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                                                                   EXHIBIT 10.35

                               EMPLOYMENT CONTRACT

         AGREEMENT made as of April 1, 2000 between BEVERLY ENTERPRISES, INC., a
Delaware corporation (the "Company"), and DOUGLAS J. BABB (the "Executive").

         WHEREAS, Executive is employed by the Company or by one of its
wholly-owned consolidated subsidiaries; and

         WHEREAS, the Company desires to assure itself of the management
services of the Executive by directly engaging the Executive as the Executive
Vice President, General Counsel and Secretary of the Company; and

         WHEREAS, the Company wishes to encourage the Executive to remain with
and devote full time and attention to the business affairs of the Company and
wishes to provide income protection to the Executive for a period of time in the
event of an involuntary Termination of Employment not for Cause or a voluntary
Termination of Employment for Good Reason within the Term of this Agreement;

         NOW, THEREFORE, in consideration of the mutual agreements and
understandings set forth herein and for other good and valuable consideration,
the receipt and adequacy of which is hereby acknowledged, the Company and the
Executive hereby agree as follows:

         1. Definitions.

                  (a) "Base Salary" shall mean the Executive's regular annual
         rate of base pay, as set forth in Paragraph 4(a), as of the date in
         question.

                  (b) The "Benefit Multiplier" shall be equal to 2.0 except that
         if Executive's Termination of Employment is pursuant to Paragraphs 6(b)
         or 6(c) it shall be equal to 3.0.

                  (c) The Benefit Period" shall be the period of years equal to
         the Benefit Multiplier which follows the Executive's Termination of
         Employment.

                  (d) "Cause" shall mean the Executive's (i) conviction of a
         crime involving moral turpitude or theft or embezzlement of property
         from the Company or (ii) willful misconduct or willful failure
         substantially to perform the duties of his position, but only if such
         has continued after receipt of notice from the Company's Board of
         Directors and such reasonable cure period as is set forth in such
         notice.

                  (e) A "Change in Control" shall be deemed to have taken place
         if: (i) any person, corporation, or other entity or group, including
         any "group" as defined in Section l3(d)(3) of the Securities Exchange
         Act of 1934, other than any employee benefit plan then maintained by
         the Company, becomes the beneficial owner of shares of the Company
         having 30 percent or more of the total number of votes that may be cast
         for the election of Directors of the Company; (ii) as the result of, or
         in connection with, any contested election for the Board of Directors
         of the Company, or any tender or exchange offer, merger or other
         business combination or sale of assets, or any combination of the
         foregoing (a "Transaction"), the persons who were Directors of the
         Company before the Transaction shall cease to constitute a majority of
         the Board of Directors of the Company or any successor to the Company
         or its assets, or (iii) at any time (a) the Company shall consolidate
         with, or merge with, any other Person and the Company shall not be the
         continuing or surviving corporation, (b) any Person shall consolidate
         with, or merge with the Company, and the

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         Company shall be the continuing or surviving corporation and in
         connection therewith, all or part of the outstanding Company stock
         shall be changed into or exchanged for stock or other securities of any
         other Person or cash or any other property, (c) the Company shall be a
         party to a statutory share exchange with any other Person after which
         the Company is a subsidiary of any other Person, or (d) the Company
         shall sell or otherwise transfer 50% or more of the assets or earning
         power of the Company and its subsidiaries (taken as a whole) to any
         Person or Persons; provided, however, that notwithstanding anything to
         the contrary herein, a Change in Control shall not include either any
         transfer to a consolidated subsidiary, reorganization, spin-off,
         split-up, distribution, or other similar or related transaction(s) or
         any combination of the foregoing in which the core business and assets
         of the Company and its subsidiaries (taken as a whole) are transferred
         to another entity ("Controlled") with respect to which (1) the majority
         of the Board of Directors of the Company (as constituted immediately
         prior to such transaction(s)) also serve as directors of Controlled and
         immediately after such transaction(s) constitute a majority of
         Controlled's board of directors, and (2) more than 70% of the
         shareholders of the Company (immediately prior to such transaction(s))
         become shareholders or other owners of Controlled and immediately after
         the transaction(s) control more than 70% of the ownership and voting
         rights of Controlled.

                  (f) The "Change in Control Date" shall mean the date
         immediately prior to the effectiveness of the Change in Control.

                  (g) The "Committee" shall mean the Compensation Committee of
         the Company's Board of Directors.

                  (h) The "Competitive Businesses" shall mean any of the health
         care businesses in which the Company is engaged on the Effective Date.

                  (i) The Executive shall have "Good Reason" to terminate
         employment if: (i) the Executive is not elected, reelected, or
         otherwise continued in the office of the Company or any of its
         subsidiaries which he held immediately prior to the Change in Control
         Date, or he is removed as a member of the Board of Directors of the
         Company or any of its subsidiaries if the Executive was a director
         immediately prior to the Change in Control Date; (ii) the Executive's
         duties, responsibilities or authority as an employee are materially
         reduced or diminished from those in effect on the Change in Control
         Date without the Executive's consent; (iii) the Executive's duties,
         responsibilities, or authority as an employee are materially reduced or
         diminished from those in effect on the Effective Date without the
         Executive's consent; (iv) the Executive's compensation or benefits are
         reduced without the Executive's consent, unless all Executive-level
         officers have their compensation or benefits reduced in the same
         percentage amount; (v) the Company reduces the potential earnings of
         the Executive under any performance-based bonus or incentive plan of
         the Company in effect immediately prior to the Change in Control Date;
         (vi) the Company requires that the Executive's employment be based
         other than at its location on the Effective Date without his consent;
         (vii) any purchaser, assign, surviving corporation, or successor of the
         Company or its business or assets (whether by acquisition, merger,
         liquidation, consolidation, reorganization, sale or transfer of assets
         or business, or otherwise) fails or refuses to expressly assume in
         writing this Agreement and all of the duties and obligations of the
         Company hereunder pursuant to Section 16 hereof; or (viii) the Company
         breaches any of the provisions of this Agreement.

                  (j) "Person" shall have the meaning ascribed to such term in
         Section 3(a)(9) of the Securities Exchange Act of 1934 and used in
         Sections 13(d) and 14(d) thereof, including a "group" as defined in
         Section 13(d).

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                  (k) "Target Bonus" shall mean the target bonus (100% level)
         established for the Executive for the year in question under the
         Company's "Annual Incentive Plan."

                  (l) "Termination of Employment" shall mean the termination of
         the Executive's employment by the Company other than such a termination
         in connection with an offer of immediate reemployment by a successor or
         assign of the Company or purchaser of the Company or its assets under
         terms and conditions which would not permit the Executive to terminate
         his employment for Good Reason.

         2. Term. The initial term of this Agreement shall be for the period
commencing on the Effective Date and ending on the third anniversary thereof.
The Term shall be automatically extended by one additional day for each day
beyond the Effective Date of this Agreement that the Executive remains employed
by the Company until such time as the Company elects to cease such extension by
giving written notice of such to the Executive. (In such event, the Agreement
shall thus terminate on the third anniversary of the effective date of such
notice).

         3. Position and Duties. During the Term, the Executive shall serve, as
an employee, as the Executive Vice President, General Counsel and Secretary of
the Company and shall have such duties, functions, responsibilities and
authority as are consistent with the Executive's position as the senior
executive officer in charge of the Legal functions of the Company.

         4. Compensation and Related Matters.

                  (a) Annual Base Salary. The Executive shall receive a Base
         Salary at a rate of $325,000 per annum through March 1, 2001 and
         thereafter at any such greater rate as is determined by the Committee.

                  (b) Benefits. During the Term, the Executive shall be entitled
         to all of the following and any other benefits and prerequisites
         offered by the Company to executives generally:

                           (i) Participate in the Company's present and future
                  stock option, restricted stock, phantom stock and other
                  similar equity-based incentive plans, pursuant to their terms.

