OMEGA HEALTHCARE INVESTORS INC, 10-K405, 1999-02-16

OMEGA HEALTHCARE INVESTORS INC
10-K405, 1999-02-16
REAL ESTATE INVESTMENT TRUSTS

Previous: NOVADIGM INC, 10-Q, 1999-02-16

Next: VISTA INFORMATION SOLUTIONS INC, SC 13G, 1999-02-16

<PAGE> 1

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

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998.

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 1-11316

OMEGA HEALTHCARE INVESTORS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S> <C>
MARYLAND 38-3041398
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION
OF INCORPORATION OR ORGANIZATION) NO.)

900 VICTORS WAY, SUITE 350 48108
ANN ARBOR, MICHIGAN (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
</TABLE>

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 734-887-0200

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

<TABLE>
<CAPTION>
NAME OF EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
------------------- -------------------
<S> <C>
COMMON STOCK, $.10 PAR VALUE NEW YORK STOCK EXCHANGE
8.5% CONVERTIBLE DEBENTURES, DUE 2001 NEW YORK STOCK EXCHANGE
9.25% SERIES A PREFERRED STOCK, $1 PAR VALUE NEW YORK STOCK EXCHANGE
8.625% SERIES B PREFERRED STOCK, $1 PAR VALUE NEW YORK STOCK EXCHANGE
</TABLE>

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

NONE

INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES AND EXCHANGE ACT
OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS) AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ]

INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. [X]

THE AGGREGATE MARKET VALUE OF THE VOTING STOCK OF THE REGISTRANT HELD BY
NON-AFFILIATES WAS $562,926,000 BASED ON THE $28.875 CLOSING PRICE PER SHARE FOR
SUCH STOCK ON THE NEW YORK STOCK EXCHANGE ON JANUARY 29, 1999.

AS OF JANUARY 29, 1999, THERE WERE 20,001,770 SHARES OUTSTANDING.

DOCUMENTS INCORPORATED BY REFERENCE

THE REGISTRANT'S DEFINITIVE PROXY STATEMENT, WHICH WILL BE FILED WITH THE
COMMISSION ON OR ABOUT FEBRUARY 28, 1999, IS INCORPORATED BY REFERENCE IN PART
III OF THIS FORM 10-K.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2

PART I

ITEM 1 -- BUSINESS OF THE COMPANY

Omega Healthcare Investors, Inc. (the "Company") was incorporated in the
state of Maryland on March 31, 1992. It is a self-administered real estate
investment trust ("REIT") which invests in income-producing healthcare
facilities, principally long-term care facilities located in the United States.
The Company anticipates providing lease or mortgage financing for healthcare
facilities to qualified operators and acquiring additional healthcare facility
types, including assisted living and acute care facilities. Financing for such
future investments may be provided by borrowings under the Company's revolving
line of credit, private placements or public offerings of debt or equity, the
assumption of secured indebtedness, or a combination of these methods. The
Company also may finance acquisitions through the exchange of properties or the
issuance of shares of its capital stock, if such transactions otherwise satisfy
the Company's investment criteria.

During 1995, the Company became a primary sponsor of Principal Healthcare
Finance Limited ("Principal"), an Isle of Jersey (United Kingdom) company
established to provide sale/leaseback and mortgage financing to the
private-sector healthcare industry in the United Kingdom.

In November 1997, the Company formed Omega Worldwide, Inc. ("Worldwide"), a
company which provides asset management services and management advisory
services to firms providing financing to providers of healthcare services,
particularly healthcare services to the elderly, principally in Europe and the
Pacific Rim. 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 shareholders of the Company on the
basis of one Worldwide share for every 3.77 common shares of the Company held by
shareholders 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 shareholders
approximated $39 million or $1.99 per share. A non-recurring gain of $30.2
million was recorded on the distribution and secondary offerings of Worldwide
common shares during 1998.

Assets of Principal contributed included (a) 3,337,500 Class A voting
ordinary shares of Principal and warrants to purchase 10 million ordinary shares
of Principal expiring June 30, 2001 at an exercise price of L1.50 (approximately
$2.40) per share and 556,250 ordinary shares of Principal expiring December 31,
2000 at an exercise price of L1.00 (approximately $1.60) per share; (b) the
Company's right to payment of L15 million (approximately $24 million) from the
Sterling denominated subordinated loan; (c) the Company's interest in a ten-year
British pound currency swap contract under which Worldwide will have the right
to exchange L20,000,000 for $31,740,000 on October 15, 2007; (d) and the
Advisory Services Agreement between the Company and Principal.

As of December 31, 1998, the Company holds a $6,226,000 investment in
Worldwide represented by 1,163,000 shares of common stock and 260,000 shares of
Preferred stock. It also holds a $1,629,000 investment in Principal represented
by 990,000 ordinary shares of Principal.

The Company and Worldwide have entered into an Opportunity Agreement to
provide each other with rights to participate in certain transactions and make
certain investments. The Opportunity Agreement provides, subject to certain
terms, that, regardless of whether the following kinds of investments (each a
"REIT Opportunity") first come to the attention of the Company or Worldwide, the
Company will have the right to: make any investment within the United States (a)
in real estate, real estate mortgages, real estate derivatives or entities that
invest exclusively in or have a substantial portion of their assets in any of
the foregoing, so long as the Company's REIT status would not be jeopardized by
the investment; and (b) that, if made by a REIT, would not result in the
termination of the REIT's status as a REIT under Sections 856 through 860 of the
Internal Revenue Code ("Code"). However, Worldwide will have the right,
regardless of whether the following kinds of investments (each a "Worldwide
Opportunity") first come to the attention of the Company or Worldwide, to: (a)
provide advisory services and/or management services to any healthcare
1
<PAGE> 3

investors, wherever located; (b) acquire or make debt and/or equity investments
(through a joint venture or otherwise) in any healthcare investor or in
healthcare real estate-related assets outside the United States; (c) make
investments in any entity conducting healthcare operations; and (d) make any
other real estate, finance or other investments not customarily undertaken by a
qualified REIT. If Worldwide declines to pursue a Worldwide Opportunity, it must
offer that opportunity to the Company, and if the Company declines to pursue a
REIT Opportunity, it must offer that opportunity to Worldwide. Each of the
Company and Worldwide may participate, in its discretion, in any REIT
Opportunity or Worldwide Opportunity that the other requests be pursued jointly.
The terms upon which each of the Company and Worldwide elect to participate in
such an opportunity will be negotiated in good faith and must be mutually
acceptable to the respective boards of directors of the Company and Worldwide,
with the affirmative votes of the independent directors of the board of
directors of the Company and Worldwide. Each of the Company and Worldwide has
agreed to notify the other of and make available to the other investment
opportunities developed by such party or of which such party becomes aware but
is unable or unwilling to pursue. The Opportunity Agreement has a term of ten
years and automatically renews for successive five-year terms unless terminated.
In that connection, Worldwide has offered to the Company the opportunity to
acquire up to 9.9% of the common shares of Principal Healthcare Finance Trust
("the Trust"), an Australian Unit Trust, which owns 35 nursing home facilities
and 475 assisted living units in New South Wales.

Effective September 30, 1994, the Company acquired all the outstanding
common stock of Health Equity Properties Incorporated ("HEP"), a healthcare real
estate investment trust. The total purchase consideration for HEP approximated
$180 million, comprising common stock of $143 million represented by 5,826,000
shares, long-term debt assumed of $26 million, and other obligations,
professional fees and costs incurred in the transaction.

As of December 31, 1998, the Company's portfolio of domestic investments
consisted of 242 long-term care facilities, 3 medical office buildings and 2
rehabilitation hospitals. The Company owns and leases 141 long-term facilities,
3 medical office buildings and 2 rehabilitation hospitals, and provides
mortgages, including participating and convertible participating mortgages on
101 long-term healthcare facilities. The facilities are located in 29 states and
operated by 30 unaffiliated operators. The Company's gross real estate
investments at December 31, 1998 totaled $984 million.

During 1998, new investments approximated $283 million as a result of
entering into sale/leaseback transactions and making mortgage loans and other
investments. Additionally, the Company initiated a plan during 1998 to dispose
of certain properties judged to have limited incremental potential and to
re-deploy the proceeds from sale. Following a review of the portfolio, assets
identified for sale had a cost of $95 million, a net carrying value of $83
million, and annualized revenues approximated $11.4 million. During the fourth
quarter, the Company completed sales of two groups of assets, yielding sales
proceeds of $42,036,000. Gains realized from assets sold approximated $2.8
million. After consideration of the results of sales and other developments
identified as part of the continuing evaluation of the assets held for sale, the
Company recorded a provision for impairment of $6.8 million to adjust the
carrying value of those assets judged to be impaired to their estimated
realizable value. The Company is committed to sell the remaining facilities as
soon as practicable.

At January 31, 1999 the Company employed 29 full-time employees. The
executive offices of the Company are located at 900 Victors Way, Suite 350, Ann
Arbor, Michigan, 48108. Its telephone number is (734) 887-0200.

INVESTMENT OBJECTIVES

The investment objectives of the Company are to pay regular cash dividends
to shareholders; to provide the opportunity for increased dividends from annual
increases in rental and interest income from revenue participations and from
portfolio growth; to preserve and protect shareholders' capital; and to provide
the opportunity to realize capital growth.

