Greenbriar Corporation's business consisted of various segments  not related to
 the assisted living business (see Note C).

 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 Facility Revenue
 --------------------------------

 Assisted living facility 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 facilities are reimbursed under a state assistance plan.

 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.

 Profit Recognition on Sales of Real Estate
 ------------------------------------------

 Gains on sales of real estate are recognized when the requirements of Statement
 of Financial Accounting Standards No. 66, "Accounting for Sales of Real
 Estate," are met.  Until the requirements for full profit recognition have been
 met, a transaction is accounted for using either the deposit, cost recovery,
 installment sale, or financing method, whichever is appropriate under the
 circumstances.

 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-9
<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 using 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 measures stock-based compensation cost as the excess of the quoted
 market price of the Company's common stock over the amount the employee must
 pay for the stock.  The Company's policy is to generally grant stock options at
 fair market value at the date of grant.

 Goodwill and Other Intangibles
 ------------------------------

 Goodwill is being amortized on the straight-line method over a period of
 fifteen years.  Other intangibles include deferred financing costs, which are
 being amortized over the terms of the related borrowings under a method which
 approximates the interest method.

 Reclassifications
 -----------------

 Certain reclassifications have been made to the financial statements for 1994
 and 1995 to classify revenues and expenses in a manner consistent with the
 Company's assisted living operations as presented in the financial statements
 as of and for the year ended December 31, 1996.

                                      F-10
<PAGE>
 
                             GREENBRIAR CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


NOTE B - 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 16 assisted living, congregate and Alzheimer's
 facilities.  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 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 Wedgwood
 have been reflected in the consolidated financial statements of the Company
 since April 1, 1996.

 The following table presents pro forma unaudited consolidated results of
 operations for the years ended December 31, 1996 and 1995, assuming that the
 acquisition had taken place on January 1, 1995.  The pro forma results are not
 necessarily indicative of the results of operations that would have occurred
 had the acquisition been made on January 1, 1995, or of future results of
 operations of the combines companies (in thousands):
<TABLE>
<CAPTION>
 
                                                              Year ended
                                                             December 31,
                                                           ---------------
                                                            1996    1995
                                                           ------   ------
<S>                                                        <C>      <C>
 
   Revenue                                                 34,047   22,904
   Earnings (loss) from continuing operations              (5,885)   4,662
   Net earnings (loss)                                     (5,127)   4,742
   Preferred stock dividend requirement                      (445)    (545)
   Earnings (loss) from continuing operations allocable
     to common stockholders                                (6,330)   4,117
   Net earnings (loss) allocable to common stockholders    (5,572)   4,197
   Earnings (loss) per share
     Continuing operations                                  (1.20)     .61
     Net earnings (loss)                                    (1.06)     .62
 
</TABLE>

                                      F-11
<PAGE>
 
                             GREENBRIAR CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


NOTE B - ACQUISITIONS - CONTINUED
---------------------------------

 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).  American Care, based in Cary, North
 Carolina currently owns or leases 15 assisted living facilities 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
 Wedgewood of $1,079,000. These amounts have been included in the statement of
 operations as merger and transition expense.

 Separate results of operations for the periods prior to the merger with
 American Care are as follows (in thousands):
<TABLE>
<CAPTION>
                                                   Year ended December 31,
                                                 --------------------------
                                                  1996      1995     1994
                                                 -------   ------   -------
<S>                                              <C>       <C>      <C>
   Revenue
     Greenbriar                                  $13,523   $  557   $ 7,939
     American Care                                16,262    7,407     3,901
                                                 -------   ------   -------
                                                 
     Combined                                    $29,785   $7,964   $11,840
                                                 =======   ======   =======
                                                 
   Earnings (loss) from continuing operations    
     Greenbriar                                  $(3,483)  $5,717   $   369
     American Care                                (2,112)    (525)     (246)
                                                 -------   ------   -------
                                                 
     Combined                                    $(5,595)  $5,192   $   123
                                                 =======   ======   =======
                                                 
   Net earnings (loss)                           
     Greenbriar                                  $(2,725)  $5,797   $ 1,788
     American Care                                (2,112)    (525)     (246)
                                                 -------   ------   -------
                                                 
     Combined                                    $(4,837)  $5,272   $ 1,542
                                                 =======   ======   =======
 