                           (ii) Participate in the Company's Employee Stock
                  Purchase Plan, pursuant to its terms;

                           (iii) Participate in the Company's Executive Deferred
                  Compensation Plan, pursuant to its terms;

                           (iv) Participate in the Company's Executive Savings
                  Plus Plan, pursuant to its terms;

                           (v) $325,000 of individual life insurance coverage
                  under the Company's Executive Split Dollar Life Insurance
                  Plan;

                           (vi) $325,000 (or such greater amount as the Company
                  may make available to its senior executives generally) of
                  group term life insurance coverage;

                           (vii) $100,000 (or such greater amount as the Company
                  may make available to its senior executives generally) of
                  business travel accident insurance coverage

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                  when traveling on Company business;

                           (viii) Participate in the Company's Medical Plan, and
                  Dental Plan, pursuant to their terms, except that the premium
                  cost for such shall be treated as a benefit under the
                  Company's Executive Medical Reimbursement Plan, described
                  below, (and therefore at the present time, there shall be no
                  payroll deduction as a condition of coverage in the Medical
                  Plan and Dental Plan);

                           (ix) Participate in the Company's Executive Medical
                  Reimbursement Plan (with a maximum benefit of $11,500 (or such
                  greater amount as the Company may make available to its senior
                  executives generally), a portion of which shall be deemed
                  applied to the payment of premiums under the Company's Medical
                  Plan and Dental Plan as described above), pursuant to its
                  terms;

                           (x) Participate in the Company's group Long-Term
                  Disability Plan, at the maximum benefit level, pursuant to its
                  terms, and participate in the Company's Supplemental Long-Term
                  Disability Plan, according to its terms;

                           (xi) 4 weeks of paid vacation;

                           (xii) Participate in or receive benefits under any
                  other employee benefit plan or other arrangement made
                  available by the Company to any of its employees, subject to
                  and on a basis consistent with the terms, conditions and
                  overall administration of such plan or arrangement.

                  (c) Annual Bonus. As additional compensation for services
         rendered, the Executive shall be eligible to receive an annual bonus in
         cash pursuant to the Company's Annual Incentive Plan.

                  (d) Expenses. The Company shall promptly reimburse the
         Executive for all reasonable travel and other business expenses
         incurred by the Executive in the performance of his duties to the
         Company hereunder.

                  (e) Reporting. The Executive shall report directly to the
         Chairman and Chief Executive Officer of the Company.

         5. Non-Solicitation.

                  (a) Executive shall not at any time during the period of his
         employment with the Company, or during the one (1) year period
         immediately following his Termination of Employment with the Company
         ("Non-Solicitation Period"), without the prior written consent of the
         Company, on behalf of himself or any other person, solicit for
         employment or employ any of the current officers or employees of the
         Company; provided, however, that nothing contained herein shall
         prohibit Executive from hiring employees of the Company when such
         employment results from general solicitations for employment.

                  (b) Executive shall not at any time during the period of his
         employment with the Company, or during the Non-Solicitation Period,
         without the prior written consent of the Company, solicit for his own
         use, or for the use of any company or person by whom he is employed, or
         for whom he may be acting, any of the current customers of the Company,
         nor shall he divulge

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         to any other person any information or fact relating to the management,
         business (including prospective business), finances, its customers or
         the terms of any of the contracts of the Company which has heretofore
         or which may hereafter come to the knowledge of Executive which is not
         freely available to the public.

                  (c) Executive shall not, during the Non-Solicitation Period,
         in any way defame the Company or disparage its business capabilities,
         products, plans or management to any customer, potential customer,
         vendor, supplier, contractor, subcontractor of the Company so as to
         affect adversely the goodwill or business of the Company.

                  (d) Executive covenants and agrees that a breach of these
         subparagraphs (a), (b) or (c) would immediately and irreparably harm
         the Company and that a remedy at law would be inadequate to compensate
         the Company for its losses by reason of such breach and therefore that
         the Company shall, in addition to any rights and remedies available
         under this Agreement, at law or otherwise, be entitled to any
         injunction to be issued by any court of competent jurisdiction
         enjoining and restraining Executive from committing any violation of
         these subparagraphs (a), (b) or (c), and Executive hereby consent to
         the issuance of such injunction.

                  (e) For purposes of this Section 5 and in consideration of
         this Agreement, this non-solicitation agreement has been separately
         negotiated and bargained for, and constitutes a substantial portion of
         the consideration for this Agreement.

         6. Eligibility for Severance Benefits. The Executive shall be eligible
for the benefits described in Paragraph 7 (the "Severance Benefits") if:

                  (a) during the Term, the Executive has a Termination of
         Employment initiated (i) by the Company without Cause, or (ii) by the
         Executive for Good Reason, and, in either case, subsections (b) or (c)
         do not apply,

                  (b) during the Term there has been a Change in Control and
         during the 31 day period commencing on the first day of the 13th
         calendar month following the Change in Control Date (e.g. the period
         April 1, 1999 - May 1, 1999, inclusive, for a Change in Control which
         is effective in the month of March, 1998), the Executive has a
         Termination of Employment initiated by the Executive without Good
         Reason, or

                  (c) during the Term either (i) there has been a Change in
         Control and during the two year period commencing on the Change in
         Control Date the Executive has a Termination of Employment which is
         initiated by the Company without Cause or by the Executive for Good
         Reason, or (ii) the Executive has a Termination of Employment initiated
         by the Company without Cause or by the Executive for Good Reason
         following the commencement of any discussion with a third person that
         ultimately results in a Change in Control with such third person within
         12 months of the commencement of such discussions (in which case, the
         date of such discussion shall be substituted for the Change in Control
         Date wherever appropriate, including in the definition of "Good Reason"
         and in Paragraph 7 hereof).

         7. Severance Benefit. Upon satisfaction of the requirements set forth
in Paragraph 6, and subject to Paragraphs 8 and 11, the Executive shall be
entitled to the following Severance Benefits:

                  (a) Cash Payment. The Executive shall be entitled to receive
         an amount of cash equal to the Benefit Multiplier times the greater of:

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                  (i) the sum of the Executive's Base Salary as in effect upon
         the Termination of Employment, and the greater of

                           (A) the Executive's Target Bonus as in effect upon
                  the Termination of Employment or,

                           (B) the Executive's actual bonus under the Company's
                  "Annual Incentive Plan" for the year prior to the year of the
                  Executive's Termination of Employment; or

                  (ii) the sum of the Executive's Base Salary as in effect on
         the Change in Control Date, and the greater of

                           (A) the Executive's Target Bonus as in effect upon
                  the Change in Control Date or,

                           (B) the Executive's actual bonus under the Company's
                  "Annual Incentive Plan" for the year prior to the Change in
                  Control Date.

The payment shall be made in a single lump sum within ten days following the
Executive's Termination of Employment.

                  (b) Long-Term Incentive Award; Equity-Based Compensation. The
         Executive's interest under the Company's long-term incentive plans
         shall be fully vested. Any and all (i) options, phantom units, and
         other awards granted to Executive to purchase Company stock or which is
         measured by the current market value of Company stock and (ii)
         restricted stock of the Company, owned by the Executive shall be fully
         vested.

                  (c) Continuation of Benefits.

                           (i) For the Benefit Period, the Executive shall be
                  treated as if he had continued to be an employee for all
                  purposes under the Company's Medical Plan, Executive Medical
                  Reimbursement Plan and Dental Plan. Following this period, the
                  Executive shall be entitled to receive continuation coverage
                  under Part Six of Title I of ERISA ("COBRA Benefits") treating
                  the end of this period as a termination of the Executive's
                  employment (other than for gross misconduct).

                           (ii) The Company shall maintain in force, at its own
                  expense, for the remainder of the Executive's life, the vested
                  life insurance in effect under the Company's Executive Split
                  Dollar Life Insurance Plan (as described in Paragraph 4(b)) as
                  of the Change in Control Date or as of the date of Termination
                  of Employment, whichever is greater.

                  (d) Relocation Benefit. If, within the Benefit Period after
         the Executive's Termination of Employment, the Executive gives the
         Company written notice that he desires to relocate within the
         continental United States, the Company will reimburse the Executive for
         any reasonable relocation expenses (in accordance with the Company's
         general relocation policy for executives as then in effect, or, at the
         Executive's election, as in effect on the Change in Control Date) in
         connection with such relocation.

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                  (e) Executive Savings Plus Plan. For the year of the
         Executive's Termination of Employment, the Company will make the
         contribution to the Executive Savings Plus Plan on behalf of the
         Executive that it would have made if the Executive had not had a
         Termination of Employment, but in no event less than the percentage
         contribution it made for the Executive in the immediately preceding
         year (and increased to take account of the additional year of service),
         in each case taking account of the Executive's annualized rate of
         "Compensation" (as defined in the Executive Savings Plus Plan) and the
         percentage of such Compensation that the Executive is contributing to
         the Executive Savings Plus Plan, as of the date of Termination of
         Employment, and the Company's matching contribution rate for such year
         (or, if greater, the preceding year). The portion of the Company's
         matching contribution which is based on the preceding year's
         contribution percentage shall be contributed to the Executive Savings
         Plus Plan on behalf of the Executive immediately upon the Executive's
         Termination of Employment and any additional contribution required
         shall be paid as soon as the amount is determined.

