LIQUIDITY AND CAPITAL RESOURCES

  The Company's primary cash needs are for acquisitions,  capital  expenditures,
working capital,  debt service and general corporate  purposes.  The Company has
historically  financed  these  requirements  primarily  through a combination of
internally  generated cash flow,  mortgage  financing and operating  leases,  in
addition to funds borrowed  under a credit  facility.  In addition,  in 1996 the
Company financed the acquisition of four facilities  located in Ohio by means of
leases  which are  accounted  for as  capital  leases  for  financial  reporting
purposes.  The Company’s  existing leased facilities are leased from either
the owner of the  facilities,  from a real  estate  investment  trust  which has
purchased the facilities from the owner, or through  synthetic lease borrowings.
The Company’s existing facility leases generally require it to make monthly
lease  payments  and pay all property  operating  costs.  The Company  generally
negotiates leases which provide for extensions beyond the initial lease term and
an option to purchase the leased facility. In some cases, the option to purchase
the leased facility is at a price based on the fair market value of the facility
at the time the option is exercised.  In other cases, the lease for the facility
sets forth a fixed purchase option price which the Company  believes is equal to
the fair market value of the facility at the inception date of such lease,  thus
allowing the Company to realize the value  appreciation  of the  facility  while
maintaining financial flexibility.

  In  connection  with the  leveraged  recapitalization  completed on August 11,
1998, the Company  obtained gross proceeds of $99.5 million through the issuance
of 11% Senior  Subordinated  Discount Notes (the "Discount  Notes") due 2008 and
$40 million  through the  issuance of 13.5%  Exchangeable  Preferred  Stock (the
"Preferred  Stock")  mandatorily  redeemable  in 2010.  Interest on the Discount
Notes accretes at 11% per annum until August 1, 2003 and then becomes payable in
cash, semi-annually in arrears,  beginning on February 1, 2004. Dividends on the
Preferred Stock are payable,  at the option of the Company, in additional shares
of the Preferred Stock until August 1, 2003.  After that date dividends may only
be paid in cash.  The Company  does not expect to pay any cash  dividends on the
Preferred  Stock  prior to August 1, 2003.  In August  1998,  the  Company  also
entered into a new $250 million  collateralized credit facility (the "New Credit
Facility").  The terms of the New Credit Facility provide up to $75 million on a
revolving  credit basis plus an additional  $175 million  initially  funded on a
revolving  basis  that  converts  to a term  loan  on an  annual  basis  on each
anniversary  of the  closing.  During  the first  four  years of the New  Credit
Facility,  any or all of the full $250  million  of  availability  under the New
Credit  Facility may be used for synthetic lease  financings.  Proceeds of loans
under the New Credit  Facility  may be used for  acquisitions,  working  capital
purposes, capital expenditures and general corporate purposes. Interest is based
on either LIBOR or prime rates of interest (plus applicable  margins  determined
by the Company's leverage ratio) at the election of the Company.  The New Credit
Facility contains various  financial and other restrictive  covenants and limits
aggregate  borrowings under the New Credit Facility to a predetermined  multiple
of EBITDA.

