Edgar Filing: OMEGA HEALTHCARE INVESTORS INC

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 2, 2001
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933
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OMEGA HEALTHCARE INVESTORS, INC.

(Exact name of Registrant as specified in its charter)

MARYLAND 6798 38-3041398
(State or Other Jurisdiction (Primary Standard Industrial (IRS Employer
of Classification Number) Identification Number)
Incorporation or Organization)

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900 VICTORS WAY
SUITE 350
ANN ARBOR, MICHIGAN 48108
(734) 887-0200
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
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C. TAYLOR PICKETT
CHIEF EXECUTIVE OFFICER
OMEGA HEALTHCARE INVESTORS, INC.
900 VICTORS WAY
SUITE 350
ANN ARBOR, MICHIGAN 48108
(734) 887-0200
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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COPIES OF COMMUNICATIONS TO:

RICHARD H. MILLER, ESQ.
ELIOT W. ROBINSON, ESQ.
POWELL, GOLDSTEIN, FRAZER & MURPHY LLP
SIXTEENTH FLOOR
191 PEACHTREE STREET, N.E.
ATLANTA, GEORGIA 30303
(404) 572-6600
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
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If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. /X/

If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /

If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /

If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. / /

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
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CALCULATION OF REGISTRATION FEE

PROPOSED MAXIMUM AGGREGATE
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED OFFERING PRICE AMOUNT OF REGISTRATION FEE

Common Stock (including the associated preferred share
purchase right).......................................... $27,240,000(1) $6,810

(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) of the Securities Act of 1933.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES, OR ACCEPT ANY OFFER TO BUY THESE SECURITIES, UNTIL
THE REGISTRATION STATEMENT WE HAVE FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION BECOMES EFFECTIVE AND WE DELIVER THIS PROSPECTUS TO YOU IN FINAL
FORM. WE ARE NOT USING THIS PROSPECTUS TO OFFER TO SELL THESE SECURITIES OR TO
SOLICIT OFFERS TO BUY THESE SECURITIES IN ANY STATE OR OTHER JURISDICTION WHERE
THEIR OFFER OR SALE IS NOT PERMITTED.

SUBJECT TO COMPLETION, DATED NOVEMBER 2, 2001

PRELIMINARY PROSPECTUS

[LOGO]

OMEGA HEALTHCARE INVESTORS, INC.
NONTRANSFERABLE RIGHTS OFFERING
TO PURCHASE UP TO [9,400,000] SHARES OF
COMMON STOCK AT $ PER SHARE
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If you held our common stock on , 2001, you will receive a
dividend of rights to purchase additional shares of common stock for a
subscription price of $ per share. You will receive one right for every
shares of common stock you held on that date. Each right entitles you to
purchase one share of common stock at the subscription price. The number of
rights allocated to you is based on the percentage of our voting stock you own
on the record date on an as converted basis. These rights represent your pro
rata portion of the aggregate $50 million in new equity capital we propose to
raise.

Explorer Holdings, L.P., which owns all of our outstanding Series C
preferred stock, representing 45.5% of our common stock on an as converted
basis, has waived its right to receive rights in this rights offering. Instead,
Explorer has agreed to purchase $22.8 million of our stock, on the closing of
the rights offering, at the same price per share available in this rights
offering. The shares that Explorer has agreed to purchase represent its pro rata
portion of the $50 million we are seeking to raise. Explorer has also committed
to invest an additional amount equal to the aggregate subscription price of the
shares of common stock that are not subscribed for by other stockholders in this
offering.

You may exercise your rights beginning on the date of this prospectus until
5:00 p.m., New York City time, on , 2001. We have the option of
extending the subscription period. However, we do not presently intend to do so.
Rights not exercised by the end of the subscription period will expire and have
no value.

The closing of the rights offering and the issuance of the shares of common
stock are conditioned upon the effectiveness of amendments and waivers with
respect to our two credit facilities, as well as other conditions. All
subscriptions will be held in escrow pending satisfaction of these conditions.
If the conditions are not satisfied on or before the expiration of the
subscription period, as it may be extended, we will terminate this offering. If
we terminate the offering, we will return your money to you, without interest.

We will not issue fractional rights or fractional shares, and you may not
exercise rights other than in whole numbers. If the number of shares of common
stock you held on the record date would result in your receipt of fractional
rights, the number of rights issued to you has been rounded up to the nearest
whole right.

Our common stock is traded on the New York Stock Exchange under the symbol
OHI. On November 1, 2001, the last reported sale price for our common stock was
$3.30 per share.

The rights may not be sold, transferred or assigned and will not be listed
for trading on any stock exchange, quotation system or the over-the-counter
market. Holders who wish to exercise their rights must certify that they have
held the shares of common stock to which the rights relate continuously from
, 2001 through the exercise date. Once you exercise your rights, you
may not revoke or change the exercise if you later change your mind.
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INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING
ON PAGE 8.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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The shares of common stock are being offered for sale directly by us without
the services of an underwriter or selling agent. We expect to deliver the shares
as soon as practicable following the expiration of the subscription period.

The date of this prospectus is , 2001

TABLE OF CONTENTS

PAGE
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Prospectus Summary.......................................... 1
Forward-Looking Statements.................................. 7
Risk Factors................................................ 8
The Rights Offering......................................... 20
Use of Proceeds............................................. 28
Determination of Subscription Price......................... 29
Price Range of Common Stock and Dividend Policy............. 39
Modifications to Agreements with Explorer................... 40
Capitalization.............................................. 42
Selected Financial Data..................................... 43
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 44
Business.................................................... 55
Management.................................................. 62
Executive Compensation...................................... 67
Principal Stockholders...................................... 75
Affiliate Relationships and Transactions.................... 77
Description of Capital Stock................................ 81
Federal Income Tax Considerations........................... 98
Plan of Distribution........................................ 104
Legal Matters............................................... 104
Experts..................................................... 104
Where You Can Find More Information......................... 104
Index to Consolidated Financial Statements.................. F-1
Annex A--Opinion of Shattuck Hammond Partners LLC........... A-1

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You should rely only on the information contained in this prospectus and the
information to which we have referred you. We have not authorized anyone else to
provide you with information different from the information contained in this
prospectus. If anyone provides you with different or inconsistent information,
you should not rely on it. You should not assume that the information in this
prospectus is accurate as of any date other than the date on the front page of
this prospectus. Also, you should not assume that there has been no change in
our business, financial position or results of operations since the date of this
prospectus.

No action is being taken in any jurisdiction outside the United States to
permit a public offering of any securities or possession or distribution of this
prospectus in that jurisdiction. Persons who come into possession of this
prospectus in jurisdictions outside the United States are required to inform
themselves about and to observe any restrictions as to this offering and the
distribution of this prospectus applicable in that jurisdiction.

PROSPECTUS SUMMARY

THIS SUMMARY HIGHLIGHTS IMPORTANT INFORMATION CONTAINED ELSEWHERE IN THIS
PROSPECTUS IN MORE DETAIL. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY.

QUESTIONS AND ANSWERS ABOUT THE RIGHTS OFFERING

WHAT ARE THE RIGHTS AND TO WHAT DO THE RIGHTS ENTITLE ME?

The rights give you the opportunity to purchase additional shares of our
common stock for $ per share. On November 1, 2001, the last reported sale
price for our common stock on the New York Stock Exchange was $3.30 per share.

The aggregate number of rights you are entitled to receive, if exercised by
you in full, represents your pro rata portion of the $50 million in additional
equity capital we are seeking to raise. Your pro rata portion is based on the
number of shares of common stock you owned on the record date assuming, solely
for this purpose, conversion of all of our outstanding Series C preferred stock,
all of which is held by Explorer.

WILL I RECEIVE FRACTIONAL RIGHTS OR SHARES?

No. We are not issuing fractional rights or shares, and you may not exercise
rights in fractional amounts. If the number of shares of common stock you held
on the record date would result in your receipt of fractional rights, the number
of rights distributed to you has been rounded up to the nearest whole right.

WHY IS OMEGA DISTRIBUTING THE RIGHTS AND OFFERING STOCK?

We are distributing the rights to purchase common stock as part of our plan
to raise up to $50 million in additional equity capital and to give all our
common stockholders the opportunity to participate in the $50 million equity
infusion in proportion to their ownership interest in our voting stock. We are
raising additional capital to facilitate our reaching an agreement with our
senior secured bank lenders regarding the modification of our credit facilities
and to enhance our ability to repay approximately $108 million in debt maturing
during the first half of 2002. We believe that this rights offering is the most
appropriate means of raising equity capital because it affords our existing
stockholders a preferential opportunity to subscribe for the new shares of
common stock and to maintain their proportionate interest in us. In addition,
since no underwriting or sales commission will be paid in respect of the shares
purchased in the rights offering, we believe the rights offering will be a
low-cost method for raising additional capital.

HOW DID OMEGA ARRIVE AT THE $ PRICE PER SHARE?

Our Board of Directors sought and obtained a written opinion from Shattuck
Hammond Partners LLC, an independent financial advisor, that as of October 29,
2001, the date of their opinion, the financial terms of the investment agreement
with Explorer taken as a whole are fair to us from a financial point of view.
For purposes of the opinion, our financial advisor assumed a subscription price
of $2.92 per share, the maximum price at which our Board of Directors authorized
proceeding with the rights offering. The actual subscription price may be lower.
At $2.92 per share, you will receive a dividend of one right for every 2.15
shares of common stock you own as of the record date.

We have attached the full text of Shattuck Hammond's opinion as Annex A to
this prospectus. You should read the entire opinion to understand the
assumptions made, matters considered and limitations

on the review undertaken by our financial advisor. The opinion is also
summarized under "Determination of Subscription Price." The opinion does not
constitute a recommendation as to whether you should exercise your rights in the
rights offering.

In recommending a price at which a share of common stock may be purchased in
this rights offering, a special committee of our Board of Directors, which did
not include affiliates of Explorer, considered several factors, including the
fairness opinion delivered by our financial advisor, the historic and current
market price of our common stock, our financial condition, challenges facing us,
anticipated cash flows, general conditions in the securities markets, our need
for additional capital, available alternate sources of financing, prices offered
to stockholders in other rights offerings and the need to offer the shares at a
price that would be attractive to investors relative to the then current trading
price for our common stock, among other things.

HAS THE BOARD OF DIRECTORS MADE A RECOMMENDATION TO ME REGARDING THE RIGHTS
OFFERING?

Our Board of Directors is not making any recommendation to you about whether
or not you should exercise any rights. Although our Board of Directors has
obtained a fairness opinion and both the Board of Directors and the special
committee approved our proceeding with the rights offering, you should make your
own decision as to whether or not to exercise your rights and, if so, how many
rights to exercise. You should make this decision only after reading this entire
prospectus and consulting with your own financial advisors. Your decision should
be based upon your own assessment of your best interests.

HOW SOON MUST I ACT?

The rights expire on , 2001, at 5:00 p.m., New York City time.
The subscription agent must actually receive all required documents and payments
before that date and time. We recommend that you send all of your subscription
documents, together with payment of the subscription price, to the subscription
agent several days in advance of the expiration date. Although we have the
option of extending the expiration date, we presently do not intend to do so.

MAY I TRANSFER MY RIGHTS OR THE SHARES TO WHICH THEY RELATE?

No. The rights are nontransferable. In addition, you must certify that you
have held the common stock to which your rights relate continuously from
, 2001 through the exercise date.

WILL I BE ENTITLED TO AN OVER-SUBSCRIPTION PRIVILEGE?

No. To the extent that shares of common stock are not subscribed for in this
offering, Explorer has committed to invest an additional amount equal to the
aggregate subscription price relating to the unsubscribed shares on the closing
of the rights offering.

WILL EXPLORER PARTICIPATE IN THE RIGHTS OFFERING?

No. Explorer will not receive rights in this rights offering. Instead,
Explorer has agreed to purchase $22.8 million of our stock, on the closing of
the rights offering, at the same price per share available in this rights
offering. The shares that Explorer has agreed to purchase represent its pro rata
portion of the $50 million in additional equity capital we are seeking to raise.
Explorer has also agreed to invest an additional amount equal to the aggregate
subscription price of any shares that are not subscribed for in this offering.
As a result of this commitment, we are assured of receiving a total of
$50 million in gross proceeds from the rights offering and Explorer's investment
assuming they are both completed.

As a condition to Explorer's investment, we have agreed to amend certain of
the agreements relating to Explorer's July 2000 investment in our company
effective as of the closing of Explorer's new investment. The effect of these
amendments is generally to remove those provisions in our agreements that
prohibit Explorer from voting in excess of 49.9% of our stock and from taking
certain actions

without the prior approval of our Board. These agreements are described in more
detail under "Agreements with Explorer" on page of this prospectus.

The rules of the New York Stock Exchange require that stockholders approve
the sale of voting capital stock to an affiliate such as Explorer. Explorer has
committed to vote its existing shares, representing 45.5% of our voting shares,
in favor of this proposal. If the issuance of common stock to Explorer has not
been approved by our stockholders at the time we close the rights offering and
Explorer's investment, we will issue shares of non-voting Series D preferred
stock to Explorer in lieu of shares of common stock. The Series D preferred
stock will automatically convert into common stock upon receipt of stockholder
approval or the waiver by the New York Stock Exchange of its stockholder
approval requirement. Explorer's commitment to purchase shares of common stock
or Series D preferred stock is subject to the satisfaction of the same closing
conditions to which the rights offering is subject.

AM I REQUIRED TO PARTICIPATE IN THE RIGHTS OFFERING?

No. You are not required to exercise any rights, purchase any new shares, or
otherwise take any action in response to this rights offering.

WHAT WILL HAPPEN IF I DO NOT EXERCISE MY RIGHTS?

If you do not exercise any rights, the number of shares you own will not
change, but your percentage ownership of our total outstanding common stock will
decline following the rights offering and Explorer's investment.

IS THE RIGHTS OFFERING SUBJECT TO ANY CLOSING CONDITIONS?

The closing of the rights offering and the issuance of shares of common
stock to stockholders exercising rights is subject to the following conditions:

- our obtaining waivers from the lenders under our two credit facilities of
any and all then existing covenant defaults as well as the right to assert
a default or give notice of an event which, with the giving of notice
and/or the passing of time, could become an event of default under the
credit facilities;

- our obtaining an extension of the maturity of our $175 million secured
revolving credit facility by not less than twelve months from its current
maturity of December 31, 2002;

- our obtaining amendments and/or modifications to some of the covenants
and/or conditions contained in our two credit facilities on terms
satisfactory to us and Explorer; and

- the absence of any governmental order or litigation with respect to the
transactions that is reasonably likely to render it impossible or unlawful
to complete the rights offering and/or Explorer's investment, or that
could reasonably be expected to have a material adverse effect on our
business, results of operations, or financial condition, or materially
restrict the rights of Explorer under the documents relating to its
investment.

All subscriptions will be held in escrow pending satisfaction of these
conditions. If these conditions are not satisfied by the expiration of the
subscription period, as it may be extended by us from time to time, in our sole
discretion, we will terminate the rights offering. If we terminate the rights
offering, we will return your money to you, without interest.

HOW DO I EXERCISE MY RIGHTS?

You must properly complete and sign the enclosed subscription agreement and
deliver it, together with payment in full for the rights you are exercising, to
the subscription agent before expiration of the subscription period. For the
address to which the subscription agreement should be mailed and payment
forwarded, see "The Rights Offering--Procedures To Exercise Rights."

AFTER I EXERCISE MY RIGHTS, CAN I CHANGE MY MIND?

No. Once you send in your subscription agreement and payment, you may not
revoke the exercise of your rights, even if you later learn information about us
that you consider to be unfavorable or if you do not like the terms on which the
closing conditions have been satisfied, including the amendments to our credit
facilities. You should not exercise your rights unless you are certain that you
wish to purchase additional shares of our common stock in this rights offering.

IS THERE RISK IN OWNING OUR COMMON STOCK

Yes. Exercising your rights means making a decision to make an additional
investment in our common stock. You should carefully consider this decision as
you would any other equity investment. Among other things, you should carefully
consider the risks described under "Risk Factors" beginning on page 8 of this
prospectus.

CAN OMEGA TERMINATE THE RIGHTS OFFERING?

Yes. We may terminate the rights offering at any time before the expiration
of the subscription period for any reason or promptly following expiration of
the subscription period if the closing conditions are not satisfied at
expiration. If we terminate the rights offering, your money will be refunded
promptly, without interest.

WHAT SHOULD I DO IF I WANT TO PARTICIPATE IN THE RIGHTS OFFERING, BUT MY COMMON
STOCK IS HELD IN THE NAME OF MY BROKER, DEALER OR OTHER NOMINEE?

If you hold your shares of our common stock through a broker, dealer or
other nominee, for example, through a custodian bank, then your broker, dealer
or other nominee is the record holder of the shares you own. This record holder
must exercise the rights on your behalf for shares you wish to purchase.
Therefore, you will need to have your broker, dealer or other nominee act for
you.

If you wish to participate in the rights offering and purchase new shares,
please promptly contact the record holder of your shares. To indicate your
decision with respect to your rights, you should follow the instructions
provided by your broker, dealer or other nominee. You should receive these
instructions from the record holder with the other rights offering materials.

WHAT FEES OR CHARGES APPLY IF I PURCHASE SHARES?

We are not charging any fee or sales commission to issue rights to you or to
issue shares to you if you exercise rights. If you exercise rights through a
record holder of your shares, you are responsible for paying any fees that the
record holder may charge you.

WHAT HAPPENS IF I SELL OR TRANSFER THE SHARES OF COMMON STOCK TO WHICH THE
RIGHTS RELATE AFTER THE RECORD DATE?

You may exercise rights only to the extent that you have held the shares of
common stock to which the rights relate continuously from , 2001
through and including the date of exercise. If you sell, gift or otherwise
transfer the shares to which the rights relate after the record date, the rights
relating to the transferred shares will be forfeited, even if you later
repurchase those shares or other shares of our common stock before expiration of
the subscription period. We intend to monitor transfers of shares during the
subscription period for this purpose.

WHAT ARE THE FEDERAL INCOME TAX CONSEQUENCES OF EXERCISING MY SUBSCRIPTION
RIGHTS?

The receipt and exercise of your subscription rights are intended to be
nontaxable. However, you should seek specific tax advice from your personal tax
advisor with respect to your particular circumstances and tax situation.

HOW MANY SHARES OF COMMON STOCK WILL BE OUTSTANDING AFTER THE RIGHTS OFFERING
AND THE EXPLORER INVESTMENT? HOW MUCH OF OMEGA WILL EXPLORER OWN?

Following the rights offering and Explorer's investment, we will have
shares of common stock outstanding assuming the conversion of the Series C
preferred stock and assuming we issue shares of common stock to Explorer in
connection with its investment. If, at the time of Explorer's investment, we
have not obtained stockholder approval for the investment, Explorer's investment
will be in the form of Series D preferred stock rather than common stock, and
the number of shares of common stock outstanding would be reduced by the number
of shares of common stock reserved for issuance upon exercise of the Series D
preferred stock. The number of additional shares to be purchased by Explorer
depends on the number of shares that are purchased by other stockholders in the
rights offering. If no shares are subscribed for in the rights offering,
Explorer would own approximately % of our voting stock on an as converted
basis. If all of the shares are subscribed for in the rights offering, Explorer
would continue to own approximately 45.5% of our voting capital stock on an as
converted basis.

WHO IS THE SUBSCRIPTION AGENT?

EquiServe Trust Company, N.A. is the subscription agent for this rights
offering. EquiServe is also the transfer agent for our common stock.

HOW DO I EXERCISE MY SUBSCRIPTION RIGHTS IF I RESIDE OUTSIDE OF THE UNITED
STATES?

We are not mailing subscription agreements to stockholders whose addresses
are outside the United States [or who have an APO or FPO address]. In those
cases, the subscription agreements will be held by EquiServe for these
stockholders. To exercise their rights, these stockholders must notify EquiServe
prior to 11:00 a.m., New York City time, on or before the third business day
prior to the expiration date.

WHAT IF MY PAYMENT IS INCONSISTENT WITH THE NUMBER OF RIGHTS BEING EXERCISED?

If you send a payment that is insufficient to purchase the number of shares
for which you are exercising rights, or if the number of shares is not indicated
in the forms you return, the subscription agent will apply the payment received
to exercise rights on your behalf up to the amount of the payment received. If
your payment exceeds the subscription price for the maximum number of rights
that you are eligible to exercise, the excess will be refunded to you as
promptly as practicable after the expiration date, without interest.

WILL MANAGEMENT PARTICIPATE IN THE RIGHTS OFFERING?

Our executive officers and directors that own shares of our common stock
have indicated that they intend to participate in the rights offering, although
they are not bound to do so and may change their mind at any time. These
executive officers and directors are eligible to subscribe for an aggregate of
additional shares of our common stock in the rights offering.

WHEN WILL SHARES BE ISSUED?

Shares of common stock purchased in the rights offering will be issued as
soon as practicable after satisfaction of the closing conditions, not to exceed
ten business days after the expiration date.

WHAT SHOULD I DO IF I HAVE OTHER QUESTIONS?

If you have questions, need additional copies of offering documents or
otherwise need assistance, you should contact EquiServe. EquiServe's address and
phone number appears on page 25. You may also contact us at the address and
telephone number shown on page . We also file annual and quarterly reports and
other information with the Securities and Exchange Commission. You may obtain
copies of these reports by contacting us or the Securities and Exchange
Commission as described in "Where You Can Find More Information" also on page .

OUR COMPANY

We are a self-administered real estate investment trust, or REIT, investing
in and providing financing to the long-term care industry in the United States.
At September 30, 2001, we owned or had mortgages on 246 skilled nursing and
assisted living facilities with approximately 25,400 beds located in 29 states
and operated by 32 independent healthcare operating companies.

We have historically financed investments through borrowings under our
revolving credit facilities, private placements or public offerings of debt or
equity securities, the assumption of secured debt or a combination of these
methods. We also finance acquisitions through the exchange of properties or the
issuance of shares of our capital stock when the transactions otherwise satisfy
our investment criteria.

We prefer to make equity investments in our properties. We do this by
purchasing the property and leasing it back to the operator. However, due to
regulatory, tax or other considerations, we sometimes pursue alternative
investment structures, including convertible participating and participating
mortgages, that we believe achieve returns comparable to equity investments. We
also provide traditional fixed-rate mortgages.

We are currently unable to borrow under our revolving credit facilities
because we are not in compliance with certain of the financial covenants
contained in the loan agreements relating to our two revolving credit
facilities. We previously obtained a waiver from the lenders under both credit
facilities through September 14, 2001. The lenders under our $175 million
secured credit facility have extended this waiver through December 13, 2001. The
waiver granted by the lenders under our $75 million secured credit facility has
expired but we have not received any notice of default or acceleration of the
outstanding balance under that facility. These covenant violations prevent us
from drawing upon the remaining availability under both credit facilities until
a permanent resolution is attained. Although discussions with our revolving
credit facility lenders are continuing, we cannot assure you that we will be
successful in restructuring the two secured credit facilities or addressing the
debt maturing during 2002, nor can we give you any assurance as to the timing or
terms of these transactions if consummated.

On October 9, 2001, we also announced that we had entered into a
comprehensive settlement with Mariner Post-Acute Network, Inc., resolving all
outstanding issues relating to our loan to Professional Healthcare
Management, Inc., a subsidiary of Mariner. For more information about this
settlement, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Recent Developments."
--------------

Our executive offices are located at 900 Victors Way, Suite 350, Ann Arbor,
Michigan 48108. Our telephone number is (734) 887-0200. On October 9, 2001, we
announced that we are relocating our corporate offices effective as of
January 1, 2002 and that we have entered into a lease of office space in
Timonium, Maryland, a suburb of Baltimore.

We also maintain a website at www.omegahealthcare.com. However, the
information on our website is not part of this prospectus and you should
consider only the information contained in this prospectus when making a
decision as to whether or not to exercise your rights.

FORWARD-LOOKING STATEMENTS

This prospectus includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. All statements other than statements of historical facts
included in this prospectus may constitute forward-looking statements. We have
based these forward-looking statements on our current expectations and
projections about future events. Although we believe that our assumptions made
in connection with the forward-looking statements are reasonable, we cannot
assure you that our assumptions and expectations will prove to have been
correct. Important factors that could cause our actual results to differ
materially from our expectations are disclosed in this prospectus, including
factors disclosed under "Risk Factors" beginning on page 8. These
forward-looking statements are subject to various risks, uncertainties and
assumptions including, among other things:

- our ability to dispose of assets held for sale on a timely basis and at
appropriate prices;

- uncertainties relating to the operation of our owned and operated assets,
including those relating to reimbursement by third party payors,
regulatory matters and occupancy levels;

- the ability of our operators in bankruptcy to reject unexpired lease
obligations, modify the terms of our mortgages, and impede our ability to
collect unpaid rent or interest during the process of a bankruptcy
proceeding and retain security deposits for the debtors' obligations;

- our ability to negotiate appropriate modifications to the terms of our
credit facilities;

- the availability and cost of capital;

- regulatory and other changes in the healthcare sector;

- our ability to manage, re-lease, or sell our owned and operated
facilities;

- competition in the financing of healthcare facilities;

- the effect of economic and market conditions generally and, particularly,
in the healthcare industry;

- changes in interest rates;

- the amount and yield of any additional investments;

- changes in tax laws and regulations affecting real estate investment
trusts; and

- changes in the ratings of our debt securities.

RISK FACTORS

You should carefully consider the risks described below and the other
information in this prospectus before deciding to purchase shares in the rights
offering. Many factors, including the risks described below and other risks we
have not recognized, could cause our operating results to be different from our
current expectations and plans.

RISKS RELATED TO THE RIGHTS OFFERING

YOU CANNOT REVOKE YOUR EXERCISE OF SUBSCRIPTION RIGHTS FOR ANY REASON.

You may not revoke or change your exercise of rights after you send your
subscription forms and payment to the subscription agent. If you later learn
information about us that you consider to be unfavorable, if you do not like the
terms on which we have satisfied the closing conditions, including the amendment
to our two credit facilities, or if you simply change your mind, you will not be
entitled to revoke your election or obtain a refund of your subscription price.
If we terminate the rights offering, you are only entitled to a refund of your
subscription price. We will not pay any interest on the subscription price while
it is held in escrow.

IF YOU DO NOT EXERCISE YOUR RIGHTS, YOUR PERCENTAGE OWNERSHIP INTEREST WILL BE
DILUTED.

If you choose not to exercise your subscription rights in full, your
percentage ownership interest will be diluted following the rights offering and
Explorer's investment. In addition, because the subscription price represents a
discount from the prevailing market price of our common stock, stockholders who
choose not to exercise their subscription rights will experience dilution of
their economic interest in us.

THE SUBSCRIPTION RIGHTS ARE NONTRANSFERABLE.

Only our stockholders of record as of the record date who continuously hold
the shares to which the rights relate between the record date and the exercise
date may exercise rights. You may not sell, give away, or otherwise transfer
your rights. If you sell your common stock during the period between the record
date and the exercise date, you will forfeit the rights you receive in this
offering.

YOU NEED TO ACT PROMPTLY AND FOLLOW SUBSCRIPTION INSTRUCTIONS.

If you decide to exercise your rights, you will need to follow the
instructions contained in this prospectus and the subscription agreement. If you
do not, your subscriptions will be rejected. Stockholders who desire to purchase
shares in the rights offering must act promptly to ensure that all required
forms and payments are actually received by EquiServe, the subscription agent,
prior to the expiration date. If you fail to complete and sign the required
subscription forms, send an incorrect payment amount, or otherwise fail to
follow the subscription procedures we may, depending on the circumstances,
reject your subscription or accept it to the extent of the payment received.
Neither we nor EquiServe undertakes to contact you concerning, or to attempt to
correct, an incomplete or incorrect subscription form. We have the sole
discretion to determine whether a subscription exercise properly follows the
subscription procedures.

In addition, any personal check used to pay for shares must clear prior to
the expiration date, and the clearing process may require five or more business
days.

RISKS RELATED TO OUR COMMON STOCK

THE PRICE OF OUR COMMON STOCK MAY DECLINE BELOW THE SUBSCRIPTION PRICE.

The subscription price in this rights offering represents a discount to the
market price of our common stock on the date it was determined. The trading
price for our common stock may decline below the subscription price during or
after the rights offering. We cannot assure you that the subscription price will
remain below any trading price for our common stock.

THE FUTURE MARKET PRICE OF OUR COMMON STOCK MAY FLUCTUATE SUBSTANTIALLY.

Future prices of our stock may be affected positively or negatively by our
future revenues and earnings, changes in estimates by analysts, our ability to
meet analysts' estimates, speculation in the trade or business press about our
company, and overall conditions affecting our business, economic trends and the
securities markets.

In addition, the stock market has recently experienced significant price and
volume fluctuations, which have been further exacerbated by the events of
September 11, 2001. We cannot assure you that the market for our common stock
will not continue to be volatile or that any additional terrorist attacks would
not further disrupt the market generally or our common stock in particular.

ALTHOUGH OUR COMMON STOCK IS LISTED ON THE NEW YORK STOCK EXCHANGE, IT IS THINLY
TRADED. OUR STOCK PRICE MAY FLUCTUATE MORE THAN THE STOCK MARKET AS A WHOLE.

As a result of the thin trading market or "float" for our stock, its market
price may fluctuate significantly more than the stock market as a whole. In
addition, sales of a substantial amount of common stock in the public market, or
the perception that these sales may occur, could adversely affect the market
price of our common stock. Explorer owns approximately 45.5% of our common stock
through the ownership of our Series C preferred stock on an as converted basis
and will likely acquire additional shares as a result of stockholders not
exercising their rights in the rights offering. Without a large float, our
common stock is less liquid than the stock of companies with broader public
ownership, and as a result, the trading prices for our common stock may be more
volatile. Among other things, trading of a relatively small volume of our common
stock may have a greater impact on the trading price for our stock than would be
the case if our public float were larger. Explorer has the right to require us
to register for resale the shares of our capital stock that it owns and can
transfer any or all of its shares without our consent. As a result, Explorer has
the ability to sell a substantial amount of our stock. Sales by Explorer, or the
perception that such sales may occur, could negatively impact the market for and
trading price of our common stock.

RISKS RELATED TO OUR COMPANY

OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION.

We have substantial indebtedness and will continue to have substantial
indebtedness after the completion of the rights offering. In addition, we may
increase our indebtedness in the future. Our level of indebtedness could have
important consequences to our stockholders. For example, it could:

- make us more vulnerable to economic downturns;

- potentially limit our ability to withstand competitive pressures;

- impair our ability to obtain additional financing in the future for
working capital, capital expenditures, acquisitions or general corporate
purposes; and

- make us more susceptible to the above risks because borrowings under our
credit facilities will bear interest at fluctuating rates.

We are subject to the risks associated with debt financing, including the
risk that the cash provided by our operating activities, asset sales or
additional equity issuances will be insufficient to meet required payments of
principal and interest, the risk of rising interest rates on our floating rate
debt that is not hedged, the risk that we will not be able to repay or refinance
existing indebtedness, which generally will not have been fully amortized at
maturity, or that the terms of such refinancing will not be as favorable as the
terms of existing indebtedness. In the event we are unable to secure refinancing
of such indebtedness on acceptable terms, we might be forced to dispose of
properties upon disadvantageous terms, which might result in losses to us, or to
obtain financing at unfavorable terms either of which might adversely affect the
cash flow available to meet debt service obligations. In addition, if a property
or properties are mortgaged to secure payment of indebtedness and we are unable
to meet required mortgage payments, the mortgage securing the property could be
foreclosed upon by, or the property could be otherwise transferred to, the
mortgagee with a consequent loss of income and asset value to us.

At September 30, 2001, on a consolidated basis, our borrowings were $426.0
million, and the ratio of our borrowings to total assets was 46.7%. On a
proforma basis at September 30, 2001, after giving effect to the rights
offering, Explorer's investment and the application of the estimated net
proceeds therefrom and certain other adjustments, we would have had borrowings
of $381.0 million and had a ratio of borrowings to total assets of 41.8%.

OUR FAILURE TO COMPLY WITH FINANCIAL COVENANTS IN OUR TWO CREDIT FACILITIES
CURRENTLY PREVENTS US FROM BORROWING UNDER THOSE FACILITIES AND COULD CAUSE THAT
AND OTHER DEBT TO BECOME IMMEDIATELY PAYABLE.

We are currently unable to borrow under our revolving credit facilities
because we are not in compliance with certain of the financial covenants
contained in the loan documents relating to our two revolving credit facilities.
We previously obtained a waiver of these violations from the lenders under two
revolving credit facilities through September 14, 2001. The lenders under our
$175 million secured credit facility have extended this waiver through
December 13, 2001. The waiver granted by the lenders under our $75 million
secured credit facility has expired but we have not received any notice of
default or acceleration of the outstanding balance under that facility. These
covenant violations prevent us from drawing upon the remaining availability
under these credit facilities until such time as a permanent resolution is
attained. Although discussions with our revolving credit facility lenders are
continuing, we cannot assure you that we will be successful in restructuring the
two secured credit facilities or in addressing the 2002 debt maturities, nor can
we give you assurance as to the timing or terms of these transactions if
consummated. If we are unable to obtain a permanent waiver from our lenders, the
lenders could declare all outstanding debt owed to them to be immediately
payable. If that occurs, we may not be able to make payments on our
indebtedness, meet our working capital and capital expenditure requirements or
find alternative financing on terms acceptable to us. Even if we obtain the
amendments sought, we cannot assure you that we will be able to comply with the
covenants as amended. If we fail to do so, we may not be able to obtain waivers
from the lenders or amend the covenants.

THE SALE OF UNSUBSCRIBED SHARES IN THE RIGHTS OFFERING TO EXPLORER OR FUTURE
STOCK PURCHASES BY EXPLORER MAY VEST CONTROL OF OUR COMPANY IN EXPLORER.

Explorer presently owns 45.5% of our common stock through the ownership of
our Series C preferred stock. The number of additional shares Explorer has
agreed to purchase depends on how many rights are exercised in the rights
offering. If all of the rights are exercised by our stockholders in the rights
offering, Explorer will continue to own 45.5% of our voting capital stock. If
none of the rights are exercised, Explorer will own % of our common stock on
an as converted basis.

As a condition to Explorer's investment, we have agreed to amend the
agreements we have with Explorer to remove restrictions limiting the right of
Explorer to purchase additional shares of our stock or to vote shares of our
capital stock that it owns in excess of 49.9% of our total voting stock. As a
result, if Explorer acquires beneficial ownership of more than 50% of our common
stock, Explorer will have the right to designate a majority of our directors and
the voting power to cause the election of all our directors. As a result,
Explorer will be able to control, through our Board, the management and affairs
of our company. It will also be able to control the vote on all matters
submitted to our stockholders, including transactions involving an actual or
potential change in our control. This could prevent transactions in which the
holders of our common stock might otherwise receive a premium for their shares
over then current market prices. The interests of Explorer may not coincide with
the interests of the other holders of our common stock.

OUR ASSETS MAY NOT BE ADEQUATE TO SATISFY OUR DEBT OBLIGATIONS IN THE EVENT OF A
LIQUIDATION AND WE MAY NOT HAVE ANY ASSETS AVAILABLE FOR DISTRIBUTION TO
STOCKHOLDERS.

If the lenders under our credit facilities were to declare any or all of the
amounts outstanding under those facilities to be immediately payable, we will
not have sufficient funds to repay the borrowings or other debt obligations that
may come due in the near future. In the event of a bankruptcy or liquidation of
our company, the lenders under our credit facilities and the holders of our debt
securities would be entitled to payment of all amounts due to them before the
holders of our common stock would receive anything. In addition, the holders of
our preferred stock are entitled to liquidation preferences. We cannot assure
you that the value of our assets will be sufficient to meet all of our
obligations. If they are not sufficient, the holders of our common stock may not
receive anything in the event of a liquidation or reorganization of our company.

WE HAVE SIGNIFICANT PRINCIPAL AND DIVIDEND PAYMENTS COMING DUE; WE MAY BE UNABLE
TO PAY THESE AMOUNTS OR REFINANCE MATURING INDEBTEDNESS.

We have significant principal and dividend payments due on our indebtedness
and preferred stock over the next several years. We are required to make the
following principal payments on our current outstanding debt:

- $0.9 million during the remainder of 2001;

- $238.5 million in 2002;

- $2.0 million in 2003;

- $2.2 million in 2004; and

- $180.4 million thereafter.

Additionally, dividends on Series A, B and C preferred stock accrue at
$20.1 million annually. As of September 30, 2001, we had $14.9 million of
accumulated and unpaid preferred dividends.

Although we intend to use a portion of the proceeds of this offering to
repay our indebtedness, it will not be enough to satisfy all of these
obligations. Our ability to meet these obligations will be dependent upon our
future performance and our ability to dispose of properties currently held for
sale, which in turn will be subject to general economic conditions, industry
cycles and financial, business and other factors affecting our operations, many
of which are beyond our control.

We cannot assure you that our business will continue to generate sufficient
cash flow from operations or that there will be sufficient proceeds from asset
sales or additional equity issuances to repay our substantial indebtedness. If
we are unable to generate sufficient cash from these sources, we may be required
to sell additional assets, to refinance all or a portion of our indebtedness or
to obtain

additional financing. We cannot assure you that any such refinancing will be
possible or that any additional financing will be available on terms acceptable
to us.

OUR DEBT AGREEMENTS IMPOSE SIGNIFICANT OPERATING AND FINANCIAL RESTRICTIONS,
WHICH MAY PREVENT US FROM CAPITALIZING ON BUSINESS OPPORTUNITIES.

Our debt agreements impose significant operating and financial restrictions
on us. These restrictions affect, and in certain cases limit, among other
things, our ability to:

- incur additional indebtedness and liens;

- make capital expenditures;

- make investments and acquisitions and sell assets; or

- consolidate, merge or sell all or substantially all of our assets.

We cannot assure you that these restrictions will not adversely affect our
ability to finance our future operations or capital needs or to engage in other
business activities that may be in the interest of stockholders.

OUR INDUSTRY IS SUBJECT TO SIGNIFICANT GOVERNMENT REGULATION

Nearly all of our properties are used as healthcare facilities; therefore,
we are directly affected by the risks associated with the healthcare industry.
The healthcare industry is highly regulated by federal, state and local laws,
rules and regulations and is directly affected by state and local licensure,
fines and loss of certification to participate in the Medicare and Medicaid
programs, as well as potential criminal penalties. These laws, rules and
regulations are complex and constantly evolving, and subject to considerable
interpretation and discretion on the part of regulators and courts. We cannot
assure you that government investigations will not result in interpretations
that are inconsistent with industry practices.

The Balanced Budget Act of 1997 enacted a number of anti-fraud and abuse
provisions and contains civil monetary penalties for an operator's violation of
the anti-kickback laws. The Balanced Budget Act also imposes an affirmative duty
on operators to ensure they do not employ or contract with persons excluded from
the Medicare or other governmental programs. It also provides a minimum ten-year
period for exclusion from participation in federal healthcare programs for
operators convicted of a prior healthcare offense. Additionally, the Health
Insurance Portability and Accountability Act of 1996, which became effective
January 1, 1997, broadened the scope of fraud and abuse laws, such as the
anti-kickback law, and related enforcement activities.

Governmental investigations and enforcement of healthcare laws have
increased dramatically and are expected to continue to increase. There are
heightened coordinated civil and criminal enforcement efforts by both federal
and state government agencies relating to the healthcare industry, including the
skilled nursing segment. There is increasing scrutiny by law enforcement
authorities, the Office of Inspector General, the Department of Health and Human
Services, the U.S. Department of Justice, the courts and Congress of
arrangements between healthcare providers and potential referral sources to
ensure that arrangements are not designed as a mechanism to exchange
remuneration for patient care referrals and opportunities. Investigators have
also demonstrated a willingness to look behind the formalities of a business
transaction to determine the underlying purpose of payments between healthcare
providers and potential referral sources. Additionally, federal and state
enforcement authorities have used the federal False Claims Act with increasing
frequency in quality of care cases. In addition to investigations and
enforcement actions initiated by governmental agencies, healthcare companies may
also be the subject of qui tam or whistleblower actions brought under the False
Claims Act by private individuals on behalf of the government. Whistleblowers
receive a portion of any

amounts collected by the government in those types of actions as a reward for
bringing the action to the government's attention. Actions under the False
Claims Act are generally filed under seal to allow the government adequate time
to investigate and determine whether or not it will intervene in the lawsuit,
and defendant healthcare providers are often without knowledge of these actions
until the government has completed its investigation and the seal is lifted.
This process can take several years. Over the past few years, a number of False
Claims Act or fraud and abuse suits have been brought against nursing home
facilities or operators based on quality of care issues, staffing levels,
submitting falsely inflated costs reports, billing for services never rendered,
billing of labor costs, and upcoding of claims.

The increase in governmental investigations, the Balanced Budget Act, Health
Insurance Portability and Accountability Act, future healthcare legislation or
other changes in administration or interpretation of governmental healthcare
programs may have a material adverse effect on the amounts we receive with
respect to our owned and operated portfolio and the liquidity, financial
condition or results of operations of our operators, which could also have a
material adverse effect on their ability to make rent and interest payments to
us.

OUR LESSEES/MORTGAGORS RELY ON THIRD PARTY PAYORS FOR PAYMENT

Based on information provided by the operators of our facilities, the
following table sets forth the approximate payor mix for our facilities for the
most recently reported twelve-month period:

Medicaid.................................................... 52.5%
Medicare.................................................... 22.5
Private..................................................... 12.0
Other....................................................... 13.0
-----
Total....................................................... 100.0%
=====

Our lessees and mortgagors, as well as the facilities owned and operated for
our account, derive a substantial portion of their net operating revenues from
third-party payors, including the Medicare and Medicaid programs. These programs
are highly regulated and subject to frequent and substantial changes. The
Balanced Budget Act significantly reduced spending levels for the Medicare and
Medicaid programs. Due to the implementation of the terms of the Balanced Budget
Act, effective July 1, 1998, the majority of skilled nursing facilities shifted
from payments based on reimbursable cost to a prospective payment system for
services provided to Medicare beneficiaries. Under the prospective payment
system, skilled nursing facilities are paid on a per diem prospective case mix
adjusted payment basis for all covered services. Implementation of the
prospective payment system has affected each long-term care facility to a
different degree depending upon the amount of revenue it derives from Medicare
patients. Long-term care facilities have had to attempt to restructure their
operations to operate profitably under the new Medicare prospective payment
system reimbursement policies. Although Congress amended the Balanced Budget Act
in 1999 and 2000 to restore some monies to skilled nursing facilities that were
cut as a result of the implementation of the Balanced Budget Act, we cannot
assure you that there will be any future legislation to increase payment rates
for skilled nursing facilities. If payment rates for skilled nursing facilities
are not increased in the future, our lessees and mortgagors may have difficulty
meeting their payment obligations to us.

Each state has its own Medicaid program that is funded jointly by the state
and federal government. Federal law governs how each state manages its Medicaid
program, but there is wide latitude for states to customize Medicaid programs to
fit the needs and resources of its citizens. The Balanced Budget Act repealed
the federal payment standard, also known as the Boren Amendment, for hospitals
and nursing facilities under Medicaid, increasing states' discretion over the
administration of

Medicaid programs. A number of states are considering legislation designed to
reduce their Medicaid expenditures which could result in decreased revenues for
our lessees and mortgagors.

In addition, private payors, including managed care payors, are increasingly
demanding discounted fee structures and the assumption by healthcare providers
of all or a portion of the financial risk of operating a healthcare facility.
Efforts to impose greater discounts and more stringent cost controls are
expected to continue. Any changes in reimbursement policies which reduce
reimbursement levels could adversely affect the amounts we receive with respect
to our owned and operated portfolio and the revenues of our lessees and
mortgagors and thereby adversely affect those lessees' and mortgagors' abilities
to make their monthly lease or debt payments to us.

OUR LESSEES/MORTGAGORS MAY NOT GENERATE SUFFICIENT INCOME TO MEET THEIR PAYMENT
OBLIGATIONS TO US.

The possibility that the healthcare facilities will not generate income
sufficient to meet operating expenses or will yield returns lower than those
available through investments in comparable real estate or other investments are
additional risks of investing in healthcare-related real estate. Income from
properties and yields from investments in such properties may be affected by
many factors, including changes in governmental regulation, such as zoning laws,
general or local economic conditions, such as fluctuations in interest rates and
adequacy of local labor supply, the available local supply and demand for
improved real estate, a reduction in rental income as the result of an inability
to maintain occupancy levels, natural disasters, such as earthquakes and floods
or similar factors.

Other changes in the healthcare industry that may adversely affect the
incomes of lessees and mortgagors include continuing trends toward shorter
lengths of stay, increased use of outpatient services, increased federal, state
and third-party regulation and oversight of healthcare company operations and
business practices and increased demand for capitated healthcare services,
defined as the delivery of services at a fixed price per capita basis to a
defined group of covered parties. The entrance of insurance companies into
managed care programs is also accelerating the introduction of managed care in
new localities, and states and insurance companies continue to negotiate
actively the amounts they will pay for services. Moreover, the percentage of
healthcare services that are reimbursed under Medicare and Medicaid programs
continues to increase as the population ages and as states expand their Medicaid
programs. Continued eligibility to participate in these programs is crucial to a
provider's financial strength. Finally, healthcare regulation through
Certificates of Need has tended to limit construction of new long-term care
facilities in many states because states that have enacted Certificate of Need
legislation require the issuance of a Certificate of Need prior to the
construction of a new healthcare facility. A Certificate of Need is issued by
the applicable health planning agency in a state only after the health planning
agency makes a determination that a need exists in a particular area in the
state for a particular service or facility. Several states in which we have
investments have repealed Certificates of Need legislation, including California
and Texas, opening up opportunities for additional competition for our
facilities. As a result of the foregoing, the revenues and margins of the
operators of our facilities may decrease, resulting in a reduction of our
rent/interest coverage from investments

OUR LESSEES/MORTGAGORS MAY EXPERIENCE A REDUCTION IN REVENUES DUE TO HEALTHCARE
REFORM.

The Health Insurance Portability and Accountability Act, enacted in 1996,
focused on assuring portability of employee healthcare benefits and increasing
enforcement powers of federal agencies that investigate and prosecute fraud and
abuse in federally funded healthcare programs. Ongoing federal budget
constraints will continue to place priority on the need to slow the growth rate
in federal healthcare expenditures. We anticipate that further debate on overall
structural reform of federal healthcare programs will affect additional
legislative action on cost-containment. We also anticipate that private payor
efforts to contain or reduce healthcare costs will continue. These trends are
likely to lead

to reduced or slower growth in reimbursement for certain services provided by
some of our lessees and mortgagors. We cannot assure you that the implementation
of any reforms will not have a material adverse effect on our financial
condition or results of operations.

Additionally, portions of the Health Insurance Portability and
Accountability Act required the Department of Health and Human Services to adopt
standards governing electronic transmission of healthcare information. The
purpose of this law is to promote efficiency and effectiveness in the healthcare
system through the establishment of standards and requirements for the
electronic transmission of certain healthcare information. The entities covered
under this law are health plans, healthcare clearinghouses, and healthcare
providers that transmit health information electronically. Pursuant to this
authority, the Department of Health and Human Services published final
regulations on August 17, 2000 setting standardized transaction forms and code
sets for several common healthcare transactions, including healthcare claims,
remittance advice, coordination of benefits, referral certification and
authorization, health plan enrollments and disenrollments, health plan premium
payments, and health plan eligibility. The use of these standardized formats for
the covered transactions is expected to be mandated within 24 months of the
effective date of these regulations for providers such as our lessees and
mortgagors that engage in these types of transactions through electronic
transmissions.

Pursuant to other Administrative Simplification provisions of the Health
Insurance Portability and Accountability Act, the Department of Health and Human
Services published final regulations governing privacy and security of health
information on December 28, 2000, which became effective April 14, 2001. These
privacy regulations will likely require substantial review of and revisions to
our lessees' and mortgagors' current policies and procedures regarding the
storage, use and disposition of health information, as well as require them to
engage in "business partners" agreements regarding these practices with any
third party to which they disclose health information in order to carry out
their business and operate their facilities. These privacy regulations would
also require publication of our lessees' and mortgagors' policies regarding
privacy of health information and would confer enumerated rights upon residents
with respect to access to their own health information, requests to correct such
information, and accounting for particular disclosures of the information by our
lessees and mortgagors, and under our agreements with business partners.

Compliance with the regulations issued by the Department of Health and Human
Services under the Administrative Simplification provisions of the Health
Insurance Portability and Accountability Act will require our lessees and
mortgagors to assure that their information systems, as well as their operating
policies and procedures, are sufficient to accommodate the final standardized
transactions and code sets, as well as the security and privacy standards in the
privacy regulations published by the Department of Health and Human Services. As
a result of compliance with the foregoing, the revenues and margins of the
operators of our facilities may decrease, resulting in a reduction of our
rent/interest coverage from investments.

MEDICAID MAY NOT ADEQUATELY REIMBURSE US OR OUR LESSEES AND MORTGAGORS WHICH
COULD IMPACT THEIR ABILITY TO MEET THEIR PAYMENT OBLIGATIONS TO US.

We cannot assure you that the Medicaid reimbursement programs in each of the
states where we own and operate facilities or where our lessees' and mortgagors'
facilities are located will adequately reimburse us for our operating costs or
the rent or interest costs of our lessees and mortgagors. Failure by these state
Medicaid programs to provide reimbursement at current or increased levels could
have an adverse effect upon the cash flow of the facilities and, hence, on the
ability of our lessees and mortgagors to meet their respective payment
obligations to us. Additionally, Medicare regulations provide that, effective
December 1, 1997, when a facility changes ownership, by sale or under certain
lease transactions, reimbursement for depreciation and interest will be based on
the cost to the owner of record as of August 5, 1997, less depreciation allowed.
Previously, the buyer would use its cost of

purchase up to the original owner's historical cost before depreciation. Such
changes could adversely affect the resale value of our healthcare facilities.

THE LONG-TERM CARE INDUSTRY MAY EXPERIENCE INCREASED LIABILITY COSTS

General liability and professional liability costs in the long-term care
industry have significantly increased over the past several years, with
increases in the number and average size of claims. Excluding Florida, where
recent experience is materially inconsistent with most other states, the number
of claims in the long-term care industry has been increasing annually at a rate
of approximately 8%, while the size of such claims has increased 14%. In
Florida, the number of claims has been increasing annually at a rate of
approximately 23%, while the size of such claims has increased 18%. The
increased frequency and magnitude of losses have led a number of insurance
companies to exit from the long-term care industry, resulting in dramatically
increased premiums and increased difficulties in obtaining coverage.

WE MAY BE EXPOSED TO UNISSURED LOSSES.

We currently require, and it is our intention to continue to require, all
lessees and mortgagors to secure adequate comprehensive property and liability
insurance that covers us as well as the lessee and borrower. Certain risks may,
however, be uninsurable or not economically insurable and we cannot assure you
that we or a lessee will have adequate funds to cover all contingencies.

WE MAY ENCOUNTER ILLIQUIDITY WITH OUR REAL ESTATE INVESTMENTS.

Real estate investments are relatively illiquid and, therefore, tend to
limit our ability to vary our portfolio promptly in response to changes in
economic or other conditions. All of our properties are "special purpose"
properties that could not be readily converted to general residential, retail or
office use. Healthcare facilities that participate in Medicare or Medicaid must
meet extensive program requirements, including physical plant and operational
requirements, which are revised from time to time. Such requirements may include
a duty to admit Medicare and Medicaid patients, limiting the ability of the
facility to increase its private pay census beyond certain limits. Medicare and
Medicaid facilities are regularly inspected to determine compliance, and may be
excluded from the programs--in some cases without a prior hearing--for failure
to meet program requirements. Transfers of operations of nursing homes and other
healthcare-related facilities are subject to regulatory approvals not required
for transfers of other types of commercial operations and other types of real
estate. Thus, if the operation of any of our properties becomes unprofitable due
to competition, age of improvements or other factors such that our lessee or
mortgagor becomes unable to meet its obligations on the lease or mortgage loan,
the liquidation value of the property may be substantially less, particularly
relative to the amount owing on any related mortgage loan, than would be the
case if the property were readily adaptable to other uses. The receipt of
liquidation proceeds or the replacement of an operator that has defaulted on its
lease or loan could be delayed by the approval process of any federal, state or
local agency necessary for the transfer of the property or the replacement of
the operator licensed to manage the facility. In addition, certain significant
expenditures associated with real estate investment, such as real estate taxes
and maintenance costs, are generally not reduced when circumstances cause a
reduction in income from the investment. Should such events occur, our income
and cash flows from operations would be adversely affected.

AS AN OWNER OR LENDER WITH RESPECT TO REAL PROPERTY, WE MAY BE EXPOSED TO
POSSIBLE ENVIRONMENTAL LIABILITIES.

Under various federal, state and local environmental laws, ordinances and
regulations, an owner of real property or a secured lender, such as us, may be
liable in certain circumstances for the costs of removal or remediation of
certain hazardous or toxic substances at, under or disposed of in connection

with such property, as well as certain other potential costs relating to
hazardous or toxic substances, including government fines and damages for
injuries to persons and adjacent property. Such laws often impose liability
without regard to whether the owner knew of, or was responsible for, the
presence or disposal of such substances and liability may be imposed on the
owner in connection with the activities of an operator of the property. The cost
of any required remediation, removal, fines or personal or property damages and
the owner's liability therefore could exceed the value of the property, and/or
the assets of the owner. In addition, the presence of such substances, or the
failure to properly dispose of or remediate such substances, may adversely
affect the owner's ability to sell or rent such property or to borrow using such
property as collateral which, in turn, would reduce our revenues.

Although our leases and mortgage loans require the lessee and the mortgagor
to indemnify us for certain environmental liabilities, the scope of such
obligations may be limited, and we cannot assure you that any such borrower or
lessee would be able to fulfill its indemnification obligations.

WE RELY ON THIRD PARTY OPERATORS OF HEALTHCARE FACILITIES

As of September 30, 2001, our portfolio of domestic investments consisted of
246 facilities located in 29 states and operated by 32 independent healthcare
operating companies. Our gross investments in these facilities totalled
$887.2 million at September 30, 2001. This portfolio is made up of 129 long-
term care facilities and 2 rehabilitation hospitals owned and leased to third
parties, fixed rate, participating and convertible participating mortgages on 55
long-term healthcare facilities and 48 long-term care facilities that were
recovered from customers and are currently operated through third-party
management contracts for our own account. In addition, 12 facilities are subject
to third-party leasehold interests. Approximately 73.7% of our real estate
investments were operated by seven public companies, including Sun Healthcare
Group, Inc. (24.6%), Integrated Health Services, Inc. (18.1%, including 10.7% as
the manager for and 50% owner of Lyric Health Care LLC), Advocat Inc. (12.0%),
Mariner Post-Acute Network, Inc. (6.7%), Kindred Healthcare, Inc. (formerly
known as Vencor Operating, Inc.) (5.7%), Alterra Healthcare Corporation (3.8%)
and Genesis Health Ventures, Inc. (2.8%). Kindred and Genesis manage facilities
for our own account, including "owned and operated" assets. The two largest
private operators represent 3.5% and 2.5%, respectively, of investments. No
other operator represents more than 2.5% of investments. The three largest
states in which we had investments were Florida (16.0%), California (7.5%) and
Illinois (7.5%).

WE ARE EXPOSED TO POTENTIAL RISKS FROM BANKRUPTCIES OF OUR LESSEES.

Our financial position and our ability to service our debt may be adversely
affected by financial difficulties experienced by any of our operators and the
related potential for a bankruptcy filing.

Our lease arrangements with operators who operate more than one of our
facilities are generally made pursuant to a single master lease covering all of
that operator's facilities. Although each lease or master lease provides that we
may terminate the master lease upon the bankruptcy or insolvency of the tenant,
the Bankruptcy Reform Act of 1978 provides that a trustee in a bankruptcy or
reorganization proceeding under the Bankruptcy Act, or a debtor-in-possession in
a reorganization, has the power and the option to assume or reject the unexpired
lease obligations of a debtor-lessee. In the event that the unexpired lease is
assumed on behalf of the debtor-lessee, all the rental obligations thereunder
generally would be entitled to a priority over other unsecured claims. However,
the court also has the power to modify a lease if a debtor-lessee in a
reorganization were required to perform certain provisions of a lease that the
court determined to be unduly burdensome. It is not possible to determine at
this time whether or not any of our leases or master lease contains any such
provision. If a lease is rejected, the lessor has a general unsecured claim
limited to any unpaid rent already due plus an amount equal to the rent reserved
under the lease, without acceleration, for the greater of one year or 15% of the
remaining term of such lease, not to exceed three years.

Generally, with respect to our mortgage loans, the imposition of an
automatic stay under the Bankruptcy Act precludes us from exercising foreclosure
or other remedies against the debtor. A mortgagee also is treated differently
from a landlord in three key respects. First, the mortgage loan is not subject
to assumption or rejection because it is not an executory contract or a lease.
Second, the mortgagee's loan may be divided into (1) a secured loan for the
portion of the mortgage debt that does not exceed the value of the property and
(2) a general unsecured loan for the portion of the mortgage debt that exceeds
the value of the property. A secured creditor such as ourselves is entitled to
the recovery of interest and costs only if and to the extent that the value of
the collateral exceeds the amount owed. If the value of the collateral is less
than the debt, a lender such as ourselves would not receive or be entitled to
any interest for the time period between the filing of the case and
confirmation. If the value of the collateral does exceed the amount of the debt,
interest and allowed costs may not be paid during the bankruptcy proceeding but
accrue until confirmation of a plan of reorganization or some other time as the
court orders. Finally, while a lease generally would either be rejected or
assumed with all of its benefits and burdens intact, the terms of a mortgage,
including the rate of interest and timing of principal payments, may be modified
if the debtor is able to effect a "cramdown" under the Bankruptcy Act.

The receipt of liquidation proceeds or the replacement of an operator that
has defaulted on its lease or loan could be delayed by the approval process of
any federal, state or local agency necessary for the transfer of the property or
the replacement of the operator licensed to manage the facility. In addition,
some significant expenditures associated with real estate investment such as
real estate taxes and maintenance costs are generally not reduced when
circumstances cause a reduction in income from the investment. In order to
protect our investments, we may take possession of a property or even become
licensed as an operator, which might expose us to successorship liability to
government programs or require us to indemnify subsequent operators to whom we
might transfer the operating rights and licenses. Third party payors may also
suspend payments to us following foreclosure until we receive the required
licenses to operate the facilities. Should these events occur, our income and
cash flows from operations would be adversely affected.

WE ARE EXPOSED TO POTENTIAL RISKS RELATED TO OWNED AND OPERATED ASSETS.

As a consequence of the financial difficulties encountered by a number of
our operators, we have recovered various long-term care assets, pledged as
collateral for the operators' obligations, either in connection with a
restructuring or settlement with certain operators or pursuant to foreclosure
proceedings. During 2000, $24.3 million of assets previously classified as held
for sale were reclassified to "owned and operated assets" as the timing and
strategy for sale or, alternatively, re-leasing, were revised in light of then
prevailing market conditions.

We are typically required to hold applicable licenses and are responsible
for the regulatory compliance at our owned and operated facilities. Our
management contracts with third party operators for these properties provide
that the third party operator is responsible for regulatory compliance, but we
could be sanctioned for violation of regulatory requirements. In addition, the
risk of third party claims such as patient care and personal injury claims may
be higher with respect to our owned and operated properties as compared to the
our leased and mortgaged assets.

THE INDUSTRY IN WHICH WE OPERATE IS HIGHLY COMPETITIVE. THIS COMPETITION MAY
PREVENT US FROM RAISING PRICES AT THE SAME PACE AS OUR COSTS INCREASE.

We compete for additional healthcare facility investments with other
healthcare investors, including other real estate investment trusts. The
operators of the facilities compete with other regional or local nursing care
facilities for the support of the medical community, including physicians and
acute care hospitals, as well as the general public. Some significant
competitive factors for the placing of patients

in skilled and intermediate care nursing facilities include quality of care,
reputation, physical appearance of the facilities, services offered, family
preferences, physician services and price.

WE ARE SUBJECT TO SIGNIFICANT ANTI-TAKEOVER PROVISIONS.

In addition to the potential anti-takeover effects resulting from Explorer's
significant investment in our company, our certificate of incorporation and
bylaws contain various procedural and other requirements which could make it
difficult for stockholders to effect certain corporate actions. Our Board of
Directors also has the authority to issue additional shares of preferred stock
and to fix the preferences, rights and limitations of the preferred stock
without stockholder approval. We have also adopted a stockholders rights plan
which provides for share purchase rights to become exercisable at a discount if
a person or group acquires more than 9.9% of our common stock or announces a
tender offer for more than 9.9% of our common stock. These provisions could
discourage unsolicited acquisition proposals or make it more difficult for a
third party to gain control of us, which could adversely affect the market price
of our common stock.

WE MAY CHANGE OUR INVESTMENT STRATEGIES AND POLICIES AND CAPITAL STRUCTURE.

Our Board of Directors, without the approval of our stockholders, may alter
our investment strategies and policies if it determines in the future that a
change is in our and our stockholders' best interests. The methods of
implementing our investment strategies and policies may vary as new investments
and financing techniques are developed.

WE ARE ORGANIZED AS A SELF-ADMINISTERED REAL ESTATE INVESTMENT TRUST.

We were organized to qualify for taxation as a real estate investment trust,
or REIT, under Sections 856 through 860 of the Internal Revenue Code. We believe
we have conducted, and we intend to continue to conduct, our operations so as to
qualify as a REIT. Qualification as a REIT involves the satisfaction of numerous
requirements, some on an annual and quarterly basis, established under highly
technical and complex provisions of the Internal Revenue Code for which there
are only limited judicial and administrative interpretations and involve the
determination of various factual matters and circumstances not entirely within
our control. We cannot assure you that we will at all times satisfy these rules
and tests.

If we were to fail to qualify as a REIT in any taxable year, as a result of
a determination that we failed to meet the annual distribution requirements or
otherwise, we would be subject to Federal income tax, including any applicable
alternative minimum tax, on our taxable income at regular corporate rates.
Moreover, unless entitled to relief under certain statutory provisions, we also
would be disqualified from treatment as a REIT for the four taxable years
following the year during which qualification is lost. This treatment would
reduce our net earnings and cash flow available for investment, debt service or
distribution to stockholders because of our additional tax liability for the
years involved. In addition, distributions to stockholders would no longer be
required to be made.

THE RIGHTS OFFERING

THE RIGHTS

If you owned our common stock as of 5:00 p.m. on , 2001, you will
receive a dividend of one right for every shares of common stock owned by you
at that time. Each right entitles you to purchase one share of common stock at
the subscription price. For example, if you owned 100 shares of common stock on
the record date, you would have the right to purchase additional shares of
common stock for $ per share. The aggregate number of rights you are entitled
to receive, if exercised by you in full, represents your pro rata portion of the
$50 million in additional equity capital we are seeking to raise. Your pro rata
portion is based on the number of shares of common stock you owned on the record
date, assuming solely for this purpose the conversion of all of our outstanding
Series C preferred stock, all of which is held by Explorer.

We will not issue fractional rights, and you may not exercise rights other
than in whole numbers. If the number of shares of common stock you held on the
record date would result in your receipt of fractional rights, the number of
rights distributed to you has been rounded up to the nearest whole right.

EXPIRATION TIME AND DATE

The rights expire on , 2001, at 5:00 p.m., New York City time.
Our subscription agent must actually receive all required documents and payments
before that date and time. We recommend that you send all of your subscription
documents, together with payment of the subscription price, to the subscription
agent several days in advance of the expiration date. Although we have the
option of extending the expiration date, we presently do not intend to do so.
Rights not exercised by the expiration date will be null and void and will have
no value.

SUBSCRIPTION PRICE

The subscription price is $ per share, payable in cash. All payments must
be cleared on or before the expiration date. The Board of Directors calculated
the subscription price at a discount to the average closing market price of our
common stock for the 20 consecutive trading days ending on October 26, 2001 of
$3.10. The market price of our common stock may increase or decrease during the
rights offering. On November 1, 2001, the last reported sale price for our
common stock on the New York Stock Exchange was $3.30 per share.

We have attached the full text of Shattuck Hammond's opinion as Annex A to
this prospectus. You should read the entire opinion to understand the
assumptions made, matters considered and limitations on the review undertaken by
our financial advisor. The opinion does not constitute a recommendation as to
whether you should exercise your rights in the rights offering. A summary of the
opinion is also set forth below under "Determination of Subscription Price."

In determining whether to pursue the rights offering as well as setting the
price at which a share of common stock may be purchased in this rights offering,
a special committee of our Board of Directors, which did not include affiliates
of Explorer, considered several factors, including the fairness opinion
delivered by our financial advisor, the historic and current market price of our
common stock,

our financial condition, challenges facing us, anticipated cash flows, general
conditions in the securities markets, our need for additional capital, available
alternate sources of financing, prices offered to stockholders in other rights
offerings and the need to offer the shares at a price that would be attractive
to investors relative to the then current trading price for our common stock,
among other things.