                  (f) Executive Deferred Compensation Plan. For the year of the
         Executive's Termination of Employment, the Company will make the
         contribution to its Executive Deferred Compensation Plan (the "EDC
         Plan") that it would have made if the Executive had not had a
         Termination of Employment determined based on the Executive's deferral
         for such year. At Executive's election, the Company contribution shall
         be paid to the Executive immediately upon his Termination of
         Employment.

                  (g) Disability. For the Benefit Period, the Company shall
         provide long-term disability insurance benefits coverage to Executive
         equivalent to the coverage that the Executive would have had had he
         remained employed under the Company's Long-Term Disability Plan and
         Supplemental Long-Term Disability Plan applicable to Executive on the
         date of Termination of Employment, or, at the Executive's election, the
         plan or plans applicable to Executive as of the Change in Control Date.
         Should Executive become disabled during such period, Executive shall be
         entitled to receive such benefits, and for such duration, as the
         applicable plan(s) provide.

                  (h) Plan Amendments. The Company shall adopt such amendments
         to its employee benefit plans and insurance policies as are necessary
         to effectuate the provisions of this Agreement. If and to the extent
         any benefits under this Paragraph 7 are not paid or payable or
         otherwise provided to the Executive or his dependents or beneficiaries
         under any such plan or policy (whether due to the terms of the plan or
         policy, the termination thereof, applicable law, or otherwise), then
         the Company itself shall pay or provide for such benefits.

         8. Golden Parachute Gross-Up. If, in the written opinion of a Big 6
accounting firm engaged by either the Company or the Executive for this purpose
(at the Company's expense), or if so alleged by the Internal Revenue Service,
the aggregate of the benefit payments under Paragraph 7 would cause the payment
of one or more of such benefits to constitute an "excess parachute payment" as
defined in Section 280G(b) of the Internal Revenue Code ("Code"), then the
Company will pay to the Executive an additional amount in cash (the "Gross-Up
Payment") equal to the amount necessary to cause the net amount retained by the
Executive, after deduction of any (i) excise tax on the payments under Paragraph
7, (ii) federal, state or local income tax on the Gross-Up Payment, and (iii)
excise tax on the Gross-Up Payment, to be equal to the aggregate remuneration
the Executive would have received under Section 7, excluding such Gross-Up
Payment (net of all federal, state and local excise and income taxes), as if
Sections 280G and 4999 of the Code (and any successor provisions thereto) had
not been enacted into law. The Gross-Up Payment provided for in this Paragraph
shall be made within ten (10) days after the termination of Executive's
employment, provided however that if the amount of the payment cannot be finally
determined at the time, the Company shall pay to Executive an estimate as
determined in good faith by the Company of such payments (together

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with interest at the rate provided in section 1274(b)(2)(B) of the Code) as soon
as the amount thereof can be determined but in no event later than the thirtieth
(30th) day after the date of termination. Any dispute concerning the application
of this Paragraph shall be resolved pursuant to Paragraph 10, and if Paragraph
11 applies, any reference in this Paragraph and to Paragraph 7 shall also be
deemed to include a reference to Paragraph 11 as well.

         9. Waiver of Other Severance Benefits. The benefits payable pursuant to
this Agreement are in lieu of any other severance benefits which may otherwise
be payable to the Executive upon termination of employment with the Company,
whether or not in connection with a Change in Control (including without
limitation, any benefits to which Executive might otherwise have been entitled
under any employment, change in control, or severance agreement or other
compensation or employee benefit plan to which the Company was a party or which
was assumed by the Company), except those benefits which are to be made
available to the Executive as required by applicable law.

         10. Disputes. Any dispute or controversy arising under, out of, in
connection with or in relation to this Agreement shall, at the election and upon
written demand of either party, be finally determined and settled by binding
arbitration in the city of Fort Smith, Arkansas, using a single arbitrator, in
accordance with the Labor Arbitration rules and procedures of the American
Arbitration Association, and judgment upon the award may be entered in any court
having jurisdiction thereof. The arbitrator shall have the power to order
specific performance, mandamus, or other appropriate legal or equitable relief
to enforce the provisions of this Agreement. The Company shall pay all costs of
the arbitration and all reasonable attorney's and accountant's fees of the
Executive in connection therewith.

         11. Additional Payments Due to Dispute. Notwithstanding anything to the
contrary herein, and without limiting the Executive's rights at law or in
equity, if the Company fails or refuses to timely pay to the Executive the
benefits due under Paragraphs 7 and/or 8 hereof, then the benefits under
Paragraph 7(a) shall be increased and the benefits under Paragraphs 7(c), 7(d),
and 7(g) shall each be continued by one additional day for each day of any such
failure or refusal of the Company to pay. In addition, any Gross-Up Payment due
under Paragraph 8 shall be increased to take into account any increased benefits
under this Paragraph.

         12. No Set-Off. There shall be no right of set-off or counterclaim in
respect of any claim, debt, or obligation against any payment to or benefit for
the Executive provided for in this Agreement.

         13. No Mitigation Obligation. The parties hereto expressly agree that
the payment of the benefits by the Company to the Executive in accordance with
the terms of this Agreement will be liquidated damages, and that the Executive
shall not be required to mitigate the amount of any payment provided for in this
Agreement by seeking other employment or otherwise, nor shall any profits,
income, earnings or other benefits from any source whatsoever create any
mitigation, offset, reduction or any other obligation on the part of the
Executive hereunder or otherwise.

         14. Waiver of Rights. Executive hereby waives any rights against the
Company, including without limitation any rights under any employment, change in
control, or severance agreement; under any stock option or long-term incentive
plan or any other compensation or employee benefit plan.

         15. Non-disclosure of Proprietary Information, Surrender of Records;
Inventions and Patents.

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                  (a) Proprietary Information. Executive shall not during the
         term of employment or at any time thereafter (irrespective of the
         circumstances under which Executive's employment terminates), directly
         or indirectly use for his own purpose or for the benefit of any person
         or entity other than Company, nor otherwise disclose, any proprietary
         information, as defined below, to any individual or entity, unless such
         disclosure has been authorized in writing by the Company or is
         otherwise required by law. For purposes of this Agreement, the term
         "proprietary information" shall include, but is not limited to: (a) the
         name or address of any client or affiliate of Company or any
         information concerning the transactions or relations of any client or
         affiliate of Company with Company or any of its shareholders; (b) any
         information concerning any product, service, methodology, analysis,
         presentation, technology or procedure employed by Company but not
         generally known to its clients or competitors, or under development by
         or being tested by Company but not at the time offered generally to
         clients; (c) any information relating to Company's computer software,
         computer systems, pricing or marketing methods, capital structure,
         operating results, borrowing arrangements or business plans; (d) any
         information which is generally regarded as confidential or proprietary
         in any line of business engaged in by Company; (e) any information
         contained in any of Company's written or oral policies and procedures
         or employee manuals; (f) any information belonging to clients or
         affiliates of Company which Company has agreed to hold in confidence;
         (g) any inventions, innovations or improvements covered by subsection
         15(c) below; (h) any other information which Company has reasonably
         determined to be confidential or proprietary; and (i) all written,
         graphic, electronic and other material relating to any of the
         foregoing. Information that is not novel or copyrighted or patented may
         nonetheless be proprietary information. Proprietary information,
         however, shall not include any information that is or becomes generally
         known to the industries in which Company competes through sources
         independent of Company or Executive or through authorized publication
         by Company to persons other than Company's employees.

                  (b) Confidentiality and Surrender of Records. Executive shall
         not during the term of employment or at any time thereafter
         (irrespective of the circumstances under which Executive's employment
         terminates), except as required by law, directly or indirectly give or
         disclose any "confidential records" (as hereinafter defined) to, or
         permit any inspection or copying of confidential records by, any
         individual or entity other than in the ordinary course and scope of
         such individual's or entity's employment or retention by Company, nor
         shall he use or retain any of the same following termination of his
         employment. Executive shall promptly return to Company all
         "confidential records" upon the termination of Executive's employment
         with Company. For purposes hereof, "confidential records" means all
         correspondence, memoranda, files, analyses, studies, reports, notes,
         documents, manuals, books, lists, financial, operating or marketing
         records, computer software, magnetic tape, or electronic or other media
         or equipment of any kind which may be in Executive's possession or
         under his control or accessible to him which contain any proprietary
         information as defined in subsection 15(a) above. All confidential
         records shall be and remain the sole property of Company during the
         term of employment and thereafter.