  As noted  above,  the Company,  through a  wholly-owned  limited  partnership,
leases and operates four facilities in Ohio (the "Cleveland  Facilities")  which
it acquired in 1996 through  capital  leases.  Each lease is  guaranteed  by the
Company.  The guaranty  provides that failure by the Company to have a specified
minimum  consolidated net worth at the end of any two consecutive quarters is an
event of default under the guaranty,  which in turn would be an event of default
under each lease.  During the third quarter of 1999, the Company recorded a $5.7
million   restructuring   charge  to   terminate   its   contracts   to  provide
rehabilitation therapy services to non-affiliated long-term care facilities.  As
a result of this restructuring  charge, the Company's  consolidated net worth as
of  September  30, 1999 (as  calculated  for purposes of this  requirement)  had
fallen  below the required  level.  The Company  anticipated  that its net worth
would  continue to be below the required level at December 31, 1999, as a result
of which the Company  would have been in default  under each of these leases and
could have faced the loss of these  operations.  Such a default  could also have
triggered  cross-defaults  under the Company's other lease and debt obligations.
In  December  of 1999,  the  Company  paid $5  million  to the  landlord  of the
Cleveland  Facilities and obtained an option (the "New Option") to acquire these
facilities. The Company borrowed $5 million from an affiliate of Investcorp S.A.
to fund this  payment.  The  Company  already  held an option to  acquire  these
facilities  during a limited  period  beginning  July 1,  2001.  The New  Option
allowed the Company to exercise its right to purchase the  Cleveland  Facilities
beginning as of the date of the New Option. The Company exercised the New Option
on June  30,  2000.  The  New  Option  requires  the  Company  to  complete  the
acquisition  prior to December  31, 2000 and  provides a waiver of the net worth
covenant through that date. The Company intends to assign its purchase rights to
an investment  entity  organized by Investcorp and enter into an operating lease
of the Cleveland Facilities by December 31, 2000. The $5 million payment made to
obtain the New Option  will be applied to the  purchase  price of the  Cleveland
Facilities,  or forfeited if the  acquisition is not  completed.  If the Company
cannot  complete the  refinancing  of the  Cleveland  Facilities by December 31,
2000,  the  Company  would also be  required  to make an  additional  payment of
$3,000,000 to the landlord,  and the Company could  potentially face the loss of
the Cleveland  Facilities.  Although no assurances  can be given in this regard,
the Company  believes  that it will be able to complete the  refinancing  of the
Cleveland Facilities within the required time period.

  During the first quarter of 1999, the Company  determined that its anticipated
financial  results  for  that  quarter  would  cause  the  Company  to be out of
compliance  with certain  financial  covenants of the New Credit  Facility.  The
Company's  reduced level of earnings before  interest,  taxes,  depreciation and
amortization  ("EBITDA")  during the first quarter of 1999 was  attributable  to
transitional difficulties associated with the implementation of the new Medicare
prospective  payment  system  which  became  effective  at all of the  Company's
facilities on January 1, 1999. Such transitional  difficulties resulted in lower
than expected  revenues,  primarily due to fewer than expected  Medicare patient
days,  lower  Medicare  Part A rates,  reduced  revenues  from therapy  services
provided to non-affiliated  long-term care centers,  and a reduction in revenues
from the provision of Medicare Part B services at the Company's own  facilities.
In response,  during the first quarter of 1999, the Company initiated additional
facility-based  training directed towards the documentation  requirements of the
revised Medicare  reimbursement system. The Company also continued to refine its
admission and assessment  protocols in order to increase patient  admissions and
introduced a series of targeted  initiatives to lower operating  expenses.  Such
initiatives  included  wage and staffing  reductions  (primarily  related to the
delivery of  rehabilitative  therapy  services  and indirect  nursing  support),
renegotiation  of vendor  contracts and ongoing  efforts to reduce the Company's
reliance on outside nurse agency personnel.  All of the staffing reductions were
implemented,  on or prior to,  April 1,  1999.  Effective  March 30,  1999,  the
Company obtained an amendment (the "Amendment") to the New Credit Facility which
limits  borrowings  under the New Credit Facility to an aggregate of $58,500,000
(exclusive of undrawn  letters of credit  outstanding  as of March 30, 1999) and
which modified certain financial covenants.  Beginning with the first quarter of
1999,  the  Amendment  replaced the original  financial  covenants  with one new
financial  covenant,  a  minimum  cumulative  amount  of  EBITDA.  The  original
financial  covenants provided maximum ratios of total indebtedness to EBITDA and
senior  indebtedness to EBITDA,  and a minimum debt service  coverage ratio. The
Amendment requires minimum amounts of EBITDA, measured quarterly, but calculated
on a rolling  twelve-month  basis,  through  December 31,  2000.  As long as the
Company meets or exceeds the required minimum  cumulative amounts of EBITDA, the
Company  may access the New Credit  Facility  for  general  corporate  purposes,
subject  to the  reduced  amount of  availability.  As of June 30,  2000,  total
borrowings  under the New Credit  Facility  were  $52,019,000  and  consisted of