2
<PAGE> 4

INVESTMENT STRATEGIES AND POLICIES

The Company maintains a diversified portfolio of income-producing
healthcare facilities or mortgages thereon, with a primary focus on long-term
care facilities located in the United States. In making investments, the Company
generally seeks and intends to focus on established, creditworthy, middle-market
healthcare operators which meet the Company's standards for quality and
experience of management. Although the Company has emphasized long-term care
investments, it intends to diversify prudently into other types of healthcare
facilities or other properties. The Company actively seeks to diversify its
investments in terms of geographic locations, operators and facility types.

In evaluating potential investments, the Company considers such factors as:
(i) the quality and experience of management and the credit worthiness of the
operator of the facility; (ii) the facility's historical, current and forecasted
cash flow and its adequacy to meet operational needs, capital expenditures and
lease or debt service obligations, while providing a competitive return on
investment to the Company; (iii) the construction quality, condition and design
of the facility; (iv) the geographic area and type of facility; (v) the tax,
growth, regulatory and reimbursement environment of the community in which the
facility is located; (vi) the occupancy and demand for similar healthcare
facilities in the same or nearby communities; and (vii) the payor mix of
private, Medicare and Medicaid patients.

A fundamental investment strategy of the Company 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.

The Company prefers to invest in equity ownership of properties. Due to
regulatory, tax or other considerations, the Company sometimes pursues
alternative investment structures, including convertible participating and
participating mortgages, that achieve returns comparable to equity investments.
The following summarizes the four primary structures currently used by the
Company:

Purchase/Leaseback. The Company's owned properties are generally
leased under provisions of leases for terms ranging from 8 to 17 years,
plus renewal options. The leases originated by the Company generally
provide for minimum annual rentals which are subject to annual formula
increases (i.e., based upon such factors as increases in the Consumer Price
Index ("CPI") or increases in the revenues of the underlying properties),
with certain fixed minimum and maximum levels. Generally, the operator
holds an option to repurchase at set dates at prices based on specified
formulas. The average annualized yield from leases was 11.02% at January 1,
1999.

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 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 participations 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 prices based on specified formulas. The average
annualized yield on these mortgages was approximately 12.71% at January 1,
1999.

Participating Mortgage. Participating Mortgages of the Company 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. The
average annualized yield on these investments was approximately 12.25% at
January 1, 1999.

3
<PAGE> 5

Fixed-Rate Mortgage. These Mortgages of the Company, 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.
The average annualized yield on these investments was 11.46% at January 1,
1999.

The following table summarizes as of December 31, 1998 the years of
expiration of the Company's revenues based on the contractual maturity dates of
the leases and mortgages:

<TABLE>
<CAPTION>
MORTGAGE
RENT INTEREST TOTAL %
---- -------- ----- -
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1999............................................ $ 1,825 $ 853 $ 2,678 2.39%
2000............................................ 984 3,216 4,200 3.74
2001............................................ 3,314 1,786 5,100 4.54
2002(1)......................................... 11,020 10,489 21,509 19.16
2003(2)......................................... 3,174 3,977 7,151 6.37
Thereafter...................................... 50,597 21,037 71,634 63.80
------- ------- -------- ------
$70,914 $41,358 $112,272 100.00%
======= ======= ======== ======
</TABLE>

- -------------------------
(1) Includes $2.8 million that was renegotiated on February 1, 1999 with Unison
Healthcare Corporation (now RainTree Healthcare Corporation). Under the
terms of the new agreement, the $2.8 million will expire in 1999. See Note
15 to the Consolidated Financial Statements.

(2) Includes $3.1 million that was renegotiated on February 1, 1999 with Unison
Healthcare Corporation (now RainTree Healthcare Corporation). Under the
terms of the new agreement, the $3.1 million will expire in 2013. See Note
15 to the Consolidated Financial Statements.

The table set forth in Item 2 -- Properties, herein, contains information
regarding the Company's real estate properties, their locations, and the types
of investment structures as of December 31, 1998.

BORROWING POLICIES

The Company may incur additional indebtedness and anticipates attaining,
and then expects to generally maintain, a long-term debt-to-capitalization ratio
of approximately 40%. The Company intends to review periodically its policy with
respect to its debt-to-equity ratio and to adapt such policy as its management
deems prudent in light of prevailing market conditions. The Company's strategy
generally has been to match the maturity of its indebtedness with the maturity
of its assets, and to employ long-term, fixed-rate debt to the extent
practicable.

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

The Company has an unsecured acquisition line of credit which permits
borrowings of up to $200,000,000. This credit facility provides temporary funds
for new investments in healthcare facilities. The Company expects periodically
to replace funds drawn on the acquisition line through long-term, fixed-rate
borrowings, the issuance of equity linked borrowings, or the issuance of
additional shares of capital stock. Item 7 -- Management's Discussion and
Analysis of Financial Condition and Results of Operations contains additional
information concerning liquidity and capital resources.

COMPETITION

The Company competes 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

4
<PAGE> 6

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.

GOVERNMENT HEALTHCARE REGULATION AND REIMBURSEMENTS

The healthcare industry is highly regulated by federal, state and local
law, 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. The failure of any lessee or borrower to comply
with such laws, requirements and regulations could adversely affect its ability
to operate its facilities and could affect such lessees' or borrowers' ability
to make debt or lease payments to the Company.

A significant portion of the revenue of the Company's lessees and borrowers
is derived from governmentally-funded reimbursement programs, such as Medicare
and Medicaid. These programs are highly regulated and subject to frequent and
substantial changes resulting from legislation, adoption of rules and
regulations, and administrative and judicial interpretations of existing law.

The levels of revenues and profitability of the Company's lessees and
mortgagors will continue to be affected by the ongoing efforts of third-party
payors to contain or reduce the costs of healthcare. Recent legislation changed
the Medicare payment methodology for skilled nursing facilities effective for
cost reporting years commencing after July 1, 1998. The cost-based system was
replaced by a federal per diem rate that is being phased in over four years. The
new per diem rate will be the sole payment for both direct nursing care ("Part A
services") and ancillary services that were previously billed separately from
the cost-based reimbursement system ("Part B services"). Capital costs are also
included in the per diem rate. Many states have also converted to a system based
on prospectively determined fixed rates.

Until 1997, state Medicaid programs were required to reimburse nursing
facilities based on rates that were reasonable and adequate to meet the costs
that must be incurred by efficiently and economically operated facilities in
order to provide services in conformity with federal and state standards and to
assure reasonable access to patients. This law restricted the ability of the
states to reduce Medicaid payments. Congress repealed this requirement in 1997.
Under the new law, states need only publish the methodology used to develop the
proposed rates, along with a justification for the methodology, and allow public
comment. Proposals have also been made to limit Medicaid reimbursement for
healthcare services in many of the states in which the Company's facilities are
located.

Any changes in reimbursement policies which 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, and, indirectly, the Company's
financial condition.

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.

There can be no assurance that the Medicaid reimbursement programs in each
of the states where the lessees' and mortgagors' facilities are located will
reimburse rent or interest costs of the lessees and mortgagors at increased
levels recognizing the initial sales to or borrowings from the Company. 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 the Company's lessees and mortgagors to
meet their respective payment obligations to the Company. Additionally, Medicare
regulations provide that effective December 1, 1997, when a facility changes
ownership (by sale or under certain lease transactions),

5
<PAGE> 7

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 the
Company's healthcare facilities.

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. All of the Company's 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 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. 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, the Company's income and cash flows from
operations would be adversely affected.

Other changes in the healthcare industry include continuing trends toward
shorter lengths of hospital stay, increased use of outpatient services,
increased federal, state and third party oversight of healthcare company
operations and business practices and increased demand for capitated healthcare
services (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 ("CON") has tended to limit construction of new long-term
care facilities in many states. Several states in which the Company has
investments have repealed CON legislation, including California and Texas. As a
result of the foregoing, the revenues and margins of the operators of the
Company's facilities may decrease, resulting in a reduction of the Company's
rent/interest coverage from investments.

FEDERAL INCOME TAX CONSIDERATIONS

At all times, the Company intends to make and manage its 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 of 1986, as amended (the "Code") (or regulations
thereunder) to qualify as a REIT, unless, because of changes in circumstances or
changes in the Code (or regulations thereunder), the Board of Directors
determines that it is no longer in the best interests of the Company to qualify
as a REIT. As such, it generally will not pay federal income taxes on the
portion of its income which is distributed to shareholders.

6
<PAGE> 8

EXECUTIVE OFFICERS OF THE COMPANY

At the date of this report, the executive officers of the Company are:

Essel W. Bailey, Jr. (54) has been President and Chief Executive
Officer of the Company since March 1992, and Chairman of the Board of
Directors since July 1995. Prior to that he was a Managing Director of
Omega Capital, a healthcare investment partnership, from 1986 to 1992. He
was previously a partner in a major Michigan law firm. Mr. Bailey was
formerly a director of Evergreen Healthcare, Inc., which was a NYSE Company
engaged in the operation of long-term healthcare facilities, and of
Vitalink Pharmacy Services Inc., a NYSE listed company and the operator of
institutional pharmacies serving the long-term care industry in the United
States. Mr. Bailey serves as President, Chief Executive Officer and a
director of Omega Worldwide Inc. and is the Managing Director of Principal
Healthcare Finance Limited and Principal Healthcare Finance Trust.

F. Scott Kellman (42) joined the Company as Senior Vice
President-Acquisitions in August 1993, and was appointed Executive Vice
President in August 1994 and Chief Operating Officer in March 1998. From
1986 to 1989, he was Vice President of Meritor Savings Bank, the last two
years as director of the healthcare lending unit. From 1989 to 1991, he
served as Vice President of Van Kampen Merritt, Inc., an investment banking
subsidiary of Xerox. From September 1991 to December 1992, he was employed
by Philadelphia First Group, and from January 1993 through August of 1993
he was the Chief Operating Officer of Medical REIT. Since April 1998 Mr.
Kellman also has been a Vice President of Omega Worldwide Inc.

