<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                  ------------

                                    FORM 10-Q

(Mark One)

[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For The QUARTER ENDED DECEMBER 31, 1997 

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 0-22261

                        LEXINGTON HEALTHCARE GROUP, INC.
             (Exact name of registrant as specified in its charter)

DELAWARE                                                      06-1468252
(State or other jurisdiction of                             (I.R.S. Employer
incorporation or organization)                              identification No.)

35 PARK PLACE, NEW BRITAIN, CT                                06052
(Address of principal executive offices)                     (Zip Code)

Registrant's telephone number, including area code:         860-223-6902



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




                      APPLICABLE ONLY TO CORPORATE ISSUERS

         State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: FEBRUARY 12, 1998 4,125,000
Common Shares outstanding
<PAGE>   2
                        LEXINGTON HEALTHCARE GROUP, INC.
                           DECEMBER 31, 1997 FORM 10-Q
                                      INDEX


<TABLE>
<S>                                                                                                            <C>
PART I  --  FINANCIAL INFORMATION

Item 1.  Consolidated Financial Statements

                  Condensed Consolidated Balance Sheets  --  December 31, 1997 and
                  June 30,  1997................................................................................Pg. 3.

                  Condensed Consolidated Statements  of Operations  --  Six months and three
                  months ended December 31, 1997 and 1996.......................................................Pg. 4.

                  Condensed Consolidated Statements of Cash Flows  --  Six months
                  ended December 31, 1997 and 1996..............................................................Pg. 5.

                  Notes to Condensed Consolidated Financial Statements........................................Pg. 6-8.

Item 2.  Management's Discussion and Analysis of Financial Condition and
         Results of Operations...............................................................................Pg. 9-14.


PART II  --  OTHER INFORMATION.

Item 1.  Legal Proceedings.....................................................................................Pg. 15.

Item 2.  Changes in Securities.................................................................................Pg. 15.

Item 3.  Defaults Upon Senior Securities.......................................................................Pg. 15.

Item 4.  Submission of Matters to a Vote of Security Holders...................................................Pg. 15.

Item 5.  Other Information.....................................................................................Pg. 15.

Item 6.  Exhibits and Reports on Form 8-K......................................................................Pg. 15.

Signatures.....................................................................................................Pg. 15.
</TABLE>




                                                                         Page 2.
<PAGE>   3
                        LEXINGTON HEALTHCARE GROUP, INC.
                           AND SUBSIDIARIES CONDENSED
                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                       December 31,           June 30,
                                                                                          1997                 1997
                                                                                        (Unaudited)
                                                                                        -----------        -----------
                                     ASSETS

<S>                                                                                    <C>                 <C> 
 CURRENT ASSETS
     Cash and cash equivalents                                                          $ 1,736,000        $ 1,000,000
     Accounts and note receivable, net                                                    9,124,000          6,541,000
     Note receivable - stockholder (Note C)                                                 300,000                 --
     Estimated third-party payor settlements - Medicare & Medicaid                          125,000            278,000
     Inventories                                                                            468,000            403,000
     Prepaid expenses and other current assets                                              477,000            418,000
                                                                                        -----------        -----------
            Total current assets                                                         12,230,000          8,640,000

LAND, BUILDINGS, EQUIPMENT & LEASEHOLD
IMPROVEMENTS, net                                                                         2,686,000            814,000

OTHER ASSETS
      Goodwill, net                                                                       3,192,000          3,275,000
      Security deposits                                                                   2,406,000          2,282,000
      Bed licenses, net                                                                   1,684,000                 --
      Operating subsidy  receivable (less current portion)                                  738,000                 --
      Other assets, net                                                                     446,000            260,000
      Residents' funds                                                                      204,000            161,000
                                                                                        -----------        -----------
                                                                                          8,670,000          5,978,000
                                                                                        -----------        -----------
                                                                                        $23,586,000        $15,432,000
                                                                                        ===========        ===========