18

$32,750,000 of revolver loans,  $13,700,000 of synthetic  lease  obligations and
$5,569,000 of undrawn  letters of credit.  As of June 30, 2000,  the Company had
approximately  $9,000,000 of funding available under the New Credit Facility and
was not in default of the financial  covenants of the New Credit  Facility.  The
Amendment  provides  minimum EBITDA targets only through  December 31, 2000. The
Amendment  also  provides  that the  Company  will have access to the New Credit
Facility if the Company is in compliance with specified  maximum ratios of total
indebtedness  to  EBITDA,  senior  indebtedness  to EBITDA,  and a minimum  debt
service  coverage ratio,  such ratios to be calculated by annualizing the actual
amounts  of EBITDA  achieved  by the  Company in either (a) the second and third
quarters of 2000, or (b) the third and fourth quarters of 2000. Continued access
to the  New  Credit  Facility  is  then  dependent  on the  Company  maintaining
compliance with financial ratio  requirements.  Since the covenant  allowing the
Company to maintain  compliance  through  the  achievement  of required  minimum
cumulative  amounts of EBITDA  expires as of December 31, 2000, the Company must
be able to achieve compliance with the alternate  financial ratios by that date,
or it may have to seek additional modifications to the New Credit Facility.

  The Company's operating activities during the first half of 1999 used net cash
of  $3,978,000 as compared to generating  net cash of  $12,037,000  in the first
half of 2000, an improvement of $16,015,000.  Cash flows from operations in 2000
increased primarily as the result of a lower net loss, higher levels of non-cash
expenses in 2000 (including depreciation, amortization and accretion of interest
on the Company's Discount Notes), and the receipt of a federal income tax refund
of approximately $3,000,000.

  Net cash used by investing  activities  decreased from  $8,915,000  during the
first half of 1999 to $3,961,000 for the same period in 2000. The primary use of
cash for investing  purposes  during 1999 was to fund  additions to property and
equipment  associated with the maintenance of the Company's existing  facilities
and the development of its data processing  capabilities.  Additionally,  during
the first quarter of 1999,  approximately  $1,000,000 was expended in connection
with obtaining the amendment of the Company's New Credit  Facility.  The primary
use of cash for  investing  purposes  during 2000 has been to fund  additions to
property and equipment  associated with the maintenance of the Company's nursing
facilities.  The  Company has made a  concerted  effort to minimize  its capital
expenditures without compromising the quality of its facilities.

  Net cash provided by financing  activities decreased from net cash provided of
$15,741,000  in 1999 to net cash used of $2,440,000  in 2000.  This decrease was
due to the fact that  during the first six months of 1999 the  Company  borrowed
$18,000,000  under the New Credit  Facility  as  compared  to no new  borrowings
during the first six months of 2000.  The Company has not drawn on its revolving
credit facility since July 7, 1999.

  In addition to the Discount  Notes,  as of June 30, 2000,  the Company had two
mortgage loans outstanding  totaling  $17,541,000 and $32,750,000 in advances on
its New Credit Facility.  One mortgage loan had an outstanding principal balance
of $16,011,000 of which  $15,140,000 is due at maturity in 2004. This loan bears
interest at an annual rate of 10.65% plus  additional  interest equal to 0.3% of
the  difference  between the annual  operating  revenues  of the four  mortgaged
facilities  and  actual  revenues  during  the  twelve-month  base  period.  The
Company's  other  mortgage  loan,  which  encumbers  a single  facility,  had an
outstanding  principal  balance  of  $1,530,000  at  June  30,  2000,  of  which
$1,338,000 is due in 2010.

  Harborside  expects  that  its  capital   expenditures  for  2000,   excluding
acquisitions  of new long-term care  facilities,  will  aggregate  approximately
$8,000,000.   Harborside's   expected  capital   expenditures   will  relate  to
maintenance capital  expenditures,  systems  enhancements,  special construction
projects  and other  capital  improvements.  Harborside  expects that its future
facility  acquisitions  will be financed  with  borrowings  under the New Credit
Facility, direct operating leases or assumed debt. Harborside may be required to
obtain additional equity in order to finance any significant acquisitions in the
future.