David A. Stover (53) joined the Company as Vice President and Chief
Financial Officer in September 1994. Mr. Stover is a Certified Public
Accountant and has 23 years' experience with the international accounting
firm of Ernst & Young LLP and its predecessor firms. From 1981 through
1990, he was an audit, tax and consulting partner, spending the last of
those years as area partner-in-charge of services for the firm's healthcare
clients in Western Michigan. From 1992 to 1994, Mr. Stover was principal of
his own consulting firm and, from 1990 to 1992, he was Chief Financial
Officer of International Research and Development Corporation. Since April
1998 Mr. Stover also has been the Vice President and Chief Financial
Officer of Omega Worldwide Inc.

James P. Flaherty (51) joined the Company in 1996 and was appointed
Vice President-International and Managing Director of Omega U.K. Limited in
January 1997. Before he joined the Company, he was Chairman of Black Rock
Capital Corporation, a leasing and merchant banking firm he founded in
1994. From April 1991 until December of 1993 Mr. Flaherty was Managing
Partner of Pareto Partners, a London based investment management firm.
Prior to 1991, he was employed by American Express Bank Ltd. in London and
Geneva in a number of senior management capacities and by State National
Bank of Connecticut and its successor, The Connecticut Bank & Trust Co.
Since April 1998 Mr. Flaherty also has been Chief Operating Officer of
Omega Worldwide Inc.

Susan A. Kovach (39) joined the Company in December 1997 as Vice
President, General Counsel and Secretary. Before she joined the Company,
she was a lawyer with Dykema Gossett PLLC in Detroit, Michigan for 12
years, the last three years as a senior member of the firm. Since April
1998 Ms. Kovach has served as Vice President, General Counsel and Secretary
of Omega Worldwide Inc.

Laurence Rich (39) joined the Company in January 1998 after five years
as a lawyer with the firms of Dykema Gossett PLLC and Pepper, Hamilton &
Scheetz. He was appointed Vice President of Acquisitions in January 1999.
Previously, Mr. Rich was Director of Operations for The Ivanhoe Companies,
a residential and commercial land development and construction company
located in West Bloomfield, Michigan from 1988 to 1992, and from 1983 to
1987 was Director of Marketing for Acorn Building Components, Inc., a
national manufacturer of residential and commercial building products
located in Detroit, Michigan.

7
<PAGE> 9

OTHER KEY PERSONNEL

Carol Albaugh (36), Controller, joined the Company in December 1996 after
completing her MBA at the University of Michigan. Prior to joining the Company,
she held various progressively responsible positions at Borders Group
Incorporated, most recently serving as Manager of Financial Planning and
Analysis through March 1996.

Mike Clark (44), Managing Director of Information Technology, joined the
Company in May 1998. Prior to joining the Company, he was the Vice President of
Information Technology for Argonaut Relocation Services. Mr. Clark has over 20
years experience in all aspects of information technology, with particular
expertise in information modeling and database design. He holds a B.S. in
chemical engineering from the University of Michigan.

Thomas Peterson (39), Managing Director -- Acquisitions, joined the Company
in May 1998 after 13 years of investment banking and financial advisory
experience. Prior to joining the Company, he served as a Principal with
Cornerstone Resources in New York, a venture capital and financial advisory
firm, and from 1993 to 1996 as a Vice President for First Albany Corporation.
Prior to 1993, he managed various financial advisory and investment banking
activities, ultimately serving as a partner in a senior services company. He has
an MBA in finance from the State University of New York at Albany.

Stephen E. Kile (33), Credit and Compliance Manager, joined the Company in
June, 1998. Prior to joining the Company, he was the Controller for Arbor
Intelligent Systems and a Commercial Lending Officer and Credit Analyst with
Comerica Bank. Mr. Kile holds an MBA from the University of Michigan.

David Jones (54), Managing Director -- Acquisitions, joined the Company in
January 1999. Prior to joining the Company, he was Assistant Vice President,
Development for National Health Investors, Inc., a healthcare REIT, from 1991 to
1998. In this capacity, over $700 million was invested in healthcare-related
projects. Mr. Jones has an MBA in Business from the University of Texas.

8
<PAGE> 10

ITEM 2 -- PROPERTIES

At December 31, 1998, the Company's real estate investments were in
long-term care facilities, medical office buildings and rehabilitation
hospitals. The investments are either in the form of purchased facilities, which
are leased to operators, or mortgages on facilities which are operated by the
mortgagors or their affiliates. The facilities are located in 29 states and are
operated by 30 unaffiliated operators. Basic information regarding investments
as of December 31, 1998 is as follows:

<TABLE>
<CAPTION>
NO. OF NO. OF
INVESTMENT STRUCTURE/OPERATOR TOTAL BEDS FACILITIES OCCUPANCY %
----------------------------- ---------- ---------- -----------
<S> <C> <C> <C>
PURCHASE/LEASEBACK PROPERTIES
Sun Healthcare Group, Inc................................... 5,963 54 91
Advocat, Inc................................................ 2,991 28 83
RainTree Healthcare Corporation (f.k.a. Unison
Healthcare)............................................... 2,262 24 73
Integrated Health Services, Inc............................. 1,522 11 84
Alden Management Services, Inc.............................. 870 4 88
Senior Care Properties, Inc................................. 746 4 63
USA Healthcare.............................................. 591 7 81
Res-Care, Inc............................................... 476 5 89
Hunter Management Group, Inc................................ 300 1 87
Meadowbrook Healthcare of N.C............................... 192 2 81
Kansas & Missouri, Inc...................................... 173 1 67
Liberty Assisted Living Centers, LP......................... 120 1 90
Tutera Evergreen, LLC....................................... 56 1 89
The Graduate Hospital....................................... 0 3 N/A
------ --- ---
16,262 146 84
CONVERTIBLE PARTICIPATING MORTGAGES
Sun Healthcare Group, Inc................................... 546 4 94
RainTree Healthcare Corporation (f.k.a. Unison
Healthcare)............................................... 347 3 78
ExtendaCare, Inc............................................ 283 3 91
Integrated Health Services, Inc. ........................... 180 1 81
Senior Care Properties, Inc................................. 150 2 72
------ --- ---
1,506 13 86
PARTICIPATING MORTGAGES
Mariner Post-Acute Network.................................. 2,310 16 85
Frontier Group.............................................. 1,247 12 92
Integrated Health Services, Inc............................. 1,144 9 92
North Country Healthcare Associates......................... 652 12 86
Advocat, Inc................................................ 317 3 76
ExtendaCare, Inc............................................ 203 3 85
------ --- ---
5,873 55 88
FIXED RATE MORTGAGES
Texas Health Enterprises/HEA Mgmt........................... 872 7 95
Essex Healthcare Corporation................................ 635 6 85
Advocat, Inc................................................ 423 4 88
Tiffany Care Centers........................................ 330 5 81
Emerald Healthcare, Inc..................................... 300 2 96
Covenant Care, Inc.......................................... 150 1 69
American Healthcare Centers, Inc............................ 100 1 90
Rocky Mountain Health Care.................................. 100 1 77
Crescent Health Services, Inc............................... 100 1 84
Preferred Care, Inc......................................... 95 1 85
Arpom, Inc.................................................. 80 1 90
Senior Care Properties, Inc................................. 76 1 83
Quality Care, Inc........................................... 75 1 92
Integrated Health Services, Inc............................. 73 1 96
------ --- ---
3,409 33 88
------ --- ---
Total................................................... 27,050 247 85
====== === ===
</TABLE>

- -------------------------
N/A -- Data not reported or not applicable.

9
<PAGE> 11

<TABLE>
<CAPTION>
TOTAL
NUMBER OF TOTAL INVESTMENT IN INVESTMENT
INVESTMENT STRUCTURE/STATE FACILITIES BEDS ($1,000) YIELD
-------------------------- ---------- ----- ------------- ----------
<S> <C> <C> <C> <C>
PURCHASE/LEASEBACK PROPERTIES:
Florida.............................................. 9 1,406 $ 74,643 10.61%
California........................................... 18 1,453 65,913 9.94
Illinois............................................. 8 1,364 54,567 10.59
Pennsylvania......................................... 5 413 49,931 12.10
Texas................................................ 15 2,201 44,664 12.01
Indiana.............................................. 14 1,087 38,845 11.04
Arkansas............................................. 12 1,305 37,888 13.61
Kentucky............................................. 9 943 35,995 10.56
Alabama.............................................. 9 1,121 35,224 12.09
Ohio................................................. 5 554 33,739 10.26
West Virginia........................................ 7 736 30,579 10.36
North Carolina....................................... 7 891 30,209 10.61
Arizona.............................................. 4 378 24,029 9.50
Tennessee............................................ 5 606 17,484 12.14
Iowa................................................. 8 668 17,045 10.63
Washington........................................... 2 319 15,900 12.69
Colorado............................................. 4 276 14,921 9.24
Massachusetts........................................ 1 135 8,300 11.06
New Hampshire........................................ 1 62 5,800 10.00
Louisiana............................................ 1 131 4,602 11.34
Kansas............................................... 1 173 2,500 8.88
Idaho................................................ 1 40 600 11.06
--- ------ -------- ------
Total Purchase/Leaseback:....................... 146 16,262 643,378 11.02
CONVERTIBLE PARTICIPATING MORTGAGES:
Tennessee............................................ 4 546 21,560 13.70
Florida.............................................. 3 330 10,929 11.99
Kentucky............................................. 3 283 10,250 11.25
Texas................................................ 3 347 10,074 12.86
--- ------ -------- ------
Total Convertible Participating Mortgage:....... 13 1,506 52,813 12.71
PARTICIPATING MORTGAGES:
Michigan and North Carolina.......................... 16 2,310 58,800 16.49
Florida.............................................. 8 917 35,899 10.65
Connecticut.......................................... 5 533 34,766 10.25
Massachusetts........................................ 8 747 34,308 10.36
Maine................................................ 11 619 23,928 12.07
Georgia.............................................. 2 304 12,000 9.50
Texas................................................ 2 240 8,633 9.95
Kentucky............................................. 3 203 4,447 12.19
--- ------ -------- ------
Total Participating Mortgage.................... 55 5,873 212,781 12.25
</TABLE>

10
<PAGE> 12

ITEM 3 -- LEGAL PROCEEDINGS

There were no legal proceedings pending as of December 31, 1998, or as of
the date of this report, to which the Company is a party or to which the
properties are subject, which were likely to have a material adverse effect on
the operations of the Company or on its financial condition.