                  (c) Inventions, Patents, and Copyrights. All inventions,
         innovations or improvements in Company's method of conducting its
         business (including policies, procedures, products, improvements,
         software, ideas and discoveries, whether or not patentable or
         copyrightable) conceived or made by Executive, either alone or jointly
         with others, during the term of employment belong to Company. Executive
         will promptly disclose in writing such inventions, innovations or
         improvements to Company and perform all actions reasonably requested by
         Company to establish and confirm such ownership by Company, including,
         but not limited to, cooperating with and assisting Company in obtaining
         patents and copyrights for Company in the

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         United States and in foreign countries. Any patent or copyright
         application filed by Executive within a year after termination of his
         employment hereunder shall be presumed to relate to an invention or
         work of authorship which was made during the term of employment unless
         Executive can provide conclusive evidence to the contrary.

         16. Successors; Binding Agreement.

                  (a) This Agreement shall not be terminated by the voluntary or
         involuntary dissolution of the Company or by any merger or
         consolidation where the Company is not the surviving corporation, or
         upon any transfer of all or substantially all of the Company's assets,
         or any other Change in Control. The Company shall require any
         purchaser, assign, surviving corporation or successor (whether direct
         or indirect, by purchase, merger, consolidation, reorganization or
         otherwise) to all or substantially all of the business and/or assets of
         the Company, by agreement in form and substance satisfactory to the
         Executive, expressly to assume and agree to perform this Agreement in
         the same manner and to the same extent the Company would be required to
         perform if no such succession had taken place. This Agreement shall be
         binding upon and inure to the benefit of the Company and any purchaser,
         assign, surviving corporation or successor to the Company, including
         without limitation any persons acquiring directly or indirectly all or
         substantially all of the business and/or assets of the Company whether
         by purchase, merger, consolidation, reorganization, transfer of all or
         substantially all of the business or assets of the Company, or
         otherwise (and such purchaser, assign, surviving corporation or
         successor shall thereafter be deemed the "Company" for the purposes of
         this Agreement), but this Agreement shall not otherwise be assignable,
         transferable or delegable by the Company.

                  (b) This Agreement shall inure to the benefit of and be
         enforceable by the Executive's personal or legal representatives,
         executors, administrators, successors, heirs, distributees and/or
         legatees.

                  (c) This Agreement is personal in nature and neither of the
         parties hereto shall, without the consent of the other, assign,
         transfer or delegate this Agreement or any rights or obligations
         hereunder except as expressly provided in this Section 16. Without
         limiting the generality of the foregoing, the Executive's right to
         receive payments hereunder shall not be assignable, transferable or
         delegable, whether by pledge, creation of a security interest or
         otherwise, or otherwise subject to anticipation, alienation, sale,
         encumbrance, charge, hypothecation, or set-off in respect of any claim,
         debt, or obligation, or to execution, attachment, levy or similar
         process, or assignment by operation of law, other than by a transfer by
         his will or by the laws of descent and distribution. Any attempt,
         voluntarily or involuntarily, to effect any action prohibited by this
         Paragraph shall be null, void, and of no effect.

         17. Notices. Any notice, request, claim, demand, document and other
communication hereunder to any party shall be effective upon receipt (or refusal
of receipt) and shall be in writing and delivered personally or sent by telex,
telecopy, or certified or registered mail, postage prepaid, or other similar
means of communication, as follows:

                  (a) If to the Company, addressed to its principal executive
         offices to the attention of its Secretary;

                                       10
<PAGE>

                           (b) If to the Executive, to him at the address set
         forth below under the Executive's signature, or at any such other
         address as either party shall have specified by notice in writing to
         the other.

         18. Amendments; Waivers. This Agreement may not be modified, amended,
or terminated except by an instrument in writing, signed by the Executive and by
a duly authorized representative of the Company. By an instrument in writing
similarly executed, either party may waive compliance by the other party with
any provision of this Agreement that such other party was or is obligated to
comply with or perform; provided, however, that such waiver shall not operate as
a waiver of, or estoppel with respect to, any other or subsequent failure. No
failure to exercise and no delay in exercising any right, remedy, or power
hereunder shall operate as a waiver thereof, nor shall any single or partial
exercise of any right, remedy, or power hereunder preclude any other or further
exercise thereof or the exercise of any other right, remedy, or power provided
herein or by law or in equity.

         19. Entire Agreement. This Agreement sets forth the entire agreement of
the parties hereto in respect of the subject matter contained herein and
supersedes all prior agreements, promises, covenants, arrangements,
communications, representations or warranties, whether oral or written, by any
officer, employee or representative of any party hereto. The parties further
intend that this Agreement shall constitute the complete and exclusive statement
of its terms and that no extrinsic evidence whatsoever may be introduced in any
judicial, administrative, or other legal proceeding involving this Agreement.

         20. Severability; Enforcement. If any provision of this Agreement, or
the application thereof to any person, place, or circumstance shall be held by a
court of competent jurisdiction to be invalid, unenforceable or void, the
remainder of this Agreement and such provisions as applied to other persons,
places and circumstances shall remain in full force and effect.

         21. Indemnification. The Company shall indemnify, defend, and hold the
Executive harmless from and against any liability, damages, costs, or expenses
(including attorney's fees) in connection with any claim, cause of action,
investigation, litigation, or proceeding involving him by reason of his having
been an officer, director, employee, or agent of the Company, unless it is
judicially determined, in a final, nonappealable order that the Executive was
guilty of gross negligence or willful misconduct. The Company also agrees to
maintain adequate directors and officers liability insurance for the benefit of
Executive for the term of this Agreement and for at least three years,
thereafter, to the extent such insurance is reasonably available and provided to
all executives of the Company.

         22. ERISA. This Agreement is pursuant to the Company's Severance Plan
for Executives (the "Plan") which is unfunded and maintained by the Company
primarily for the purpose of providing deferred compensation for a select group
of management or highly compensated employees. The Plan constitutes an employee
welfare benefit plan ("Welfare Plan") within the meaning of Section 3(1) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"). Any
payments pursuant to this Agreement which could cause the Plan not to constitute
a Welfare Plan shall be deemed instead to be made pursuant to a separate
"employee pension benefit plan" within the meaning of Section 3(2) of ERISA as
to which the applicable portions of the document constituting the Plan shall be
deemed to be incorporated by reference. None of the benefits hereunder may be
assigned in any way.

         23. Governing Law. This Agreement shall be interpreted, administered
and enforced in accordance with the law of the State of Arkansas, except to the
extent pre-empted by Federal law.

         The parties have duly executed this Agreement to be effective as of the
date first written above.

                                       11
<PAGE>

BEVERLY ENTERPRISES, INC.                       EXECUTIVE

By:
     ---------------------------------------    --------------------------------
     David R. Banks                             Douglas J. Babb
     Chairman and Chief Executive Officer       503 St. James Court
                                                Southlake, TX  76092

By:
     --------------------------------------
     John W. MacKenzie
     Vice President, Deputy General Counsel
            and Assistant Secretary

                                       12<PAGE>
                                                                   EXHIBIT 10.36

                    SEVERANCE AGREEMENT AND RELEASE OF CLAIMS

         This Severance Agreement and Release of Claims ("Release") is entered
into between Beverly Enterprises, Inc., its officers, agents, directors,
employees, successors, subsidiaries, insurers, parents and/or affiliated
companies, and assigns (the "Company") and MICHAEL MATHENY (the "Employee").

         WHEREAS, the Employee is employed by the Company in the capacity of
Executive Vice President - Information Technology and Chief Information Officer;
and

         WHEREAS, the Employee and the Company entered into an Employment
Contract dated March 1, 2001, ("Employment Contract"), and it is the parties'
intent that all the terms of such Agreement shall be superceded on the Effective
Date of this Release and the terms of this Release shall govern the rights and
obligations of the parties after the Employee's termination of employment except
as otherwise set forth in this Release; and

         WHEREAS, Employee is resigning from the Company on October 11, 2002 as
a result of a Termination of Employment without Cause under his Employment
Contract; and

         WHEREAS, the Company and the Employee have made arrangements to promote
an orderly transition of the Employee's responsibilities, and the Company had
committed to Employee that he would receive certain benefits in the event his
employment was terminated without Cause under his Employment Contract upon his
execution of a liability release; and

         NOW, THEREFORE, in consideration of the mutual promises and other
consideration described herein, the Company and the Employee agree as follows.

         1. TERMINATION OF EMPLOYMENT. The Employee hereby tenders, and the
Company hereby accepts, the Employee's resignation under the terms of his
Employment Contract as an officer and employee of the Company effective October
11, 2002 (the "Termination Date"). The parties agree that, upon the Termination
Date of this Release, the Employee shall have no further right or duty to render
services to or on behalf of the Company. The "Effective Date" of this Release
will be the eighth day following receipt by the Company of an original of this
Release executed by the Employee, provided that there has been no revocation as
specified in Section 4(d) by the Employee.