  In November 1999, the "Balanced Budget Refinement Act" (the "BBRA") was signed
into law. The BBRA was designed to mitigate  some of the effects of the BBA. The
BBRA allowed skilled nursing  facilities to elect transition to the full federal
per diem rate at the beginning of their cost reporting  periods for cost periods
beginning on or after January 1, 2000.  Using the election  allowed by the BBRA,
the Company chose to move fourteen  facilities to the full federal per diem rate
effective  January 1, 2000.  As a result,  the Company now uses the full federal
per diem rate to  calculate  Medicare  revenue at  twenty-three  of its  skilled
nursing facilities. Additionally, the BBRA temporarily increased the federal per
diem rates by 20% for  fifteen  acuity  categories  beginning  on April 1, 2000.
These increased rates will stay in effect until the later of (a) October 1, 2000
or (b) the date  HCFA  implements  a revised  PPS  system  that more  accurately
reimburses  the costs of caring for medically  complex  patients.  The BBRA also
provides  for a four  percent  increase  in the  federal  per diem rates for all
acuity categories for a two-year period beginning October 1, 2000. The BBRA also
excluded costs for certain supplies and services that were formerly  required to
be reimbursed by a skilled nursing facility's PPS rate. The BBRA also eliminated
the annual  provider  limitations on Part B therapy  charges per beneficiary for
fiscal 2000 and 2001.

  The  Company's  earnings  generally  fluctuate  from quarter to quarter.  This
seasonality  is related to a combination of factors which include the timing and
amount of Medicaid rate  increases,  seasonal  census cycles,  and the number of
days in a given fiscal quarter.

  The  healthcare  industry is labor  intensive.  Wages and other labor  related
costs are especially sensitive to inflation. Certain of the Company’s other
expense  items,  such as supplies  and real estate  costs are also  sensitive to
inflationary  pressures.  Shortages in the labor market or general  inflationary
pressure could have a significant effect on the Company. In addition,  suppliers
pass along rising costs to the Company in the form of higher prices.  When faced
with  increases  in  operating  costs,  the Company  has sought to increase  its
charges  for  services  and  its  requests  for  reimbursement  from  government
programs.  The Company's  private pay  customers  and third party  reimbursement
sources may be less able to absorb increased prices for the Company's  services.
The Company's  operations could be adversely affected if it is unable to recover
future cost increases or experiences  significant  delays in increasing rates of
reimbursement  of its labor or other costs from  Medicare and  Medicaid  revenue
sources.

  Certain  statements in this Form 10-Q,  including  information set forth under
the caption  "Management's  Discussion  and Analysis of Financial  Condition and
Results  of  Operations",  constitute  "Forward-Looking  Statements"  within the
meaning of the Private  Securities  Litigation  Reform Act of 1995 (the  "Reform
Act").  The  Company  desires  to  take  advantage  of  certain  "safe  harbor";
provisions  of the Reform Act and is  including  this special note to enable the
Company to do so.  Forward-looking  statements  included  in this Form 10-Q,  or
hereafter  included  in  other  publicly  available  documents  filed  with  the
Securities and Exchange  Commission,  reports to the Company's  stockholders and
other publicly  available  statements  issued or released by the Company involve
known and unknown risks, uncertainties,  and other factors which could cause the
Company's actual results,  performance  (financial or operating) or achievements
to  differ  materially  from  the  future  results,  performance  (financial  or
operating)  or  achievements   expressed  or  implied  by  such  forward-looking
statements.  The Company  believes the following  important  factors could cause
such a material difference to occur:

     1.   TheCompany's  ability to grow through the  acquisition and development
          of  long-term  care   facilities  or  the   acquisition  of  ancillary
          businesses.

     2.   The Company's ability to identify suitable acquisition candidates,  to
          consummate or complete construction projects, or to profitably operate
          or  successfully   integrate  enterprises  into  the  Company's  other
          operations.

     3.   The  occurrence of changes in the mix of payment  sources  utilized by
          the Company's patients to pay for the Company's services.