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

No matters were submitted to shareholders during the fourth quarter of the
year covered by this report.

PART II

ITEM 5 -- MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

The Company's shares of common stock are traded on the New York Stock
Exchange under the symbol OHI. The following table sets forth, for the periods
shown, the high and low closing prices as reported on the New York Stock
Exchange Composite and cash dividends per share:

<TABLE>
<CAPTION>
1998 1997
- -------------------------------------------- --------------------------------------------
DIVIDENDS DIVIDENDS
QUARTER HIGH LOW PER SHARE QUARTER HIGH LOW PER SHARE
- ------- ---- --- --------- ------- ---- --- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
First $39.9375 $37.9375 $0.670 First $32.8750 $30.7500 $0.645
Second 39.7500 33.8125 0.670 Second 33.5625 30.5000 0.645
Third 35.6250 27.4375 0.670 Third 36.1875 31.8125 0.645
Fourth 32.6250 28.0625 0.670 Fourth 38.6250 35.5000 0.645
------ ------
$2.680 $2.580
</TABLE>

The closing price on January 29, 1999 was $28.875 per share. As of January
29, 1999, there were 20,001,770 shares of common stock outstanding with
approximately 3,200 registered holders and approximately 26,000 beneficial
owners.

11
<PAGE> 13

ITEM 6 -- SELECTED FINANCIAL DATA

The following selected financial data with respect to the Company should be
read in conjunction with the Company's Consolidated Financial Statements which
are listed herein under Item 14 and are included on pages F-1 through F-17.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1998 1997 1996 1995 1994(1)
---- ---- ---- ---- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
OPERATING DATA
Revenues...................................... $108,738 $90,820 $73,127 $61,430 $37,747
Net Earnings Available to Common (before gain
on asset dispositions in 1998 and
Extraordinary Charge in 1995)............ 41,777 41,305 34,590 29,490 17,777
Net Earnings Available to Common.............. 68,015 41,305 34,590 23,011 17,777
Per Share Amounts:
Net Earnings (before gain on asset
dispositions in 1998 and Extraordinary
Charge in 1995), Basic................... $ 2.09 $ 2.16 $ 2.01 $ 1.83 $ 1.70
Net Earnings Available to Common, Basic....... 3.39 2.16 2.01 1.43 1.70
Net Earnings Available to Common, Diluted..... 3.39 2.16 2.01 1.43 1.70
Dividends, Series A Preferred (2)............. 2.31 1.16
Dividends, Series B Preferred (2)............. 1.08
Dividends, Common Stock (2)................... 2.68 2.58 2.48 2.36 2.20
Weighted Average Shares Outstanding, Basic.... 20,034 19,085 17,196 16,071 10,451
Weighted Average Shares Outstanding,
Diluted.................................. 20,041 19,137 17,240 16,081 10,459
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Cost of Investments...................... $1,025,586 $839,927 $643,261 $547,923 $475,961
Assets Held for Sale..................... 35,289 -- -- -- --
Total Assets............................. 1,032,645 816,108 634,836 551,188 500,731
Acquisition Line of Credit............... 123,000 58,300 6,000 74,690 20,000
Long-Term Borrowings..................... 333,354 208,966 135,659 120,453 133,602
Subordinated Convertible Debentures...... 48,405 62,485 94,810 -- --
Shareholders' Equity..................... 505,762 468,221 383,007 347,129 338,543
</TABLE>

- -------------------------
(1) The Company acquired Health Equity Properties Incorporated on September 30,
1994.

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

ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

"Safe Harbor" Statement Under the United States Private Securities Litigation
Reform Act of 1995

Statements contained in this document that are not based on historical fact
are "forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements include statements
regarding the Company's future development activities, the future condition and
expansion of the Company's markets, the Company's ability to meet its liquidity
requirements and the Company's growth strategies, as well as other statements
which may be identified by the use of forward-looking terminology such as "may,"
"will," "expect," "estimate," "anticipate," or similar terms, variations of
those terms or the negative of those terms. Statements that are not historical
facts contained in Management's Discussion and Analysis are forward-looking
statements that involve risks and uncertainties that could cause actual results
to differ from projected results. Some of the factors that could cause actual
results to differ materially include: The financial strength of the operators of
the Company's facilities as it affects their

12
<PAGE> 14

continuing ability to meet their obligations to the Company under the terms of
the Company's agreements with such operators; changes in the reimbursement
levels under the Medicare and Medicaid programs; operators' continued
eligibility to participate in the Medicare and Medicaid programs; changes in
reimbursement by other third party payors; occupancy levels at the Company's
facilities; the availability and cost of capital; the strength and financial
resources of the Company's competitors; the Company's ability to make additional
real estate investments at attractive yields; and changes in tax laws and
regulations affecting real estate investment trusts.

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

RESULTS OF OPERATIONS

Year Ended December 31, 1998 compared to Year Ended December 31, 1997

Revenues for the year ended December 31, 1998 totaled $108,738,000,
increasing $17.9 million over 1997 revenues. The 1998 revenue growth stems
primarily from additional investments during 1997 and 1998. A partial year of
revenues from 1998 investments provided revenue increases of approximately $9.5
million, while a full year of revenues from 1997 investments added $11.3 million
to revenues. Additionally, approximately $2.3 million of the revenue growth
stems from participating incremental revenues which became effective during
1998.

Real estate investments of $983.8 million as of December 31, 1998 will
provide 1999 annualized revenues of $112.3 million, which reflects no additional
revenues for assets held for sale. Revenues will continue at this level until
additional 1999 investments are made and additional escalation provisions
commence in 1999. Annualized revenues for 1999, excluding assets held for sale,
represent a $19.2 million increase over the 1998 annualized revenues of $93.1
million based on real estate investments of $779.4 million as of January 1,
1998.

Expenses for the year ended December 31, 1998 totaled $58,767,000,
increasing approximately $12.8 million over expenses of $45.9 million for 1997.
The 1998 provision for depreciation and amortization of real estate totaled
$21,542,000, increasing $4.6 million over 1997. This increase stems from a full
year provision for 1997 investments, plus a partial year provision for 1998
investments.

Interest expense for the year ended December 31, 1998 was approximately
$31,860,000, compared with $24.4 million for 1997. The increase in 1998 is
primarily due to higher average outstanding borrowings during the 1998 periods,
offset partially by interest rate savings from conversions of subordinated
debentures and reduced spreads on line of credit borrowings.

General and administrative expenses for 1998 totaled $5,365,000 million or
approximately 4.9% of revenues as compared to 5.1% for 1997. The 1998 percentage
decrease stems primarily from economies of scale resulting from additional
investments made in 1998.

No provision for Federal income taxes has been made since the Company
intends to 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, the Company will not be subject to Federal income taxes on
amounts distributed to shareholders, provided it distributes at least 95% of its
real estate investment trust taxable income and meets certain other conditions.

Funds from operations (FFO) for the year ended December 31, 1998 totaled
$65,050,000, an increase of $6.3 million over the $58.8 million for 1997. FFO is
net earnings available to common shareholders, excluding any gains or losses
from debt restructuring and the effects of asset dispositions, plus depreciation
and amortization associated with real estate investments and charges to earnings
for non-cash common stock based compensation. The 1998 growth in cash flow is
primarily due to net additions to investments in 1998 and 1997.

13
<PAGE> 15

Year Ended December 31, 1997 compared to Year Ended December 31, 1996

Revenues for the year ended December 31, 1997 totaled $90,820,000,
increasing $17.7 million over 1996 revenues. The 1997 revenue growth stems
primarily from additional investments during 1996 and 1997. A partial year of
revenues from 1997 investments provided revenue increases of approximately $9.8
million, while a full year of revenues from 1996 investments added $5.1 million
to revenues during 1997. Additionally, approximately $1.9 million of the revenue
growth stems from participating incremental revenues, which became effective
during 1997.

Real estate investments of $779.4 million as of December 31, 1997 will
provide 1998 annualized revenues of $93.1 million. Revenues will continue at
this level until additional 1998 investments are made and additional escalation
provisions commence in 1998. Annualized revenues for 1998 represent a $20.1
million increase over the 1997 annualized revenues of $73.0 million based on
real estate investments of $593.7 million as of January 1, 1997.