CLOSING CONDITIONS; ESCROW

The closing of the rights offering and the issuance of shares of common
stock to stockholders exercising rights is subject to the following conditions:

- our obtaining an extension of the maturity of our $175 million credit
facility by not less than twelve months from its current maturity of
December 31, 2002;

- our obtaining amendments and/or modifications to some of the covenants
and/or conditions contained in our two credit facilities on terms
satisfactory to us and Explorer; and

- the absence of any governmental order or litigation with respect to the
transactions that is reasonably likely to render it impossible or unlawful
to complete the rights offering and/or the Explorer investment, or that
could reasonably be expected to have a material adverse effect on our
business, results of operations, or financial condition, or materially
restrict the rights of Explorer under the documents relating to its
investment.

We will make a public announcement of the general terms of the amendments to
our two credit facilities promptly after the satisfaction of these closing
conditions, and in any event, prior to expiration of the subscription period as
it may be extended by us.

Your subscription price will be held in an escrow account until the
expiration date and the satisfaction of the closing conditions. If the closing
conditions are not satisfied on or before expiration of the subscription period
as it may be extended by us, we will terminate the rights offering and return
your money to you, without interest.

EXPLORER'S INVESTMENT

Although Explorer has the right pursuant to the terms of its Series C
preferred stock to receive its pro rata portion of the rights offered in this
rights offering, Explorer has agreed to waive its rights, and accordingly,
Explorer will not receive rights in this rights offering. Instead, Explorer has
agreed to purchase $22.8 million of our stock, on the closing of the rights
offering, at the same price per share available in this rights offering. The
shares that Explorer has committed to purchase represent its pro rata portion of
the $50 million in additional equity capital we are seeking to raise. Explorer
has also agreed to fund an amount equal to the aggregate subscription price of
any shares that are not subscribed for in this offering. As a result of this
commitment, we are assured of receiving a total of $50 million in gross proceeds
from the rights offering and Explorer's investment assuming they are both
completed.

As a condition to Explorer's investment, we have agreed to amend certain of
the agreements relating to Explorer's previous investment in us effective as of
the closing of Explorer's new investment.

The effect of these amendments is generally to remove those provisions in our
agreements that prohibit Explorer from voting in excess of 49.9% of our stock
and from taking certain actions without the prior approval of our Board. These
agreements are described in more detail under "Agreements with Explorer" on
page of this prospectus.

The rules of the New York Stock Exchange require that stockholders approve
the sale of voting capital stock to an affiliate such as Explorer. If the
issuance of common stock to Explorer has not been approved by our stockholders
at the time we close the rights offering and Explorer's investment, we will
issue shares of non-voting Series D preferred stock to Explorer in lieu of
shares of common stock. The Series D preferred stock will automatically convert
into common stock upon receipt of stockholder approval or the waiver by the New
York Stock Exchange of its stockholder approval requirement. Explorer's
commitment to purchase shares of common stock or Series D preferred stock is
subject to the satisfaction of the same closing conditions to which the rights
offering is subject.

REASONS FOR THE RIGHTS OFFERING

We are offering the rights to raise equity capital. We are raising this
capital to facilitate our reaching an agreement with our senior secured bank
lenders regarding the modification of our credit facilities and to enhance our
ability to repay approximately $108 million in debt maturing during the first
half of 2002.

We believe that this rights offering is the most appropriate means of
raising equity capital because it affords our existing stockholders the
preferential opportunity to subscribe for the new shares of common stock and to
maintain their proportionate interest in us. Some of the factors considered by
our Board of Directors in approving the rights offering include:

- our need for capital;

- the alternative methods available to us for raising capital;

- the pro rata nature of a rights offering to our stockholders;

- the investment agreement with Explorer;

- the market price of our common stock; and

- general conditions of the securities markets.

In addition, since no underwriting or sales commission will be paid in respect
of the shares purchased in the rights offering, we believe the rights offering
will be a low-cost method for raising additional capital.

NO BOARD INVESTMENT RECOMMENDATION TO STOCKHOLDERS

CONSEQUENCES OF FAILURE TO EXERCISE RIGHTS

If you choose not to exercise your subscription rights in full, your
relative percentage ownership interest will be diluted.

NO REVOCATION

You may not revoke or change your exercise of rights after you send in your
subscription agreement and payment even if you later learn information about us
that you deem to be unfavorable. In addition, if you exercise your rights prior
to satisfaction of the closing conditions, you will not have the right to revoke
or change your exercise of rights if you are not satisfied with the terms on
which we satisfy the closing conditions, including the amendments to our credit
facilities.

OVER-SUBSCRIPTION RIGHTS

There will be no over-subscription rights for unexercised rights. To the
extent that shares of common stock are not subscribed for in this offering,
Explorer has committed to invest an additional amount equal to the aggregate
subscription price relating to the unsubscribed shares on the closing of the
rights offering.

EXTENSION, WITHDRAWAL AND AMENDMENT

We have the option of extending the rights offering and the period for
exercising your rights, although we presently do not intend to do so.

We also reserve the right to terminate the rights offering at any time for
any reason including the failure of the closing conditions to occur. In the
event that the offering is terminated, money received from subscriptions will be
returned, without interest.

We reserve the right to amend the terms of the rights offering. If we make
an amendment that we consider significant, we will:

- mail notice of the amendment to all stockholders of record as of the
record date;

- extend the expiration date by at least ten days; and

- offer all subscribers no less than ten days to revoke any subscription
already submitted.

The extension of the expiration date will not, in and of itself, be treated
as a significant amendment for these purposes. The terms of the amendments to
the covenants contained in our two credit facilities and any waivers obtained
from the lenders under those facilities will also not be treated as a
significant amendment for these purposes. We will make a public announcement of
the general terms of these amendments and waivers promptly after obtaining them,
and in any event prior to the expiration date.

MAILING OF SUBSCRIPTION AGREEMENTS AND EXERCISE OF RIGHTS

We are sending a subscription agreement to each record holder as of the
record date along with this prospectus and related instructions. To exercise
rights, you must complete and sign the subscription agreement and deliver it,
along with full payment for the shares to be purchased, to EquiServe before the
expiration of the subscription period. See "--Procedures to Exercise Rights."

SHARES HELD FOR OTHERS

Only holders of record of common stock at the close of business on the
record date may exercise rights. You are a record holder for this purpose only
if your name is registered as a stockholder with our transfer agent, EquiServe,
as of the record date.

A depository bank, trust company or securities broker or dealer which is a
record holder for more than one beneficial owner of shares may divide or
consolidate subscription agreements to represent shares held on the record date
by their beneficial owners, upon proper showing to EquiServe.

If you own shares held in a brokerage, bank or other custodial or nominee
account, you should promptly send the proper instruction form to the person
holding your shares in order to exercise your rights. Your broker, dealer,
depository or custodian bank or other person holding your shares is the record
holder of your shares and will have to act on your behalf in order for you to
exercise rights. We have asked your broker, dealer or other nominee holders of
our stock to contact the beneficial owners to obtain instructions concerning
rights the beneficial owners are entitled to exercise.

[FOREIGN AND UNKNOWN ADDRESSES

We are not mailing subscription agreements to stockholders whose addresses
are outside the United States or who have an APO or FPO address. In those cases,
the subscription agreements will be held by EquiServe for these stockholders. To
exercise their rights, these stockholders must notify EquiServe prior to
11:00 a.m., New York City time, on the third business day prior to the
expiration date.]

RIGHT TO BLOCK EXERCISE DUE TO REGULATORY ISSUES

We reserve the right to refuse the exercise of rights by any holder of
rights who would, in our opinion, be required to obtain prior clearance or
approval from any state, federal or foreign regulatory authorities for the
exercise of rights or ownership of additional shares if, at the expiration date,
this clearance or approval has not been obtained. We are not undertaking to pay
any expenses incurred in seeking that clearance or approval.

We are not offering or selling, or soliciting any purchase of, rights or
underlying shares in any state or other jurisdiction in which this rights
offering is not permitted. We reserve the right to delay the commencement of the
rights offering in certain states or other jurisdictions if necessary to comply
with local laws. However, we may elect not to offer rights to residents of any
state or other jurisdiction whose law would require a change in the rights
offering in order to carry out the rights offering in that state or
jurisdiction.

PROCEDURES TO EXERCISE RIGHTS

Rights may be exercised by delivering to EquiServe, the subscription agent,
on or prior to 5:00 p.m., New York City time, on , 2001, the properly
completed and executed subscription agreement, together with payment in full of
the exercise price for each right exercised. IF YOU ARE NOT A BROKER, BANK OR
OTHER ELIGIBLE INSTITUTION, YOU MUST OBTAIN A SIGNATURE GUARANTEE ON THE
SUBSCRIPTION AGREEMENT FROM A BROKER, BANK OR OTHER INSTITUTION ELIGIBLE TO
GUARANTEE SIGNATURES. Please do not send subscription agreements or related
forms to us. The subscription price may be paid by:

- a personal check, which must have timely cleared payment on or before
expiration of the subscription period; or

- a certified or cashier's check or bank draft drawn upon a U.S. bank or a
U.S. postal money order.

FUNDS PAID BY UNCERTIFIED PERSONAL CHECK MAY TAKE AT LEAST FIVE BUSINESS DAYS TO
CLEAR. ACCORDINGLY, IF YOU PAY THE SUBSCRIPTION PRICE BY MEANS OF UNCERTIFIED
PERSONAL CHECK, YOU SHOULD MAKE PAYMENT SUFFICIENTLY IN ADVANCE OF THE
EXPIRATION TIME TO ENSURE THAT YOUR CHECK ACTUALLY CLEARS AND THE PAYMENT IS
RECEIVED BEFORE THAT TIME. WE ARE NOT RESPONSIBLE FOR ANY DELAY IN PAYMENT BY
YOU AND SUGGEST THAT YOU CONSIDER PAYMENT BY MEANS OF CERTIFIED OR CASHIER'S
CHECK, MONEY ORDER OR WIRE TRANSFER OF FUNDS.

All subscription agreements, payments of the subscription price, other than
wire transfers and nominee holder certifications, to the extent applicable to
your exercise of rights, must be delivered to EquiServe as follows:

By Regular Mail: By Overnight Courier:
EquiServe Trust Company, N.A. EquiServe Trust Company, N.A.
P.O. Box 43025 40 Campanelli Drive
Providence, RI 02940-3025 Braintree, MA 02184

By Hand:
EquiServe Trust Company, N.A.
c/o Securities Transfer and Reporting Services, Inc.
100 William Street--Galleria
New York, NY 10038

Eligible institutions may also deliver documents by facsimile transaction.
EquiServe's facsimile number is (781) 575-4826 or (781) 575-4827. You should
confirm receipt of all facsimiles by calling (781) 575-4816.

You should read carefully the forms of subscription agreement and related
instructions and forms which accompany this prospectus. You should call
at promptly with any questions you may have.

LIMITATIONS ON YOUR ABILITY TO EXERCISE YOUR RIGHTS

The rights may be exercised only to the extent that you held the shares of
common stock to which the rights relate continuously from , 2001
through the date of exercise of the rights. Any transfers of those shares before
exercising your rights will correspondingly reduce the number of rights that you
may exercise. For example:

- If you beneficially own 100 shares on , 2001 you will receive
rights.

- If, between , 2001 and the date of exercise of the rights, you
transfer beneficial ownership of out of the 100 shares, then you may
only exercise rights.

- If, between , 2001 and the date of exercise of the rights, you
transfer beneficial ownership of out of the 100 shares, then you still
may exercise of the rights because fractional rights will be rounded up
to the nearest whole right.

If you are both the record holder and beneficial owner of the shares of
common stock to which the rights relate you must certify as to the number of
shares you beneficially owned on , 2001. You must also certify as to
the number of shares that, as of the date of exercise, continue to be
beneficially owned, having not been transferred since , 2001.

If you hold shares of common stock for the account of others, such as a
broker, a trustee or a depository for securities, you must certify as to the
number of shares beneficially owned on , 2001 by each beneficial
owner for which you hold shares. You must also certify as to the corresponding
number of shares that, as of the date of exercise, continue to be beneficially
owned, having not been transferred since , 2001.

We intend to monitor beneficial ownership by rightsholders who elect to
exercise all or a portion of their rights.

ESCROW ARRANGEMENT

Until the closing conditions have been satisfied and expiration of the
subscription period, the subscription proceeds will be held in a
non-interest-bearing account maintained by EquiServe, the subscription agent. If
we terminate the offering, we will return your money, without interest.

INCOMPLETE FORMS; INSUFFICIENT PAYMENT

If you do not specify the number of rights being exercised in your
subscription agreement, or do not forward sufficient payment to pay for the
number of rights that you indicate are being exercised, then we will accept the
subscription forms and payment only for the maximum number of rights that may be
exercised based on the amount of the payment received. If your payment exceeds
the aggregate subscription price for the number of common shares indicated on
your subscription agreement or the maximum number of common shares for which you
are eligible to subscribe, your payment will be applied to the maximum number of
common shares for which you are eligible to subscribe. We will return any
payment not applied to the purchase of shares under the rights offering
procedures to those who made these payments as soon as practicable by mail.
Interest will not be payable on amounts refunded.

INSTRUCTIONS TO NOMINEE HOLDERS

If you are a broker, trustee or depository for securities or other nominee
holder of common stock for beneficial owners of the stock, we are requesting you
to contact the beneficial owners as soon as possible to obtain instructions and
related certifications concerning their rights. Our request to you is further
explained in the suggested form of letter of instructions from nominee holders
to beneficial owners accompanying this prospectus.

To the extent so instructed, nominee holders should complete appropriate
subscription agreements on behalf of beneficial owners and submit them on a
timely basis to EquiServe with the proper payment.

RISK OF LOSS ON DELIVERY OF SUBSCRIPTION AGREEMENT FORMS AND PAYMENTS

Each holder of rights bears all risk of the method of delivery to EquiServe
of subscription agreements and payments of the subscription price.

IF SUBSCRIPTION AGREEMENTS AND PAYMENTS ARE SENT BY MAIL, YOU ARE URGED TO
SEND THESE BY REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED,
AND TO ALLOW A SUFFICIENT NUMBER OF DAYS TO ENSURE DELIVERY TO EQUISERVE AND
CLEARANCE OF PAYMENT PRIOR TO THE EXPIRATION TIME.

BECAUSE UNCERTIFIED PERSONAL CHECKS MAY TAKE AT LEAST FIVE BUSINESS DAYS TO
CLEAR, YOU ARE STRONGLY URGED TO PAY, OR ARRANGE FOR PAYMENT, BY MEANS OF
CERTIFIED OR CASHIER'S CHECK, MONEY ORDER OR WIRE TRANSFER OF FUNDS.

PROCEDURES FOR DTC PARTICIPANTS

If you hold your shares of common stock through the Depository Trust Company
or one if its participants, you may exercise your rights through the facilities
of the Depository Trust Company. You should contact the Depository Trust Company
or the participant through which you hold your shares for further instructions.

TRANSFERABILITY OF RIGHTS

The rights may not be sold, transferred or assigned, even by gift. To the
extent you sell, gift or otherwise transfer the shares of common stock to which
the rights relate after the record date, the

rights related to those shares will be forfeited, even if you later repurchase
those shares or other shares of our common stock before expiration of the
subscription period.

HOW PROCEDURAL AND OTHER QUESTIONS ARE RESOLVED

We are entitled to resolve all questions concerning the timeliness,
validity, form and eligibility of any exercise of rights and our determinations
of such questions will be final and binding. We, in our sole discretion, may
waive any defect or irregularity, or permit a defect or irregularity to be
corrected within such time as we may determine, or reject the purported exercise
of any right because of any defect or irregularity in the exercise.

Subscription agreements will not be deemed to have been received or accepted
until all irregularities have been waived or cured within such time as we
determine, in our sole discretion. Neither we nor EquiServe will have any duty
to notify you of any defect or irregularity in connection with the submission of
subscription agreements or any other required document and neither we nor
EquiServe will incur any liability for failure to so notify you.

We reserve the right to reject any exercise of rights if the exercise does
not comply with the terms of this rights offering or is not in proper form or if
the exercise of rights would be unlawful or materially burdensome.

MANAGEMENT PARTICIPATION

FEDERAL INCOME TAX CONSIDERATIONS

For United States federal income tax purposes, we believe that holders of
our common stock will not recognize taxable income upon receipt or exercise of
the rights. If you sell the common stock you acquire upon exercise of your
rights, you may recognize taxable income equal to the excess of the amount
realized over your basis in the common stock. You should consult your own tax
advisor concerning the tax consequences of this offering with respect to your
particular circumstances and tax situation.

ISSUANCE OF STOCK CERTIFICATES

Stock certificates for shares of common stock purchased in the rights
offering will be issued as soon as practicable after the expiration date.
EquiServe will deliver subscription payments to us at the same time as it
delivers stock certificates to those exercising rights. Unless otherwise
instructed in your subscription agreement form, shares purchased by the exercise
of rights will be registered in the name of the person exercising the rights.

SUBSCRIPTION AGENT

EquiServe is the subscription agent for the rights offering. It is also the
transfer agent for our common stock. We will pay the fees and expenses of
EquiServe, which we estimate to be approximately $ . We have also agreed to
indemnify EquiServe from any liability which it may incur in connection with the
rights offering.

QUESTIONS AND ANSWERS CONCERNING THE RIGHTS

You should direct any questions, requests for assistance concerning the
rights or requests for additional copies of this prospectus to:

[Name]
[Address]
[Telephone Number]

USE OF PROCEEDS

We estimate that the net proceeds of this offering and Explorer's investment
will be approximately $48 million. We intend to use the proceeds to repay a
portion of our outstanding debt maturing in 2002, as well as for debt service,
working capital needs and other general corporate purposes. We have not
determined the exact amount of proceeds that we will use for each of these
purposes. The allocation of the net proceeds for a particular purpose, including
a determination as to which outstanding debt we repay, is subject to numerous
factors, which can be expected to change over the short term. These factors
include:

- economic conditions generally and in the healthcare industry in
particular, including the financial situation of our operators and the
resulting effect on our revenues and cash flows;

- our ability to negotiate appropriate modifications to the terms of our
credit facilities;

- developments in the capital markets affecting our ability to refinance all
or a portion of our outstanding debt;

- our ability to dispose of assets held for sale and other property at
appropriate prices;

- re-leasing of owned and operated assets and recoupment of working capital
investments; and

- the other factors discussed under "Risk Factors," which begin on page 8.

We will therefore have broad discretion over the use of proceeds. Pending
application, we intend to invest the net proceeds from this offering and
Explorer's investment in interest-bearing deposit accounts, certificates of
deposit, government securities or short-term and investment-grade financial
instruments of varying maturities.

Our $175 million secured revolving credit facility currently expires on
December 31, 2002, although we are negotiating an extension of this maturity
with the lender. As of the date of this prospectus, we had approximately
$129 million of loans outstanding under this facility, which bear interest at a
weighted average rate of 6.73% at that date. Our $75 million secured revolving
credit facility expires on March 31, 2002 as to $10 million and June 30, 2005 as
to the remaining $65 million. As of the date of this prospectus, we had
approximately $74.6 million of loans outstanding under this facility, which bear
interest at a weighted average rate per annum of 8.06% at that date. Our 6.95%
senior notes also mature in June 2002. As of the date of this prospectus, we had
approximately $97.6 million aggregate principal amount of these notes
outstanding.

DETERMINATION OF SUBSCRIPTION PRICE

The subscription price is $ per share, payable in cash. Our Board of
Directors sought and obtained a written opinion from Shattuck Hammond Partners
LLC, an independent financial advisor, that as of October 29, 2001, the date of
their opinion, the financial terms of the investment agreement with Explorer,
taken as a whole are fair to us from a financial point of view. We have attached
the full text of their opinion as Annex A to this prospectus. You should read
the entire opinion to understand the assumptions made, matters considered and
limitations on the review undertaken by our financial advisor. The opinion does
not constitute a recommendation as to whether you should exercise your rights in
the rights offering.

In recommending a price at which a share of common stock may be purchased in
this rights offering, a special committee of our Board of Directors, which did
not include affiliates of Explorer, considered several factors, including the
fairness opinion delivered by our financial advisor, the historic and current
market price of our common stock, our financial condition, challenges facing us,
anticipated cash flows, general conditions in the securities markets, our need
for additional capital, available alternate sources of financing, prices offered
to stockholders in other rights offerings, and the need to offer the shares at a
price that would be attractive to investors relative to the then current trading
price for our common stock, among other things. Our Board of Directors
established $2.92 as the maximum subscription price based upon a 6% discount
from the average closing price of $3.10 for our common stock over a 20
consecutive trading day period ending on October 26, 2001.

Based on the maximum $2.92 subscription price, up to [9,400,000] shares of
common stock will be offered to stockholders who own our common stock on the
, 2001 record date. These shares represent 54.5% of the total
equity capital we seek to raise. The remaining 45.5% of the equity capital
sought will be invested by Explorer, plus an amount equal to the aggregate
subscription price for all rights not exercised by common stockholders.

OPINION OF FINANCIAL ADVISOR TO THE SPECIAL COMMITTEE OF INDEPENDENT DIRECTORS
AND THE BOARD OF DIRECTORS

Our Board of Directors asked a special committee, composed solely of
directors who are unaffiliated with Explorer, to evaluate any proposals received
from Explorer and make a recommendation to the full Board of Directors regarding
what action, if any, our company should take with respect to such proposals. The
special committee engaged Shattuck Hammond Partners LLC on October 15, 2001 as
the committee's financial advisor to (i) review and analyze potential financing
alternatives for your company as well as financing proposals we received; and
(ii) if requested, render an opinion to the Board of Directors regarding the
fairness from a financial point of view of a financing contemplated by us
involving, among other things, an investment by Explorer, a 45.5% owner of our
common stock on an as converted basis, and a rights offering to our stockholders
other than Explorer. Prior to being engaged by us as the financial advisor to
the special committee, Shattuck Hammond had no professional relationship with
us.

The amount, terms and structure of the proposed financing were determined
through a negotiated process between the special committee and Explorer and are
set forth in an investment agreement dated as of October 29, 2001 between us and
Explorer. Shattuck Hammond did not participate directly in the negotiation of
the terms of the investment agreement. Pursuant to the investment agreement,
among other things, Explorer commits to invest, subject to certain closing
conditions being satisfied or waived, up to $50 million in payment for our
common stock or Series D preferred stock. The actual amount of Explorer's
investment will be equal to the difference between $50 million and the gross
proceeds received by us through a rights offering to our common stockholders
other than Explorer, defined as the "unsubscribed purchase amount." If all
rights offered in the rights offering are exercised, it was Shattuck Hammond's
understanding that the proportional ownership of our stock by stockholders other
than Explorer and by Explorer on an as converted basis would, upon Explorer's
payment of the

unsubscribed purchase amount and the issuance to it of shares of our common
stock, remain approximately the same as of the date of Shattuck Hammond's
opinion.

It was also Shattuck Hammond's understanding that the subscription price per
common share in the rights offering and the price per common share or the
conversion price of the Series D preferred to be paid by Explorer would be the
same. For purposes of their opinion Shattuck Hammond assumed that the
subscription price was $2.92, the maximum price approved by our Board of
Directors.

Shattuck Hammond rendered an oral opinion to the special committee and our
Board of Directors on October 23, 2001 (subject to review of definitive
documentation that was in the process of being negotiated), and a written
opinion addressed to the special committee and our Board of Directors on
October 29, 2001, in each case to the effect that, as of such date and subject
to the assumptions made, matters considered and the limitations set forth in its
opinion, the financial terms of the investment agreement taken as a whole,
defined as the "financial terms of the investment agreement" as described more
fully in its opinion, are fair to us from a financial point of view. The full
text of Shattuck Hammond's written opinion is attached as Annex A to this
prospectus and is incorporated herein by reference. Shattuck Hammond's opinion
sets forth the assumptions made, the matters considered and limits on the review
undertaken by Shattuck Hammond in connection with its engagement. The following
summary of Shattuck Hammond's opinion is qualified in its entirety by reference
to the full text of such opinion. Shattuck Hammond's opinion is directed only to
the fairness to us, from a financial point of view, of the financial terms of
the investment agreement taken as a whole and does not address any other aspect
of the investment by Explorer or the rights offering or any other transaction to
which Explorer and our company are parties. Shattuck Hammond's opinion was
provided for the information and assistance of the special committee and the
Board of Directors in connection with their consideration of the financing
proposal put forward by Explorer and is not a recommendation of any action that
the special committee, the Board of Directors or any of our stockholders should
take.

It was Shattuck Hammond's further understanding that the investment
agreement included, among other things, the various financial terms that are
specifically identified in Shattuck Hammond's fairness opinion set forth in
Annex A (see pages - ) to this prospectus.

In connection with preparing its opinion, Shattuck Hammond reviewed a
variety of materials including those specifically identified in its fairness
opinion set forth in Annex A (see pages - ) to this prospectus and made such
investigations as it deemed appropriate. Shattuck Hammond did not independently
verify any of the information it obtained for the purposes of its opinion.
Instead, Shattuck Hammond assumed the accuracy and completeness of all such
information. Shattuck Hammond relied upon assurances by our management that all
forward-looking information concerning us reflected the best currently available
judgments and estimates of management as to our likely future financial
performance and capital requirements. Shattuck Hammond assumed that the
financing will be consummated in accordance with the terms of the investment
agreement. Shattuck Hammond did not make an independent inspection, evaluation
or appraisal of our assets or liabilities, nor did anyone furnish Shattuck
Hammond with any such evaluation or appraisal. The Shattuck Hammond opinion is
based on market, economic and other conditions as they existed and could be
evaluated at the time their fairness opinion was rendered.

No limitations were imposed by the special committee, the Board of Directors
or us on the scope of Shattuck Hammond's investigation or the procedures
Shattuck Hammond followed in rendering its opinion. The terms of Shattuck
Hammond's engagement, however, did not include soliciting interest in an
investment transaction from investors, and Shattuck Hammond made no such
solicitation.

In evaluating the fairness, from a financial point of view, of the financial
terms of the investment agreement taken as a whole to us, Shattuck Hammond
employed a variety of analyses and reviews which it believes were appropriate
for preparing its opinion. The preparation of a fairness opinion

involves various determinations of the most appropriate and relevant methods of
financial analyses and review and the application of those methods to the
particular circumstances. Therefore such an opinion is not necessarily
susceptible to partial analysis or summary description. Shattuck Hammond
believes that its analyses and reviews must be considered as a whole and that
selection of portions of its analyses and reviews and of the factors considered
by it, without considering all of the factors and analyses and reviews, would
create a misleading view of the processes underlying its opinion. In arriving at
its opinion, Shattuck Hammond did not attribute any particular weight to any
particular analysis, review or factor considered by it, but rather made
qualitative judgments about the significance and relevance of each analysis,
review and factor.

In performing its analyses and reviews, Shattuck Hammond made numerous
assumptions with respect to industry performance, general business and economic
conditions and other matters, many of which are beyond our control. The analyses
and reviews performed by Shattuck Hammond do not purport to be an appraisal and
are not necessarily indicative of actual values or actual future results that
might be achieved, all of which may be significantly more or less favorable than
suggested by Shattuck Hammond's analyses and reviews.

In connection with its analyses and reviews, Shattuck Hammond utilized
estimates and forecasts of our future operating results contained in or derived
from projections developed and supplied by our management. Analyses based on
forecasts of future results are not necessarily indicative of actual future
results, which may be significantly more or less favorable than the forecasts.
Such analyses are inherently subject to uncertainty, being based on numerous
factors or events beyond our control, and are susceptible to interpretations and
periodic revision based on actual experience and business and economic
developments after the date they were prepared. Therefore, future results or
actual values may be materially different from these forecasts or assumptions.

The following is a brief summary of material analyses and reviews performed
by Shattuck Hammond in connection with the preparation of Shattuck Hammond's
fairness opinion delivered to the special committee and our Board of Directors
on October 29, 2001. The following analyses and reviews reflect substantially
the same methodologies used by Shattuck Hammond in its preliminary oral
presentation to the special committee and our Board of Directors on October 23,
2001, but updated and confirmed in writing to reflect financial information and
market data that was available as of October 26, 2001 as well as a review of the
definitive documentation executed in connection with the Explorer investment.

ALTERNATIVE FINANCING STRUCTURES REVIEW

GENERAL

Shattuck Hammond reviewed a number of financing alternatives to Explorer's
investment including:

- equity financing (secondary public offering, private investment into
public equity, private placement);

- debt financing (subordinated debt, collateralized mortgage backed
securitization, Health and Urban Development insured and senior
unsecured); and

- other financings (asset sales, sale or merger of our company).

Shattuck Hammond's review was based on a number of theoretical criteria
including pricing, completion risk, timing, deleveraging of balance sheet,
governance and approval requirements, fees and other factors. Based on its
review and the criteria cited, Shattuck Hammond was of the view that no

other financing alternative was clearly better than the Explorer investment. In
this regard, Shattuck Hammond noted that, among other things:

- Explorer did not require any additional due diligence;

- Explorer and our company were willing to enter into agreements on terms
that were substantially similar to the definitive documentation related to
Explorer's investment in our Series C preferred stock;

- the views of our management regarding the potential consequences if we did
not reach an agreement with its banks for covenant waivers by mid
December, 2001, including, without limitation, interest rate increases and
other penalties and possible acceleration of its senior debt;

- the requirement of our banks that there be an infusion of equity or other
junior capital in connection with any covenant waivers and possible term
extensions;

- Explorer's commitment to purchase our common stock at a fixed price per
share determined under the investment agreement irrespective of the actual
price of our common stock at the time Explorer makes its investment;

- the structure of the Explorer investment as an investment in our common
stock or Series D preferred stock to convert into our common stock thereby
eliminating the potential need to pay dividends or interest that other
investments might require (assuming that Series D preferred stock is not
issued or, if issued, is outstanding for only a short period of time);

- an investment of equity would deleverage our balance sheet;

- the World Trade Center attack on September 11, 2001 negatively impacted
the financing markets; and

- a rights offering is "democratic" from the perspective that all
stockholders can participate based on their proportional ownership.

MARKET VALUATION OF OMEGA PUBLICLY-TRADED SENIOR UNSECURED DEBT AND SERIES A AND
B PREFERRED STOCK

Shattuck Hammond noted that our senior unsecured debt and Series A and B
preferred stock were trading at significant discounts to their respective par
values. Moreover, Shattuck Hammond further noted that our unsecured debt has a
below investment grade rating and that the Series A and B preferred stock have
had their dividends suspended. Shattuck Hammond concluded that our below
investment grade rating on our debt, dividend suspension on our preferred stock
and relative trading values of such securities to their par amounts were
indicative of the challenges we would face in attempting to complete an
alternative financing to the Explorer investment.

OMEGA SENIOR UNSECURED DEBT

PRICE YTM S&P RATING
-------- -------- ----------

Omega 6.95%; 6/15/02................................. 85 35.8% CCC+
Omega 6.95%; 8/01/07................................. 60 18.5% CCC+

OMEGA SERIES A AND SERIES B PREFERRED (ACTUAL DOLLARS)

CURRENT DISCOUNT TO
LIQUIDATION PRICE AS OF LIQUIDATION DIVIDEND
PREFERENCE 10/26/01 PREFERENCE YIELD
----------- ----------- ----------- --------

Series A Preferred.................. $25.00 $14.51 58.0% NA (1 )
Series B Preferred.................. $25.00 $13.70 54.8% NA (2 )

(1) DIVIDEND SUSPENDED; ACCRUES AT RATE OF 9.250%.

(2) DIVIDEND SUSPENDED; ACCRUES AT RATE OF 8.625%.

EXPLORER PRO FORMA OWNERSHIP ANALYSIS

Shattuck Hammond noted that Explorer's current ownership of 45.5% of our
voting capital stock and the ability to designate four out of nine Board seats
(and approve an independent director) provided Explorer with significant control
of our company. Based on the $50 million financing and a subscription price of
$2.92, depending on the number of our stockholders other than Explorer who
exercise their rights, Explorer's ownership of our voting capital stock could
exceed 50% on an as converted basis.

The table below presents Explorer and non-Explorer ownership of our common
stock on an as converted basis based on different assumed levels of non-Explorer
stockholder participation in the rights offering:

OWNERSHIP ANALYSIS (SHARES IN MILLIONS)

COMMON SHARES ON AN AS CONVERTED BASIS (1)
------------------------------------------------------------------------------
NON-
EXPLORER
PARTICIPATION TOTAL TOTAL
IN RIGHTS SHARES PERCENTAGE SHARES PERCENTAGE TOTAL
EXPLORER OWNERSHIP LEVEL OFFERING NON-EXPLORER NON-EXPLORER EXPLORER EXPLORER SHARES
------------------------ ------------- ------------ ------------ -------- ---------- --------

High.................................. 0% 26.1 37.2% 33.9 62.8% 54.0
Medium................................ 50% 24.7 45.8% 29.2 54.2% 54.0
Low................................... 100% 29.4 54.5% 24.6 45.5% 54.0

(1) Excludes options and warrants.

Shattuck Hammond further noted that in the event that upon consummation of
the rights offering and transactions contemplated by the investment agreement,
Explorer were to beneficially own more than 50% of our voting securities,
Explorer would have voting control of our company through its unrestricted right
to vote our voting capital stock and the power to designate a majority of our
Board of Directors subject to the following restrictions imposed by the
investment agreement and any other limitation or restriction imposed by law:

- a limitation on the number of our Board of Directors which Explorer could
designate;

- so long as Explorer holds at least 15% of our voting securities, a
commitment by Explorer to vote in favor of the election of three directors
who are both "independent" under the rules of the New York Stock Exchange
and unaffiliated with Explorer and, upon the increase in the number of
directors to ten, one additional person who is unaffiliated with Explorer;
and

- except for a transaction approved by a committee of our Board of Directors
comprised entirely of independent directors and under certain other
limited circumstances, a prohibition against Explorer acquiring beneficial
ownership of more than 80% of our voting securities.

RIGHTS OFFERING ANALYSIS

Shattuck Hammond reviewed 31 rights offerings (excluding rights offerings
involving closed end funds and American Depositary Receipts) that have been
completed since January 1, 2001. Shattuck Hammond noted that rights offerings
are:

- in many instances used by financially troubled companies, and
approximately 61% of the companies in the sample involved companies with
share prices less than $5.00 per share;

- all of the rights offerings in the sample for which information was
available had over-subscription rights available to all shareholders;

- approximately 41% of such rights offerings for which information was
available had a large investor that was willing to purchase all or a large
part of any rights which were not exercised;

- approximately 36% of the rights offerings in the sample for which
information was available had rights that were transferable; and

- approximately 86% of the sample for which information was available were
priced based on intangible factors that may have had no relation to the
value of the companies' assets, operating performance or share price.

Shattuck Hammond also reviewed the relative share price performance of the
sample group based on the date of announcement and ex dividend date, and
concluded that rights offerings typically have relatively little impact on a
company's share price.

RIGHTS OFFERING ANALYSIS

ANALYSIS BY ANNOUNCEMENT DATE

WEEK DAY ON ONE ONE
BEFORE BEFORE DAY OF DAY AFTER WEEK AFTER
--------------------- -------- -------- --------- ----------

1.00 0.99 1.00 0.97 0.93

ANALYSIS BY EX DATE

WEEK DAY ON ONE ONE
BEFORE BEFORE DAY OF DAY AFTER WEEK AFTER
--------------------- -------- -------- --------- ----------

1.13 1.13 1.00 0.98 1.05
---- ---- ---- ----

OMEGA FLOAT COMPARISON

Based on information provided by Bloomberg Investor Services, Shattuck
Hammond compared our public float (common shares not owned by management or
other affiliates) with the public float of a select group of publicly-traded
financially stable healthcare REITs (Health Care Property Investors, Inc.,
Health Care REIT, Inc., Healthcare Realty Trust, Inc., Nationwide Health
Properties, Inc. and Senior Housing Properties Trust) and a select group of
publicly-traded financially distressed REITs (LTC Properties, Inc. and National
Health Investors, Inc.). The REITs in each group were selected because their
healthcare focus and mix of assets were reasonably similar to those of our
company. The general criteria used to distinguish between a stable and
distressed REIT is that stable REITs generally have stronger financial
performance, fewer operators who are in bankruptcy, and pay a dividend to their
common shareholders. Shattuck Hammond considered our company to be a distressed
REIT.

The float for the stable REITs ranged from 16.4 million shares to
54.7 million shares and averaged 37.9 million shares. The float for the
distressed REITs (excluding our company) ranged from 20.2 million shares to
21.8 million shares and averaged 21.0 million shares. Shattuck Hammond noted
that a larger float generally increases the trading liquidity of a stock and may
enhance the ability to undertake a reverse split to increase share price. In
this regard, if any non-Explorer stockholders (other than management and other
affiliates) exercised their rights, our float would increase.

The table below presents the pro forma impact on our float based on
different levels of assumed participation in the rights offering by our
stockholders other than Explorer:

OMEGA PRO FORMA FLOAT ANALYSIS (SHARES IN MILLIONS)

HIGH MEDIUM LOW
-------- -------- --------

Omega Float............................................ 19.2 19.2 19.2
Non-Explorer Rights Participation...................... 100% 50% 0%
New Shares Issued (1).................................. 9.3 4.7 0.0
Total Pro Forma Float.................................. 28.5 23.9 19.2
% Increase in Float.................................... 48% 24% 0%

(1) ASSUMES $27.3 MILLION RIGHTS OFFERING PRICED AT 6% DISCOUNT TO AVERAGE
CLOSING PRICE FOR 20 TRADING DAY PERIOD ENDED OCTOBER 26, 2001--HENCE $2.92.

PRO FORMA DEBT TO CAPITALIZATION ANALYSIS

Shattuck Hammond analyzed the debt to capitalization of the stable REITs and
the distressed REITs (excluding our company) and compared them to our company.
Debt/capitalization is calculated as (long-term + short-term debt)/(long-term
debt + short-term debt + preferred stock + equity value). The
debt/capitalization of the stable REITs ranged from 14.2% to 56.7% and from
30.8% to 38.5% for the distressed REITs. Shattuck Hammond noted that a
$50 million equity financing and additional subsequent repayment of debt through
cash flow from operations would significantly lower our debt/ capitalization
ratio and bring such ratio into closer proximity with the ratios of the
distressed REITs and stable REITs.

The table presents our capitalization at June 30, 2001 and as adjusted on a
pro forma basis for a $50 million equity investment that is assumed will be used
to repay debt, and for an assumed further $73.5 million reduction in debt
through cash flow from operations:

OMEGA PRO FORMA DEBT TO CAPITALIZATION ANALYSIS (DOLLARS IN MILLIONS)

PRO FORMA
JUNE 30, EQUITY PRO FORMA FURTHER JUNE 30,
2001 INVESTMENT WITH EQUITY REDUCTION 2001
-------- ---------- ----------- --------- ---------

DEBT
Total Debt (1)............. $425.6 (50.0) $375.6 (73.5) $302.1
EQUITY
Preferred.................. $212.3 $212.3 $212.3
Other...................... 247.4 50.0 297.4 297.4
------ ------ ------ ------ ------
Total Equity........... $459.7 50.0 $509.7 $509.7

DEBT TO CAPITALIZATION: 48.1% 42.4% 37.2%
MEAN (2)
Distressed REITs........... 34.7% 34.7% 34.7%
Stable REITs............... 42.5% 42.5% 42.5%
MEDIAN (2)
Distressed REITs........... 34.7% 34.7% 34.7%
Stable REITs............... 40.3% 40.3% 40.3%

(1) ASSUMES ADDITIONAL $10M OF DEBT IS REPAID FROM $50 MILLION PROCEEDS IN
EXCESS OF $113.5 DUE IN JUNE OF 2002.

(2) MEAN AND MEDIAN FOR DISTRESSED REITS EXCLUDE OMEGA. MEAN AND MEDIAN FOR
STABLE REITS EXCLUDE SENIOR HOUSING PROPERTIES TRUST.

OMEGA SHARE PRICE ANALYSIS

Shattuck Hammond compared our share price performance to an index created by
Shattuck Hammond of the share price performances of the stable REITs and the
distressed REITs. Shattuck Hammond noted that we under-performed both indices
for the five year period and twelve month period ended October 26, 2001.
Shattuck Hammond also noted that for the three months ended October 26, 2001, we
outperformed the stable REIT index and improved relative to the distressed REIT
index.

Shattuck Hammond calculated our average share price based on the daily close
for our common stock for the five year, twelve month and three month period
ended October 26, 2001. Such averages were $20.26, $3.03 and $3.03,
respectively. Shattuck Hammond noted that the maximum rights offering price of
$2.92 was 94% of the average price for both the twelve month and three month
period.

COMPARABLE COMPANY ANALYSIS

In its comparable company analysis, Shattuck Hammond derived various
valuation and leverage multiples as well as leverage and operating margins for
our company and compared them to similar multiples and margins for the stable
REITs and the distressed REITs. As previously discussed, the REITs in each group
were selected because their healthcare focus and mix of assets were reasonably
similar to our company. Shattuck Hammond focused the comparable company analysis
on:

- the common share price to funds from operations multiple defined as
"Price/FFO" where FFO is defined as net income available to common
stockholders plus depreciation and amortization less any gains or losses
on sales of assets, and adjusted for any items deemed extraordinary or
"one-time" items; and

- the Debt/Capitalization ratio (see "Omega Pro Forma Debt to Capitalization
Analysis" above).

Shattuck Hammond noted that Omega's Price/FFO multiple was below the median and
mean multiples for the distressed and stable REITs. Shattuck Hammond further
noted that completion of the Explorer investment and rights offering could
result in an increase in our Price/FFO multiple.

The table below presents the mean and median price to FFO multiples for the
periods shown:

COMPARABLE PUBLIC COMPANIES' PRICE/FFO MULTIPLES

LTM ANNUALIZED 2001 2002
6/30/01 6/30/01 ESTIMATED PROJECTED
-------- ---------- --------- ---------

STABLE REITS
Mean......................................... 10.4x 10.5x 9.6x 9.2x
Median....................................... 10.4x 10.4x 10.2x 9.8x
DISTRESSED REITS
Mean (1)..................................... 5.6x 6.0x 7.0x 7.0x
Median (1)................................... 5.6x 6.0x 7.0x 7.0x
OMEGA (2) (3)................................ 3.2X 3.1X 3.9X 4.4X

(1) MEAN AND MEDIAN EXCLUDES OMEGA.

(2) 2001E AND 2002P ASSUME FULL CONVERSION OF SERIES C PREFERRED STOCK, AND
INCLUDES ADDITIONAL STOCK IN 2002 DUE TO PROPOSED $50 MILLION FINANCING.

(3) OUR FFO PER SHARE INCLUDES ADD-BACK OF ONE-TIME ITEMS AND CERTAIN
ADJUSTMENTS RELATED TO 2002 FINANCING.

NET ASSET VALUE ANALYSIS

Shattuck Hammond performed a net asset value analysis that compared the
estimated net asset value per fully-diluted common share to our actual share
price at October 26, 2001. A similar comparative analysis was done with respect
to the stable REITs and the distressed REITs. The analysis was based on
financial results for the latest twelve months ended June 30, 2001 and the six
months ended June 30, 2001 annualized. The net asset value calculation was based
on determining a value for owned properties and other income and then adjusting
this combined value for various balance sheet related items such as cash, debt
and preferred stock. The value of owned properties was determined by multiplying
property cash flow by a multiple. Property cash flow was assumed to be equal to
real estate operating revenue less direct real estate operating costs. Other
income is assumed to consist primarily of interest income and excludes income or
losses related to sales of assets. The value of other income is determined by
multiplying other income for the period by a multiple. For the stable REITs, the
property cash flow multiple and other income multiple utilized is 10.0x and
6.0x, respectively. For the distressed REITs, the property cash flow multiple
and other income multiple utilized is 8.0x and 5.5x, respectively.

The table below presents the calculation of our net asset value, the median
and mean net asset values per share for the stable REITs and the distressed
REITs and the premium or discount of the actual share prices to the net asset
value per share for each group of REITs and our company at October 26, 2001:

SUMMARY NET ASSET VALUE PER SHARE (ACTUAL DOLLARS)

LTM PREMIUM/ ANNUALIZED PREMIUM/
6/30/01 (DISCOUNT) 6/30/01 (DISCOUNT)
-------- ---------- ---------- ----------

STABLE REITS
Mean.................................. $ 25.5 (6.8)% $ 25.0 (4.7)%
Median................................ $ 24.8 (3.7)% $ 24.8 (2.2)%
DISTRESSED REITS
Mean (1).............................. $13.31 (22.9)% $11.95 (8.3)%
Median (1)............................ $13.31 (22.9)% $11.95 (8.3)%
OMEGA................................. $ 2.97 7.2% $ 2.39 33.2%

(1) DISTRESSED REITS EXCLUDE OMEGA.

CALCULATION OF OMEGA'S NET ASSET VALUE (DOLLARS IN MILLIONS)

LTM ANNUALIZED
6/30/01 6/30/01
-------- ----------

Real Estate Operating Revenue........................... $ 251.6 $ 241.1
Direct Operating Expenses............................... 191.2 180.3
-------- -------
Property Cash Flow.................................... $ 60.4 $ 60.8
Applied Market Multiple................................. 8.0x 8.0x
Property Asset Value.................................. $ 483.4 $ 486.7
Other Income............................................ $ 31.3 $ 28.6
Applied Market Multiple................................. 5.5x 5.5x
Other Income for NAV Purposes......................... $ 172.3 $ 157.2

LTM ANNUALIZED
6/30/01 6/30/01
-------- ----------

BALANCE SHEET (6/30/01)
Property Asset Value.................................... $ 483.4 $ 486.7
Other Income............................................ 172.3 157.2
Plus: Land.............................................. 32.1 32.1
Plus: Cash.............................................. 10.8 10.8
Less: Debt.............................................. (425.7) (425.7)
Less: Preferred......................................... (212.3) (212.3)
-------- -------
Net Asset Value....................................... $ 60.5 $ 48.7
SHARES OUTSTANDING (MILLIONS)........................... 20.4 20.4
NET ASSET VALUE PER SHARE (ACTUAL)...................... $ 2.97 $ 2.39
CURRENT SHARE PRICE (ACTUAL)............................ $ 3.18 $ 3.18
SHARE PRICE RELATIVE TO NAV............................. 7.16% 33.17%

ENGAGEMENT TERMS

As compensation for its services as financial advisor to the special
committee, pursuant to a letter agreement dated October 15, 2001, we agreed to
pay Shattuck Hammond $250,000 in cash as follows:

- a retainer of $50,000;

- $50,000 upon the submission of a written report to the Board of Directors
which addressed a review and analysis of potential financing alternatives
for us as well as a review and analysis of financing proposals received by
us; and

- $250,000 (less any fees previously received) upon the earlier of the
completion of a financing or the delivery of a written opinion as to the
fairness of such financing from a financial point of view.

On October 29, 2001, the October 15, 2001 agreement was amended in
recognition of the increased time requirement of Shattuck Hammond, to provide
for Shattuck Hammond to receive a fee of $400,000 (instead of $250,000) less any
fees received, upon the earlier of the completion of a financing and the
delivery of its written opinion. In addition, Shattuck Hammond agreed to pay for
all of its out-of-pocket expenses.

PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY

Our common stock is listed on the NYSE under the symbol "OHI." On
November 1, 2001, there were approximately registered holders of the
common stock, and the closing price per share of the common stock as listed on
the NYSE composite tape was $3.30.

In prior years, we historically distributed to stockholders a large portion
of the cash available from operations. Cash dividends paid totaled $1.00 per
common share for 2000, compared with $2.80 per common share for the year ended
December 31, 1999. Our historical policy had been to make distributions on our
common stock of approximately 80% of funds from operations. The dividend payout
ratio, that is the ratio of per common share amounts for dividends paid to the
diluted per common share amounts of funds from operations, was approximately
238% for 2000 and 84.3% for 1999. Excluding the provision for loss on mortgages
and notes receivable and severance and consulting agreement costs, the dividend
payout ratio for 2000 was approximately 73.0%. Cash dividends paid totaled $1.00
per common share during 2000 and $0.75 for the nine-month period ended
September 30, 2000. No common dividends were paid during the first three
quarters of 2001.

In November 2000, Explorer agreed to defer receipt until April 2, 2001 of
$4.7 million in dividends declared in the third quarter of 2000 on the Series C
preferred stock. We requested this deferral in light of the maturity in February
2001 of $16.6 million of subordinated debentures. In February 2001, we suspended
payment of all common and preferred cash dividends. This action was intended to
preserve cash to facilitate our ability to obtain financing to fund the 2002
debt maturities. Additionally, on March 30, 2001, we exercised our option to pay
the $4,666,667 Series C preferred stock dividend deferred from November 15, 2000
and the associated deferral fee by issuing 48,420 Series C preferred shares to
Explorer on April 2, 2001, which are convertible into 774,722 shares of our
common stock at $6.25 per share. We do not know when or if we will resume
dividend payments on our common stock and preferred stock or, if resumed, what
the amount or timing of any dividend will be. We do not anticipate paying
dividends on any class of capital stock at least until our $108 million of debt
maturing in the first half of 2002 has been repaid. All accumulated and unpaid
dividends on our Series A, B and C preferred stock, which totalled
$14.9 million at September 30, 2001, must be paid in full before dividends on
our common stock can be resumed.

We have made sufficient distributions to satisfy the distribution
requirements under the REIT rules of the Internal Revenue Code of 1986 to
maintain our REIT status for 2000 and intend to satisfy the requirements under
the REIT rules for 2001.

The following table sets forth the high and low closing prices of the common
stock as reported on the NYSE composite tape, together with the amount of cash
dividends declared per common share for each quarter for 2001, 2000 and 1999.

2001 2000 1999
------------------------------------------------------- -------------------------------------------------- ----------------
DIVIDENDS DIVIDENDS
PER PER
QUARTER HIGH LOW SHARE QUARTER HIGH LOW SHARE QUARTER
------- -------- -------- ---------- ---------------- -------- -------- ---------- ----------------

First................ 4.7188 1.7500 $ 0.00 First........... $12.8125 $5.8125 $0.50 First...........
Second............... 3.3906 1.3438 0.00 Second.......... 7.0625 4.5156 0.00 Second..........
Third................ 3.6406 2.4531 0.00 Third........... 6.6875 4.5625 0.25 Third...........
Fourth (through Fourth.......... 6.2500 3.3750 0.25 Fourth..........
November 1, 2001) 3.4062 2.9062

1999
--------------------- --------------------------------
DIVIDENDS
PER
QUARTER HIGH LOW SHARE
------- -------- -------- ----------

First................ $30.5000 $21.1875 $0.70
Second............... 28.6875 21.3750 0.70
Third................ 25.8125 19.8125 0.70
Fourth (through 21.0000 12.5625 0.70
November 1, 2001)

MODIFICATIONS TO AGREEMENTS WITH EXPLORER

Explorer has agreed to purchase $22.8 million of our stock, on the closing
of the rights offering, at the same price per share available in this rights
offering. The shares that Explorer has agreed to purchase represent its pro rata
portion of the $50 million in additional equity capital we are seeking to raise.
Explorer has also committed to invest an additional amount equal to the
aggregate subscription price of any shares that are not subscribed for in this
offering. As a result of this commitment, we are assured of receiving a total of
$50 million in gross proceeds from the rights offering and the Explorer
investment assuming they are both completed.

As a condition to Explorer's investment, we have agreed to amend certain of
the agreements relating to Explorer's July 2000 investment in our company
effective as of the closing of Explorer's new investment. The effect of these
amendments generally will be to remove those provisions in our agreements that
prohibit Explorer from voting in excess of 49.9% of our stock and from taking
certain actions without the prior approval of our Board of Directors.

AMENDED AND RESTATED STOCKHOLDERS AGREEMENT

We will enter into an amended and restated stockholders agreement at the
closing of Explorer's investment. If Explorer owns more than 50% of our common
stock, Explorer would be able to elect all of the members of the Board of
Directors. However, pursuant to the amended and restated stockholders agreement,
Explorer will be entitled to designate to our Board of Directors that number of
directors that would generally be proportionate to Explorer's ownership of
voting securities of our company, not to exceed five directors (six following
increase in the size of the Board of Directors to ten directors). We will limit
the number of directors on our Board so as not exceed ten without the consent of
Explorer. We will also take such action to ensure generally that Explorer's
representation on all committees of the Board is proportionate to its
representation on the entire Board other than any special committee established
to consider transactions in which Explorer or any of its affiliates may have a
conflict of interest.

Explorer will, so long as it owns at least 15% of our voting securities,
vote its shares in favor of three "independent directors" as defined under the
rules of the New York Stock Exchange who are not affiliates of Explorer. Upon
the increase of the size of the Board to ten members, Explorer will vote its
shares in accordance with the previous sentence in favor of an additional
director who is not affiliated with Explorer. Upon the increase of the size of
the Board to ten members, we will appoint C. Taylor Pickett, our Chief Executive
Officer, as a new director. Mr. Pickett will then constitute the fourth non-
Explorer director.

Pursuant to the amended stockholders agreement, Explorer will no longer be
subject to certain restrictions under the prior stockholders agreement
preventing it from acquiring more than 5% of our voting securities without prior
board approval, but Explorer will be restricted from acquiring beneficial
ownership of more than 80% of our voting securities without the approval of a
committee of the Board consisting entirely of independent directors. Other
restrictions on Explorer under the prior stockholders agreement, including the
agreement of Explorer not to solicit proxies in opposition to, or prior to the
issuance of a recommendation by, the Board; not to join, form or participate in
a group relating to the ownership or voting of our securities or control of our
company; not to deposit any securities in a voting trust or other voting
arrangement; and not to tender any securities in a tender offer not approved by
the Board will also no longer apply to Explorer. Explorer will also no longer be
subject to the right of first offer transfer restrictions in the prior
stockholders agreement.

Pursuant to the amended stockholders agreement, Explorer will not transfer
our voting securities to a transferee who, as a result of such transfer, would
beneficially own 10% or more of our outstanding voting securities unless such
transferee agrees to be bound by certain provisions of the amended stockholders
agreement including those relating to the election of independent directors.

AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT

Pursuant to an amended and restated registration rights agreement, we have
agreed, subject to certain limitations and under certain circumstances, to
register for sale any shares of our stock held by Explorer. We will enter into
the amended and restated registration rights agreement with Explorer at the
closing of Explorer's investment.

AMENDED SERIES C ARTICLES SUPPLEMENTARY

Pursuant to our investment agreement with Explorer, we are required to seek
the approval of our stockholders to amend the Series C articles supplementary
for the Series C preferred stock presently owned by Explorer. Pursuant to the
amended Series C articles supplementary, the terms of the Series C preferred
stock will be amended to:

(i) remove the restriction that prevents the voting or conversion of the
Series C preferred stock in excess of 49.9% of our voting securities
owned by Explorer;

(ii) provide that if we fail to pay dividends owed upon the Series C
preferred stock or the Series D preferred stock for a period of time,
the holders of the Series C preferred stock and the Series D preferred
stock, voting together as a single class, will be entitled to designate
two additional directors to our Board;

(iii) provide that the subscription price in the rights offering will not
result in an adjustment to the conversion price of our Series C
preferred stock; and

(iv) make other technical changes to reflect the existence of the Series D
preferred stock.

The above amendments will not be effective unless approved by our stockholders.
We intend to seek stockholder approval for these amendments at a special meeting
of our stockholders. Explorer has committed to vote its shares, representing
approximately 45.5% of our voting shares, in favor of these amendments. We will
file an amended Series C articles supplementary with the State Department of
Assessments and Taxation of the State of Maryland following receipt of
stockholder's approval and the closing of Explorer's investment.

STOCKHOLDERS RIGHTS PLAN AMENDMENT

Pursuant to our investment agreement with Explorer, we have amended our
stockholders rights plan to provide that neither Explorer nor its affiliates
shall be an "acquiring person" for purposes of activating the rights that were
issued pursuant to our stockholders rights plan. The amendment also exempts
direct and indirect transferees of Explorer, other than in transfers through an
underwriter or national securities exchange, from the definition of an
"acquiring person." We will enter into the amendment to our stockholder's rights
plan at the closing of Explorer's investment.

ADVISORY AGREEMENT SIDE LETTER

We have agreed that upon the closing of the rights offering The Hampstead
Group, L.L.C., an affiliate of Explorer, will have fulfilled all of its
obligations under the amended and restated advisory agreement to provide certain
specified financial advisory, consulting and operational services, including,
but not limited to, assistance in our efforts to refinance, repay or extend
certain indebtedness and assistance in efforts to manage our capitalization and
liquidity. As a result, the advisory fee payable to Hampstead under the advisory
agreement will be earned but will only be payable at such time as all of the
conditions to payment of the advisory fee contained in the advisory agreement
are met. These conditions include the extension, repayment or refinancing of the
outstanding balances of our senior unsecured notes maturing on June 15, 2002 as
well as the extension, refinancing or repayment of our $175 million senior
secured revolving credit facility. The advisory fee that will be payable is
equal to 1% of the amount of refinanced indebtedness (based on the maximum
amount available to drawn in the case of revolving credit facilities) up to a
maximum fee of $3.1 million. If Hampstead provides additional services, we will
be required to pay them a customary advisory fee.

CAPITALIZATION

The following table shows, as of September 30, 2001, our historical
capitalization and our capitalization as adjusted for the rights offering and
Explorer's investment, including the application of the proceeds, assuming net
proceeds of $48 million. For purposes of this table, we have assumed that all of
the rights will be exercised in full by stockholders in the rights offering and
that we will issue Series D preferred stock to Explorer at the closing of the
rights offering. If stockholders approve Explorer's investment before the
closing of the rights offering, Explorer will be issued a number of shares of
common stock equal to the number of shares of common stock that would otherwise
have been issuable upon conversion of the Series D preferred stock in lieu of
the Series D preferred stock. To the extent stockholders do not exercise all of
the rights, the amount of Series D preferred stock or common stock issued to
Explorer will increase. For purposes of our capitalization as adjusted, we have
assumed a subscription price of $2.92 per share, the maximum price at which our
Board of Directors authorized our proceeding with the rights offering. The
actual subscription price may be lower.

UNAUDITED
------------------------------
HISTORICAL AS ADJUSTED
---------- --------------
(IN THOUSANDS)

Debt:
Revolving lines of credit................................. $ 203,641 $ 203,641
Other secured borrowings.................................. 18,595 18,595
Unsecured borrowings:
6.95% Notes Due June 2002............................... 99,641 51,641
6.95% Notes Due August 2007............................. 100,000 100,000
Other unsecured borrowings.............................. 4,160 4,160
--------- ---------
Total Debt................................................ 426,037 378,037

Stockholders' Equity:
Preferred Stock $1.00 par value:
Authorized--10,000 Shares
Issued and Outstanding--2,300 shares Series A with an
aggregate liquidation preference of $57,500............ 57,500 57,500
Issued and Outstanding--2,000 shares Series B with an
aggregate liquidation preference of $50,000............ 50,000 50,000
Issued and Outstanding--1,048 shares Series C with an
aggregate liquidation preference of $104,842........... 104,842 104,842
Issued and Outstanding--228 shares Series D with an
aggregate liquidation preference of $22,760(2)......... -- 22,760

Common Stock $.10 par value:
Authorized--100,000 shares
Issued and Outstanding--20,076(2)....................... 2,008 --
Issued and Outstanding--37,199.......................... -- 3,720
Additional paid-in capital.............................. 438,384 461,912
Cumulative net earnings................................. 171,272 171,272
Cumulative dividends paid............................... (365,654) (365,654)
Unamortized restricted stock awards....................... (202) (202)
Accumulated other comprehensive income.................... (1,491) (1,491)
--------- ---------
Total Stockholders' Equity................................ 456,659 504,659
--------- ---------
Total Capitalization...................................... $ 882,696 $ 882,696
========= =========

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

(1) For purposes of our capitalization, as adjusted, we have assumed that the
net proceeds from this offering and the Explorer investment will be
approximately $48 million and that we used those proceeds to repay notes
due June 2002. We have not determined the actual allocation of proceeds
from this offering and the Explorer investment and management will have
broad discretion in making that determination. See "Use of Proceeds."

(2) If none of the subscription rights are exercised by stockholders,
shares of common stock and shares of Series D preferred
stock with a liquidation preference of $50 million will be outstanding
following the closing of the rights offering and Explorer's investment as
adjusted. Upon stockholder approval of Explorer's investment, all the
outstanding Series D preferred stock will automatically be converted into
shares of common stock.

SELECTED FINANCIAL DATA

The operating financial data set forth below for the nine months ended
September 30, 2000 and 2001 and the balance sheet data as of September 30, 2001
are derived from our unaudited consolidated financial statements and notes
included in this prospectus and, in the opinion of our management, include all
adjustments, consisting of only normal recurring adjustments, considered
necessary for a fair presentation. Interim results are not necessarily
indicative of the results that can be expected for a full fiscal year. The
operating financial data set forth below for each of the years in the three-year
period ended December 31, 2000 and the balance sheet data as of December 31,
2000 and 1999 are derived from our audited consolidated financial statements and
notes included in this prospectus, which have been audited by Ernst & Young LLP,
independent auditors. The operating financial data set forth below for each of
the years in the two-year period ended December 31, 1997 and the balance sheet
data as of December 31, 1998, 1997 and 1996 are derived from our audited
consolidated financial statements and notes, which have not been included in
this prospectus but which we have previously filed with the Securities and
Exchange Commission and have been audited by Ernst & Young LLP, independent
auditors. The following selected financial data have been derived from and
should be read in conjunction with our consolidated financial statements and the
related notes and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."

NINE MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------- ----------------------------------------------------
2001 2000 2000 1999 1998 1997 1996
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

OPERATING DATA
Revenues(1)...................................... $201,666 $195,673 $275,793 $148,129 $109,314 $90,820 $73,127
Net Earnings (Loss) Available to Common (before
gain/loss on assets sold and provision for
impairment in 2001, 2000, 1999 and 1998)....... (19,951) (13,500) (14,784) 40,047 41,777 41,305 34,590
Net Earnings (Loss) Available to Common.......... (26,242) (57,507) (66,485) 10,040 68,015 41,305 34,590
Per Share Amounts:
Net Earnings (Loss) (before gain/loss on assets
sold and provision for impairment in 2001,
2000, 1999 and 1998):
Basic........................................ (1.00) (0.67) $ (0.74) $ 2.01 $ 2.09 $ 2.16 $ 2.01
Diluted...................................... (1.00) (0.67) (0.74) 2.01 2.08 2.16 2.01
Net Earnings (Loss) Available to Common:
Basic........................................ (1.31) (2.87) (3.32) 0.51 3.39 2.16 2.01
Diluted...................................... (1.31) (2.87) (3.32) 0.51 3.39 2.16 2.01
Dividends, Common Stock(2)..................... -- 0.75 1.00 2.80 2.68 2.58 2.48
Dividends, Series A Preferred(2)............... -- 1.73 2.31 2.31 2.31 1.16
Dividends, Series B Preferred(2)............... -- 1.62 2.16 2.16 1.08
Dividends, Series C Preferred(3)............... -- -- 0.25
Weighted Average Common Shares Outstanding,
Basic.......................................... 20,032 20,058 20,052 19,877 20,034 19,085 17,196
Weighted Average Common Shares Outstanding,
Diluted........................................ 20,032 20,058 20,052 19,877 20,041 19,137 17,240

NINE MONTHS
ENDED
SEPTEMBER 30, DECEMBER 31,
-------------- --------------------------------------------------------
2001 2000 1999 1998 1997 1996
-------------- -------- ---------- ---------- -------- --------
(UNAUDITED)

BALANCE SHEET DATA
Gross Investments............................... $944,148 $974,507 $1,072,398 $1,069,646 $839,927 $643,261
Total Assets.................................... 911,265 948,451 1,038,731 1,037,207 816,108 634,836
Revolving Lines of Credit....................... 203,641 185,641 166,600 123,000 58,300 6,000
Other Long-Term Borrowings...................... 222,396 249,161 339,764 342,124 208,966 135,659
Subordinated Convertible Debentures............. -- 16,590 48,405 48,405 62,485 94,810
Stockholders' Equity............................ 456,659 464,313 457,081 505,762 468,221 383,007

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

(1) Revenues for the nine months ended September 2001 and 2000 and the years
ended December 2000 and December 1999 include $133,613, $123,461, $175,559,
and $26,223, respectively, of revenues from nursing home operations from
facilities recovered from customers and managed for our own account.

(2) Dividends per share are those declared and paid during each period.

(3) Dividends per share are those declared during each period, based on the
number of shares of common stock issuable upon conversion of the outstanding
Series C. See Note 15 to our December 31, 2000 consolidated financial
statements included in this prospectus.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS. THESE
STATEMENTS RELATE TO OUR EXPECTATIONS, BELIEFS, INTENTIONS, PLANS, OBJECTIVES,
GOALS, STRATEGIES, FUTURE EVENTS, PERFORMANCE AND UNDERLYING ASSUMPTIONS AND
OTHER STATEMENTS OTHER THAN STATEMENTS OF HISTORICAL FACTS. IN SOME CASES YOU
CAN IDENTIFY FORWARD-LOOKING STATEMENTS BY THE USE OF FORWARD-LOOKING
TERMINOLOGY INCLUDING "MAY" "WILL" "ANTICIPATES" "EXPECTS" "BELIEVES" "INTENDS"
"SHOULD" OR COMPARABLE TERMS OR THE NEGATIVE THEREOF. THESE STATEMENTS ARE BASED
ON INFORMATION AVAILABLE ON THE DATE OF THIS PROSPECTUS AND ONLY SPEAK AS OF THE
DATE HEREOF AND NO OBLIGATION TO UPDATE SUCH FORWARD-LOOKING STATEMENTS SHOULD
BE ASSUMED. OUR ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE REFLECTED IN THE
FORWARD-LOOKING STATEMENTS CONTAINED HEREIN AS A RESULT OF A VARIETY OF FACTORS,
INCLUDING THOSE DISCUSSED UNDER "FORWARD-LOOKING STATEMENTS" AND "RISK FACTORS."