                            LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
      Accounts payable and accrued expenses                                             $ 7,234,000        $ 7,737,000
      Estimated third-party payor settlements - Medicare & Medicaid                         939,000            323,000
      Notes and capital leases payable (current portion)                                    422,000             89,000
      Income taxes payable                                                                  318,000            204,000
                                                                                        -----------        -----------
            Total current liabilities                                                     8,913,000          8,353,000

OTHER LIABILITIES
      Mortgage note payable (less current portion)                                        6,766,000                 --
      Notes and capital leases payable (less current portion)                               284,000            107,000
      Deferred rent                                                                         390,000            416,000
      Residents' funds payable                                                              204,000            161,000
      Deferred taxes                                                                         42,000                 --
                                                                                        -----------        -----------
                                                                                          7,686,000            684,000
                                                                                        -----------        -----------
            Total liabilities                                                            16,599,000          9,037,000
                                                                                        -----------        -----------

MINORITY INTERESTS                                                                          145,000                 --

STOCKHOLDERS' EQUITY
      Common stock, par value $.01 per share, authorized
      15,000,000 shares, issued and outstanding 4,125,000 shares                             41,000             41,000
      Additional paid-in capital                                                          6,126,000          6,168,000
      Retained earnings                                                                     675,000            186,000
                                                                                        -----------        -----------
            Total stockholders' equity                                                    6,842,000          6,395,000
                                                                                        ===========        ===========
                                                                                        $23,586,000        $15,432,000
                                                                                        ===========        ===========

</TABLE>


   The accompanying notes are an integral part of these condensed consolidated
                             financial statements.







                                                                         Page 3.
<PAGE>   4
                        LEXINGTON HEALTHCARE GROUP, INC.
                    AND SUBSIDIARIES CONDENSED CONSOLIDATED
                            STATEMENTS OF OPERATIONS
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                                         Six months ended                     Three months ended
                                                                         December 31, 1997                    December 31, 1997

                                                                     1997             1996                1997               1996
<S>                                                             <C>                <C>                <C>                <C>
 REVENUES
    Net patient service revenue                                 $27,859,000        $17,295,000        $14,044,000        $8,732,000
    Other revenue                                                   610,000            152,000            494,000            96,000
                                                                -----------        -----------        -----------        ----------
            Total revenues                                       28,469,000         17,447,000         14,538,000         8,828,000


EXPENSES
    Facility operating expenses:
      Salaries and benefits                                      20,639,000         13,010,000         10,478,000         6,565,000
      Food, medical and other supplies                            2,247,000          1,075,000          1,089,000           336,000
      Other operating expenses                                    3,381,000          2,574,000          1,936,000         1,234,000
    Corporate, general and administrative expenses                1,010,000            486,000            507,000           380,000
    Interest expense                                                433,000             70,000            253,000            44,000
                                                                -----------        -----------        -----------        ----------
            Total expenses                                       27,710,000         17,215,000         14,263,000         8,559,000
                                                                -----------        -----------        -----------        ----------


    Income before income taxes                                      759,000            232,000            275,000           269,000

INCOME TAXES (Note B)                                               270,000                 --             65,000                --
                                                                -----------        -----------        -----------        ----------

    Net income                                                  $   489,000        $   232,000        $   210,000        $  269,000
                                                                ===========        ===========        ===========        ==========

    Net income  per common share                                $      0.12        $      0.09        $      0.05        $     0.10
                                                                ===========        ===========        ===========        ==========

    Weighted average number of common shares outstanding          4,125,000          2,592,000          4,125,000         2,592,000
                                                                ===========        ===========        ===========        ==========

</TABLE>



              The accompanying notes are an integral part of these
                  condensed consolidated financial statements.