Expenses for the year ended December 31, 1997 totaled $45,969,000,
increasing approximately $7.4 million over expenses of $38.5 million for 1996.
The 1997 provision for depreciation and amortization of real estate totaled
$16,910,000, increasing $3.2 million over 1996. This increase stems from a full
year provision for 1996 investments, plus a partial year provision for 1997
investments.

Interest expense for the year ended December 31, 1997 was approximately
$24,423,000, compared with $20.8 million for 1996. The increase in interest
expense is primarily due to an increase in average outstanding borrowings on the
acquisition line of credit, partially offset by lower rates.

General and administrative expenses for 1997 totaled $4.6 million or
approximately 5.1% of revenues as compared to 5.5% for 1996. The 1997 percentage
decrease stems primarily from economies of scale resulting from additional
investments made in 1997.

Funds from operations (FFO) for the year ended December 31, 1997 totaled
$58,815,000, an increase of $9.8 million over the $49.0 million for 1996. FFO is
net earnings available to common shareholders, excluding any gains or losses
from debt restructuring and sales of property, plus depreciation and
amortization associated with real estate investments and charges to earnings for
non-cash common stock based compensation. The 1997 growth in cash flow is
primarily due to the additional investments in 1997 and 1996 and the increase in
operating earnings before provisions for depreciation and amortization.

LIQUIDITY AND CAPITAL RESOURCES

The Company continually seeks new investments in healthcare properties,
primarily long-term care facilities, with the objective of profitable growth and
further diversification of the investment portfolio. Permanent financing for
future investments is expected to be provided through a combination of private
and public offerings of debt and equity securities. Management believes the
Company's liquidity and various sources of available capital are adequate to
finance operations, fund future investments in additional facilities, and meet
debt service requirements.

At December 31, 1998, the Company has a strong financial position with
total assets of $1.03 billion, shareholders' equity of $505.8 million, and
long-term debt of $381.8 million, representing approximately 37% of total
capitalization. Long-term debt excludes funds borrowed under its acquisition
credit agreement. The Company anticipates maintaining a long-term
debt-to-capitalization ratio of approximately 40%. The Company has a $200
million revolving credit facility, of which $123 million was drawn at year-end.
In January 1999, additional credit line borrowings of $33 million were used
primarily for funding of investments. Proceeds from asset sales and anticipated
term-loan borrowings in the first quarter of 1999 are expected to reduce
borrowings on the credit facility by approximately $85 million.

In February 1997, the Company filed a Form S-4 shelf registration statement
with the Securities and Exchange Commission registering common stock totaling
$100 million to be issued in connection with future property acquisitions.
Additionally, on January 14, 1999, the Company's Form S-3 registration statement

14
<PAGE> 16

permitting the issuance of up to $300 million related to common stock,
unspecified debt, preferred stock and convertible securities was declared
effective by the Securities and Exchange Commission.

The Company has demonstrated a strong capacity for timely access capital
markets and has raised more than $1.2 billion in debt and equity capital since
it was organized in 1992. The Company raised more than $500 million in equity,
including $130 million from the initial public offering in 1992, $73 million
from a follow-on common stock offering in 1994, $165 million from the Health
Equity Properties acquisition in 1994 and three additional offerings, including
the offering of Series A and Series B preferred stock. Additionally, over $700
million of debt capital has been raised, some of which has been used to retire
secured borrowings with higher interest rates. In 1996, the Company completed a
placement of $95 million of 8.5% Convertible Subordinated Debentures due 2001,
and executed an agreement to increase its current bank line of credit facility
by $50 million and to extend the term of the revolving credit agreement to July
1999. In 1997, the Company issued $57.5 million of Series A Preferred Stock with
a yield of 9.25% and completed a $100 million 10-year senior note offering
priced to yield 6.99%. In September 1997, the Company completed the second
amended and restated loan agreement. The new agreement provides for total
permitted borrowings of up to $200 million, reduces interest rates on
borrowings, and extends the term of the agreement to September 2000. In April
1998, the Company issued $50 million of Series B Preferred Stock with a yield of
8.625%. In June 1998, the Company completed a $125 million 4-year senior note
offering priced to yield 7.04%.

The Company distributes a large portion of the cash available from
operations. Cash dividends paid totaled $2.68 per share for 1998, compared with
$2.58 per share for the year ended December 31, 1997. The dividend payout ratio,
that is the ratio of per share amounts for dividends paid to the diluted per
share amounts of funds from operations, was approximately 84% for 1998, compared
with 86% for 1997. The Company believes that cash provided from quarterly
operating activities at current levels will continue to be sufficient to fund
normal working capital requirements and pay 1999 dividends at a quarterly rate
of $0.70 per share as declared at the January 21, 1999 Board of Directors
meeting. In addition, the Board declared regular quarterly dividends of $.578
per share and $.539 per share to be paid February 15, 1999 to Series A and
Series B Cumulative Preferred shareholders of record on January 29, 1999,
respectively. Approximately 50% of incremental cash flow from operations is
expected to be retained annually through gradual reductions in the dividend
payout ratio, with such funds used to fund additional investments and provide
financial flexibility.

New investments generally are funded from temporary borrowings under the
Company's acquisition credit line agreement. Interest cost incurred by the
Company on borrowings under the acquisition credit line will vary depending upon
fluctuations in prime and/or LIBOR rates, and upon changes in the Company's
ratings by national agencies. Borrowings bear interest at LIBOR plus 1.00% or,
at the Company's option, at the prime rate. The Company expects to periodically
replace funds drawn on the acquisition credit line through fixed-rate long-term
borrowings, the placement of convertible debentures, or the issuance of
additional shares of common and/or preferred stock. Historically, the Company's
strategy has been to match the maturity of its indebtedness with the maturity of
its assets and to employ fixed-rate long-term debt to the extent practicable.

MARKET RISK

The Company is exposed to various market risks, including the potential
loss arising from adverse changes in interest rates. The Company does not enter
into derivatives or other financial instruments for trading or speculative
purposes. The Company seeks 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 the Company's long-term fixed rate borrowings and
mortgages are subject to interest rate risk. 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 the Company's total
long-term borrowings at December 31, 1998 was $368 million. A 1% increase in
interest rates would result in a decrease in fair value of long-term borrowings
by approximately $10 million. The estimated fair value of the Company's total
mortgages portfolio at December 31, 1998 was $369 million. A 1% increase in
interest rates would result in a decrease in fair value of the mortgage
portfolio by approximately $14 million.

15
<PAGE> 17

The Company is 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 the Company was unable to refinance its indebtedness on
acceptable terms, it might be forced to dispose of properties on disadvantageous
terms, which might result in losses to the Company and might adversely affect
the cash available for distributions to shareholders. If interest rates or other
factors at the time of the refinancing result in higher interest rates upon
refinancing, the Company's interest expense would increase, which might affect
the Company's ability to make common stock distributions to its shareholders.

The majority of the Company's borrowings were completed pursuant to
indentures which limit the amount of indebtedness the Company may incur.
Accordingly, in the event that the Company is unable to raise additional equity
or borrow money because of these limitations, the Company's ability to acquire
additional properties may be limited. If the Company is unable to acquire
additional properties, its ability to increase the distributions with respect to
common shares, as it has done in the past, will be limited to management's
ability to increase funds from operations, and thereby cash available for
distributions, from the existing properties in the Company's portfolio.

YEAR 2000 COMPLIANCE

The Year 2000 compliance issue concerns the inability of certain systems
and devices to properly use or store dates beyond December 31, 1999. This could
result in system failures, malfunctions, or miscalculations that disrupt normal
operations. This issue affects most companies and organizations to large and
small degrees, at least to the extent that potential exposures must be
evaluated.

The Company is reviewing risks with regard to the ability of the Company's
own internal operations, the impact of outside vendors' ability to operate, and
the impact of tenants' ability to operate. The Company initially focused this
review on mission-critical operations, recognizing that other potential effects
are expected to be less material. The Company believes its own internal
operations, its technology infrastructure, information systems, and software
applications are likely to be compliant or will be compliant by mid-1999 based
upon certification statements by the applicable vendors. In those cases where
there are compliance issues, these are considered to be minor in nature, and
remedies are already identified. Expenditures for such remedies will not be
material.

With respect to the Company's material outside vendors, such as its banks,
payroll processor, and telecommunications providers, the Company's assessment
will cover the compliance efforts of significant vendors, the effects of
potential non-compliance, and remedies that may mitigate or obviate such effects
as to the Company's business and operations. The Company plans to complete its
assessment of compliance by important vendors by mid-1999.

With respect to the Company's tenants and properties, the Company's
assessment will cover the tenants' compliance efforts, the possibility of any
interface difficulties or electromechanical problems relating to compliance by
material vendors, the effects of potential non-compliance, and remedies that may
mitigate or obviate such effects. The Company plans to process information from
tenant surveys beginning in 1999 and complete its assessment by mid-1999.

Because the Company's evaluation of these issues has been conducted by its
own personnel or by selected inquiries of its vendors and tenants in connection
with their routine servicing operations, the Company believes that its
expenditures for assessing Year 2000 issues, though difficult to quantify, have
not been material. In addition, the Company is not aware of any issues that will
require material expenditures by the Company in the future.