         2. SEVERANCE PAYMENT. The Company promises that Employee will receive
the amounts or benefits set forth in this Section 2, subject to the terms of
this Release, and in lieu of all other severance benefits:

<PAGE>

         (a)      Severance Agreement. A single, lump-sum payment in the amount
                  of nine hundred and forty five thousand dollars ($945,000)
                  (subject to this Section 2 and less all legally required and
                  authorized deductions and withholdings), representing two (2)
                  times the Employee's current base salary and target bonus
                  amounts (75% of base salary), and a payment representing
                  earned, but unused 2002 vacation less all legally required and
                  authorized deductions and withholdings, shall be paid to
                  Employee on the Effective Date.

         (b)      Continuation of Benefits. The Company will continue to provide
                  the Employee with coverage as an executive employee under its
                  Group Medical, Executive Medical Reimbursement Plan, Executive
                  Medical and Dental Benefits Plan to the same extent as it
                  would for active employees, for two (2) years following the
                  Employee's Termination Date. These benefits shall be reduced
                  to the extent comparable benefits are provided to Employee
                  through any subsequent employers.

         (c)      Relocation Benefit, If, within two (2) years after the
                  Employee's Termination of Employment by the Company, Employee
                  gives the Company written notice that he desires to relocate
                  from Fort Smith, Arkansas to another state within the
                  Continental United States, the Company will reimburse the
                  Employee for any reasonable relocation expenses (in accordance
                  with the Company's general relocation policy for executives
                  then in effect which shall not be materially different or less
                  beneficial than the Company's relocation policy in effect on
                  the date of the Release) in connection with such relocation.

         (d)      Executive Retirement Plan. For the year of the Employee's
                  Termination of Employment, the Company will make the
                  contribution to the Executive Retirement Plan on behalf of the
                  Employee that it would have made if the Employee had not had a
                  Termination of Employment, but in no event less than the
                  percentage contribution it made for the Employee in the
                  immediately preceding year (and increased to take account of
                  the additional year of service), in each case taking account
                  of the Employee's annualized rate of "Compensation" (as
                  defined in the Executive Retirement Plan) and the percentage
                  of such Compensation that the Employee is contributing to the
                  Executive Retirement Plan, as of the date of Termination of
                  Employment, and the Company's matching contribution rate for
                  such year (or, if greater, the preceding year). The portion of
                  the Company's matching contribution which is based on the
                  preceding year's

                                       2
<PAGE>

                  contribution percentage shall be contributed to the Executive
                  Retirement Plan on behalf of the Employee immediately upon the
                  Employee's Termination Date and any additional contribution
                  required shall be paid as soon as the amount is determined.

         (e)      Executive Deferred Compensation Plan. For the year of the
                  Employee's Termination of Employment, the Company will make
                  the contribution to its Executive Deferred Compensation Plan
                  (the "EDC Plan") that it would have made if the Employee had
                  not had a Termination of Employment determined based on the
                  Employee's deferral for such year. At Employee's election, the
                  Company contribution shall be paid to the Employee immediately
                  upon his Termination of Employment.

         (f)      Long-Term Incentive Award; Equity-Based Compensation.
                  Employee's stock-related rights are set forth in Attachment 1
                  to this Agreement. Employee will have ninety (90) days from
                  his Termination Date in which to exercise vested stock
                  options.

         (g)      Extent of Benefit Eligibility. Employee will cease to be
                  eligible to participate under any stock option, bonus,
                  incentive compensation, commission, medical, dental, life
                  insurance, retirement, and other compensation or benefit plans
                  of the Company or any affiliate following the Termination Date
                  except to the extent described above and except where the
                  governing documents of those plans provide otherwise. Any
                  payment from these plans will be in accordance with the
                  election(s) previously made by the Employee.

         In the event of any material breach by the Employee of the terms of
this Release, the Employee's right to receive any further payments or benefits
under the Release shall immediately end, and the Employee will forfeit and be
required to return to the Company any payments or benefits received. Any such
breach shall not relieve the Employee of any obligations under the Release, and
the cessation of any benefits on account of a breach shall not limit the
Company's right to any other relief it may have as a matter of law or equity.
Notwithstanding the foregoing, any challenge as to the validity of the ADEA
release contained in subsection 4(d) of this Release shall not be considered a
material breach, to the extent such treatment is mandated by applicable law.

         3. CONSIDERATION OF RELEASE. Employee acknowledges that, before signing
this Release, he was given at least 21 days in which to consider this Release.
Employee waives any right he might have to additional time within which to
consider this Release. Employee further acknowledges that: (1) he took advantage
of the time he was given to consider this Release before signing it; (2) he
carefully read this Release; (3) he fully understand it; (4) he is entering into
it voluntarily; (5) he is receiving valuable consideration in exchange for his
execution of this Release that he would not otherwise

                                       3
<PAGE>

be entitled to receive; and (6) the Company, in writing, encouraged him to
discuss this Release with his attorney (at his own expense) before signing it,
and that he did so to the extent he deemed appropriate.

         4. GENERAL RELEASE

         (a)      In General: Except for obligations established in this
                  Release, Employee irrevocably and unconditionally releases all
                  the Claims described in this Section 4 that he may now have
                  against the Released Parties listed in Section 4(b). The
                  Company and the Released Parties irrevocably and
                  unconditionally release Employee from all the claims described
                  in this Section 4 except for obligations established in this
                  Release.

         (b)      Released Parties: The Released Parties are the Company, all
                  current and former parents, subsidiaries, related companies,
                  partnerships, or joint ventures, and, with respect to each of
                  them, their predecessors and successors; and, with respect to
                  each such entity, all of its past, present, and future
                  employees, officers, directors, stockholders, owners,
                  representatives, assigns, attorneys, agents, insurers,
                  employee benefit programs (and the trustees, administrators,
                  fiduciaries, and insurers of such programs), and any other
                  persons acting by, through, under or in concert with any of
                  the persons or entities listed in this subsection, and their
                  successors.

         (c)      Claims Released: The Claims Employee is releasing under this
                  Section 4 include all known and unknown claims, promises,
                  causes of action, or similar rights of any type that Employee
                  presently may have ("Claims") with respect to any Released
                  Party listed in Section 4(b). Employee understands that the
                  Claims Employee is releasing might arise under many different
                  foreign, domestic, national, state, or local laws (including
                  statutes, regulations, other administrative guidance, and
                  common law doctrines), as set forth in this Section 4.

         (d)      Employee acknowledges that a portion of the amounts or
                  benefits under this Release is being paid to induce him to
                  release any claims that he may have under the Age
                  Discrimination in Employment Act ("ADEA"). Employee
                  acknowledges that he has adequate and legally sufficient time
                  to review and seek legal guidance concerning this Release.
                  Specifically, Employee acknowledges that this Release was
                  provided to him on October 11, 2002, and that he has until
                  November 1, 2002 to consider this Release. If Employee chooses
                  to execute this Release prior to

                                       4
<PAGE>

                  November 1, 2002, it is solely his choice. Employee may revoke
                  the waiver of the ADEA claims in this Section of this Release
                  (which Employee acknowledges constitutes an entirely separate
                  release from the balance of this Release) within seven (7)
                  days after signing of this Release, in which case Employee
                  will not be paid that portion of the amounts or benefits that
                  are being paid to Employee for his release of ADEA claims.
                  Employee agrees that any revocation will be in writing and
                  accompanied by all sums received pursuant to this Release and
                  received by the Executive Vice President, General Counsel by
                  the end of the seven (7) day period. Employee has been advised
                  to consult with an attorney or advisor concerning this
                  Release. Employee understands the rights that have been waived
                  by this Release, including rights under the Age Discrimination
                  in Employment Act of 1967, 29 U.S.C. Section 62 1, et seq., as
                  amended. Employee further represents and warrants that he
                  freely negotiated the terms of this Release, and enters into
                  it and executes it voluntarily. He understands that this is a
                  voluntary waiver of any claims under the laws and orders
                  stated below, that relate in any way to his employment with,
                  complaints about, compensation due, or separation from the
                  Company.

                  Anti-discrimination statutes, such as the Age Discrimination
                  in Employment Act and Executive Order 11141, which prohibit
                  age discrimination in employment; Title VII of the Civil
                  Rights Act of 1964, Sections 1981 and 1983 of the Civil Rights
                  Act of 1866, and Executive Order 11246, which prohibit
                  discrimination based on race, color, national origin,
                  religion, or sex; the Equal Pay Act, which prohibits paying
                  men and women unequal pay for equal work; the Americans With
                  Disabilities Act and Sections 503 and 504 of the
                  Rehabilitation Act of 1973, which prohibit discrimination
                  based on disability; and any other federal, state, or local
                  laws prohibiting employment discrimination, such as the State
                  of Arkansas.