                                                                         Page 4.
<PAGE>   5
               LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
              FOR THE SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996
                                  (UNAUDITED)

<TABLE>
<CAPTION>


                                                                                    1997               1996

<S>                                                                            <C>                 <C> 
 CASH FLOWS FROM OPERATING ACTIVITIES
   Net income                                                                  $   489,000         $   232,000
   Adjustments to reconcile net income to net cash
      provided by operating activities                                              18,000             (53,000)
   (Increase) decrease in accounts receivable                                   (2,583,000)          1,249,000
   Changes in other operating assets and liabilities                             1,575,000           1,432,000
                                                                               -----------         -----------
            Net cash provided by operating activities                             (501,000)          2,860,000
                                                                               -----------         -----------

CASH FLOWS FROM INVESTING ACTIVITIES
    Note receivable - related party                                               (757,000)            (64,000)
    Repayments of note receivable - related party                                  457,000                  --
    Increase in security deposits                                                 (124,000)                 --
    Acquisition of fixed assets                                                   (138,000)           (173,000)
                                                                               -----------         -----------
            Net cash used in investing activities                                 (562,000)           (237,000)
                                                                               -----------         -----------

CASH FLOWS FROM FINANCING ACTIVITIES
    Stock registration costs                                                       (42,000)            (28,000)
    Proceeds from sale of bed licenses                                           1,550,000                  --
    Proceeds from notes payable                                                    264,000             500,000
    Minority interest investment in consolidated joint ventures                    117,000                  --
    Issuance of common stock                                                            --             215,000
    Repayments of notes payable                                                    (68,000)         (2,168,000)
    Repayments of capital lease obligations                                        (22,000)            (21,000)
                                                                               -----------         -----------
            Net cash provided by (used in) by financing activities               1,799,000          (1,502,000)
                                                                               -----------         -----------

NET INCREASE IN CASH AND CASH EQUIVALENTS                                          736,000           1,121,000

CASH AND CASH EQUIVALENTS, beginning of year                                     1,000,000             212,000
                                                                               -----------         -----------

CASH AND CASH EQUIVALENTS, end of year                                         $ 1,736,000         $ 1,333,000
                                                                               ===========         ===========




  NON-CASH INVESTING AND FINANCING ACTIVITIES:

    Certain assets acquired through assumption of mortgage note payable        $ 6,863,000         $        --
    Equipment and leasehold improvements acquired through assumption
     of notes payable and capital leases                                           220,000                  --
</TABLE>


                 The accompanying notes are an integral part of
               these condensed consolidated financial statements.



                                                                         Page 5.
<PAGE>   6
                LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
                    NOTES TO CONDENSED CONSOLIDATED FINANCIAL
                STATEMENTS (INFORMATION WITH RESPECT TO DECEMBER
                        31, 1997 AND FOR THE THREE MONTHS
          AND SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996 IS UNAUDITED)

NOTE A - THE COMPANY

The consolidated financial statements include the accounts of Lexington
Healthcare Group, Inc. and all of its wholly-owned subsidiaries: Balz Medical
Services, Inc. ("BALZ"), Professional Relief Nurses, Inc. ("PRN" ), LEV Rehab
Services, Inc. ("LEV"), and Lexington Highgreen Holding, Inc. (collectively, the
"Company"), as well as the accounts of the following joint ventures controlled
by the Company: LexiCore Rehab Services, LLC and Lexicon Pharmacy Services, LLC.
All material intercompany balances and transactions have been eliminated in
consolidation.

The Company is a long-term and subacute care provider which operates six nursing
home facilities at December 31, 1997 with 853 beds licensed by the State of
Connecticut. BALZ provides medical supplies and durable medical equipment to
nursing homes ; PRN provides health care services in the homes of its patients.
Lexicore and Lexicon provide rehab and pharmacy services respectively to
patients in the Company's and other nursing homes.