</TABLE>

                                      F-12
<PAGE>
 
                             GREENBRIAR CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


NOTE C - DISCONTINUED OPERATIONS

 In 1994, management concluded that operation of skilled medical care
 facilities, consisting of nursing homes and eating disorder clinics, was not in
 the best interest of the Company. In September 1994, the Company sold its
 investment in Remuda Ranch Center for Anorexia and Bulimia, Inc. for shares of
 the buyer's preferred stock, which is not marketable, valued at $1,678,000. The
 sale resulted in a gain of $804,000. The preferred stock bears a cumulative
 dividend of 8% and is convertible into shares of common stock equal to
 approximately 5% of the outstanding shares at December 31, 1996. Valuation was
 based on discounted future cash flows. In December 1994, the Company's
 subsidiary, Altman Nursing, Inc., sold its two skilled nursing facilities for
 an aggregate price of $6,400,000, which resulted in a gain of $981,000. The
 aggregate gain of $1,785,000 for both transactions, net of applicable income
 taxes of $607,000, was recorded in 1994.

 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 real
 estate assets and anticipates completing the sales in 1997.  Accordingly, the
 Company's real estate operations have been reflected as discontinued
 operations.  Management expects that the proceeds from the sales will be at
 least equal to the $5,379,000 carrying value of the real estate assets.


 The operations of the skilled medical care segment, mobility products segment
 and 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>
<CAPTION>
 
                                 1996    1995    1994
                                 -----  ------  -------
<S>                              <C>    <C>     <C>
 
 Revenues                        $864   $2,815  $17,650
                                 ====   ======  =======
 
 Earnings before income taxes    $361   $   28  $   362
 
 Income tax expense               123        9      121
                                 ----   ------  -------
 
      Net earnings               $238   $   19  $   241
                                 ====   ======  =======
 
</TABLE>

                                      F-13
<PAGE>
 
                             GREENBRIAR CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


NOTE D - CASH FLOW INFORMATION

 Supplemental information on cash flows and noncash investing and financing
 transactions is as follows (in thousands):
<TABLE>
<CAPTION>
                                                                       Year ended December 31,
                                                                     ---------------------------
                                                                       1996      1995     1994
                                                                     --------   ------  --------
<S>                                                                  <C>        <C>     <C>
 
  Supplemental cash flow information
    Interest paid                                                    $  4,460   $1,579  $ 4,221
    Income taxes paid                                                      95       46       27
 
  Supplemental data on noncash investing and financing activities
    Stock dividend paid on preferred shares                                72       73       93
    Sale of stock in exchange for notes receivable from
      employees and officers                                               -        78      186
 
    Conversion of subordinated debt to common stock                        -       200       -
    Goodwill associated with acquisition of assets                         -       493      452
 
  Sale of subsidiary
    Securities received                                              $ (4,300)          $(1,678)
    Assets sold                                                         3,780             4,462
    Liabilities transferred                                                -             (3,861)
    Gain on sale                                                          520               804
                                                                     --------           -------
 
       Net cash effect of sale of subsidiary                         $     -            $  (273)
                                                                     ========           =======
 
 Business acquired
  Fair value of assets acquired                                      $ 59,890                
  Cash received                                                           739                 
  Stock issued                                                        (16,202)               
                                                                     --------                 
 
      Liabilities assumed                                            $ 44,427                 
                                                                     ========   
</TABLE>

                                      F-14
<PAGE>
 
                             GREENBRIAR CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


NOTE E - DEBT

 Long-term debt is comprised of the following (in thousands):
<TABLE>
<CAPTION>
                                                                                      December 31,
                                                                                    ----------------
                                                                                     1996     1995
                                                                                    -------  -------
<S>                                                                                 <C>      <C>
Notes payable to financial institutions maturing in 2015; fixed
 and variable interest rates ranging from 4.8% to 11.75% ; collateralized
 by, property, fixtures, equipment and the assignment of rents                      $13,319  $    -
 
Notes payable to individuals and companies maturing in 2022; variable and
 fixed interest rates ranging from 7% to 12% collateralized by real
 property, personal property, fixtures, equipment and the assignment of rents        12,391       -
 
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 5.6% at December 31, 1996; collateralized  by
 personal property, land, fixtures and rents                                          7,660       -
 
Notes payable to related parties maturing in 2001; interest rates ranging
 from 9.25% to 12%.                                                                   1,196       -
 