OVERVIEW

The long-term care industry has experienced unprecedented financial
challenges in the recent past that have had an adverse impact on us during 2000
and 2001. These challenges are due principally to the Balanced Budget Act of
1997 which introduced the prospective payment system for the reimbursement of
Medicare patients in skilled nursing facilities, implementing an acuity-based
reimbursement system in lieu of the cost-based reimbursement system historically
used. The prospective payment system significantly reduced payments to nursing
home operators. That reduction, in turn, has negatively affected the revenues of
our nursing home facilities and the ability of our nursing home operators to
service their capital costs to us. Many nursing home operators, including a
number of our large nursing home operators, have sought protection under
Chapter 11 of the Bankruptcy Act.

In response to the adverse impact of the prospective payment system
reimbursement cuts, the Federal government passed the Balanced Budget Refinement
Act of 1999 and the Benefits Improvement and Protection Act of 2000, both of
which increase payments to nursing home operators. These increases have
positively affected the revenues of our nursing home facilities and the ability
of our nursing home operators to service their capital costs to us. In addition,
the facilities that we own and currently operate for our own account have been
likewise positively affected by the Balanced Budget Refinement Act and Benefits
Improvement and Protection Act.

The initial impact of the prospective payment system negatively affected our
financial results and our access to capital sources to fund growth and refinance
existing indebtedness. To obtain sufficient liquidity to enable us to address
the maturity in July 2000 and February 2001 of indebtedness totaling
$129.8 million, we issued $100.0 million of Series C preferred stock to Explorer
in July 2000 as described in more detail in Note 10 to our audited consolidated
financial statements included in this prospectus. Simultaneously with the
issuance of the Series C preferred stock, we also refinanced our then existing
credit facilities.

As a consequence of the financial difficulties encountered by a number of
our nursing home operators, we have recovered various long-term care assets
pledged as collateral for the operators' obligations either in connection with a
restructuring or settlement with certain operators or pursuant to foreclosure
proceedings. Under normal circumstances, we would classify such assets as
"assets held for sale" and seek to re-lease or otherwise dispose of such assets
as promptly as practicable. However, a number of companies were actively
marketing portfolios of similar assets and, in light of the market conditions in
the long-term care industry generally, it had become more difficult both to sell
these properties and for potential buyers to obtain financing to acquire them.
As a result, during 2000, $24.3 million of assets previously classified as held
for sale were reclassified to "owned and operated assets" as the timing and
strategy for sale or, alternatively, re-leasing, were revised in light of
prevailing market conditions.

As of September 30, 2001, we owned 60 long-term healthcare facilities that
had been recovered from customers and are currently operated for our own
account. During 1999, 2000 and 2001, we experienced a significant increase in
nursing home revenues attributable to the increase in owned and operated assets.
In addition, in connection with the recovery of these assets, we often fund
working capital and deferred capital expenditure needs for a transitional period
until license transfers and other regulatory matters are completed and
reimbursement from third-party payors recommences. Our management intends to
sell or re-lease these assets as promptly as possible consistent with achieving
valuations that reflect our management's estimate of fair realizable value of
the assets. We do not know, however, if or when the dispositions will be
completed or whether the dispositions will be completed on terms that will
enable us to realize the fair value of such assets.

In November 2000, Explorer agreed to defer receipt until April 2, 2001 of
$4.7 million in dividends declared in October 2000 on the Series C preferred
stock. We requested this deferral in light of the maturity in February 2001 of
$16.6 million of subordinated debentures. In February 2001, we suspended payment
of all dividends on all common and preferred stock. This action was intended to
preserve cash to facilitate our ability to obtain financing to fund debt
maturing in 2002. Additionally, on March 30, 2001, we exercised our option to
pay the deferred Series C preferred stock dividend and associated deferral fee
by issuing 48,420 additional shares of Series C preferred stock to Explorer.
These shares are convertible into 774,722 shares of our common stock at $6.25
per share. We do not know when or if we will resume dividend payments on our
common stock or, if resumed, what the amount or timing of any dividend will be.
We do not anticipate paying dividends on any class of capital stock at least
until our $108 million of debt maturing in the first half of 2002 has been
repaid, and in any event, all accrued and unpaid dividends on our Series A, B
and C preferred stock must be paid in full before dividends on our common stock
can be resumed. We have made sufficient distributions to satisfy the
distribution requirements under the REIT rules of the Internal Revenue Code of
1986 to maintain our REIT status for 2000 and intend to satisfy the requirements
under the REIT rules for 2001.

In August 2001, we paid $10 million to settle a lawsuit brought against us
by Karrington Health, Inc. The recognition of this non-recurring expense
associated with the settlement has resulted in violations of certain financial
covenants in the loan agreements relating to our revolving credit facilities. We
previously obtained a waiver from the lenders under our two revolving credit
facilities through September 14, 2001 in respect of our default under these
covenants. The lenders under our $175 million credit facility have granted us a
waiver through December 13, 2001. The waiver granted by our lenders under our
$75 million secured credit facility has expired and discussions regarding an
extension are continuing.

The following is our discussion of the consolidated results of operations,
financial position and liquidity and capital resources, which should be read in
conjunction with our consolidated financial statements and accompanying notes.

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999

Our revenues for the year ended December 31, 2000 totaled $275.8 million, an
increase of $127.7 million over 1999 revenues. This increase is principally due
to the inclusion of revenue from nursing home operations for assets owned and
operated for our account recovered pursuant to foreclosure and settlements with
troubled operators in 2000 and revenues associated with foreclosure assets that
were previously classified as "assets held for sale" and reclassified to "owned
and operated assets" during the third quarter of 2000. Excluding nursing home
revenues of owned and operated assets, revenues were $96.8 million for the
twelve-month period ended December 31, 2000, a decrease of $26.1 million from
the comparable prior year period.

Our rental income for the year ended December 31, 2000 totaled
$67.3 million, a decrease of $9.1 million over 1999 rental income. The decrease
is due to $8.7 million from reductions in lease revenue due to foreclosures,
bankruptcies and restructurings, and $4.9 million from reduced investments
caused by 1999 and 2000 asset sales. These decreases are offset by $2.4 million
in additional revenue from 1999 investments held for a full year, $1.3 million
relating to contractual increases in rents that became effective in 2000 as
defined under the related agreements and $0.8 million from a mortgage that
converted to a lease in 1999.

Our mortgage interest income for the year ended December 31, 2000 totaled
$24.1 million, decreasing $12.2 million over 1999 mortgage interest income. The
decrease is due to $7.3 million from reductions due to foreclosures,
bankruptcies and restructurings, $4.7 million from reduced investments caused by
the payoffs of mortgages and $0.8 million reduction from a mortgage that
converted to a lease in 1999. These decreases are offset by $0.5 million
relating to contractual increases in interest income that became effective in
2000 as defined under the related agreements.

Our nursing home revenues of owned and operated assets for the year ended
December 31, 2000 totaled $175.6 million, increasing $149.3 million over 1999
nursing home revenues. The increase is due to the increased number of facilities
classified as owned and operated assets in 2000 as a result of bankruptcies,
foreclosures and restructurings.

Our expenses for the year ended December 31, 2000 totaled $335.3 million,
increasing approximately $217.4 million over expenses of $117.9 million for
1999.

Our nursing home expenses for owned and operated assets increased to
$179.0 million from $25.2 million in 1999 due to the increase in the number of
nursing homes operated for our account.

Our interest expense for the year ended December 31, 2000 was approximately
$42.4 million, compared with $42.9 million for 1999. The decrease in 2000 is
primarily due to lower average outstanding borrowings during the 2000 period,
partially offset by higher average interest rates.

The 2000 provision for depreciation and amortization of real estate totaled
$23.3 million, decreasing $0.9 million over 1999. The decrease primarily
consists of $2.0 million depreciation expense for properties sold or held for
sale and a reduction in amortization of non-compete agreements of $0.8 million
offset by $1.6 million additional depreciation expense from properties
previously classified as mortgages and new investments placed in service in 1999
and 2000.

Our general and administrative expenses for 2000 totaled $6.4 million as
compared to $5.2 million for 1999, an increase of $1.2 million or 22.8%. The
increase is due in part to the incremental administrative costs incurred in 2000
to manage the owned and operated assets, $0.5 million of non-cash compensation
expense relating to the dividend equivalent rights granted to management, and
increased consulting costs related to the foreclosure assets.

Our legal expenses for 2000 totaled $2.5 million as compared to
$0.4 million in 1999. The increase is largely attributable to legal costs
associated with the operator bankruptcy filings and negotiations with our
troubled operators.

We recognized a $4.7 million charge for severance payments in 2000. The
charges are comprised of severance and consulting payments to our former Chief
Executive Officer and former Chief Financial Officer.

We also recognized a provision for loss on mortgages and notes receivable of
$15.3 million in 2000, adjusting the carrying value of mortgages and notes
receivable to their net realizable value.

A provision for impairment of $61.7 million is included in expenses for
2000. This provision included $14.4 million for assets held for sale to reduce
properties to fair value less cost to dispose, $43.0 million for facilities
recovered from operators and now held as owned and operated assets to fair

value, $1.9 million for other real estate assets and $2.4 million of goodwill
which, due to the diminished value of the related real estate assets, our
management has determined is impaired.

During 2000, we sold certain of our core and other assets realizing proceeds
of $34.7 million, resulting in a gain of $10.0 million. During 1999, we
completed asset sales yielding net proceeds of $18.2 million, realizing losses
of $10.5 million.

Our funds from operations for the year ended December 31, 2000 on a fully
diluted basis totaled $19.2 million, a decrease of $52.6 million as compared to
the $71.9 million for 1999 due to factors mentioned above. After adjusting for
the non-recurring provision for loss on mortgages and notes receivable and
severance and consulting costs, funds from operations for the year was
$39.3 million, a decrease of $32.6 million from the year ended December 31,
1999. Funds from operations is net earnings available to common stockholders,
excluding any gains or losses from debt restructuring and the effects of asset
dispositions, plus depreciation and amortization associated with real estate
investments. We consider funds from operations to be one performance measure
which is helpful to investors of real estate companies because, along with cash
flows from operating activities, financing activities and investing activities,
it provides investors an understanding of our ability to incur and service debt
and to make expenditures. Funds from operations in and of itself does not
represent cash generated from operating activities in accordance with generally
accepted accounting principles and therefore should not be considered an
alternative to net earnings as an indication of operating performance, or to net
cash flow from operating activities as determined by generally accepted
accounting principles in the United States, as a measure of liquidity and is not
necessarily indicative of cash available to fund cash needs.

No provision for Federal income taxes has been made since we continue to
qualify as a real estate investment trust under the provisions of Sections 856
through 860 of the Internal Revenue Code of 1986, as amended. Accordingly, we
have not been subject to Federal income taxes on amounts distributed to
stockholders, as we distributed at least 95% of our real estate investment trust
taxable income and have met certain other conditions. In 2001, under applicable
law, the requirement will be reduced to 90% of our real estate investment trust
taxable income.

YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998

Revenues for the year ended December 31, 1999 totaled $148.1 million,
increasing $38.8 million over 1998 revenues.

Our rental income for the year ended December 31, 1999 totaled
$76.4 million, an increase of $4.3 million over 1998 rental income. The 1999
revenue growth stems primarily from $11.7 million in revenue from additional
investments during 1999 and a full year of revenue from investments made in
1998, $1.2 million relating to contractual increases in rents that became
effective in 1999 as defined under the related agreements, and $1.3 million from
mortgages that converted to leases in 1999. These increases are offset by
$9.9 million from reductions in lease revenue due to foreclosure, bankruptcy and
asset sales.

Our mortgage interest income for the year ended December 31, 1999 totaled
$36.4 million, an increase of $6.0 million over 1998 mortgage interest income.
The 1999 revenue growth stems primarily from $9.3 million in revenue from
additional investments during 1999 and a full year of revenue from investments
made in 1998, and $0.3 million relating to contractual increases in mortgage
interest that became effective in 1999 as defined under the related agreements.
These increases are offset by $2.4 million from reductions in interest revenue
due to the payment of mortgages and $1.3 million from mortgages that converted
to leases in 1999.

Our nursing home revenues of owned and operated assets for the year ended
December 31, 1999 totaled $26.2 million. This is due to the consolidation of
nursing home revenues for owned and operated assets as a result of foreclosures
occurring in 1999.

Our expenses for the year ended December 31, 1999 totaled $117.9 million,
increasing approximately $51.8 million over expenses of $66.1 million for 1998.

Our nursing home expenses attributable to owned and operated assets
increased $25.2 million due to recovery of nursing homes operated for our own
account.

The 1999 provision for depreciation and amortization of real estate totaled
$24.2 million, increasing $2.7 million over 1998. This increase stems from a
full year provision for 1998 investments, plus a partial year provision for 1999
investments.

Our interest expense for the year ended December 31, 1999 was approximately
$42.9 million, compared with $32.4 million for 1998. The increase in 1999 is
primarily due to higher average outstanding borrowings during the 1999 period,
partially offset by lower average interest rates.

During 1999, we completed asset sales yielding net proceeds of
$18.2 million, realizing losses of $10.5 million. In addition, our management
initiated a plan in the 1999 fourth quarter for additional asset sales to be
completed in 2000. The additional assets identified as assets held for sale had
a cost of $33.8 million, a net carrying value of $28.6 million and annualized
revenue of approximately $3.4 million. As a result of this review, we recorded a
provision for impairment in 1999 of $19.5 million to adjust the carrying value
of assets held for sale to their fair value, less cost of disposal.

During 1998, we initiated a plan to dispose of certain properties judged to
have limited long-term potential and to re-deploy the proceeds. Following a
review of the portfolio, assets identified for sale in 1998 had a cost of
$95.0 million, a net carrying value of $83.0 million, and annualized revenues of
approximately $11.4 million. In 1998, we recorded a provision for impairment of
$6.8 million to adjust the carrying value of those assets judged to be impaired
to their fair value, less cost of disposal. During 1998, we completed sales of
two groups of assets, yielding sales proceeds of $42.0 million. Gains realized
in 1998 from the dispositions approximated $2.8 million.

Our funds from operations for the year ended December 31, 1999 on a fully
diluted basis totaled $71.9 million, an increase of $2.1 million over the
$69.8 million for 1998. The 1999 increase in funds from operations is primarily
due to new additions to investments, offset by early payment of mortgages and
disposition of real estate assets.

THREE- AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE- AND
NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2000

Revenues for the three-month and nine-month periods ended September 30, 2001
totaled $66.8 million and $201.7 million, respectively, a decrease of
$1.2 million and an increase of $6.0 million, respectively, over the periods
ending September 30, 2000. Excluding nursing home revenues of owned and operated
assets, revenues were $23.0 million and $68.1 million, respectively, for the
three-month and nine-month periods ended September 30, 2001, an increase of
$1.0 million and a decrease of $4.2 million, respectively, from the comparable
prior year periods.

Rental income for the three-month and nine-month periods ended
September 30, 2001 totaled $14.9 million and $45.7 million, respectively, a
decrease of $0.6 million and $4.0 million, respectively, over the same periods
in 2000. The three-month decrease is due to $1.5 million from reductions in
lease revenue due to foreclosures, bankruptcies and restructurings. This
decrease is offset by

$0.3 million relating to contractual increases in rents that became effective in
2001 and $0.2 million relating to assets previously classified as owned and
operated. The nine-month decrease is due to $3.8 million from reductions in
lease revenue due to foreclosures, bankruptcies and restructurings, and
$1.8 million from reduced investments resulting from the sale of assets in 2000.
These decreases are offset by $0.9 million relating to contractual increases in
rents that became effective in 2001 as defined under the related agreements and
$0.2 million relating to assets previously classified as owned and operated.

Mortgage interest income for the three-month and nine-month periods ended
September 30, 2001 totaled $5.1 million and $16.3 million, respectively,
decreasing $0.8 million and $1.5 million, respectively, from the same periods in
2000. The three-month decrease is due to reduced investments resulting from the
payoff of mortgage notes. The nine-month decrease is due to reductions from
foreclosures, bankruptcies and restructurings ($0.5 million) and reduced
investments resulting from the payoffs of mortgage notes ($1.2 million). These
decreases are partially offset by contractual increases in interest income that
became effective in 2001 as defined under the related agreements.

Nursing home revenues of owned and operated assets for the three-month and
nine-month periods ended September 30, 2001 totaled $43.8 million and
$133.6 million, respectively, decreasing $2.1 million and increasing
$10.2 million, respectively, over the same periods in 2000. The decrease for the
three-month period is due to a decreased number of operated facilities versus
the same three-month period in 2000 as a result of the closure of certain
facilities and their reclassification to assets held for sale as well as the
re-lease of three facilities during 2001 to a new operator. The increase in the
nine-month period is primarily due to the inclusion of 30 facilities formerly
operated by RainTree Healthcare Corporation for the full nine-month period ended
September 30, 2001 versus seven months during the nine-month period ended
September 30, 2000.

Expenses for the three-month and nine-month periods ended September 30, 2001
totaled $67.4 million and $215.0 million, respectively, decreasing approximately
$65.6 million and $38.0 million, respectively, over expenses of $133.0 million
and $253.0 million for the three-month and nine-month periods ended
September 30, 2000.

Nursing home expenses for owned and operated assets for the three-month
period and nine-month periods ended September 30, 2001 decreased by
$4.1 million and increased by $8.1 million, respectively, from $48.6 million and
$126.4 million for same periods in 2000. The decrease in the three-month period
is due to a decreased number of facilities versus the same three-month period in
2000 as a result of the closure of certain facilities and their reclassification
to assets held for sale as well as the re-lease of three facilities during 2001
to a new operator. The increase in the nine-month period is primarily due to the
inclusion of 30 facilities formerly operated by RainTree Healthcare Corporation
for the full nine-month period ended September 30, 2001 versus seven months
during the three-month period ended September 30, 2000.

The provision for depreciation and amortization totaled $5.5 million and
$16.6 million, respectively, during the three-month and nine-month periods ended
September 30, 2001. This is a decrease of $0.1 million and $0.8 million,
respectively, over the same periods in 2000. The decrease is primarily due to
assets sold in 2000, lower depreciable values due to impairment charges on owned
and operated properties and a reduction in the amortization of goodwill and
non-compete agreements.

Interest expense for the three-month and nine-month periods ended
September 30, 2001 was approximately $9.1 million and $28.0 million, compared
with $9.8 million and $32.2 million, respectively, for the same periods in 2000.
The decrease in 2001 is primarily due to lower average outstanding borrowings
during the 2001 period, partially offset by slightly higher average interest
rates due to increased rate spreads under our credit facilities versus last
year.

General and administrative expenses for the three-month and nine-month
periods ended September 30, 2001 totaled $2.2 million and $7.7 million,
respectively, as compared to $1.8 million and $4.6 million, respectively, for
the same periods in 2000, an increase of $0.4 million and $3.1 million. The
increase is due primarily to consulting costs related to the efforts associated
with the business objective of re-leasing our owned and operated assets,
restructuring activities and other non-recurring expenses including executive
recruiting fees.

Legal expenses for the three-month and nine-month periods ended
September 30, 2001 totaled $1.1 million and $2.9 million, respectively, an
increase of $0.7 million and $1.9 million, respectively, over the same periods
in 2000. The increase is largely attributable to legal costs associated with the
foreclosure of assets and other negotiations with our troubled operators as well
as the defense of various lawsuits to which we are party.

The nine-month period ended September 30, 2001 included a $10 million
litigation settlement expense related to a suit brought against us by Karrington
Health, Inc. which was recorded in the quarter ended June 30, 2001.

Expenses for the nine-month period ended September 30, 2001 included a
provision for impairment of $8.4 million. This provision was recorded to reduce
the cost basis of assets recovered from a defaulting operator to their fair
value less costs of disposal, since these assets are being marketed for sale. A
provision for impairment of $54.3 million was recognized in the 2000 period,
including $41.1 million related to foreclosure assets operated for our own
account, $11.3 million related to assets held for sale and $1.9 million related
to a leased asset doubtful of recovery.

Charges totalling $0.7 million for provision for uncollectible accounts were
taken during the nine-month period ended September 30, 2001 relating to
write-off of rents due from and funds advanced to the defaulting operator. A
provision for uncollectible accounts of $12.1 million was recognized in the 2000
periods, including a provision for loss on mortgages of $4.9 million and notes
receivable of $7.2 million.

Severance, moving and consulting agreement costs of $4.3 million were
recorded in the three-month period ended September 30, 2001, in connection with
our planned relocation to Maryland. The nine-month period ended September 30,
2001 also includes $0.5 million related to the termination of an employment
contract with an officer of our company. Severance and consulting agreement
costs of $4.7 million were recognized during the same period in 2000.

We disposed of one healthcare facility during the three-month period ended
September 30, 2001, resulting in a loss on sale of $1.5 million. The loss on
sale of $0.9 million for the nine-month period ended September 30, 2001 includes
the gain on sale of $0.6 million from the sale of three healthcare facilities.
For the nine-month period ended September 30, 2000, a gain of $10.3 million was
recognized on the disposal of real estate. The net gain was comprised of a
$10.9 million gain on the sale of four facilities previously leased to Tenet
Healthsystem Philadelphia, Inc., offset by a loss of $0.6 million on the sale of
a healthcare facility.

Funds from operations for the three-month and nine-month periods ended
September 30, 2001 were $0.5 million and a deficit of $2.3 million,
respectively, an increase of approximately $15.7 million and a decrease of
$6.2 million, respectively, as compared to the deficit of $15.2 million and
positive $3.9 million for the same periods in 2000 due to factors mentioned
above. Diluted funds from operations amounts were a $3.1 million and
$5.5 million, respectively, for the three-month and nine-month periods ended
September 30, 2001, as compared to the deficit of $11.0 million and positive
$10.2 million for the same period in 2000 due to factors mentioned above. Funds
from operations is defined as net earnings available to common stockholders,
excluding any gains or losses from debt restructuring and the effects of asset
dispositions, plus depreciation and amortization associated with real estate
investments. We consider funds from operations to be one performance measure
which is

helpful to investors of real estate companies because, along with cash flows
from operating activities, financing activities and investing activities, it
provides investors an understanding of our ability to incur and service debt, to
make capital expenditures and to pay dividends to our stockholders. Funds from
operations in and of itself does not represent cash generated from operating
activities in accordance with generally accepted accounting principles and
therefore should not be considered an alternative to net earnings as an
indication of operating performance or to net cash flow from operating
activities as determined by generally accepted accounting principles as a
measure of liquidity and is not necessarily indicative of cash available to fund
cash needs.

RECENT DEVELOPMENTS

MARINER AND PROFESSIONAL HEALTHCARE SETTLEMENT. We have entered into a
comprehensive settlement with Mariner Post-Acute Network, Inc. resolving all
outstanding issues relating to our loan to Professional Healthcare
Management Inc., a subsidiary of Mariner. Pursuant to the settlement, the
Professional Healthcare loan is secured by a first mortgage on 12 skilled
nursing facilities owned by Professional Healthcare with 1,668 operating beds.
Professional Healthcare will remain obligated on the total outstanding loan
balance as of January 18, 2000, the date Mariner filed for protection under
Chapter 11 of the Bankruptcy Act, and is to pay us our accrued interest at a
rate of approximately 11% for the period from the filing date until
September 1, 2001. Monthly payments with interest at the rate of 11.57% per
annum resumed October 1, 2001. The settlement agreement was approved by the
United States Bankruptcy Court in Wilmington, Delaware on August 22, 2001, and
became effective as of September 1, 2001.

On February 1, 2001, four Michigan facilities, previously operated by
Professional Healthcare and subject to our pre-petition mortgage, were
transferred by Professional Healthcare to a new operator who paid for the
facilities by execution of a promissory note that has been assigned to us.
Professional Healthcare was given a $4.5 million credit on February 1, 2001 and
an additional $3.5 million credit as of September 1, 2001, both against the
Professional Healthcare loan balance in exchange for the assignment of the
promissory note to us. The promissory note is secured by a first mortgage on the
four facilities.

Following the closing under the settlement agreement, the outstanding
principal balance on the Professional Healthcare loan is approximately
$59,700,000. The Professional Healthcare loan term will be ten years with
Professional Healthcare having the option to extend for an additional ten years.
Professional Healthcare will also have the option to prepay the Professional
Healthcare loan between February 1, 2005 and July 31, 2005.

ALTERRA AND LYRIC. We have a master lease with Alterra relating to ten
assisted living facilities representing an investment of $34.1 million which
provides for annual rental payments of $3.6 million. Alterra did not make their
March through June 2001 rent payments. $100,000 was paid in July 2001 and in
August 2001. $185,097 was paid in September 2001 and October 2001. All
shortfalls were funded out of security deposits. The balance of the security
deposit on October 26, 2001 was $1,068,396. Discussions with Alterra are
ongoing.

During the first quarter of 2001, pursuant to a forbearance agreement
between us and Lyric through August 31, 2001, we began receiving 60% of the
approximately $860,000 of monthly rent due under the Lyric leases. Lyric
continues to pay at the reduced rate although there is currently no forbearance
agreement in effect. Discussions are continuing with Lyric to reach a permanent
restructuring agreement. Our total original investment in the ten nursing homes
covered under the leases is $95.4 million, and annual rent is $10.3 million.

In several instances we hold security deposits that can be applied in the
event of lease and loan defaults, subject to applicable limitations under
bankruptcy law with respect to operators seeking protection under Chapter 11 of
the Bankruptcy Act.

OFFICE RELOCATION. We are relocating our corporate offices effective as of
January 1, 2002 and have entered into a lease of office space in Timonium,
Maryland, a suburb of Baltimore. All of our current employees either have an
employment agreement or are otherwise entitled to incentives if they remain
employed with us in their current positions during the transitional period
expected to be completed by January 31, 2002.

LIQUIDITY AND CAPITAL RESOURCES

On July 17, 2000, we replaced our $200 million unsecured revolving credit
facility with a new $175 million secured revolving credit facility that expires
on December 31, 2002. Borrowings under this facility bear interest based on the
London Interbank Offered Rate, or LIBOR, plus a margin based on our consolidated
debt/EBITDA ratio, which resulted in a weighted-average rate of 6.73% at
September 30, 2001, and 10.00% at December 31, 2000. Borrowings under our prior
credit facility bore interest at a weighted-average rate of 7.30% at December
31, 1999. Investments with a gross book value of approximately $240 million are
pledged as collateral for this credit facility.

On August 16, 2000, we replaced our $50 million secured revolving credit
facility with a new $75 million secured revolving credit facility that expires
on March 31, 2002 as to $10 million and June 30, 2005 as to $65 million.
Borrowings under this facility bear interest based on LIBOR plus a margin based
on our consolidated debt/EBITDA ratio, which resulted in a weighted average rate
of 8.06% at September 30, 2001, and 9.77% at December 31, 2000. Borrowings under
our prior credit facility bore interest at a weighted average rate of 8.44% at
December 31, 1999. Investments with a gross book value of approximately
$90 million are pledged as collateral for this credit facility.

At September 30, 2001, we had total assets of $911.3 million, stockholders'
equity of $456.7 million, and long-term debt of $426.0 million, representing
approximately 46.7% of total capitalization.

The settlement of the lawsuit with Karrington Health, Inc. in August 2001
fixed the amount of expense associated with this claim against us at
$10 million and was therefore recorded at June 30, 2001. The recognition of this
non-recurring expense has resulted in certain violations of financial covenants
contained in the loan agreements relating to our revolving credit facilities. We
previously obtained a waiver from the lenders under our two revolving credit
facilities through September 14, 2001. The lenders under our $175 million
secured credit facility have extended this waiver through December 13, 2001. The
waiver granted by the lenders under our $75 million secured credit facility has
expired and discussions with the lenders are continuing. We have not received
any notice of default or acceleration of the outstanding balance under that
facility. These covenant violations prevent us from drawing upon the remaining
availability under these credit facilities until such time as a permanent
resolution is attained.

As of the date of this prospectus, we had $14.5 million available under our
secured revolving credit facilities if we were in compliance with the applicable
financial covenants in the loan documents. Some of the assets that served as
collateral for one of the credit facilities were recovered from a customer
during the quarter. These assets are no longer eligible to serve as collateral,
resulting in reduced availability under the credit facility even if we could
borrow. We have the ability to replace this collateral and increase the
availability under the line by up to an additional $18.0 million subject to
compliance with the applicable financial covenants.

As of September 30, 2001, we had an aggregate of $238.6 million of
outstanding debt which matures in 2002, including $99.6 million of 6.95% Notes
due June 2002 and $139 million on our two credit facilities maturing during
2002.

In prior years, we historically distributed to stockholders a large portion
of the cash available from operations. Our historical policy has been to make
distributions on common stock of approximately 80% of funds from operations, but
on February 1, 2001, we announced the suspension of all common and preferred
dividends. This action is intended to preserve cash to facilitate our ability to
obtain financing to fund the 2002 debt maturities. Additionally, on March 30,
2001, we exercised our option to pay the accrued $4,666,667 Series C preferred
stock dividend from November 15, 2000 and the associated waiver fee by issuing
48,420 Series C preferred shares to Explorer on April 2, 2001, which are
convertible into 774,722 shares of our common stock at $6.25 per share.

Cash dividends paid totaled $1.00 per common share for 2000, compared with
$2.80 per common share for the year ended December 31, 1999. The dividend payout
ratio, that is the ratio of per common share amounts for dividends paid to the
diluted per common share amounts of funds from operations, was approximately
238% for 2000 and 84.3% for 1999. Excluding the provision for loss on mortgages
and notes receivable and severance and consulting agreement costs, the dividend
payout ratio for 2000 was approximately 73.0%. Cash dividends paid totaled $0.25
per common share and $0.75 per common share for the three-month period ended
March 31, 2000. No common dividends were paid during the first and second
quarters of 2001 nor during the second quarter of 2000.

We do not know when or if we will resume dividend payments on our common
stock or, if resumed, what the amount or timing of any dividend will be. We do
not anticipate paying dividends on any class of capital stock at least until our
$108 million of debt maturing in the first half of 2002 has been repaid and, in
any event, all accrued and unpaid dividends on our Series A, B and C preferred
stock must be paid in full before dividends on our common stock can be resumed.
We have made sufficient distributions to satisfy the distribution requirements
under the REIT rules to maintain our REIT status for 2000 and expect to satisfy
the requirements under the REIT rules for 2001.

The table below sets forth information regarding arrearages in payment of
preferred stock dividends:

ANNUAL ARREARAGE AS OF
DIVIDEND PER SEPTEMBER 30,
TITLE OF CLASS SHARE 2001
-------------- ------------ ---------------

9.25% Series A Cumulative Preferred Stock.................. $ 2.3125 $ 3,989,063
8.625% Series B Cumulative Preferred Stock................. $ 2.1563 3,234,375
Series C Convertible Preferred Stock....................... $10.0000 7,660,493
-----------
Total.................................................. $14,883,931
===========

We have entered into an investment agreement with Explorer under which
Explorer has committed to purchase, on the closing of the rights offering, at
the same price per share available in the rights offering, shares of our stock.
The shares that Explorer has committed to purchase represent its pro rata
portion of the $50 million in additional capital we are seeking to raise, plus
an additional amount equal to the aggregate subscription price for the shares
that are not subscribed for in the rights offering. As a result of Explorer's
commitment, we are assured of receiving a total of $50 million in gross proceeds
from the rights offering and Explorer's investment assuming they are both
completed.

Assuming we obtain the amendments we are seeking to our credit facilities on
satisfactory terms and that we complete the rights offering and Explorer's
investment, management believes our liquidity and various sources of available
capital, including funds from operations and expected proceeds from planned
asset sales, are adequate to finance operations, meet recurring debt service
requirements and fund future investments through the next 12 months. As a result
of the ongoing financial challenges facing long-term care operators, the
availability of the external capital sources historically used by us

has become extremely limited and expensive, and, therefore, no assurance can be
given that we will be able to replace or extend our debt maturing in 2002, or
that any refinancing or replacement financing would be on favorable terms to us.
There also can be no assurance that we will be able to complete the rights
offering and Explorer investment as planned, including the required modification
of our credit facilities. If we were unable to refinance this debt or other
indebtedness on acceptable terms, we might be forced to dispose of properties on
disadvantageous terms, which might result in losses to us and might adversely
affect the cash available for distribution to stockholders, or to pursue
additional dilutive equity financing. If interest rates or other factors at the
time of the refinancing result in higher interest rates upon refinancing, our
interest expense would increase, which might affect our ability to make
distributions to our stockholders.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

We are exposed to various market risks, including the potential loss arising
from adverse changes in interest rates. We do not enter into derivatives or
other financial instruments for trading or speculative purposes, but we seek to
mitigate the effects of fluctuations in interest rates by matching the term of
new investments with new long-term fixed rate borrowing to the extent possible.

The market value of our long-term fixed rate borrowings and mortgages are
subject to interest rate risks. Generally, the market value of fixed rate
financial instruments will decrease as interest rates rise and increase as
interest rates fall. The estimated fair value of our total long-term borrowings
at September 30, 2001 was $396 million. A one percent increase in interest rates
would result in a decrease in the fair value of long-term borrowings by
approximately $5.3 million.

We are subject to risks associated with debt or preferred equity financing,
including the risk that existing indebtedness may not be refinanced or that the
terms of such refinancing may not be as favorable as the terms of current
indebtedness. If we were unable to refinance our 2002 debt maturities or other
indebtedness on acceptable terms, we might be forced to dispose of properties on
disadvantageous terms, which might result in losses to us and might adversely
affect the cash available for distribution to stockholders, or to pursue
dilutive equity financing. If interest rates or other factors at the time of the
refinancing result in higher interest rates upon refinancing, our interest
expense would increase, which might affect our ability to make distributions to
our stockholders.

We utilize interest rate swaps to fix interest rates on variable rate debt
and reduce certain exposures to interest rate fluctuations. At September 30,
2001, we had two interest rate swaps with notional amounts of $32 million each,
based on 30-day LIBOR. Under the first $32 million agreement, we receive
payments when LIBOR interest rates exceed 6.35% and pay the counterparties when
LIBOR rates are under 6.35%. The amounts exchanged are based on the notional
amounts. The $32 million agreement expires in December 2001 but may be extended
for an additional year by the counterparty.

Under the terms of the second agreement, which expires in December 2002, we
receive payments when LIBOR rates exceed 4.89% and pay the counterparties when
LIBOR rates are under 4.89%. The combined fair value of the interest rate swaps
at September 30, 2001 was a deficit of $2,006,297.

BUSINESS

OVERVIEW

We were incorporated in the State of Maryland on March 31, 1992. We are a
self-administered real estate investment trust, or REIT, investing in
income-producing healthcare facilities, principally long-term care facilities
located in the United States. We provide lease or mortgage financing to
qualified operators of skilled nursing facilities and, to a lesser extent,
assisted living and acute care facilities. We have historically financed
investments through borrowings under our revolving credit facilities, private
placements or public offerings of debt or equity securities, the assumption of
secured indebtedness, or a combination of these methods. We also finance
acquisitions through the exchange of properties or the issuance of shares of our
capital stock when the transactions otherwise satisfy our investment criteria.

As of September 30, 2001, our portfolio of domestic investments consisted of
246 healthcare facilities, located in 29 states and operated by 32 third-party
operators. Our gross investments in these facilities totaled $887.2 million at
September 30, 2001. This portfolio is made up of:

- 129 long-term healthcare facilities and two rehabilitation hospitals owned
and leased to third parties;

- fixed rate, participating and convertible participating mortgages on 55
long-term healthcare facilities; and

- 48 long-term healthcare facilities that were recovered from customers and
are currently operated through third-party management contracts for our
own account.

In addition, we have 12 facilities subject to third-party leasehold
interests. We also hold miscellaneous investments and closed healthcare
facilities held for sale of approximately $55.2 million at September 30, 2001,
including $22.3 million related to two non-healthcare facilities leased by the
United States Postal Service, a $7.7 million investment in Omega Worldwide,
Principal Healthcare Finance Limited, and Principal Healthcare Finance Trust,
and $14.3 million of notes receivable.

The following tables summarize our net revenues and real estate assets by
asset category for 2000, 1999 and 1998, setting forth the effect of the results
of operations of property recovered as a result of foreclosure and settlements
with troubled operators that are held for sale or operated on an interim basis
for our own account until such time as the properties are sold or re-leased.
Historical information for 1999 and 1998 is reclassified, for comparative
purposes, to the presentation for 2000.

NET REVENUES BY ASSET CATEGORY
(IN THOUSANDS)

YEARS ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------

Core Assets:
Lease Rental Income....................................... $67,308 $ 76,389 $ 72,072
Mortgage Interest Income.................................. 24,126 36,369 30,399
------- -------- --------
Total Core Asset Revenues............................. 91,434 112,758 102,471
Owned and Operated Assets Net Revenue (Loss)................ (3,416) 1,050 --
Other Asset Revenue......................................... 6,594 6,814 5,971
Miscellaneous Income........................................ 2,206 2,334 872
------- -------- --------
Total Net Revenue..................................... $96,818 $122,956 $109,314
======= ======== ========

REAL ESTATE ASSETS BY ASSET CATEGORY
(IN THOUSANDS)

AS OF DECEMBER 31,
----------------------------------
2000 1999 1998
-------- ---------- ----------

Core Assets:
Leased Assets............................................ $579,941 $ 686,105 $ 643,378
Mortgaged Assets......................................... 206,710 213,617 340,455
-------- ---------- ----------
Total Core Assets.................................... 786,651 899,722 983,833
Owned and Operated and Held for Sale Assets................ 134,614 97,216 35,289
Other Assets............................................... 53,242 75,460 41,753
-------- ---------- ----------
Total Real Estate Assets................................... $974,507 $1,072,398 $1,060,875
======== ========== ==========

INVESTMENT STRATEGIES

INVESTMENT POLICIES We maintain a diversified portfolio of long-term
healthcare facilities and mortgages on healthcare facilities located in the
United States. In making investments, we generally have focused on established,
creditworthy, middle-market healthcare operators that meet our standards for
quality and experience of management. We have sought to diversify our
investments in terms of geographic locations, operators and facility types. As a
consequence of our current financial condition and upcoming debt maturities, we
have not recently made investments and do not intend to make investments unless
and until we address our $108 million of debt maturing in the first half of
2002.

In evaluating potential investments, we consider such factors as:

- the quality and experience of management and the credit worthiness of the
operator of the facility;

- the facility's historical, current and forecasted cash flow and its
adequacy to meet operational needs, capital expenditures and lease or debt
service obligations, providing a competitive return on investment to us;

- the construction quality, condition and design of the facility;

- the geographic area and type of facility;

- the tax, growth, regulatory and reimbursement environment of the community
in which the facility is located;

- the occupancy and demand for similar healthcare facilities in the same or
nearby communities; and

- the payor mix of private, Medicare and Medicaid patients.

One of our fundamental investment strategies is to obtain contractual rent
escalations under long-term, non-cancelable, "triple-net" leases and revenue
participation through participating mortgage loans, and to obtain substantial
liquidity deposits. Additional security is typically provided by covenants
regarding minimum working capital and net worth, liens on accounts receivable
and other operating assets, and various provisions for cross-default,
cross-collateralization and corporate/personal guarantees, when appropriate.

We prefer to invest in equity ownership of properties. Due to regulatory,
tax or other considerations, we sometimes pursue alternative investment
structures, including convertible participating and participating mortgages,
that achieve returns comparable to equity investments. The following summarizes
the four primary investment structures currently used by us. Average annualized
yields reflect existing contractual arrangements and an estimate of restructured
arrangements for one of

our troubled operators. However, in view of the ongoing financial challenges in
the long-term care industry, we cannot assure you that the operators of our
facilities will meet their payment obligations in full or when due. Certain
operators have recently indicated to us that they intend to delay or reduce the
payment of their contractual obligations to us, and therefore the annualized
yields as of January 1, 2001 set forth below are not necessarily indicative of
or a forecast of actual yields, which may be lower.

PURCHASE/LEASEBACK. In a Purchase/Leaseback transaction, we purchase the
property from the operator and lease it back to the operator over terms
ranging from 8 to 17 years, plus renewal options. The leases originated
by us generally provide for minimum annual rentals which are subject to
annual formula increases based upon such factors as increases in the
consumer price index, or CPI, or increases in the revenue streams
generated by the underlying properties, with certain fixed minimum and
maximum levels. Generally, the operator holds an option to repurchase the
property at set dates at prices based on specified formulas. The average
annualized yield from leases was 11.19% at January 1, 2001.

CONVERTIBLE PARTICIPATING MORTGAGE. Convertible participating mortgages
are secured by first mortgage liens on the underlying real estate and
personal property of the mortgagor. Interest rates are usually subject to
annual increases based upon increases in the consumer price index or
increases in the revenues generated by the underlying long-term care
facilities, with certain maximum limits. Convertible participating
mortgages afford us the option to convert our mortgage into direct
ownership of the property, generally at a point six to nine years from
inception. If we exercise our purchase option, we are obligated to lease
the property back to the operator for the balance of the originally
agreed term and for the originally agreed participations in revenues or
consumer price index adjustments. This allows us to capture a portion of
the potential appreciation in value of the real estate. The operator has
the right to buy out our option at prices based on specified formulas.
The average annualized yield on these mortgages was approximately 12.99%
at January 1, 2001.

PARTICIPATING MORTGAGE. Participating mortgages are similar to
convertible participating mortgages except that we do not have a purchase
option. Interest rates are usually subject to annual increases based upon
increases in the consumer price index or increases in revenues of the
underlying long-term care facilities, with certain maximum limits. The
average annualized yield on these investments was approximately 13.26% at
January 1, 2001.

FIXED-RATE MORTGAGE. These mortgages have a fixed interest rate for the
mortgage term and are secured by first mortgage liens on the underlying
real estate and personal property of the mortgagor. The average
annualized yield on these investments was 11.20% at January 1, 2001.

The following table identifies the years of expiration of the payment
obligations due to us under existing contractual obligations as of January 1,
2001, or in the case of one of our troubled operators, under an estimated
restructured arrangement. This information is provided solely to indicate the
scheduled expiration of payment obligations due to us, and is not a forecast of
expected revenues.

MORTGAGE
RENT INTEREST TOTAL %
-------- -------- -------- --------
(IN THOUSANDS)

2001..................................................... $ -- $ 1,746 $ 1,746 1.92%
2002..................................................... 215 15 230 0.25
2003..................................................... 1,128 4,049 5,177 5.69
2004..................................................... 1,263 572 1,835 2.02
2005..................................................... 805 588 1,393 1.53
Thereafter............................................... 61,476 19,117 80,593 88.59
------- ------- ------- ------
Total.............................................. $64,887 $26,087 $90,974 100.00%
======= ======= ======= ======

BORROWING POLICIES. We may incur additional indebtedness and have
historically sought to maintain a long-term debt-to-total capitalization ratio
in the range of 40% to 50%. Total capitalization is total stockholders equity
plus long-term debt. We intend to review periodically our policy with respect to
our debt-to-total capitalization ratio and to modify the policy as our
management deems prudent in light of prevailing market conditions. Our strategy
generally has been to match the maturity of our indebtedness with the maturity
of our investment assets, and to employ long-term, fixed-rate debt to the extent
practicable in view of market conditions in existence from time to time.

We may use proceeds of any additional indebtedness to provide permanent
financing for investments in additional healthcare facilities. We may obtain
either secured or unsecured indebtedness, and may obtain indebtedness which may
be convertible into capital stock or be accompanied by warrants to purchase
capital stock. Where debt financing is present on terms deemed favorable, we
generally may invest in properties subject to existing loans, secured by
mortgages, deeds of trust or similar liens on properties.

Industry turmoil and continuing adverse economic conditions have caused the
terms on which we can obtain additional borrowings to become unfavorable. If we
need capital to repay indebtedness as it matures, we may be required to
liquidate investments in properties at times which may not permit realization of
the maximum recovery on these investments. This also could result in adverse tax
consequences to us. We may also be required to issue additional equity interests
in our company, which could dilute your investment in our company.

FEDERAL INCOME TAX CONSIDERATIONS. We intend to make and manage our
investments, including the sale or disposition of property or other investments,
and to operate in such a manner as to be consistent with the requirements of the
Internal Revenue Code to qualify as a REIT, unless, because of changes in
circumstances or changes in the Internal Revenue Code, our Board of Directors
determines that it is no longer in our best interest to qualify as a REIT. As a
REIT, we generally will not pay federal income taxes on the portion of our
income which is distributed to stockholders, although income earned from
foreclosure property, the owned and operated assets, after deducting
depreciation expense, is subject to corporate level taxation.

PROPERTIES

At September 30, 2001, our real estate investments include long-term care
facilities and rehabilitation hospital investments, either in the form of
purchased facilities which are leased to operators, mortgages on facilities
which are operated by the mortgagors or their affiliates and facilities owned
and operated for our account, including facilities subject to leasehold
interests. The facilities are located in 29 states and are operated by 32
unaffiliated operators. The following table summarizes our property investments
as of September 30, 2001:

GROSS
NO. OF NO. OF OCCUPANCY INVESTMENT
INVESTMENT STRUCTURE/OPERATOR BEDS/UNITS FACILITIES PERCENTAGE(1) (IN THOUSANDS)
----------------------------- ---------- ---------- ------------- --------------

PURCHASE/LEASEBACK
Sun Healthcare Group, Inc..................... 5,408 50 88 $218,985
Integrated Health Services, Inc............... 1,573 11 81 105,400
Advocat, Inc.................................. 3,055 29 78 89,647
Alterra Healthcare Corporation................ 361* 10 75 34,085
Alden Management Services, Inc................ 868 4 62 31,306
Roncalli Health Center........................ 312 3 95 22,163
USA Healthcare, Inc........................... 668 8 76 17,213
Washington N&R, LLC........................... 286 2 87 12,152
Peak Medical of Idaho, Inc.................... 224 2 76 10,500
HQM of Floyd County, Inc...................... 283 3 96 10,250

Safe Harbor Florida Healthcare Properties,
Inc......................................... 300 1 85 8,151
Liberty Assisted Living Centers, LP........... 120 1 88 5,995
Meadowbrook Healthcare of N.C................. 192 2 75 5,561
Eldorado Care Center, Inc. & Magnolia
Manor, Inc.................................. 167 2 59 5,100
Lamar Healthcare, Inc......................... 102 1 49 2,540
Kansas & Missouri, Inc........................ 102 1 75 2,500
Lakeland Diversified.......................... 118 1 62 80
------ --- -- --------
14,139 131 81 581,628
OWNED AND OPERATED ASSETS--FEE
Kindred Healthcare, Inc....................... 1,436 14 80 48,495
Genesis Health Ventures, Inc.................. 767 7 86 25,062
Atrium Living Centers, Inc.................... 1,049 22 78 21,721
Pinon Management, Inc......................... 181 3 85 14,287
Nexion Health Management, Inc................. 197 2 81 6,437
------ --- -- --------
3,630 48 81 116,002
OWNED AND OPERATED ASSETS--LEASEHOLD INTEREST
Kindred Healthcare, Inc....................... 896 10 69 1,761
Pinon Management, Inc......................... 175 2 72 358
------ --- -- --------
1,071 12 70 2,119
CONVERTIBLE PARTICIPATING MORTGAGES
Senior Care Properties, Inc................... 150 2 59 6,184
Integrated Health Services, Inc............... 180 1 62 4,903
------ --- -- --------
330 3 60 11,087
PARTICIPATING MORTGAGES
Mariner Post-Acute Network, Inc............... 1,679 12 90 59,688
Integrated Health Services, Inc............... 1,144 9 91 49,500
Midtown Real Estate Company, LLC.............. 552 4 61 8,900
Advocat, Inc.................................. 120 1 57 2,000
------ --- -- --------
3,495 26 84 102,088
FIXED RATE MORTGAGES
Essex Healthcare Corporation.................. 633 6 70 15,821
Advocat, Inc.................................. 423 4 73 14,785
Parthenon Healthcare, Inc..................... 300 2 83 11,003
Texas Health Enterprises/HEA Mgmt. Group,
Inc......................................... 594 4 57 5,557
Tiffany Care Centers, Inc..................... 319 5 79 4,892
Covenant Care, Inc............................ 150 1 50 1,922
Rocky Mountain Health Care.................... 100 1 50 1,851
BNS, Inc...................................... 80 1 93 1,515
Integrated Health Services, Inc............... 164 2 84 1,080
------ --- -- --------
2,763 26 70 58,426
------ --- -- --------
Total..................................... 25,428 246 80 $889,350
====== === == ========

------------------------
(1) Generally represents data for the twelve-month period ending June 30, 2001.

* Represents Assisted Living Units. Occupancy percentage for these facilities
excludes 216 units that are in fill-up.

The following table presents the concentration of our facilities by state as
of September 30, 2001:

NUMBER TOTAL % OF
OF TOTAL INVESTMENT TOTAL
FACILITIES BEDS/UNITS(1) (IN THOUSANDS) INVESTMENT
---------- ------------- -------------- ----------

Florida........................................ 29 3,439 $142,544 16.0%
California..................................... 19 1,545 66,922 7.5
Illinois....................................... 13 1,732 66,386 7.5
Ohio........................................... 11 1,282 55,887 6.3
Michigan....................................... 13 1,784 50,909 5.7
Texas.......................................... 16 1,976 50,273 5.7
North Carolina................................. 10 1,346 45,950 5.2
Indiana........................................ 32 1,806 41,105 4.6
Arkansas....................................... 12 1,281 39,325 4.4
Alabama........................................ 12 1,431 36,362 4.1
Massachusetts.................................. 7 772 33,153 3.7
West Virginia.................................. 7 734 30,579 3.4
Kentucky....................................... 7 757 26,963 3.0
Connecticut.................................... 4 442 22,373 2.5
Washington..................................... 3 354 21,574 2.4
Tennessee...................................... 6 636 21,553 2.4
Iowa........................................... 10 898 20,650 2.3
Pennsylvania................................... 2 413 19,900 2.2
Arizona........................................ 8 894 18,150 2.0
Colorado....................................... 6 393 17,228 1.9
Missouri....................................... 7 605 17,044 1.9
Georgia........................................ 2 304 12,000 1.4
Idaho.......................................... 3 264 11,100 1.3
Kansas......................................... 2 136 5,919 0.7
New Hampshire.................................. 1 68 5,800 0.7
Louisiana...................................... 1 131 4,603 0.5
Oklahoma....................................... 1 32 3,178 0.4
Utah........................................... 1 100 1,851 0.2
Nevada......................................... 1 73 71 --
--- ------ -------- ----
Total...................................... 246 25,428 $889,350 100%
=== ====== ======== ====

------------------------
(1) Beds include a total of 361 assisted living units.

EMPLOYEES

As of September 30, 2001, we had 29 full-time employees and 5 part-time
employees. On October 9, 2001, we announced that we are relocating our corporate
offices effective as of January 1, 2002 to Timonium, Maryland, a suburb of
Baltimore. All of our current employees either have an employment agreement or
are otherwise entitled to incentives if they remain employed with us in their
current positions during the transitional period expected to be completed by
January 31, 2002.

LEGAL PROCEEDINGS

We are subject to various legal proceedings, claims and other actions
arising out of the normal course of business. While any legal proceeding or
claim has an element of uncertainty, we believe that the outcome of each lawsuit
claim or legal proceeding that is pending or threatened, or all of them
combined, will not have a material adverse effect on our consolidated financial
position or results of operations.

On June 21, 2000, we were named as a defendant in certain litigation brought
against us by Madison/OHI Liquidity Investors, LLC, a customer that claims that
we have breached and/or anticipatorily breached a commercial contract.
Ronald M. Dickerman and Bryan Gordon are partners

in Madison and limited guarantors of Madison's obligations to us. Madison claims
damages as a result of the alleged breach of approximately $700,000. Madison
seeks damages as a result of the claimed anticipatory breach in the amount of
$15 million or, in the alternative, Madison seeks specific performance of the
contract as modified by a course of conduct that Madison alleges developed
between Madison and us. We contend that Madison is in default under the contract
in question. We believe that the litigation is meritless. We continue to
vigorously defend the case and have filed counterclaims against Madison and the
guarantors, seeking repayment of approximately $9.4 million, excluding default
interest, that Madison owes us. Our Motion for Summary Judgment seeking
dismissal of Madison's anticipatory breach claim is scheduled for November 19,
2001. The trial in this matter is set for February 2002.

On December 29, 1998, Karrington Health, Inc. brought suit against us in the
Franklin County, Ohio, Common Pleas Court (subsequently removed to the U.S.
District Court for the Southern District of Ohio, Eastern Division) alleging
that we repudiated and ultimately breached a financing contract to provide
$95 million of financing for the development of 13 assisted living facilities.
Karrington was seeking recovery of approximately $34 million in damages it
alleged to have incurred as a result of the breach. On August 13, 2001, we paid
Karrington $10 million to settle all claims arising from the suit, but without
our admission of any liability or fault, which liability is expressly denied.
Based on the settlement, the suit has been dismissed with prejudice. The
settlement was recorded in the quarter ended June 30, 2001.

MANAGEMENT

Under the terms of our Articles of Restatement, our Board of Directors is
classified into three classes. Each class of directors serves for a terms of
three years, with one class being elected each year. As of the date of this
prospectus, there are nine directors, with three directors in each class.

Our directors and executive officers are listed below.

NAME AGE POSITION
---- -------- --------

C. Taylor Pickett......................... 39 Chief Executive Officer
Robert O. Stephenson...................... 37 Chief Financial Officer
Daniel J. Booth........................... 38 Chief Operating Officer
R. Lee Crabill, Jr........................ 48 Vice-President of Operations
Daniel A. Decker(1)....................... 48 Director, Chairman of the Board
Thomas W. Erickson(1)..................... 50 Director
Thomas F. Franke.......................... 71 Director
Harold J. Kloosterman..................... 59 Director
Bernard J. Korman......................... 70 Director
Edward Lowenthal.......................... 56 Director
Christopher W. Mahowald(1)................ 40 Director
Donald J. McNamara(1)..................... 48 Director
Stephen D. Plavin(2)...................... 42 Director

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

(1) Designated by Explorer pursuant to our stockholders agreement with Explorer.

(2) Independent Director designated pursuant to our stockholders agreement with
Explorer.

C. TAYLOR PICKETT is the Chief Executive Officer and has served in this
capacity since June 12, 2001. Prior to joining our company, Mr. Pickett served
as the Executive Vice President and Chief Financial Officer of Integrated Health
Services, Inc., a public company specializing in post-acute healthcare services.
He also served as Executive Vice President of mergers and acquisitions of
Integrated Health Services. Prior to his roles as Chief Financial Officer and
Executive Vice President of mergers and acquisitions, Mr. Pickett served as the
President of Symphony Health Services, Inc.

ROBERT O. STEPHENSON is the Chief Financial Officer and has served in this
capacity since August 1, 2001. Prior to joining our Company, Mr. Stephenson
served for five years as the Senior Vice President and Treasurer of Integrated
Health Services, Inc., a public company specializing in post-acute healthcare
services. Prior to Integrated Health Services, Mr. Stephenson served in
management roles at CSX Intermodal, Martin Marietta Corporation and Electronic
Data Systems.

DANIEL J. BOOTH is the Chief Operating Officer and has served in this
capacity since October 15, 2001. Prior to joining our company, Mr. Booth served
as Senior Vice President, Finance, of Integrated Health Services, Inc. since
1993. Prior to joining Integrated Health Services, Mr. Booth was Vice President
in the Healthcare Lending Division of Maryland National Bank (now Bank America).

R. LEE CRABILL, JR. is the Senior Vice-President of Operations of our
Company and has served in this capacity since July 2001. Mr. Crabill served as a
Senior Vice-President of Operations at Mariner Post-Acute Network from 1997
through 2000. Prior to that, he served as an Executive Vice-President of
Operations at Beverly Enterprises.

DANIEL A. DECKER is Chairman of the Board and has served in this capacity
since October 2000. Mr. Decker also served as Executive Chairman from
March 2001 until June 12, 2001 when Mr. Pickett joined us as Chief Executive
Officer. Mr. Decker has been a member of The Hampstead Group, L.L.C., a
privately-held equity investment firm based in Dallas, Texas, since 1990.
Mr. Decker currently serves as a director of Malibu Entertainment International
Inc. Mr. Decker has previously served on

the boards of Bristol Hotel Company (NYSE), Wyndham Hotel Company (NYSE) and the
Forum Group (NASDAQ).

THOMAS W. ERICKSON is a Director since 2000 and served in this capacity as
Interim Chief Executive Officer from October 1, 2000 until June 12, 2001.
Mr. Erickson has served as President and Chief Executive Officer of CareSelect
Group, Inc., an operator of physician clinics, since 1994 and ECG
Ventures, Inc., a healthcare venture capital firm, since 1987.

THOMAS F. FRANKE is a Director and has served in this capacity since 1992.
Mr. Franke is Chairman and principal owner of Cambridge Partners, Inc., an
owner, developer and manager of multifamily housing in Grand Rapids and Ann
Arbor, Michigan. He is also the principal owner of private healthcare firms
operating in the United States and the United Kingdom and is a principal owner
of a private hotel firm in the United Kingdom. Mr. Franke is a director of
Principal Healthcare Finance Limited and Omega Worldwide, Inc.

HAROLD J. KLOOSTERMAN is a Director and has served in this capacity since
1992. Mr. Kloosterman currently serves as President of Cambridge
Partners, Inc., a company he formed in 1985. He has been involved in the
development and management of commercial, apartment and condominium projects in
Grand Rapids and Ann Arbor, Michigan and in the Chicago area. Mr. Kloosterman
was formerly a Managing Director of Omega Capital from 1986 to 1992.
Mr. Kloosterman has been involved in the acquisition, development and management
of commercial and multifamily properties since 1978. He has also been a senior
officer of LaSalle Partners, Inc.

BERNARD J. KORMAN is a Director and has served in this capacity since 1993.
Mr. Korman is Chairman of the Board of Trustees of Philadelphia Health Care
Trust, a private healthcare foundation. He formerly was President, Chief
Executive Officer and Director of MEDIQ Incorporated (health care services) from
1977 to 1995. Mr. Korman also is a director of the following public companies:
The New America High Income Fund, Inc. (financial services), The Pep Boys, Inc.
(auto supplies), Kramont Realty Trust (real estate investment trust), NutraMax
Products, Inc. (consumer health care products), and Omega Worldwide, Inc.

EDWARD LOWENTHAL is a Director and has served in this capacity since 1995.
Mr. Lowenthal is President and Chief Executive Officer of Wellsford Real
Properties, Inc. (AMEX:WRP), a real estate Merchant bank, and was President of
the predecessor of Wellsford Real Properties, Inc. since 1986. Mr. Lowenthal
also serves as a director of United American Energy Corporation (a developer,
owner and operator of energy facilities), Corporate Renaissance Group, Inc. (a
mutual fund), Equity Residential Properties Trust, and Great Lakes REIT.

CHRISTOPHER W. MAHOWALD is a Director and has served in this capacity since
2000. Mr. Mahowald is President of EFO Realty where he is responsible for the
origination, analysis, structuring and execution of new investment activity and
asset management relating to EFO Realty's existing real estate assets.

DONALD J. MCNAMARA is a Director and has served in this capacity since 2000.
Mr. McNamara is the founder of The Hampstead Group, L.L.C., a privately-held
equity investment firm based in Dallas, Texas, and has served as its Chairman
since its inception in 1989. He currently serves as Chairman of the Board of
Directors of FelCor Lodging Trust (NYSE:FCH). Mr. McNamara also currently serves
as a trustee of Saint Mark's School, a trustee of the Virginia Tech Foundation,
and a member of the Urban Land Institute. Mr. McNamara is also a director of
Franklin Covey Co. (NYSE:FC)

STEPHEN D. PLAVIN is a Director and has served in this capacity since 2000.
Mr. Plavin is Chief Operating Officer of Capital Trust, Inc., a New York
City-based specialty finance and investment management company and has served in
this capacity since 1998. In this role, Mr. Plavin is responsible for all of the
lending, investing and portfolio management activities of Capital Trust, Inc.

RIGHT OF EXPLORER TO APPOINT DIRECTORS

Pursuant to the existing stockholders agreement executed in connection with
Explorer's investment in our Series C preferred stock in July 2000, Explorer is
entitled to designate up to four members of our Board of Directors depending on
the percentage of total voting securities (consisting of common stock and
Series C preferred stock) acquired from time to time by Explorer. Explorer is
entitled to designate at least one director as long as it owns at least five
(5%) percent of the total outstanding voting power and to approve one
"independent director" as long as it owns at least 25% of the shares it acquired
in July 2000, or common stock issued upon the conversion of the Series C
preferred stock acquired by Explorer at that time. The holders of the Series C
preferred stock are entitled to elect a majority of the members of the Board of
Directors at such time as their dividends are in arrears for four or more
dividend periods. Explorer has waived such right through December 31, 2002,
provided that dividends on the Series C preferred stock are not in arrears for
six or more dividend periods from January 1, 2001 through December 31, 2002.
Explorer's right to appoint directors under the existing stockholders agreement
expires July 14, 2010.

As a condition to the closing of Explorer's new investment, we have agreed
to amend and restate our stockholders agreement with Explorer and to seek
stockholder approval to increase the maximum size of our Board of Directors so
that C. Taylor Pickett, our Chief Executive Officer, can be appointed to the
Board of the Directors. Under the new stockholders agreement to be executed at
the closing of Explorer's investment at or promptly following the closing of the
rights offering, Explorer would be entitled to designate a number of directors
that would generally be proportionate to Explorer's ownership of voting
securities, not to exceed five directors, six following any increase in the size
of the Board to ten directors. Under the new stockholders agreement, the number
of directors on the Board will not exceed ten without the consent of Explorer.
We will agree to take appropriate action to ensure generally that Explorer's
representation on all committees of the Board is proportionate to its
representation on the entire board, other than any special committee established
to consider transactions in which Explorer or any of its affiliates may have a
conflict of interest.

The new stockholders agreement will require Explorer to vote its shares in
favor of three independent directors (as defined under the rules of the New York
Stock Exchange) who are not affiliated with Explorer so long as it owns at least
15.0% of our voting securities. Upon the increase of the size of the Board to
ten directors, Explorer will vote its shares in favor of an additional director
who is not affiliated with Explorer. The fourth company designee will be
C. Taylor Pickett, our Chief Executive Officer. The new stockholders agreement
would expire five years from execution.

The terms of the Seried D preferred stock to be issued to Explorer if
stockholders have not approved the investment before its closing will provide
that the holders of the Series D preferred stock, voting together as a single
class with the holders of the Series C preferred stock, will have the right to
elect two additional directors if dividends on the Series D preferred stock are
in arrears for four or more dividend periods.

BOARD COMMITTEES AND MEETINGS

The Board of Directors held 24 meetings during 2000. Henry H. Greer, a
former member of our Board of Directors, attended 11 of the 21 meetings held
during the time he was director. All other members of the Board of Directors
attended more than 75% of the Board or committee meetings held during 2000.

The Board of Directors has established an audit committee consisting of
Messrs. Korman, Kloosterman and Plavin, a compensation committee consisting of
Messrs. Kloosterman, McNamara and Franke, an independent directors committee
consisting of Messrs. Franke, Kloosterman, Korman and Lowenthal, and an
executive committee consisting of Messrs. Decker and Korman.

The Board of Directors does not presently have a standing nominating
committee and the functions that would typically be performed by a nominating
committee are performed by the entire Board of Directors, except that each
nominee that is not designated by Explorer pursuant to the stockholders
agreement are designated by the independent directors committee. In connection
with the closing of the rights offering and Explorer's investment, the Board of
Directors intends to reconstitute the nominating committee with two independent
directors, and one Explorer designee. Recommendations of the nominating
committee must be approved by the entire Board of Directors.

The audit committee met twice in 2000. Its primary function is to assist the
Board of Directors in fulfilling its oversight responsibilities with respect to:

- the annual financial information to be provided to stockholders and the
Securities and Exchange Commission;

- the system of internal controls that management has established; and

- the external audit process.

In addition, the audit committee provides an avenue for communication
between the independent accountants, financial management and the Board.

The compensation committee met three times during 2000 and is responsible
for the compensation of directors and key management personnel and the
administration of our 2000 Stock Incentive Plan and our 1993 Deferred
Compensation Plan. The compensation committee also administered our Amended and
Restated Stock Option and Restricted Stock Plan prior to the plan's termination
in 2000.