NOTE B - BASIS OF PRESENTATION

The financial information included herein is unaudited and presented on a
condensed basis; however, the information reflects all adjustments (consisting
solely of normal recurring adjustments) that are, in the opinion of management,
necessary to present fairly the financial position, results of operations, and
cash flows for the interim periods presented although the results shown for the
interim periods presented herein are not necessarily indicative of the results
to be obtained for a full fiscal year. The condensed balance sheet data as of
June 30, 1997 is derived from audited financial statements; certain line items
have been combined or condensed in their presentation herein.

Inventories consisting of food, chemicals and supplies are valued at the lower
of cost or market, with cost determined on a first-in, first-out (FIFO) basis.

In 1996 the Company was operated as an LLC and accordingly no income taxes were
due at that time. However, income taxes are payable after the reorganization of
entities under common control discussed below. On a pro forma basis had income
taxes been due in 1996, income before income taxes, income taxes, net income,
and net income per common share would have been as follows:

<TABLE>
<CAPTION>
                                          Six months ended 12/31/96            Three months ended 12/31/96
                                             $             Per share             $             Per share
                                             -             ---------             -             ---------
<S>                                      <C>               <C>                <C>              <C> 
Income before income taxes               $232,000             $.09            $269,000            $.10
Income taxes                              (96,000)                             (96,000)
Net income                               $136,000             $.05            $173,000            $.07
</TABLE>





                                                                         Page 6.
<PAGE>   7
                LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
           (INFORMATION WITH RESPECT TO DECEMBER 31, 1997 AND FOR THE
               THREE MONTHS AND SIX MONTHS ENDED DECEMBER 31, 1997
                             AND 1996 IS UNAUDITED)

NOTE C - REORGANIZATION, PUBLIC STOCK OFFERING AND ACQUISITIONS

Lexington Healthcare Group, Inc. was incorporated in 1996. It completed an
initial public offering of its common stock in May 1997 during which 1,125,000
shares of common stock at $5 per share and 1,940,625 common stock warrants at
$.10 per warrant were issued resulting in net proceeds to the Company of $4.1
million. Upon completion of such offering, the Company became the successor to
Lexington Health Care Group, LLC, a limited liability company ("LLC"). The
business combination was accounted for as a reorganization of entities under
common control, in a manner similar to a pooling of interests, using LLC's
historical cost basis.

Accordingly, the accompanying condensed consolidated financial statements for
the period prior to the reorganization reflect the accounts and operations of
LLC and adjustment has been made to give effect to the reorganization resulting
in the restatement of certain stockholders' equity accounts.

The Company acquired in May 1997, simultaneously with the closing of the public
offering, all of the common stock of BALZ and PRN. On the basis of a pro forma
consolidation of the results of operations as if these acquisitions had taken
place at the beginning of fiscal year 1997, consolidated total revenues would
have been $20.2 million for the six months ended December 31, 1996.

On October 14, 1997 the Company loaned $757,000 to its Chief Executive Officer
and principal stockholder in order for him to pay personal income taxes due as a
result of the reorganization of entities under common control (i.e., the
Company's IPO). There was no cash compensation paid to him as part of the
reorganization. The borrowing was evidenced by a 9% interest earning note
receivable on which payments were made on December 26 ($157,000) and December 31
($300,000) to reduce the note to $300,000, which remained outstanding as of
December 31, 1997. Interest on the note (amounting to $14,500) was paid in full
through December 31, 1997. Subsequently, an additional $150,000 was repaid on
February 3, 1998 leaving a balance of $150,000.

NURSING HOME ACQUISITIONS

On July 1, 1997 Lexington Highgreen Holding, Inc. (a wholly-owned subsidiary of
Lexington Healthcare Group, Inc.) purchased substantially all of the assets of
two skilled nursing facilities in Connecticut, Greenwood Health Center and
Highland Acres Extend-a-Care Center from Beverly Enterprises, Inc. ("Beverly").
Before the sale of the two nursing facilities, Beverly had operated 315 licensed
beds at these two facilities. The Company is operating 225 beds and has returned
the license on 40 beds to the State of Connecticut.