Notes payable to a bank maturing in 2007; interest at prime
 (8.25% to December 31, 1996) plus 2.0% collateralized by 
 property and equipment                                                               1,658       -
 
Notes payable to financial institution maturing in 1997 through 
 2000; bearing interest at prime plus .50% to 1.25%;
 collateralized by property and equipment                                             8,043    3,254
 
Mortgage note payable to a financial institution bearing interest at 11.35%; 
  collateralized by property and equipment                                           11,500   11,500
 
Other                                                                                   538    2,557
                                                                                    -------  -------
                                                                                     56,305   17,311
 Less:  current maturities                                                            1,588      826
                                                                                    -------  -------
 
                                                                                    $54,717  $16,485
                                                                                    =======  =======
</TABLE>

                                      F-15
<PAGE>
 
                             GREENBRIAR CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


NOTE E - DEBT - CONTINUED

 Aggregate annual principal maturities of long-term debt at December 31, 1996
 are as follows: (in thousands)
<TABLE>
<CAPTION>
 
<S>                                                               <C>
     1997                                                         $ 1,588
     1998                                                           7,568
     1999                                                           2,750
     2000                                                           4,529
     2001                                                           4,990
     Thereafter                                                    34,880
                                                                  -------
                                                                  $56,305
                                                                  =======


</TABLE>

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


NOTE F - FINANCING OBLIGATIONS

 The Company operates two properties that are financed through sale-leaseback
 obligations.  At the end of the tenth year of fifteen-year leases, the Company
 has options to repurchase the facilities for the greater of the sales prices or
 their fair market values.  Accordingly, these transactions have been recorded
 as financings, and the Company has recorded the proceeds from the sales as
 financing obligations, classified the lease payments as interest expense and
 continued to carry the facilities and record depreciation.  Payments under the
 lease agreements are $1,167,000 for each of the years 1997 through 2001.

 At December 31, 1996, the Company had a financing arrangement with a real
 estate investment trust (the REIT). Under this arrangement, the REIT would
 provide up to $60,000,000 over the next three years to be used to construct
 assisted living facilities, which, upon completion, would be sold to the REIT
 and leased back by the Company. The leases would have terms ranging from 11 to
 14 years, with two 5 year renewal options and rates based upon the yield of
 United States Treasury notes plus 3.75%, adjusted annually for inflation. A
 commitment fee of 1% is required at the date each of the aforementioned leases
 is executed. At December 31, 1996, there were no amounts outstanding under this
 arrangement.

                                      F-16
<PAGE>
 
                             GREENBRIAR CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


NOTE G - OPERATING LEASES

 The Company leases certain retirement centers 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, 1996 are as follows: (in 
 thousands)
<TABLE>
<CAPTION>
 
<S>                                                           <C>
     1997                                                      $ 5,327
     1998                                                        5,458
     1999                                                        5,189
     2000                                                        4,461
     2001                                                        3,651
                                                               -------
     Thereafter                                                
                                                               $24,086
                                                               =======
</TABLE>

 Lease expense in 1996, 1995 and 1994 was $5,153,000, $2,082,000, and $212,000
 respectively. Certain leases contain rent escalation clauses which are based
 upon future events or changes in indices.


NOTE H - INCOME TAXES

 At December 31, 1996, the Company had net operating loss carryforwards of
 approximately $16,000,000 which expire between 1999 and 2011.  However,
 approximately $5,100,000 of these net operating loss carryforwards have
 limitations that restrict utilization to approximately $600,000 for any one
 year.  Also, carryforwards of $1,800,000, 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):
<TABLE>
<CAPTION>
 
                                Year ended December 31,
                               ------------------------
                                 1996      1995    1994
                                -------   ------  ------
<S>                             <C>       <C>     <C>
 
     Current                    $    23   $ 151   $ 160
     Deferred                    (2,423)    (57)   (361)
                                -------   -----   -----
 
                                $(2,400)  $  94   $(201)
                                =======   =====   =====
</TABLE>

                                      F-17
<PAGE>
 
                             GREENBRIAR CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


NOTE H - INCOME TAXES - CONTINUED

 Deferred tax assets, liabilities and associated valuation allowances were
 comprised of the following (in thousands):
<TABLE>
<CAPTION>
 