                  Federal employment statutes, such as the WARN Act, which
                  requires that advance notice be given of certain work force
                  reductions; the Employee Retirement Income Security Act of
                  1974, which, among other things, protects employee benefits;
                  the Fair Labor Standards Act of 1938, which regulates wage and
                  hour matters; the Family and Medical Leave Act of 1993, which
                  requires employers to provide leaves of absence under certain
                  circumstances; and any other federal laws relating to
                  employment, such as veterans' reemployment rights laws.

                                       5
<PAGE>

                  Other laws, such as any federal, state, or local laws
                  providing workers' compensation benefits, mandating leaves of
                  absence, restricting an employer's right to terminate
                  employees, or otherwise regulating employment; any federal,
                  state, or local law enforcing express or implied employment
                  contracts or requiring an employer to deal with employees
                  fairly or in good faith; any other federal, state, or local
                  laws providing recourse for alleged wrongful discharge, tort,
                  physical or personal injury, emotional distress, fraud,
                  negligent misrepresentation, defamation, and similar or
                  related claims, and any other law, such as the State of
                  Arkansas.

                  Examples of released Claims include, but are not limited to
                  the following (except to the extent explicitly preserved by
                  Section 1 or 2(a) of this Release): (i) Claims that in any way
                  relate to Employee's employment with the Company, or the
                  termination of that employment, such as Claims for
                  compensation, bonuses, commissions, lost wages, or unused
                  accrued vacation or sick pay except as otherwise provided in
                  paragraph 2(a); (ii) Claims that in any way relate to the
                  design or administration of any employee benefit program;
                  (iii) Claims that Employee has irrevocable or vested rights to
                  severance or similar benefits or to post-employment health or
                  group insurance benefits; (iv) any Claims to attorneys' fees
                  or other indemnities (such as under the Civil Rights
                  Attorneys' Fees Act), with respect to Claims Employee is
                  releasing, or any Claims that Employee has under his
                  Employment and Severance Agreement.

         (e)      Unknown Claims: Employee understands that he is releasing
                  Claims that he may not know about. That is his knowing and
                  voluntary intent even though he recognizes that someday he
                  might regret having signed this Release. Nevertheless,
                  Employee is assuming that risk and agrees that this Release
                  shall remain effective in all respects in any such case.
                  Employee expressly waives all rights he might have under any
                  law that is intended to protect him from waiving unknown
                  claims (such as California Civil Code Section 1542). Employee
                  understands the significance of doing so.

         (f)      Employee represents and covenants that Employee, his heirs,
                  representatives, executors, administrators, successors, and
                  assigns have not and will not file any claims, charges, or
                  complaints against the Company, with any Federal, State, or
                  local agency or court arising out of his employment and/or
                  separation from the Company. Employee further represents that
                  if any such agency or

                                       6
<PAGE>

                  court ever assumes jurisdiction of or otherwise pursues any
                  such lawsuit, claim, charge, or complaint and/or purports to
                  bring any legal proceeding, in whole or in part, on behalf of
                  Employee, or Employee's heirs, representatives, executors,
                  administrators, successors, and/or assigns, behalf against the
                  Company, Employee, or Employee's heirs, representatives,
                  executors, administrators, successors, and/or assigns,
                  promptly, in writing, will request the agency or court to
                  withdraw from and/or dismiss the lawsuit, claim, charge or
                  complaint with prejudice and will take all available legal
                  action to be removed from any such legal proceeding brought,
                  in whole or in part, on behalf of Employee. This subsection
                  shall not apply to challenges to the ADEA release in
                  subsection 4(d) of this Release, to the extent, if any,
                  prohibited by applicable law.

         (g)      Employee understands and agrees that his employment with the
                  Company has terminated effective October 11, 2002, and he will
                  not apply for or otherwise seek re-employment with the
                  Company, or its successors, at any time. The Company shall
                  have the absolute right, without incurring liability of any
                  kind, to refuse Employee's consideration for employment and
                  Employee agrees that he shall not authorize any person or
                  agency to pursue any claim for such refusal of employment. The
                  Employee acknowledges that he has received no promise or
                  assurance that his employment will resume at any point in the
                  future or that he will ever be rehired by the Company or its
                  affiliates, parent, or subsidiaries.

         (h)      As further consideration for the covenants set forth herein,
                  Employee hereby agrees to cooperate fully with the Company's
                  Legal Department and/or any lawyer, law firm, or consultant
                  that the Company designates with respect to any litigation,
                  deposition, hearing, arbitration, or other proceeding
                  (including, but not limited to, support of the Company's
                  position in defending any employment-related lawsuits or
                  claims concerning which Employee has knowledge or audits,
                  investigations, lawsuits, complaints or proceedings by
                  government entities of state or federal law compliance) where
                  the Company's legal or financial interests are at issue.
                  Employee agrees to provide up to a maximum of ten (10) hours
                  of time in any given month to assist the Company under this
                  paragraph without compensation. Any assistance Employee
                  provides to Company under this paragraph in excess of ten (10)
                  hours in any given month shall be compensated on an hourly
                  basis as mutually agreed by Employee and Company. In

                                       7
<PAGE>

                  addition, Company agrees to compensate Employee on a mutually
                  acceptable basis for any time incurred in assisting the
                  Company under this paragraph after Employee has worked in
                  excess of forty (40) hours of accumulated time. Company will
                  reimburse Employee for reasonable and necessary business
                  expenses incurred in providing assistance under this
                  paragraph. Employee further covenants that he will contact the
                  Company's Legal Department in the event that there is any
                  subpoena, notice or other instruction directing the Employee
                  to appear in any legal proceeding involving the Company.

         (i)      To the maximum extent permitted by law, the Company shall
                  indemnify Employee against all expenses (including reasonable
                  attorneys' fees), judgments, fines and amounts paid in
                  settlement actually incurred by himself in connection with any
                  claim, action, suit or proceeding, whether civil, criminal,
                  administrative or investigative, to which Employee becomes a
                  party or in which Employee becomes otherwise involved by
                  reason of the fact that Employee was a director, officer,
                  employee or agent of the Company or of any subsidiary or
                  affiliate of the Company. In addition, the Company shall
                  continue to include Employee among those individuals covered
                  by the Company's director and officer liability insurance, as
                  long as such insurance is available and the Company elects to
                  maintain such insurance; provided, however, that the
                  unavailability of such insurance coverage or the Company's
                  discontinuance of such insurance shall in no way limit, reduce
                  or otherwise affect Employee's rights to indemnification by
                  the Company under the first sentence of this subsection. This
                  subsection shall remain in full force and effect indefinitely
                  with respect to any claims based upon events occurring on or
                  prior to October 11, 2002.

         (j)      Employee also promises neither to contest the validity of this
                  Release, nor sue the Company concerning any claim he may have
                  relating to his employment with the Company or the termination
                  of that employment. This subsection shall not apply to
                  challenges to the ADEA release in subsection 4(d) of this
                  Release, to the extent, if any, prohibited by applicable law.

         5. TRANSFER OF DUTIES. During the period preceding the Termination Date
and for two (2) years thereafter, the Employee will act at all times with
complete loyalty and good faith in promoting the best interests of the Company.
To this end, the Employee will: (a) fully inform the Company and the Employee's
successor (if any) of all material activities performed by the Employee and of
progress on assigned duties; and

                                       8
<PAGE>

(b) transfer or otherwise make available to the Company and the Employee's
successor (if any), to the extent reasonably possible, the Employee's knowledge
and experience regarding his activities on behalf of the Company. Employee will
also promote the goodwill, reputation, and ongoing business of the Company, and
take all steps necessary to maintain, and in no way act to hinder, the foregoing
interests.

         6. COMPANY PROPERTY. By Employee's last day of work, Employee will
return to the Company all files, memoranda, documents, records, copies of the
foregoing, credit cards, keys, and any other property of the Company or its
affiliates in his possession.

         7. OWNERSHIP OF CLAIMS. Employee has not assigned or transferred any
Claim he is purporting to release, nor has he attempted to do so.