                                                                         Page 7.
<PAGE>   8
                LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
           (INFORMATION WITH RESPECT TO DECEMBER 31, 1997 AND FOR THE
               THREE MONTHS AND SIX MONTHS ENDED DECEMBER 31, 1997
                             AND 1996 IS UNAUDITED)

NOTE C - REORGANIZATION, PUBLIC STOCK OFFERING AND ACQUISITIONS (CONTINUED)

The entire transaction was financed by a $6.8 million mortgage. Beverly has
agreed to pay a $2.5 million operating subsidy to the Company over five years,
bringing the net cost of the transaction to the Company to $4.3 million. In
November 1997, the Company sold the remaining license on 50 beds to an unrelated
party for $1,550,000 in cash which resulted in a gain of $280,000 ($.04 per
common share).

On the basis of a pro forma consolidation of the results of operations as if the
acquisitions had taken place on July 1, 1996, consolidated net revenues would
have been $24,087,000 for six months ended December 31, 1996. Consolidated pro
forma net loss would have been $(1,013,000) in the six months ended December 31,
1996 and pro forma net loss per share would have been $(.39). Such pro forma
amounts reflect the operating results produced by Beverly and are not
necessarily indicative of what the actual consolidated results of operations
might have been had the acquisitions been effective on July 1, 1996.

NEW BUSINESSES

On October 15, 1997 Lexicore Rehab Services, LLC began operations as a 50% owned
joint venture with Core Rehab Management, LLC. The joint venture is controlled
by the Company and the results of its operations from inception are included in
the Company's consolidated financial statements with appropriate recognition of
minority interest.

On December 1, 1997 Lexicon Pharmacy Services, LLC began operations as a 70%
owned joint venture with Pharmacy Corporation of America. The joint venture is
controlled by the Company and the results of its operations from inception are
included in the Company's consolidated financial statements with appropriate
recognition of minority interest.

NOTE D - RECENTLY ISSUED ACCOUNTING STANDARDS; EARNINGS PER SHARE

The Company has adopted Statement of Financial Accounting Standards (SFAS) No.
128, "Earnings per Share". The objective of SFAS No. 128 is to simplify the
standards for computing earnings per share (EPS) and make them comparable to
international EPS standards. It replaces the presentation of primary EPS with a
presentation of basic EPS. SFAS No. 128 was effective for periods ending after
December 15, 1997, including interim periods; earlier application was not
permitted. Implementation of SFAS No. 128 did not have any impact on the
Company's calculation of EPS.


                                                                         Page 8.
<PAGE>   9
                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

In May 1997, the Company reorganized its capital structure and completed an
initial public stock offering (the "Offering") which raised net proceeds of
approximately $4.1 million. In connection with the Offering, the Company
acquired two healthcare businesses - a medical supplies company and a home
health agency.

During the six months ended December 1997, the Company expanded its nursing home
operations by adding two additional facilities, which were acquired on July 1,
1997. Also, in October and December 1997, the Company started two joint venture
companies with other healthcare providers to provide rehabilitation and pharmacy
services.

On January 20, 1998 the Company announced that it had signed a letter of intent
to acquire Franvale Nursing and Rehabilitation Center, a 128-bed skilled nursing
facility located in Braintree, Massachusetts from an unrelated party, Quality
Care Centers of Massachusetts, Inc., a subsidiary of PHC, Inc. (dba Pioneer
Healthcare). The acquisition of this facility expands the Company's operations
into Massachusetts, a target growth area.

The Company believes that the demand for long-term care and specialty medical
services will increase substantially over the next decade due primarily to
favorable demographic trends, advances in medical technology and emphasis on
healthcare cost containment. At the same time, government restrictions and high
construction and start-up costs are expected to limit the supply of long-term
care facilities. In addition, the Company anticipates that recent trends toward
industry consolidation will continue and will provide future acquisition
opportunities.