     4.   The adoption of cost containment  measures by private pay sources such
          as  commercial  insurers  and managed care  organizations,  as well as
          efforts  by   governmental   reimbursement   sources  to  impose  cost
          containment measures.

     5.   Changes in the United States healthcare  system,  including changes in
          reimbursement  levels and the method of reimbursement,  under Medicaid
          and Medicare,  and other changes in applicable government  regulations
          that might affect the profitability of the Company.

     6.   The  Company's  continued  ability to  operate in a heavily  regulated
          environment and to satisfy regulatory authorities,  thereby avoiding a
          number of potentially adverse consequences,  such as the imposition of
          fines, temporary suspension of admission of patients,  restrictions on
          the ability to acquire new facilities,  suspension or  decertification
          from Medicaid or Medicare programs,  and in extreme cases,  revocation
          of a facility's  license or the closure of a facility,  including as a
          result of unauthorized activities by employees.

     7.   The  Company's  ability to secure the capital and the related  cost of
          such capital  necessary to fund its future growth through  acquisition
          and development, as well as internal growth.

     8.   Changes in certificate of need laws that might increase competition in
          the  Company's  industry,  including,  particularly,  in the states in
          which the Company currently  operates or anticipates  operating in the
          future.

     9.   The  Company's  ability  to staff its  facilities  appropriately  with
          qualified  healthcare  personnel,  including  in times of shortages of
          such personnel and to maintain a satisfactory  relationship with labor
          unions.

     10.  The level of competition in the Company's industry,  including without
          limitation, increased competition from acute care hospitals, providers
          of assisted and  independent  living and providers of home  healthcare
          and changes in the regulatory system in the state in which the Company
          operates that facilitate such competition.

     11.  The continued  availability  and pricing of insurance for the inherent
          risks of liability in the healthcare industry.

     12.  Price  increases in  pharmaceuticals,  durable  medical  equipment and
          other items.

     13.  The Company's  reputation  for  delivering  high-quality  care and its
          ability  to attract  and  retain  patients,  including  patients  with
          relatively high acuity levels.

     14.  Changes  in  general  economic  conditions,   including  changes  that
          pressure  governmental  reimbursement sources to reduce the amount and
          scope of healthcare coverage.


  The  foregoing  review of  significant  factors  should  not be  construed  as
exhaustive or as an admission  regarding the adequacy of disclosures  previously
made by the Company.

  Most of the Company's  debt  obligations  bear interest at fixed rates and are
not affected by changes in market interest rates; however,  borrowings under the
Company's New Credit Facility are sensitive to changes in interest rates.  Under
the New Credit  Facility,  interest  is based on either  LIBOR or prime rates of
interest (plus applicable margins determined by the Company's leverage),  at the
Company's election. As the prime and LIBOR rates of interest increase,  interest
expense  associated with the Company's  borrowings under the New Credit Facility
would also increase.

  The Company did not  experience  significant  changes in interest rates during
the three months ended June 30, 2000. As part of the Company's  risk  management
program,  the Company continuously reviews its overall exposure to interest rate
risk and  evaluates  the benefits of interest  rate  hedging  through the use of
derivative  instruments,  such as  interest  rate  swaps.  By  entering  into an
interest rate swap,  the Company can  effectively  transform  variable rate debt
into  fixed  rate  debt.  The  Company  did not  have  any  interest  rate  swap
arrangements  outstanding  during the six month periods  ending June 30, 1999 or
June 30, 2000.

Item 1.     Legal Proceedings
                 None

Item 2.     Changes in Securities
                 None

Item 3.    Defaults upon Senior Securities
                 None

Item 4.     Submission of Matters to a Vote of Security Holders
                 None.

Item 5.     Other Information
                  None.

                              Harborside Healthcare Corporation



                               By:   /s/ Stephen L. Guillard
                                     -----------------------
                                     Stephen L. Guillard
                                     President, and Chief Executive Officer


                               By:   /s/ William H.Stephan
                                     ---------------------
                                     William H. Stephan
                                     Senior Vice President and
                                     Chief Financial Officer



DATE:   August 14, 2000