                                             December 31,
                                          ------------------
                                            1996      1995
                                          --------  --------
<S>                                       <C>       <C>
Deferred tax assets:
 Net operating loss carryforwards         $ 5,422   $ 2,783
 Real estate                                   40       141
 Charitable contribution carryforwards        207       606
 Tax credits                                  436       220
 Accrued expenses                             407       103
 Financing obligations                      1,802        -
 Other                                        609       221
                                          -------   -------
      Total deferred tax assets             8,923     4,074
 
Valuation allowance                          (418)   (1,624)
 
Deferred tax liabilities:
 Investment in securities                    (104)     (237)
 Property and equipment                    (7,476)      (45)
 Other                                        (57)      (18)
                                          -------   -------
      Total deferred tax liabilities       (7,637)     (300)
                                          -------   -------
 
      Net deferred tax asset              $   868   $ 2,150
                                          =======   =======
</TABLE>
 Management expects the net deferred tax asset will be recovered within two to
 three years from the Company's earnings from operations or gains on sales of 
 assets.

                                      F-18
<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 statutory rate (in
 thousands):
<TABLE>
<CAPTION>
                                                                               Year ended December 31,
                                                                               ------------------------
                                                                                1996      1995     1994
                                                                              --------  --------  ------
<S>                                                                           <C>       <C>       <C>
 
     Tax expense (benefit) at the statutory rate                              $(2,718)  $ 1,797   $ (27)
     Amortization of intangibles                                                   -         30     113
     Change in deferred tax asset valuation allowance,
         exclusive of reductions for business sold in 1994
         and business purchased in 1996                                           418    (1,716)   (463)
     Correction of prior period estimates                                          -         -      138
     Other                                                                       (100)      (17)     38
                                                                              -------   -------   -----
 
     Tax expense                                                              $(2,400)  $    94   $(201)
                                                                              =======   =======   =====
</TABLE>

  Reductions 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.


NOTE I - STOCKHOLDERS' EQUITY
  
 Stock split
 -----------

 On November 17, 1995, the Board of Directors authorized a one-for-five
 reverse stock split effective December 1, 1995.  All share and per share
 data have been retroactively restated to give effect to the reverse stock
 split.

 Preferred stock
 ---------------

 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.  Cumulative
 dividends at a rate of 6% are payable in cash or preferred shares at the
 option of the Company.

 The Series C preferred stock has a liquidation value of $100 per share and is
 convertible into common stock at a price of $15.00 per share.  Cumulative
 dividends are payable in cash at a rate of 6%.

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

 

                                      F-19
<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 Plan) for
 the benefit of certain key employees.  Under the Plan, up to 217,500 shares
 of the Company's common stock are reserved for issuance.  Options granted to
 employees under the 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 1996, the Company granted to its Chief Executive Officer options, not
 covered by the Plan, for 400,000 shares of common stock which are
 exercisable immediately and expire in 2006 through 2008.

 Effective in 1996, the Company adopted the disclosure requirements of
 Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting
 for Stock-Based Compensation".  As permitted under SFAS 123, the Company
 will continue to  measure stock-based compensation cost as the excess of the
 quoted market price of the Company's common stock at the grant date over the
 amount the employee must pay for the stock.

 SFAS 123 requires disclosure of pro forma net earnings (loss) and pro forma
 net income (loss) per share as if the fair value based method had been
 applied in measuring compensation cost for stock-based awards granted in
 1996 and 1995.  Management believes that 1996 and 1995 pro forma amounts are
 not 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 income (loss) and net income (loss) per share
 amounts are set forth below: (in thousands, except per share data)
<TABLE>
<CAPTION>
 
                                                               1996     1995
                                                             --------  ------
                                                              (in thousands)
<S>                                                          <C>       <C>
     Net earnings (loss) allocable to common stockholders
       (amounts in thousands)
       As reported                                           $(4,837)  $5,272
       Pro forma                                             $(8,153)  $5,173
 
     Net earnings (loss) per share
       As reported                                           $  (.99)  $ 1.03
       Pro forma                                             $ (1.55)  $ 1.02
</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 35 percent for 1996 and 66 percent for
 1995; risk-free interest rates of 7.0 percent for 1996 and 6.5 percent for
 1995; no dividend yield; and expected lives of 10 years.