         8. OTHER REPRESENTATIONS. In addition to Employee's other
representations in this Release, Employee has made the following representations
to the Company, on which he acknowledges it also has relied in entering into
this Release with Employee: (a) Employee has not suffered any discrimination on
account of his age, sex, race, national origin, marital status, sexual
orientation, or any other protected status, and none of these ever has been an
adverse factor used against Employee by any Released Party; (b) Employee has not
suffered any job-related wrongs or injuries for which he might still be entitled
to compensation or relief, such as an injury for which Employee might receive a
workers' compensation award in the future; (c) Employee has no knowledge of any
wrongdoing by the Company that would subject the Company to any harm, civil or
criminal; and (d) Employee has provided no information, oral or in writing, to
anyone - individual, corporation or any other organization, private, public or
governmental - that involves any wrongdoing, civil or criminal, by the Company.

         9. FALSE CLAIMS REPRESENTATIONS AND PROMISES. Employee has disclosed to
the Company any information he has concerning any conduct involving the Company
or any affiliate that he has any reason to believe may be unlawful or that
involves any false claims to the United States. Employee promises to cooperate
fully in any investigation the Company or any affiliate undertakes into matters
occurring during Employee's employment with the Company or any affiliate.
Employee understands that nothing in this Release prevents him from cooperating
with any U.S. government investigation. In addition, to the fullest extent
permitted by law, Employee hereby irrevocably assign to the U.S. government any
right he might have to any proceeds or awards in connection with any false
claims proceedings against the Company or any affiliate.

         10. COOPERATION REQUIRED. Employee agrees that, as requested by the
Company, he will fully cooperate with the Company or any affiliate in effecting
a smooth transition of his responsibilities to others.

                                       9
<PAGE>

         11. NON-SOLICITATION. Employee agrees to the following prohibitions on
solicitation of the Company's employees, customers, and business interests, to
wit:

         (a)      Employee shall not at any time during the period of his
                  employment with the Company, or during the two (2) year period
                  immediately following the effective date of his termination
                  (the "Non-Solicitation Period"), without the prior written
                  consent of the Company, on behalf of himself or any other
                  person or entity, solicit for employment or employ any of the
                  current officers or employees of the Company; provided,
                  however, that nothing contained herein shall prohibit the
                  Employee from hiring employees of the Company when such
                  employment results from general solicitations for employment.

         (b)      Employee shall not at any time during the period of his
                  employment with the Company, or during the Non-Solicitation
                  Period, without the prior written consent of the Company,
                  solicit for his own benefit, or for the benefit of any company
                  or persons by whom he is employed, or for whom he may be
                  acting, any of the current customers of the Company, nor shall
                  he divulge to any other person any information or fact
                  relating to the management, business (including prospective
                  business), finances, or customers of the Company or the terms
                  of any contracts of the Company which is not freely available
                  to the public.

         (c)      Employee covenants and agrees that a material breach of the
                  foregoing subsections would immediately and irreparably harm
                  the Company and that a remedy at law would be inadequate to
                  compensate the Company for its losses by reason of such breach
                  and therefore that the Company shall, in addition to any
                  rights and remedies available under this Release, at law or
                  otherwise, be entitled to an injunction to be issued by any
                  court of competent jurisdiction enjoining and restraining the
                  Employee from committing any violation of the foregoing
                  subsections.

         12. NON-DISCLOSURE, RETURN OF PROPRIETARY INFORMATION, AND INVENTIONS
AND PATENTS. The Company and the Employee agree that during his employment with
the Company, the Employee has received and become acquainted with confidential,
proprietary, and trade secret information of the Company including, but not
limited to, information regarding Company business programs, plans, and
strategies; finances; customers and prospective customers; suppliers and
vendors; marketing plans and results; personnel matters regarding Company
employees, officers, directors, and owners; manners of operation and services
provided; negotiating positions and strategies; legal arguments, theories,
claims, and defenses; pending, threatened, or potential legal

                                       10
<PAGE>

actions, claims, investigations, and audits; or information which could lead to
the same; and similar sensitive information regarding the operation and business
of the Company. The Employee acknowledges that such information has been
developed or acquired by the Company through the expenditure of substantial
time, effort, and money, that such information provides the Company with
strategic and business advantages over others who do not know or use such
information, and that the Company has implemented specific policies and
practices to keep such information secret. Accordingly, the Employee agrees as
follows:

         (a)      The Employee shall not during the term of employment or at any
                  time thereafter directly or indirectly use for his own purpose
                  or for the benefit of any person or entity other than the
                  Company, or otherwise disclose or permit others to obtain
                  access to, any proprietary of confidential information to any
                  individual or entity unless such disclosure has been
                  authorized in writing by the Company or is otherwise required
                  by law. For purposes of this provision, the Company's
                  proprietary information shall include, but is not limited to,
                  information and material identified in this section and that
                  identified in Section 17 of Employee's March 1, 2002
                  Employment Contract. Information or material that is not novel
                  or copyrighted or patented may nonetheless be proprietary
                  information. Proprietary information shall not include,
                  however, any information that is or becomes generally known to
                  the industries in which the Company competes through sources
                  independent of the Company or the Employee or through
                  authorized publication by the Company to persons other than
                  Company employees.

         (b)      The Employee shall not during his employment or at any time
                  thereafter, except as required by law, directly or indirectly
                  give or disclose any records containing confidential
                  information or material to, or permit any inspection or
                  copying of such records by, any individual or entity other
                  than in the authorized course and scope of such individual's
                  or entity's employment or retention by the Company. In
                  addition, the Employee shall promptly return to the Company
                  all such records upon his resignation hereunder and shall not
                  use or retain any such records thereafter. Records subject to
                  this subsection shall include, but not be limited to, all
                  correspondence, memoranda, files, analyses, studies, reports,
                  notes, documents, manuals, books, lists, financial, operating,
                  or marketing records, computer software, magnetic tape, or
                  electronic or other media or equipment of any kind that may be
                  in the Employee's possession or under his control or
                  accessible to his which contain or may be derived from
                  proprietary or confidential

                                       11
<PAGE>

                  information covered by this section or by Section 17 of
                  Employee's March 1, 2002 Employment Contract. All such records
                  are and will remain the sole property of the Company.

         (c)      Employee acknowledges his responsibilities with respect to
                  inventions, patents, and copyrights as set forth in Section 17
                  of his March 1, 2002 Employment Contract. Employee
                  acknowledges that there are no inventions, innovations or
                  improvements that should be disclosed as required by Section
                  17(c).

         13. CONFIDENTIALITY. The Employee agrees that he will keep confidential
the existence and terms of this Release; provided, however, that nothing herein
shall prevent the Employee from disclosing the fact and terms of this Release
with his attorney, accountant, or financial advisor for the purposes of
receiving professional advice from such individual in that capacity. The
Employee will advise those individuals that the existence and terms of this
Release shall be kept confidential.

         14. PUBLIC STATEMENTS. Except as necessary to secure other employment
or for other necessary reasons, Employee agrees that he will make no public
statements concerning his employment or the termination thereof with the
Company. Employee also agrees that he will make no disparaging remarks to any
third parties concerning the Company, its employees, agents, representatives,
subsidiaries, parents, affiliates, and shareholders and Company agrees to make
same commitment with respect to Employee. Employee further agrees that he will
not disparage the Company's business capabilities, products, plans, or
management to any customer, potential customer, vendor, supplier, contractor or
subcontractor of the Company so as to affect adversely the good will or business
of the Company.

         15. CONSEQUENCES OF VIOLATING PROMISES:

         (a)      GENERAL CONSEQUENCES. In addition to any other remedies or
                  relief that may be available, Employee agrees to pay the
                  reasonable attorneys' fees and any damages Released Parties
                  may incur as a result of his breaching a promise he made in
                  this Release (such as by suing a Released Party over a
                  released Claim) or if any representation he made in this
                  Release was false when made. Employee further agrees that the
                  Company would be irreparably harmed by any actual or
                  threatened violation of Sections 11 and 12 that involves
                  Release-related disclosures or disclosure or use of
                  confidential information or trade secrets or solicitation of
                  employees, customers, or suppliers, and that the Company will
                  be entitled to an injunction prohibiting Employee from
                  committing any such violation.

                                       12
<PAGE>

         (b)      CHALLENGES TO VALIDITY. Should Employee attempt to challenge
                  the enforceability of this Release, Employee agrees first: (1)
                  to deliver a certified check to the Company for all amounts he
                  has received because he signed this Release, plus 10 percent
                  interest per annum; (2) to direct in writing that all future
                  benefits or payments Employee is to receive because he signed
                  this Release be suspended; and (3) to invite the Company to
                  cancel this Release. If the Company accepts Employee's offer,
                  this Release will be canceled. If it rejects Employee's offer,
                  the Company will notify Employee and deposit the amount
                  Employee repaid, plus all suspended future benefits and
                  payments, in an interest-bearing account pending a
                  determination of the enforceability of this Release. If the
                  Release is determined to be enforceable, the Company is to pay
                  Employee the amount in the account, less any amounts Employee
                  owes the Company. If the Release is determined to be
                  unenforceable, the amount credited to the account shall be
                  paid to the entities that paid the consideration for this
                  Release in proportion to their payments, and the suspension of
                  future benefits or payments shall become permanent.