Based upon current information, the Company believes that the risk posed by
foreseeable Year 2000 related problems with its internal systems (including both
information and non-information systems) is minimal. Year 2000 related problems
with the Company's software applications and internal operational programs are
unlikely to cause more than minor disruptions in the Company's operations. Year
2000 related problems at certain of its third-party service providers, such as
its banks, payroll processor, and telecommunications provider, is marginally
greater, though, based upon current information, the Company

16
<PAGE> 18

does not believe any such problems would have a material effect on its
operations. For example, Year 2000 related problems at such third-party service
providers could delay the processing of financial transactions and the Company's
payroll and could disrupt the Company's internal and external communications.

The Company believes that the risk posed by Year 2000 related problems with
its tenants is marginally greater, though, based upon current information, the
Company does not believe any such problems would have a material effect on its
operations. Year 2000 related problems at certain governmental agencies and
third-party payers could delay the processing of tenant financial transactions,
though, based upon current information, the Company does not believe any such
problems would have a material long-term effect on its operations. Year 2000
related problems with the electromechanical systems at its properties are
unlikely to cause more than minor disruptions.

The Company intends to complete outstanding assessments, to implement
identified remedies, to continue to monitor Year 2000 issues, and will develop
contingency plans if, and to the extent, deemed necessary. However, based upon
current information and barring developments, the Company does not anticipate
developing any substantive contingency plans with respect to Year 2000 issues.
In addition, the Company has no plans to seek independent verification or review
of its assessments.

While the Company believes that it will be Year 2000 compliant by December
31, 1999, there can be no assurance that the Company will be successful in
identifying and assessing all compliance issues, or that the Company's efforts
to remedy all Year 2000 compliance issues will be effective such that they will
not have a material adverse effect on the Company's business or results of
operations.

The information above contains forward-looking statements, including,
without limitation, statements relating to the Company's plans, strategies,
objectives, expectations, intentions and adequate resources that are made
pursuant to "safe harbor" provisions of the Private Securities Litigation Reform
Act of 1995. Readers are cautioned that forward-looking statements about the
Year 2000 should be read in conjunction with the Company's disclosures under the
heading: "Safe Harbor" Statement Under the Private Securities Litigation Reform
Act of 1995.

ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated financial statements and report of independent auditors
are filed as part of this report on pages F-1 through F-17.

17
<PAGE> 19

The following unaudited summary of quarterly results of operations for the
years ended December 31, 1998 and 1997 is submitted in response to Item 302 of
Regulation S-K.

<TABLE>
<CAPTION>
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE)
<S> <C> <C> <C> <C>
1998
Revenues......................................... $26,268 $27,926 $28,434 $26,110
Net earnings available to common (before gain on
asset dispositions)............................ 10,817 10,676 10,750 9,534
Net earnings available to common................. 10,817 40,916 10,750 5,532
Net Earnings Available to Common per share:
Basic net earnings before gain on asset
dispositions................................... $0.55 $0.53 $0.53 $0.47
Diluted net earnings before gain on asset
dispositions................................... 0.55 0.53 0.53 0.47
Basic net earnings............................... 0.55 2.03 0.53 0.27
Diluted net earnings............................. 0.55 2.03 0.53 0.27
Cash dividends paid on common stock.............. 0.67 0.67 0.67 0.67
1997
Revenues......................................... $20,012 $22,515 $23,564 $24,729
Net earnings..................................... 9,989 10,917 11,804 12,141
Net earnings available to common................. 9,989 10,031 10,474 10,811
Per Share Amounts:
Net earnings available to common, basic.......... $0.53 $.053 $0.55 $0.56
Net earnings available to common, diluted........ 0.53 0.52 0.54 0.55
Cash dividends paid on common stock.............. 0.645 0.645 0.645 0.645
</TABLE>

- -------------------------
Note: During the three-month period ended June 30, 1998, the Company realized a
$30,240 gain on the distribution of Omega Worldwide, Inc. Additionally, during
the three-month period ended December 31, 1998, the Company recognized a $4,002
loss on asset dispositions. Also refer to the audited financial statements
appearing in Item 14.

ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not applicable.

PART III

ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this item is contained in Item 1 herein or
incorporated herein by reference to the Company's definitive proxy statement for
the Annual Meeting of Shareholders to be held on April 20, 1999 at 11:00 a.m.
EST, which will be filed on or about February 28, 1999 with the Securities and
Exchange Commission pursuant to Regulation 14A.

ITEM 11 -- EXECUTIVE COMPENSATION

The information required by this item is incorporated herein by reference
to the Company's definitive proxy statement for the Annual Meeting of
Shareholders to be held on April 20, 1999, which will be filed on or about
February 28, 1999 with the Securities and Exchange Commission pursuant to
Regulation 14A.

ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

18
<PAGE> 20

ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

PART IV

ITEM 14 -- EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K

(a)(1) Listing of Consolidated Financial Statements

<TABLE>
<CAPTION>
PAGE
TITLE OF DOCUMENT NUMBER
- ----------------- ------
<S> <C>
Report of Independent Auditors.............................. F-1
Consolidated Balance Sheets as of December 31, 1998 and
1997...................................................... F-2
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996.......................... F-3
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1998, 1997 and 1996.............. F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996.......................... F-5
Notes to Consolidated Financial Statements.................. F-6
</TABLE>

(a)(2) Listing of Financial Statement Schedules. The following consolidated
financial statement schedules are included herein:

Schedule III -- Real Estate and Accumulated Depreciation

Schedule IV -- Mortgage Loans on Real Estate

All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable and therefore have been
omitted.

(a)(3) Listing of Exhibits -- See Index to Exhibits beginning on Page I-1
of this report.

(b) Reports on Form 8-K. There were no 8-K filings in the fourth quarter of
1998.

(d) Financial Statement Schedules -- The following consolidated financial
statement schedules are included herein:

Schedule III Real Estate and Accumulated Depreciation

Schedule IV Mortgage Loans on Real Estate

19
<PAGE> 21

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, 1998, and 1997
and the related consolidated statements of operations, shareholders' equity and
cash flows for each of the three years in the period ended December 31, 1998.
Our audits also included the financial statement schedules listed in the Index
at Item 14(a). 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated 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, 1998 and 1997,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. 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

Detroit, Michigan
January 22, 1999 (except for Note 15,
as to which the date is January 31, 1999)

F-1
<PAGE> 22

OMEGA HEALTHCARE INVESTORS, INC.

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Investments in real estate:
Real estate properties -- net............................. $ 586,993 $512,907
Mortgage notes receivable................................. 340,455 218,353
---------- --------
927,448 731,260
Investment in Omega Worldwide, Inc.......................... 6,226
Investment in Principal Healthcare Finance Limited.......... 1,629 30,730
Other investments........................................... 33,898 29,790
---------- --------
969,201 791,780
Assets held for sale........................................ 35,289
Cash and short-term investments............................. 1,877 500
Non-compete agreements and goodwill -- net.................. 4,422 5,981
Other assets................................................ 21,856 17,847
---------- --------
Total assets........................................... $1,032,645 $816,108
========== ========

LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Acquisition line of credit................................ $ 123,000 $ 58,300
6.95% Notes due 2002...................................... 125,000
6.95% Notes due 2007...................................... 100,000 100,000
Senior Notes.............................................. 81,381 81,381
Other long-term borrowings................................ 26,973 27,585
Subordinated convertible debentures....................... 48,405 62,485
Accrued expenses and other liabilities.................... 22,124 18,136
---------- --------
Total liabilities...................................... 526,883 347,887
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
Common stock $.10 par value:
Authorized -- 50,000 shares
Issued and outstanding -- 20,057 shares in 1998 and 19,475
shares in 1997......................................... 2,006 1,947
Additional paid-in capital................................ 452,439 439,214
Cumulative net earnings................................... 212,434 136,225
Cumulative dividends paid................................. (266,054) (165,824)
Stock option loans........................................ (2,863)
Unamortized restricted stock awards....................... (461) (841)
Accumulated other comprehensive income.................... 761
---------- --------
Total shareholders' equity............................. 505,762 468,221
---------- --------
Total liabilities and shareholders' equity............. $1,032,645 $816,108
========== ========
</TABLE>

See accompanying notes.

F-2
<PAGE> 23

OMEGA HEALTHCARE INVESTORS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1998 1997 1996
---- ---- ----
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C> <C>
REVENUE:
Rental income............................................. $ 72,072 $54,073 $42,688
Mortgage interest income.................................. 30,399 28,727 24,692
Other investment income................................... 5,652 6,888 5,213
Miscellaneous............................................. 615 1,132 534
-------- ------- -------
108,738 90,820 73,127
EXPENSES:
Depreciation and amortization............................. 21,542 16,910 13,693
Interest.................................................. 31,860 24,423 20,836
General and administrative................................ 5,365 4,636 4,008
-------- ------- -------
58,767 45,969 38,537
-------- ------- -------
Earnings before gain on asset dispositions.................. 49,971 44,851 34,590
Gain on asset dispositions:
Gain on distribution of Omega Worldwide, Inc.............. 30,240
Loss on assets held for sale -- net....................... (4,002)
-------- ------- -------
Net Earnings................................................ 76,209 44,851 34,590
Preferred stock dividends................................... (8,194) (3,546) --
-------- ------- -------
Net Earnings Available to Common............................ $ 68,015 $41,305 $34,590
======== ======= =======
NET EARNINGS AVAILABLE TO COMMON PER SHARE:
Basic net earnings before gain on asset dispositions...... $ 2.09 $ 2.16 $ 2.01
======== ======= =======
Diluted net earnings before gain on asset dispositions.... $ 2.08 $ 2.16 $ 2.01
======== ======= =======
Basic net earnings........................................ $ 3.39 $ 2.16 $ 2.01
======== ======= =======
Diluted net earnings...................................... $ 3.39 $ 2.16 $ 2.01
======== ======= =======
Weighted Average Shares Outstanding:
Basic..................................................... 20,034 19,085 17,196
======== ======= =======
Diluted................................................... 20,041 19,137 17,240
======== ======= =======
Total comprehensive income.................................. $ 76,970 $44,851 $34,590
======== ======= =======
</TABLE>

See accompanying notes.