                                      F-20
<PAGE>
 
                             GREENBRIAR CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


NOTE I - STOCKHOLDERS' EQUITY - CONTINUED

 Additional information with respect to options outstanding at December 31,
 1996, and changes for the three years then ended was as follows:
<TABLE>
<CAPTION>
 
                                                                1996
                                                        -------------------
                                                                   Weighted
                                                                   average
                                                                   exercise
                                                         Shares     price
                                                        ---------  --------
<S>                                                     <C>        <C>
                                                       
     Outstanding at beginning of year                    155,500     $12.83
     Granted                                             432,000      11.98
                                                        --------     ------
                                                       
     Outstanding at end of year                          587,500     $12.20
                                                        ========     ======
                                                       
     Options exercisable at December 31, 1996            577,500     $12.21
                                                        ========     ======
                                                       
     Weighted average fair value per share of          
      options granted during 1996                                    $ 7.72
                                                                     ======

<CAPTION>                                              
                                                               1995
                                                        -------------------
                                                                   Weighted
                                                                    average
                                                                   exercise
                                                          Shares      price
                                                        --------     ------
<S>                                                     <C>        <C>
     Outstanding at beginning of year                    155,500     $13.63
     Granted                                              10,000      12.50
     Expired                                             (10,000)     25.00
                                                        --------
                                                       
     Outstanding at end of year                          155,500     $12.83
                                                        ========     ======
                                                       
     Options exercisable at December 31, 1995            141,500     $12.96
                                                        ========     ======

<CAPTION>                                              
                                                                1994
                                                        -------------------
                                                                   Weighted
                                                                    average
                                                                   exercise
                                                          Shares      price
                                                        --------     ------
<S>                                                     <C>        <C>
                                                       
     Outstanding at beginning of year                    327,500     $13.04
     Cancelled                                           (30,000)     12.50
     Reacquired                                         (142,000)     12.50
                                                        --------
                                                       
     Outstanding at end of year                          155,500     $13.63
                                                        ========     ======
                                                       
     Options exercisable at December 31, 1994            141,500     $13.86
                                                        ========     ======
</TABLE>

    Information about stock options outstanding at December 31, 1996 is
    summarized as follows:

                                      F-21
<PAGE>
 
                             GREENBRIAR CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


NOTE I - STOCKHOLDERS' EQUITY - CONTINUED
<TABLE>
<CAPTION>
                                     Options outstanding
                                -----------------------------
                                             Weighted average
                                  Number        remaining      Weighted average
    Range of exercise prices    outstanding  contractual life   exercise price
    ------------------------    -----------  ----------------  ----------------
    <S>                         <C>          <C>               <C>
 
    $11.25 to $15.75                587,500             10.57            $12.20
 
                                                       Options exercisable
                                                  -----------------------------
                                                     Number    Weighted average
    Range of exercise prices                      exercisable   exercise price
    ------------------------                      -----------  ----------------
 
    $11.25 to $15.75                                  577,500            $12.21
</TABLE>
 In 1994, the Company purchased options covering 142,000 shares of common
 stock from a former employee director for $178,000.


NOTE J - EARNINGS PER SHARE

 Earning (loss) per share are determined by dividing net earnings or net loss,
 after deduction of preferred stock dividends, by the weighted average number
 of common and dilutive equivalent shares outstanding during the period.
 Dilutive stock options are included in weighted average shares outstanding.
 Fully diluted earnings per share, giving effect to assumed conversion of
 convertible preferred stock and notes, are not presented because the effect
 of these securities is insignificant in 1995 and 1994 and anti-dilutive in
 1996.


NOTE K - SALES OF ASSETS

 Gains on the sale of assets in 1995 and 1994 (sales in 1996 were not
 material) result from the following transactions (in thousands):
<TABLE>
<CAPTION>
            1995
            ----
                                                                                 Gain
                                                                                ------
    <S>                                                                         <C>
                                                                            
    Sale of Fountainview retirement center for cash of approximately $18,000    $5,149
    Sale of economic interest in legal claim for cash of $1,085                    654
    Sale of rights to the interest on escrow funds for cash of $1,140            1,140
    Other                                                                            7
                                                                                ------
                                                                            
                                                                                $6,950
                                                                                ======
            1994                                                                
            ----                                                                
                                                                            