         (c)      ADEA CLAIMS. This section shall not apply to a challenge to
                  the ADEA release in subsection 4(b) of this Release to the
                  extent, if any, prohibited by applicable law.

         16. NO ADMISSION OF LIABILITY. This Release shall not in any way be
construed as an admission by the Company that it has acted wrongfully with
respect to Employee or any other person, entity or agency, or that Employee has
any rights whatsoever against the Company. The Company further specifically
disclaims and denies any liability to or wrongful acts against Employee or any
other person, entity or agency, on the part of itself, its employees and its
agents.

         17. SUCCESSORS AND ASSIGNS. This Release shall inure to the benefit of
and be binding upon the parties hereto and their respective heirs, successors,
legal representatives, and assigns. However, neither this Release nor any right
or interest hereunder shall be assignable by Employee, his beneficiaries, or
legal representatives, except as provided by law or pursuant to referenced
benefit plan documents.

         18. SEVERABILITY AND REFORMATION. The provisions of this Release are
severable. If any provision of this Release shall be determined to be invalid,
illegal, or unenforceable, in whole or in part, neither the validity of the
remaining parts of such provision nor the validity of any other provision of
this Release shall in any way be affected thereby. In lieu of such invalid,
illegal, or unenforceable provision, there shall be added automatically as part
of this Release a provision as similar in terms to such invalid, illegal, or
unenforceable provision as may be possible and be valid, legal, and

                                       13
<PAGE>

enforceable. Each party also agrees that, without receiving further
consideration, it will sign and deliver such documents and do anything else
necessary in the future to make the provisions of this Release effective.

         19. TAXES. Employee understands that he will be responsible for paying
all taxes that may become due on any of the severance benefits provided herein.
If he fails to pay these payments, or any taxing authority alleges that he has
failed to do so or that the Company is responsible for the payment of these
taxes, for any reason, Employee agrees to be fully responsible for any judgments
or orders, fines and penalties, and that he will indemnify the Company
including, but not limited to, the satisfaction of judgments, orders, fines or
penalties in the payment of the Company's defense by counsel of its choice in
such proceedings. The taxability of the amounts contained herein shall not
affect the validity of this Release.

         20. GOVERNING LAW. This Release shall be governed by the law of the
State of Arkansas.

         21. ARBITRATION OF DISPUTES:

         (a)      In the event the Company believes that Employee has breached
                  this Release in any way, prior to seeking any remedy,
                  including arbitration, the Company's General Counsel will
                  first contact Employee and inform him of the claimed breach.
                  Employee will then have seven (7) days within which to address
                  the Company's claim before it may take any action under this
                  Release.

         (b)      ARBITRATION DISPUTES. The Company and Employee agree to
                  resolve any claims they may have with each other (except, if
                  either Employee or the Company so elects, any dispute for
                  which injunctive relief is a principal remedy) through final
                  and binding arbitration in accordance with this section.
                  Employee also agrees to resolve in accordance with this
                  section any claim between him and any other Released Party who
                  offers or agrees to arbitrate the claim in this manner. This
                  arbitration requirement applies to, among other things,
                  disputes about the validity, interpretation, or effect of this
                  Release or alleged violations of it, claims of discrimination
                  under federal or state law, or other statutory violation
                  claims.

         (c)      ARBITRATION. Except as otherwise provided in any other
                  enforceable arbitration agreement between Employee and the
                  Company (Another Arbitration Agreement), which the Company and
                  Employee hereby reaffirm if one exists, the arbitration shall
                  be in accordance with the then-current arbitration rules and
                  procedures for employment disputes governing arbitrations

                                       14
<PAGE>

                  administered by the Judicial Arbitration and Mediation Service
                  (JAMS), except as provided in this section. Arbitration shall
                  take place before a panel of three arbitrators experienced in
                  employment law licensed to practice in the state of Arkansas
                  selected in accordance with subsection (c). The arbitrators
                  may not modify or change this Release in any way. Employee,
                  the Company, and any Released Party who agrees to arbitrate an
                  Arbitrable Dispute under this section agree to submit to
                  personal jurisdiction in the state listed in the first Section
                  of this Release for such arbitration and in any jurisdiction
                  necessary for the enforcement of any arbitration award.

         (d)      SELECTION OF THE ARBITRATORS. The arbitrators shall be
                  selected as follows: JAMS shall give each party a list of 11
                  arbitrators drawn from its panel of employment dispute
                  arbitrators from the state of Arkansas. Each party may strike
                  all names on the list it deems unacceptable. If only three
                  common names remain on the lists of both parties, those
                  individuals shall be designated as the Arbitrators. If more
                  than three common names remain on the lists of both parties,
                  the parties shall strike names alternately from the list of
                  common names until only three remain. The party who did not
                  initiate the claim shall strike first. If no common name
                  exists on the lists of both parties, JAMS shall furnish an
                  additional list and the process shall be repeated. If the
                  arbitrators have been selected after two lists have been
                  distributed, then the parties shall strike alternately from a
                  third list, with the party initiating the claim striking
                  first, until only three names remain. Those persons shall be
                  designated as the arbitrators. Striking decisions must be made
                  and communicated to the other party and JAMS within 10
                  calendar days after the date of the transmittal communication
                  relaying the arbitrators remaining for selection. In the event
                  a party does not make a timely strike, the other party may
                  select the arbitrators from the names remaining.

         (e)      EXCLUSIVE REMEDY. Arbitration in this manner shall be the
                  exclusive remedy for any claim that must be arbitrated
                  pursuant to this section. Should Employee or the Company
                  attempt to resolve such a claim by any method other than
                  arbitration pursuant to this section, the responding party
                  will be entitled to recover from the initiating party all
                  damages, expenses, and attorneys' fees incurred as a result of
                  that breach.

         (f)      FEES AND EXPENSES. Each party shall pay the fees of his or her
                  attorneys, the expenses of his or his witnesses, and any other

                                       15
<PAGE>

                  expenses that party incurs in connection with the arbitration,
                  but all other costs of the arbitration, including the fees of
                  the arbitrator, the cost of any record or transcript of the
                  arbitration, administrative fees, and other fees and costs
                  shall be paid in equal shares by the Employee and Company.
                  Except as provided in Another Arbitration Agreement, the party
                  losing the arbitration shall reimburse the party who prevailed
                  for all attorneys' fees and expenses the prevailing party paid
                  pursuant to the preceding sentence.

         22. ENTIRE RELEASE. This Release constitutes the entire Release between
the parties with respect to the subject matter hereof and supersedes all prior
agreements, oral and written, between the parties hereto to the extent such
agreements are inconsistent herewith, including but not limited to, any prior
agreements with respect to severance benefits. This Release may be modified or
amended only by an instrument in writing signed by both parties hereof.

READ THIS RELEASE, AND CAREFULLY CONSIDER ALL OF ITS PROVISIONS BEFORE SIGNING
IT: IT INCLUDES A RELEASE OF KNOWN AND UNKNOWN CLAIMS, AND ITS
ARBITRATION-OF-CLAIMS REQUIREMENT WAIVES EMPLOYEE'S RIGHT TO A JURY TRIAL. IF
EMPLOYEE WISHES, HE SHOULD TAKE ADVANTAGE OF THE FULL CONSIDERATION PERIOD
AFFORDED BY SECTION 3 AND YOU SHOULD CONSULT AN ATTORNEY.

         Employee represents that as of October 11, 2002, he has not filed any
lawsuits, charges, complaints, or claims relating to his employment or any other
matters that involve the Company. Employee agrees to cause the withdrawal or
dismissal with prejudice of all of these matters unless otherwise stated by the
Company, to the extent still pending within five (5) days after this Release
becomes irrevocable, and until such withdrawal or dismissal is accepted or
ordered, no amounts otherwise due Employee under this Release shall become
payable.

         IN WITNESS WHEREOF, the Company and the Employee have executed this
Release as of the day and year indicated below.

                                       16
<PAGE>

                                         Beverly Enterprises, Inc.

Dated:                                   By:
       ----------------------------         ------------------------------------
                                         William R. Floyd
                                         President and Chief Executive Officer

                                         Employee

Dated:
      -----------------------------      ---------------------------------------
                                         Mike Matheny

                                       17

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