The independent directors committee, which did not meet during 2000, is
responsible for passing upon those issues with respect to which a conflict may
exist between us and Explorer and its affiliates, including issues with respect
to the allocation of costs between us and Explorer pursuant to the advisory
agreement between us and The Hampstead Group L.L.C., an affiliate of Explorer.
See "Affiliate Relationships and Transactions--Advisory Agreement" below.

The executive committee, which met four times during 2000, is responsible
for acting on behalf of the entire Board of Directors in between meetings of the
Board of Directors.

COMPENSATION OF DIRECTORS

For the year ended December 31, 2000, we paid each non-employee director a
fee of $20,000 per year for services as a director, plus $3,000 for services as
a committee chairperson and $500 for attendance at a meeting of the Board of
Directors, or of any committee during the first and second quarters of fiscal
year 2000 and $1,000 for attendance at a meeting during the third and fourth
quarters of fiscal year 2000, as well as $500 for participation in each
teleconference meeting. In addition, we reimbursed the directors for travel
expenses incurred in connection with their duties as directors. Employee
directors received no compensation for service as directors. The cash
compensation, not including reimbursement for expenses, paid by us in
consideration of Mr. Decker's and Mr. McNamara's service on the Board of
Directors as Explorer designees was paid directly to Hampstead under the
advisory agreement.

The compensation committee changed the manner in which non-employee
directors are awarded cash compensation for 2001 and thereafter. Commencing in
2001, each non-employee director will receive a cash payment equal to $10,000
per year, payable in quarterly installments of $2,500. Each non-employee
director will receive a grant of shares of common stock equal to the number of
shares determined by dividing the sum of $2,500 by the fair market value of the
common stock on the date of each quarterly grant, currently set at February 15,
May 15, August 15, and November 15. In addition, each non-employee director is
entitled to receive fees equal to $1,000 per meeting for attendance at each
regularly scheduled meeting of the Board of Directors. For each teleconference
or called special

meeting of the Board of Directors, each non-employee director will receive
$1,000 for meetings with a duration in excess of 15 minutes and $500 for
meetings with a duration of less than 15 minutes. We will also continue to
reimburse directors for travel expenses incurred in connection with their duties
as directors. In addition, we expect to continue paying this cash compensation
and expense reimbursement in connection with Mr. Decker's and Mr. McNamara's
service on the Board of Directors as Explorer designees directly to Hampstead.

Mr. Erickson is compensated through payments made to an entity controlled by
him under a management services agreement. Under the management services
agreement, Mr. Erickson may also receive awards of stock options and dividend
equivalent rights. See "Executive Compensation--Management Services Agreement."

Robert L. Parker, one of our former directors, provided ongoing consulting
services to us during the time he served as a director. Mr. Parker received
$3,000 per month up until the time of his resignation from the Board of
Directors on July 14, 2000.

Directors are eligible to participate in our 2000 Stock Incentive Plan.
Directors received option grants under our amended and restated plan prior to
its termination in 2000. Each non-employee director was awarded options with
respect to 10,000 shares at the date the plan was adopted or on his or her
subsequent election as a director, and each non-employee director will be
granted an additional option grant with respect to 1,000 shares on January 1 of
each year they serve as a director. On July 17, 2000, Messrs. Decker, Erickson,
Mahowald and Plavin each received their initial award of an option to purchase
10,000 shares of our common stock. Mr. McNamara received his initial award of an
option to purchase 10,000 shares of our common stock on October 17, 2000. All
grants have been and will be at an exercise price equal to 100% of the fair
market value of our common stock on the date of the grant. Non-employee director
options vest one third after each year for three years.

During the year ended December 31, 2000, Messrs. Franke, Kloosterman, Korman
and Lowenthal were each awarded a grant of 300 shares of restricted stock, which
vested six months after the date of grant.

In addition, a borrowing program was adopted to enable directors and
employees to borrow funds from us with which to purchase shares of our common
stock pursuant to the exercise of stock options. See "Affiliate Relationships
and Transactions--Borrowing Program."

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Mr. Decker, the Chairman of the Board, and Mr. Erickson were previously
members of our compensation committee. Both Mr. Decker and Mr. Erickson have
resigned from the compensation committee as of March 30, 2001. Mr. McNamara is
currently a member of the compensation committee. Messrs. Decker and McNamara
are affiliates of Explorer and Hampstead, and therefore may be deemed to have an
interest in the investment to be made by Explorer contemporaneously with the
closing of the rights offering, as well as the agreements and transactions
described under "Affiliate Relationships and Transactions--Explorer."
Mr. Erickson can be deemed to have an interest in payments made by us under the
terms of the management services agreement, the terms of which are described
under "Executive Compensation--Management Services Agreement."

EXECUTIVE COMPENSATION

COMPENSATION OF EXECUTIVE OFFICERS

The following table sets forth, for the years ended December 31, 2000, 1999,
and 1998, the compensation for services in all capacities to our company of each
person who served as chief executive officer during the year ended December 31,
2000 and the four most highly compensated executive officers serving at
December 31, 2000.

LONG-TERM COMPENSATION
----------------------------------
AWARD(S) PAYOUTS
----------------------- --------
ANNUAL RESTRICTED SECURITIES ALL
COMPENSATION STOCK UNDERLYING LTIP OTHER
NAME AND -------------------- AWARD(S) OPTIONS/ PAYOUTS COMPENSATION
PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($) SARS(#) ($) ($)(1)
------------------------------------- -------- --------- -------- ---------- ---------- -------- -------------

Thomas W. Erickson................... 2000 127,055(2) -- -- 45,000(3) -- --
Interim Chief Executive Officer
(10/1/2000 through 6/12/2001)

Essel W. Bailey, Jr.................. 2000 241,718 -- 381,500(4) -- -- 2,547,110 (5)
Chief Executive Officer (Prior to 1999 440,000 66,000 66,000(4) 50,000 -- (85,229)
7/14/2000) 1998 420,000 75,000 140,500(4) -- -- 252,043

Richard M. FitzPatrick............... 2000 139,634(6) -- -- -- -- --
Chief Financial Officer (7/14/2000
through 7/31/2001)

F. Scott Kellman..................... 2000 266,651 325,000(7) 212,400(8) 500,000(9) -- 10,743
Chief Operating Officer (prior to 1999 245,000 55,000 55,000(8) 27,500 -- (19,559)
10/15/2001) 1998 236,000 65,000 78,200(8) -- -- 37,092

Susan A. Kovach...................... 2000 143,219 90,000(7) 112,700(10) 227,500(9) -- 3,741
Vice President, Secretary and 1999 130,000 26,000 26,000(10) 17,500 -- 9,385
General Counsel (prior to 1998 120,000 15,000 31,100(10) -- -- 1,800
4/6/2001)

Laurence D. Rich..................... 2000 139,833 115,000(7) 104,000(11) 227,500(9) -- 3,239
Vice President 1999 120,000 27,500 27,500(11) 15,000 -- 9,664

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

(1) Consists of our contributions to our 401(k) Profit-Sharing Plan and
provisions for each participant under our 1993 Deferred Compensation Plan,
except as follows or as otherwise noted in footnotes appearing in this
column: with respect to Mr. Bailey, such amount includes $219,525 for 1998
from the settlement of the Directors' Retirement Plan as described under
"Compensation of Directors"; with respect to Mr. Kellman, such amount
includes a payment of $8,036 for consideration of acceleration of certain
options in 1999; with respect to Ms. Kovach, such amount includes a payment
of $3,325 for consideration of acceleration of certain options in 1999; with
respect to Mr. Rich, such amount includes a payment of $2,700 for
consideration of acceleration of certain options in 1999.

(2) Represents amounts paid to a company controlled by Mr. Erickson pursuant to
the terms of the Management Services Agreement in consideration of the
services performed by Mr. Erickson as our Interim Chief Executive Officer.
See "Compensation and Severance Agreements--Management Services Agreement."

(3) Includes 35,000 shares subject to an option granted to Mr. Erickson under
the terms of the Management Services Agreement and 10,000 shares subject to
an option granted to Mr. Erickson in consideration of becoming a director.
See "Compensation and Severance Agreements--Management Services Agreement."

(4) Represents restricted stock awards of 63,321 shares, 8,516 shares and 4,655
shares of our common stock made to Mr. Bailey on February 10, 2000,
January 31, 2000 and January 4, 1999, respectively. The February 10, 2000
award was a prospective award for service in fiscal 2000. The January 31,
2000 and January 4, 1999 awards represent compensation earned in fiscal 1999
and 1998, respectively. With regard to the February 10, 2000 award, 47,490
shares were released from vesting requirements pursuant to the Consulting
and Severance Agreement dated July 18, 2000 between us and Mr. Bailey. The
severance agreement also provided that 15,831 shares of the February 10,
2000 award would have been awarded if the price of the common stock met
certain performance hurdles prior to February 10, 2001. See "Compensation
and Severance Agreements--Bailey Severance Agreement." The performance of
our common stock did not satisfy the performance hurdle prior to the
required time and Mr. Bailey was not awarded the 15,831 shares. Under the
terms of the severance agreement the vesting of 12,218 restricted shares
held by Mr. Bailey in connection with restricted stock awards made prior to
the February 10, 2000 award was accelerated.

(5) Includes severance pay of $1,555,000, $249,510 paid in connection with
certain deferred compensation units held by Mr. Bailey and $737,500 in
consulting fees paid to Mr. Bailey through December 31, 2000. Mr. Bailey
received payment with respect to the items described in the prior sentence
under the terms of his severance agreement. See "Compensation and Severance
Agreements--Bailey Severance Agreement."

(6) Represents compensation payable to Mr. FitzPatrick by Hampstead in
consideration of Mr. FitzPatrick serving as our Chief Financial Officer
through December 31, 2000. Pursuant to the Advisory Agreement, we have
agreed to reimburse Explorer for the services provided to us by
Mr. FitzPatrick. See "Certain Transactions--Advisory Agreement."

(7) Includes a special bonus paid in connection with the Series C Investment
pursuant to a compensation agreement entered into between the named
individuals and us. See "Compensation and Severance Agreements--Compensation
Agreements with Management."

(8) Represents restricted stock awards of 35,258 shares, 7,097 shares, and 2,590
shares of our common stock made to Mr. Kellman on February 10, 2000,
January 31, 2000 and January 4, 1999, respectively. The February 10, 2000
award was a prospective award for service in fiscal 2000. The January 31,
2000 and January 4, 1999 awards represent compensation earned in fiscal 1999
and 1998, respectively. With respect to the February 10, 2000 grant, 25% of
the shares vested 180 days following the grant date and 25% of the shares
vest on each anniversary of the grant date for the next three years. Under
the February 10, 2000 award, 17,629 shares were awarded subject to the price
of our common stock meeting certain performance hurdles. The price of our
common stock did not satisfy the required performance hurdles, and the
17,629 shares referred to above were forfeited in accordance with the terms
of the grant. With respect to the January 31, 2000 grant, 50% of the shares
vested 180 days following the grant date, with the balance vesting on the
anniversary of the grant date. With respect to the January 4, 1999 grant,
25% of the shares vested 180 days following the grant date, with the balance
vesting in equal 25% increments on each anniversary of the grant date.
Mr. Kellman receives dividends on unvested shares. The number of unvested
shares and value of Mr. Kellman's restricted stock awards as of the end of
last year were 13,656 shares and $42,675 of which 4,195 shares and 8,814
shares were released in January and February 2001, respectively.

(9) Represents special grant of options in connection with the Series C
Investment pursuant to the terms of a Compensation Agreement between the
named individuals and us. See "Compensation and Severance
Agreements--Compensation Agreements with Management."

(10) Represents restricted stock awards of 18,708 shares, 3,355 shares and 1,030
shares of our common stock made to Ms. Kovach on February 10, 2000,
January 31, 2000 and January 4, 1999, respectively. The February 10, 2000
award was a prospective award for service in fiscal 2000. The January 31,
2000 and January 4, 1999 awards represent compensation earned in fiscal 1999
and 1998, respectively. With respect to the February 10, 2000 grant, 25% of
the shares vested 180 days following the grant date and 25% of the shares
are to vest on each anniversary of the grant date for the next three years.
Under the February 10, 2000 award, 9,354 shares were awarded subject to the
price of our common stock meeting certain performance hurdles. The price of
our common stock did not satisfy the required performance hurdles and the
9,354 shares referred to above were forfeited in accordance with the terms
of the grant. With respect to the January 31, 2000 grant, 50% of the shares
vested 180 days following the grant date with the remaining 50% vesting on
the anniversary of the grant date. With respect to the January 4, 1999
grant, 25% of the shares vested 180 days following the grant date with the
balance vesting in equal 25% increments on each anniversary of the grant
date. The number of unvested shares and value of Ms. Kovach's restricted
stock awards at the end of last year were 6,868 shares and $21,463 of which
1,934 shares and 4,677 shares were released in January and February 2001,
respectively.

(11) Represents restricted stock awards of 17,269 shares and 3,548 shares of our
common stock made to Mr. Rich on February 10, 2000 and January 31, 2000,
respectively. The February 10, 2000 award was a prospective award for
service in fiscal 2000. The January 31, 2000 award represents compensation
earned in fiscal 1999. With respect to the February 10, 2000 grant, 25% of
the shares vested 180 days following the grant date and 25% of the shares
are to vest on each anniversary of the grant date for the next three years.
Under the February 10, 2000 award, 8,634 shares were awarded subject to the
price of our common stock meeting certain performance hurdles. The price of
our common stock did not satisfy the required performance hurdles and the
8,634 shares referred to above were forfeited in accordance with the terms
of the grant. With respect to the January 31, 2000 grant, 50% of the shares
vested 180 days following the grant date, with the remaining 50% vesting on
the anniversary of the grant date. Mr. Rich receives dividends on unvested
shares. The number of unvested shares and value of Mr. Rich's restricted
stock awards at the end of last year were 430 shares and $1,344 from a 1999
grant awarded before Mr. Rich became an officer, of which 215 shares were
released in January 2001; and 6,091 shares and $19,034 of which 1,774 shares
and 4,317 shares were released in January and February 2001, respectively.

OPTION GRANTS/SAR GRANTS

The following table sets forth certain information concerning options and
stock appreciation rights, or SARs, granted during 2000 to Messrs. Erickson,
Kellman and Rich and Ms. Kovach. Messrs. Bailey, FitzPatrick and Stover did not
receive any option grants during 2000 and therefore do not appear in the table
below.

INDIVIDUAL GRANTS
------------------------------- POTENTIAL REALIZABLE VALUE
NUMBER OF % OF TOTAL AT ASSUMED ANNUAL RATES
SECURITIES OPTIONS/SARS EXERCISE OF STOCK PRICE APPRECIATION
UNDERLYING GRANTED TO OR BASE FOR OPTION TERM(1)
OPTIONS/SARS EMPLOYEES IN PRICE EXPIRATION ---------------------------
NAME GRANTED(2) FISCAL YEAR ($/SHARE) DATE 5%($) 10%($)
---- ------------ ------------ --------- ---------- ------------ ------------

Thomas W. Erickson......... 10,000(3) $ 6.250 7/17/11 $ 29,400 $ 90,900
35,000(4)(5) 6.250 11/01/11 117,950 343,000
------- --------- ---------
45,000 4.20% 147,350 433,900
======= ========= =========
F. Scott Kellman........... 500,000(5)(6) 46.62% 6.250 7/17/11 1,470,000 4,545,000
======= ========= =========
Susan A. Kovach............ 227,500(5)(6) 21.21% 6.250 7/17/11 668,850 2,067,975
======= ========= =========
Laurence D. Rich........... 227,500(5)(6) 21.21% 6.250 7/17/11 668,850 2,067,975
======= ========= =========

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

(1) The assumed annual rates of appreciation of 5% and 10% would result in the
price of our stock increasing, at the expiration date of the options, to
$9.19 and $15.34 for the July 17, 2000 grant, and $9.62 and $16.05 for the
November 1, 2000 grant. We cannot assure you that our stock price will
appreciate at such rates.

(2) Represents a grant of non-qualified options which expires 11 years after the
date of grant.

(3) Vests in equal increments of 1/3rd on each anniversary of the grant date of
July 17, 2001.

(4) The shares subject to such option will vest on the earlier of (a) May 1,
2001 or (b) upon the termination of the management services agreement.

(5) Shares granted in tandem with dividend equivalent rights.

(6) 30% of the shares subject to the indicated option grant will vest on
December 31, 2001, with the remainder vesting in equal monthly increments of
1/60th thereafter.

AGGREGATED OPTIONS/ SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/ SAR VALUES

The following table summarizes options and stock appreciation rights
exercised during 2000 and presents the value of unexercised options and stock
appreciation rights held by the named executive officers at December 31, 2000.
Messrs. Bailey, FitzPatrick and Stover did not have any outstanding options or
stock appreciation rights at December 31, 2000 and therefore do not appear in
the table below.

NUMBER OF SECURITIES IN-THE-MONEY
SHARES UNDERLYING UNEXERCISED OPTIONS/SARS AT
ACQUIRED OPTIONS/ SARS AT FISCAL
ON VALUE FISCAL YEAR-END(#) YEAR-END($)
EXERCISE REALIZED UNEXERCISABLE(U) UNEXERCISABLE(U)
NAME (#) ($) EXERCISABLE(E) EXERCISABLE(E)
---- -------- -------- ---------------------- ----------------

Thomas W. Erickson....................... -- -- 45,000(U) 0(U)
F. Scott Kellman......................... -- -- 500,000(U) 0(U)
-- -- 27,880(E) 0(E)
Susan A. Kovach.......................... -- -- 227,500(U) 0(U)
Laurence D. Rich......................... -- -- 227,500(U) 0(U)

LONG-TERM INCENTIVE PLAN

For the period from August 14, 1992, the date of commencement of our
operations, through December 31, 2000, we have had no long-term incentive plans.

C. TAYLOR PICKETT EMPLOYMENT AGREEMENT

We have entered into an employment agreement with C. Taylor Pickett dated as
of June 12, 2001, to be our Chief Executive Officer. The term of the agreement
expires on June 12, 2005.

Mr. Pickett's base salary is $450,000 per year, subject to increase by us
and provides that he will be eligible for an annual bonus of up to 100% of his
base salary based on criteria determined by the compensation committee of our
Board of Directors. We issued Mr. Pickett 50,000 shares of our restricted common
stock on June 12, 2001, which vest after he has completed two years of service.
Additionally, Mr. Pickett was granted an incentive stock option to purchase
172,413 shares of our common stock and a nonqualified stock option to purchase
627,587 shares of our common stock. The incentive stock option will be vested as
to 25% of the shares on December 31, 2002; as to an additional 25%, after
Mr. Pickett completes two years of service; as to an additional 25%, ratably on
a monthly basis in 2004; and as to the final 25%, ratably on a monthly basis in
the first six months of 2005, in each case provided Mr. Pickett continues to
work for us on the applicable vesting date. The nonqualified stock option will
become vested as to 50% of the shares after Mr. Pickett completes two years of
service and will become ratably vested as to the remainder of the shares on a
monthly basis over the next 24 months of service following that two year
anniversary.

If we terminate Mr. Pickett's employment without cause or if he resigns for
good reason, he will be entitled to payment of his base salary for a period of
12 months or, if shorter, for the remainder of the term of the agreement.
Additionally, Mr. Pickett will be entitled to payment of an amount equal to the
bonus paid in the prior year, payable in 12 monthly installments. Mr. Pickett is
required to execute a release of claims against us as a condition to the payment
of severance benefits. The vesting of Mr. Pickett's options may be subject to
acceleration upon the occurrence of certain events such as termination without
cause or resignation for good reason and will become fully vested if, within one
year following a change of control, he is terminated without cause or resigns
for good reason.

Mr. Pickett is restricted from using any of our confidential information
during his employment and for two years thereafter or from using any trade
secrets during his employment and for as long thereafter as permitted by
applicable law. Mr. Pickett is subject to covenants which prohibit him from
competing with us and from soliciting our customers or employees while he is
employed by us and for 12 months following his termination of employment.

DANIEL J. BOOTH EMPLOYMENT AGREEMENT

We have entered into an employment agreement with Daniel J. Booth effective
as of October 15, 2001, to be our Chief Operating Officer. The term of the
agreement expires on January 1, 2006.

Mr. Booth's base salary is $275,000 per year, subject to increase by us, and
he is eligible for an annual bonus of up to 50% of his base salary based on
criteria determined by the compensation committee. Mr. Booth was granted an
incentive stock option to purchase 166,666 shares of our common stock and a
nonqualified stock option to purchase 83,334 shares of our common stock. The
incentive stock option will vest as to 20% of the shares on each of
December 31, 2002, October 1, 2003, October 1, 2004, October 1, 2005, and
January 1, 2006 and the nonqualified stock option will vest on January 1, 2003,
provided Mr. Booth continues to work for us on the applicable vesting date.

Our agreement with Mr. Booth contains severance and accelerated option
vesting provisions similar to those in Mr. Pickett's agreement described above.
Mr. Booth is required to execute a release of claims against us as a condition
to the payment of severance benefits. He is also subject to

restrictions on his use of confidential information and our trade secrets that
are the same as those in our agreement with Mr. Pickett described above.

ROBERT O. STEPHENSON EMPLOYMENT AGREEMENT

We have entered into an employment agreement with Robert O. Stephenson
effective as of August 30, 2001, to be our Chief Financial Officer. The term of
the agreement expires on January 1, 2006.

Mr. Stephenson's base salary is $215,000 per year, subject to increase by
us, and he is eligible for an annual bonus of up to 50% of his base salary based
on criteria determined by the compensation committee. Mr. Stephenson was granted
an incentive stock option to purchase 181,155 shares of our common stock and a
nonqualified stock option to purchase 18,845 shares of our common stock. The
incentive stock option will vest as to 20% of the shares on each of
December 31, 2002, August 1, 2003, August 1, 2004, August 1, 2005, and
January 1, 2006 and the nonqualified stock option will vest on August 1, 2003,
provided Mr. Stephenson continues to work for us on the applicable vesting date.

Our agreement with Mr. Stephenson contains severance and accelerated option
vesting provisions similar to those in Mr. Pickett's agreement described above.
Mr. Stephenson is required to execute a release of claims against us as a
condition to the payment of severance benefits. He is also subject to
restrictions on his use of confidential information and our trade secrets that
are the same as those in our agreement with Mr. Pickett described above.

R. LEE CRABILL, JR. EMPLOYMENT AGREEMENT

We have entered into an employment agreement with R. Lee Crabill, Jr.
effective as of July 30, 2001, to be our Senior Vice President of Operations.
The term of the agreement expires on July 30, 2005.

Mr. Crabill's base salary is $215,000 per year, subject to increase by us,
and he is eligible for an annual bonus of up to 50% of his base salary based on
criteria determined by the compensation committee. Mr. Crabill was granted an
incentive stock option to purchase 133,333 shares of our common stock and a
nonqualified stock option to purchase 41,667 shares of our common stock. The
incentive stock option will vest as to 25% of the shares on each of
December 31, 2002, August 1, 2003, August 1, 2004, and August 1, 2005, and the
nonqualified stock option will vest as to 50% of the shares after Mr. Crabill
completes two years of service and will become ratably vested as to the
remainder of the shares on a monthly basis over the next twenty-four
(24) months of service following that two year anniversary, provided
Mr. Crabill continues to work for us on the applicable vesting date.

Our agreement with Mr. Crabill contains severance and accelerated option
vesting provisions similar to those in Mr. Pickett's agreement described above.
Mr. Crabill is required to execute a release of claims against us as a condition
to the payment of severance benefits. He is also subject to restrictions on his
use of confidential information and our trade secrets that are the same as those
in our agreement with Mr. Pickett described above.

THOMAS W. ERICKSON MANAGEMENT SERVICES AGREEMENT

We entered into a management services agreement with ECG Ventures, Inc.
dated as of October 1, 2000, to obtain the services of Thomas W. Erickson as our
interim Chief Executive Officer. Mr. Erickson continued to provide services
following the appointment of Mr. Pickett as Chief Executive Officer to
facilitate a transition. The term of the agreement expires on the earlier of
(i) December 31, 2001 or (ii) the later of (x) the date we determine that
Mr. Erickson's services are no longer necessary, or (y) three months following
the hiring of a new Chief Executive Officer.

We pay ECG Ventures $41,667 per month and granted them an option to purchase
50,000 shares of our common stock which will be fully vested on December 31,
2001. We also reimburse ECG

Ventures for the premiums for healthcare coverage for Mr. Erickson and his
dependents. We agreed to pay ECG Ventures $250,000 if Mr. Erickson continues to
provide transitional services through the earlier of December 31, 2001, or the
date we determine that his services are no longer necessary. Mr. Erickson and
ECG Ventures are subject to customary restrictions on their use of our
confidential information and trade secrets.

RICHARD M. FITZPATRICK EMPLOYMENT AGREEMENT

We entered into an employment agreement with Richard M. FitzPatrick
effective as of May 1, 2001, to be our interim Chief Financial Officer. The term
of the agreement expires on the earlier of January 31, 2002 or the date we
determine his services are no longer necessary.

Mr. FitzPatrick's base salary was $250,000 per year and provides that he was
eligible for an annual bonus of up to 100% of his base salary based on criteria
determined by the compensation committee. We agreed to pay Mr. FitzPatrick an
amount equal to $125,000 plus 50% of his actual bonus for 2001 if he continues
to work for us for three months following the expiration of his agreement to
facilitate a transition to Mr. Stephenson. We also reimbursed The Hampstead
Group, L.L.C. for the amount of Mr. Fitzpatrick's annual compensation paid by
Hampstead during the period from January 1, 2001 to May 1, 2001, since
Mr. FitzPatrick worked as our interim Chief Financial Officer on a full-time
basis during that period prior to the effectiveness of his employment agreement.

If Mr. FitzPatrick's employment is terminated by us without cause or if he
resigns for good reason, in either event before January 31, 2002, he will be
entitled to payment of his base salary through January 31, 2002.
Mr. FitzPatrick is required to execute a release of claims against us as a
condition to the payment of severance benefits and his use of our confidential
information and trade secrets is subject to customary restraints.

SUSAN A. KOVACH SEVERANCE AGREEMENT

We entered into a separation agreement and full and final release of claims
with Susan A. Kovach, pursuant to which Ms. Kovach resigned as our Senior Vice
President and General Counsel effective as of April 6, 2001. Pursuant to the
agreement, Ms. Kovach received payment of an immediate lump sum payment of
$291,426.67 and a payment of $175,000 in substantially equal installments over a
period of twelve (12) months. The lump sum payment was reduced by the $44,600.09
in outstanding principal and accrued interest on a loan that we made to
Ms. Kovach in August 25, 1999. Ms. Kovach received a payment of $113,500 in
exchange for the extinguishment of all of her rights with respect to the
dividend equivalent rights for 227,500 shares of our common stock and she was
fully vested in $381.89 in deferred compensation plan units and in 257 shares of
our unvested common stock from a January 4, 1999 grant. Ms. Kovach's vested and
unvested deferred compensation units, valued at $954.72, were paid in a single
lump sum within five (5) days of her resignation.

Ms. Kovach is required to be available to consult with us on litigation
matters pending at the time of her resignation, until such matters are finally
resolved. Ms. Kovach is subject to customary restrictions regarding her use of
our proprietary information, a covenant not to compete and a covenant not to
solicit our customers or employees for one year following her resignation date.
Ms. Kovach also released us from any claims.

F. SCOTT KELLMAN RETENTION, SEVERANCE AND RELEASE AGREEMENT

Our October 9, 2001, retention, severance and release agreement with F.
Scott Kellman, our former Chief Operating Officer, provides that Mr. Kellman
will continue his employment with us until January 31, 2002 or such earlier date
specified by us. Mr. Kellman's employment will end on this resignation date.
Mr. Kellman will be paid his regular base salary through January 31, 2002, and
if he remains employed through the resignation date, he will receive a minimum
cash bonus of $150,000 payable on February 1, 2002, that may be increased by an
additional $150,000 if specified performance

objectives are reached. In addition, if Mr. Kellman remains employed through the
resignation date he will also receive a retention bonus of $930,000 to be paid
on February 1, 2002. We will pay Mr. Kellman's premiums for eligible health care
insurance benefits, less required employee contributions for premiums, through
December 31, 2002. As a condition to payment of the amounts under the retention
grant, Mr. Kellman is required to execute a comprehensive release of claims
against us. If we terminate Mr. Kellman for cause, he will not be entitled to
any payments under the agreement.

If any of the payments to Mr. Kellman are subject to an excise tax on
"excess parachute payments" under the Internal Revenue Code, he will be entitled
to receive a payment in an amount that puts him in the same after-tax position
as if no excise tax had been imposed. Mr. Kellman has agreed to maintain the
confidentiality of our information for a period of two (2) years after the
resignation date.

LAURENCE D. RICH RETENTION, SEVERANCE AND RELEASE AGREEMENT

Our August 1, 2001, retention, severance and release agreement with Laurence
D. Rich provides that Mr. Rich will continue his employment until January 31,
2002 or such earlier date specified by us. Mr. Rich's employment will end on
this resignation date. Mr. Rich will be paid his regular base salary through
January 31, 2002, and, if he remains employed through the resignation date, he
will receive a minimum cash bonus of $117,500 payable on February 1, 2002, that
may be increased by an additional $87,500 if specified performance objectives
are reached. In addition, if Mr. Rich remains employed through the resignation
date he will also receive a retention bonus of $530,000 to be paid on
February 1, 2002. We will pay Mr. Rich's premiums for eligible heath care
insurance benefits, less required employee contributions for premiums, through
December 31, 2002. As a condition to payment of the amounts under the retention
agreement, Mr. Rich is required to execute a comprehensive release of claims
against us. If we terminate Mr. Rich's employment for cause, he will not be
entitled to any payments under the agreement.

If any of the payments to Mr. Rich are subject to an excise tax on "excess
parachute payments" under the Internal Revenue Code, he will be entitled to
receive a payment in an amount that puts him in the same after-tax position as
if no excise tax had been imposed. Mr. Rich has agreed to maintain the
confidentiality of our information for a period of two (2) years after his
termination of employment.

RETENTION, SEVERANCE, AND RELEASE AGREEMENTS FOR OTHER EMPLOYEES

In August, 2001, we entered into retention, severance, and release
agreements with a total of 24 of our employees (excluding Mr. Kellman and
Mr. Rich) who were not expected to work for us in our future headquarters in
Maryland. Pursuant to these agreements, each employee agrees to continue his or
her employment with us until January 31, 2002, or such earlier date as we
specify. Each such employee's employment will end on his or her respective
resignation date. Pursuant to the agreement, each employee will be paid his or
her regular base salary through January 31, 2002, and, if he or she remains
employed though the resignation date, the employee will receive a specified
minimum cash bonus payable on February 1, 2002, that may be increased by a
specified amount if performance objectives are satisfied. In addition, if the
employee remains employed through the resignation date, the employee will also
receive a specified retention bonus to be paid in equal monthly installments
beginning on February 1, 2002 over a specified retention bonus period. The
maximum total amount of all mandatory bonuses, performance bonuses, and
retention bonuses are $275,785, $243,935, and $495,490, respectively.

During the retention bonus period, we will pay the employee's premiums for
eligible health care insurance benefits, less required employee contributions
for premiums, and we will also provide outplacement services for a reasonable
period of time after the resignation date. As a condition to the

payment of these severance benefits, the employee is required to execute a
comprehensive release of claims against us. If we terminate the employee's
employment for cause, the employee will not be entitled to any severance
benefits under the agreement.

ESSEL W. BAILEY, JR. SEVERANCE AGREEMENT

On July 18, 2000, we entered into a consulting and severance agreement with
Essel W. Bailey, Jr. under which Mr. Bailey resigned as Chairman and Chief
Executive Officer of our company. Mr. Bailey's resignation and the severance
agreement became effective as of July 14, 2000.

Under the terms of the severance agreement, Mr. Bailey received payment of
his regular base salary through the effective date of his resignation and a
lump-sum severance payment equal to $1,555,000. The severance agreement provides
that Mr. Bailey is fully vested in his deferred compensation plan and in 59,708
shares of his restricted stock. Mr. Bailey's deferred compensation units, valued
at $249,510 and the value of his account under our terminated director's
retirement plan were transferred to an account in his name. The agreement also
provided that Mr. Bailey would be fully vested in the remaining 15,831 shares of
his restricted stock if our common stock reached a per share value of at least
$10 for ten consecutive business days, or an average price of $10 over a period
of thirty consecutive business days during the period from July 11, 2000 to
February 10, 2001. These vesting requirements were not met and these shares were
cancelled. The severance agreement also provides that Mr. Bailey's unvested
options to purchase 85,000 shares of our common stock terminated on his
resignation date. The agreement permits Mr. Bailey to transfer shares he
purchased under the borrowing program back to us in satisfaction of his debt
under the borrowing program. See "Certain Transactions--Borrowing Program." The
severance agreement provides Mr. Bailey with an office and secretarial support,
health insurance and long-term disability insurance for a period of 24 months
following his resignation date. The severance agreement provides that if
Mr. Bailey incurs an excise tax under the Internal Revenue Code, we will pay
additional compensation necessary to put him in the same after-tax position as
if no excise tax had been imposed.

Under the terms of the severance agreement, Mr. Bailey provided consulting
services to us for 12 months following his resignation. Mr. Bailey agrees not to
compete with us or solicit any of our customers or employees for 24 months
following his resignation. In exchange for the consulting services and his
agreement not to compete with us or solicit our customers or employees,
Mr. Bailey received compensation equal to $147,500 per month for twelve months.
Mr. Bailey also agreed not to disclose confidential information and trade
secrets for long as protected by applicable law.

PRINCIPAL STOCKHOLDERS

The following table sets forth information regarding beneficial ownership of
our common stock as of October 31, 2001 by:

- each of our directors and the named executive officers appearing in the
table under "Executive Compensation--Compensation of Executive Officers"
(except for those executive officers no longer employed by the Company);

- each of the four new executive officers who have joined the Company since
June 2001;

- all directors and executive officers as a group (except for those
executive officers no longer employed by the Company); and

- all persons known to us to be the beneficial owner of more than 5% of our
outstanding common stock.

Except as indicated in the footnotes to this table, the persons named in the
table have sole voting and investment power with respect to all shares of our
common stock shown as beneficially owned by them, subject to community property
laws where applicable. The business address of the directors and executive
officers is 900 Victors Way, Suite 350, Ann Arbor, Michigan 48108.

COMMON STOCK
-----------------------------------------------------
BEFORE THE RIGHTS AFTER THE RIGHTS
OFFERING AND OFFERING AND
EXPLORER INVESTMENT EXPLORER INVESTMENT(14) SERIES A PREFERRED
------------------------- ------------------------- -------------------------
NUMBER OF PERCENT OF NUMBER OF PERCENT OF NUMBER OF PERCENT OF
BENEFICIAL OWNER SHARES CLASS(1) SHARES CLASS(1) SHARES CLASS(15)
------------------------ ---------- ------------ ---------- ------------ ---------- ------------

DIRECTORS AND EXECUTIVE OFFICERS:
C. Taylor Pickett....... 50,000(2) 0.3% -- --
Robert O. Stephenson.... 1,000 * -- --
Daniel J. Booth......... -- -- -- --
R. Lee Crabill.......... -- -- -- --
Thomas W. Erickson...... 3,362 * -- --
Richard M. -- -- -- --
FitzPatrick...........
F. Scott Kellman........ 39,888(3)(4) 0.2% -- --
Laurence D. Rich........ 13,239(5) 0.1% -- --
Thomas F. Franke........ 38,637(6) 0.2% 3,000 *
Harold J. Kloosterman... 58,792(7) 0.3% -- --
Bernard J. Korman....... 365,930(8) 1.8% 200 *
Edward Lowenthal........ 8,330(8)(9) * -- --
Christopher W. 6,695(10) * -- --
Mahowald..............
Donald J. McNamara...... 16,781,417(10) 45.5% -- --
Daniel A. Decker........ 16,778,084 45.5% -- --
Stephen D. Plavin....... 3,362 * -- --
Directors and executive 17,374,014(12) 47.2% 3,200 *
officers as a group
(16 persons)..........

5% BENEFICIAL OWNERS:
Merrill Lynch & Co. Inc.
(on behalf of Merrill
Lynch Asset Management
Group)
World Financial
Center, North Tower
250 Vesey Street
New York, NY 10381.... 1,136,750(13) 5.7%

Hampstead Investment
Partners III, L.P.
4200 Texas Commerce
Tower West
2200 Ross Avenue
Dallas, TX 75201...... 16,774,722(11) 45.5%

SERIES B PREFERRED
-------------------------
NUMBER OF PERCENT OF
BENEFICIAL OWNER SHARES CLASS(16)
------------------------ ---------- ------------

DIRECTORS AND EXECUTIVE
C. Taylor Pickett....... -- --
Robert O. Stephenson.... -- --
Daniel J. Booth......... -- --
R. Lee Crabill.......... -- --
Thomas W. Erickson...... -- --
Richard M. -- --
FitzPatrick...........
F. Scott Kellman........ -- --
Laurence D. Rich........ -- --
Thomas F. Franke........ -- --
Harold J. Kloosterman... -- --
Bernard J. Korman....... 1,300 *
Edward Lowenthal........ -- --
Christopher W. -- --
Mahowald..............
Donald J. McNamara...... -- --
Daniel A. Decker........ -- --
Stephen D. Plavin....... -- --
Directors and executive 1,300 *
officers as a group
(16 persons)..........
5% BENEFICIAL OWNERS:
Merrill Lynch & Co. Inc.
(on behalf of Merrill
Lynch Asset Management
Group)
World Financial
Center, North Tower
250 Vesey Street
New York, NY 10381....
Hampstead Investment
Partners III, L.P.
4200 Texas Commerce
Tower West
2200 Ross Avenue
Dallas, TX 75201......

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

* Less than 0.10%

(1) Based on 20,076,024 shares of our common stock outstanding as of
September 30, 2001, except as to Messrs. McNamara and Decker and directors
and officers as a group, which includes shares of our common stock issuable
upon conversion of Series C Preferred Stock. See note (11) below.

(2) Represents unvested shares of Restricted Stock granted in July 2001.

(3) Includes shares owned jointly by Mr. Kellman and his wife, plus 171 shares
held solely in Mrs. Kellman's name. Mr. Kellman disclaims any beneficial
interest in the shares held solely by Mrs. Kellman.

(4) Includes 647 unvested shares of Restricted Stock granted in January 1999.

(5) Includes 215 unvested shares of Restricted Stock granted in January 1999.

(6) Includes 26,037 shares owned by a family limited liability company (Franke
Family LLC) of which Mr. Franke is a Member.

(7) Includes shares owned jointly by Mr. Kloosterman and his wife, and 23,269
shares held solely in Mrs. Kloosterman's name.

(8) Includes stock options that are exercisable within 60 days to acquire 668
shares.

(9) Includes 1,000 shares held in a private profit sharing plan for the benefit
of Mr. Lowenthal.

(10) Includes stock options that are exercisable within 60 days to acquire
3,333 shares.

(11) Based on Amendment No. 3 to Schedule 13D filed by Hampstead Investment
Partners III, L.P. on October 30, 2001. Represents shares of our common
stock issuable upon conversion of 1,048,420 shares of Series C preferred
stock owned by Explorer. Hampstead holds the ultimate controlling interest
in Explorer. Messrs. McNamara and Decker disclaim beneficial ownership of
the Series C preferred stock, which they may be deemed to beneficially own
because of their ownership interests in Hampstead, which holds the
ultimate controlling interest in Explorer.

(12) Includes options that are exercisable within 60 days to acquire 8,002
shares. Also includes 50,862 unvested shares of restricted stock. Includes
shares of our common stock issuable upon conversion of Series C preferred
stock owned by Explorer. See Note 11.

(13) Based on the Schedule 13G filed by Merrill Lynch & Co., Inc. with the
Securities and Exchange Commission on February 7, 2000.

(14) Assumes full exercise of the subscription rights by each stockholder in
the rights offering. If none of the subscription rights are exercised in
the rights offering, Explorer would beneficially own shares, or
%, of our common stock, represented directly or by of
Series C preferred stock and shares of Series D preferred stock,
depending on whether or not we have obtained shareholder approval for
Explorer's investment at the time of the investment.

(15) Based on 2,300,000 shares of Series A preferred stock outstanding on
September 30, 2001.

(16) Based on 2,000,000 shares of Series B preferred stock outstanding on
September 30, 2001.

AFFILIATE RELATIONSHIPS AND TRANSACTIONS

EXPLORER

Hampstead, through its affiliate Explorer, indirectly owns 1,048,722 shares
of Series C preferred stock, representing 45.5% of our outstanding voting power.
Daniel A. Decker, our Chairman of the Board, is a member of Hampstead. Donald J.
McNamara, the Chairman of Hampstead, is one of our directors. In connection with
this rights offering and Explorer's investment, we have agreed to amend certain
documents currently in effect between Explorer and us. See "Agreements with
Explorer" beginning on page 32.

STOCKHOLDERS AGREEMENT. In connection with Explorer's July 2000 investment
in our company, we entered into a stockholders agreement dated July 14, 2000
under which Explorer is entitled to designate up to four members of our Board of
Directors depending on the percentage of total voting securities, consisting of
common stock and Series C preferred stock, acquired from time to time by
Explorer. Explorer is entitled to designate at least one director to our Board
of Directors as long as it owns at least 5% of the total voting power of our
company and to approve one "independent" director as long as it owns at least
25% of the shares it acquired at the initial closing or our common stock issued
upon conversion of those preferred shares. The right to designate directors will
terminate on the tenth anniversary of the stockholders agreement.

Explorer is permitted to transfer its Series C preferred stock to large
institutional investors if either (i) the total amount of voting securities
represented by the Series C preferred stock does not exceed 9.9% of the total
voting power of our voting securities or (ii) the investor becomes a party to
the standstill agreement contained in the stockholders agreement. Explorer has
the right, up to five times, to request us to register its shares for resale,
subject to customary conditions and limitations on such registration requests.
Any transfer of voting securities by Explorer or its affiliates (other than in
connection with the exercise of registration rights) is subject to a right of
first offer that can be exercised by us or any other purchaser that we may
designate. These transfer restrictions will terminate on the fifth anniversary
of the Series C investment.

Under the terms of the standstill provisions in the stockholders agreement,
Explorer agreed that, until the fifth anniversary of the Series C investment, it
will not acquire, without the prior approval of our Board of Directors,
beneficial ownership of any voting securities, other than acquisitions of not
more than 5% of our voting securities. In addition, without the prior approval
of our Board of Directors, Explorer is restricted from soliciting proxies from
our other stockholders in opposition to a recommendation of the Board of
Directors, joining a "group" within the meaning of Section 13(d)(3) of the
Exchange Act with respect to our securities, depositing our securities into a
voting trust, or tendering our securities in a tender offer in which we are
involved. If Explorer or its affiliates beneficially own voting securities
representing more than 49.9% of our total voting power, the terms of the
Series C preferred stock provide that no holder of Series C preferred stock will
be entitled to vote any shares of Series C preferred stock that would result in
such holder, together with its affiliates, voting in excess of 49.9% of the then
outstanding voting power. In addition, shares of Series C preferred stock cannot
be converted to the extent that such conversion would cause the converting
stockholder to beneficially own in excess of 49.9% of the then outstanding
voting power.

These arrangements will be amended in connection with the closing of the
rights offering and Explorer's additional investment. See "Agreements With
Explorer--Amended and Restated Stockholders Agreement."

INVESTMENT AGREEMENT. Under the terms of an investment agreement dated
May 11, 2000 between us and Explorer, we agreed to reimburse Explorer for its
out-of-pocket expenses, up to a maximum amount of $2.5 million, incurred in
connection with the Series C investment. To date, we have reimbursed Explorer
for approximately $1.6 million of these expenses. As part of our investment
agreement with Explorer dated October 29, 2001 in connection with the rights
offering and Explorer's investment, we have agreed to reimburse Explorer for its
out of pocket expenses in connection with the currently contemplated Explorer
investment.

ADVISORY AGREEMENT. Under the terms of an Amended and Restated Advisory
Agreement dated October 4, 2000 between us and Hampstead, we have agreed to pay
Explorer an advisory fee if Hampstead provides assistance to us in connection
with the evaluation of growth opportunities or other financing matters. On
June 1, 2001, in connection with Hampstead's agreement to provide certain
specified financial advisory, consulting and operational services, including but
not limited to assistance in our efforts to refinance, repay or extend certain
indebtedness and assist in efforts to manage our capitalization and liquidity,
we agreed to pay Hampstead a fee equal to 1% of the aggregate amount of our
indebtedness that is refinanced, repaid or extended (based on the maximum amount
available to be drawn in the case of revolving credit facilities) up to a
maximum fee of $3.1 million. The advisory fee was payable five business days
following the completion of the refinancing, repayment or extension of any of
our indebtedness, but as amended no fee will be payable prior to December 31,
2001. Upon the closing of the rights offering and Explorer investment, Hampstead
will have fulfilled all of its obligations under the agreement, but the advisory
fee will only be payable at such time as all of the conditions of the advisory
fee contained in the advisory agreement are met. See "Agreements With
Explorer--Advisory Agreement Side Letter."

DIVIDEND AND GOVERNANCE RIGHT DEFERRAL. We and Explorer entered into a
dividend deferral letter agreement dated November 15, 2000 relating to the
extension of the dividend payment payable in connection with our Series C
preferred stock for the dividend period ended October 31, 2000. The deferral
period expired on April 2, 2001. The amount of the deferred dividend payment is
$4.667 million representing the total unpaid preferential cumulative dividend
for the October 2000 dividend. In exchange for the deferral, we also agreed to
pay Explorer a fee equal to 10% of the daily unpaid principal balance of the
unpaid dividend amount from November 15, 2000 until the dividend was paid. Under
certain circumstances, the portion of the unpaid dividend amount and fee which
is not paid in cash may be payable with additional shares of Series C preferred
stock. Shares of Series C preferred stock issued pursuant to this agreement are
valued at $100 per share, the stated per share liquidation preference, and are
convertible into our common stock at $6.25 per share. In consideration of the
payment of the deferral fee, Explorer agreed that the deferral of the subject
dividend would not be considered an unpaid dividend and, as a result, the
October 31, 2000 dividend period will not be included in the determination of
when Explorer's right to elect additional directors will vest.

By letter dated January 31, 2001, Explorer has waived its right to elect
additional preferred stock directors through December 31, 2002 provided that the
dividends on any shares of Series C preferred stock would not be in arrears for
six or more dividend periods from January 31, 2001 through and including
December 31, 2002.

In full payment of our obligations under the dividend deferral letter
agreement, we issued 48,420 shares of Series C preferred stock to Explorer on
April 2, 2001.

OMEGA WORLDWIDE

FLEET CREDIT GUARANTY. We guaranteed repayment of our affiliate, Omega
Worldwide, Inc.'s, borrowings pursuant to a revolving credit facility with a
bank group, of which Fleet Bank, N.A. acts as agent in exchange for an initial
1% fee and an annual facility fee of 25 basis points. At December 31, 2000,
borrowings of $2,850,000 were outstanding under Omega Worldwide's revolving
credit facility. Omega Worldwide's credit agreement required scheduled payments
to be made until fully repaid in June 2001. Under this agreement, no further
borrowings may be made by Omega Worldwide under its revolving credit facility.
We were required to provide collateral in the amount of up to $8,800,000

related to the guarantee of Omega Worldwide's obligations. Upon repayment by
Omega Worldwide of the remaining outstanding balance under its revolving credit
facility, the subject collateral was released in connection with the termination
of our guarantee.

OPPORTUNITY AGREEMENT. We and Omega Worldwide have entered into an
opportunity agreement to provide each other with rights to participate in
transactions and make investments. The opportunity agreement provides that each
company will offer the other a right of first refusal to participate in
transactions or investments of which it becomes aware. In addition, both
companies agree to jointly pursue certain transactions and investments upon the
request of either company. The terms upon which each of us elect to participate
in any transaction or investment will be negotiated in good faith and must be
mutually acceptable to our respective boards of directors, with the affirmative
votes of the independent directors of each of the boards of directors. The
opportunity agreement has a term of ten years and automatically renews for
successive five-year terms, unless terminated.

SERVICES AGREEMENT. We and Omega Worldwide have entered into a services
agreement which provides for the allocation of indirect costs incurred by us to
Omega Worldwide. The allocation of indirect costs has been based on the
relationship of assets under our management to the combined total of those
assets and assets under Omega Worldwide's management. Upon expiration of this
agreement on June 30, 2000, we entered into a new agreement requiring quarterly
payments from Omega Worldwide of $37,500 for the use of offices and
administrative and financial services provided by us. Upon the reduction of our
accounting staff, the service agreement was renegotiated again on November 1,
2000 requiring quarterly payments from Omega Worldwide of $32,500. Costs
allocated to Omega Worldwide for 2000 and 1999 were $404,000 and $754,000,
respectively. The former services agreement has expired and Omega Worldwide is
paying monthly invoices for services rendered.

OTHER

BORROWING PROGRAM. On January 14, 1998, the Board of Directors adopted a
program pursuant to which we agreed to lend funds to employees and directors to
enable them to purchase our common stock through the exercise of stock options.
The goal of the borrowing program was to increase ownership of our common stock
by employees and directors, and, as a result, to foster a proprietary feeling
among employees and directors and to further align the interests of employees
and directors with those of our other stockholders. The maximum amount that an
employee was permitted to borrow under the borrowing program depended on the
employee's salary level, with the maximum loan amount for employees at the lower
end of the salary range being $20,000, and the maximum loan amount for employees
at the upper end of the salary range being $300,000. The maximum loan amount for
directors was $300,000. Each loan carried interest at our borrowing cost, as
determined by our management. Interest was payable quarterly, and all principal
and accrued and unpaid interest was due five years from the date of the loan.
Upon receipt by an employee of a cash bonus from us, the employee was obligated
to make a principal reduction payment equal to 10% of the amount of the cash
bonus. The loans are secured by pledges of the stock purchased with the proceeds
of the loans. As long as a loan is not in default, the borrower may vote the
shares purchased and is entitled to receive all dividends paid on the shares. At
January 1, 2000, the following loans were outstanding to executive officers and
non-employee directors:

NAME OF DIRECTOR AMOUNT BORROWED AS OF
OR EXECUTIVE OFFICER JANUARY 1, 2000
-------------------- ---------------------

Essel W. Bailey, Jr...................................... $195,707
James E. Eden............................................ $262,587
James P. Flaherty........................................ $262,632
Thomas F. Franke......................................... $262,587
Harold J. Kloosterman.................................... $262,587
Bernard J. Korman........................................ $300,000
Edward Lowenthal......................................... $187,472
Robert L. Parker......................................... $299,955
David A. Stover.......................................... $296,847

As of January 1, 2000, the outstanding aggregate principal balance of loans
made under the borrowing program to employees who are not directors or executive
officers was $201,088. On July 31, 2000, Messrs. Bailey, Eden, Flaherty, Franke,
Kloosterman, Korman, Lowenthal, Parker and Stover each surrendered 7,664;
12,000; 8,333; 12,000; 12,000; 12,000; 6,999; 12,739; and 11,703 shares of
common stock, respectively in exchange for forgiveness of $191,803; $262,587;
$255,171; $262,587; $262,587; $300,000; $187,472; $299,955; and $294,118,
respectively, of debt, incurred by each of them under the borrowing program. As
of December 31, 2000, no loans were outstanding under the borrowing program for
our directors or executive officers. We do not currently expect that any loans
will be made pursuant to the borrowing program in the future.

LEASE FROM CIRCLE PARTNERS. We leased 5,823 square feet of office space at
905 West Eisenhower Circle, Suite 110, Ann Arbor, Michigan 48103, from Circle
Partners, a general partnership whose general partners are Essel W. Bailey, Jr.,
our former President and Chief Executive Officer, and Thomas F. Franke, a
director. During 1998, we moved our principal executive offices to 900 Victors
Way, Suite 350, Ann Arbor, Michigan 48108 and entered into a sublease agreement
with respect to 1,900 square feet of the Eisenhower space on December 14, 1998.
We entered into a second sublease agreement with respect to an additional 3,000
square feet of the Eisenhower space in July 1999. The lease expired,
concurrently with the expiration of the subleases, on October 31, 2000. Rent
payments totaling $77,198 were made to Circle Partners in 2000. Rent income on
the subleases in 2000 was $65,509.

RELOCATION LOAN. In connection with the 1994 relocation of F. Scott
Kellman, our former Chief Operating Officer, from the Philadelphia metropolitan
area to Ann Arbor, Michigan, we loaned him $220,000 to enable him to purchase a
home in Ann Arbor. At January 1, 2000 the outstanding principal balance on the
loan was $67,000. The loan was secured by a lien on Mr. Kellman's residence, and
bore interest at 7.05% per annum. Mr. Kellman paid the balance of the mortgage
in full on January 29, 2001.

LOAN TO OAKWOOD. On December 30, 1998, we made a $6,000,000 loan to Oakwood
Living Centers of Massachusetts, Inc., an affiliate of Oakwood Living
Centers, Inc., of which James E. Eden, a former director of our company, also is
Chairman and Chief Executive Officer. The loan is secured by a second mortgage
lien on six skilled nursing facilities located in Massachusetts, bears interest
at 14% per annum and currently is past due and the borrower is paying interest
at the default rate of 17%.

STOVER SEVERANCE AGREEMENT. On June 15, 2000, we entered into a consulting
and severance agreement with David A. Stover, our former Chief Financial
Officer, pursuant to which Mr. Stover resigned as an officer of our company.
Mr. Stover's resignation and severance agreement was effective as of June 15,
2000.

Under the terms of the severance agreement, Mr. Stover received payment of
his regular base salary for thirty days after the effective date of his
resignation and a lump-sum severance payment equal to $348,667. The agreement
provided that Mr. Stover was fully vested in his restricted stock awards for
which there were no performance requirements, stock options and deferred
compensation units. In addition, the dollar value of Mr. Stover's deferred
compensation units under our deferred compensation arrangement were to be paid
to Mr. Stover in a lump sum payment pursuant to the terms of the plan. The
severance agreement permitted Mr. Stover to transfer shares he purchased under
the borrowing program back to us in satisfaction of his debt under the borrowing
program.

Under the terms of the severance agreement, Mr. Stover will provide
consulting services to us for one year following his resignation in exchange for
compensation equal to $348,667 payable in twelve equal monthly installments.

DESCRIPTION OF CAPITAL STOCK

We are offering shares of our common stock, par value $0.10 per share, to be
issued upon the exercise of rights given to stockholders of record as of
, 2001.

Our authorized capital stock currently consists of 100,000,000 shares of our
common stock, par value $0.10 per share, 2,300,000 shares of Series A preferred
stock, par value $1.00 per share, 2,000,000 shares of Series B preferred stock,
par value $1.00 per share, 2,000,000 shares of Series C preferred stock, par
value $1.00 per share, and 1,000,000 shares of Series D preferred stock, par
value $1.00 per share. As of October 29, 2001, we have 20,076,024 shares of our
common stock, 2,300,000 shares of our Series A preferred stock, 2,000,000 shares
of our Series B preferred stock, 1,048,420 shares of our Series C preferred
stock, and no shares of our Series D preferred stock issued and outstanding. Our
common stock, Series A preferred stock and Series B preferred stock are listed
on the New York Stock Exchange. We intend to apply to list for trading on the
New York Stock Exchange any additional shares of our common stock which are
issued and sold hereunder.

COMMON STOCK

All shares of our common stock participate equally in dividends payable to
stockholders of our common stock when and as declared by our Board of Directors
and in net assets available for distribution to stockholders of our common stock
on liquidation or dissolution, have one vote per share on all matters submitted
to a vote of the stockholders and do not have cumulative voting rights in the
election of directors. All issued and outstanding shares of our common stock
are, and our common stock offered hereby will be upon issuance, validly issued,
fully paid and nonassessable. Holders of our common stock do not have
preference, conversion, exchange or preemptive rights. Our common stock is
listed on the New York Stock Exchange under the symbol "OHI."

SERIES A PREFERRED STOCK

The following description of the terms of the Series A preferred stock sets
forth certain general terms and provisions of the Series A preferred stock. The
description of certain provisions of the Series A preferred stock set forth
below does not purport to be complete and is subject to and qualified in its
entirety by reference to our Articles of Restatement, as amended, and the Board
of Directors' resolutions or articles supplementary relating to the Series A
preferred stock.

GENERAL. Under the Articles of Restatement, our Board of Directors is
authorized without further stockholder action to provide for the issuance of up
to an aggregate of 10,000,000 shares of our preferred stock, in one or more
series, with such designations, preferences, powers and relative participating,
optional or other special rights and qualifications, limitations or restrictions
thereon, including, but not limited to, dividend rights, dividend rate or rates,
conversion rights, voting rights, rights and terms of redemption, including
sinking fund provisions, the redemption price or prices, and the liquidation
preferences as will be stated in the resolutions providing for the issuance of a
series of such stock, adopted, at any time or from time to time, by our Board of
Directors. The shares of Series A preferred stock are fully paid and
nonassessable and have no preemptive rights.

RANK. The Series A preferred stock will, with respect to dividend rights
and rights upon liquidation, dissolution or winding-up of our company, rank:

- senior to all classes or series of our common stock, and to all equity
securities ranking junior to the Series A preferred stock with respect to
dividend rights or rights upon liquidation, dissolution or winding-up of
our company;

- on a parity with the Series B preferred stock, the Series C preferred
stock, the Series D preferred stock, if issued, and all other equity
securities we issue, the terms of which specifically provide that such
equity securities rank on a parity with the Series A preferred stock with

respect to dividend rights or rights upon liquidation, dissolution or
winding-up of our company; and

- junior to all of our existing and future indebtedness.

ANTI-TAKEOVER PROVISIONS IN OUR ARTICLES OF RESTATEMENT. See "Redemption
and Business Combination Provisions" for a description of certain provisions of
our Articles of Restatement, including provisions relating to redemption rights
and provisions, which may have certain anti-takeover effects.

DIVIDEND RIGHTS. Holders of shares of the Series A preferred stock are
entitled to receive, when and as declared by our Board of Directors, or a duly
authorized committee, out of funds legally available for the payment of
dividends, preferential cumulative cash dividends at the rate of 9.25% per annum
of the liquidation preference discussed below per share, equivalent to a fixed
annual amount of $2.31 per share. Dividends on the Series A preferred stock are
cumulative from the date of original issue and are payable quarterly in arrears
for each quarterly dividend period ended April 30, July 31, October 31 and
January 31, on or before the 15th day of May, August, November and February
respectively of each year or, if not a business day, the next succeeding
business day. The first dividend was paid on August 15, 1997 with respect to the
period commencing on the date of issue and ending on July 31, 1997. Any dividend
payable on Series A preferred stock for any partial period will be computed on
the basis of a 360-day year consisting of twelve 30-day months. Dividends will
be payable to holders of record as they appear in our stock records at the close
of business on the applicable record date which will be the last day of the
preceding calendar month prior to the applicable payment date of the dividend or
such other date designated by our Board of Directors that is not more than 30
nor less than 10 days prior to the date of the dividend payment. No dividends on
shares of Series A preferred stock will be declared by our Board of Directors or
paid or set apart for payment by us at such time as the terms and provisions of
any of our agreements, including any agreement relating to our indebtedness,
prohibit such declaration, payment or setting apart for payment or provide that
such declaration, payment or setting apart for payment would constitute a breach
thereof or a default thereunder, or if such declaration or payment is restricted
or prohibited by law. Notwithstanding the foregoing, dividends on the Series A
preferred stock will accrue whether or not we have earnings, whether or not
there are funds legally available for payment on such dividends and whether or
not such dividends are declared. Accrued but unpaid dividends on the Series A
preferred stock will not bear interest and holders of the Series A preferred
stock will not be entitled to any distributions in excess of full cumulative
distributions described above. Except as set forth in the next sentence, no
dividends will be declared or paid or set apart for payment on any of our
capital stock or any other series of preferred stock ranking, as to dividends,
on a parity with or junior to the Series A preferred stock other than a dividend
in shares of our common stock or in shares of any other class of stock ranking
junior to the Series A preferred stock as to dividends and upon liquidation for
any period unless full cumulative dividends have been or contemporaneously are
declared and paid or declared and a sum sufficient for the payment thereof is
set apart for such payment on the Series A preferred stock for past dividend
periods and the then current dividend period. When dividends are not paid in
full, or a sum sufficient for such payment is not so set apart, upon the
Series A preferred stock and the shares of any other series of preferred stock
ranking on a parity as to dividends with Series A preferred stock, all dividends
declared upon the Series A preferred stock and any other series of preferred
stock ranking on a parity as to dividends with the Series A preferred stock will
be declared pro rata so that the amount of dividends declared per share of
Series A preferred stock and any other series of preferred stock will in all
cases bear to each other the same ratio that the accrued dividends per share of
the Series A preferred stock and such other series of preferred stock bear to
each other, but not including any accrual in respect of unpaid dividends for
prior dividend periods if the preferred stock does not have a cumulative
dividend bear to each other. Except as provided above, unless full cumulative
dividends on the Series A preferred stock have been or contemporaneously are
declared and paid or

declared and a sum sufficient for payment thereof is set apart for payment for
all past dividend periods and the then current dividend period, no dividend,
other than in shares of common stock or other shares of capital stock ranking
junior to the Series A preferred stock as to dividends and liquidation, will be
declared or paid or set aside for payment nor will any other distribution be
declared or made upon the common stock, or any other class or series of our
capital stock ranking junior to or on a parity with the Series A preferred stock
as to dividends or upon liquidation, nor will any shares of our common stock, or
any other shares of our capital stock ranking junior to or on a parity with the
Series A preferred stock as to dividends or upon liquidation be redeemed,
purchased or otherwise acquired for any consideration, or any monies paid to or
made available for a sinking fund for the redemption for any such shares, by us
except by conversion into or exchange for other capital stock ranking junior to
the Series A preferred stock as to dividends and upon liquidation or redemption
or for the purpose of preserving our qualification as a real estate investment
trust under the Internal Revenue Code. Holders of shares of Series A preferred
stock will not be entitled to any dividend, whether payable in cash, property or
stock in excess of full cumulative dividends on the Series A preferred stock as
provided above. Any dividend payment made on shares of Series A preferred stock
will be first credited against the earliest accrued but unpaid dividends due
with respect to such shares which remain payable.

LIQUIDATION PREFERENCE. In the event of any liquidation, dissolution or
winding up of our company, whether voluntary or involuntary, the holders of
Series A preferred stock will be entitled to receive out of our assets legally
available for distribution to stockholders, the amount of $25 per share, plus an
amount equal to any accrued and unpaid dividends to the date of payment, but
without interest, before any distribution of assets is made to holders of our
common stock or any other class or series of our capital stock that ranks junior
to the Series A preferred stock as to liquidation rights. If, upon any voluntary
or involuntary liquidation, dissolution or winding up our company, the amounts
payable with respect to the Series A preferred stock and any other shares of our
preferred stock ranking as to any such distribution on a parity with Series A
preferred stock are not paid in full, the holders of the Series A preferred
stock and of such other shares of our preferred stock will share ratably in any
such distribution of our assets in proportion to the full respective
preferential amounts and accrued and unpaid dividends to which they are
entitled. After payment to the holders of the preferred stock of each series of
the full preferential amounts of the liquidating distribution and accrued and
unpaid dividends to which they are entitled, the holders of each such series of
the preferred stock will be entitled to no further participation in any
distribution of our assets. If liquidating distributions have been made in full
to all holders of shares of Series A preferred stock, our remaining assets will
be distributed among the holders of junior stock, according to their respective
rights and preferences and in each case according to their respective number of
shares. For such purposes, the consolidation or merger of us with or into any
other corporation, or the sale, lease or conveyance of all or substantially all
of our property or business, will not be deemed to constitute a liquidation,
dissolution or winding up of our company.

REDEMPTION. On and after July 1, 2002, Series A preferred stock may be
redeemed, in whole or from time to time in part, at our option and may be
subject to mandatory redemption pursuant to a sinking fund or otherwise, in each
case upon terms, at the time and at a redemption price of $25 per share plus all
accrued and unpaid dividends thereon without interest. The shares of the
Series A preferred stock redeemed will be restored to the status of authorized
but unissued shares of our preferred stock. In the event that fewer than all of
the outstanding shares of Series A preferred stock are to be redeemed, whether
by mandatory or optional redemption, the number of shares to be redeemed will be
determined by lot or pro rata, subject to rounding to avoid fractional shares,
as we may determine or by any other method as we may determine in our sole
discretion to be equitable. From and after the redemption date, unless we
default in providing for the payment of the redemption price plus accumulated
and unpaid dividends, if any, dividends will cease to accumulate on the shares
of Series A preferred stock called for redemption and all rights of the holders
thereof, except the right

to receive the redemption price plus accumulated and unpaid dividends, if any,
will cease. Unless full cumulative dividends on all shares of Series A preferred
stock will have been or contemporaneously are declared and a sum sufficient for
the payment thereof set apart for payment for all past dividend periods and the
then current dividend period, no shares of Series A preferred stock will be
redeemed unless all outstanding shares of Series A preferred stock are
simultaneously redeemed and we will not purchase or otherwise acquire directly
or indirectly any shares of Series A preferred stock, except by exchange for our
capital stock ranking junior to the Series A preferred stock as to dividends and
upon liquidation; provided, however, that the foregoing will not prevent our
purchase of excess shares in order to insure that we continue to meet the
requirements for qualification as a REIT, or the purchase or acquisition of
shares of Series A preferred stock pursuant to a purchase or exchange offer made
on the same terms to all holders of all outstanding shares of Series A preferred
stock. So long as no dividends are in arrears, we will be entitled at any time
to repurchase shares of Series A preferred stock in open market transactions
duly authorized by the Board of Directors and in compliance with the applicable
law.