    Sale of Rivermont retirement center for cash of approximately $6,900        $1,720
    Recognition of deferred gain on long-term care facilities sold in 1991      
     for approximately $15,400 in notes                                          1,070
    Other                                                                           13
                                                                                ------
                                                                                $2,803
                                                                                ======
</TABLE>

                                      F-22
<PAGE>
 
                             GREENBRIAR CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


NOTE K - SALES OF ASSETS - CONTINUED

 The sale of the economic interest in a legal claim resulted from a claim the
 Company held against Wespac Investors Trust III ("Wespac") based upon an
 award of legal fees following a protracted lawsuit.  Wespac subsequently
 filed for protection under Chapter 11 of the Bankruptcy Code.  The Company
 then sold its claim for $1,085,000.  The buyer required the acquisition of
 the interest of an unrelated 49% Wespac shareholder as a condition precedent
 to the purchase of the claim.  To facilitate the transaction, the Company
 acquired the 49% equity interest from the shareholder and immediately
 conveyed the interest to such buyer.  The Company recorded a gain on the
 sale of its claim of $654,000, the excess of the proceeds of $1,085,000 over
 the Company's cost of the claim of $431,000.

 At December 31, 1996 and 1995, the balance sheet reflects a deferred gain of
 $3,083,000.  This gain resulted from the sale in 1991 of four nursing homes
 in exchange for notes receivable of $15,400,000.  The original gain of
 $7,259,000 was deferred and is being accounted for by the installment
 method.  Sales in previous years by the Company of some of the notes
 resulted in a reduction of the deferred gain to $3,083,000.


NOTE L - RELATED PARTY TRANSACTIONS

 1994
 ----

 The Company sold to W. Michael Gilley, Executive Vice-President/Director of
 the Company, 30,000 shares of common stock for a non interest bearing note
 of $187,500;  principal is due in December 1999.  Additional loans to
 executives and directors of $55,000 were made in 1994.  Also, a former
 executive of the Company was paid commissions of $145,000 relating to the
 sale of property.
 
 Sylvia Gilley, wife of the Company's Chief Executive Officer, James R.
 Gilley, made a loan of $1,000,000 to the Company.  The loan was repaid
 during 1994.

 1995
 ----

 The Company purchased land from Sylvia Gilley for $221,000.

 1996
 ----

 See Note B with respect to related party transactions for 1996.

                                      F-23
<PAGE>
 
                             GREENBRIAR CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


NOTE M - CONTINGENCIES

 Southern Care Corp. Litigation
 ------------------------------

 The Company and a subsidiary, CareAmerica, Inc. (CareAmerica) are defendants
 in lawsuits brought by a corporation that purchased nursing homes from the
 Company in 1991.  The plaintiff alleges mismanagement of the homes during
 the period that CareAmerica provided management services and, seeks damages
 in excess of $1,500,000, cancellation of $6,700,000 of mortgage notes
 payable to the Company and secured by the nursing homes, and recovery of
 interest payments made on the mortgage notes.  The Company has filed a
 counterclaim for breach of the management contract and to confirm the
 indebtedness.  The plaintiff terminated the contract and claimed that the
 mortgage notes had previously been discharged.  The Company believes that
 the plaintiff's actions, including payments against the indebtedness, are
 inconsistent with the plaintiff's claims that the notes have been
 discharged.  The Company intends to vigorously contest those lawsuits and
 pursue its counterclaims.
 
 In October 1996, the trial court granted plaintiff's motion for summary
 judgment on the issue of whether the indebtedness was discharged.  A notice
 of appeal has been filed by the Company on that ruling and an appeal will be
 filed.  The Company does not believe that the court's ruling is correct, and
 believes that it will prevail on its appeal, although there can be no
 assurance.
 
 IRS Audit
 ---------
 
 The Company's 1993 federal income tax return has been audited by the
 Internal Revenue Service (IRS).  The IRS has assessed an additional tax
 liability of $321,000.  Management of the Company believes that they are not
 liable for additional taxes and plan to contest the IRS assessment.
 
 Other Litigation
 ----------------
 
 The Company is also defendant in several other lawsuits 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 or financial position of the Company.


NOTE N - 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, 1996:

 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 private companies.  Fair value, based on
 estimated future discounted cash flows, approximates carrying value.
 