F-3
<PAGE> 24

OMEGA HEALTHCARE INVESTORS, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
ACCUMULATED
COMMON ADDITIONAL CUMULATIVE UNAMORTIZED STOCK OTHER
STOCK PAID-IN PREFERRED NET CUMULATIVE RESTRICTED OPTION COMPREHENSIVE
PAR VALUE CAPITAL STOCK EARNINGS DIVIDENDS STOCK AWARDS LOANS INCOME
--------- ---------- --------- ---------- ---------- ------------ ------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1996.................... $1,666 $360,803 $ 56,784 $ (72,071) $ (53)
Issuance of common stock:
Grant of restricted
stock (8 shares at
$26.625 per share) net
of provision charged
to operations......... 1 212 (49)
Proceeds from November
1996 equity offering:
less offering costs of
$325.................. 100 30,075
Dividend Reinvestment
Plan.................. 48 12,755
Conversion of
debentures, net of
issue costs........... 1 181
Stock options
exercised............. 1 223
Other................... 62
Net earnings for 1996.... 34,590
Common dividends paid
($2.48 per share)...... (42,322)
------ -------- -------- -------- --------- ----- ------- ----
Balance at December 31,
1996 (18,175 shares).... 1,817 404,311 91,374 (114,393) (102)
Issuance of common stock:
Grant of restricted
stock (39 shares at an
average of $34.488 per
share) net of
provision charged to
operations............ 4 1,310 (739)
Dividend Reinvestment
Plan (53 shares)...... 5 1,676
Conversion of
debentures, net of
issue costs (1,129
shares)............... 113 31,535
Stock options exercised
(12 shares)........... 1 270
Acquisition of real
estate (67 shares).... 7 2,423
Issuance of preferred
stock.................. (2,311) $ 57,500
Net earnings for 1997.... 44,851
Common dividends paid
($2.58 per share)...... (48,772)
Preferred dividends paid
($1.156 per share)..... (2,659)
------ -------- -------- -------- --------- ----- ------- ----
Balance at December 31,
1997 (19,475 shares).... 1,947 439,214 57,500 136,225 (165,824) (841)
Issuance of common stock:
Grant of restricted
stock (3 shares at an
average of $38.112 per
share) net of
provision charged to
operations............ 42 380
Dividend Reinvestment
Plan (58 shares)...... 6 1,826
Conversion of
debentures, net of
issue costs (522
shares)............... 52 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......... $(2,863)
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......... (39,062)
Common dividends paid
($2.68 per share)...... (53,693)
Preferred dividends paid
(Series A of $2.312 per
share and Series B of
$1.078 per share)...... (7,475)
Unrealized Gain on Omega
Worldwide, Inc......... $761
------ -------- -------- -------- --------- ----- ------- ----
Balance at December 31,
1998 (20,057 shares).... $2,006 $452,439 $107,500 $212,434 $(266,054) $(461) $(2,863) $761
====== ======== ======== ======== ========= ===== ======= ====
</TABLE>

See accompanying notes.

F-4
<PAGE> 25

OMEGA HEALTHCARE INVESTORS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net earnings................................................ $ 76,209 $ 44,851 $ 34,590
Adjustment to reconcile net earnings to cash provided by
operating activities:
Depreciation and amortization............................. 21,543 16,910 13,693
Gain on distribution of Omega Worldwide................... (30,240)
Provision for impairment loss, less realized gains........ 4,002
Income realized on assets held for sale................... 1,281
Other non-cash items...................................... 898 1,232 706
--------- --------- --------
Funds from operations available for distribution and
investment................................................ 73,693 62,993 48,989
Net change in operating assets and liabilities.............. (3,980) (2,562) 5,897
--------- --------- --------
Net cash provided by operating activities 69,713 60,431 54,886
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from unsecured note offering....................... 125,000 100,000
Proceeds from preferred stock offering...................... 50,000 57,500
Proceeds (payments) of acquisition line of credit........... 64,700 52,300 (68,690)
Proceeds (payments) of bank term loan....................... (25,000) 25,000
Proceeds from issuance of common stock...................... 30,500
Proceeds from issuance of Subordinated Convertible
Debentures................................................ 95,000
Payments of long-term borrowings............................ (612) (6,578) (9,794)
Receipts from Dividend Reinvestment Plan.................... 1,832 1,681 12,803
Dividends paid.............................................. (61,168) (51,431) (42,322)
Cost of raising capital..................................... (3,290) (4,702) (3,048)
Repurchase of Company common stock.......................... (3,545)
Other....................................................... 356 (587) 327
--------- --------- --------
Net cash provided by financing activities................... 173,273 123,183 39,776
CASH FLOW FROM INVESTING ACTIVITIES:
Acquisition of real estate.................................. (157,474) (184,877) (18,621)
Placement of mortgage loans................................. (125,850) (11,155) (66,222)
Funding of other investments -- net......................... (17,488) (6,237) (13,037)
Investment in Principal Healthcare Finance Limited.......... (760) 2,108
Net proceeds from sale of Omega Worldwide shares............ 16,938
Collection of mortgage principal............................ 3,748 13,365 957
Proceeds from sale of real estate investments............... 37,771
Other....................................................... 746 306 (29)
--------- --------- --------
Net cash used in investing activities....................... (241,609) (189,358) (94,844)
--------- --------- --------
Increase (decrease) in cash and short-term investments...... 1,377 (5,744) (182)
Cash and short-term investments at beginning of year........ 500 6,244 6,426
--------- --------- --------
Cash and short-term investments at end of year.............. $ 1,877 $ 500 $ 6,244
========= ========= ========
</TABLE>

See accompanying notes.

F-5
<PAGE> 26

OMEGA HEALTHCARE INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998

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). The Company
commenced operations in 1992 and currently has investments in 247
income-producing healthcare facilities, with a principal focus on diversified
investments in long-term care facilities located primarily in the United States.

CONSOLIDATION

The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries after elimination of all material intercompany
accounts and transactions.

REAL ESTATE INVESTMENTS

Investments in 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.

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) is amortized on a straight-line
basis over periods ranging from five to ten years. Accumulated amortization was
$6,935,000 and $5,277,000 at December 31, 1998 and 1997, respectively.

IMPAIRMENT OF ASSETS

Provisions for impairment losses related to long-lived assets, including
certain intangible assets and goodwill, 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 operations. The Company adjusts the net book value of leased
properties, assets held for sale and other long-lived assets to fair value, if
the sum of the expected future cash flow or sales proceeds is less than book
value. Assets classified as held for sale are reported at the lower of their
carrying amount or fair value, less the estimated cost to sell. Residual cash
receipts and depreciation are excluded from operations after management has
committed to a plan to sell the asset.

CASH AND SHORT-TERM INVESTMENTS

Short-term investments 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.

INVESTMENTS IN EQUITY SECURITIES OR OTHER INVESTMENTS

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.

F-6
<PAGE> 27
OMEGA HEALTHCARE INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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
$1,042,000, $829,000 and $524,000 in 1998, 1997, and 1996, 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.

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. Certain mortgage agreements include
provisions for deferred interest which is not payable by the borrower until
maturity of the related note. The portion of deferred interest recognized as
earned approximates $600,000 for each of the three years in the period ended
December 31, 1998.

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, 1998 exceeds the tax basis of assets by
approximately $63 million.

EARNINGS PER SHARE

Basic earnings per share is computed based on the weighted average number
of common shares outstanding during the respective periods. Average shares
outstanding for basic earnings per share were 20,034 million for 1998, 19,085
million for 1997 and 17,196 million for 1996, respectively. The calculation of
diluted earnings per share amounts reflect the dilutive effect of stock options
of 5,999 shares, 52,394 shares and 44,240 shares for 1998, 1997 and 1996,
respectively. The assumed conversion of debentures is anti-dilutive for all
periods presented.

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.

ACCOUNTING ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles 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.