CONVERSION RIGHTS. The shares of Series A preferred stock are not
convertible into common stock.

VOTING RIGHTS. Except as indicated below or except as required by law,
holders of the Series A preferred stock will not be entitled to vote for any
purpose. So long as any shares of Series A preferred stock remain outstanding,
we will not, without the affirmative vote or consent of the holders of at least
two-thirds of the shares of the Series A preferred stock outstanding at the
time, given in person or by proxy, either in writing or at a meeting, voting
separately as a class, amend, alter or repeal the provisions of the Articles of
Restatement or the articles supplementary relating to the Series A preferred
stock, whether by merger, consolidation or otherwise so as to materially and
adversely affect any right, preference, privilege or voting power of the
Series A preferred stock or the holders thereof; including without limitation,
the creation of any series of preferred stock ranking senior to the Series A
preferred stock with respect to payment of dividends or the distribution of
assets upon liquidation, dissolution or winding up. However, so long as the
Series A preferred stock (or any equivalent class or series of stock issued by
the surviving corporation in any merger or consolidation to which we become a
party) remains outstanding with the terms thereof materially unchanged, the
occurrence of any such event will not be deemed to materially and adversely
affect such rights, preferences, privileges or voting power of holders of the
Series A preferred stock. Any increase in the amount of the authorized preferred
stock or the creation or issuance of any other series of preferred stock or any
increase in the amount of authorized shares of such series, in each case ranking
on a parity with or junior to the Series A preferred stock with respect to
payment of dividends or the distribution of assets upon liquidation, dissolution
or winding up, will not be deemed to materially and adversely affect such
rights, preferences, privileges or voting powers. Whenever dividends on any
shares of Series A preferred stock are in arrears for 18 or more months, the
number of directors then constituting the Board of Directors will be increased
by two, if not already increased by a reason of a similar arrearage pursuant to
similar rights of any other preferred stock on parity with the Series A
Preferred Stock. The holders of such shares of Series A preferred stock, voting
separately as a class with any other preferred stock on parity with the
Series A preferred stock, if such stock has like voting rights that are then
exercisable, will be entitled to vote separately as a class in order to fill the
vacancies thereby created for the election of a total of two additional
directors at a special meeting called by the holders of record of such stock,
and at each subsequent annual meeting until all dividends accumulated on such
shares of preferred stock for the past dividend period and the dividend for the
then current dividend period shall have been fully paid or declared and a sum
sufficient for the payment thereof set aside for payment. Each director elected
pursuant to these voting rights, as a qualification for election as such, and
regardless of how elected, must submit to our Board of Directors a duly
executed, valid, binding and enforceable letter of resignation from the Board of
Directors, to be effective upon the date upon which all dividends accumulated on
such shares of preferred stock for the past dividend periods and the dividend
for the then current dividend period have been fully paid or declared and a sum
sufficient for the payment

thereof set aside for payment, whereupon the terms of office of all persons
elected pursuant to these voting rights will terminate upon the effectiveness of
their respective letters of resignation, and the number of directors then
constituting the Board of Directors will be reduced accordingly. If and when all
accumulated dividends and the dividend for the then current dividend period on
the Series A preferred stock have been paid in full or declared and set aside
for payment in full, the holders thereof will be divested of the foregoing
voting rights, subject to revesting in the event of each and every Series A
dividend default, and, if all accumulated dividends and the dividend for the
then current dividend period have been paid for all preferred stock with like
voting power in full or set aside for payment in full the term of office of each
director so elected will terminate. Any director elected pursuant to these
voting rights may be removed at any time with or without cause by, and will not
be removed otherwise than by the vote of, the holders of record of a majority of
the outstanding shares of the Series A preferred stock when they have the voting
rights described above, voting separately as a class with other preferred stock
on parity with the Series A preferred stock with like voting rights that are
then exercisable. So long as a Series A dividend default continues, any vacancy
in the office of a director elected pursuant to these voting rights may be
filled by written consent of the director elected pursuant to these voting
rights remaining in office, or if none remains in office, by a vote of the
holders of record of a majority of the outstanding shares of Series A preferred
stock when they have the voting rights described above, voting separately as a
class with other preferred stock on parity with the Series A preferred stock
with like voting rights that are then exercisable. The directors elected
pursuant to these voting rights will each be entitled to one vote per director
on any matter.

SERIES B PREFERRED STOCK

The following description of the terms of the Series B preferred stock sets
forth general terms and provisions of the Series B preferred stock. The
description of provisions of the Series B preferred stock set forth below does
not purport to be complete and is subject to and qualified in its entirety by
reference to our Articles of Restatement, and the Board of Directors'
resolutions or Articles Supplementary relating to the Series B preferred stock.

GENERAL. Under the Articles of Restatement, our Board of Directors is
authorized without further stockholder action to provide for the issuance of up
to an aggregate of 10,000,000 shares of our preferred stock, in one or more
series, with such designations, preferences, powers and relative participating,
optional or other special rights and qualifications, limitations or restrictions
thereon, including, but not limited to, dividend rights, dividend rate or rates,
conversion rights, voting rights, rights and terms of redemption, including
sinking fund provisions, the redemption price or prices, and the liquidation
preferences as will be stated in the resolutions providing for the issuance of a
series of such stock, adopted, at any time or from time to time, by our Board of
Directors. The shares of Series B preferred stock are fully paid and
nonassessable and have no preemptive rights.

RANK. The Series B preferred stock will, with respect to dividend rights
and rights upon liquidation, dissolution or winding-up of our company, rank:

- senior to all classes or series of our common stock, and to all equity
securities ranking junior to the Series B preferred stock with respect to
dividend rights or rights upon liquidation, dissolution or winding-up of
our company;

- on a parity with the Series A preferred stock, the Series C preferred
stock, the Series D preferred stock, if issued, and all other equity
securities we issue, the terms of which specifically provide that such
equity securities rank on a parity with the Series B preferred stock with
respect to dividend rights or rights upon liquidation, dissolution or
winding-up of our company; and

- junior to all of our existing and future indebtedness.

DIVIDEND RIGHTS. Holders of shares of the Series B preferred stock are
entitled to receive, when and as declared by our Board of Directors, or a duly
authorized committee, out of funds legally available for the payment of
dividends, preferential cumulative cash dividends at the rate of 8.625% per
annum of the liquidation preference per share equivalent to a fixed annual
amount of $2.156 per share. Dividends on the Series B preferred stock are
cumulative from the date of original issue and are payable in arrears for each
period ended July 31, October 31, January 31, and April 30 on or before the 15th
day of August, November, February and May of each year, or, if not a business
day, the next succeeding business day. The first dividend was paid on
August 15, 1998 with respect to the period ending on July 31, 1998. Any dividend
payable on Series B preferred stock for any partial period will be computed on a
basis of a 360-day year consisting of twelve 30-day months. Dividends will be
payable to holders of record as they appear in our stock records at the close of
business on the applicable record date, which will be the last day of the
preceding calendar month prior to the applicable dividend payment date or such
other date designated by our Board of Directors that is not more than 30 days
nor less than 10 days prior to such dividend payment date. No dividends on
shares of Series B preferred stock will be declared by our Board of Directors or
paid or set apart for payment by us at such time as the terms and provisions of
any agreement of our company, including any agreement relating to our
indebtedness, prohibit such declaration, payment or setting apart for payments
or provide that such declaration, payment or setting apart for payment will
constitute a breach thereof or a default thereunder, or if such declaration or
payment is restricted or prohibited by law. Notwithstanding the foregoing,
dividends on the Series B preferred stock will accrue whether or not we have
earnings, whether or not there are funds legally available for the payment on
such dividends and whether or not such dividends are declared. Accrued but
unpaid dividends on the Series B preferred stock will not bear interest and
holders of the Series B preferred stock will not be entitled to any
distributions in excess of the full cumulative distributions described above.
Except as set forth in the next sentence, no dividends will be declared or paid
or set apart for payment on any of our capital stock or any of our other series
of preferred stock ranking, as to dividends, on a parity with or junior to the
Series B preferred stock (other than a dividend in shares of our common stock or
in shares of any other class of stock ranking junior to the Series B preferred
stock as to the dividends and upon liquidation) for any period unless full
cumulative dividends have been or contemporaneously are declared and paid or
declared and a sum sufficient for the payment thereof is set apart for such
payment on the Series B preferred stock for all past dividend periods and the
then current dividend period. When dividends are not paid in full, or a sum
sufficient for such full payment is not so set apart, upon the Series B
preferred stock and the shares of any other series of preferred stock ranking on
a parity as to dividends with the Series B preferred stock, all dividends
declared upon the Series B preferred stock and any other series of preferred
stock ranking on a parity as to dividends with the Series B preferred stock will
be declared pro rata so that the amount of dividends declared per share of
Series B preferred stock and such other series of preferred stock will in all
cases bear to each other the same ratio that accrued dividends per share of the
Series B preferred stock and such other series of preferred stock, which will
not include any accrual in respect of unpaid dividends for prior dividend
periods if such preferred stock does not have a cumulative dividend, bear to
each other. Except as provided above, unless full cumulative dividends on the
Series B preferred stock have been or contemporaneously are declared and paid or
declared in a sum sufficient for payment thereof is set apart for payment for
all past dividend periods and the then current dividend period, no dividend,
other than in shares of common stock or other shares of our capital stock
ranking junior to the Series B preferred stock as to dividends and upon
liquidation, will be declared or paid or set aside for payment nor shall any
other distribution be declared or made upon the common stock, or any other

class or series of our capital stock ranking junior to or on a parity with the
Series B preferred stock as to dividends or upon liquidation, nor will any
shares of our common stock, or any other shares of our capital stock ranking
junior to or on a parity with the Series B preferred stock as to dividends or
upon liquidation be redeemed, purchased or otherwise acquired for any
consideration or any monies to be paid to or made available for a sinking fund
for the redemption for such shares by us, except by conversion into or exchange
for other capital stock ranking junior to the Series B preferred stock as to
dividends and upon liquidation or redemption for the purposes of preserving our
qualification as a real estate investment trust under the Internal Revenue Code.
Holders of shares of Series B preferred stock will not be entitled to any
dividend, whether payable in cash, property or stock, in excess of full
cumulative dividends on the Series B preferred stock as provided above. Any
dividend payment made on shares of Series B preferred stock will be first
credited against the earliest accrued but unpaid dividends due with respect to
such shares which remain payable.

LIQUIDATION PREFERENCE. In the event of any liquidation, dissolution or
winding up of our company, whether voluntary or involuntary, the holders of
Series B preferred stock will be entitled to receive out of our assets legally
available for distribution to stockholders, the amount of $25 per share plus an
amount equal to any accrued and unpaid dividends to the date of payment, but
without interest, before any distribution of assets is made to holders of our
common stock or any other class or series of our capital stock that ranks junior
to the Series B preferred stock in liquidation rights. If, upon any voluntary or
involuntary liquidation, dissolution or winding up of our company, the amounts
payable with respect to the Series B preferred stock and any other shares of our
preferred stock ranking as to any such distribution on a parity with Series B
preferred stock are not paid in full, the holders of the Series B preferred
stock and of such other shares of our preferred stock will share ratably in any
such distribution of our assets in proportion to the full respective
preferential amounts and accrued and unpaid dividends to which they are
entitled. After payment to the holders of the preferred stock of each series of
the full preferential amounts of the liquidating distribution and accrued and
unpaid dividends to which they are entitled, the holders of each such series of
the preferred stock will be entitled to no further participation in any
distribution of our assets. If liquidating distributions have been made in full
to all holders of shares of our preferred stock, our remaining assets will be
distributed among the holders of junior stock, according to their respective
rights and preferences and in each case according to their respective number of
shares. For such purposes, the consolidation or merger of us with or into any
other corporation, or the sale, lease or conveyance of all or substantially all
of our property or business, will not be deemed to constitute a liquidation,
dissolution or winding up of our company.

REDEMPTION. On and after July 1, 2003, the Series B preferred stock may be
redeemed, in whole or from time to time in part, at our option, and may be
subject to mandatory redemption pursuant to a sinking fund or otherwise, in each
case upon terms, at the time and a redemption price of $25 per share plus all
accrued and unpaid dividends thereon without interest. The shares of the
Series B preferred stock redeemed will be restored to the status of authorized
but unissued shares of our preferred stock. In the event that fewer than all of
the outstanding shares of Series B preferred stock are to be redeemed, whether
by mandatory or optional redemption, the number of shares to be redeemed will be
determined by lot or pro rata, subject to rounding to avoid fractional shares,
as we may determine or by any other method as we may determine in our sole
discretion to be equitable. From and after the redemption date, unless we
default in providing for the payment of the redemption price plus accumulated
and unpaid dividends, if any, dividends will cease to accumulate on the shares
of Series B preferred stock called for redemption and all rights of the holders
thereof, except the right to receive the redemption price plus accumulated and
unpaid dividends, if any, will cease. Unless full cumulative dividends on all
shares of Series B preferred stock will have been or contemporaneously are
declared and a sum sufficient for the payment thereof set apart for payment for
all past dividend periods and the then current dividend period, no shares of
Series B preferred stock will be redeemed unless all outstanding shares of
Series B preferred stock are simultaneously redeemed and we shall not

purchase or otherwise acquire directly or indirectly any shares of Series B
preferred stock except by exchange for our capital stock ranking junior to the
Series B preferred stock as to dividends and upon liquidation; provided,
however, that the foregoing will not prevent our purchase of shares of Series B
preferred stock in excess of 9.9% of the value of our outstanding capital stock
in order to insure that we continue to meet the requirements for qualification
as a REIT, or the purchase or acquisition of shares of Series B preferred stock
pursuant to a purchase or exchange offer made on the same terms to all holders
of all outstanding shares of Series B preferred stock. So long as no dividends
are in arrears, we will be entitled at any time to repurchase shares of
Series B preferred stock in open market transactions duly authorized by the
Board of Directors and in compliance with the applicable law.

CONVERSION RIGHTS. The shares of Series B preferred stock are not
convertible into common stock.

VOTING RIGHTS. Except as indicated below or except as required by law,
holders of the Series B preferred stock will not be entitled to vote for any
purpose. So long as any shares of Series B preferred stock remain outstanding,
we will not, without the affirmative vote or consent of the holders of at least
two-thirds of the shares of the Series B preferred stock outstanding at the
time, given in person or by proxy, either in writing or at a meeting, voting
separately as a class, amend, alter or repeal the provisions of the Articles of
Restatement or the articles supplementary relating to the Series B preferred
stock, whether by merger, consolidation or otherwise so as to materially and
adversely affect any right, preference, privilege or voting power of the
Series B preferred stock or the holders thereof, including without limitation,
the creation of any series of preferred stock ranking senior to the Series B
preferred stock with respect to payment of dividends or the distribution of
assets upon liquidation, dissolution or winding up. However, so long as the
Series B preferred stock or any equivalent class or series of stock issued by
the surviving corporation in any merger or consolidation to which we becomes a
party remains outstanding with the terms thereof materially unchanged, the
occurrence of any such event will not be deemed to materially and adversely
affect such rights, preferences, privileges or voting power of holders of the
Series B preferred stock. Any increase in the amount of the authorized preferred
stock or the creation or issuance of any other series of preferred stock or any
increase in the amount of authorized shares of such series, in each case ranking
on a parity with or junior to the Series B preferred stock with respect to
payment of dividends or the distribution of assets upon liquidation, dissolution
or winding up, will not be deemed to materially and adversely affect such
rights, preferences, privileges or voting powers. Whenever dividends on any
shares of Series B preferred stock are in arrears for 18 or more months, the
number of directors then constituting the Board of Directors will be increased
by two if not already increased by a reason of a similar arrearage pursuant to
similar rights of any other preferred stock on parity with the Series B
preferred stock. The holders of such shares of Series B preferred stock, voting
separately as a class with any other preferred stock on a parity with the
Series A preferred stock, if such stock has like voting rights that are then
exercisable, will be entitled to vote separately as a class, in order to fill
the vacancies thereby created for the election of a total of two additional
directors at a special meeting called by the holders of record of such stock,
and at each subsequent annual meeting until all dividends accumulated on such
shares of preferred stock for the past dividend period and the dividend for the
then current dividend period shall have been fully paid or declared and a sum
sufficient for the payment thereof set aside for payment. Each director elected
pursuant to these voting rights, as a qualification for election as such and
regardless of how elected must submit to our Board of Directors a duly executed,
valid, binding and enforceable letter of resignation from the Board of
Directors, to be effective upon the date upon which all dividends accumulated on
such shares of preferred stock for the past dividend periods and the dividend
for the then current dividend period have been fully paid or declared and a sum
sufficient for the payment thereof set aside for payment, whereupon the terms of
office of all persons elected pursuant to these voting rights will terminate
upon the effectiveness of their respective letters of resignation, and the
number of directors then constituting the Board of Directors will be reduced
accordingly. If and when all accumulated dividends and the dividend for the then
current dividend period on the Series B preferred stock shall have been paid in
full or declared and set aside for

payment in full, the holders thereof will be divested of the foregoing voting
rights subject to revesting in the event of each and every Series B dividend
default and, if all accumulated dividends and the dividend for the then current
dividend period have been paid for all preferred stock with like voting power in
full or set aside for payment in full, the term of office of each director so
elected will terminate. Any director elected pursuant to these voting rights may
be removed at any time with or without cause by, and will not be removed
otherwise than by the vote of, the holders of record of a majority of the
outstanding shares of the Series B preferred stock when they have the voting
rights described above, voting separately as a class with other preferred stock
on parity with the Series A preferred stock with like voting rights that are
then exercisable. So long as a Series B dividend default shall continue, any
vacancy in the office of a director elected pursuant to these voting rights may
be filled by written consent of the director elected pursuant to these voting
rights remaining in office, or if none remains in office, by a vote of the
holders of record of a majority of the outstanding shares of Series B preferred
stock when they have the voting rights described above, voting separately as a
class with other preferred stock on parity with the Series A preferred stock
with like voting rights that are then exercisable. The directors elected
pursuant to these voting rights will each be entitled to one vote per director
on any matter.

SERIES C PREFERRED STOCK

The following description of the terms of the Series C preferred stock sets
forth the general terms and provisions of the Series C preferred stock. The
description of the provisions of the Series C preferred stock set forth below
does not purport to be complete and is subject to and qualified in its entirety
by reference to our Articles of Restatement, and the Board of Directors'
resolutions or articles supplementary relating to the Series C preferred stock.
As part of Explorer's investment, our stockholders will be asked to approve the
adoption of Amended and Restated Articles Supplementary for Series C Convertible
Preferred Stock, which will alter certain terms and provisions of the Series C
preferred stock. The changes that would result from the adoption of the Amended
and Restated Articles Supplementary for Series C Convertible Preferred Stock are
described below but the description does not purport to be complete and is
subject to and qualified in its entirety to the Form of Amended and Restated
Articles Supplementary for Series C Convertible Preferred Stock.

GENERAL. Under the Articles of Restatement, our Board of Directors is
authorized without further stockholder action to provide for the issuance of up
to an aggregate of 10,000,000 shares of our preferred stock, in one or more
series, with such designations, preferences, powers and relative participating,
optional or other special rights and qualifications, limitations or restrictions
thereon, including, but not limited to, dividend rights, dividend rate or rates,
conversion rights, voting rights, rights and terms of redemption, including
sinking fund provisions, the redemption price or prices, and the liquidation
preferences as will be stated in the resolutions providing for the issuance of a
series of such stock, adopted, at any time or from time to time, by our Board of
Directors. The shares of Series C preferred stock are fully paid and
nonassessable and have no preemptive rights. The articles supplementary relating
to the Series C preferred stock authorize us to issue up to 2,000,000 shares of
the Series C preferred stock at an original issuance price of $100 per share.
However, the number of authorized shares of Series C preferred stock may
increase automatically if we pay any dividend in shares of Series C preferred
stock.

RANK. The Series C preferred stock will, with respect to dividend rights
and rights upon liquidation, dissolution or winding up of our company, rank
senior to our common stock and to all other equity securities that by their
terms rank junior to the Series C preferred stock with respect to dividend
rights or rights upon liquidation, dissolution or winding up of our company.
However, the Series C preferred stock will rank on a parity with our outstanding
Series A preferred stock, Series B preferred stock, Series D preferred stock, if
issued, and any other equity securities that may be issued by us that have terms
which specifically provide that such equity securities will rank on a parity
with

the Series C preferred stock. The Series C preferred stock will rank junior to
all of our existing and future indebtedness. Any of our convertible debt
securities will rank senior to the Series C preferred stock prior to conversion.

ANTI-TAKEOVER PROVISIONS IN OUR ARTICLES OF RESTATEMENT. See "Redemption
and Business Combination Provisions" for a description of provisions of our
Articles of Restatement, including provisions relating to redemption rights and
certain provisions, which may have anti-takeover effects.

DIVIDEND RIGHTS. Holders of shares of the Series C preferred stock are
entitled to receive dividends at the greater of:

- 10% per annum of the liquidation preference discussed below per share,
which is equivalent to a fixed annual amount of $10.00 per share; and

- the amount per share declared or paid by us on our common stock based on
the number of shares of common stock into which the shares of Series C
preferred stock are then convertible.

Assuming that quarterly dividends on our common stock are recommenced at the
rate of $0.25 per share, each share of Series C preferred stock would receive a
quarterly dividend of $4.00 or an annual dividend of $16.00. Dividends on each
share of the Series C preferred stock are cumulative commencing from the date of
issuance. Dividends are payable in arrears for each dividend period ended
July 31, October 31, January 31 and April 30 on or before the relevant dividend
payment date, which will be the 15th day of August, November, February and May
of each year. The first dividend was paid on November 15, 2000, with respect to
the period commencing on the date of first issuance of Series C preferred stock
and ending on October 31, 2000. Any dividend payable on shares of the Series C
preferred stock for any partial period will be prorated for the partial period
based on the actual number of days elapsed commencing with and including the
date of issuance of such shares through the end of the dividend period. For any
dividend periods ending after February 1, 2001, dividends are payable in cash.
Dividends on shares of Series C preferred stock will not be declared by the
Board of Directors or paid or set apart for payment if the terms of any
agreement to which we are a party, including any agreement relating to our
indebtedness, prohibit the declaration or payment of dividends on the Series C
preferred stock or provide that such declaration or payment would constitute a
breach or default under the agreement, or if the payment is restricted or
prohibited by law. Dividends on the Series C preferred stock will also accrue
whether or not we have earnings or other funds legally available for the payment
of such dividends and whether or not such dividends are declared. Accrued but
unpaid dividends on the Series C preferred stock will not bear interest. Except
as set forth in the next sentence, no dividends will be declared or paid or set
apart for payment on any of our capital stock or any other series of preferred
stock ranking, as to dividends, on a parity with or junior to the Series C
preferred stock, other than a dividend in shares of our common stock or in
shares of any other class of stock ranking junior to the Series C preferred
stock as to dividends and upon liquidation, for any period unless full
cumulative dividends have been or contemporaneously are declared and paid or
declared and a sum sufficient for the payment thereof is set apart for such
payment on the Series C preferred stock for all past dividend periods and the
then current dividend period. When dividends are not paid in full upon the
Series C preferred stock and the shares of any other series of preferred stock
ranking on a parity as to dividends with the Series C preferred stock, all
dividends declared upon the Series C preferred stock and any other series of
preferred stock ranking on a parity as to dividends with the Series C preferred
stock shall be declared pro rata so that the amount of dividends declared per
share of Series C preferred stock and such other series of preferred stock will
in all cases bear to each other the same ratio that accrued dividends per share
of the Series C preferred stock and such other series of preferred stock, bear
to each other, not including any accrual in respect of unpaid dividends for
prior dividend periods if such preferred stock does not have a cumulative
dividend, bear to each other. Unless full cumulative dividends on the Series C
preferred stock have been or contemporaneously are declared and paid in full or
declared and a sum sufficient

for the payment thereof has been set aside, no dividends, other than any other
shares of our capital stock ranking junior to or on a parity with the Series C
preferred stock as to dividends or upon liquidation, may be paid or declared
upon the common stock or any other class or series of our capital stock ranking
junior to or on a parity with the Series C preferred stock as to dividends, nor
will any shares of common stock or any other shares of our capital stock ranking
junior to or on a parity with the Series C preferred stock as to dividends or
liquidation be redeemed, purchased or otherwise acquired for any consideration
or any monies be paid to or made available for a sinking fund for the redemption
of such shares by us, except for certain limited exceptions such as dividends
paid for the purpose of preserving our qualification as a real estate investment
trust under the Internal Revenue Code. Any dividend payment made on shares of
the Series C preferred stock will first be credited against the earliest accrued
but unpaid dividend due with respect to such shares which remains payable.

LIQUIDATION PREFERENCE. Upon any voluntary or involuntary liquidation,
dissolution or winding up of our affairs, the holders of shares of Series C
preferred stock will be entitled to be paid the liquidation preference out of
our assets legally available for distribution to our stockholders before any
distribution of assets is made to holders of common stock or any other class or
series of our capital stock that ranks junior to the Series C preferred stock as
to liquidation rights. After payment of the full amount of the liquidation
preference, plus any accrued and unpaid dividends to which they are entitled,
the holders of Series C preferred stock will have no right or claim to any of
our remaining assets. The consolidation or merger of us with or into any other
corporation, trust or entity or of any other corporation with or into us in a
manner that constitutes a change in control, or the sale, lease or conveyance of
all or substantially all of our property or business, shall be deemed to
constitute a liquidation, dissolution or winding up of the company. The
"liquidation preference" with respect to each share of Series C preferred stock
means an amount equal to the original issue price ($100 per share), plus any
accrued but unpaid dividends.

REDEMPTION. The Series C preferred stock is not redeemable, subject,
however, to certain restrictions on transfer and ownership, described in
"Redemption and Business Combination Provisions."

VOTING RIGHTS. Each holder of shares of Series C preferred stock will be
entitled to a number of votes equal to the number of shares of common stock into
which the shares of Series C preferred stock held by such holder could then be
converted. The holders of Series C preferred stock will vote together as a
single class with holders of common stock, except as expressly required by law.
The holders of Series C preferred stock will have no separate class or series
vote on any matter except as expressly required by law or as otherwise set forth
in the articles supplementary related to the Series C preferred stock. Whenever
dividends on any shares of Series C preferred stock are in arrears for four or
more dividend periods, the number of directors then constituting the Board of
Directors will be increased, if necessary, by such number that would, if the
number were added to the number of directors already designated by the holders
of the Series C preferred stock, whether pursuant to the Stockholders Agreement
between us and Explorer or otherwise, constitute a majority of the Board of
Directors. The holders of the shares of Series C preferred stock, voting
separately as a class with any other preferred stock on a parity with the
Series C preferred stock, if such stock has like voting rights that are then
exercisable, will be entitled to vote separately as a class to elect the
additional preferred stock directors until such time as all dividends
accumulated on such shares of Series C preferred stock and any preferred stock
that ranks on a parity with the Series C preferred stock for the past dividend
periods and the dividend for the then current dividend period have been fully
paid, at which time the additional preferred stock directors elected pursuant to
the rights described above are required to resign. In any election of such
additional preferred stock directors, each holder of shares of Series C
preferred stock or shares of preferred stock that ranks on a parity with the
Series C preferred stock will be entitled to one vote for each $1.00 amount of
liquidation preference attributable to the shares of preferred stock held. So
long as any shares of Series C preferred stock remain outstanding, we will

not, without the affirmative vote or consent of the holders of at least
two-thirds of the shares of the Series C preferred stock outstanding at the
time, voting separately as a class together with any other classes of preferred
stock adversely affected in the same manner, amend, alter or repeal the
provisions of our Articles of Restatement or the articles supplementary related
to the Series C preferred stock, whether by merger, consolidation or otherwise,
so as to materially and adversely affect any right, preference, privilege or
voting power of the Series C preferred stock, including the creation of any
series of preferred stock ranking senior to the Series C preferred stock with
respect to payment of dividends or the distribution of assets upon liquidation,
dissolution or winding up, but not including the creation or issuance of
preferred stock ranking on a parity with the Series C preferred stock. No holder
of Series C preferred stock will be entitled to vote any shares of Series C
preferred stock that would result in such holder and any of its affiliates or
any group, as such term is used in Section 13(d)(3) of the Exchange Act, of
which any of them is a member voting in excess of 49.9% of our then-outstanding
voting stock. This provision does not apply to situations when the Series C
preferred stock is entitled to vote separately as a class. ``Voting stock" means
any shares of our capital stock that have the power to vote for the election of
directors. If the Amended Series C Articles Supplementary are adopted, the
holders of the Series C preferred stock will no longer have the special rights
upon dividend defaults described above. Instead, whenever dividends on any
shares of Series C preferred stock are in arrears for four or more dividend
periods, the Series C preferred stock will have the same special board election
rights as the Series D preferred stock, described below. Under the amended
Series C Articles Supplementary, the restriction limiting a holder of Series C
preferred stock from voting in excess of 49.9% of our then outstanding voting
stock will no longer exist.

CONVERSION. The holders of Series C preferred stock have the following
conversion rights:

OPTIONAL CONVERSION. Subject to certain limitations, each share of
Series C preferred stock, including all accrued and unpaid dividends thereon,
may be converted at any time into common stock at the option of the holder of
shares of the Series C preferred stock.

CONVERSION PRICE. Subject to certain limitations, each share of Series C
preferred stock may be converted into the number of shares of common stock as is
equal to the quotient obtained by dividing the original issue price for such
share by the conversion price discussed below in effect at the time of
conversion. The conversion price initially will be equal to the $6.25 per share
of our common stock, subject to adjustment from time to time as provided in the
supplementary articles related to the Series C preferred stock. The conversion
price will be adjusted to reflect the economic impact of a stock split, stock
combination, certain dividends paid in common stock, the issuance of additional
common stock at a price less than the then fair market value and similar events.

SERIES D PREFERRED STOCK

The following description of the terms of the Series D preferred stock sets
forth the general terms and provisions of the Series D preferred stock. The
description of the provisions of the Series D preferred stock set forth below
does not purport to be complete and is subject to and qualified in its entirety
by reference to our Articles of Restatement, and the Board of Directors'
resolutions or the Form of Articles Supplementary for Series D Convertible
Preferred Stock.

Whether or not we file the Series D Articles Supplementary with the Maryland
State Department of Assessment and Taxation or issue any shares of Series D
preferred stock will depend on whether our stockholders have approved the
issuance of common stock upon conversion of the Series D preferred stock prior
to the closing of Explorer's investment in our company.

RANK. The Series D preferred stock will, with respect to dividend rights
and rights upon liquidation, dissolution or winding up of our company, rank
(i) senior to our common stock and to all other equity securities that by their
terms rank junior to the Series D preferred stock with respect to dividend
rights or rights upon liquidation, dissolution or winding up of our company;
(ii) on a parity with our outstanding Series A preferred stock, Series B
preferred stock, Series C preferred stock and any other equity securities that
may be issued by our company that have terms which specifically provide that
such equity securities will rank on a parity with the Series D preferred stock;
and (iii) junior to all existing and future indebtedness of Omega. Any of our
Company's convertible debt securities will rank senior to the Series D preferred
stock prior to conversion.

ANTI-TAKEOVER PROVISIONS IN OUR ARTICLES OF RESTATEMENT. See "Redemption
and Business Combination Provisions" for a description of certain provisions of
our Articles of Restatement including provisions relating to redemption rights
and provisions, which may have certain anti-takeover effects.

DIVIDEND RIGHTS. If approval of our stockholders to permit the conversion
of Series D preferred stock into common stock is not received by January 30,
2002, holders of shares of the Series D preferred stock are entitled to receive
dividends at the greater of:

- 10% per annum of the liquidation preference, as discussed below, per
share; and

- the amount per share declared or paid by us on our common stock based on
the number of shares of common stock into which the shares of Series D
preferred stock are then convertible.

Dividends on each share of the Series D preferred stock will be cumulative
commencing from the date of issuance. Dividends are payable in arrears for each
dividend period ended July 31, October 31, January 31 and April 30 on or before
the relevant dividend payment date, which will be the 15th day of August,
November, February and May of each year. Any dividend payable on shares of the
Series D preferred stock for any partial period will be prorated for the partial
period based on the actual number of days elapsed commencing with and including
the date of issuance of such shares through the end of the dividend period.
Dividends will be payable at the election of the holders of a majority of the
Series D preferred stock with respect to any period after June 30, 2002, and at
the election of the Board of Directors with respect to any period on or prior to
June 30, 2002, (i) by the issuance as of the relevant dividend payment date of
additional shares of Series D preferred stock having an aggregate liquidation
preference equal to the amount of such accrued dividends, or (ii) in cash. If
dividends are paid in additional shares of Series D preferred stock, the number
of authorized shares of Series D preferred stock will be deemed, without further
action, to be increased by the number of shares so issued. Dividends on shares
of Series D preferred stock will not be declared by the Board of Directors or
paid or set apart for payment if the terms of any agreement to which we are a
party, including any agreement relating to our indebtedness, prohibits the
declaration or payment of dividends on the Series D preferred stock or provides
that such declaration, payment or setting aside for payment would constitute a
breach thereof or default thereunder; provided that in such case dividends on
the Series D preferred stock will accrue. Dividends on the Series D preferred
stock will also accrue whether or not we have earnings or other funds legally
available for the payment of such dividends. Accrued but unpaid dividends on the
Series D preferred stock will not bear interest. Except as set forth in the next
sentence, no dividends will be declared or paid or set apart for payment on any
of our capital stock or any other series of preferred stock ranking, as to
dividends, on a parity with or junior to the Series D preferred stock, other
than a dividend in shares of our common stock or in shares of any other class of

stock ranking junior to the Series D preferred stock as to dividends and upon
liquidation, for any period unless full cumulative dividends have been or
contemporaneously are declared and paid or declared and a sum sufficient for the
payment thereof is set apart for such payment on the Series D preferred stock
for all past dividend periods and the then current dividend period. When
dividends are not paid in full upon the Series D preferred stock and the shares
of any other series of preferred stock ranking on a parity as to dividends with
the Series D preferred stock, all dividends declared upon the Series D preferred
stock and any other series of preferred stock ranking on a parity as to
dividends with the Series D preferred stock will be declared pro rata so that
the amount of dividends declared per share of Series D preferred stock and such
other series of preferred stock will in all cases bear to each other the same
ratio that accrued dividends per share as the Series D preferred stock and such
other series of preferred stock, which shall not include any accrual in respect
of unpaid dividends for prior dividend periods if such preferred stock does not
have a cumulative dividend, bear to each other. Unless full cumulative dividends
on the Series D preferred stock have been or contemporaneously are declared and
paid in full or declared and a sum sufficient for the payment thereof is set
apart for payment in full, no dividends, other than certain dividends payable in
our capital stock, may be declared or paid upon our common stock, except for
certain limited exceptions such as dividends paid for the purpose of preserving
our qualification as a real estate investment trust under the Internal Revenue
Code of 1986, as amended. Any dividend payment made on shares of the Series D
preferred stock will first be credited against the earliest accrued but unpaid
dividend due with respect to such shares which remains payable.

LIQUIDATION PREFERENCE. Upon any voluntary or involuntary liquidation,
dissolution or winding up of our affairs, each holder of shares of Series D
preferred stock will, at the election of such holder, be entitled to be paid the
liquidation preference out of our assets legally available for distribution to
our stockholders before any distribution of assets is made to holders of common
stock or any other class or series of our capital stock that ranks junior to the
Series D preferred stock as to liquidation rights. After payment of the full
amount of the liquidation preference, plus any accrued and unpaid dividends and
interest thereon, if any, to which they are entitled, the holders of Series D
preferred stock will have no right or claim to any of our remaining assets. The
consolidation or merger of our Company with or into any other corporation, trust
or entity or of any other corporation with or into us in a manner that
constitutes a change in control, or the sale, lease or conveyance of all or
substantially all of our property or business will be deemed to constitute a
liquidation, dissolution or winding up of our company. The liquidation
preference for shares of Series D preferred stock is equal to the original issue
price of the Series D preferred stock plus any accrued and unpaid dividends.

REDEMPTION. The Series D preferred stock is not redeemable, subject,
however, to certain restrictions on transfer and ownership, described in
"Redemption and Business Combination Provisions."

VOTING RIGHTS. Holders of Series D preferred stock will not have voting
rights, except as set forth below. Whenever dividends on any shares of Series D
preferred stock are in arrears for two or more dividend periods, the number of
directors then constituting the Board of Directors will be increased by two if
not already increased pursuant to a similar provision in the Amended and
Restated Articles Supplementary for Series C Convertible Preferred Stock, which
will become effective upon stockholder approval as set forth in the description
of the Series C preferred stock above. The holders of such shares of Series D
preferred stock and the holders of Series C preferred stock upon which like
voting rights have been conferred and are exercisable, voting together as a
single class, will be entitled to vote as a single class to elect the additional
preferred stock directors until such time as all dividends accumulated on such
shares of Series D preferred stock and Series C preferred stock for the past
dividend periods and the dividend for the then current dividend period shall
have been fully paid, at which time the directors elected pursuant to this right
are required to resign. In any vote to elect or remove such directors, each
holder of shares of Series D preferred stock and Series C preferred stock

will be entitled to one vote for each share held by such holder. So long as any
shares of Series D preferred stock remain outstanding, we will not, without the
affirmative vote or consent of the holders of at least two-thirds of the shares
of the Series D preferred stock outstanding at the time (voting as a single
class together with any other classes of preferred stock adversely affected in
the same manner), amend, alter or repeal the provisions of our charter or the
Series D Articles Supplementary, whether by merger, consolidation or otherwise,
so as to materially and adversely affect any right, preference, privilege or
voting power of the Series D preferred stock, including the creation of any
series of preferred stock ranking senior to the Series D preferred stock with
respect to payment of dividends or the distribution of assets upon liquidation,
dissolution or winding up, but not including the creation or issuance of
preferred stock ranking on a parity with the Series D preferred stock.

CONVERSION. The holders of Series D preferred stock have the following
conversion rights:

AUTOMATIC CONVERSION. Each share of Series D preferred stock will
automatically convert into shares of our common stock upon the earlier of:
(i) the date the holders of a majority of the shares of our common stock, giving
effect to the conversion of the Series C preferred stock, present and entitled
to vote at a duly convened meeting of our stockholders vote to approve the
conversion of the Series D preferred stock into common stock and the issuance of
common stock upon such conversion and (ii) the date the New York Stock Exchange
waives any requirement for stockholder approval of the conversion of the
Series D preferred stock into common stock under its rules and policies.

CONVERSION PRICE. Subject to certain limitations on conversion set forth in
the Series D Articles Supplementary, each share of Series D preferred stock will
be converted into the number of shares of our common stock as is equal to the
quotient obtained by dividing the original issue price for such share by the
conversion price, as discussed below, in effect at the time of conversion. The
conversion price will be adjusted to reflect the economic impact of a stock
split, stock combination, certain dividends paid on common stock, the issuance
of additional common stock at a price less than fair market value and similar
events.

DIVIDENDS ON COMMON STOCK. In February 2001, we suspended payment of all
dividends on all common stock and preferred stock. We do not know when or if we
will resume dividend payments on our common stock or, if resumed, what the
amount or timing of any dividend will be. We do not anticipate paying dividends
on any class of capital stock at least until our $108 million of debt maturing
in the first half of 2002 has been repaid, and in any event, all accrued and
unpaid dividends on our Series A, B and C preferred stock must be paid in full
before dividends on our common stock can be resumed. We have made sufficient
distributions to satisfy the distribution requirements under the REIT rules of
the Internal Revenue Code of 1986 to maintain our REIT status for 2000 and
expect to satisfy the requirements under the REIT rules for 2001.

REDEMPTION AND BUSINESS COMBINATION PROVISIONS

If our Board of Directors is, at any time and in good faith, of the opinion
that direct or indirect ownership of at least 9.9% or more of the voting shares
of capital stock has or may become concentrated in the hands of one beneficial
owner, our Board of Directors will have the power:

- by lot or other means deemed equitable by it, to call for the purchase
from any of our stockholders a number of voting shares sufficient, in the
opinion of our Board of Directors, to maintain or bring the direct or
indirect ownership of voting shares of capital stock of such beneficial
owner to a level of no more than 9.9% of our outstanding voting shares of
our capital stock, and

- to refuse to transfer or issue voting shares of our capital stock to any
person whose acquisition of such voting shares would, in the opinion of
our Board of Directors, result in the direct or

indirect ownership by that person of more than 9.9% of our outstanding
voting shares of our capital stock.

Further, any transfer of shares, options, warrants, or other securities
convertible into voting shares that would create a beneficial owner of more than
9.9% of the outstanding voting shares will be deemed void ab initio and the
intended transferee will be deemed never to have had an interest therein.
Subject to the rights of the preferred stock described below, the purchase price
for any voting shares of our capital stock so redeemed will be equal to the fair
market value of the shares reflected in the closing sales prices for the shares,
if then listed on a national securities exchange, or the average of the closing
sales prices for the shares if then listed on more than one national securities
exchange, or if the shares are not then listed on a national securities
exchange, the latest bid quotation for the shares if then traded
over-the-counter, on the last business day immediately preceding the day on
which we send notices of such acquisitions, or, if no such closing sales prices
or quotations are available, then the purchase price shall be equal to the net
asset value of such stock as determined by our Board of Directors in accordance
with the provisions of applicable law. The purchase price for shares of
Series A preferred stock, Series B preferred stock, Series C preferred stock and
Series D preferred stock will be equal to the fair market value of the shares
reflected in the closing sales price for the shares, if then listed on a
national securities exchange, or if the shares are not then listed on a national
securities exchange, the purchase price will, in the case of the Series A
preferred stock and Series B preferred stock, be equal to the redemption price
of such shares of Series A preferred stock and Series B preferred stock,
respectively, and, in the case of the Series C preferred stock and Series D
preferred stock, the purchase price will be equal to the liquidation preference
of such shares of Series C preferred stock and Series D preferred stock,
respectively. From and after the date fixed for purchase by our Board of
Directors, the holder of any shares so called for purchase will cease to be
entitled to distributions, voting rights and other benefits with respect to such
shares, except the right to payment of the purchase price for the shares.

Our Articles of Restatement require that, except in certain circumstances,
business combinations between us and a beneficial holder of 10% or more of our
outstanding voting stock, a related person, be approved by the affirmative vote
of at least 80% of our outstanding voting shares.

A "business combination" is defined in the Articles of Incorporation as:

- any merger or consolidation of our company with or into a related person;

- any sale, lease, exchange, transfer or other disposition, including
without limitation a mortgage or any other security device, of all or any
"substantial part", as defined below, of our assets including, without
limitation, any voting securities of a subsidiary to a related person;

- any merger or consolidation of a related person with or into our Company;

- any sale, lease, exchange, transfer or other disposition of all or any
substantial part of the assets of a related person to our company;

- the issuance of any securities (other than by way of pro rata distribution
to all stockholders) of our company to a related person; and

- any agreement, contract or other arrangement providing for any of the
transactions described in the definition of business combination. The term
"substantial part" is defined as more than 10% of the book value of our
total assets as of the end of our most recent fiscal year ending prior to
the time the determination is being made.

The 80% voting requirement described above will not be applicable if
(i) our Board of Directors has unanimously approved in advance the acquisition
of our stock that caused a related person to become a related person or
(ii) the business combination is solely between us and a wholly owned
subsidiary. Our Board of Directors unanimously approved in advance Explorer's
acquisition of our

Series C preferred stock, which made Explorer a related person to us. Therefore,
the 80% voting requirement is inapplicable to Explorer.

Under the terms of our Articles of Restatement, our Board of Directors is
classified into three classes. Each class of directors serves for a term of
three years, with one class being elected each year. As of the date of this
prospectus, there are nine directors, with each class consisting of three
directors.

The foregoing provisions of the Articles of Incorporation and certain other
matters may not be amended without the affirmative vote of at least 80% of our
outstanding voting shares.

The foregoing provisions may have the effect of discouraging unilateral
tender offers or other takeover proposals which certain stockholders might deem
in their interests or in which they might receive a substantial premium. Our
Board of Directors' authority to issue and establish the terms of currently
authorized preferred stock, without stockholder approval, may also have the
effect of discouraging takeover attempts. The provisions could also have the
effect of insulating current management against the possibility of removal and
could, by possibly reducing temporary fluctuations in market price caused by
accumulation of shares, deprive stockholders of opportunities to sell at a
temporarily higher market price. However, our Board of Directors believes that
inclusion of the business combination provisions in the Articles of Restatement
may help assure fair treatment of stockholders and preserve our assets.

The foregoing summary of certain provisions of the Articles of Restatement
does not purport to be complete or to give effect to provisions of statutory or
common law. The foregoing summary is subject to, and qualified in its entirety
by reference to, the provisions of applicable law and the Articles of
Restatement, a copy of which is incorporated by reference as an exhibit to the
registration statement of which this prospectus is a part.

STOCKHOLDER RIGHTS PLAN

On May 12, 1999, our Board of Directors authorized the adoption of a
stockholder rights plan. The plan is designed to require a person or group
seeking to gain control of our company to offer a fair price to all of our
stockholders. The rights plan will not interfere with any merger, acquisition or
business combination that our Board of Directors finds is in our best interest
and the best interests of our stockholders.

In connection with the adoption of the stockholder rights plan, our Board of
Directors declared a dividend distribution of one right for each common share
outstanding on May 24, 1999. The stockholder protection rights will not become
exercisable unless a person acquires 10% or more of our common stock, or begins
a tender offer that would result in the person owning 10% or more of our common
stock. At that time, each stockholder protection right would entitle each
stockholder other than the person who triggered the rights plan to purchase
either our common stock or stock of an acquiring entity at a discount to the
then market price. The plan was not adopted in response to any specific attempt
to acquire control of our company. We amended the stockholder rights plan to
exempt Explorer and any of its transferees that become a party to the
stockholders' agreement we have with Explorer from being deemed an acquiring
person for purposes of the plan.

TRANSFER AGENT AND REGISTRAR

EquiServe Trust Company, N.A. is the transfer agent and registrar of the
common stock and preferred stock.

FEDERAL INCOME TAX CONSIDERATIONS

The following is a summary of material United States income tax consequences
of the offering to the holders of the common stock upon the distribution of
rights and to the holders of the rights upon their sale or exercise.

This summary is based on provisions of the Internal Revenue Code of 1986, as
amended, existing and proposed Treasury regulations promulgated thereunder and
administrative and judicial interpretations thereof, all as of the date hereof
and all of which are subject to change, possibly on a retroactive basis.

This summary is limited to those who have held the common stock, and will
hold the rights and any shares acquired upon the exercise of rights as "capital
assets" within the meaning of section 1221 of the Code. This summary does not
address all of the tax consequences that may be relevant to particular holders
in light of their personal circumstances, or to holders who are subject to
special rules (such as banks and other financial institutions, broker-dealers,
real estate investment trusts, regulated investment companies, insurance
companies, tax-exempt organizations and foreign taxpayers). In addition, this
summary does not include any description of the tax laws of any state, local or
non-U.S. government that may be applicable to a particular holder.

HOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE
PARTICULAR U.S. FEDERAL INCOME TAX CONSEQUENCES TO THEM OF THIS OFFERING, AS
WELL AS THE TAX CONSEQUENCES UNDER STATE, LOCAL, NON-U.S. AND OTHER TAX LAWS AND
THE POSSIBLE EFFECTS OF CHANGES IN TAX LAWS.

DISTRIBUTION OF RIGHTS. Holders of our common stock will not recognize
taxable income for federal income tax purposes upon distribution of the rights.

STOCKHOLDER BASIS AND HOLDING PERIOD OF THE RIGHTS. Except as provided in
the following sentence, the basis of the rights received by a stockholder as a
distribution with respect to such stockholder's common stock will be zero. If,
however, either (i) the fair market value of the rights on their date of
issuance is 15% or more of the fair market value (on the date of issuance) of
the common stock with respect to which they are received or (ii) the stockholder
properly elects, in his or her federal income tax return for the taxable year in
which the rights are received, to allocate part of the basis of such common
stock to the rights, then upon exercise or sale of the rights, the stockholder's
basis in such common stock will be allocated between the common stock and the
rights in proportion to the fair market values of each on the date of issuance.

The holding period of a stockholder with respect to the rights received as a
distribution on such stockholder's common stock will include the stockholder's
holding period for the common stock with respect to which the rights were
distributed.

LAPSE OF THE RIGHTS. Holders who allow the rights received by them in this
offering to lapse will not recognize any gain or loss, and no adjustment will be
made to the basis of the common stock, if any, they own.

EXERCISE OF THE RIGHTS; BASIS AND HOLDING PERIOD OF THE COMMON
STOCK. Holders will not recognize any gain or loss upon the exercise of rights.
The basis of the shares acquired through exercise of the rights will be equal to
the sum of the subscription price for the rights and the holder's basis in such
rights, if any. The holding period for the shares acquired through exercise of
the rights will begin on the day after the date the rights are exercised.

SALE OF RIGHTS. Holders will recognize gain or loss upon sale of the rights
equal to the difference between the amount realized and the basis allocated to
such rights, if any, as described above. Gain or

loss upon the sale of the rights will be long-term capital gain or loss if the
holding period for the shares is more than one year.

SALE OF SHARES. The sale of shares will result in the recognition of gain
or loss to the stockholder in an amount equal to the difference between the
amount realized and the stockholder's basis in the shares. Gain or loss upon the
sale of the shares will be long-term capital gain or loss if the holding period
for the shares is more than one year.

TAXATION OF THE COMPANY

GENERAL. We have elected to be taxed as a real estate investment trust, or
a REIT, under Sections 856 through 860 of the Code. We believe that we have been
organized and operated in such a manner as to qualify for taxation as a REIT
under the Code and we intend to continue to operate in such a manner, but no
assurance can be given that we have operated or will be able to continue to
operate in a manner so as to qualify or remain qualified.

The sections of the Code that govern the Federal income tax treatment of a
REIT are highly technical and complex. The following sets forth the material
aspects of those sections. This summary is qualified in its entirety by the
applicable Code provisions, rules and regulations promulgated thereunder, and
administrative and judicial interpretations thereof.

In the opinion of Powell, Goldstein, Frazer & Murphy LLP, whose opinion has
been filed as an Exhibit to the Registration Statement of which the Prospectus
is a part, we are organized in conformity with the requirements for
qualifications as a REIT, and our proposed method of operation will enable us to
continue to meet the requirements for continued qualification and taxation as a
REIT under the Code. This opinion is based on various assumptions and is
conditioned upon certain representations made by us as to factual matters. In
addition, this opinion is based upon our factual representations concerning our
business and properties set forth in the Prospectus. Moreover, such
qualification and taxation as a REIT depends upon our ability to meet, through
actual annual operating results, distribution levels and diversity of stock
ownership, and the various qualification tests imposed under the Code discussed
below, the results of which have not and will not be reviewed by Powell,
Goldstein, Frazer & Murphy LLP. Accordingly, no assurance can be given that the
various results of our operation for any particular taxable year will satisfy
such requirements. Further, such requirements may be changed, perhaps
retroactively, by legislative or administrative actions at any time. We have
neither sought nor obtained any formal ruling from the Internal Revenue Service
regarding our qualification as a REIT and presently have no plan to apply for
any such ruling. See "--Failure to Qualify."

If we qualify for taxation as a REIT, we generally will not be subject to
Federal corporate income taxes on our net income that is currently distributed
to stockholders. This treatment substantially eliminates the "double taxation"
(that is, taxation at both the corporate and the stockholder level) that
generally results from investment in a corporation. However, we will be subject
to Federal income tax as follows: First, we will be taxed at regular corporate
rates on any undistributed REIT taxable income, including undistributed net
capital gains; provided, however, that if we have a net capital gain, we will be
taxed at regular corporate rates on our undistributed REIT taxable income,
computed without regard to net capital gain and the deduction for capital gains
dividends, plus a 35% tax on undistributed net capital gain, if our tax as thus
computed is less than the tax computed in the regular manner. Second, under
certain circumstances, we may be subject to the "alternative minimum tax" on our
items of tax preference. Third, if we have (i) net income from the sale or other
disposition of "foreclosure property" which is held primarily for sale to
customers in the ordinary course of business or (ii) other nonqualifying income
from foreclosure property, we will be subject to tax at the highest regular
corporate rate on such income. Fourth, if we have net income from prohibited
transactions (which are, in general, certain sales or other dispositions of
property (other than foreclosure property) held primarily for sale to customers
in the ordinary course of business by us, (i.e., when we are acting

as a dealer)), such income will be subject to a 100% tax. Fifth, if we should
fail to satisfy the 75% gross income test or the 95% gross income test (as
discussed below), but have nonetheless maintained our qualification as a REIT
because certain other requirements have been met, we will be subject to a 100%
tax on an amount equal to (a) the gross income attributable to the greater of
the amount by which we fail the 75% or 95% test, multiplied by (b) a fraction
intended to reflect our profitability. Sixth, if we should fail to distribute by
the end of each year at least the sum of (i) 85% of our REIT ordinary income for
such year, (ii) 95% of our REIT capital gain net income for such year, and
(iii) any undistributed taxable income from prior periods, we will be subject to
a 4% excise tax on the excess of such required distribution over the amounts
actually distributed. Seventh, if we acquire any asset, which is defined as a
"built-in gain asset" from a C corporation that is not a REIT (i.e., generally a
corporation subject to full corporate-level tax) in a transaction in which the
basis of the built-in gain asset in our hands is determined by reference to the
basis of the asset (or any other property) in the hands of the C corporation,
and we recognize gain on the disposition of such asset during the 10-year
period, which is defined as the "recognition period", beginning on the date on
which such asset was acquired by us, then, to the extent of the built-in gain
(i.e., the excess of (a) the fair market value of such asset on the date such
asset was acquired by us over (b) our adjusted basis in such asset on such
date), such gain will be subject to tax at the highest regular corporate rate.
The results described above with respect to the recognition of built-in gain
assume we will make an election pursuant to Regs. Section 1.337(d)-ST.

REQUIREMENTS FOR QUALIFICATIONS. The Code defines a REIT as a corporation,
trust or association (1) which is managed by one or more trustees or directors;
(2) the beneficial ownership of which is evidenced by transferable shares, or by
transferable certificates of beneficial interest; (3) which would be taxable as
a domestic corporation, but for Sections 856 through 859 of the Code; (4) which
is neither a financial institution nor an insurance company subject to the
provisions of the Code; (5) the beneficial ownership of which is held by 100 or
more persons; (6) during the last half year of each taxable year not more than
50% in value of the outstanding stock of which is owned, actually or
constructively, by five or fewer individuals (as defined in the Code to include
certain entities, the "not closely held requirement"); and (7) which meets
certain other tests, described below, regarding the nature of its income and
assets and the amount of it annual distributions to stockholders. The Code
provides that conditions (1) to (4), inclusive, must be met during the entire
taxable year and that condition (5) must be met during at least 335 days of a
taxable year of twelve months, or during a proportionate part of a taxable year
of less than twelve months. For purposes of conditions (5) and (6), pension
funds and certain other tax-exempt entities are treated as individuals, subject
to a "look-through" exception in the case of condition (6).

INCOME TESTS. In order to maintain our qualification as a REIT, we annually
must satisfy two gross income requirements. First, at least 75% of our gross
income (excluding gross income from prohibited transactions) for each taxable
year must be derived directly or indirectly from investments relating to real
property or mortgages on real property (including generally "rents from real
property," interest on mortgages on real property and gains on sale of real
property, other than property described in Section 1221 of the Code) and income
derived from certain types of temporary investments. Second, at least 95% of our
gross income (excluding gross income from prohibited transactions) for each
taxable year must be derived from such real property investments, dividends,
interest and gain from the sale or disposition of stock or securities other than
property held for sale to customers in the ordinary course of business (or from
any combination of the foregoing).

Rents received by us will qualify as "rents from real property" in
satisfying the gross income requirements for a REIT described above only if
several conditions are met. First, the amount of the rent must not be based in
whole or in part on the income or profits of any person. However, any amount
received or accrued generally will not be excluded from the term "rents from
real property" solely by reason of being based on a fixed percentage or
percentages of receipts or sales. Second, the

100

Code provides that rents received from a tenant will not qualify as "rents from
real property" in satisfying the gross income tests if the REIT, or an owner
(actually or constructively) of 10% or more of the value of the REIT, actually
or constructively owns 10% or more of the value or voting power of such tenant,
which is defined as a related party tenant. Third, if rent attributable to
personal property, leased in connection with a lease of real property, is
greater than 15% of the total rent received under the lease, then the portion of
rent attributable to such personal property will not qualify as "rents from real
property." Finally, for rents received to qualify as "rents from real property,"
the REIT generally must not operate or manage the property or furnish or render
services to the tenants of such property, other than through an independent
contractor from which the REIT derives no revenue. The REIT may, however,
directly perform certain services that are "usually or customarily rendered" in
connection with the rental of space for occupance only and are not otherwise
considered "rendered to the occupant" of the property.

The term "interest" generally does not include any amount received or
accrued (directly or indirectly) if the determination of such amount depends in
whole or in part on the income or profits of any person. However, an amount
received or accrued generally will not be wholly excluded from the term
"interest" solely by reason of being based on a fixed percentage or percentages
of gross receipts or sales. Generally, if a loan is secured by both personal
property and real property, interest must be allocated between the personal
property and the real property, with only the interest allocable to the real
property qualifying as mortgage interest under the 75% gross income test.
Treasury Regulations provide that if a loan is secured by both personal and real
property and the fair market value of the real property as of the commitment
date equals or exceeds the amount of the loan, the entire interest amount will
qualify under the 75% gross income test. If the amount of the loan exceeds the
fair market value of the real property, the interest income is allocated between
real property and personal property based on the relative fair market value of
each. Under certain circumstances, income from shared appreciation mortgages may
qualify under the REIT gross income requirements. If we fail to satisfy one or
both of the 75% or 95% gross income tests for any taxable year, we may
nevertheless qualify as a REIT for such year if we are entitled to relief under
certain provisions of the Code. These relief provisions will be generally
available if our failure to meet such tests was due to reasonable cause and not
due to willful neglect, we attach a schedule of the sources of our income to our
return, and any incorrect information on the schedule was not due to fraud with
intent to evade tax. It is not possible, however, to state whether in all
circumstances we would be entitled to the benefit of these relief provisions.
Even if these relief provisions apply, a special 100% tax is imposed.

ASSET TESTS. At the close of each quarter of our taxable year, we must also
satisfy three tests relating to the nature of its assets. First, at least 75% of
the value of our total assets must be represented by real estate assets
(including (i) our allocable share of real estate assets held by partnerships in
which we own an interest and (ii) stock or debt instruments held for not more
than one year purchased with the proceeds of a stock offering or long-term (at
least five years) debt offering of our company), cash, cash items and government
securities. Second, not more than 25% of our total assets may be represented by
securities other than those of the 75% asset class. Third, of the investments
included in the 25% asset class, the value of any one issuer's securities owned
by us may not exceed 5% of the value of our total assets and we may not own more
than 10% of any one issuer's outstanding voting securities.

After initially meeting the asset tests at the close of any quarter, we will
not lose our status as a REIT for failure to satisfy any of the asset tests at
the end of a later quarter solely by reason of changes in asset values. If the
failure to satisfy the asset tests results from an acquisition of securities or
other property during a quarter, the failure can be cured by disposition of
sufficient nonqualifying assets within 30 days after the close of that quarter.
We intend to maintain adequate records of the value of its assets to ensure
compliance with the asset tests, and to take such other action within 30 days
after the close of any quarter as may be required to cure any noncompliance.

101

ANNUAL DISTRIBUTION REQUIREMENTS. In order to qualify as a REIT, we are
required to distribute dividends (other than capital gain dividends) to our
stockholders in an amount at least equal to (A) the sum of (i) 90% of our "REIT
taxable income" (computed without regard to the dividends paid deduction and our
net capital gain) and (ii) 90% of the net income (after tax), if any, from
foreclosure property, minus (B) the sum of certain items of noncash income. In
addition, if we dispose of any built-in gain asset during our recognition
period, we will be required to distribute at least 90% of the Built-In Gain
(after tax), if any, recognized on the disposition of such asset. Such
distributions must be paid in the taxable year to which they relate, or in the
following taxable year if declared before we timely file our tax return for such
year and if paid on or before the first regular dividend payment after such
declaration. We may also be entitled to pay and deduct deficiency dividends in
later years as a relief measure to correct errors in determining our taxable
income. In addition, such distributions are required to be made pro rata, with
no preference to any share of stock as compared with other shares of the same
class, and with no preference to one class of stock as compared with another
class except to the extent that such class is entitled to such a preference. To
the extent that we do not distribute all of our net capital gain or do
distribute at least 90%, but less than 100% of its "REIT taxable income," as
adjusted, we will be subject to tax thereon at regular ordinary and capital gain
corporate tax rates. We intend to make timely distributions sufficient to
satisfy these annual distribution requirements.

The availability to us of, among other things, depreciation deductions with
respect to our owned facilities depends upon the treatment by us as the owner of
such facilities for federal income tax purposes, and the classification of the
leases with respect to such facilities as "true leases" rather than financing
arrangements for federal income tax purposes. The questions of whether we are
the owner of such facilities and whether the leases are true leases for federal
tax purposes are essentially factual matters. We believe and it is the opinion
of tax counsel to us, that we will be treated as the owner of each of the
facilities that we lease, and such leases will be treated as true leases for
federal income tax purposes. This opinion is not binding on the IRS, however,
and no assurances can be given that the IRS may not successfully challenge our
status as the owner of our facilities subject to leases, and the status of such
leases as true leases, asserting that the purchase of the facilities by us and
the leasing of such facilities merely constitute steps in secured financing
transactions in which the lessees are owners of the facilities and we are merely
a secured creditor. In such event, we would not be entitled to claim
depreciation deductions with respect to any of the affected facilities. As a
result, we may fail to meet the 90% distribution requirement or, if such
requirement is met, then a larger percentage of distributions from us would
constitute ordinary dividend income to stockholders, rather than a partial
return of capital.

FAILURE TO QUALIFY

If we fail to qualify as a REIT in any taxable year, and the relief
provisions do not apply, we will be subject to tax (including any applicable
alternative minimum tax) on our taxable income at regular corporate rates.
Distributions to stockholders in any year in which we fail to qualify will not
be deductible and our failure to qualify as a REIT would reduce the cash
available for distribution by us to our stockholders. In addition, if we fail to
qualify as a REIT, all distributions to stockholders will be taxable as ordinary
income, to the extent of current and accumulated earnings and profits, and,
subject to certain limitations of the Code, corporate distributees may be
eligible for the dividends received deduction. Unless entitled to relief under
specific statutory provisions, we will also be disqualified from taxation as a
REIT for the four taxable years following the year during which qualification
was lost. It is not possible to state whether in all circumstances we would be
entitled to such statutory relief. Failure to qualify could result in our
incurring indebtedness or liquidating investments in order to pay the resulting
taxes.

102

OTHER TAX MATTERS

We own and operate a number of properties through qualified REIT
subsidiaries (the "QRSs"). We have owned 100% of the stock of each of the QRSs
at all times that each of the QRSs has been in existence. As a result, the QRSs
will be treated as qualified REIT subsidiaries under the Code. Code
Section 856(i) provides that a corporation which is a qualified REIT subsidiary
shall not be treated as a separate corporation, and all assets, liabilities, and
items of income, deduction, and credit of a qualified REIT subsidiary shall be
treated as assets, liabilities and such items (as the case may be) of the REIT.
Thus, in applying the tests for REIT qualification described in this Prospectus
under the heading "Taxation of the Company," the QRSs will be ignored, and all
assets, liabilities and items of income, deduction, and credit of such QRSs will
be treated as our assets, liabilities and items. We have not, however, sought or
received a ruling from the IRS that the QRSs are qualified REIT subsidiaries.

STATE AND LOCAL TAXES

We may be subject to state or local taxes in other jurisdictions such as
those in which we may be deemed to be engaged in activities or own property or
other interests. The state and local tax treatment of us may not conform to the
federal income tax consequences discussed above.

103

PLAN OF DISTRIBUTION

We are offering shares of our common stock directly to you pursuant to this
rights offering. We have not employed any brokers, dealers or underwriters in
connection with the solicitation or exercise of subscription privileges in this
rights offering and no commissions, fees or discounts will be paid in connection
with it. Certain of our officers and other employees may solicit responses from
you, but such officers and other employees will not receive any commissions or
compensation for such services other than their normal employment compensation.

We will pay the fees and expenses of EquiServe, as subscription agent, and
also has agreed to indemnify the subscription agent from any liability it may
incur in connection with the rights offering.

As soon as practicable after the record date, we will distribute the rights
and copies of this prospectus to individuals who owned shares of our common
stock on the record date. If you wish to exercise your rights and subscribe for
new shares of common stock, you should follow the procedures described under
"The Rights Offering--Procedure to Exercise Rights." The subscription rights
generally are non-transferable; there are substantial restrictions on the
transfer of the rights, as described under "The Rights Offering--Restrictions on
Transferability of Rights."