 Mortgage notes receivable - The mortgage notes receivable consist primarily
 of $6,700,000 of notes with a stated interest rate of 14% due in 2021 from
 Southern Care Corp., the plaintiff in the lawsuit discussed in Note M.   The
 obligor has brought suit to cancel the notes, and as a result, future cash
 flows are not predictable.  Management believes the value of the underlying 
 collateral is adequate to recover the carrying value of the note.

                                      F-24
<PAGE>
 
                             GREENBRIAR CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


NOTE N - FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED

 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.  At December 31, 1995,
 the carrying amount of long-term debt approximates its fair value.
 
 Accounts receivable and payable - The carrying amount approximates fair
 value because of their short maturity.

 The estimated fair value of the Company's financial instruments are as follows:
 (in thousands)
<TABLE> 
<CAPTION> 
                                                                December 31,
                                                -----------------------------------------
                                                      1996                    1995
                                                ------------------         -----------------
                                                Carrying      Fair         Carrying     Fair
                                                 Amount      Value          Amount     Value
                                                --------     -----         --------    -----
<S>                                             <C>         <C>            <C>        <C>  
Financial Assets:                                                  
   Cash and cash equivalents                    $ 2,784     $2,784         $ 7,623    $7,623
   Accounts receivable - trade                      561        561             259       259
   Investment in securities                       4,086      4,086           1,853     1,853
   Mortgage notes receivable                      8,768      8,768           7,368     7,368
                                                                   
Financial Liabilities:                                             
   Accounts payable - trade                      (1,588)    (1,588)           (826)     (826)
   Notes payable - stockholder                     (930)      (930)           (358)     (358)
   Long-term debt collateralized by                                
      properties under contract of sale            (901)      (901)              -         -
   Long-term debt                               (56,305)   (56,305)        (17,311)  (17,311)
</TABLE> 

NOTE O - NOTES RECEIVABLE
 
 Stock Purchase Notes
 --------------------
<TABLE>
<CAPTION>
                                                                           December 31,
                                                                        -----------------
                                                                         1996       1995
                                                                        ------     ------
                                                                          (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
                                                                                    
    Note from W. Michael Gilley, executive vice-president/director,                
        noninterest-bearing and due in December 1999 (Note L)             188         188
                                                                                    
 Other                                                                    135         135
                                                                       ------      ------
                                                                       $2,573      $2,573
                                                                       ======      ======
</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.
 
 Mortgage Notes
 --------------
<TABLE>
<CAPTION>
                                                                          December 31,
                                                                       -----------------
                                                                        1996       1995
                                                                       ------     ------
                                                                         (In thousands)
<S>                                                                    <C>         <C>
 Notes receivable from a corporation, collateralized by a third 
   lien on real property, interest at 14% due annually, principal 
   due in 2021                                                         $6,700      $6,700
 
 Note receivable from a corporation, collateralized by its 
   common stock, interest at prime plus 1% (effective rate of 
   9.25% at December 31, 1996) due quarterly, principal due in 
   annual installments equal to the lesser of 25% of its net 
   earnings or $400,000 through maturity in 2000.                       2,000          -
 
 Other                                                                     68         668
                                                                       ------      ------
                                                                       $8,768      $7,368
                                                                       ======      ======
</TABLE>

                                      F-25
<PAGE>
 
                             GREENBRIAR CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


NOTE O - NOTES RECEIVABLE - CONTINUED

 In connection with certain litigation in which the Company is defendant (see
 Note M), the maker of the $6,700,000 note stopped making the interest
 payments required under the note.  As a result, the Company 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 in
 1996 and 1995.  No interest income was recognized on this note in 1996 or
 1995.

 Based on the value of the underlying collateral at December 31, 1996, no
 impairment reserve is required for this note.


NOTE P - FOURTH QUARTER ADJUSTMENTS

 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.
 
 During the fourth quarter of 1995, the Company made an adjustment to reduce
 the deferred tax valuation allowance by $1,895,000.
 
 During the fourth quarter of 1994, the Company wrote off goodwill related to
 a 1992 acquisition of approximately $150,000, made other adjustments
 reducing earnings by approximately $175,000 and reduced the deferred tax
 valuation allowance by approximately $550,000.  The goodwill write off
 resulted from the decision to discontinue the sale of mobility products to
 third parties.
 
 The adjustments to the deferred tax valuation allowance resulted from
 assessments made by the Company of its expected future taxable income
 available to absorb its net operating loss carryfowards.

                                      F-26