The Company's operating strategy is to increase Facility profitability levels,
through aggressive marketing and by offering rehabilitation therapies and other
specialized services; adhering to strict cost standards at the Facility level
while providing effective patient care and containing corporate overhead
expenses; and becoming a fully integrated health network whereby the Company
will market medical products and supplies, rehabilitative services,
institutional pharmaceutical services and nursing services to affiliated and
non-affiliated nursing homes and hospitals, as well as patients at home.

By concentrating its facilities and ancillary service operations within a
selected geographic region, the Company's strategy is to achieve operating
efficiencies through economies of scale, reduced corporate overhead, more
effective management supervision and financial controls. In addition, the
Company believes that geographic concentration also enhances the Company's
ability to establish more effective relationships with referral sources and
regulatory authorities in the states where the Company operates. The Company's
strategy is to gradually expand services into additional states including
Massachusetts and New Jersey.




                                                                         Page 9.
<PAGE>   10
                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1997 ("1997 PERIOD") VS. THREE MONTHS ENDED 
DECEMBER 31, 1996 ("1996 PERIOD")

For the three months ended December 31, 1997, the Company had total revenues of
$14,538,000 and total expenses of $14,263,000. For the three months ended
December 31, 1996, the Company had total revenues of $8,828,000 and total
expenses of $8,559,000. The Company had net income of $210,000 or $.05 per share
for the three months ended December 31, 1997, after providing for income taxes
of $65,000. The Company had net income of $269,000 or $.10 per share for the
three months ended December 31, 1996, but no income taxes were due for the 1996
period since the Company was operated as an LLC at that time. On a pro forma
basis, had income taxes been provided in 1996 at a rate of 36%, net income would
have been $173,000 ($.07 per common share).

For the three months ended December 31, 1997, expenses consisted of salaries and
benefits of $10,478,000, food, medical and other supplies of $1,089,000, other
operating expenses (including rent of $669,000) of $1,936,000, corporate,
general and administrative expenses of $507,000 and interest expense of
$253,000.

Revenues in the 1997 period increased over the 1996 period by $5,710,000 or 65%,
largely as a result of the acquisitions during May 1997 and July 1997. Of the
total increase, $5,463,000 pertained to the nursing homes and healthcare
businesses acquired and $247,000 was from increased rates, mix changes and
higher occupancy (2% increase) in the existing nursing facilities. A gain of
$280,000 was recorded on the sale of the bed license in November 1997 which has
been included in other revenue.

The Company collected $102,000 in excess of the net carrying value of accounts
receivable purchased from Beverly in connection with the Greenwood and Highland
acquisitions. Since the Company has collected more than originally recorded for
these purchased accounts receivable such amount has been included in other
revenue.

Operating expenses in the 1997 period increased over the 1996 period by
$5,704,000 or 67%, largely as a result of the acquisitions noted above. Of the
total cost increase, $5,053,000 pertained to the nursing homes and healthcare
businesses acquired and $651,000 was from increased existing-facility and
corporate, general and administrative costs. The increase in existing nursing
home costs was attributable to higher salaries and benefits including additional
nursing, dietary, and housekeeping staffing (as a result of higher occupancy and
wage increases), higher therapy costs and occupancy-driven higher operating
expenses. Interest expense increased by $209,000 mostly as a result of the new
mortgage on the facilities acquired in July.

Income taxes were provided in the 1997 period on pre-tax income of $275,000; the
combined federal and state effective tax rate was 24%. No income taxes were
provided in the 1996 period since the Company was operated as an LLC at that
time.
                                                                        

                                                                        Page 10.
<PAGE>   11
                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 1997 ("1997 PERIOD") VS.
SIX MONTHS ENDED DECEMBER 31, 1996 ("1996 PERIOD")