Shares of Omega common stock received through the exercise of subscription
rights will be traded on the NYSE under the symbol "OHI" as our currently
outstanding shares of common stock now trade.

LEGAL MATTERS

The validity of the issuance of the securities offered in this offering will
be passed upon for us by Powell, Goldstein, Frazer & Murphy LLP, Atlanta,
Georgia.

EXPERTS

Ernst & Young, LLP, independent auditors, have audited our consolidated
financial statements at December 31, 2000 and 1999, and for each of the three
years in the period ended December 31, 2000, and the related financial statement
schedules appearing elsewhere in this prospectus and the related registration
statement, as set forth in their report. We have included these consolidated
financial statements in reliance upon the report of Ernst & Young LLP, given on
the authority of such firm as experts in accounting and auditing.

WHERE YOU CAN FIND MORE INFORMATION

We have filed a registration statement on Form S-1 to register with the
Commission the rights and the shares of our common stock to be issued upon the
exercise of the rights. This prospectus is part of that registration statement.
As allowed by the SEC's rules, this prospectus does not contain all of the
information you can find in the registration statement or the exhibits to the
registration statement.

We file annual, quarterly and other information with the SEC. You may read
and copy any reports, statements and other information we file at the SEC's
public reference rooms in Washington, D.C., New York, New York, and Chicago,
Illinois. Please call 1 (800) SEC-0330 for further information on the public
reference rooms. Our filings will also be available to the public from
commercial document retrieval services and at the web site maintained by the SEC
at http://www.sec.gov.

Also, we will provide to you, free of charge, any of our documents filed
with the Securities and Exchange Commission. To get your free copies, please
call or write:

Omega Healthcare Investors, Inc.
900 Victors Way
Suite 350
Ann Arbor, Michigan 48108
Attn: Corporate Secretary
(734) 887-0200

104

OMEGA HEALTHCARE INVESTORS, INC.
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS

PAGE
--------

AUDITED CONSOLIDATED FINANCIAL STATEMENTS

Independent Auditors' Report................................ F-2

Consolidated Balance Sheets at December 31, 1999 and 2000... F-3

Consolidated Statements of Operations for the three years
ended December 31, 2000................................... F-4

Consolidated Statements of Changes in Shareholders' Equity
for the three years ended
December 31, 2000......................................... F-5

Consolidated Statements of Cash Flows for the three years
ended December 31, 2000................................... F-7

Notes to the Consolidated Financial Statements.............. F-8

UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Condensed Consolidated Balance Sheets at December 31, 2000
and September 30, 2001.................................... F-37

Condensed Consolidated Statements of Operations for the
three months ended September 30, 2001 and 2000, and the
nine months ended September 30, 2001 and 2000............. F-38

Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 2001 and 2000.................. F-39

Notes to the Unaudited Consolidated Financial Statements.... F-40

FINANCIAL STATEMENT SCHEDULES.

Schedule III--Real Estate and Accumulated Depreciation...... S-1

Schedule IV--Mortgage Loans on Real Estate.................. S-2

F-1

REPORT OF INDEPENDENT AUDITORS

Board of Directors
Omega Healthcare Investors, Inc.

We have audited the accompanying consolidated balance sheets of Omega
Healthcare Investors, Inc. and subsidiaries as of December 31, 2000 and 1999,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 2000.
Our audit also included the financial statement schedules listed in the Index on
page F-1. These financial statements and schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedules based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Omega
Healthcare Investors, Inc. and subsidiaries at December 31, 2000 and 1999, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedules, when considered in relation
to the basic financial statements taken as a whole, present fairly in all
material respects the information set forth therein.

/s/ Ernst & Young LLP

Chicago, Illinois
March 16, 2001, except
for the third and seventh paragraphs
of Note 15, as to which the
date is March 30, 2001.

F-2

OMEGA HEALTHCARE INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)

DECEMBER 31,
----------------------
2000 1999
--------- ----------

ASSETS
Real estate properties
Land and buildings at cost................................ $ 710,542 $ 746,915
Less accumulated depreciation............................. (89,870) (67,929)
--------- ----------
Real estate properties--net............................. 620,672 678,986
Mortgage notes receivable--net............................ 206,710 213,617
--------- ----------
827,382 892,603
Other investments--net...................................... 53,242 75,460
--------- ----------
880,624 968,063
Assets held for sale--net................................... 4,013 36,406
--------- ----------
Total Investments......................................... 884,637 1,004,469
Cash and cash equivalents................................... 7,172 4,105
Accounts receivable......................................... 10,497 9,664
Other assets................................................ 9,338 10,845
Operating assets for owned properties....................... 36,807 9,648
--------- ----------
Total Assets.............................................. $ 948,451 $1,038,731
========= ==========

LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Revolving lines of credit................................. $ 185,641 $ 166,600
6.95% Unsecured Notes due 2002............................ 125,000 125,000
6.95% Unsecured Notes due 2007............................ 100,000 100,000
Unsecured Notes due 2000.................................. -- 81,381
Other long-term borrowings................................ 24,161 33,383
Subordinated convertible debentures....................... 16,590 48,405
Accrued expenses and other liabilities.................... 18,002 14,818
Operating liabilities for owned properties................ 14,744 12,063
--------- ----------
Total Liabilities....................................... 484,138 581,650
Shareholders' equity:
Preferred Stock $1.00 par value:
Authorized--10,000 shares Issued and outstanding--2,300
shares Class A with an aggregate liquidation
preference of $57,500................................. 57,500 57,500
Issued and outstanding--2,000 shares Class B with an
aggregate liquidation preference of $50,000........... 50,000 50,000
Issued and outstanding--1,000 shares Class C with an
aggregate liquidation preference of $100,000.......... 100,000 --
Common stock $.10 par value:
Authorized--100,000 shares Issued and
outstanding--20,038 shares in 2000 and 19,877 shares
in 1999............................................... 2,004 1,988
Additional paid-in capital................................ 438,552 447,304
Cumulative net earnings................................... 182,548 232,105
Cumulative dividends paid................................. (365,654) (331,341)
Stock option loans........................................ -- (2,499)
Unamortized restricted stock awards....................... (607) (526)
Accumulated other comprehensive income (loss)............. (30) 2,550
--------- ----------
Total Shareholders' Equity.............................. 464,313 457,081
--------- ----------
Total Liabilities and Shareholders' Equity.............. $ 948,451 $1,038,731
========= ==========

See accompanying notes.

F-3

OMEGA HEALTHCARE INVESTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------

Revenues
Rental income............................................. $ 67,308 $ 76,389 $ 72,072
Mortgage interest income.................................. 24,126 36,369 30,399
Other investment income--net.............................. 6,594 6,814 5,971
Nursing home revenues of owned and operated assets........ 175,559 26,223 --
Miscellaneous............................................. 2,206 2,334 872
-------- -------- --------
275,793 148,129 109,314
Expenses
Depreciation and amortization............................. 23,265 24,211 21,542
Interest.................................................. 42,400 42,947 32,436
General and administrative................................ 6,425 5,231 4,852
Legal..................................................... 2,467 386 155
State taxes............................................... 195 503 358
Severance and consulting agreement costs.................. 4,665 -- --
Provision for loss on mortgages and notes receivable...... 15,257 -- --
Provision for impairment.................................. 61,690 19,500 6,800
Nursing home expenses of owned and operated assets........ 178,975 25,173 --
-------- -------- --------
335,339 117,951 66,143
-------- -------- --------
(Loss) earnings before gain (loss) on assets sold........... (59,546) 30,178 43,171
Gain (loss)on assets sold--net.............................. 9,989 (10,507) 2,798
Gain on distribution of Omega Worldwide, Inc................ -- -- 30,240
-------- -------- --------
Net (loss) earnings......................................... (49,557) 19,671 76,209
Preferred stock dividends................................... (16,928) (9,631) (8,194)
-------- -------- --------
Net (loss) earnings available to common..................... $(66,485) $ 10,040 $ 68,015
======== ======== ========
(Loss) earnings per common share:
Net (loss) earnings per share--basic...................... $ (3.32) $ 0.51 $ 3.39
======== ======== ========
Net (loss) earnings per share--diluted.................... $ (3.32) $ 0.51 $ 3.39
======== ======== ========
Dividends declared and paid per common share................ $ 1.00 $ 2.80 $ 2.68
======== ======== ========
Weighted Average Shares Outstanding, Basic.................. 20,052 19,877 20,034
======== ======== ========
Weighted Average Shares Outstanding, Diluted................ 20,052 19,877 20,041
======== ======== ========
Other comprehensive income (loss):
Unrealized Gain (Loss) on Omega Worldwide, Inc............ $ (2,580) $ 1,789 $ 761
======== ======== ========
Total comprehensive (loss) income........................... $(52,137) $ 21,460 $ 76,970
======== ======== ========

See accompanying notes.

F-4

OMEGA HEALTHCARE INVESTORS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

COMMON CUMULATIVE
STOCK ADDITIONAL PREFERRED NET
PAR VALUE PAID-IN CAPITAL STOCK EARNINGS
--------- --------------- --------- ----------

Balance at December 31, 1997 (19,475 shares)............... $1,947 $439,214 $ 57,500 $136,225
Issuance of common stock:
Grant of restricted stock (3 shares at an average of
$38.112 per share) and amortization of deferred stock
compensation......................................... 42
Dividend Reinvestment Plan (58 shares)................. 6 1,826
Conversion of debentures, net of issue costs (522 52
shares).............................................. 13,810
Stock options exercised (151 shares)................... 15 3,780
Acquisition of real estate (8 shares).................. 1 282
Stock option loans from directors, officers and
employees............................................
Shares purchased and retired (156 shares).............. (15) (4,515)
Issuance of preferred stock.............................. (2,000) 50,000
Net earnings for 1998.................................... 76,209
Distribution of common shares of Omega Worldwide, Inc....
Common dividends paid ($2.68 per share)..................
Preferred dividends paid (Series A of $2.313 per share
and Series B of $1.078 per share)......................
Unrealized Gain on Omega Worldwide, Inc..................
------ -------- -------- --------
Balance at December 31, 1998 (20,057 shares)............... 2,006 452,439 107,500 212,434
Issuance of common stock:
Grant of restricted stock (1 share at an average of
$29.709 per share) and amortization of deferred stock
compensation......................................... 270
Dividend Reinvestment Plan (113 shares) 11 2,370
Acquisition of real estate (8 shares) 1 301
Payments on stock option loans from directors, officers
and employees........................................
Shares purchased and retired (320 shares).............. (30) (8,076)
Net earnings for 1999.................................. 19,671
Common dividends paid ($2.80 per share)................
Preferred dividends paid (Series A of $2.313 per share
and Series B of $2.156 per share)....................
Unrealized Gain on Omega Worldwide, Inc................
------ -------- -------- --------
Balance at December 31, 1999 (19,877 shares)............... 1,988 447,304 107,500 232,105
Issuance of common stock:
Grant of restricted stock (187 shares at an average of 19
$6.378 per share) and amortization of deferred stock
compensation......................................... 1,179
Dividend Reinvestment Plan (74 shares)................. 7 487
Shares surrendered for stock option loan cancellation (10)
(100 shares)......................................... (579)
Issuance of preferred stock............................ (9,839) 100,000
Net loss for 2000...................................... (49,557)
Common dividends paid ($1.000 per share)...............
Preferred dividends paid and/or declared (Series A of
$2.313 per share, Series B of $2.156 per share and
Series C of $0.25 per share).........................
Unrealized Gain on Omega Worldwide, Inc..................
------ -------- -------- --------
Balance at December 31, 2000 (20,038 shares)............... $2,004 $438,552 $207,500 $182,548
====== ======== ======== ========

See accompanying notes.

F-5

OMEGA HEALTHCARE INVESTORS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

ACCUMULATED
UNAMORTIZED STOCK OTHER
CUMULATIVE RESTRICTED OPTION COMPREHENSIVE
DIVIDENDS STOCK AWARDS LOANS INCOME
---------- ------------ -------- -------------

Balance at December 31, 1997 (19,475 shares)............. $(165,824) $ (841)
Issuance of common stock:
Grant of restricted stock (3 shares at an average of
$38.112 per share) and amortization of deferred
stock compensation................................. 380
Dividend Reinvestment Plan (58 shares)...............
Conversion of debentures, net of issue costs (522
shares)............................................
Stock options exercised (151 shares).................
Acquisition of real estate (8 shares)................
Stock option loans from directors, officers and
employees.......................................... $(2,863)
Shares purchased and retired (156 shares)............
Issuance of preferred stock............................
Net earnings for 1998..................................
Distribution of common shares of Omega Worldwide, (39,062)
Inc..................................................
Common dividends paid ($2.68 per share)................ (53,693)
Preferred dividends paid (Series A of $2.313 per share (7,475)
and Series B of $1.078 per share)....................
Unrealized Gain on Omega Worldwide, Inc................ $ 761
--------- ------- ------- ------
Balance at December 31, 1998 (20,057 shares)............. (266,054) (461) (2,863) 761
Issuance of common stock:
Grant of restricted stock (1 share at an average of
$29.709 per share) and amortization of deferred
stock compensation................................. (65)
Dividend Reinvestment Plan (113 shares)
Acquisition of real estate (8 shares)
Payments on stock option loans from directors,
officers and employees............................. 67
Shares purchased and retired (320 shares)............ 297
Net earnings for 1999................................
Common dividends paid ($2.80 per share).............. (55,655)
Preferred dividends paid (Series A of $2.313 per (9,632)
share and Series B of $2.156 per share)............
Unrealized Gain on Omega Worldwide, Inc.............. 1,789
--------- ------- ------- ------
Balance at December 31, 1999 (19,877 shares)............. (331,341) (526) (2,499) 2,550
Issuance of common stock:
Grant of restricted stock (187 shares at an average
of $6.378 per share) and amortization of deferred
stock compensation................................. (81)
Dividend Reinvestment Plan (74 shares)...............
Shares surrendered for stock option loan cancellation
(100 shares)....................................... 2,499
Issuance of preferred stock..........................
Net loss for 2000....................................
Common dividends paid ($1.000 per share)............. (20,015)
Preferred dividends paid and/or declared (Series A of (14,298)
$2.313 per share, Series B of $2.156 per share and
Series C of $0.25 per share).......................
Unrealized Gain on Omega Worldwide, Inc................ (2,580)
--------- ------- ------- ------
Balance at December 31, 2000 (20,038 shares)............. $(365,654) $ (607) $ -- $ (30)
========= ======= ======= ======

See accompanying notes.

F-6

OMEGA HEALTHCARE INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

YEAR ENDED DECEMBER 31,
2000 1999 1998
---------- --------- ----------
(IN THOUSANDS)

OPERATING ACTIVITIES
Net (loss) earnings..................................... $ (49,557) $ 19,671 $ 76,209
Adjustment to reconcile net (loss) earnings to cash
provided by operating activities:
Depreciation and amortization....................... 23,265 24,211 21,543
Provision for impairment............................ 61,690 19,500 6,800
Provision for loss on notes and mortgages
receivable........................................ 15,257 -- --
(Gain)/loss on assets sold--net..................... (9,989) 10,507 (2,798)
Gain on distribution of Omega Worldwide............. -- -- (30,240)
Other............................................... 3,283 3,538 2,179
Net change in accounts receivable for Owned & Operated
assets--net............................................. (20,442) (9,588) --
Net change in accounts payable for Owned & Operated
assets.................................................. 4,674 3,962 --
Net change in other Owned & Operated assets and
liabilities............................................. (8,709) 8,040 --
Net change in operating assets and liabilities............ 20 (5,529) (3,980)
---------- --------- ----------
Net cash provided by operating activities................. 19,492 74,312 69,713

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds of revolving lines of credit--net................ 19,041 43,600 64,700
Proceeds from unsecured note offering..................... -- -- 125,000
Payments of long-term borrowings.......................... (122,418) (1,078) (612)
Receipts from Dividend Reinvestment Plan.................. 495 2,381 1,832
Dividends paid............................................ (29,646) (65,287) (61,168)
Proceeds from preferred stock offering.................... 100,000 -- 50,000
Costs of raising capital.................................. (9,839) -- (3,290)
Purchase of Company common stock.......................... -- (8,106) (3,545)
Deferred financing costs paid............................. (5,071) -- --
Other..................................................... -- (957) 356
---------- --------- ----------
Net cash (used in) provided by financing activities....... (47,438) (29,447) 173,273

CASH FLOW FROM INVESTING ACTIVITIES
Acquisition of real estate................................ -- (79,844) (157,474)
Placement of mortgage loans............................... -- (22,987) (125,850)
Proceeds from sale of real estate investments--net........ 35,792 18,198 37,771
Net proceeds from sale of Omega Worldwide shares.......... -- -- 16,938
Fundings of other investments--net........................ (6,815) (14,714) (17,488)
Collection of mortgage principal.......................... 2,036 54,749 3,748
Other..................................................... -- 1,961 746
---------- --------- ----------
Net cash provided by (used in) investing activities....... 31,013 (42,637) (241,609)
---------- --------- ----------
Increase in cash and cash equivalents..................... 3,067 2,228 1,377
Cash and cash equivalents at beginning of year............ 4,105 1,877 500
---------- --------- ----------
Cash and cash equivalents at end of year.................. $ 7,172 $ 4,105 $ 1,877
========== ========= ==========

See accompanying notes.

F-7

OMEGA HEALTHCARE INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1--ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

Omega Healthcare Investors, Inc., a Maryland corporation ("the Company"), is
a self-administered real estate investment trust (REIT). From the date the
Company commenced operations in 1992, it has invested primarily in long-term
care facilities, which include nursing homes, assisted living facilities and
rehabilitation hospitals. The Company currently has investments in 264
healthcare facilities located in the United States.

CONSOLIDATION

The consolidated financial statements include the accounts of our Company
and our wholly-owned subsidiaries after elimination of all material intercompany
accounts and transactions. Due to changes in the market conditions affecting the
long-term care industry, we have begun to operate a portfolio of our foreclosure
assets for our own account until such time as these facilities' operations are
stabilized and are re-leasable or saleable at lease rates or sales prices that
maximize the value of these assets to the Company. As a result, these facilities
and their respective operations are presented on a consolidated basis in the
Company's financial statements. Certain reclassifications have been made to the
1999 and 1998 financial statements for consistency with the presentation adopted
for 2000. Such reclassifications have no effect on previously reported earnings
or equity.

REAL ESTATE INVESTMENTS

Investments in leased real estate properties and mortgage notes are recorded
at cost and original mortgage amount, respectively. The cost of the properties
acquired is allocated between land and buildings based generally upon
independent appraisals. Depreciation for buildings is recorded on the
straight-line basis, using estimated useful lives ranging from 20 to 39 years.
Leasehold interests are amortized over the initial term of the lease, with lives
ranging from four to seven years.

OWNED & OPERATED ASSETS AND ASSETS HELD FOR SALE

In the ordinary course of our business activities, our Company periodically
evaluates investment opportunities and extends credit to customers. It also is
regularly engaged in lease and loan extensions and modifications. Additionally,
the Company monitors and manages its investment portfolio with the objectives of
improving credit quality and increasing returns. In connection with portfolio
management, it engages in various collection and foreclosure activities. When
the Company acquires real estate pursuant to a foreclosure proceeding, it is
designated as "owned and operated assets" and is recorded at the lower of cost
or fair value. Such amounts are included in real estate properties on the
Company's Consolidated Balance Sheet. Operating assets and operating liabilities
for the owned and operated properties are shown separately on the face of the
Company's Consolidated Balance Sheet and are detailed in Note 18--Segment
Information.

When a formal plan to sell real estate is adopted, the real estate is
classified as "assets held for sale," with the net carrying amount adjusted to
the lower of cost or estimated fair value, less cost of disposal. Depreciation
of the facilities is excluded from operations after management has committed to
a plan to sell the asset.

F-8

OMEGA HEALTHCARE INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 1--ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
IMPAIRMENT OF ASSETS

Provisions for impairment losses related to long-lived assets are recognized
when expected future cash flows are less than the carrying values of the assets.
If indicators of impairment are present, the Company evaluates the carrying
value of the related real estate investments in relationship to the future
undiscounted cash flows of the underlying facilities and, if impaired, the
Company then adjusts the net carrying value of leased properties and other
long-lived assets to the lower of discounted present value of its expected
future cash flows or fair value, if the sum of the expected future cash flow or
sales proceeds is less than carrying value.

CASH EQUIVALENTS

Cash equivalents consist of highly liquid investments with a maturity date
of three months or less when purchased. These investments are stated at cost,
which approximates fair value.

ACCOUNTS RECEIVABLE--OWNED AND OPERATED ASSETS

Accounts Receivable from Owned and Operated Assets consist primarily of
amounts due from Medicare and Medicaid programs, other government programs,
managed care health plans, commercial insurance companies and individual
patients. Amounts recorded include estimated provisions for loss related to
uncollectible accounts and disputed items.

INVESTMENTS IN EQUITY SECURITIES

Marketable securities held as available-for-sale are stated at fair value
with unrealized gains and losses for the securities reported in accumulated
other comprehensive income. Realized gains and losses and declines in value
judged to be other-than-temporary on securities held as available-for-sale are
included in investment income. The cost of securities sold is based on the
specific identification method. Interest and dividends on securities
available-for-sale are included in investment income.

DEFERRED FINANCING COSTS

Deferred financing costs are amortized on a straight-line basis over the
terms of the related borrowings. Amortization of financing costs totaling
$1,930,000, $1,342,000 and $1,042,000 in 2000, 1999 and 1998, respectively, is
classified as interest expense in the Consolidated Statements of Operations.
Unamortized deferred financing costs applicable to debt which is converted to
common stock are charged to paid-in capital at the date of conversion.

NON-COMPETE AGREEMENTS AND GOODWILL

Non-compete agreements and the excess of the purchase price over the value
of tangible net assets acquired (i.e., goodwill) are amortized on a
straight-line basis over periods ranging from five to ten years. Non-compete
agreements, which have cost of $4,982,000 became fully amortized and were
eliminated in 1999 by a charge to accumulated amortization. Due to the
diminished value of the related real estate assets, management has determined
that the goodwill is entirely impaired and has written off the balance of
$2,356,000 in 2000. Accumulated amortization was $-0- and $3,363,000 at
December 31, 2000 and 1999, respectively.

F-9

OMEGA HEALTHCARE INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 1--ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION

Rental income and mortgage interest income is recognized as earned over the
terms of the related master leases and mortgage notes, respectively. Such income
includes periodic increases based on pre-determined formulas as defined in the
master leases and mortgage loan agreements. Reserves are taken against earned
revenues from leases and mortgages when collection of amounts due become
questionable or when negotiations for restructurings of troubled operators lead
to lower expectations of expected ultimate collection amounts. Nursing home
revenues from owned and operated assets are recognized as services are provided.

FEDERAL AND STATE INCOME TAXES

As a qualified real estate investment trust, the Company will not be subject
to Federal income taxes on its income, and no provisions for Federal income
taxes have been made. The reported amounts of the Company's assets and
liabilities as of December 31, 2000 are less than the tax basis of assets by
approximately $21 million.

STOCK BASED COMPENSATION

The Company grants stock options to employees and directors with an exercise
price equal to the fair value of the shares at the date of the grant. In
accordance with the provisions of APB Opinion No. 25, Accounting for Stock
Issued to Employees, compensation expense is not recognized for these stock
option grants.

Expense related to Dividend Equivalent Rights is recognized as dividends are
declared, based on anticipated vesting.

ACCOUNTING ESTIMATES

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

RISKS AND UNCERTAINTIES

The Company is subject to certain risks and uncertainties affecting the
healthcare industry as a result of healthcare legislation and growing regulation
by federal, state and local governments. Additionally, the Company is subject to
risks and uncertainties as a result of changes affecting operators of nursing
home facilities due to the actions of governmental agencies and insurers to
limit the growth in cost of healthcare services. (See Note 5--Concentration of
Risk).

NOTE 2--PROPERTIES

LEASED PROPERTY

The Company's leased real estate properties, represented by 130 long-term
care facilities and 2 rehabilitation hospitals at December 31, 2000, are leased
under provisions of master leases with initial

F-10

OMEGA HEALTHCARE INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 2--PROPERTIES (CONTINUED)
terms ranging from 10 to 16 years, plus renewal options. Substantially all of
the master leases provide for minimum annual rentals which are subject to annual
increases based upon increases in the Consumer Price Index or increases in
revenues of the underlying properties, with certain maximum limits. Under the
terms of the leases, the lessee is responsible for all maintenance, repairs,
taxes and insurance on the leased properties.

A summary of the Company's investment in leased real estate properties is as
follows:

DECEMBER 31,
-----------------------
2000 1999
-------- --------
(IN THOUSANDS)

Buildings............................................ $553,183 $655,588
Land................................................. 26,758 30,517
-------- --------
579,941 686,105
Less accumulated depreciation........................ (72,190) (67,115)
-------- --------
Total.............................................. $507,751 $618,990
======== ========

The future minimum contractual rentals for the remainder of the initial
terms of the leases are as follows:

(IN THOUSANDS)
--------------

2001........................................................ $ 65,212
2002........................................................ 65,194
2003........................................................ 64,186
2004........................................................ 62,816
2005........................................................ 62,405
Thereafter.................................................. 310,569
--------
$630,382
========

OWNED AND OPERATED PROPERTY

The Company's owned and operated real estate properties include 69 long-term
care facilities at December 31, 2000, of which 57 are owned directly by the
Company and 12 are subject to third-party leases. An impairment charge of
$41.3 million was taken on these assets during the year ended December 31, 2000.

F-11

OMEGA HEALTHCARE INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 2--PROPERTIES (CONTINUED)
A summary of the Company's investment in the 57 owned and operated real
estate properties is as follows:

DECEMBER 31,
-----------------------
2000 1999
-------- --------
(IN THOUSANDS)

Buildings............................................. $124,452 $57,637
Land.................................................. 6,149 3,173
-------- -------
130,601 60,810
Less accumulated depreciation......................... (17,680) (814)
-------- -------
Total............................................... $112,921 $59,996
======== =======

A summary of the Company's investment in the 12 facilities subject to
third-party leases is as follows:

DECEMBER 31, 2000
-----------------

Leasehold interest.......................................... $1,771
Less accumulated amortization............................... (92)
------
Total..................................................... $1,679
======

Future minimum operating lease payments on the 12 facilities are as follows:

2001........................................................ $ 4,318
2002........................................................ 4,318
2003........................................................ 4,318
2004........................................................ 3,335
2005........................................................ 2,221
Thereafter.................................................. 855
-------
$19,365
=======

ASSETS SOLD OR HELD FOR SALE

During 1998, management initiated a plan to dispose of certain properties
judged to have limited long-term potential and to re-deploy the proceeds.
Following a review of the portfolio, assets identified for sale in 1998 had a
cost of $95 million, a net carrying value of $83 million, and annualized
revenues of approximately $11.4 million. In 1998, the Company recorded a
provision for impairment of $6.8 million to adjust the carrying value of certain
assets to their fair value, less cost of disposal. During 1998, the Company
completed sales of two groups of assets, yielding sales proceeds of
$42.0 million. Gains realized in 1998 from the dispositions approximated
$2.8 million.

During 1999, the Company completed sales yielding net proceeds of
$18.2 million, realizing losses of $10.5 million. In addition, management
initiated a plan for additional asset sales to be completed in 2000. The
additional assets identified as assets held for sale had a cost of
$33.8 million, a net carrying amount of $28.6 million and annualized revenue of
approximately $3.4 million. As a result of this

F-12

OMEGA HEALTHCARE INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 2--PROPERTIES (CONTINUED)
review, the Company recorded a provision for impairment of $19.5 million to
adjust the carrying value of assets held for sale to their fair value, less cost
of disposal.

During 2000, the Company recorded a $14.4 million provision for impairment
related to assets held for sale and reclassified $24.3 million of assets held
for sale to "owned and operated assets" as the timing and strategy for sale or,
alternatively, re-leasing were revised in light of prevailing marketing
conditions. During 2000, the Company realized disposition proceeds of
$1.1 million on assets held for sale. Additionally, the Company received
proceeds of $34.7 million from sales of certain of its core and other assets,
resulting in a gain of $9.9 million.

Following is a summary of the impairment reserve:

Beginning Impairment at January 1, 1998..................... $ 0
Provision charged........................................... 6,800
Provision applied........................................... --
--------
Impairment Balance at December 31, 1998..................... 6,800
Provision charged........................................... 19,500
Provision applied........................................... (4,567)
--------
Impairment Balance at December 31, 1999..................... 21,733
Provision charged........................................... 14,415
Converted to Owned and Operated............................. (17,339)
Provision applied........................................... (10,060)
--------
Impairment Balance at December 31, 2000..................... $ 8,749
========

F-13

OMEGA HEALTHCARE INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 3--MORTGAGE NOTES RECEIVABLE

The following table summarizes the mortgage notes balances for the years
ended December 31, 2000 and 1999:

2000 1999
-------- --------
(IN THOUSANDS)

Gross mortgage notes.................................... $211,581 $213,617

Reserve for uncollectable loans......................... (4,871) --
-------- --------

Net mortgage notes at December 31....................... $206,710 $213,617
======== ========

Mortgage notes receivable relate to 63 long-term care facilities. The
mortgage notes are secured by first mortgage liens on the borrowers' underlying
real estate and personal property. The mortgage notes receivable relate to
facilities located in 13 states, operated by 12 independent healthcare operating
companies.

The Company monitors compliance with mortgages and when necessary has
initiated collection, foreclosure and other proceedings with respect to certain
outstanding loans.

During 2000, the Company determined that a certain mortgage was impaired and
accordingly wrote down the mortgage to its net realizable value resulting in a
provision for loan loss of $4.9 million. Income recognized on the mortgage was
$745,000, $966,000, and $951,000 for the years ended December 31, 2000, 1999 and
1998, respectively.

The following are the three primary mortgage structures currently used by
the Company:

CONVERTIBLE PARTICIPATING MORTGAGES are secured by first mortgage liens on
the underlying real estate and personal property of the mortgagor. Interest
rates are usually subject to annual increases based upon increases in the CPI or
increases in revenues of the underlying long-term care facilities, with certain
maximum limits. Convertible Participating Mortgages afford the Company an option
to convert its mortgage into direct ownership of the property, generally at a
point six to nine years from inception; they are then subject to a leaseback to
the operator for the balance of the original agreed term and for the original
agreed participation in revenues or CPI adjustments. This allows the Company to
capture a portion of the potential appreciation in value of the real estate. The
operator has the right to buy out the Company's option at formula prices.

PARTICIPATING MORTGAGES are secured by first mortgage liens on the
underlying real estate and personal property of the mortgagor. Interest rates
are usually subject to annual increases based upon increases in the CPI or
increases in revenues of the underlying long-term care facilities, with certain
maximum limits.

FIXED-RATE MORTGAGES, with a fixed interest rate for the mortgage term, are
also secured by first mortgage liens on the underlying real estate and personal
property of the mortgagor.

F-14

OMEGA HEALTHCARE INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 3--MORTGAGE NOTES RECEIVABLE (CONTINUED)
The outstanding principal amount of mortgage notes receivable, net of
allowances, are as follows:

DECEMBER 31,
-------------------
2000 1999
-------- --------
(IN THOUSANDS)

Participating mortgage note due 2007; interest at 16.00%
payable monthly (excluding 1.0% deferred interest)........ $ 58,800 $ 58,800

Participating mortgage note due 2003; interest at 10.55%
payable monthly........................................... 37,500 37,500

Participating mortgage note due 2008; interest at 10.08%
payable monthly........................................... 12,000 12,000

Convertible participating mortgage note due 2001; monthly
interest payments at 16.16% with principal due at
maturity.................................................. 8,932 8,932

Convertible participating mortgage note due 2016, monthly
interest payments at 13.50%............................... 8,114 8,127

Mortgage notes due 2015; monthly payments of $189,004,
including interest at 11.01%.............................. 16,199 16,656

Mortgage note due 2010; monthly payment of $124,826,
including interest at 11.50%.............................. 12,805 12,825

Mortgage note due 2006; monthly payment of $107,382,
including interest at 11.50%.............................. 11,025 11,035

Other mortgage notes........................................ 19,527 20,975

Other convertible participating mortgage notes.............. 15,287 15,297

Other participating mortgage notes.......................... 6,521 11,470
-------- --------

Total mortgages--net.................................... $206,710 $213,617
======== ========

Mortgage notes are shown net of allowances of $4,871,000 in 2000. There were
no provisions recorded prior to 2000.

On December 30, 1999, the Company provided notice as to an Event of Default
and acceleration of the due date to the mortgagor of the $58.8 million
participating mortgage note. The total obligation outstanding at that time,
including deferred interest, was $63.3 million. At that date the mortgagor was
current with respect to principal and interest payments due on the loan but had
failed to fully comply with certain covenants and to pay certain property taxes.
On January 13, 2000, the Company offset security deposits of $2.4 million
against unpaid current and deferred interest. On January 18, 2000 the mortgagor
filed with the Bankruptcy Court of Wilmington, Delaware for protection under
Chapter 11 of the Bankruptcy Code. While the Company's collection actions have
been stayed as a result of the bankruptcy filing by the mortgagor, the Company
believes the security for its loan will be adequate for collection of amounts
due. During 2000, the Company recorded interest on this mortgage note at a rate
equal to the results expected from negotiations with the operator, and continues
to accrue interest at this reduced rate. On February 1, 2001, four facilities
that were collateral for this mortgage were sold to a third-party, and the
Company received a separate mortgage note in the amount of $4.5 million,

F-15

OMEGA HEALTHCARE INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 3--MORTGAGE NOTES RECEIVABLE (CONTINUED)
which is secured by liens on the underlying real estate. The Company reduced the
amount of the participating mortgage note by $4.5 million.

The estimated fair value of the Company's mortgage loans at December 31,
2000 is approximately $230.6 million. Fair value is based on the estimates by
management using rates currently prevailing for comparable loans.

NOTE 4--OTHER INVESTMENTS

A summary of the Company's other investments is as follows:

AT DECEMBER 31,
-------------------
2000 1999
-------- --------

Assets leased by United States Postal Service-net......... $22,416 $22,672
Notes Receivable.......................................... 24,550 27,548
Allowance for loss on notes receivable.................... (8,995) (1,460)
Equity Securities of Omega Worldwide Inc.................. 5,435 8,015
Equity Securities of Principal Healthcare Finance
Limited................................................. 1,615 1,615
Equity Securities of Principal Healthcare Finance Trust... 1,266 1,266
Other..................................................... 6,955 15,804
------- -------
Total Other Investments............................... $53,242 $75,460
======= =======

NOTE 5--CONCENTRATION OF RISK

As of December 31, 2000, 92% of the Company's real estate investments are
related to long-term care facilities. The Company's facilities are located in 29
states and are operated by 27 independent healthcare operating companies.

Investing in long-term healthcare facilities involves certain risks stemming
from government legislation and regulation of operators of the facilities. The
Company's tenants/mortgagors depend on reimbursement legislation which will
provide them adequate payments for services because a significant portion of
their revenue is derived from government programs funded under Medicare and
Medicaid. The Medicare program recently implemented a Prospective Payment System
for skilled nursing facilities, which replaced cost-based reimbursements and
significantly reduced payments for services provided. Additionally, certain
State Medicaid programs have implemented similar prospective payment systems.
The reduction in payments to nursing home operators pursuant to the Medicare and
Medicaid payment changes has negatively affected the revenues of the Company's
nursing home facilities.

Most of the Company's nursing home investments were designed exclusively to
provide long-term healthcare services. These facilities are also subject to
detailed and complex specifications for the physical characteristics as mandated
by various governmental authorities. If the facilities cannot be operated as
long-term care facilities, finding alternative uses may be difficult. The
Company's triple-net leases require its tenants to comply with regulations
affecting its facilities, and the Company regularly monitors compliance by
tenants with healthcare facilities' regulations. Nevertheless, if tenants fail
to perform their obligations, the Company may be required to do so in order to
maintain the value of its investments.

F-16

OMEGA HEALTHCARE INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 5--CONCENTRATION OF RISK (Continued)
Approximately 77% of the Company's real estate investments are operated by 7
public companies, including Sun Healthcare Group, Inc. (26.1%), Integrated
Health Services, Inc. (17.5%), Advocat, Inc. (11.6%), Vencor Operating, Inc.
(5.8%), Mariner Post-Acute Network (6.4%), Genesis Health Ventures, Inc. (5.3%)
and Alterra Healthcare Corporation (formerly Alternative Living Services)
(3.7%). Of the remaining 20 operators, none operate investments in facilities
representing more than 3.4% of the total real estate investments.

Many of the nursing home companies operating the Company's facilities have
reported significant operating losses in the last two years. The Company has
initiated discussions with all operators who are experiencing financial
difficulties, as well as state officials who regulate its properties. It also
has initiated various other actions to protect its interest under its leases and
mortgages.

NOTE 6--LEASE AND MORTGAGE DEPOSITS

The Company obtains liquidity deposits and letters of credit from most
operators pursuant to its leases and mortgages. These generally represent the
monthly rental and mortgage interest income for periods ranging from three to
six months with respect to certain of its investments. At December 31, 2000, the
Company held $7.6 million in such liquidity deposits and $9.6 million in letters
of credit. Additional security for rental and mortgage interest revenue from
operators is provided by covenants regarding minimum working capital and net
worth, liens on accounts receivable and other operating assets of the operators,
provisions for cross default, provisions for cross-collateralization and by
corporate/personal guarantees.

NOTE 7--BORROWING ARRANGEMENTS

On July 17, 2000, the Company replaced its $200 million unsecured revolving
line of credit facility with a new $175 million secured revolving line of credit
facility that expires on December 31, 2002. Borrowings bear interest at 2.5% to
3.25% over LIBOR, based on the Company's leverage ratio. Borrowings of
approximately $129 million are outstanding at December 31, 2000. LIBOR based
borrowings under this facility bear interest at a weighted-average rate of
10.00% at December 31, 2000 and 7.30% at December 31, 1999. Investments with a
gross book value of approximately $240 million are pledged as collateral for
this revolving line of credit facility.

On August 16, 2000, the Company replaced its $50 million secured revolving
line of credit facility with a new $75 million secured revolving line of credit
facility that expires on March 31, 2002 as to $10 million and June 30, 2005 as
to $65 million. Borrowings under the facility bear interest at 2.5% to 3.75%
over LIBOR, based on the Company's leverage ratio and collateral assigned. LIBOR
based borrowings under this facility bear interest at a weighted-average rate of
9.77% at December 31, 2000 and 8.44% at December 31, 1999. Investments with a
gross book value of approximately $90 million are currently pledged as
collateral for this revolving line of credit facility.

The Company is required to meet certain financial covenants, including
prescribed leverage and interest coverage ratios on its long-term borrowings.

F-17

OMEGA HEALTHCARE INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 7--BORROWING ARRANGEMENTS (CONTINUED)
The following is a summary of the Company's long-term borrowings:

DECEMBER 31,
-------------------
2000 1999
-------- --------
(IN THOUSANDS)

Unsecured borrowings:
6.95% Notes due June 2002................................. $125,000 $125,000
6.95% Notes due August 2007............................... 100,000 100,000
Subordinated Convertible Debentures due 2001.............. 16,590 48,405
Unsecured Notes due July 2000............................. -- 81,381
Other..................................................... 4,455 4,615
-------- --------
246,045 359,401

Secured borrowings:
Revolving lines of credit................................. 185,641 166,600
Industrial Development Revenue Bonds...................... 8,375 8,595
Mortgage notes payable to banks........................... 6,112 14,844
HUD loans................................................. 5,219 5,329
-------- --------
205,347 195,368
-------- --------
$451,392 $554,769
======== ========

The Subordinated Convertible Debentures ("Debentures") are convertible at
any time into shares of Common Stock at a conversion price of $26.962 per share.
The Debentures are unsecured obligations of the Company and are subordinate in
right and payment to the Company's senior unsecured indebtedness. The balance of
the Debentures was repaid in full on February 1, 2001 principally utilizing
borrowings under the Company's revolving lines of credit. (See Note 15--
Subsequent Events).

On July 15, 2000 the Company repaid the 10% and 7.4% Unsecured Notes issued
in 1995. The effective interest rate for the unsecured notes was 8.8%, with
interest-only payments due semi-annually through July 2000.

Real estate investments with a gross book value of approximately
$41 million are pledged as collateral for outstanding secured borrowings.
Long-term secured borrowings are payable in aggregate monthly installments of
approximately $282,300, including interest at rates ranging from 7.0% to 10.0%.

F-18

OMEGA HEALTHCARE INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 7--BORROWING ARRANGEMENTS (CONTINUED)
Assuming none of the Company's borrowing arrangements are refinanced,
converted or prepaid prior to maturity, required principal payments for each of
the five years following December 31, 2000 and the aggregate due thereafter are
set forth below:

2001........................................................ $ 18,882

2002........................................................ 263,429

2003........................................................ 2,026

2004........................................................ 2,176

2005........................................................ 50,036

Thereafter.................................................. 114,843
--------

$451,392
========

The estimated fair values of the Company's long-term borrowings is
approximately $415.0 million at December 31, 2000 and $508.5 million at
December 31, 1999. Fair values are based on the estimates by management using
rates currently prevailing for comparable loans.

F-19

OMEGA HEALTHCARE INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 8--FINANCIAL INSTRUMENTS

At December 31, 2000 and 1999, the carrying amounts and fair values of the
Company's financial instruments are as follows:

2000 1999
------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------

ASSETS:
Cash and cash equivalents......................... $ 7,172 $ 7,172 $ 4,105 $ 4,105
Mortgage notes receivable......................... 206,710 230,590 213,617 230,781
Other investments................................. 53,242 53,675 75,460 74,610
-------- -------- -------- --------
Totals.......................................... $267,124 $291,437 293,182 309,496
======== ======== ======== ========
LIABILITIES:
Revolving lines of credit......................... $185,641 $185,641 $166,600 $166,600
6.95% Notes....................................... 225,000 190,177 225,000 181,832
Senior Unsecured Notes............................ -- -- 81,381 81,054
Subordinated Convertible Debentures............... 16,590 17,101 48,405 47,402
Other long-term borrowings........................ 24,161 22,121 33,383 31,620
-------- -------- -------- --------
Totals.......................................... $451,392 $415,040 $554,769 $508,508
======== ======== ======== ========

Fair value estimates are subjective in nature and are dependent on a number
of important assumptions, including estimates of future cash flows, risks,
discount rates and relevant comparable market information associated with each
financial instrument (See Note 1--Risks and Uncertainties). The use of different
market assumptions and estimation methodologies may have a material effect on
the reported estimated fair value amounts. Accordingly, the estimates presented
above are not necessarily indicative of the amounts the Company would realize in
a current market exchange.

The Company utilizes interest rate swaps to fix interest rates on variable
rate debt and reduce certain exposures to interest rate fluctuations. At
December 31, 2000, the Company had an interest rate cap with a notional amount
of $100 million and an interest rate swap with a notional amount of
$32 million, based on 30-day London Interbank Offered Rates (LIBOR). Under the
$100 million agreement, the Company's LIBOR base interest rate cannot exceed
7.5%. This agreement expires in March, 2001. Under the $32 million agreement,
the Company receives payments when LIBOR interest rates exceed 6.35% and pays
the counterparties when LIBOR rates are under 6.35%. The amounts exchanged are
based on the notional amounts. The $32 million agreement expires on
December 17, 2001. The combined fair value of the interest rate swaps at
December 31, 2000 was a deficit of $351,344.

In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, which is
required to be adopted in years beginning after June 15, 2000. The Company
expects to adopt the new Statement effective January 1, 2001. The Statement will
require the Company to recognize all derivatives on the balance sheet at fair
value. Derivatives that are not hedges must be adjusted to fair value through
income. If the derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of derivatives will either be offset against the
change in fair value of the hedged assets, liabilities, or firm commitments
through

F-20

OMEGA HEALTHCARE INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 8--FINANCIAL INSTRUMENTS (CONTINUED)
earnings or recognized in other comprehensive income until the hedge item is
recognized in earnings. The ineffective portion of a derivative's change in fair
value will be immediately recognized in earnings.

Based on the Company's derivative positions at December 31, 2000, the
Company estimates that upon adoption it will record a loss from the cumulative
effect of an accounting change of approximately $400,000 in the consolidated
statement of operations.

NOTE 9--RETIREMENT ARRANGEMENTS

The Company has a 401(k) Profit Sharing Plan covering all eligible
employees. Under the Plan, employees are eligible to make contributions, and the
Company, at its discretion, may match contributions and make a profit sharing
contribution.

In 1993, the Company adopted the 1993 Deferred Compensation Plan, which
covered all eligible employees and members of our Board of Directors.
Participation by the directors in the Deferred Compensation Plan was terminated
effective December 31, 1997, and accumulated benefits to the Directors under the
plan were settled and paid in 1998.

The Deferred Compensation Plan is an unfunded plan under which the Company
may award units that result in participation in the dividends and future growth
in the value of the Company's common stock. The total number of units permitted
by the plan is 200,000, of which 90,850 units have been awarded and 20,050 are
outstanding at December 31, 2000. Units awarded to eligible participants vest
over a period of five years based on the participant's initial service date.

Provisions charged to operations with respect to these retirement
arrangements totaled $181,000, $123,000 and $346,000, in 2000, 1999, and 1998,
respectively.

NOTE 10--STOCKHOLDERS' EQUITY AND STOCK OPTIONS

SERIES C PREFERRED STOCK

On July 14, 2000, Explorer Holdings, L.P. ("Explorer"), an affiliate of
Hampstead Investment Partners III, L.P. ("Hampstead"), a private equity
investor, completed an investment (the "Equity Investment") of $100.0 million in
the Company in exchange for 1,000,000 shares of the Company's Series C Preferred
Stock Stock. The Company used a portion of the proceeds from the Equity
Investment to repay $81 million of maturing debt on July 17, 2000.

Shares of the Series C Preferred Stock are convertible into Common Stock at
any time by the holder at an initial conversion price of $6.25 per share of
Common Stock. The shares of Series C Preferred Stock are entitled to receive
dividends at the greater of 10% per annum or the dividend payable on shares of
Common Stock, with the Series C Preferred Stock participating on an "as
converted" basis. Dividends on the Series C Preferred Stock are cumulative from
the date of original issue and are payable quarterly commencing on November 15,
2000. Explorer agreed to defer until April 2, 2001, the accrued dividend of
$4,666,667 payable on November 15, 2000 with respect to the Series C Preferred
Stock Stock. (See Note 15--Subsequent Events).

The Series C Preferred Stock will vote (on an "as converted" basis) together
with our common stock on all matters submitted to stockholders. However, without
the consent of our Board of Directors, no holder of Series C Preferred Stock may
vote or convert shares of Series C Preferred Stock if the effect thereof would
be to cause such holder to beneficially own more than 49.9% of the

F-21

OMEGA HEALTHCARE INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 10--STOCKHOLDERS' EQUITY AND STOCK OPTIONS (CONTINUED)
Company's Voting Securities. If dividends on the Series C Preferred Stock are in
arrears for four quarters, the holders of the Series C Preferred Stock, voting
separately as a class (and together with the holder of Series A and Series B
preferred if and when dividends on such series are in arrears for six or more
quarters and special class voting rights are in effect with respect to the
Series A and Series B preferred), will be entitled to elect directors who,
together with the other directors designated by the holders of Series C
Preferred Stock, would constitute a majority of the Company's Board of
Directors.

The general terms of the Equity Investment are set forth in the Investment
Agreement. In addition to setting forth the terms on which Explorer has acquired
the initial $100.0 million of Series C Preferred Stock, the Investment Agreement
also contains provisions pursuant to which Explorer will make available, upon
satisfaction of certain conditions up to $50.0 million to fund growth (the
"Growth Equity Commitment"). Draws under the Growth Equity Commitment will be
evidenced by Common Stock issued at the then fair market value less a discount
agreed to by Explorer and the Company representing the customary discount
applied in rights offerings to an Issuer's existing security holders, or, if not
agreed, 6%. Following the drawing in full of the Growth Equity Commitment or
upon expiration of the Initial Growth Equity Commitment, Explorer will have the
option to provide up to an additional $50.0 million to fund growth for an
additional twelve month period (the "Increased Growth Equity Commitment"). Draws
under the Increased Growth Equity Commitment will be subject to the same
conditions as applied to the Growth Equity Commitment and the common stock so
issued will be priced in the same manner described above.

If Explorer exercises its option to fund the Increased Growth Equity
Commitment, the Company will have the option to engage in a Rights Offering to
all common stockholders other than Explorer and its affiliates. In the Rights
Offering, stockholders will be entitled to acquire their proper share of our
common stock issued in connection with the Growth Equity Commitment at the same
price paid by Explorer. Proceeds received from the Rights Offering will be used
to repurchase Common Stock issued to Explorer under the Growth Commitment.

Upon the first to occur of the drawing in full of the Increased Growth
Equity Commitment or the expiration of the Increased Growth Equity Commitment,
the Company again will have the option to engage in a second Rights Offering,
Stockholders (other than Explorer and its affiliates) will be entitled to
acquire their proportionate share of the common stock issued in connection with
the Increased Growth Equity Commitment at the same price paid by Explorer.
Proceeds received in connection with the second Rights Offering will be used to
repurchase Common Stock issued to Explorer under the increased Growth
Commitment.

In connection with Explorer's Equity Investment, the Company entered into a
Stockholders Agreement with Explorer dated July 14, 2000 (the "Stockholders'
Agreement") pursuant to which Explorer is entitled to designate up to four
members of the Company's Board of Directors depending on the percentage of total
voting securities (consisting of Common Stock and Series C Preferred Stock)
acquired from time to time by Explorer pursuant to the documentation entered
into by Explorer in connection with the Equity Investment. Explorer is entitled
to designate at least one director of the Company's Board of Directors as long
as it owns at least five percent (5%) of the total voting power of the Company
and to approve one "independent director" as long as it owns at least
twenty-five percent (25%) of the shares it acquired at the time it completed the
Equity Investment (or Common Stock issued upon the conversion of the Series C
Preferred Stock acquired by Explorer at such time). Explorer's director
designations terminate upon the tenth anniversary of the Stockholders'
Agreement.

F-22

OMEGA HEALTHCARE INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 10--STOCKHOLDERS' EQUITY AND STOCK OPTIONS (CONTINUED)
The Company has amended its Stockholders' Right Plan to exempt Explorer and
any of its transferees that become parties to the standstill as Acquiring
Persons under such plan. Subsequent acquisitions of voting securities by a
transferee of more than 9.9% of voting securities from Explorer are limited to
not more than 2% of the total amount of outstanding voting securities in any
twelve-month period.

The Company has agreed to indemnify Explorer, its affiliates and the
individuals that will serve as directors of the Company against any losses and
expenses that may be incurred as a result of the assertion of certain claims,
provided that the conduct of the indemnified parties meets certain required
standards. In addition, the Company has agreed to pay Explorer an advisory fee
if Explorer provides assistance to the Company in connection with evaluating
growth opportunities or other financing matters. The amount of the advisory fee
will be mutually determined by the Company and Explorer at the time the services
are rendered based upon the nature and extent of the services provided. The
Company will also reimburse Explorer for Explorer's out-of-pocket expenses, up
to a maximum of $2.5 million, incurred in connection with the Equity Investment.
To date, the Company has reimbursed Explorer approximately $964,000 of such
expenses.

SERIES A AND SERIES B CUMULATIVE PREFERRED STOCK

On April 28, 1998, the Company received gross proceeds of $50 million from
the issuance of 2 million shares of 8.625% Series B Cumulative Preferred Stock
("Series B Preferred Stock") at $25 per share. Dividends on the Series B
Preferred Stock are cumulative from the date of original issue and are payable
quarterly commencing on August 15, 1998. On April 7, 1997, the Company received
gross proceeds of $57.5 million from the issuance of 2.3 million shares of 9.25%
Series A Cumulative Preferred Stock ("Series A Preferred Stock") at $25 per
share. Dividends on the Series A Preferred Stock are cumulative from the date of
original issue and are payable quarterly. At December 31, 2000, the aggregate
liquidation preference of Series A and Series B preferred stock issued is
$107,500,000.

STOCKHOLDER RIGHTS PLAN

On May 12, 1999, the Company's Board of Directors authorized the adoption of
a stockholder rights plan. The plan is designed to require a person or group
seeking to gain control of the Company to offer a fair price to all the
Company's stockholders. The rights plan will not interfere with any merger,
acquisition or business combination that the Company's Board of Directors finds
is in the best interest of the Company and its stockholders.

In connection with the adoption of the rights plan, the board declared a
dividend distribution of one right for each common share outstanding on May 24,
1999. The rights will not become exercisable unless a person acquires 10% or
more of the Company's common stock, or begins a tender offer that would result
in the person owning 10% or more of the Company's common stock. At that time,
each right would entitle each stockholder other than the person who triggered
the rights plan to purchase either the Company's common stock or stock of an
acquiring entity at a discount to the then market price. The plan was not
adopted in response to any specific attempt to acquire control of the Company.

The Company amended its Stockholders' Right Plan to exempt Explorer and any
of its transferees that become parties to the standstill as Acquiring Persons
under such plan. Subsequent acquisitions of voting securities by a transferee of
more than 9.9% of voting securities from Explorer are limited to not more than
2% of the total amount of outstanding voting securities in any 12 month period.

F-23

OMEGA HEALTHCARE INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 10--STOCKHOLDERS' EQUITY AND STOCK OPTIONS (CONTINUED)
STOCK OPTIONS AND STOCK PURCHASE ASSISTANCE PLAN

In January 1998, the Company adopted a stock purchase assistance plan,
whereby the Company extended credit to directors and employees to purchase the
Company's stock through the exercise of stock options. During 2000, the Company
terminated this borrowing program and forgave the outstanding stock option loans
in exchange for the surrender of the underlying stock certificates and payment
of all outstanding interest on the loans. The Company recorded a charge of
$1.9 million related to these loans, which is included in the provision for loss
on mortgages and notes receivable in the Company's Consolidated Statements of
Operations.

Under the terms of the 2000 Stock Incentive Plan, the Company reserved
3,500,000 shares of common stock for grants to be issued during a period of up
to 10 years. Options are exercisable at the market price at the date of grant,
expire five years after date of grant for over 10% owners and 10 years from the
date of grant for less than 10% owners. Directors' shares vest over three years
while other grants vest over five years. Directors, officers and employees are
eligible to participate in the Plan. Options for 1,346,953 shares have been
granted to 22 eligible participants. Additionally, 275,052 shares of restricted
stock have been granted under the provisions of the Plan. The market value of
the restricted shares on the date of the award was recorded as unearned
compensation-restricted stock, with the unamortized balance shown as a separate
component of stockholders' equity. Unearned compensation is amortized to expense
generally over the vesting period, with charges to operations of $535,000,
$635,000, and $612,000 in 2000, 1999, and 1998, respectively.

During 2000, 1,005,000 Dividend Equivalent Rights were granted to eligible
employees. A Dividend Equivalent Right entitles the participant to receive
payments from the Company in an amount determined by reference to any cash
dividends paid on a specified number of shares of stock to the Company
stockholders of record during the period such rights are effective. The Company
recorded $502,500 of expense related to the Dividend Equivalent Rights in 2000.

At December 31, 2000, options currently exercisable (49,562) have a weighted
average exercise price of $25.677, with exercise prices ranging from $24.45 to
$37.20. There are 1,877,995 shares available for future grants as of
December 31, 2000.

F-24

OMEGA HEALTHCARE INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 10--STOCKHOLDERS' EQUITY AND STOCK OPTIONS (CONTINUED)
The following is a summary of activity under the plan. Exercise prices and
all other option data for grants prior to April 2, 1998 have been adjusted based
on a formula reflecting the per share value of the distribution of Omega
Worldwide, Inc.

STOCK OPTIONS
------------------------------------- WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE PRICE
--------- ------------------------- --------

Outstanding at December 31, 1997...................... 710,726 $ 19.866 - $34.795 $29.265
Granted during 1998................................. 84,000 28.938 - 37.205 35.342
Exercised........................................... (151,200) 19.866 - 30.210 23.605
Canceled............................................ (67,599) 24.215 - 35.500 33.462
--------- ------------------------- -------
Outstanding at December 31, 1998...................... 575,927 19.866 - 37.205 31.144
Granted during 1999................................. 101,500 15.250 - 30.188 27.483
Canceled............................................ (312,164) 28.938 - 36.676 33.099
--------- ------------------------- -------
Outstanding at December 31, 1999...................... 365,263 15.250 - 37.205 28.542
Granted during 2000................................. 1,109,500 5.688 - 7.750 6.268
Canceled............................................ (307,699) 6.125 - 37.205 28.885
--------- ------------------------- -------
Outstanding at December 31, 2000...................... 1,167,064 $ 5.688 - 37.205 $ 7.276
========= ========================= =======

During 1999, the Company offered holders of options the opportunity to
accelerate the expiration date of options in consideration of a cash payment.
Twenty-two employees who were holders of options for 431,830 shares accepted the
offer and were paid a total of $38,000. Options for 157,000 shares granted in
1999 and canceled in 1999 under this arrangement are excluded from the above
table for 1999 and from the calculation for the weighted average fair value of
options granted in 1999.

In 1995, the Financial Accounting Standards Board issued the Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation." This standard prescribes a fair value-based method of accounting
for employee stock options or similar equity instruments and requires certain
pro forma disclosures. For purposes of the pro forma disclosures required under
Statement 123, the estimated fair value of the options is amortized to expense
over the option's vesting period. Based on the Company's option activity, net
earnings would have increased in 2000 and 1999 by approximately $1,064,000 and
$618,000, respectively and decreased in 1998 by approximately $2.2 million. Net
earnings per basic and diluted common share on a pro forma basis would have
increased in 2000 and 1999 by approximately $.06 and $.03, respectively, and
decreased in 1998 by $.11 under APB 25. The estimated weighted average fair
value of options granted in 2000, 1999, and 1998 was $407,000, $168,000 and
$220,000, respectively. In determining the estimated fair value of the Company's
stock options as of the date of grant, a Black-Scholes option pricing model was
used with the following weighted-average assumptions: risk-free interest rates
of 5.2% in 2000, 6.5% in 1999 and 6% in 1998; a dividend yield of 10% in 2000
and 1999 and 6.75% in 1998; volatility factors of the expected market price of
the Company's common stock based on 30.0% volatility in 2000, 22.7% in 1999 and
15.0% in 1998; and a weighted-average expected life of the options of eight
years for each of the three years.

The Black-Scholes options valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option

F-25

OMEGA HEALTHCARE INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 10--STOCKHOLDERS' EQUITY AND STOCK OPTIONS (CONTINUED)
valuation models require the input of highly subjective assumptions, including
the expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.

NOTE 11--RELATED PARTY TRANSACTIONS

The Company has agreed to pay Explorer an advisory fee if Explorer provides
assistance to the Company in connection with the evaluating growth opportunities
or other financing matters. The amount of the advisory fee will be mutually
determined by the Company and Explorer, based upon the nature and the extent of
the services provided and the results achieved. The Company will also reimburse
Explorer for Explorer's out-of-pocket expenses, up to a maximum of
$2.5 million, incurred in connection with the Equity Investment. To date, the
Company has reimbursed Explorer for approximately $964,000 of such expenses.

Explorer agreed to defer until April 2, 2001, the accrued dividend of
$4,666,667 payable on November 15, 2000 with respect to the Series C Preferred
Stock stock. In exchange for this deferral, the Company agreed to pay Explorer a
waiver fee equal to 10% per annum of the unpaid dividend from November 15, 2000
until the October dividend is paid. (See note 15--Subsequent Events)

In 1995, the Company sponsored the organization of Principal Healthcare
Finance Limited ("Principal"), an Isle of Jersey company, whose purpose is to
invest in nursing homes and long-term care facilities in the United Kingdom.
Prior to the April 2, 1998 contribution to Omega Worldwide, Inc. ("Worldwide")
as explained below, the Company had invested $30.7 million in Principal, of
which $23.8 million was represented by a L15 million subordinated note due
December 31, 2000, and $6.9 million was represented by an equity investment. The
Company had also provided investment advisory and management services to
Principal and had advanced temporary loans to Principal from time to time.

In November 1997, the Company formed Worldwide, a company which provides
asset management services and management advisory services, as well as equity
and debt capital to the healthcare industry, particularly residential healthcare
services to the elderly. On April 2, 1998, the Company contributed substantially
all of its Principal assets to Worldwide in exchange for approximately
8.5 million shares of Worldwide common stock and 260,000 shares of Series B
preferred stock. Of the 8,500,000 shares of Worldwide received by the Company,
approximately 5,200,000 were distributed on April 2, 1998 to the Company's
stockholders on the basis of one Worldwide share for every 3.77 common shares of
the Company held by stockholders of the Company on the record date of
February 1, 1998. Of the remaining 3,300,000 shares of Worldwide received by the
Company, 2,300,000 shares were sold by the Company on April 3, 1998 for net
proceeds of approximately $16,250,000 in a secondary offering pursuant to a
registration statement of Worldwide. The market value of the distribution to
stockholders approximated $39 million or $1.99 per share. The Company recorded a
non-recurring gain of $30.2 million on the distribution and secondary offerings
of Worldwide common shares during 1998. In April 1999, in conjunction with a
similar acquisition by Worldwide, the Company acquired an interest in Principal
Healthcare Finance Trust ("the Trust"), an Australian Unit Trust, which owns 44
nursing home facilities and 483 assisted living units in Australia and New
Zealand.

F-26

OMEGA HEALTHCARE INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 11--RELATED PARTY TRANSACTIONS (CONTINUED)
As of December 31, 2000, the Company holds 1,163,000 shares of Worldwide
common stock and 260,000 shares of its preferred stock. The carrying value of
the Company's investment in Worldwide is $5,435,000, including the market value
of its common stock and its cost basis in its preferred stock. The Company also
holds a $1,615,000 investment in Principal, represented by 990,000 ordinary
shares of Principal, and a $1,266,000 investment in the Trust.

The Company has guaranteed repayment of Worldwide borrowings pursuant to a
revolving credit facility in exchange for an initial 1% fee and an annual
facility fee of 25 basis points. At December 31, 2000 borrowings of $2,850,000
were outstanding under Worldwide's revolving credit facility. Worldwide's credit
agreement calls for scheduled payments to be made until fully repaid in
June 2001. Under this agreement, no further borrowings may be made by Worldwide
under its revolving credit facility. The Company is required to provide
collateral in the amount of $8.8 million related to the guarantee of Worldwide's
obligations. Upon repayment by Worldwide of the remaining outstanding balance
under its revolving credit facility, the subject collateral will be released in
connection with the termination of the Company's guarantee.

Additionally, the Company had a Services Agreement with Worldwide that
provided for the allocation of indirect costs incurred by the Company to
Worldwide. The allocation of indirect costs has been based on the relationship
of assets under the Company's management to the combined total of those assets
and assets under Worldwide's management. Upon expiration of this agreement on
June 30, 2000, the Company entered into a new agreement requiring quarterly
payments from Worldwide of $37,500 for the use of offices and certain
administrative and financial services provided by the Company. Upon the
reduction of the Company's accounting staff, the Service Agreement was
renegotiated again on November 1, requiring quarterly payments from Worldwide of
$32,500. Costs allocated to Worldwide for 2000 and 1999 were $404,000 and
$754,000, respectively.

NOTE 12--DIVIDENDS

In order to qualify as a real estate investment trust, the Company must,
among other requirements, distribute at least 95% of its real estate investment
trust taxable income to its

F-27

OMEGA HEALTHCARE INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 12--DIVIDENDS (CONTINUED)
stockholders. Per share distributions by the Company were characterized in the
following manner for income tax purposes:

2000 1999 1998
-------- -------- --------

COMMON
Ordinary income..................................... $ -- $2.100 $2.275
------ ------ ------
Return of capital................................... 1.000 0.700 0.191
Long-term capital gain.............................. -- -- 0.214
------ ------ ------
Total dividends paid.............................. $1.000 $2.800 $2.680
====== ====== ======
COMMON NON-CASH
Return of capital................................... $ -- $ -- $0.461
Long-term capital gain.............................. -- -- 1.529
------ ------ ------
Total non-cash distribution....................... $ -- $ -- $1.990
====== ====== ======
SERIES A PREFERRED
Ordinary income..................................... $2.313 $2.313 $2.313
====== ====== ======
SERIES B PREFERRED
Ordinary income..................................... $2.156 $2.156 $1.078
====== ====== ======

F-28

OMEGA HEALTHCARE INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 13--SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Following are details of changes in operating assets and liabilities
(excluding the effects of non-cash expenses), and other non-cash transactions:

FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
2000 1999 1998
--------- --------- ---------
(IN THOUSANDS)

Increase (decrease) in cash from changes in operating assets
and liabilities:
Operating assets, including $517 and $2,896 transferred
to held for sale in 1999 and 1998, respectively....... $1,306 $ (568) $(8,183)
Accrued interest........................................ (3,751) 589 (70)
Other liabilities....................................... 2,465 (5,550) 4,273
------ ------- -------
$ 20 $(5,529) $(3,980)
====== ======= =======
Other non-cash investing and financing transactions:
Acquisition of real estate:
Value of real estate acquired........................... $ -- $ 302 $ 283
Common stock issued..................................... -- (302) (283)
Common stock issued for conversion of debentures.......... -- -- 13,862
Interest paid during the period............................. 44,221 41,015 31,464

NOTE 14--LITIGATION

The Company is subject to various legal proceedings, claims and other
actions arising out of the normal course of business. While any legal proceeding
or claim has an element of uncertainty, management believes that the outcome of
each lawsuit claim or legal proceeding that is pending or threatened, or all of
them combined, will not have a material adverse effect on its consolidated
financial position or results of operations.