For the six months ended December 31, 1997, the Company had total revenues of
$28,469,000 and total expenses of $27,710,000. For the six months ended December
31, 1996, the Company had total revenues of $17,447,000 and total expenses of
$17,215,000. The Company had net income of $489,000 or $.12 per share for the
six months ended December 31, 1997, after providing for income taxes of
$270,000. The Company had net income of $232,000 or $.09 per share for the six
months ended December 31, 1996, but no income taxes were due for the 1996 period
since the Company was operated as an LLC at that time. On a pro forma basis, had
income taxes been provided in 1996 at a rate of 41%, net income would have been
$136,000 ($.05 per common share)

For the six months ended December 31, 1997, expenses consisted of salaries and
benefits of $20,639,000, food, medical and other supplies of $2,247,000, other
operating expenses (including rent of $1,304,000) of $3,381,000, corporate,
general and administrative expenses of $1,010,000 and interest expense of
$433,000.

Revenues in the 1997 period increased over the 1996 period by $11,022,000 or
63%, largely as a result of the acquisitions during May 1997 and July 1997. Of
the total increase, $10,100,000 pertained to the nursing homes and healthcare
businesses acquired and $922,000 was from increased rates, mix changes and
higher occupancy (3% increase) in the existing nursing facilities. A gain of
$280,000 was recorded on the sale of the bed license in November, 1997 which has
been included in other revenue.

The Company collected $102,000 in excess of the net carrying value of accounts
receivable purchased from Beverly in connection with the Greenwood and Highland
acquisitions. Since the Company has collected more than originally recorded for
these purchased accounts receivable such amount has been included in other
revenue.

Operating expenses in the 1997 period increased over the 1996 period by
$10,495,000 or 61%, largely as a result of the acquisitions noted above. Of the
total cost increase, $9,356,000 pertained to the nursing homes and healthcare
businesses acquired and $1,139,000 was from increased existing-facility and
corporate, general and administrative costs. The increase in existing nursing
home costs was attributable to higher salaries and benefits including additional
nursing, dietary, and housekeeping staffing (as a result of higher occupancy and
wage increases), higher therapy costs and occupancy-driven higher operating
expenses. Interest expense increased by $363,000 mostly as a result of the new
mortgage on the facilities acquired in July.



                                                                        Page 11.
<PAGE>   12
                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Income taxes were provided in the 1997 period on pre-tax income of $759,000; the
combined federal and state effective tax rate was 36%. No income taxes were
provided in the 1996 period since the Company was operated as an LLC at that
time.

LIQUIDITY AND CAPITAL RESOURCES

Since its formation in 1995, the Company has primarily financed its operations
through operating revenues, borrowings from the prior operator of the Facilities
and other private lenders (including stockholders), by financing its accounts
receivable, through a public offering of its common stock which raised net
proceeds of approximately $4.1 million and through the sale of a portion of
certain bed licenses acquired in 1997.

In July 1997, the Company borrowed $6.8 million in connection with the
acquisition of land, buildings, bed licenses and operating assets of the two
nursing homes acquired. Interest is payable at 10% over the 20 year term of the
mortgage. In connection with the acquisitions, the Company also obtained an
operating subsidy of $2.5 million to be received over five years. As discussed
above, some of the bed licenses acquired were sold for $1,550,000 in November
1997.

In August 1997, the Company obtained a $2,000,000 revolving line of credit (at
prime plus .50%) from a bank, which is secured by its accounts receivable and
other assets. In November, 1997 this line of credit was utilized with a
borrowing of $1,000,000 for working capital purposes. This borrowing was repaid
later in November 1997 after the sale of bed licenses noted above. The full
$2,000,000 line of credit was available at December 31, 1997.

On October 14, 1997 the Company loaned $757,000 to its Chief Executive Officer
and principal stockholder in order for him to pay personal income taxes due as a
result of the reorganization of entities under common control (i.e., the
Company's IPO). There was no cash compensation paid to him as part of the
reorganization. The borrowing was evidenced by a 9% interest earning note
receivable on which payments were made on December 26 ($157,000) and December 31
($300,000) to reduce the note to $300,000, which remained outstanding as of
December 31, 1997. Interest on the note (amounting to $14,500) was paid in full
through December 31, 1997. Subsequently, an additional $150,000 was repaid on
February 3, 1998 leaving a balance of $150,000.