On June 20, 2000, the Company and its chief executive officer, chief
financial officer and chief operating officer were named as defendants in
certain litigation brought by Ronald M. Dickerman, in his individual capacity,
in the United States District Court for the Southern District of New York. In
the complaint, Mr. Dickerman contends that the Company and the named executive
officers violated Section 10(b) and 20(a) of the Securities Exchange Act of 1934
and Rule 10b-5 promulgated thereunder. Mr. Dickerman subsequently amended the
complaint to assert his claims on behalf of an unnamed class of plaintiffs. On
July 28, 2000, Benjamin LeBorys commenced a class action lawsuit making similar
allegations against the Company and certain of its officers and directors in the
United States District Court for the Southern District of New York. The cases
have been consolidated, and Mr. LeBorys has been named lead plaintiff. The
plaintiffs seek unspecified damages. The Company has reported the litigation to
its directors and officers liability insurer. The Company believes that the
litigation is without merit and is defending vigorously. The Company's Motion to
Dismiss was filed with the Court on February 16, 2001.

F-29

OMEGA HEALTHCARE INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 14--LITIGATION (CONTINUED)
and is a guarantor of Madison's obligations to the Company. Madison claims
damages as a result of the alleged breach of approximately $700,000. Madison
seeks damages as a result of the claimed anticipatory breach in the amount of
$15 million or, in the alternative, Madison seeks specific performance of the
contract as modified by a course of conduct that Madison alleges developed
between Madison and the Company. The Company contends that Madison is in default
under the contract in question. The Company believes that the litigation is
meritless. The Company is defending vigorously and on December 5, 2000, filed
counterclaims against Madison and the guarantors, including Mr. Dickerman,
seeking repayment of approximately $8.5 million that Madison owes the Company.

Karrington Health, Inc. brought suit against the Company alleging that the
Company repudiated and ultimately breached a financing contract to provide
$95,000,000 of financing for the development of 13 assisted living facilities.
Karrington seeks recovery of approximately $20,000,000 in damages it alleges to
have incurred as a result of the breach. The Company denies that it entered into
a valid and binding contract with Karrington and is vigorously defending the
litigation.

NOTE 15--SUBSEQUENT EVENTS

On February 1, 2001, the Company repaid the outstanding balance of its 8.5%
Subordinated Convertible Debentures due February 1, 2001 from cash and revolving
credit line availability.

On February 1, 2001, the Company also announced suspension of payments of
common and preferred dividends to strengthen the Company's Balance Sheet while
it pursues alternatives for extending or repaying its 2002 debt maturities. The
Company can give no assurance as to when the dividends will be reinstated or the
amount of the dividends, if and when such payments are recommenced. All accrued
and unpaid dividends on the Company's outstanding shares of Series A, B and C
Preferred Stock must be paid in full before dividends on our common stock can be
resumed.

On March 30, 2001, the Company exercised its option to pay the accrued
$4,666,667 Series C dividend from November 15, 2000 and the associated waiver
fee by issuing 48,420 Series C Preferred Stock shares to Explorer, which are
convertible into 774,722 shares of the Company's common stock at $6.25 per
share. (See "Note 11--Related Party Transactions" for information regarding the
dividend deferral).

In March 2001, the Company announced that it continues its discussions with
several of its lessees to resolve payment issues, including Alterra Healthcare
Corp., Lyric Healthcare, Alden Management Services Inc., and TLC
Healthcare Inc. Alterra has recently issued a press release stating that it had
informed certain of its lenders and landlords in March, 2001 that they will not
be paying their March rents and debt service and are seeking relief as to these
payments. The Company has a master lease with Alterra relating to ten assisted
living facilities representing an investment of $34.1 million which provides for
annual rental payments of $3.6 million. Alterra has not made its March rental
payment to the Company, and while discussions are ongoing, the Company has sent
Alterra a notice of default.

Additionally, during the first quarter of 2001, pursuant to a forbearance
agreement between the Company and Lyric through April 30, 2001, the Company
began receiving 60% of the approximately $860,000 of monthly rent due under the
Lyric leases. Discussions are continuing with Lyric to reach a permanent
restructuring agreement. The Company's total original investment in the ten
nursing homes covered under the leases is $95.4 million, and annual rent is
$10.3 million.

F-30

OMEGA HEALTHCARE INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 15--SUBSEQUENT EVENTS (CONTINUED)
Affiliates of Alden Management, Inc., Chicago, IL, are delinquent in paying
their lease, loan and escrow payments on the four facilities it leases from the
Company. These facilities represent an initial investment by the Company of
$31.3 million, with annual rent of approximately $3.2 million. Discussions with
Alden are ongoing.

TLC Healthcare of Illinois, Inc. has made only partial payments under its
master lease with the Company, based on the shut down of one of its facilities
having an annual rent payment of approximately $732,000, and has notified the
Company that it may not be able to make its April payment on its other seven
facilities or otherwise fund operations with annual rent and mortgage payments
totaling approximately $2.8 million. The Company has funded $623,000 for payroll
at the facilities to facilitate continued operations and is taking steps to
transition the operations of the facilities to qualified operators through new
lease or management structures.

In several instances the Company holds security deposits that can be applied
in the event of lease and loan defaults, subject to applicable limitations under
bankruptcy law with respect to operators seeking protection under Chapter 11 of
the Bankruptcy Code.

NOTE 16--SUMMARY OF QUARTERLY RESULTS (UNAUDITED)

The following summarizes quarterly results of operations for the years ended

MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE)

2000
Revenues.......................................... $57,214 $70,448 $74,010 $74,121
(Loss) earnings before gain (loss) on assets
sold............................................ 3,018 4,637 (64,984) (2,217)
Net (loss) earnings available to common........... 610 12,680 (70,797) (8,978)
(Loss) earnings before gain (loss) on assets sold
per share:
Basic (loss) earnings before gain (loss) on
asset dispositions............................ $ 0.15 $ 0.23 $ (3.24) $ (0.11)
Diluted (loss) earnings before gain (loss) on
asset dispositions............................ 0.15 0.23 (3.24) (0.11)
Net (Loss) Earnings Available to Common per share:
Basic net (loss) earnings....................... $ 0.03 $ 0.63 $ (3.53) $ (0.45)
Diluted net (loss) earnings..................... 0.03 0.63 (3.53) (0.45)
Cash dividends paid on common stock............... 0.50 -- 0.25 0.25

F-31

OMEGA HEALTHCARE INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 16--SUMMARY OF QUARTERLY RESULTS (UNAUDITED) (CONTINUED)

MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE)

1999
Revenues.......................................... $30,177 $30,914 $40,971 $46,067
(Loss) earnings before gain (loss) on assets
sold............................................ 12,825 13,010 12,355 (8,012)
Net (loss) earnings available to common........... 10,417 10,602 9,947 (20,926)
(Loss) earnings before gain (loss) on assets sold
per share:
Basic (loss) earnings before gain (loss) on
asset dispositions............................ $ 0.64 $ 0.66 $ 0.62 $ (0.40)
Diluted (loss) earnings before gain (loss) on
asset dispositions............................ 0.64 0.65 0.62 (0.40)
Net (Loss) Earnings Available to Common per share:
Basic net (loss) earnings....................... $ 0.52 $ 0.53 $ 0.50 $ (1.05)
Diluted net (loss) earnings..................... 0.52 0.53 0.50 (1.05)
Cash dividends paid on common stock............... 0.70 0.70 0.70 0.70

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

Note: During the three-month periods ended March 31, 2000, September 30, 2000
and December 31, 2000, the Company recognized a provision for impairment
of assets of $4,500, $49,849 and $7,341 respectively. Additionally, during
the three-month period ended June 30, 2000, the Company recognized a gain
of $10,451 related to assets sold during the period. During the
three-month period ended December 31, 1999, the Company recognized a loss
of $30,000 related to assets sold during the period and a provision for
impairment of assets held for sale (See Note 2--Properties).

NOTE 17--CONSULTING AND SEVERANCE AGREEMENTS

On July 18, 2000, the Company entered into a Consulting and Severance
Agreement with Essel W. Bailey, Jr. (The "Bailey Severance Agreement"), pursuant
to which Mr. Bailey resigned as an officer of the Company. Mr. Bailey's
resignation and the Bailey Severance Agreement became effective on July 14,
2000.

Pursuant to the Bailey Severance Agreement, Mr. Bailey received payment of
his regular salary through the effective date of his resignation and a lump-sum
severance payment equal to $1,555,000. The Bailey Severance Agreement provides
that Mr. Bailey is fully vested in his deferred compensation plan and in 59,708
shares of his restricted stock. Pursuant to the Bailey Severance Agreement,
Mr. Bailey will provide consulting services to the Company for twelve months
following his resignation. In exchange for consulting services and his agreement
not to compete with the Company or solicit its customers or employees,
Mr. Bailey will receive compensation equal to $147,500 per month for twelve
months.

The costs incurred related to the Bailey Severance Agreement, along with
costs incurred in connection with a similar agreement with the Company's former
Chief Financial Officer, total approximately $4.7 million and have been included
in the Company's Consolidated Statements of Operations in 2000.

F-32

OMEGA HEALTHCARE INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 18--SEGMENT INFORMATION

The following tables set forth the reconciliation of operating results and
total assets for the Company's reportable segments for the years ended
December 31, 2000, 1999 and 1998.

FOR THE YEAR ENDED DECEMBER 31, 2000
----------------------------------------------------
OWNED AND
OPERATED AND CORPORATE
CORE ASSETS HELD AND
OPERATIONS FOR SALE OTHER CONSOLIDATED
---------- ------------ --------- ------------
(IN THOUSANDS)

Operating Revenues....................................... $ 91,434 $ 175,559 $ -- $ 266,993
Operating Expenses....................................... -- (178,975) -- (178,975)
-------- --------- -------- ---------
Net operating income................................... 91,434 (3,416) -- 88,018
Adjustments to arrive at net income:
Other revenues......................................... -- -- 8,800 8,800
Interest expense....................................... -- -- (42,400) (42,400)
Depreciation and amortization.......................... (17,978) (3,797) (1,490) (23,265)
General and administrative............................. -- -- (6,425) (6,425)
Legal.................................................. -- -- (2,467) (2,467)
State Taxes............................................ -- -- (195) (195)
Severance and consulting agreement costs............... -- -- (4,665) (4,665)
Provision for uncollectable mortgages and notes
receivable........................................... (4,871) -- (10,386) (15,257)
-------- --------- -------- ---------
(22,849) (3,797) (59,228) (85,874)
-------- --------- -------- ---------
Income before gain on assets sold and impairment
charges................................................ 68,585 (7,213) (59,228) 2,144
Provision for impairment................................. (1,939) (57,395) (2,356) (61,690)
Gain on assets sold--net................................. 9,989 -- -- 9,989
Preferred dividends...................................... -- -- (16,928) (16,928)
-------- --------- -------- ---------
Net loss available to common............................. $ 76,635 $ (64,608) $(78,512) $ (66,485)
======== ========= ======== =========
Total Assets............................................. $724,338 $ 159,105 $ 65,008 $ 948,451
======== ========= ======== =========

Operating Revenues....................................... $112,758 $ 26,223 $ -- $ 138,981
Operating Expenses....................................... -- (25,173) -- (25,173)
-------- --------- -------- ----------
Net operating income................................... 112,758 1,050 -- 113,808
Adjustments to arrive at net income:
Other revenues......................................... -- -- 9,148 9,148
Interest expense....................................... -- -- (42,947) (42,947)
Depreciation and amortization.......................... (21,204) (814) (2,193) (24,211)
General and administrative............................. -- -- (5,231) (5,231)
Legal.................................................. -- -- (386) (386)
State Taxes............................................ -- -- (503) (503)
Severance and consulting agreement costs............... -- -- -- --
Provision for uncollectable mortgages and notes
receivable........................................... -- -- -- --
-------- --------- -------- ----------
(21,204) (814) (42,112) (64,130)
-------- --------- -------- ----------
Income before gain on assets sold and impairment
charges................................................ 91,554 236 (42,112) 49,678
Provision for impairment................................. -- (19,500) -- (19,500)
Loss on assets sold--net................................. -- (10,507) -- (10,507)
Preferred dividends...................................... -- -- (9,631) (9,631)
-------- --------- -------- ----------
Net loss available to common............................. $ 91,554 $ (29,771) $(51,743) $ 10,040
======== ========= ======== ==========
Total Assets............................................. $841,558 $ 106,050 $ 91,123 $1,038,731
======== ========= ======== ==========

F-33

OMEGA HEALTHCARE INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 18--SEGMENT INFORMATION (CONTINUED)

FOR THE YEAR ENDED DECEMBER 31, 1998
----------------------------------------------------
OWNED AND
OPERATED AND CORPORATE
CORE ASSETS HELD AND
OPERATIONS FOR SALE OTHER CONSOLIDATED
---------- ------------ --------- ------------
(IN THOUSANDS)

Operating Revenues.................................... $102,471 $ -- $ -- $ 102,471
Operating Expenses.................................... -- -- -- --
-------- --------- -------- ----------
Net operating income................................ 102,471 -- -- 102,471
Adjustments to arrive at net income:
Other revenues...................................... -- -- 6,843 6,843
Interest expense.................................... -- -- (32,436) (32,436)
Depreciation and amortization....................... (19,838) -- (1,704) (21,542)
General and administrative.......................... -- -- (4,852) (4,852)
Legal............................................... -- -- (155) (155)
State Taxes......................................... -- -- (358) (358)
Severance and consulting agreement costs............ -- -- -- --
Provision for uncollectable mortgages and notes
receivable........................................ -- -- -- --
-------- --------- -------- ----------
(19,838) -- (32,662) (52,500)
-------- --------- -------- ----------
Income before gain on assets sold and impairment
charges............................................. 82,633 -- (32,662) 49,971
Provision for impairment.............................. -- (6,800) -- (6,800)
Gain on assets sold--net.............................. 2,798 -- -- 2,798
Gain on distribution of Omega Worldwide, Inc.......... -- -- 30,240 30,240
Preferred dividends................................... -- -- (8,194) (8,194)
-------- --------- -------- ----------
Net loss available to common.......................... $ 85,431 $ (6,800) $(10,616) $ 68,015
======== ========= ======== ==========
Total Assets.......................................... $936,414 $ 35,289 $ 65,504 $1,037,207
======== ========= ======== ==========

F-34

OMEGA HEALTHCARE INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 18--SEGMENT INFORMATION (CONTINUED)
The revenues, expenses, assets and liabilities in the Company's consolidated
financial statements which related to owned and operated assets are as follows:

YEAR ENDED DECEMBER 31,
-----------------------
2000 1999
-------- --------
(IN THOUSANDS)

REVENUES(1)
Medicaid.............................................. $108,082 $16,636
Medicare.............................................. 31,459 4,861
Private & Other....................................... 36,018 4,726
-------- -------
Total Revenues...................................... 175,559 26,223
EXPENSES
Administration........................................ 34,264 4,925
Property & Related.................................... 11,701 1,675
Patient Care Expenses................................. 120,444 17,393
-------- -------
Total Expenses...................................... 166,409 23,993
Contribution Margin................................... 9,150 2,230
Management Fees....................................... 8,778 1,180
Rent.................................................. 3,788 --
-------- -------
EBITDA(2)............................................. $ (3,416) $ 1,050
======== =======

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

(1) Nursing home revenues from these owned and operated assets are recognized as
services are provided.

(2) EBITDA represents earnings before interest, income taxes, depreciation and
amortization. It is considered by the Company to be a meaningful measure of
performance of its Owned and Operated Assets. EBITDA in and of itself does
not represent cash generated from operating activities in accordance with
GAAP and therefore should not be considered an alternative to net earnings
as an indication of operating performance or to net cash flow from operating
activities as

F-35

OMEGA HEALTHCARE INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 18--SEGMENT INFORMATION (CONTINUED)
determined by GAAP as a measure of liquidity and is not necessarily
indicative of cash available to fund cash needs.

DECEMBER 31,
-------------------
2000 1999
-------- --------
(IN THOUSANDS)

ASSETS
Cash $ 5,364 $ --
Accounts Receivable...................................... 30,030 9,588
Other Current Assets..................................... 5,098 60
-------- -------
Total Current Assets................................... 40,492 9,648
Investment in leasehold.................................. 1,679 --
Land and Buildings....................................... 130,601 60,810
Less Accumulated Depreciation............................ (17,680) (814)
-------- -------
Land and Buildings--Net.................................. 112,921 59,996
-------- -------
TOTAL ASSETS............................................. $155,092 $69,644
======== =======
LIABILITIES
Accounts Payable......................................... $ 8,636 $ 3,962
Other Current Liabilities................................ 6,108 8,101
-------- -------
Total Current Liabilities.............................. 14,744 12,063
-------- -------
TOTAL LIABILITIES........................................ $ 14,744 $12,063
======== =======

Accounts receivable for owned and operated assets is net of an allowance for
doubtful accounts of approximately $7 million in 2000 and $0.2 million in 1999.

F-36

OMEGA HEALTHCARE INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 19--EARNINGS PER SHARE

The following tables set forth the computation of basic and diluted earnings
per share:

YEAR ENDED DECEMBER 31,
-----------------------------------------
2000 1999 1998
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

Numerator:
(Loss) earnings before gain (loss) on assets sold........ $(59,546) $ 30,178 $43,171
Preferred stock dividends................................ (16,928) (9,631) (8,194)
-------- -------- -------
Numerator for (loss) earnings available to common before
gain (loss) on assets sold--basic and diluted.......... (76,474) 20,547 34,977
Gain (loss) on assets sold--net.......................... 9,989 (10,507) 2,798
Gain on distribution of Omega Worldwide, Inc............. -- -- 30,240
-------- -------- -------
Numerator for net loss (earnings) per share--basic and
diluted.................................................. (66,485) 10,040 68,015
======== ======== =======
Denominator:
Denominator for net loss (earnings) per share--basic..... 20,052 19,877 20,034
Effect of dilutive securities:
Stock option incremental shares........................ -- -- 7
-------- -------- -------
Denominator for net loss (earnings) per share--diluted... 20,052 19,877 20,041
======== ======== =======

YEAR ENDED DECEMBER 31,
--------------------------------------
2000 1999 1998
-------- -------- --------

Net (loss) earnings per share--basic:
(Loss) earnings before gain (loss) on assets sold.......... $ (3.82) $ 1.04 $ 1.74
(Loss) gain on assets sold--net............................ 0.50 (0.53) 1.65
-------- -------- -------
Net (loss) earnings per share--basic....................... $ (3.32) $ 0.51 $ 3.39
======== ======== =======
Net (loss) earnings per share--diluted:
(Loss) earnings before gain (loss) on assets sold.......... $ (3.82) $ 1.04 $ 1.74
(Loss) gain on assets sold--net............................ 0.50 (0.53) 1.65
-------- -------- -------
Net (loss) earnings per share--diluted $ (3.32) $ 0.51 $ 3.39
======== ======== =======

The effect of converting the Series C Preferred Stock for the year 2000 and
the effects of converting the 1996 convertible debentures have been excluded as
all such effects are antidilutive.

F-37

[FORMAT AND PRESENTATION TO BE REVIEWED BY E&Y]

OMEGA HEALTHCARE INVESTORS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS)

SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
(UNAUDITE(SEE NOTE)

ASSETS
Real estate properties
Land and buildings at cost................................ $ 701,370 $710,542
Less accumulated depreciation............................. (101,861) (89,870)
--------- --------
Real estate properties--net............................. 599,509 620,672
Mortgage notes receivable--net............................ 185,861 206,710
--------- --------
785,370 827,382
Other investments........................................... 47,818 53,242
--------- --------
833,188 880,624
Assets held for sale--net................................... 7,377 4,013
--------- --------
Total Investments....................................... 840,565 884,637
Cash and cash equivalents................................... 14,145 7,172
Accounts receivable......................................... 6,881 10,497
Other assets................................................ 3,789 9,338
Operating assets for owned properties....................... 45,885 36,807
--------- --------
Total Assets............................................ $ 911,265 $948,451
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Revolving lines of credit................................... $ 203,641 $185,641
Unsecured borrowings........................................ 199,641 225,000
Other long-term borrowings.................................. 22,755 24,161
Subordinated convertible debentures......................... -- 16,590
Accrued expenses and other liabilities...................... 16,708 18,002
Operating liabilities for owned properties.................. 11,861 14,744
--------- --------
Total Liabilities....................................... 454,606 484,138

Preferred Stock............................................. 212,342 207,500
Common stock and additional paid-in capital................. 440,392 440,556
Cumulative net earnings..................................... 171,272 182,548
Cumulative dividends paid................................... (365,654) (365,654)
Unamortized restricted stock awards......................... (202) (607)
Accumulated other comprehensive loss........................ (1,491) (30)
--------- --------
Total Stockholders' Equity.............................. 456,659 464,313
--------- --------
Total Liabilities and Stockholders' Equity.............. $ 911,265 $948,451
========= ========

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

Note--The balance sheet at December 31, 2000, has been derived from the audited
consolidated financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
in the United States for complete financial statements.

See notes to condensed consolidated financial statements.

F-38

OMEGA HEALTHCARE INVESTORS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

UNAUDITED

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

THREE MONTHS
ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2001 2000 2001 2000
-------- -------- -------- --------

REVENUES
Rental income............................................. $ 14,936 $ 15,503 $ 45,686 $ 49,652
Mortgage interest income.................................. 5,130 5,888 16,343 17,800
Other investment income--net.............................. 1,374 534 3,640 4,277
Nursing home revenues of owned and operated assets........ 43,820 45,960 133,613 123,461
Miscellaneous............................................. 1,575 126 2,384 483
-------- -------- -------- --------
66,835 68,011 201,666 195,673
EXPENSES
Nursing home expenses of owned and operated assets........ 44,439 48,552 134,565 126,436
Depreciation and amortization............................. 5,515 5,657 16,560 17,385
Interest.................................................. 9,124 9,846 28,039 32,221
General and administrative................................ 2,203 1,830 7,707 4,631
Legal..................................................... 1,145 481 2,862 974
State taxes............................................... 126 15 339 241
Litigation settlement expense............................. -- -- 10,000 --
Provision for impairment.................................. -- 49,849 8,381 54,349
Provision for uncollectable accounts...................... 19 12,100 700 12,100
Severance, moving and consulting agreement costs.......... 4,300 4,665 4,766 4,665
Charges for derivative accounting......................... 561 -- 1,113 --
-------- -------- -------- --------
67,432 132,995 215,032 253,002
-------- -------- -------- --------
Loss before (loss) gain on assets sold and gain on early
extinguishment of debt.................................... (597) (64,984) (13,366) (57,329)
(Loss) gain on assets sold--net (1,485) (109) (873) 10,342
Gain on early extinguishment of debt........................ 226 -- 2,963 --
-------- -------- -------- --------
Net loss.................................................... (1,856) (65,093) (11,276) (46,987)
Preferred stock dividends................................... (5,029) (5,705) (14,966) (10,520)
-------- -------- -------- --------
Net loss available to common................................ $ (6,885) $(70,798) $(26,242) $(57,507)
======== ======== ======== ========
Loss per common share:
Net loss per share--basic................................. $ (0.34) $ (3.53) $ (1.31) $ (2.87)
======== ======== ======== ========
Net loss per share--diluted............................... $ (0.34) $ (3.53) $ (1.31) $ (2.87)
======== ======== ======== ========
Dividends declared and paid per common share................ $ -- $ 0.25 $ -- $ 0.75
======== ======== ======== ========
Weighted Average Shares Outstanding, Basic.................. 20,071 20,064 20,032 20,058
======== ======== ======== ========
Weighted Average Shares Outstanding, Diluted................ 20,071 20,064 20,032 20,058
======== ======== ======== ========
Other comprehensive loss:
Unrealized Loss on Omega Worldwide, Inc................... $ (814) $ (1,745) $ (567) $ (2,944)
======== ======== ======== ========
Unrealized Loss on Hedging Contracts...................... $ (458) $ -- $ (894) $ --
======== ======== ======== ========
Total comprehensive loss.................................... $ (3,128) $(66,838) $(12,737) $(49,931)
======== ======== ======== ========

See notes to condensed consolidated financial statements.

F-39

OMEGA HEALTHCARE INVESTORS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

UNAUDITED

(IN THOUSANDS)

NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
2001 2000
-------- --------

OPERATING ACTIVITIES
Net loss.................................................. $(11,276) $(46,987)
Adjustment to reconcile net loss to cash provided by
operating activities:
Depreciation and amortization........................... 16,560 17,385
Provision for impairment................................ 8,381 54,349
Provision for collection losses......................... 700 12,100
Loss (Gain) on assets sold--net......................... 873 (10,342)
Gain on early extinguishment of debt.................... (2,963) --
Other................................................... 3,291 2,078
Net change in accounts receivable for Owned & Operated
assets--net............................................... (8,120) (17,087)
Net change in accounts payable for Owned & Operated
assets.................................................... (3,776) 5,421
Net change in other Owned & Operated assets and
liabilities............................................... (97) (12,723)
Net change in operating assets and liabilities.............. 3,875 (3,383)
-------- --------

Net cash provided by operating activities................... 7,448 811

CASH FLOW FROM FINANCING ACTIVITIES
Proceeds of revolving lines of credit--net.................. 18,000 25,041
Payments of long-term borrowings............................ (43,355) (121,447)
Receipts from Dividend Reinvestment Plan.................... 29 430
Dividends paid.............................................. -- (22,253)
Proceeds from preferred stock offering...................... -- 100,000
Deferred financing costs paid............................... (852) (4,976)
Other....................................................... (45) (9,339)
-------- --------
Net cash used in financing activities....................... (26,223) (32,544)

CASH FLOW FROM INVESTING ACTIVITIES
Proceeds from sale of real estate investments--net.......... 1,514 35,793
Fundings of other investments--net.......................... 1,444 (5,507)
Collection of mortgage principal............................ 22,790 1,632
-------- --------
Net cash provided by investing activities................... 25,748 31,918
-------- --------
Increase in cash and cash equivalents....................... 6,973 185
Cash and cash equivalents at beginning of period............ 7,172 4,105
-------- --------
Cash and cash equivalents at end of period.................. $ 14,145 $ 4,290
======== ========

See notes to condensed consolidated financial statements.

F-40

OMEGA HEALTHCARE INVESTORS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

SEPTEMBER 30, 2001

NOTE A--BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements for
Omega Healthcare Investors, Inc. (the "Company") have been prepared in
accordance with generally accepted accounting principles in the United States
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals and impairment provisions to adjust the
carrying value of assets) considered necessary for a fair presentation have been
included. Certain reclassifications have been made to the 2000 financial
statements for consistency with the current presentation. Such reclassifications
have no effect on previously reported earnings or equity. Operating results for
the three-month and nine-month periods ended September 30, 2001 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2001. For further information, refer to the financial statements
and footnotes thereto included in the Company's annual report on Form 10-K for
the year ended December 31, 2000.

NOTE B--PROPERTIES

In the ordinary course of its business activities, the Company periodically
evaluates investment opportunities and extends credit to customers. It also
regularly engages in lease and loan extensions and modifications. Additionally,
the Company actively monitors and manages its investment portfolio with the
objectives of improving credit quality and increasing returns. In connection
with portfolio management, the Company engages in various collection and
foreclosure activities.

When the Company acquires real estate pursuant to a foreclosure, lease
termination or bankruptcy proceeding, and does not immediately re-lease the
properties to new operators, the assets are included on the balance sheet as
"real estate properties," and the value of such assets is reported at the lower
of cost or fair value. (See "Owned and Operated Assets" below). Additionally,
when a formal plan to sell real estate is adopted, the real estate is classified
as "Assets Held for Sale," with the net carrying amount adjusted to the lower of
cost or fair value, less cost of disposal.

Based on management's current review of the Company's portfolio, a provision
for impairment on the value of assets held for sale of $8.4 million was recorded
for the nine-month period ended September 30, 2001. This provision relates to
additional properties that were added to Assets Held for Sale during the
three-month period ended June 30, 2001 as a result of the foreclosure of assets
leased by a defaulting customer during that quarter.

F-41

OMEGA HEALTHCARE INVESTORS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

SEPTEMBER 30, 2001

NOTE B--PROPERTIES (CONTINUED)
A summary of the number of properties by category for the quarter ended
September 30, 2001 follows:

TOTAL
PURCHASE / OWNED & HEALTHCARE
FACILITY COUNT LEASEBACK MORTGAGES OPERATED FACILITIES HELD FOR SALE TOTAL
-------------- ---------- --------- -------- ---------- ------------- --------

Balance at June 30, 2001............. 129 57 63 249 9 258
Properties transferred to Held for
Sale............................... -- -- (2) (2) 2 --
Properties transferred to Owned &
Operated........................... -- -- -- -- -- --
Properties Sold / Mortgages Paid..... -- -- (1) (1) (1) (2)
Properties Leased / Mortgages
Placed............................. -- -- -- -- -- --
Properties transferred to Purchase/
Leaseback.......................... 2 (2) -- -- -- --
-------- -------- -------- -------- ------- --------
Balance at September 30, 2001........ 131 55 60 246 10 256
======== ======== ======== ======== ======= ========

GROSS INVESTMENT ($000'S)
-------------------------
Balance at June 30, 2001. $ 581,468 $ 180,768 $121,368 $ 883,604 $ 5,698 $889,302

Properties transferred to Held for
Sale............................... -- -- (2,230) (2,230) 2,230 --
Properties transferred to Owned &
Operated........................... -- -- -- -- -- --
Properties Sold / Mortgages Paid..... -- -- (3,404) (3,404) (149) (3,553)
Properties Leased / Mortgages
Placed............................. -- 9,360 -- 9,360 -- 9,360
Properties transferred to Purchase /
Leaseback.......................... 3,900 (3,900) -- -- -- --
Capex and other...................... -- (367) 268 (99) (402) (501)
-------- -------- -------- -------- ------- --------
Balance at September 30, 2001........ $585,368 $185,861 $116,002 $887,231 $ 7,377 $894,608
======== ======== ======== ======== ======= ========

REAL ESTATE DISPOSITIONS

The Company disposed of two facilities during the three-month period ended
September 30, 2001. One facility, located in Texas, had a total of 120 beds and
was classified as Owned & Operated Assets. The Company recognized a loss on
disposition of this facility of $1.5 million. The other facility, located in
Indiana, was classified as Assets Held for Sale. The Company recognized a net
gain on disposition of assets during the nine-month period ended September 30,
2000 of $10.3 million. The net gain was comprised of a $10.9 million gain on the
sale of four facilities previously leased to Tenet Healthsystem
Philadelphia, Inc., offset by a loss of $0.6 million on the sale of a 57 bed
facility in Colorado.

NOTES AND MORTGAGES RECEIVABLE

Income on notes and mortgages that are impaired will be recognized as cash
is received. During the nine-month period ended September 30, 2000 the Company
recorded a charge of $12.1 million to provision for loss on mortgages
($4.9 million) and notes receivable ($7.2 million).

F-42

OMEGA HEALTHCARE INVESTORS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

SEPTEMBER 30, 2001

NOTE B--PROPERTIES (CONTINUED)
OWNED AND OPERATED ASSETS

The Company owns 60 facilities that were recovered from customers and are
operated for the Company's own account. These facilities have 4,701 beds and are
located in nine states. During the three-month period ended September 30, 2001,
one of the Company's previously Owned and Operated facilities was sold and two
were closed and reclassified to Assets Held for Sale.

The Company intends to operate these owned and operated assets for its own
account until such time as these facilities' operations are stabilized and are
re-leasable or saleable at lease rates or sale prices that maximize the value of
these assets to the Company. As a result, these facilities and their respective
operations are presented on a consolidated basis in the Company's financial
statements. See Note J--"Subsequent Events."

The revenues, expenses, assets and liabilities included in the Company's
condensed consolidated financial statements which relate to such owned and
operated assets are set forth in the table below. Nursing home revenues from
these owned and operated assets are recognized as services are provided. The
amounts shown in the condensed consolidated financial statements are not
comparable, as the number of Owned and Operated facilities and the timing of the
foreclosures and re-leasing activities have occurred at different times during
the periods presented.

THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
2001 2000 2001 2000
-------- -------- -------- --------
UNAUDITED
(IN THOUSANDS)

Revenues (1)
Medicaid.............................................. $27,084 $29,176 $ 80,645 $ 75,535
Medicare.............................................. 10,074 8,646 32,588 21,896
Private & Other....................................... 6,662 8,138 20,380 26,030
------- ------- -------- --------
Total Revenues...................................... 43,820 45,960 133,613 123,461
Expenses
Patient Care Expenses................................. 30,917 28,782 93,638 78,885
Administration........................................ 7,246 13,171 21,423 30,613
Property & Related.................................... 3,092 3,084 9,052 7,955
------- ------- -------- --------
Total Expenses...................................... 41,255 45,037 124,113 117,453
Contribution Margin................................... 2,565 923 9,500 6,008
Management Fees....................................... 2,217 2,337 7,084 6,235
Rent.................................................. 967 1,178 3,368 2,748
------- ------- -------- --------
Net Operating Loss.................................... $ (619) $(2,592) $ (952) $ (2,975)
======= ======= ======== ========

F-43

OMEGA HEALTHCARE INVESTORS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

SEPTEMBER 30, 2001

NOTE B--PROPERTIES (CONTINUED)

SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
UNAUDITED
(IN THOUSANDS)

ASSETS
Cash........................................................ $ 8,826 $ 5,364
Accounts Receivable--Net.................................... 38,150 30,030
Other Current Assets........................................ 6,013 5,098
-------- --------
Total Current Assets........................................ 52,989 40,492
Investment in leasehold..................................... 1,722 1,679
Land and Buildings.......................................... 116,002 130,601
Less Accumulated Depreciation............................... (17,043) (17,680)
-------- --------
Land and Buildings--Net..................................... 98,959 112,921
-------- --------
TOTAL ASSETS................................................ $153,670 $155,092
======== ========
LIABILITIES
Accounts Payable............................................ $ 4,861 $ 8,636
Other Current Liabilities................................... 6,967 6,108
-------- --------
Total Current Liabilities................................... 11,828 14,744
-------- --------
TOTAL LIABILITIES........................................... $ 11,828 $ 14,744
======== ========

ASSETS HELD FOR SALE

At September 30, 2001, the carrying value of assets held for sale totals
$7.4 million (net of impairment reserves of $15.9 million). The Company intends
to sell the remaining facilities as soon as practicable. There can be no
assurance if or when such sales will be completed or whether such sales will be
completed on terms that allow the Company to realize the carrying value of the
assets.

F-44

OMEGA HEALTHCARE INVESTORS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

SEPTEMBER 30, 2001

NOTE B--PROPERTIES (CONTINUED)

SEGMENT INFORMATION

The following tables set forth the reconciliation of operating results and
total assets for the Company's reportable segments for the three and nine-month
periods ended September 30, 2001 and 2000.

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001
----------------------------------------------------
OWNED AND
OPERATED AND
CORE ASSETS HELD CORPORATE
OPERATIONS FOR SALE AND OTHER CONSOLIDATED
---------- ------------ --------- ------------
(IN THOUSANDS)

Operating Revenues.......................................... $ 20,066 $ 43,820 $ -- $ 63,886
Operating Expenses.......................................... -- (44,439) -- (44,439)
-------- -------- -------- ----------
Net operating income (loss)............................... 20,066 (619) -- 19,447
Adjustments to arrive at net income (loss):
Other revenues............................................ -- -- 2,949 2,949
Depreciation and amortization............................. (4,273) (1,018) (224) (5,515)
Interest expense.......................................... -- -- (9,124) (9,124)
General and administrative................................ -- -- (2,203) (2,203)
Legal..................................................... -- -- (1,145) (1,145)
State Taxes............................................... -- -- (126) (126)
Litigation settlement expense............................. -- -- -- --
Provision for impairment.................................. -- -- -- --
Provision for uncollectable accounts...................... (19) -- -- (19)
Severance, moving and consulting agreement costs.......... -- -- (4,300) (4,300)
Charges for derivative accounting......................... -- -- (561) (561)
-------- -------- -------- ----------
(4,292) (1,018) (14,734) (20,044)
-------- -------- -------- ----------
Income (loss) before net loss on assets sold and gain on
early extinguishment of debt.............................. 15,774 (1,637) (14,734) (597)
Loss on assets sold--net.................................... -- (1,485) -- (1,485)
Gain on early extinguishment of debt........................ -- -- 226 226
Preferred dividends......................................... -- -- (5,029) (5,029)
-------- -------- -------- ----------
Net income (loss) available to common....................... $ 15,774 $ (3,122) $(19,537) $ (6,885)
======== ======== ======== ==========
Total Assets................................................ $686,411 $161,047 $ 63,807 $ 911,265
======== ======== ======== ==========

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000
----------------------------------------------------
OWNED AND
OPERATED AND
CORE ASSETS HELD CORPORATE
OPERATIONS FOR SALE AND OTHER CONSOLIDATED
---------- ------------ --------- ------------
(IN THOUSANDS)

Operating Revenues.......................................... $ 21,391 $ 45,960 $ -- $ 67,351
Operating Expenses.......................................... -- (48,552) -- (48,552)
-------- -------- -------- ----------
Net operating income (loss)............................... 21,391 (2,592) -- 18,799
Adjustments to arrive at net income (loss):
Other revenues............................................ -- -- 660 660
Depreciation and amortization............................. (4,302) (967) (388) (5,657)
Interest expense.......................................... -- -- (9,846) (9,846)
General and administrative................................ -- -- (1,830) (1,830)
Legal..................................................... -- -- (481) (481)
State Taxes............................................... -- -- (15) (15)
Provision for impairment.................................. (1,940) (47,909) -- (49,849)
Provision for uncollectable accounts...................... (12,100) -- -- (12,100)
Severance and consulting agreement costs.................. -- -- (4,665) (4,665)
-------- -------- -------- ----------
(18,342) (48,876) (16,565) (83,783)
-------- -------- -------- ----------

F-45

OMEGA HEALTHCARE INVESTORS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

SEPTEMBER 30, 2001

NOTE B--PROPERTIES (CONTINUED)

Income (loss) before net loss on assets sold................ 3,049 (51,468) (16,565) (64,984)
Loss on assets sold--net.................................... (109) -- -- (109)
Preferred dividends......................................... -- -- (5,705) (5,705)
-------- -------- -------- ----------
Net income (loss) available to common....................... $ 2,940 $(51,468) $(22,270) $ (70,798)
======== ======== ======== ==========
Total Assets................................................ $719,848 $166,038 $ 78,803 $ 964,689
======== ======== ======== ==========

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
----------------------------------------------------
OWNED AND
OPERATED AND CORPORATE
CORE ASSETS HELD AND
OPERATIONS FOR SALE OTHER CONSOLIDATED
---------- ------------ --------- ------------
(IN THOUSANDS)

Operating Revenues.................................... $ 62,029 $133,613 $ -- $ 195,642
Operating Expenses.................................... -- (134,565) -- (134,565)
-------- -------- -------- ----------
Net operating income (loss)......................... 62,029 (952) -- 61,077
Adjustments to arrive at net income (loss):
Other revenues...................................... -- -- 6,024 6,024
Depreciation and amortization....................... (12,941) (2,950) (669) (16,560)
Interest expense.................................... -- -- (28,039) (28,039)
General and administrative.......................... -- -- (7,707) (7,707)
Legal............................................... -- -- (2,862) (2,862)
State Taxes......................................... -- -- (339) (339)
Litigation settlement expense....................... -- -- (10,000) (10,000)
Provision for impairment............................ -- -- (8,381) (8,381)
Provision for uncollectable accounts................ (700) -- -- (700)
Severance, moving and consulting agreement costs.... -- -- (4,766) (4,766)
Charges for derivative accounting................... -- -- (1,113) (1,113)
-------- -------- -------- ----------
(13,641) (2,950) (57,852) (74,443)
-------- -------- -------- ----------
Income (loss) before net loss on assets sold and gain
on early extinguishment of debt..................... 48,388 (3,902) (57,852) (13,366)
Loss on assets sold--net.............................. -- (873) -- (873)
Gain on early extinguishment of debt.................. -- -- 2,963 2,963
Preferred dividends................................... -- -- (14,966) (14,966)
-------- -------- -------- ----------
Net income (loss) available to common................. $ 48,388 $ (4,775) $(69,855) $ (26,242)
======== ======== ======== ==========
Total Assets.......................................... $686,411 $161,047 $ 63,807 $ 911,265
======== ======== ======== ==========

F-46

OMEGA HEALTHCARE INVESTORS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

SEPTEMBER 30, 2001

NOTE B--PROPERTIES (CONTINUED)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
----------------------------------------------------
OWNED AND
OPERATED AND CORPORATE
CORE ASSETS HELD AND
OPERATIONS FOR SALE OTHER CONSOLIDATED
---------- ------------ --------- ------------
(IN THOUSANDS)

Operating Revenues.................................... $ 67,452 $123,461 $ -- $ 190,913
Operating Expenses.................................... -- (126,436) -- (126,436)
-------- -------- -------- ----------
Net operating income (loss)......................... 67,452 (2,975) -- 64,477
Adjustments to arrive at net income (loss):
Other revenues...................................... -- -- 4,760 4,760
Depreciation and amortization....................... (13,723) (2,545) (1,117) (17,385)
Interest expense.................................... -- -- (32,221) (32,221)
General and administrative.......................... -- -- (4,631) (4,631)
Legal............................................... -- -- (974) (974)
State Taxes......................................... -- -- (241) (241)
Provision for impairment............................ (1,940) (52,409) -- (54,349)
Provision for uncollectable accounts................ (12,100) -- -- (12,100)
Severance and consulting agreement costs............ -- -- (4,665) (4,665)
-------- -------- -------- ----------
(27,763) (54,954) (39,089) (121,806)
-------- -------- -------- ----------
Income (loss) before gain on assets sold.............. 39,689 (57,929) (39,089) (57,329)
Gain on assets sold--net.............................. 10,342 -- -- 10,342
Preferred dividends................................... -- -- (10,520) (10,520)
-------- -------- -------- ----------
Net income (loss) available to common................. $ 50,031 $(57,929) $(49,609) $ (57,507)
======== ======== ======== ==========
Total Assets.......................................... $719,848 $166,038 $ 78,803 $ 964,689
======== ======== ======== ==========

NOTE C--CONCENTRATION OF RISK AND RELATED ISSUES

As of September 30, 2001, the Company's portfolio of domestic investments
consisted of 246 healthcare facilities, located in 29 states and operated by 32
third-party operators. The Company's gross investments in these facilities
totaled $887.2 million at September 30, 2001. This portfolio is made up of 129
long-term healthcare facilities and 2 rehabilitation hospitals owned and leased
to third parties, fixed rate, participating and convertible participating
mortgages on 55 long-term healthcare facilities and 48 long-term healthcare
facilities that were recovered from customers and are currently operated through
third-party management contracts for the Company's own account. In addition, 12
facilities subject to third-party leasehold interests are included in Other
Investments. The Company also holds miscellaneous investments and closed
healthcare facilities held for sale of approximately $55.2 million at
September 30, 2001, including $22.3 million related to two non-healthcare
facilities leased by the United States Postal Service, a $7.7 million investment
in Omega Worldwide, Inc., Principal Healthcare Finance Limited, an Isle of
Jersey (United Kingdom) company and Principal Healthcare Finance Trust, an
Australian Unit Trust, and $14.3 million of notes receivable.

Seven public companies operate approximately 73.7% of the Company's
investments, including Sun Healthcare Group, Inc. (24.6%), Integrated Health
Services, Inc. (18.1%, including 10.7% as the manager for and 50% owner of Lyric
Health Care LLC), Advocat, Inc. (12.0%), Mariner Post-Acute Network (6.7%),
Kindred Healthcare, Inc. (formerly known as Vencor Operating, Inc.) (5.7%),
Alterra

F-47

OMEGA HEALTHCARE INVESTORS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

SEPTEMBER 30, 2001

NOTE C--CONCENTRATION OF RISK AND RELATED ISSUES (CONTINUED)
Healthcare Corporation (3.8%), and Genesis Health Ventures, Inc. (2.8%). Kindred
and Genesis manage facilities for the Company's own account, included in
Owned & Operated Assets. The two largest private operators represent 3.5% and
2.5%, respectively, of investments. No other operator represents more than 2.5%
of investments. The three states in which the Company has its highest
concentration of investments are Florida (16.0%), California (7.5%) and Illinois
(7.5%).

GOVERNMENT HEALTHCARE REGULATION, REIMBURSEMENTS AND INDUSTRY CONCENTRATION
RISKS

Nearly all of the Company's properties are used as healthcare facilities,
therefore, the Company is directly affected by the risk associated with the
healthcare industry. The Company's lessees and mortgagors, as well as the
facilities owned and operated for the Company's account, derive a substantial
portion of their net operating revenues from third-party payers, including the
Medicare and Medicaid programs. Such programs are highly regulated and subject
to frequent and substantial changes. In addition, private payers, including
managed care payers, are increasingly demanding discounted fee structures and
the assumption by healthcare providers of all or a portion of the financial risk
of operating a healthcare facility. Any changes in reimbursement policies that
reduce reimbursement levels could adversely affect revenues of the Company's
lessees and borrowers and thereby adversely affect those lessees' and borrowers'
abilities to make their monthly lease or debt payments to the Company.

The possibility that the healthcare facilities will not generate income
sufficient to meet operating expenses or will yield returns lower than those
available through investments in comparable real estate or other investments are
additional risks of investing in healthcare-related real estate. Income from
properties and yields from investments in such properties may be affected by
many factors, including changes in governmental regulation (such as zoning
laws), general or local economic conditions (such as fluctuations in interest
rates and employment conditions), the available local supply and demand for
improved real estate, a reduction in rental income as the result of an inability
to maintain occupancy levels, natural disasters (such as earthquakes and floods)
or similar factors.

Real estate investments are relatively illiquid and, therefore, tend to
limit the ability of the Company to vary its portfolio promptly in response to
changes in economic or other conditions. Thus, if the operation of any of the
Company's properties becomes unprofitable due to competition, age of
improvements or other factors such that the lessee or borrower becomes unable to
meet its obligations on the lease or mortgage loan, the liquidation value of the
property may be substantially less, particularly relative to the amount owing on
any related mortgage loan, than would be the case if the property were readily
adaptable to other uses.

F-48

OMEGA HEALTHCARE INVESTORS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

SEPTEMBER 30, 2001

NOTE C--CONCENTRATION OF RISK AND RELATED ISSUES (CONTINUED)

POTENTIAL RISKS FROM BANKRUPTCIES

Generally, the Company's lease arrangements with a single operator who
operates more than one of the Company's facilities is designed pursuant to a
single master lease (a "Master Lease" or collectively, the "Master Leases").
Although each lease or Master Lease provides that the Company may terminate the
Master Lease upon the bankruptcy or insolvency of the tenant, the Bankruptcy
Reform Act of 1978 ("Bankruptcy Code") provides that a trustee in a bankruptcy
or reorganization proceeding under the Bankruptcy Code (or debtor-in-possession
in a reorganization under the Bankruptcy Code) has the power and the option to
assume or reject the unexpired lease obligations of a debtor-lessee. In the
event that the unexpired lease is assumed on behalf of the debtor-lessee, all
the rental obligations thereunder generally would be entitled to a priority over
other unsecured claims. However, the court also has the power to modify a lease
if a debtor-lessee in a reorganization were required to perform certain
provisions of a lease that the court determined to be unduly burdensome. It is
not possible at this time to determine whether or not a court would hold that
any lease or Master Lease contains any such provisions. If a lease is rejected,
the lessor has a general unsecured claim limited to any unpaid rent already due
plus an amount equal to the rent reserved under the lease, without acceleration,
for the greater of one year or 15% of the remaining term of such lease, not to
exceed the rent obligation for three years.

Generally, with respect to the Company's mortgage loans, the imposition of
an automatic stay under the Bankruptcy Code precludes the Company from
exercising foreclosure or other remedies against the debtor. A mortgagee also is
treated differently from a landlord in three key respects. First, the mortgage
loan is not subject to assumption or rejection because it is not an executory
contract or a lease. Second, the mortgagee's loan may be divided into (1) a
secured loan for the portion of the mortgage debt that does not exceed the value
of the property and (2) a general unsecured loan for the portion of the mortgage
debt that exceeds the value of the property. A secured creditor such as the
Company is entitled to the recovery of interest and costs only if and to the
extent that the value of the collateral exceeds the amount owed. If the value of
the collateral is less than the debt, a lender such as the Company would not
receive or be entitled to any interest for the time period between the filing of
the case and confirmation. If the value of the collateral does exceed the debt,
interest and allowed costs may not be paid during the bankruptcy proceeding but
accrue until confirmation of a plan or reorganization or some other time as the
court orders. Finally, while a lease generally would either be rejected or
assumed with all of its benefits and burdens intact, the terms of a mortgage,
including the rate of interest and timing of principal payments, may be modified
if the debtor is able to effect a "cramdown" under the Bankruptcy Code.

The receipt of liquidation proceeds or the replacement of an operator that
has defaulted on its lease or loan could be delayed by the approval process of
any federal, state or local agency necessary for the transfer of the property or
the replacement of the operator licensed to manage the facility. In addition,
certain significant expenditures associated with real estate investment (such as
real estate taxes and maintenance costs) are generally not reduced when
circumstances cause a reduction in income from the investment. In order to
protect its investments, the Company may take possession of a property or even
become licensed as an operator, which might expose the Company to successorship
liability to government programs or require the Company to indemnify subsequent
operators to whom

F-49

OMEGA HEALTHCARE INVESTORS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

SEPTEMBER 30, 2001

NOTE C--CONCENTRATION OF RISK AND RELATED ISSUES (CONTINUED)
it might transfer the operating rights and licenses. Third party payors may also
suspend payments to the Company following foreclosure until the Company receives
the required licenses to operate the facilities. Should such events occur, the
Company's income and cash flows from operations would be adversely affected.

RISKS RELATED TO OWNED AND OPERATED ASSETS

As a consequence of the financial difficulties encountered by a number of
the Company's operators, the Company has recovered various long-term care
assets, pledged as collateral for the operators' obligations, either in
connection with a restructuring or settlement with certain operators or pursuant
to foreclosure proceedings. Under normal circumstances, the Company would
classify such assets as "Assets Held for Sale" and seek to re-lease or otherwise
dispose of such assets as promptly as practicable. During 2000, a number of
companies were actively marketing portfolios of similar assets and, in light of
market conditions in the long-term care industry generally, it had become more
difficult both to sell such properties and for potential buyers to obtain
financing to acquire such properties. During 2000, $24.3 million of assets
previously classified as held for sale were reclassified to "Owned and Operated
Assets" as the timing and strategy for sale or, alternatively, re-leasing, were
revised in light of prevailing market conditions.

The Company is typically required to hold applicable leases and is
responsible for the regulatory compliance at its owned and operated facilities.
The Company's management contracts with third-party operators for such
properties provide that the third-party operator is responsible for regulatory
compliance, but the Company could be sanctioned for violation of regulatory
requirements. In addition, the risk of third-party claims such as patient care
and personal injury claims may be higher with respect to Company owned and
operated properties as compared to the Company's leased and mortgaged assets.

NOTE D--DIVIDENDS

On February 1, 2001, the Company announced the suspension of all common and
preferred dividends. This action is intended to preserve cash to facilitate the
Company's ability to obtain financing to fund its 2002 maturing indebtedness.
Prior to recommencing the payment of dividends on the Company's Common stock,
all accrued and unpaid dividends on the Company's Series A, B and C preferred
stock must be paid in full. The Company has made sufficient distributions to
satisfy the distribution requirements under the REIT rules to maintain its REIT
status for 2000 and intends to satisfy such requirements under the REIT rules
for 2001. The accumulated and unpaid dividends relating to all series of the
preferred stock, excluding the November 15, 2000 Series C dividends described
below, total $14.9 million as of September 30, 2001.

On March 30, 2001, the Company exercised its option to pay the accrued
$4,666,667 Series C dividend from November 15, 2000 and the associated waiver
fee by issuing 48,420 Series C preferred shares to Explorer on April 2, 2001,
which are convertible into 774,722 shares of the Company's common stock at $6.25
per share. Such election resulted in an increase in the aggregate liquidation

F-50

OMEGA HEALTHCARE INVESTORS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

SEPTEMBER 30, 2001

NOTE D--DIVIDENDS (CONTINUED)
preference of Series C Preferred Stock as of April 2, 2001 to $104,842,000,
including accrued dividends through that date.

During the nine-month period ended September 30, 2000 the Company paid
dividends of $4.0 million on its 9.25% Series A Cumulative Preferred Stock and
8.625% Series B Cumulative Preferred Stock.

NOTE E--EARNINGS PER SHARE

The computation of basic earnings per share is determined based on the
weighted average number of common shares outstanding during the respective
periods. Diluted earnings per share reflect the dilutive effect, if any, of
stock options and, beginning in the third quarter of 2000, the assumed
conversion of the Series C Preferred Stock.

NOTE F--OMEGA WORLDWIDE, INC.

As of September 30, 2001 the Company holds a $4.9 million investment in
Omega Worldwide, Inc. ("Worldwide"), represented by 1,163,000 shares of common
stock and 260,000 shares of preferred stock. The Company also holds a
$1.6 million investment in Principal Healthcare Finance Limited, an Isle of
Jersey (United Kingdom) company, and a $1.3 million investment in Principal
Healthcare Finance Trust, an Australian Unit Trust. The Company had guaranteed
repayment of Worldwide borrowings pursuant to a revolving credit facility in
exchange for an initial 1% fee and an annual facility fee of 25 basis points.
The Company was required to provide collateral in the amount of $8.8 million
related to the guarantee of Worldwide's obligations. Worldwide repaid all
borrowings under the revolving credit facility in June 2001. The Company's
guarantee was terminated and the subject collateral was released.

Additionally, the Company had a Services Agreement with Worldwide that
provided for the allocation of indirect costs incurred by the Company to
Worldwide. The allocation of indirect costs has been based on the relationship
of assets under the Company's management to the combined total of those assets
and assets under Worldwide's management. Upon expiration of this agreement on
June 30, 2000, the Company entered into a new agreement requiring quarterly
payments from Worldwide of $37,500 for the use of offices and certain
administrative and financial services provided by the Company. Upon the
reduction of the Company's accounting staff, the Service Agreement was
renegotiated again on November 1, 2000 requiring quarterly payments from
Worldwide of $32,500. Costs allocated to Worldwide for the three-month and
nine-month periods ended September 30, 2001 were $32,500 and $97,500,
respectively, compared with ($19,000) and $370,000 for the same periods in 2000.

NOTE G--LITIGATION

F-51

OMEGA HEALTHCARE INVESTORS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

SEPTEMBER 30, 2001

NOTE G--LITIGATION (CONTINUED)
threatened, or all of them combined, will not have a material adverse effect on
its consolidated financial position or results of operations.

On June 21, 2000, the Company was named as a defendant in certain litigation
brought against it by Madison/OHI Liquidity Investors, LLC ("Madison"), a
customer that claims that the Company has breached and/or anticipatorily
breached a commercial contract. Ronald M. Dickerman and Bryan Gordon are
partners in Madison and limited guarantors of Madison's obligations to the
Company. Madison claims damages as a result of the alleged breach of
approximately $700,000. Madison seeks damages as a result of the claimed
anticipatory breach in the amount of $15 million or, in the alternative, Madison
seeks specific performance of the contract as modified by a course of conduct
that Madison alleges developed between Madison and the Company. The Company
contends that Madison is in default under the contract in question. The Company
believes that the litigation is meritless. The Company continues to vigorously
defend the case and has filed counterclaims against Madison and the guarantors,
seeking repayment of approximately $9.4 million, excluding default interest,
that Madison owes the Company. The Company's Motion for Summary Judgment seeking
dismissal of Madison's anticipatory breach claim is scheduled for November 19,
2001. The trial in this matter is set for February 2002.

On December 29, 1998, Karrington Health, Inc. brought suit against the
Company in the Franklin County, Ohio, Common Pleas Court (subsequently removed
to the U.S. District Court for the Southern District of Ohio, Eastern Division)
alleging that the Company repudiated and ultimately breached a financing
contract to provide $95 million of financing for the development of 13 assisted
living facilities. Karrington was seeking recovery of approximately $34 million
in damages it alleged to have incurred as a result of the breach. On August 13,
2001, the Company paid Karrington $10 million to settle all claims arising from
the suit, but without admission of any liability or fault by the Company, which
liability is expressly denied. Based on the settlement, the suit has been
dismissed with prejudice. The settlement was recorded in the quarter ended
June 30, 2001.

NOTE H--BORROWING ARRANGEMENTS

The Company has a $175 million secured revolving credit facility that
expires on December 31, 2002. Borrowings under the facility bear interest at
2.5% to 3.25% over London Interbank Offered Rates ("LIBOR"), based on the
Company's leverage ratio. Borrowings of approximately $129 million are
outstanding at September 30, 2001. Investments with a gross book value of
approximately $240 million are pledged as collateral for this credit facility.

The Company has a $75 million secured revolving credit facility that expires
on March 31, 2002 as to $10 million and June 30, 2005 as to $65 million.
Borrowings under the facility bear interest at 2.5% to 3.75% over LIBOR, based
on the Company's leverage ratio and collateral assigned. Borrowings of
approximately $74.6 million are outstanding at September 30, 2001. Investments
with a gross book value of approximately $95 million are pledged as collateral
for this credit facility.

During the three-month and nine-month periods ended September 30, 2001, the
Company repurchased $3.9 million and $25.4 million, respectively, of its 6.95%
Notes maturing in June 2002. At September 30, 2001, $99.6 million of these notes
remain outstanding.

F-52

OMEGA HEALTHCARE INVESTORS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

SEPTEMBER 30, 2001

NOTE H--BORROWING ARRANGEMENTS (CONTINUED)
As of September 30, 2001, the Company had an aggregate of $238.6 million of
outstanding debt that matures in 2002, including $99.6 million of 6.95% Notes
due June 2002 and $139 million on credit facilities expiring in 2002.

The recognition of $10 million of expense associated with the settlement of
the lawsuit with Karrington Health, Inc. described in Note G above resulted in a
violation of certain financial covenants in the loan agreements relating to the
Company's secured credit facilities as of June 30, 2001. The Company previously
obtained a waiver from the lenders under both credit facilities through
September 14, 2001. The lenders under the Company's $175 million secured credit
facility have extended this waiver through December 13, 2001. The waiver granted
by the lenders under the Company's $75 million secured credit facility has
expired and discussions with the lenders are continuing. The Company has not
received any notice of default or acceleration of the outstanding balance under
that facility. These covenant violations prevent the Company from drawing upon
the otherwise remaining availability under both credit facilities until a
permanent resolution is attained.

At September 30, 2001 the Company would have had $14.5 million available
under its secured revolving credit facilities if it were in compliance with the
applicable financial covenants. Certain assets that served as collateral for one
of the credit facilities were recovered from a customer during the June 30, 2001
quarter. These assets are no longer eligible to serve as collateral, resulting
in reduced availability under the credit facility. The Company has the ability
to replace this collateral and increase the availability under the line by up to
an additional $18.1 million subject to compliance with the applicable financial
covenants. (See Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources)

NOTE I--EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS

The Company utilizes interest rate swaps to fix interest rates on variable
rate debt and reduce certain exposures to interest rate fluctuations. In
June 1998, the Financial Accounting Standards Board issued Statement No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, which is required
to be adopted in years beginning after June 15, 2000. The Company adopted the
new Statement effective January 1, 2001. The Statement requires the Company to
recognize all derivatives on the balance sheet at fair value. Derivatives that
are not hedges must be adjusted to fair value through income. If the derivative
is a hedge, depending on the nature of the hedge, changes in the fair value of
derivatives will either be offset against the change in fair value of the hedged
assets, liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedge item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings.

At September 30, 2001, the Company had two interest rate swaps with notional
amounts of $32 million each, based on 30-day LIBOR. Under the terms of the first
agreement, which expires in December 2001, the Company receives payments when
LIBOR exceeds 6.35% and pays the counterparty when LIBOR is less than 6.35%. At
September 30, 2001, 30-day LIBOR was 2.63%. This interest rate swap may be
extended for an additional twelve months at the option of the counterparty and
therefore does not qualify for hedge accounting under FASB No. 133. The fair
value of this swap

F-53

OMEGA HEALTHCARE INVESTORS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

SEPTEMBER 30, 2001

NOTE I--EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)
at January 1, and September 30, 2001 was a liability of $351,344 and $1,200,369,
respectively. The liability at January 1 was recorded as a transition adjustment
in other comprehensive income and is being amortized over the initial term of
the swap. Such amortization for the three-month and nine-month periods ended
September 30, 2001 of $87,836 and $263,508, respectively, together with the
change in fair value of the swap of $472,544 and $849,025, respectively, is
included in charges for derivative accounting in the Company's Condensed
Consolidated Statement of Operations.

Under the second agreement, which expires December 31, 2002, the Company
receives payments when LIBOR exceeds 4.89% and pays the counterparty when LIBOR
is less than 4.89%. The fair value of this interest rate swap at September 30,
2001 was a liability of $805,928, which is included in other comprehensive
income as required under FASB No. 133 for fully effective cash flow hedges.

The fair values of these interest rate swaps are included in accrued
expenses and other liabilities in the Company's Condensed Consolidated Balance
Sheet at September 30, 2001.

FASB 144 ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS

The Financial Accounting Standards Board recently issued SFAS 144,
ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS, which is
applicable to financial statements issued for fiscal years beginning after
December 15, 2001. The Company expects to adopt the new pronouncement effective
January 1, 2002. This pronouncement supersedes FASB Statement No. 121,
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO
BE DISPOSED. The Company has not yet evaluated the impact of this pronouncement
on its financial condition or results of operations.

NOTE J--SUBSEQUENT EVENTS

On October 30, 2001, the Company announced that it has reached an agreement
with Explorer Holdings, L.P. ("Explorer") to facilitate Omega's ability to raise
$50.0 million in new equity capital. Explorer has committed to invest
approximately $22.8 million in a private placement and has agreed to "backstop"
Omega's proposal to engage in a fixed price rights offering of Omega Common
Stock to raise approximately $27.2 million from existing holders of Omega's
Common Stock. Holders of Omega Common Stock (other than Explorer) will receive a
non-transferable right to purchase at an exercise price of $2.92 per share, one
full share of Omega Common Stock for every 2.15 shares of Omega Common Stock
they hold as of the close of business on November 8, 2001 or such later date as
the Registration Statement filed with the Securities and Exchange Commission to
register the shares of Common Stock to be offered in the rights offering becomes
effective. The Company intends to use the proceeds of the rights offering and
Explorer's investment will be used to repay certain indebtedness maturing in
2002 and for general working capital purposes.

Explorer, which beneficially owns 1,048,420 shares of Omega's Series C
Convertible Preferred Stock constituting approximately 45.5% of Omega's issued
and outstanding Common Stock on an as converted basis, will not receive rights
in the rights offering. Instead, the amount of Explorer's private placement is
equal to Explorer's percentage interest in the aggregate amount of the proposed
$50.0 million offering. In addition, to the extent the Company's stockholders do
not fully exercise their

F-54

OMEGA HEALTHCARE INVESTORS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

SEPTEMBER 30, 2001

NOTE J--SUBSEQUENT EVENTS (CONTINUED)
rights to purchase Common Stock in the rights offering, Explorer has committed
to invest an additional amount equal to the exercise price of the unexercised
rights.

In exchange for its investment in the Company, Explorer will receive shares
of the Company's Common Stock if stockholders have approved its issuance to
Explorer at the closing of its investment. If the issuance of Common Stock to
Explorer has not been approved by stockholders at the time of closing, Explorer
will receive shares of a newly created series of non-voting convertible
preferred stock which will automatically convert into Common Stock upon receipt
of stockholder approval. Omega will call a special meeting of stockholders to
seek approval of the issuance of Common Stock to Explorer among other matters.

The closing of the rights offering and Explorer's investment will occur
simultaneously no later than 10 days following the expiration of the
subscription period for the rights offering. The closing is subject to the
fulfillment or waiver of customary closing conditions as well as the amendment
of Omega's two secured bank credit facilities and permanent waiver of Omega's
current non-compliance with certain covenants on terms acceptable to Omega and
Explorer. There can be no assurance that the proposed offering will be
consummated.

A registration statement relating to the rights and the underlying Common
Stock to be offered in the rights offering has not yet been filed with the U.S.
Securities and Exchange Commission ("SEC"). These securities, if registered, may
not be sold nor may offers to buy be accepted prior to the time the proposed
registration statement becomes effective.

On November 1, 2001 seventeen properties previously classified as Owned and
Operated Assets were sold to Hickory Creek Foundation, Inc., subject to a
mortgage provided by us in the amount of $10.5 million. The initial term of the
mortgage is three years and the initial yield is 7.6%.

F-55

SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION
OMEGA HEALTHCARE INVESTORS, INC.
DECEMBER 31, 2000

GROSS AMOUNT AT
WHICH CARRIED AT
CLOSE OF PERIOD(6)
INITIAL COST ------------------
TO COMPANY
------------- COST CAPITALIZED
SUBSEQUENT TO BUILDINGS
BUILDINGS ACQUISITION AND LAND
AND LAND ---------------------------- IMPROVEMENTS
DESCRIPTION(1) ENCUMBRANCES IMPROVEMENTS IMPROVEMENTS IMPAIRMENT TOTAL
-------------- ------------- ------------- ------------- ------------ ------------------

Sun Healthcare Group, Inc.:
Alabama (LTC)................... $ 23,584,957 $ 23,584,957
California (LTC, RH)............ (4)(5) 65,912,924 65,912,924
Florida (LTC)................... 10,796,688 10,796,688
Florida (LTC)................... 10,700,000 10,700,000
Idaho (LTC)..................... 600,000 600,000
Illinois (LTC).................. 4,900,000 4,900,000
Illinois (LTC).................. 3,942,726 3,942,726
Indiana (LTC)................... 3,000,000 3,000,000
Louisiana (LTC)................. 4,602,574 4,602,574
Massachusetts (LTC)............. 8,300,000 8,300,000
North Carolina (LTC)............ (4) 19,970,418 19,970,418
North Carolina (LTC)............ (5) 2,739,021 2,739,021
Ohio (LTC)...................... (4)(5) 11,884,567 11,884,567
Tennessee (LTC)................. (2) 7,942,374 7,942,374
Texas (LTC)..................... 9,415,056 9,415,056
Washington (LTC)................ (4) 5,900,000 5,900,000
West Virginia (LTC)............. (4)(5) 24,793,444 24,793,444
------------ ------------
218,984,749 218,984,749
Integrated Health Services, Inc.:
Florida (LTC)................... (5) 10,000,000 10,000,000
Florida (LTC)................... 29,000,000 29,000,000
Illinois (LTC).................. (5) 14,700,000 14,700,000
New Hampshire (LTC)............. (5) 5,800,000 5,800,000
Ohio (LTC)...................... (5) 16,000,000 16,000,000
Pennsylvania (LTC).............. (5) 14,400,000 14,400,000
Pennsylvania (LTC).............. 5,500,000 5,500,000
Washington (LTC)................ 10,000,000 10,000,000
------------ ------------
105,400,000 105,400,000
Advocat, Inc.:
Alabama (LTC)................... (4) 11,638,797 707,998 12,346,795
Arkansas (LTC).................. (4) 37,887,832 1,473,599 39,361,431
Kentucky (LTC).................. (4) 14,897,402 1,816,000 16,713,402
Ohio (LTC)...................... (4) 5,854,186 5,854,186
Tennessee (LTC)................. (2) 9,542,121 9,542,121
West Virginia (LTC)............. (4) 5,283,525 502,338 5,785,863
------------ ---------- ------------
85,103,863 4,499,935 89,603,798

LIFE ON WHICH
DEPRECIATION IN
(7) LATEST INCOME
ACCUMULATED DATE OF DATE STATEMENTS
DESCRIPTION(1) DEPRECIATION RENOVATION ACQUIRED IS COMPUTED
-------------- ------------ ---------- ------------------ ---------------

Sun Healthcare Group, Inc.: 1964-1995
Alabama (LTC)................... $ 2,549,186 March 31, 1997 33 years
California (LTC, RH)............ 5,913,927 October 8, 1997 33 years
Florida (LTC)................... 1,166,963 March 31, 1997 33 years
Florida (LTC)................... 1,182,106 February 28, 1997 33 years
Idaho (LTC)..................... 66,286 February 28, 1997 33 years
Illinois (LTC).................. 673,130 August 30, 1996 30 years
Illinois (LTC).................. 426,151 March 31, 1997 33 years
Indiana (LTC)................... 412,120 August 30, 1996 30 years
Louisiana (LTC)................. 497,470 March 31, 1997 33 years
Massachusetts (LTC)............. 916,961 February 28, 1997 33 years
North Carolina (LTC)............ 3,936,793 June 4, 1994 39 years
North Carolina (LTC)............ 250,496 October 8, 1997 33 years
Ohio (LTC)...................... 1,070,766 October 8, 1997 33 years
Tennessee (LTC)................. 1,569,783 September 30, 1994 30 years
Texas (LTC)..................... 1,017,629 March 31, 1997 33 years
Washington (LTC)................ 650,949 March 31, 1997 33 years
West Virginia (LTC)............. 2,196,026 October 8, 1997 33 years
-----------
24,496,742
Integrated Health Services, Inc.: 1979-1993
Florida (LTC)................... 792,958 January 13, 1998 33 years
Florida (LTC)................... 2,361,040 March 31, 1998 33 years
Illinois (LTC).................. 1,221,821 January 13, 1998 33 years
New Hampshire (LTC)............. 495,564 January 13, 1998 33 years
Ohio (LTC)...................... 1,268,733 March 31, 1998 33 years
Pennsylvania (LTC).............. 1,230,365 January 13, 1998 33 years
Pennsylvania (LTC).............. 436,127 March 31, 1998 33 years
Washington (LTC)................ 2,118,746 September 1, 1996 20 years
-----------
9,925,354
Advocat, Inc.: 1972-1994
Alabama (LTC)................... 3,015,242 August 14, 1992 31.5 years
Arkansas (LTC).................. 9,842,102 August 14, 1992 31.5 years
Kentucky (LTC).................. 2,798,615 July 1, 1994 33 years
Ohio (LTC)...................... 970,874 July 1, 1994 33 years
Tennessee (LTC)................. 2,449,079 August 14, 1992 31.5 years
West Virginia (LTC)............. 975,555 July 1, 1994 33 years
-----------
20,051,467

F-56

Vencor Operating, Inc.:
Arizona (LTC)................... 24,029,032 44,924 (6,603,745) 17,470,211
Indiana (LTC)................... 8,383,671 100,914 (1,820,624) 6,663,961
Texas (LTC)..................... 27,141,483 84,323 27,225,806
------------ ---------- ------------ ------------
59,554,186 230,161 (8,424,369) 51,359,978
Genesis Health Ventures, Inc.:
Connecticut (LTC)............... 28,483,164 185,670 (4,787,084) 23,881,750
Massachusetts (LTC)............. 34,559,901 421,567 (10,506,822) 24,474,646
------------ ---------- ------------ ------------
63,043,065 607,237 (15,293,906) 48,356,396
Alterra Healthcare Corporation:
Colorado (AL)................... 2,583,440 2,583,440
Indiana (AL).................... 11,641,805 11,641,805
Kansas (AL)..................... 3,418,670 3,418,670
Ohio (AL)....................... 3,520,747 3,520,747
Oklahoma (AL)................... 3,177,993 3,177,993
Tennessee (AL).................. 4,068,652 4,068,652
Washington (AL)................. 5,673,693 5,673,693
------------ ---------- ------------ ------------
34,085,000 34,085,000
Alden Management Services, Inc.:
Illinois (LTC).................. 31,000,000 305,756 31,305,756

Atrium Living Centers, Inc.:
Indiana (LTC)................... 25,693,563 47,216 (12,846,628) 12,894,151
Indiana (LTC)................... 6,456,391 26,464 (2,773,242) 3,709,613
------------ ---------- ------------ ------------
32,149,954 73,680 (15,619,870) 16,603,764
TLC Healthcare, Inc.:
Illinois (LTC).................. (5) 1,274,703 1,274,703
Illinois (LTC).................. (5) 5,118,775 5,118,775
Ohio (LTC)...................... (5) 2,804,347 2,804,347
Texas (LTC)..................... (5) 4,942,000 4,942,000
Texas (LTC)..................... (5) 6,557,143 6,557,143
Texas (LTC)..................... (5) 2,442,858 2,442,858
------------ ------------
23,139,826 23,139,826
USA Healthcare, Inc.:
Iowa(LTC)....................... 14,344,797 168,000 14,512,797
Iowa(LTC)....................... 2,700,000 2,700,000
------------ ---------- ------------
17,044,797 168,000 17,212,797

Vencor Operating, Inc.: 1980-1994
Arizona (LTC)................... 1,327,091 December 31, 1998 33 years
Indiana (LTC)................... 1,997,691 December 23, 1992 31.5 years
Texas (LTC)..................... 3,165,920 December 1, 1993 39 years
-----------
6,490,702
Genesis Health Ventures, Inc.:
Connecticut (LTC)............... 1,143,510 July 14, 1999 33 years
Massachusetts (LTC)............. 1,373,516 July 14, 1999 33 years
-----------
2,517,026
Alterra Healthcare Corporation:
Colorado (AL)................... 115,241 June 14, 1999 33 years
Indiana (AL).................... 519,313 June 14, 1999 33 years
Kansas (AL)..................... 152,499 June 14, 1999 33 years
Ohio (AL)....................... 157,052 June 14, 1999 33 years
Oklahoma (AL)................... 141,763 June 14, 1999 33 years
Tennessee (AL).................. 181,493 June 14, 1999 33 years
Washington (AL)................. 253,090 June 14, 1999 33 years
-----------
1,520,451
Alden Management Services, Inc.: 1978
Illinois (LTC).................. 6,378,152 September 30, 1994 30 years
Atrium Living Centers, Inc.:
Indiana (LTC)................... 5,621,697 September 30, 1994 25 years
Indiana (LTC)................... 2,233,127 November 1, 1992 31.5 years
-----------
7,854,824
TLC Healthcare, Inc.: 1972-1996
Illinois (LTC).................. 72,217 January 7, 1999 33 years
Illinois (LTC).................. 228,336 June 1, 1999 33 years
Ohio (LTC)...................... 154,298 January 7, 1999 33 years
Texas (LTC)..................... 220,451 June 30, 1999 33 years
Texas (LTC)..................... 627,086 September 5, 1997 33 years
Texas (LTC)..................... 198,479 March 4, 1998 33 years
-----------
1,500,867
USA Healthcare, Inc.: 1974-1997
Iowa(LTC)....................... 1,267,902 October 7, 1997 33 years
Iowa(LTC)....................... 370,908 August 30, 1996 30 years
-----------
1,638,810

F-57

Pinon Management, Inc.:
Colorado (LTC).................. 14,170,968 109,931 14,280,899
Washington N & R, LLC.:
Missouri (LTC).................. (5) 12,152,174 12,152,174
Peak Medical of Idaho, Inc.:
Idaho (LTC)..................... (5) 10,500,000 10,500,000
HQM of Floyd County, Inc.:
Kentucky (LTC).................. (5) 10,250,000 10,250,000
Safe Harbor Florida Health Care
Properties, Inc.:
Florida (LTC)................... 8,150,000 866 8,150,866
Meadowbrook Healthcare of North
Carolina:
North Carolina (AL)............. (3) 7,500,000 (1,939,476) 5,560,524
Liberty Assisted Living Center:
Florida (AL).................... 5,994,730 760 5,995,490
Eldorado Care Center, Inc. &
Magnolia Manor, Inc.:
Illinois (LTC).................. 5,100,000 5,100,000
Kansas & Missouri, Inc.:
Kansas (LTC).................... 2,500,000 2,500,000
------------ ---------- ------------ ------------
$745,823,312 $5,996,326 ($41,277,621) $710,542,017
============ ========== ============ ============

Pinon Management, Inc.:
Colorado (LTC).................. 817,633 December 31, 1998 33 years
Washington N & R, LLC.:
Missouri (LTC).................. 690,758 January 7, 1999 33 years
Peak Medical of Idaho, Inc.:
Idaho (LTC)..................... 544,512 March 26, 1999 33 years
HQM of Floyd County, Inc.:
Kentucky (LTC).................. 358,673 June 30, 1997 33 years
Safe Harbor Florida Health Care
Properties, Inc.: 1984
Florida (LTC)................... 1,384,872 September 13, 1993 39 years
Meadowbrook Healthcare of North
Carolina:
North Carolina (AL)............. 1,444,027 September 30, 1994 31.5 years
Liberty Assisted Living Center:
Florida (AL).................... 1,464,958 September 30, 1994 27 years
Eldorado Care Center, Inc. &
Magnolia Manor, Inc.: 1995-1998
Illinois (LTC).................. 276,157 February 1, 1999 33 years
Kansas & Missouri, Inc.:
Kansas (LTC).................... 513,922 September 30, 1994 30 years
-----------
$89,869,907
===========

F-58

(1) All of the real estate included in this schedule are being used in either
the operation of long-term care facilities (LTC), assisted living facilities
(AL), or rehabilitation hospitals (RH) located in the states indicated.

(2) Certain of the real estate indicated are security for Industrial Development
Revenue bonds totaling $8,375,000 at December 31, 2000.

(3) Certain of the real estate indicated are security for HUD loans totaling
$5,218,497 at December 31, 2000.

(4) Certain of the real estate indicated are security for the Provident line of
credit borrowings totaling $56,641,232 at December 31, 2000.

(5) Certain of the real estate indicated are security for the Fleet line of
credit borrowings totaling $129,000,000 at December 31, 2000.

YEAR ENDED DECEMBER 31,
------------------------------------------
1998 1999 2000
(6) ------------ ------------ ------------

Balance at beginning of period.................... $561,054,194 $643,378,340 $746,914,941
Additions during period:
Acquisitions................................... 157,474,363 79,676,000 --
Conversion from mortgage....................... -- 79,431,597 --
Impairment(a).................................. -- -- (37,456,499)
Improvements................................... -- 168,000 1,302,828
Disposals/other................................ (75,150,217) (55,738,996) (219,253)
------------ ------------ ------------
Balance at close of period....................... $643,378,340 $746,914,941 $710,542,017
============ ============ ============

(a) The variance in impairment in the table shown above relates to assets
previously classified as held for sale which were reclassified to owned
and operated assets during 2000.

1998 1999 2000
(7) ------------ ----------- -----------

Balance at beginning of period...................... $ 48,147,275 $56,385,853 $67,929,407
Additions during period:
Provisions for depreciation....................... 19,749,781 21,119,252 21,683,180
Dispositions/other................................ (11,511,203) (9,575,698) 257,320
------------ ----------- -----------
Balance at close of period.......................... $ 56,385,853 $67,929,407 $89,869,907
============ =========== ===========

F-59

SCHEDULE IV MORTGAGE LOANS ON REAL ESTATE
OMEGA HEALTHCARE INVESTORS, INC.
DECEMBER 31, 2000

FACE
FINAL PERIODIC PRIOR AMOUNT OF
DESCRIPTION (1) INTEREST RATE MATURITY DATE PAYMENT TERMS LIENS MORTGAGES
--------------- ---------------- ------------------ ------------------------- -------- ------------

Michigan Interest payable at
(13 LTC facilities)............. 17.00% August 13, 2007 16.00% payable monthly None $ 58,800,000
North Carolina
(3 LTC facilities).............. Deferred interest at 1%
accrues monthly and is
payable at maturity of
the note
Florida
(4 LTC facilities).............. 11.50% February 28, 2010 Interest plus $2,200 of None 12,891,500
principal payable monthly
Florida
(2 LTC facilities).............. 11.50% June 4, 2006 Interest payable monthly None 11,090,000
Texas
(6 LTC facilities).............. 9.00% to 10.00% various Interest plus $57,000 of None 8,106,487
principal payable monthly
Tennessee
(2 LTC facilities).............. 16.16% April 29, 2001 Interest payable monthly None 8,932,000
Tennessee
(2 LTC facilities).............. 11.56% to 13.50% August 1, 2016 Interest payable monthly None 12,650,000
Ohio
(6 LTC facilities).............. 11.01% January 1, 2015 Interest plus $42,500 of None 18,238,752
principal payable monthly
Georgia
(2 LTC facilities).............. 10.08% March 13, 2008 Interest payable monthly None 12,000,000
Florida
(5 LTC facilities)
Texas
(2 LTC facilities).............. 10.55% December 3, 2003 Interest payable monthly None 37,500,000
Other Mortgage Notes:
Various........................... 9.00% to 14.14% 2002 to 2012 Interest payable monthly None 37,503,181
Quarterly amortization of
$50,000 commencing in the
year 2002
------------
$217,711,920
============

PRINCIPAL AMOUNT
CARRYING OF LOANS
AMOUNT OF SUBJECT TO
MORTGAGES(2) DELINQUENT
DESCRIPTION (1) (3) INTEREST
--------------- ------------ ----------------

Michigan
(13 LTC facilities)............. $58,800,000 $58,800,000(4)
North Carolina
(3 LTC facilities)..............
Florida
(4 LTC facilities).............. 12,804,956
Florida
(2 LTC facilities).............. 11,024,884
Texas
(6 LTC facilities).............. 5,951,566
Tennessee
(2 LTC facilities).............. 8,932,000
Tennessee
(2 LTC facilities).............. 12,613,539
Ohio
(6 LTC facilities).............. 16,198,689
Georgia
(2 LTC facilities).............. 12,000,000
Florida
(5 LTC facilities)
Texas
(2 LTC facilities).............. 37,500,000
Other Mortgage Notes:
Various........................... 30,883,936 $ 5,882,009(5)
------------
$206,709,570
============

(1) The mortgage loans included in this schedule represent first mortgages on
facilities used in the delivery of long-term healthcare, such facilities are
located in the states indicated.

(2) The aggregate cost for federal income tax purposes is equal to the carrying
amount.

YEAR ENDED DECEMBER 31,
------------------------------------------
1998 1999 2000
(3) ------------ ------------ ------------

Balance at beginning of period..................... $218,353,007 $340,455,332 $213,616,645
Additions during period -- Placements.............. 125,850,000 22,986,500 --
Deductions during period -- Collection of
principal........................................ (3,747,675) (54,748,620) (2,035,825)
Allowance for loss on mortgage loans............... -- -- (4,871,250)
Conversion to purchase leaseback/other changes..... -- (95,076,567) --
------------ ------------ ------------
Balance at close of period......................... $340,455,332 $213,616,645 $206,709,570
============ ============ ============

(4) On January 18, 2000, the mortgagor filed for protection under Chapter 11 of
the Bankruptcy Code. On February 1 2001, four facilities that were
collateral for this mortgage were taken back in exchange for a reduction in
principal of $4.5 million.

(5) A mortgagor with a mortgage on two facilities in Florida declared bankruptcy
on July 8, 1999. The bankruptcy court has ordered that all amounts owed to
the Company (including default rate interest, late charges, attorney's fees
and court costs), bear interest at an annual rate of 10% and that the
mortgagor make monthly payments of $40,000 on a timely basis. As of
December 31, 2000, the mortgagor had complied with the court order.

F-60

ANNEX A

[SHATTUCK HAMMOND PARTNERS LLC LETTERHEAD]

October 29, 2001

The Committee of Independent Directors and
The Board of Directors
Omega Healthcare Investors, Inc.
900 Victors Way
Ann Arbor, MI 48108

Members of the Committee of Independent Directors and the Board of Directors:

We understand that Omega Healthcare Investors, Inc. ("OHI") has entered into an
Investment Agreement (including the exhibits attached thereto), dated as of
October 29, 2001 (the "Investment Agreement"), with Explorer Holdings, L.P.
("Explorer"). Explorer currently owns, and its only investment in OHI is,
1,048,420 shares of OHI's Series C Preferred Stock, constituting all the shares
of that class presently outstanding (the "Preferred C") and representing
approximately 45.5% of OHI's common stock on an as converted basis. Pursuant to
the Investment Agreement as described in more detail below, among other things,
Explorer will commit to invest, subject to certain conditions being satisfied or
waived, up to $50.0 million (the "Capital Infusion Amount") in payment for OHI
common stock or a newly created security, Series D Preferred stock of OHI
("Preferred D") (the "Explorer Investment"). The actual amount of the Explorer
Investment will be equal to the difference between the Capital Infusion Amount
and the gross proceeds received by OHI through a Rights Offering (the "Rights
Offering") to OHI common stockholders other than Explorer (the "Unsubscribed
Purchase Amount"). If all rights offered in the Rights Offering were exercised,
we understand that the proportional ownership of OHI by stockholders other than
Explorer and by Explorer on an as converted basis would, upon Explorer's payment
of the Unsubscribed Purchase Amount and the issuance to it of shares of OHI
common stock, remain approximately the same as such ownership on the date of
this letter.

We understand that the price per common OHI share in the Rights Offering and the
price per common OHI share or the conversion price of the Preferred D to be paid
by Explorer will be the same; i.e., not to exceed $2.92 per share as determined
in accordance with the provisions of the Investment Agreement. Explorer's
commitment to fund the Unsubscribed Purchase Amount is irrespective of the
actual price per OHI common share at the time of the expiration of the Rights
Offering.

This opinion to the Committee of Independent Directors and the Board of
Directors of OHI addresses the fairness, from a financial point of view, to OHI
of the financial terms of the Investment Agreement taken as a whole (the
"Financial Terms of the Investment Agreement").

We further understand that the Investment Agreement, among other things,
includes the following Financial Terms which are more fully set forth in the
Investment Agreement:

- DISTRIBUTION OF RIGHTS: OHI will undertake a Rights Offering whereby each
OHI common stockholder other than Explorer will receive a dividend of one
right ("Right") for every 2.15 shares of OHI common stock owned by such
stockholder on the record date. An OHI stockholder who exercises all of
the Rights issued to him or her will maintain their proportional interest
in OHI common stock on an as converted basis. Each Right will entitle the
holder to purchase one share of OHI common stock at the Exercise Price as
described below;

- EXPLORER INVESTMENT: Explorer will not receive any Rights pursuant to the
Rights Offering. Explorer commits within ten days after the expiration
date of the Rights Offering to purchase either OHI common stock or
Preferred D shares for an aggregate amount equal to the Unsubscribed
Purchase Amount. In this regard, if the issuance of OHI common stock has
not been approved by OHI's stockholders at the time of the Explorer
Investment, the Explorer

The Committee of Independent Directors and
The Board of Directors
Omega Healthcare Investors, Inc.
October 29, 2001
Page 2

Investment will be in the form of Preferred D shares which will be
substantially the same as the Preferred C and which will be automatically
converted into OHI common stock upon the earlier of receipt of stockholder
approval for the issuance of OHI common stock to Explorer and the date the
New York Stock Exchange waives any requirement under its rules and policies
for stockholder approval of the conversion of the Preferred D into OHI
common stock. We understand that Explorer has agreed to vote its Preferred C
shares in favor of stockholder approval;

- OVER-SUBSCRIPTION RIGHT: There will be no over-subscription right for
unexercised Rights;

- TRANSFERABILITY AND TRADING OF RIGHTS: The Rights will not be
transferable or assignable and will not trade as a separate security;

- EXERCISE PRICE: The exercise price of each Right (the "Exercise Price")
is $2.92 determined in accordance with the terms of the Investment
Agreement;

- CLOSING CONDITION: The closing of the Rights Offering and the Explorer
Investment will be conditioned upon Fleet Bank, NA ("Fleet") and The
Provident Bank: (i) amending their loan agreements with OHI in a manner
and on terms and conditions satisfactory to each of OHI and Explorer in
their respective sole discretion; (ii) waiving any then existing defaults
as well as the right to assert a default based on OHI's current
non-compliance with certain covenants; and (iii) with respect to Fleet,
extending the current maturity date of its loan by no less than
12 months;

- TERMINATION: OHI will have the right to amend the terms of or terminate
the Rights Offering at any time prior to the expiration of the
subscription period in the Rights Offering;

- CONTROL OF OHI: In the event that upon consummation of the Rights
Offering and the transactions contemplated by the Investment Agreement,
Explorer holds more than 50% of the voting securities of OHI, Explorer
will have voting control of OHI, the unrestricted right to vote the OHI
voting securities which it holds and the power to designate a majority of
the Directors of OHI subject to the following restrictions imposed by the
Investment Agreement and any other limitation or restriction imposed by
law: (i) a limitation on the number of Directors of OHI which Explorer can
designate; (ii) so long as Explorer holds at least 15% of the voting
securities of OHI, a commitment by Explorer to vote in favor of the
election of three directors who are "independent" under the rules of the
New York Stock Exchange and otherwise unaffiliated with Explorer and, upon
the increase in the number of directors to ten, one additional person who
is unaffiliated with Explorer; and (iii) except in a transaction approved
by a committee of the Board of OHI comprised entirely of independent
directors and under certain limited circumstances, a prohibition against
Explorer's acquiring beneficial ownership of more than 80% of the voting
securities of OHI then issued and outstanding; and

- TRANSFERABILITY OF VOTING SECURITIES OWNED BY EXPLORER: Transfers by
Explorer of its voting securities that cause the transferee's beneficial
ownership to exceed 9.9% of OHI's total voting securities are subject to
the transferee agreeing to be bound by certain provisions of the Amended
and Restated Stockholders Agreement to be executed in connection with the
closing of the Rights Offering (the "Amended and Restated Stockholders
Agreement").

For the purposes of this opinion, we have:

(i) Reviewed the Investment Agreement (including the exhibits attached
thereto) between OHI and Explorer, dated as of October 29, 2001;

The Committee of Independent Directors and
The Board of Directors
Omega Healthcare Investors, Inc.
October 29, 2001
Page 3

(ii) Reviewed the Investment Agreement between OHI and Explorer, dated as
of May 11, 2000 and the First Amendment thereto, dated June 2, 2000;

(iii) Reviewed the Stockholders Agreement between OHI and Explorer, dated
July 14, 2000, which will be superceded by the Amended and Restated
Stockholders Agreement;

(iv) Reviewed the following documents filed by OHI with the Securities and
Exchange Commission: Form 10-K for OHI for the year ended
December 31, 2000; Forms 10-Q for the quarters ended March 31, and
June 30, 2001; 2000 Annual Report; and Proxy Statement for the Annual
Meeting of Stockholders, dated as of April 18, 2001;

(v) Reviewed various reports and analyses prepared by OHI management;

(vi) Discussed the business, operations, projections, capital structure and
prospects of OHI with OHI's management;

(vii) Reviewed financial projections and other financial information
prepared by OHI management for the years ending December 31, 2001 and
2002;

(viii) Reviewed Explorer's pro forma ownership of OHI under various
assumptions related to the Rights Offering. With regard to this
review, we noted that Explorer's current ownership in OHI common stock
on an as converted basis is approximately 45.5% and based on various
assumptions concerning the number of shares of OHI common stock which
are purchased in the Rights Offering, Explorer's ownership of OHI's
voting securities on as converted basis could exceed 50%;

(ix) Discussed with management of OHI (a) OHI's efforts to negotiate with
its banks; (b) the financial implications for OHI if agreement for
covenant waivers and a term extension were not reached with OHI's
banks; (c) the importance to OHI of securing an equity or junior
capital investment in order to potentially obtain such waivers and
extensions; and (d) OHI's efforts to access alternative sources of
capital including the timing and risk of closing associated with such
alternative investments;

(x) Discussed with a principal of Explorer, among other things Explorer's:
(a) timing of the Explorer Investment; (b) additional due diligence
requirements; (c) definitive agreement requirements; and (d) ability to
make the investment contemplated in the Investment Agreement without
any additional approvals by Explorer's partners;

(xi) Reviewed publicly available financial and stock market data with
respect to publicly-traded companies in lines of business we believe
to be generally comparable to those of OHI;

(xii) Reviewed over a five year, twelve month and three month period ending
October 26, 2001 the trading price history of OHI's common stock;

(xiii) Reviewed over the twelve month and three month period ending
October 26, 2001 the trading price history of OHI's Series A Preferred
Stock and Series B Preferred Stock;

(xiv) Reviewed the price and yield to maturity of OHI's senior unsecured
debt;

(xv) Reviewed the trading performance and other data of selected
publicly-traded companies which have undertaken a rights offering since
January 1, 2001;

The Committee of Independent Directors and
The Board of Directors
Omega Healthcare Investors, Inc.
October 29, 2001
Page 4

(xvi) Reviewed the draft dated October 25, 2001 of OHI's Registration
Statement on Form S-1; and

(xvii) Conducted such other studies, analyses, investigations and inquiries,
and considered such other information, as we deemed relevant.

In rendering our opinion, we have assumed and relied upon the accuracy and
completeness of all documents and other information supplied or otherwise made
available to us by OHI or obtained by us from other sources, and we have relied
upon the assurances of the management of OHI that they are unaware of any
information or facts that would make the information provided to us incomplete
or misleading. We have further assumed that the Investment Agreement, including
but not limited to the Rights Offering, will not be amended after the date
hereof. While we have discussed the information provided to us with management
of OHI, we have not independently verified such information, undertaken an
independent appraisal of the assets or liabilities (contingent or otherwise) of
OHI or been furnished with any such appraisals of OHI. With respect to financial
forecasts furnished to us by OHI, we have been advised by the management of OHI,
and we have assumed, that they have been reasonably prepared and reflect
management's best currently available estimates and judgment as to the expected
future financial performance of such entities. The terms of our engagement did
not include soliciting interest in an investment transaction from investors, and
we have made no such solicitation.

Our opinion is necessarily based upon market, economic and other conditions that
exist and can be evaluated as of the date of this letter, and on information
available to us as of the date hereof. We disclaim any undertaking or obligation
to advise any person of any change in any fact or matter affecting the opinion
expressed herein that may come or be brought to our attention after the date
hereof.

As part of its investment banking business, Shattuck Hammond Partners LLC is
continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, secondary
distributions of securities, private placements and other purposes. We have
acted as financial advisor to the Committee of Independent Directors in
connection with a review of other financing alternatives that might be available
to OHI and a review of any proposals related to Explorer and will receive from
OHI a fee for such services and an additional fee upon the delivery of this
opinion.

The opinion expressed herein does not constitute a recommendation as to any
action the Committee of Independent Directors, the Board of Directors or any
stockholder of OHI should take in connection with the Investment Agreement. This
opinion addresses only the fairness, from a financial point of view, of the
Financial Terms of the Investment Agreement taken as a whole. Further, we
express no opinion herein as to the structure, terms (other than the Financial
Terms) or effect of any other aspect of the investment by Explorer or the Rights
Offering, including, without limitation, the tax consequences thereof or the
corporate governance changes occurring in connection therewith except to the
extent that such changes constitute Financial Terms of the Investment Agreement.

Based upon and subject to the foregoing, it is our opinion, as investment
bankers, that, as of the date hereof, the Financial Terms of the Investment
Agreement taken as a whole are fair to OHI from a financial point of view.

Very truly yours,
/s/ Shattuck Hammond Partners LLC
Shattuck Hammond Partners LLC

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

RIGHTS TO PURCHASE UP TO [9,400,000] SHARES

[LOGO]

COMMON STOCK

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

PROSPECTUS
--------------

, 2001

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

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth the estimated expenses in connection with
this offering.

SEC Registration Fee........................................ $ 6,810
NYSE Listing Fee............................................ *
Subscription Agent Fee...................................... *
Printing and Engraving Costs................................ *
Legal Fees and Expenses..................................... *
Accounting Fees and Expenses................................ *
Miscellaneous............................................... *
--------
Total................................................. *
========

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

* To be supplied by amendment.

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

The Articles of Incorporation and Bylaws of the Registrant provide for
indemnification of directors and officers to the full extent permitted by
Maryland law.

Section 2-418 of the General Corporation Law of the State of Maryland
generally permits indemnification of any director or officer with respect to any
proceedings unless it is established that (a) the act or omission of the
director or officer was material to the matter giving rise to the proceeding and
was either committed in bad faith or the result of active or deliberate
dishonesty; (b) the director or officer actually received an improper personal
benefit in money, property or services, or; (c) in the case of criminal
proceedings, the director or officer had reasonable cause to believe that the
act or omission was unlawful. The indemnity may include judgments, penalties,
fines, settlements, and reasonable expenses actually incurred by the director or
officer in connection with the proceedings; provided, however, that if the
proceeding is one by, or in the right of, the corporation, indemnity is
permitted only for reasonable expenses and not with respect to any proceeding in
which the director shall have been adjudged to be liable to the corporation. The
termination of any proceeding by judgment, order or settlement does not create a
presumption that the director did not meet the requisite standard of conduct
required for permitted indemnification. The termination of any proceeding by
conviction, or plea of nolo contendere or its equivalent, or an entry of an
order of probation prior to judgment, creates a rebuttable presumption that the
director or officer did not meet that standard of conduct.

The Company has entered into indemnity agreements with the officers and
directors of the Company that provide that the Company will, subject to certain
conditions, pay on behalf of the indemnified party any amount which the
indemnified party is or becomes legally obligated to pay because of any act or
omission or neglect or breach of duty, including any actual or alleged error or
misstatement or misleading statement, which the indemnified party commits or
suffers while acting in the capacity as an officer or director of the Company.

Insofar as indemnification for liabilities arising under the Securities Act
is permitted to directors and officers of the Registrant pursuant to the
above-described provisions, the Registrant understands that the Commission is of
the opinion that such indemnification contravenes federal public policy as
expressed in said act and therefore is unenforceable.

II-1

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

On July 17, 2000, the Company received gross proceeds of $100 million from
the issuance of 1,000,000 shares of Series C convertible preferred stock to
Explorer, which were initially convertible into 16,000,000 shares of common
stock. On April 2, 2001 the Company issued an additional 48,420 shares of
Series C convertible preferred stock to Explorer, which are convertible into
774,722 shares of the Company's common stock, to satisfy accrued and unpaid
dividends on the Series C preferred stock issued in July 2000, which had been
deferred by agreement with Explorer from November 15, 2000 through April 2,
2001. Explorer received a fee of $ million in connection with the deferral. The
conversion price of the Series C convertible preferred stock is currently $6.25
per share. The shares of Series C preferred stock issued to Explorer on
July 17, 2000 were sold in reliance upon the exemption from the registration
provided by Section 4(2) of the Securities Act. The shares of Series C
convertible preferred stock issued on April 2, 2001 were issued without
registration under the Securities Act, because the issuance did not involve a
sale within the meaning of the Securities Act and/or in reliance upon the
exemption from registration provided by Section 4(2) of the Securities Act. For
more information about the terms of conversion see "Business" set forth in the
Prospectus.

Proceeds from the July 17, 2001 issuance were used to repay outstanding
debt.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

INDEX TO EXHIBITS

EXHIBIT
NUMBER DESCRIPTION
------- -----------

II-2

EXHIBIT
NUMBER DESCRIPTION
------- -----------

4.9 Amendment No. 1, dated May 11, 2000 to Rights Agreement,
dated as of May 12, 1999, between Omega Healthcare
Investors, Inc. and First Chicago Trust Company, as Rights
Agent (Incorporated by reference to Exhibit 4.1 to the
Company's Form 10-Q for the quarterly period ended March 31,
2000)
4.10 Articles Supplementary for Series C Convertible Preferred
Stock (Incorporated by reference to Exhibit 4.1 to the
Company's Form 10-Q for the quarterly period ended June 30,
2000)
4.11 Stockholders Agreement between Explorer Holdings, L.P. and
Omega Healthcare Investors, Inc. (Incorporated by reference
to Exhibit 4.2 to the Company's Form 10-Q for the quarterly
period ended June 30, 2000)
4.12 Registration Rights Agreement between Explorer Holdings,
L.P. and Omega Healthcare Investors, Inc. (Incorporated by
reference to Exhibit 4.3 to the Company's Form 10-Q for the
quarterly period ended June 30, 2000)
4.13 Form of Amended and Restated Articles Supplementary for
Series C Convertible Preferred Stock (Incorporated by
reference to Exhibit B to the Schedule 13D filed by Explorer
Holdings, L.P. on October 30, 2001 on behalf of the Company)
4.14 Form of Articles Supplementary for Series D Convertible
Preferred Stock (Incorporated by reference to Exhibit C to
the Schedule 13D filed by Explorer Holdings, L.P. on
October 30, 2001 on behalf of the Company)
5.1 Opinion of Powell, Goldstein, Frazer & Murphy LLP***
8.1 Opinion of Powell, Goldstein, Frazer & Murphy LLP*** with
respect to certain tax matters
10.1 1993 Deferred Compensation Plan, effective March 2, 1993
(Incorporated by reference to Exhibit 10.16 to the Company's
Form 10-K for the year ended December 31, 1992)**
10.2 Form of Note Exchange Agreement--10% Senior Notes due July
15, 2000 (Incorporated by reference to Exhibit 10.1 to the
Company's Form 10-Q for the quarterly period ended September
30, 1995)
10.3 Form of Note Exchange Agreement--7.4% Senior Notes due July
15, 2000 (Incorporated by reference to Exhibit 10.2 to the
Company's Form 10-Q for the quarterly period ended September
30, 1995)
10.4 Form of Note Exchange Agreement--7.4% Senior Notes due July
15, 2000 (Incorporated by reference to Exhibit 10.25 to the
Company's Form 10-K for the year ended December 31, 1995)
10.5 First Amendment of Purchase Agreement, Master Lease
Agreement, Facility Leases and Guaranty between Delta
Investors I, LLC and Sun Healthcare Group, Inc. and Delta
Investors II, LLC and Sun Healthcare Group, Inc.
(Incorporated by reference to Exhibits 99.1 and 99.2 to the
Company's Form 8-K dated April 30, 1998)
10.6 Agreement of Sale and Purchase dated May 12, 2000, by and
between Omega Healthcare Investors, Inc. and Tenet
Healthsystem Philadelphia, Inc. (Incorporated by reference
to Exhibit 10.3 to the Company's Form 10-Q for the quarterly
period ended March 31, 2000)
10.7 Amended and Restated Investment Agreement, by and among
Omega Healthcare Investors, Inc. and Explorer Holdings, L.P.
(Incorporated by reference to Exhibit A of the Company's
Proxy Statement dated June 16, 2000)
10.8 Indemnification Agreement between Omega Healthcare
Investors, Inc. and Explorer Holdings, L.P. (Incorporated by
reference to Exhibit 10.12 to the Company's Form 10-Q for
the quarterly period ended June 30, 2000)
10.9 Amended and Restated Advisory Agreement between Omega
Healthcare Investors, Inc. and The Hampstead Group, L.L.C.,
dated October 4, 2000 (Incorporated by reference to
Exhibit 10.1 to the Company's Form 10-Q for the quarterly
period ended September 30, 2000)
10.10 Loan Agreement by and among Omega Healthcare Investors, Inc.
and certain of its subsidiaries, the banks signatory hereto
and Fleet Bank, N.A., as agent for such banks, dated June
15, 2000 (Incorporated by reference to Exhibit 10.2 to the
Company's Form 10-Q for the quarterly period ended June 30,
2000)

II-3

EXHIBIT
NUMBER DESCRIPTION
------- -----------

10.11 Amendment No. 1 to Loan Agreement by and among Omega
Healthcare Investors, Inc. and certain of its subsidiaries,
the banks signatory hereto and Fleet Bank, N.A., as agent
for such banks* (Incorporated by reference to Exhibit 10.11
of the Company's Form 10-k for the year ended December 31,
2000)
10.12 Amendment No. 2 to Loan Agreement by and among Omega
Healthcare Investors, Inc. and certain of its subsidiaries,
the banks signatory hereto and Fleet Bank, N.A., as agent
for such banks* (Incorporated by reference to Exhibit 10.12
of the Company's Form 10-k for the year ended December 31,
2000)
10.13 Amendment No. 3 to Loan Agreement by and among Omega
Healthcare Investors, Inc. and certain of its subsidiaries,
the banks signatory hereto and Fleet Bank, N.A., as agent
for such banks** (Incorporated by reference to
Exhibit 10.13 of the Company's Form 10-k for the year ended
December 31, 2000)
10.14 2000 Stock Incentive Plan (Incorporated by reference to
Exhibit 10.5 to the Company's Form 10-Q for the quarterly
period ended June 30, 2000)**
10.15 Amendment to 2000 Stock Incentive Plan (Incorporated by
reference to Exhibit 10.6 to the Company's Form 10-Q for the
quarterly period ended June 30, 2000)**
10.16 Consulting and Severance Agreement with Essel W. Bailey, Jr.
(Incorporated by reference to Exhibit 10.7 to the Company's
Form 10-Q for the quarterly period ended June 30, 2000)**
10.17 Compensation Agreement with F. Scott Kellman (Incorporated
by reference to Exhibit 10.8 to the Company's Form 10-Q for
the quarterly period ended June 30, 2000)**
10.18 Compensation Agreement with Susan Kovach (Incorporated by
reference to Exhibit 10.9 to the Company's Form 10-Q for the
quarterly period ended June 30, 2000)**
10.19 Compensation Agreement with Laurence Rich (Incorporated by
reference to Exhibit 10.10 to the Company's Form 10-Q for
the quarterly period ended June 30, 2000)**
10.20 Form of Directors and Officers Indemnification Agreement
(Incorporated by reference to Exhibit 10.11 to the Company's
Form 10-Q for the quarterly period ended June 30, 2000)
10.21 Loan Agreement by and among Omega Healthcare Investors,
Inc., Sterling Acquisition Corp. and Delta Investors I, LLC,
The Provident Bank, Agent and Various Lenders Described
Herein, dated August 16, 2000 (Incorporated by reference to
Exhibit 10.2 to the Company's Form 10-Q for the quarterly
period ended September 30, 2000)
10.22 Amendment No. 1 to Loan Agreement by and among Omega
Healthcare Investors, Inc., Sterling Acquisition Corp. and
Delta Investors I, LLC, The Provident Bank, Agent and
Various Lenders Described Herein (Incorporated by reference
to Exhibit 10.22 to the Company's Form 10-K for the year
ended December 31, 2000)
10.23 Amendment No. 2 to Loan Agreement by and among Omega
Healthcare Investors, Inc., Sterling Acquisition Corp. and
Delta Investors I, LLC, The Provident Bank, Agent and
Various Lenders Described Herein (Incorporated by reference
to Exhibit 10.23 to the Company's Form 10-K for the year
ended December 31, 2000)
10.24 Settlement and Restructuring Agreement by and among Omega
Healthcare Investors, Inc. and Sterling Acquisition Corp,
and Advocat, Inc., Diversicare Leasing Corp., Sterling
Health Care Management Inc., Diversicare Management Services
Co. and Advocat Finance, Inc. dated October 1, 2000
(Incorporated by reference to Exhibit 10.3 to the Company's
Form 10-Q for the quarterly period ended September 30, 2000)
10.25 Consolidated Amended and Restated Master Lease by and among
Sterling Acquisition Corp. and Diversicare Leasing
Corporation, effective October 1, 2000 and dated November 8,
2000 (Incorporated by reference to Exhibit 10.4 to the
Company's Form 10-Q for the quarterly period ended September
30, 2000)
10.26 Letter Agreement between Omega Healthcare Investors, Inc.
and Explorer Holdings, L.P. regarding deferral of dividends
and waiver of certain provisions of Articles Supplementary
pertaining to Series C Preferred Stock (Incorporated by
reference to Exhibit 10.5 to the Company's Form 10-Q/A for
the quarterly period ended September 30, 2000)
10.27 Management Services Agreement by and among Omega Healthcare
Investors, Inc., Erickson Capital Group, Inc. and Thomas
Erickson dated October 1, 2000 (Incorporated by reference to
Exhibit 10.27 to the Company's Form 10-K for the year ended
December 31, 2000)**

II-4

EXHIBIT
NUMBER DESCRIPTION
------- -----------

10.28 Agreement of Sale and Purchase between Omega Healthcare
Investors, Inc. and Tenet Healthsystem Philadelphia, Inc.
dated May 12, 2000 (Incorporated by reference to Exhibit
10.3 to the Company's Form 10-Q for the quarterly period
ended March 31, 2000)
10.29 Letter Agreement between Omega Healthcare Investors, Inc.
and The Hampstead Group, L.L.C. dated as of June 1, 2001
(Incorporated by reference to Exhibit 10.1 to the Company's
Form 10-Q for the quarterly period ended June 30, 2001)
10.30 Employment Agreement between Omega Healthcare Investors,
Inc. and C. Taylor Pickett, dated June 12, 2001
(Incorporated by reference to Exhibit 10.2 to the Company's
Form 10-Q for the quarterly period ended June 30, 2001)
10.31 Investment Agreement, dated as of October 29, 2001, by and
between Omega Healthcare Investors, Inc. and Explorer
Holdings, L.P. (Incorporated by reference to Exhibit A to
the Schedule 13D filed by Explorer Holdings, L.P. on
October 30, 2001 on behalf of the Company)
10.32 Form of Amended and Restated Stockholders Agreement
(Incorporated by reference to Exhibit D to the Schedule 13D
filed by Explorer Holdings, L.P. on October 30, 2001 on
behalf of the Company)
10.33 Form of Amended and Restated Registration Rights Agreement
(Incorporated by reference to Exhibit E to the Schedule 13D
filed by Explorer Holdings, L.P. on October 30, 2001 on
behalf of the Company)
10.34 Amendment No. 2 to Rights Agreement (Incorporated by
reference to Exhibit F to the Schedule 13D filed by Explorer
Holdings, L.P. on October 30, 2001 on behalf of the Company)
10.35 Employment Agreement between Omega Healthcare Investors,
Inc. and R. Lee Crabill, Jr., dated July 30, 2001
(Incorporated by reference to Exhibit 10.1 to the Company's
Form 10-Q for the quarterly period ended September 30, 2001)
10.36 Employment Agreement between Omega Healthcare Investors,
Inc. and Robert O. Stephenson, dated August 30, 2001
(Incorporated by reference to Exhibit 10.2 to the Company's
Form 10-Q for the quarterly period ended September 30, 2001)
10.37 Employment Agreement between Omega Healthcare Investors,
Inc. and Daniel J. Booth, dated October 15, 2001
(Incorporated by reference to Exhibit 10.3 to the Company's
Form 10-Q for the quarterly period ended September 30, 2001)
10.38 Retention, Severance and Release Agreement between Omega
Healthcare Investors, Inc. and F. Scott Kellman, dated
October 9, 2001 (Incorporated by reference to Exhibit 10.4
to the Company's Form 10-Q for the quarterly period ended
September 30, 2001)
10.39 Retention, Severance and Release Agreement between Omega
Healthcare Investors, Inc. and Laurence D. Rich, Dated
August 1, 2001 (Incorporated by reference to Exhibit 10.5 to
the Company's Form 10-Q for the quarterly period ended
September 30, 2001)
10.40 Amended and Restated Secured Promissory Note between Omega
Healthcare Investors, Inc. and Professional Health Care
Management, Inc. dated as of September 1, 2001 (Incorporated
by reference to Exhibit 10.6 to the Company's 10-Q for the
quarterly period ended September 30, 2001)
10.41 Settlement Agreement between Omega Healthcare Investors,
Inc. Professional Health Care Management, Inc., Living
Centers - PHCM, Inc., GranCare, Inc., and Mariner Post-Acute
Network, Inc. dated as of September 1, 2001 (Incorporated by
reference to Exhibit 10.7 to the Company's 10-Q for the
quarterly period ended September 30, 2001)
21 Subsidiaries of the Registrant (Incorporated by reference to
Exhibit 21 to the Company's Form 10-K for the year ended
December 31, 2000)
23.1 Consent of Ernst & Young LLP*
23.2 Consent of Powell, Goldstein, Frazer & Murphy LLP (included
in Exhibit 5.1)***
99.1 Form of Subscription Agreement*
99.2 Form of Letter to Stockholders*
99.3 Form of Letter to Brokers, Dealers, Commercial Banks, Trust
Companies and Other Nominees*

II-5

EXHIBIT
NUMBER DESCRIPTION
------- -----------

99.4 Form of Letter to Clients for use by Brokers, Dealers,
Commercial Banks, Trust Company and Other Nominees*

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

* Filed herewith.

** Management contract or compensatory plan, contract or arrangement.

*** To be filed by amendment.

ITEM 17. UNDERTAKINGS.

(a) The undersigned registrant hereby undertakes:

(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:

(i) To include any prospectus required by Section 10(a)(3) of the Securities
Act of 1933, as amended (the "Securities Act");

(ii) To reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high and of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;

(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement;

(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.

(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.

(a) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.

II-6

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Ann Arbor, State of
Michigan, on November 2, 2001.

OMEGA HEALTHCARE INVESTORS, INC.

By: /s/ C. TAYLOR PICKETT_____________
C. Taylor Pickett
Chief Executive Officer

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints C. Taylor Pickett and Robert O. Stephenson and
each or any of them, his true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) and supplements to this Registration Statement, and
to file the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their substitutes or
substitute, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on November 2, 2001.

SIGNATURE TITLE
--------- -----

/s/ C. TAYLOR PICKETT
------------------------------------------- Chief Executive Officer
C. Taylor Pickett (Principal Executive Officer)

/s/ ROBERT O. STEPHENSON Chief Financial Officer
------------------------------------------- (Principal Financial and
Robert O. Stephenson Accounting Officer)

/s/ DANIEL A. DECKER
------------------------------------------- Director
Daniel A. Decker

/s/ THOMAS W. ERICKSON
------------------------------------------- Director
Thomas W. Erickson

II-7

SIGNATURE TITLE
--------- -----

/s/ THOMAS F. FRANKE
------------------------------------------- Director
Thomas F. Franke

/s/ HAROLD J. KLOOSTERMAN
------------------------------------------- Director
Harold J. Kloosterman

/s/ BERNARD J. KORMAN
------------------------------------------- Director
Bernard J. Korman

/s/ EDWARD LOWENTHAL
------------------------------------------- Director
Edward Lowenthal

/s/ CHRISTOPHER W. MAHOWALD
------------------------------------------- Director
Christopher W. Mahowald

/s/ DONALD J. MCNAMARA
------------------------------------------- Director
Donald J. McNamara

/s/ STEPHEN D. PLAVIN
------------------------------------------- Director
Stephen D. Plavin

II-8

EXHIBIT INDEX

EXHIBIT
NUMBER DESCRIPTION
--------------------- ------------------------------------------------------------

3.1 Articles of Incorporation, as amended (Incorporated by
reference to the Registrant's Form 10-Q for the quarterly
period ended March 31, 1995)
3.2 Articles of Amendment to the Company's Articles of
Incorporation, as amended (Incorporated by reference to the
Company's Form 10-Q for the quarterly period ended September
30, 1999)
3.3 Amended and Restated Bylaws, as amended April 20, 1999
(Incorporated by reference to Exhibit 3.1 to the Company's
Form 8-K dated April 20, 1999)
4.1 Indenture dated December 27, 1993 (Incorporated by reference
to Exhibit 4.2 to the Company's Form S-3 dated December 29,
1993)
4.2 First Supplemental Indenture dated January 23, 1996
(Incorporated by reference to Exhibit 4 to the Company's
Form 8-K dated January 19, 1996)
4.3 Form of Convertible Debenture (Incorporated by reference to
Exhibit 4.2 to the Company's Form S-3 dated February 3,
1997)
4.4 Form of Indenture (Incorporated by reference to Exhibit 4.2
to the Company's Form S-3 dated February 3, 1997)
4.5 Form of Articles Supplementary for Series A Preferred Stock
(Incorporated by reference to Exhibit 4.1 of the Company's
Form 10-Q for the quarterly period ended March 31, 1997)
4.6 Articles Supplementary for Series B Preferred Stock
(Incorporated by reference to Exhibit 4 to the Company's
Form 8-K dated April 27, 1998)
4.7 Form of Supplemental Indenture No. 1 dated as of June 1,
1998 relating to the 6.95% Notes due 2002 (Incorporated by
reference to Exhibit 4 to the Company's Form 8-K dated June
9, 1998)
4.8 Rights Agreement, dated as of May 12, 1999, between Omega
Healthcare Investors, Inc. and First Chicago Trust Company,
as Rights Agent, including Exhibit A thereto (Form of
Articles Supplementary relating to the Series A Junior
Participating Preferred stock) and Exhibit B thereto (Form
of Rights Certificate) (Incorporated by reference to Exhibit
4 to the Company's Form 8-K dated April 20, 1999)
4.9 Amendment No. 1, dated May 11, 2000 to Rights Agreement,
dated as of May 12, 1999, between Omega Healthcare
Investors, Inc. and First Chicago Trust Company, as Rights
Agent (Incorporated by reference to Exhibit 4.1 to the
Company's Form 10-Q for the quarterly period ended March 31,
2000)
4.10 Articles Supplementary for Series C Convertible Preferred
Stock (Incorporated by reference to Exhibit 4.1 to the
Company's Form 10-Q for the quarterly period ended June 30,
2000)
4.11 Stockholders Agreement between Explorer Holdings, L.P. and
Omega Healthcare Investors, Inc. (Incorporated by reference
to Exhibit 4.2 to the Company's Form 10-Q for the quarterly
period ended June 30, 2000)
4.12 Registration Rights Agreement between Explorer Holdings,
L.P. and Omega Healthcare Investors, Inc. (Incorporated by
reference to Exhibit 4.3 to the Company's Form 10-Q for the
quarterly period ended June 30, 2000)
4.13 Form of Amended and Restated Articles Supplementary for
Series C Convertible Preferred Stock (Incorporated by
reference to Exhibit B to the Schedule 13D filed by Explorer
Holdings, L.P. on October 30, 2001 on behalf of the Company)
4.14 Form of Articles Supplementary for Series D Convertible
Preferred Stock (Incorporated by reference to Exhibit C to
the Schedule 13D filed by Explorer Holdings, L.P. on
October 30, 2001 on behalf of the Company)
5.1 Opinion of Powell, Goldstein, Frazer & Murphy LLP***
8.1 Opinion of Powell, Goldstein, Frazer & Murphy LLP*** with
respect to certain tax matters

EXHIBIT
NUMBER DESCRIPTION
--------------------- ------------------------------------------------------------

10.1 1993 Deferred Compensation Plan, effective March 2, 1993
(Incorporated by reference to Exhibit 10.16 to the Company's
Form 10-K for the year ended December 31, 1992)**
10.2 Form of Note Exchange Agreement--10% Senior Notes due July
15, 2000 (Incorporated by reference to Exhibit 10.1 to the
Company's Form 10-Q for the quarterly period ended September
30, 1995)
10.3 Form of Note Exchange Agreement--7.4% Senior Notes due July
15, 2000 (Incorporated by reference to Exhibit 10.2 to the
Company's Form 10-Q for the quarterly period ended September
30, 1995)
10.4 Form of Note Exchange Agreement--7.4% Senior Notes due July
15, 2000 (Incorporated by reference to Exhibit 10.25 to the
Company's Form 10-K for the year ended December 31, 1995)
10.5 First Amendment of Purchase Agreement, Master Lease
Agreement, Facility Leases and Guaranty between Delta
Investors I, LLC and Sun Healthcare Group, Inc. and Delta
Investors II, LLC and Sun Healthcare Group, Inc.
(Incorporated by reference to Exhibits 99.1 and 99.2 to the
Company's Form 8-K dated April 30, 1998)
10.6 Agreement of Sale and Purchase dated May 12, 2000, by and
between Omega Healthcare Investors, Inc. and Tenet
Healthsystem Philadelphia, Inc. (Incorporated by reference
to Exhibit 10.3 to the Company's Form 10-Q for the quarterly
period ended March 31, 2000)
10.7 Amended and Restated Investment Agreement, by and among
Omega Healthcare Investors, Inc. and Explorer Holdings, L.P.
(Incorporated by reference to Exhibit A of the Company's
Proxy Statement dated June 16, 2000)
10.8 Indemnification Agreement between Omega Healthcare
Investors, Inc. and Explorer Holdings, L.P. (Incorporated by
reference to Exhibit 10.12 to the Company's Form 10-Q for
the quarterly period ended June 30, 2000)
10.9 Amended and Restated Advisory Agreement between Omega
Healthcare Investors, Inc. and The Hampstead Group, L.L.C.,
dated October 4, 2000 (Incorporated by reference to
Exhibit 10.1 to the Company's Form 10-Q for the quarterly
period ended September 30, 2000)
10.10 Loan Agreement by and among Omega Healthcare Investors, Inc.
and certain of its subsidiaries, the banks signatory hereto
and Fleet Bank, N.A., as agent for such banks, dated June
15, 2000 (Incorporated by reference to Exhibit 10.2 to the
Company's Form 10-Q for the quarterly period ended June 30,
2000)
10.11 Amendment No. 1 to Loan Agreement by and among Omega
Healthcare Investors, Inc. and certain of its subsidiaries,
the banks signatory hereto and Fleet Bank, N.A., as agent
for such banks* (Incorporated by reference to Exhibit 10.11
of the Company's Form 10-k for the year ended December 31,
2000)
10.12 Amendment No. 2 to Loan Agreement by and among Omega
Healthcare Investors, Inc. and certain of its subsidiaries,
the banks signatory hereto and Fleet Bank, N.A., as agent
for such banks* (Incorporated by reference to Exhibit 10.12
of the Company's Form 10-k for the year ended December 31,
2000)
10.13 Amendment No. 3 to Loan Agreement by and among Omega
Healthcare Investors, Inc. and certain of its subsidiaries,
the banks signatory hereto and Fleet Bank, N.A., as agent
for such banks** (Incorporated by reference to
Exhibit 10.13 of the Company's Form 10-k for the year ended
December 31, 2000)
10.14 2000 Stock Incentive Plan (Incorporated by reference to
Exhibit 10.5 to the Company's Form 10-Q for the quarterly
period ended June 30, 2000)**
10.15 Amendment to 2000 Stock Incentive Plan (Incorporated by
reference to Exhibit 10.6 to the Company's Form 10-Q for the
quarterly period ended June 30, 2000)**
10.16 Consulting and Severance Agreement with Essel W. Bailey, Jr.
(Incorporated by reference to Exhibit 10.7 to the Company's
Form 10-Q for the quarterly period ended June 30, 2000)**
10.17 Compensation Agreement with F. Scott Kellman (Incorporated
by reference to Exhibit 10.8 to the Company's Form 10-Q for
the quarterly period ended June 30, 2000)**

EXHIBIT
NUMBER DESCRIPTION
--------------------- ------------------------------------------------------------

10.18 Compensation Agreement with Susan Kovach (Incorporated by
reference to Exhibit 10.9 to the Company's Form 10-Q for the
quarterly period ended June 30, 2000)**
10.19 Compensation Agreement with Laurence Rich (Incorporated by
reference to Exhibit 10.10 to the Company's Form 10-Q for
the quarterly period ended June 30, 2000)**
10.20 Form of Directors and Officers Indemnification Agreement
(Incorporated by reference to Exhibit 10.11 to the Company's
Form 10-Q for the quarterly period ended June 30, 2000)
10.21 Loan Agreement by and among Omega Healthcare Investors,
Inc., Sterling Acquisition Corp. and Delta Investors I, LLC,
The Provident Bank, Agent and Various Lenders Described
Herein, dated August 16, 2000 (Incorporated by reference to
Exhibit 10.2 to the Company's Form 10-Q for the quarterly
period ended September 30, 2000)
10.22 Amendment No. 1 to Loan Agreement by and among Omega
Healthcare Investors, Inc., Sterling Acquisition Corp. and
Delta Investors I, LLC, The Provident Bank, Agent and
Various Lenders Described Herein (Incorporated by reference
to Exhibit 10.22 to the Company's Form 10-K for the year
ended December 31, 2000)
10.23 Amendment No. 2 to Loan Agreement by and among Omega
Healthcare Investors, Inc., Sterling Acquisition Corp. and
Delta Investors I, LLC, The Provident Bank, Agent and
Various Lenders Described Herein (Incorporated by reference
to Exhibit 10.23 to the Company's Form 10-K for the year
ended December 31, 2000)
10.24 Settlement and Restructuring Agreement by and among Omega
Healthcare Investors, Inc. and Sterling Acquisition Corp,
and Advocat, Inc., Diversicare Leasing Corp., Sterling
Health Care Management Inc., Diversicare Management Services
Co. and Advocat Finance, Inc. dated October 1, 2000
(Incorporated by reference to Exhibit 10.3 to the Company's
Form 10-Q for the quarterly period ended September 30, 2000)
10.25 Consolidated Amended and Restated Master Lease by and among
Sterling Acquisition Corp. and Diversicare Leasing
Corporation, effective October 1, 2000 and dated November 8,
2000 (Incorporated by reference to Exhibit 10.4 to the
Company's Form 10-Q for the quarterly period ended September
30, 2000)
10.26 Letter Agreement between Omega Healthcare Investors, Inc.
and Explorer Holdings, L.P. regarding deferral of dividends
and waiver of certain provisions of Articles Supplementary
pertaining to Series C Preferred Stock (Incorporated by
reference to Exhibit 10.5 to the Company's Form 10-Q/A for
the quarterly period ended September 30, 2000)
10.27 Management Services Agreement by and among Omega Healthcare
Investors, Inc., Erickson Capital Group, Inc. and Thomas
Erickson dated October 1, 2000 (Incorporated by reference to
Exhibit 10.27 to the Company's Form 10-K for the year ended
December 31, 2000)**
10.28 Agreement of Sale and Purchase between Omega Healthcare
Investors, Inc. and Tenet Healthsystem Philadelphia, Inc.
dated May 12, 2000 (Incorporated by reference to Exhibit
10.3 to the Company's Form 10-Q for the quarterly period
ended March 31, 2000)
10.29 Letter Agreement between Omega Healthcare Investors, Inc.
and The Hampstead Group, L.L.C. dated as of June 1, 2001
(Incorporated by reference to Exhibit 10.1 to the Company's
Form 10-Q for the quarterly period ended June 30, 2001)
10.30 Employment Agreement between Omega Healthcare Investors,
Inc. and C. Taylor Pickett, dated June 12, 2001
(Incorporated by reference to Exhibit 10.2 to the Company's
Form 10-Q for the quarterly period ended June 30, 2001)
10.31 Investment Agreement, dated as of October 30, 2001, by and
between Omega Healthcare Investors, Inc. and Explorer
Holdings, L.P. (Incorporated by reference to Exhibit A to
the Schedule 13D filed by Explorer Holdings, L.P. on
October 30, 2001 on behalf of the Company)
10.32 Form of Amended and Restated Stockholders Agreement
(Incorporated by reference to Exhibit D to the Schedule 13D
filed by Explorer Holdings, L.P. on October 30, 2001 on
behalf of the Company)

EXHIBIT
NUMBER DESCRIPTION
--------------------- ------------------------------------------------------------

10.33 Form of Amended and Restated Registration Rights Agreement
(Incorporated by reference to Exhibit E to the Schedule 13D
filed by Explorer Holdings, L.P. on October 30, 2001 on
behalf of the Company)
10.34 Amendment No. 2 to Rights Agreement (Incorporated by
reference to Exhibit F to the Schedule 13D filed by Explorer
Holdings, L.P. on October 30, 2001 on behalf of the Company)
10.35 Employment Agreement between Omega Healthcare Investors,
Inc. and R. Lee Crabill, Jr., dated July 30, 2001
(Incorporated by reference to Exhibit 10.1 to the Company's
Form 10-Q for the quarterly period ended September 30, 2001)
10.36 Employment Agreement between Omega Healthcare Investors,
Inc. and Robert O. Stephenson, dated August 30, 2001
(Incorporated by reference to Exhibit 10.2 to the Company's
Form 10-Q for the quarterly period ended September 30, 2001)
10.37 Employment Agreement between Omega Healthcare Investors,
Inc. and Daniel J. Booth, dated October 15, 2001
(Incorporated by reference to Exhibit 10.3 to the Company's
Form 10-Q for the quarterly period ended September 30, 2001)
10.38 Retention, Severance and Release Agreement between Omega
Healthcare Investors, Inc. and F. Scott Kellman, dated
October 9, 2001 (Incorporated by reference to Exhibit 10.4
to the Company's Form 10-Q for the quarterly period ended
September 30, 2001)
10.39 Retention, Severance and Release Agreement between Omega
Healthcare Investors, Inc. and Laurence D. Rich, Dated
August 1, 2001 (Incorporated by reference to Exhibit 10.5 to
the Company's Form 10-Q for the quarterly period ended
September 30, 2001)
10.40 Amended and Restated Secured Promissory Note between Omega
Healthcare Investors, Inc. and Professional Health Care
Management, Inc. dated as of September 1, 2001 (Incorporated
by reference to Exhibit 10.6 to the Company's 10-Q for the
quarterly period ended September 30, 2001)
10.41 Settlement Agreement between Omega Healthcare Investors,
Inc. Professional Health Care Management, Inc., Living
Centers - PHCM, Inc. GranCare, Inc., and Mariner Post-Acute
Network, Inc. dated as of September 1, 2001 (Incorporated by
reference to Exhibit 10.7 to the Company's 10-Q for the
quarterly period ended September 30, 2001)
21 Subsidiaries of the Registrant (Incorporated by reference to
Exhibit 21 to the Company's Form 10-K for the year ended
December 31, 2000)
23.1 Consent of Ernst & Young LLP*
23.2 Consent of Powell, Goldstein, Frazer & MurphyLLP (included
in Exhibit 5.1)***
99.1 Form of Subscription Agreement*
99.2 Form of Letter to Stockholders*
99.3 Form of Letter to Brokers, Dealers, Commercial Banks, Trust
Companies and Other Nominees*
99.4 Form of Letter to Clients for use by Brokers, Dealers,
Commercial Banks, Trust Company and Other Nominees*

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

* Filed herewith.

** Management contract or compensatory plan, contract or arrangement.

*** To be filed by amendment.