                                                                        Page 12.
<PAGE>   13
                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

During the six months ended December 31, 1997, the Company expended
approximately $87,000 in capital improvements at its leased Facilities. Any
capital improvements made to the Facilities belong to the landlord. However, any
amounts expended for capital improvements are generally recouped in their
entirety through the reimbursement system. During the six months ended December
31, 1997 the Company expended $160,000 for capital improvements at its owned
facilities, which amount was funded by the mortgagor under the terms of the
mortgage.

The Company has recorded $272,000 of investments in joint ventures (of which
$48,000 was paid through December 31, 1997) which began operations in 1997 and
became profitable in 1997; positive cash flow is expected in 1998. The Company's
profitable ancillary businesses grew by approximately 30% from 1996 to 1997.

At December 31, 1997, the Company had cash and cash equivalents of $1,736,000,
receivables of $9,249,000, inventories of $468,000, prepaid expenses and other
current assets of $477,000, and a note receivable from its principal stockholder
of $300,000. Accounts receivable increased by $2,430,000 since June 30, 1997 due
mostly to the nursing homes acquired in July and generally higher rates in
effect.

Working capital at December 31, 1997 was $3,317,000 as compared with working
capital of $287,000 at June 30, 1997. The principal reasons for the increase are
profitable operations in the first half of the year, the bed licenses sold, and
the operating subsidy receivable obtained in connection with the nursing home
acquisitions. Current liabilities at December 31, 1997 consist principally of
trade accounts payable, estimated third-party payor settlements due Medicare and
Medicaid, current portion of notes and capital leases payable, accrued payroll
and related taxes, income taxes, and other accrued expenses.

FORWARD LOOKING STATEMENTS

This quarterly report contains certain forward-looking statements regarding the
Company, its business prospects and results of operations that are subject to
certain risks and uncertainties posed by many factors and events that could
cause the Company's actual business, prospects and results of operations to
differ materially from those that may be anticipated by such forward-looking
statements.

Factors that may affect such forward-looking statements include, without
limitations: the Company's ability to successfully and timely develop and
finance new projects, the impact of competition on the Company's revenues, and
changes in reimbursement rates, patient mix, and demand for the Company's
services.


                                                                        Page 13.
<PAGE>   14
                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS


When used, words such as "believes," "anticipates," "expects," "intends" and
similar expressions are intended to identify forward-looking statements, but are
not the exclusive means of identifying forward-looking statements. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date of this report. The Company undertakes no obligation
to revise any forward-looking statements in order to reflect events or
circumstances that may subsequently arise.

Readers are urged to carefully review and consider the various disclosures made
by the Company in this report, news releases, and other reports filed with the
Securities and Exchange Commission that attempt to advise interested parties of
the risks and factors that may affect the Company's business.




                                                                        Page 14.
<PAGE>   15
                           PART II - OTHER INFORMATION



Item 1.  Legal Proceedings
                                           NONE

Item 2.  Change in Securities
                                           NONE

Item 3.  Defaults Upon Senior Securities
                                           NONE

Item 4.  Submission of Matters to a Vote of Security Holders

                                           NONE

Item 5.  Other Information
                                           NONE

Item 6.  Exhibits and Reports on Form 8-K
                                           NONE
     
     
                                   SIGNATURES


         Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

                                   /s/ Jack Friedler
                                  (Jack Friedler, Chief Executive Officer)
                                  (Duly Authorized Officer)
                               
                                   /s/ Harry Dermer
                                  (Harry Dermer, President)
                                  (Duly Authorized Officer)
                        
Date      February 13, 1998        /s/ Thomas E. Dybick
                                   (Thomas E. Dybick, Chief Financial Officer)
                                   (Principal Financial Officer)



                                                                        Page 15.