NOTE 2 -- PROPERTIES

The Company's real estate properties, represented by 141 long-term care
facilities, 3 medical office buildings and 2 rehabilitation hospitals at
December 31, 1998, are leased under provisions of master leases with initial
terms ranging from 8 to 17 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
F-7
<PAGE> 28
OMEGA HEALTHCARE INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 real estate properties is as
follows:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Buildings................................................... $615,846 $539,274
Land........................................................ 27,532 21,780
-------- --------
643,378 561,054
Less accumulated depreciation............................... (56,385) (48,147)
-------- --------
Total.................................................. $586,993 $512,907
======== ========
</TABLE>

The following table summarizes the changes in real estate properties and
accumulated depreciation during 1998, 1997 and 1996:

<TABLE>
<CAPTION>
REAL ESTATE ACCUMULATED
PROPERTIES DEPRECIATION
----------- ------------
(IN THOUSANDS)
<S> <C> <C>
Balance at January 1, 1996.................................. $357,556 $ 20,836
Additions/provision for 1996.............................. 18,621 12,048
-------- --------
Balance at December 31, 1996................................ 376,177 32,884
Additions/provision for 1997.............................. 184,877 15,263
-------- --------
Balance at December 31, 1997................................ 561,054 48,147
Addition/provisions for 1998.............................. 157,474 19,749
Disposals and transfer to assets held for sale............ (75,150) (11,511)
-------- --------
Balance at December 31, 1998................................ $643,378 $ 56,385
======== ========
</TABLE>

The future minimum rentals expected to be received for the remainder of the
initial terms of the leases are as follows:

<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1999........................................................ $ 69,926
2000........................................................ 68,761
2001........................................................ 68,463
2002........................................................ 63,550
2003........................................................ 55,020
Thereafter.................................................. 354,804
--------
$680,524
========
</TABLE>

At the Company's Board of Directors' Meeting on July 15, 1998, management
was authorized to initiate a plan to dispose of certain properties judged to
have limited incremental potential and to re-deploy the proceeds from sale.
Following a review of the portfolio, assets identified for sale had a cost of
$95 million, a net carrying value of $83 million, and annualized revenues of
approximately $11.4 million. During the fourth quarter, the Company completed
sales of two groups of assets, yielding sales proceeds of $42,036,000. Gains
realized in the dispositions approximated $2.8 million. After consideration of
the results of sales and other developments identified as part of the continuing
evaluation of the assets held for sale, the Company recorded

F-8
<PAGE> 29
OMEGA HEALTHCARE INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

a provision for impairment of $6.8 million to adjust the carrying value of those
assets judged to be impaired to their estimated realizable value. The Company is
committed to sell the remaining facilities as soon as practicable.

NOTE 3 -- MORTGAGE NOTES RECEIVABLE

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 of the Company 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 Mortgage. These Mortgages of the Company, 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.

Mortgage notes receivable relate to 101 long-term care facilities. The
mortgage notes are secured by first mortgage liens on the borrowers' underlying
real estate and personal property. Through December 31, 1998, required principal
payments have been made pursuant to the terms of the underlying mortgage
agreements. Based on management's review, no provision for loss is considered
necessary. The following table summarizes the changes in mortgage notes during
1998 and 1997:

<TABLE>
<CAPTION>
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Balance at January 1........................................ $218,353 $217,474
New mortgage notes........................................ 125,850 11,155
Collection of principal................................... (3,748) (13,365)
Conversion/reclassification............................... -- 3,089
-------- --------
Balance at December 31...................................... $340,455 $218,353
======== ========
</TABLE>

F-9
<PAGE> 30
OMEGA HEALTHCARE INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The outstanding principal amount of mortgage notes receivable follow:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Participating mortgage note due 2004; interest at 10.25%
payable monthly........................................ $ 67,000 --
Participating mortgage note due 2007; interest at 15.84%
payable monthly, plus amortization of $1,470,000 per
quarter commencing in 2002............................. 58,800 $ 58,800
Participating mortgage note due 2003; interest at 9.95%
payable monthly........................................ 37,500 --
Participating mortgage note due 2000; interest at 11.87%
payable monthly plus amortization of $37,500
quarterly.............................................. 26,003 26,279
Participating mortgage note due 2008; interest at 9.50%
payable monthly........................................ 12,000 --
Participating mortgage note due 2012; interest at 13.53%
payable monthly, plus amortization of $50,000 per
quarter commencing in 2002............................. 7,031 7,031
Convertible participating mortgage note due 2011; monthly
interest payments at 10.92%............................ 10,250 10,250
Convertible participating mortgage note due 2005; interest
at 12.44% payable monthly, plus annual amortization of
$60,000 through 1999 and $120,000 thereafter........... 10,074 10,200
Convertible participating mortgage note due 2001; monthly
interest payments at 15.23% with principal due at
maturity............................................... 8,932 8,932
Convertible participating mortgage note due 2000, monthly
interest payments at 13.50%............................ 8,127 8,150
Mortgage notes due 2015; monthly payments of $209,244,
including interest at 11.01%........................... 18,738 19,141
Mortgage note due 2010; monthly payment of $124,826,
including interest at 11.50%........................... 12,847 12,864
Mortgage note due 2006; monthly payment of $107,382,
including interest at 11.50%........................... 11,053 11,071
Other mortgage notes........................................ 32,223 30,304
Other convertible participating mortgage notes.............. 15,430 10,934
Other participating mortgage notes.......................... 4,447 4,397
-------- --------
$340,455 $218,353
======== ========
</TABLE>

The stated interest rates indicated above for Participating Mortgages and
Convertible Participating Mortgages are 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. Certain of the mortgage
notes, designated as "Convertible Participating," also permit the Company to
convert the note into ownership of the related real and personal property.
Conversions would generally result in purchase/leaseback transactions with
annual economic benefit to the Company substantially the same as under the
mortgage notes.

The estimated fair value of the Company's mortgage loans at December 31,
1998 is approximately $369,416,000. Fair value is based on the estimates of
management and on rates currently prevailing for comparable loans.

On the basis of contractual provisions of the various agreements, the
principal balances of mortgage notes receivable as of December 31, 1998 are
expected to mature or to be converted to purchase/leaseback transactions
approximately as follows: $10,221,000 in 1999, $28,240,000 in 2000, $14,918,000
in 2001, $63,277,000 in 2002, $41,447,000 in 2003, and $182,352,000 thereafter.

F-10
<PAGE> 31
OMEGA HEALTHCARE INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 4 -- PRINCIPAL HEALTHCARE FINANCE LIMITED AND OMEGA WORLDWIDE, INC.

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. The
Company had invested $30.7 million in Principal at December 31, 1997, 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
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 a separate company, Omega Worldwide,
Inc. (Worldwide) and on April 2, 1998 it 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 shareholders on the basis of
one Worldwide share for every 3.77 common shares of the Company held by
shareholders 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 shareholders
approximates $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. As of December 31, 1998, the Company
holds a $6,226,000 investment in Worldwide, represented by 1,163,000 shares of
common stock and 260,000 shares of Preferred stock. It also holds a $1,629,000
investment in Principal, represented by 990,000 ordinary shares of Principal.

The Company has a guaranteed repayment of $25 million of Worldwide
permitted borrowings pursuant to a revolving credit facility in exchange for a
1% annual fee and an unused fee of 25 basis points. Additionally, the Company
has a Services Agreement with Worldwide which provides for the allocation of
indirect costs incurred by the Company to Worldwide. The allocation of indirect
costs is based on the relationship of assets under the Company's management to
the combined total of those assets and assets under Worldwide's management.
Indirect costs allocated to Worldwide for 1998 were $490,000.

NOTE 5 -- CONCENTRATION OF RISK

As of December 31, 1998, 95% of the Company's real estate investments
related to long-term care facilities. The Company's facilities are located in 29
states and are operated by 30 independent healthcare operating companies.
Approximately 70% of the Company's real estate investments are operated by 6
public companies, including Sun Healthcare Group, Inc. (26.5%), Integrated
Health Services, Inc. (15.8%), Advocat, Inc. (11.5%), Unison Healthcare Corp.
(now known as RainTree Healthcare Corporation) (8.4%), and Mariner Post-Acute
Network, Inc. (formerly Paragon Health Network) (6.0%). Of the remaining 24
operators, none operate investments in facilities representing more than 7.0% of
the total real estate investments.

NOTE 6 -- ADDITIONAL SECURITY

The Company obtains liquidity deposits and letters of credit from
substantially all operators pursuant to leases and mortgages. These generally
represent the initial monthly rental and mortgage interest income for periods
ranging from three to six months with respect to certain of the investments.
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.

F-11
<PAGE> 32
OMEGA HEALTHCARE INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 7 -- BORROWING ARRANGEMENTS

The Company has a $200,000,000 unsecured revolving line of credit facility,
under which borrowings bear interest at LIBOR plus 1.00% or at the prime rate.
Borrowings of $123 million are outstanding at December 31, 1998. The underlying
revolving credit agreement contains various covenants and expires on September
30, 2000. Permitted borrowings under the agreement are based upon levels of
eligible real estate investments. LIBOR based borrowings bear interest at a
weighted-average rate of 6.63% at December 31, 1998 and 6.99% at December 31,
1997.

The following is a summary of long-term borrowings:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Unsecured borrowings:
6.95% Notes due June 2002................................. $125,000
6.95% Notes due August 2007............................... 100,000 $100,000
Unsecured Notes due July 2000............................. 81,381 81,381
Subordinated Convertible Debentures....................... 48,405 62,485
Other..................................................... 5,189 5,324
-------- --------
359,975 249,190
Secured borrowings:
Industrial Development Revenue Bonds...................... 8,795 8,980
Mortgage notes payable to bank............................ 7,635 7,901
HUD loans................................................. 5,354 5,380
-------- --------
21,784 22,261
-------- --------
Total long-term borrowings............................. $381,759 $271,451
======== ========
</TABLE>

On June 10, 1998, the Company completed a $125 million public offering of
unsecured 6.95% notes due 2002. The notes were priced to yield 7.04% with
interest paid semi-annually.

On August 5, 1997, the Company completed a $100 million public offering of
unsecured 6.95% notes due 2007. The notes were priced to yield 6.99% with
interest paid semi-annually.

On January 24, 1996, the Company issued $95 million of 8.5% Subordinated
Convertible Debentures (the Debentures) due 2001. The Debentures are convertible
at any time into shares of Common Stock at a conversion price of $26.962 per
share ($28.625 prior to the Worldwide distribution). The Debentures are
unsecured obligations of the Company and are subordinate in right and payment to
the Company's senior unsecured indebtedness. As of December 31, 1998, there were
1,795,305 shares reserved for issuance under the Debentures.

In 1995, the Company issued 10% and 7.4% Unsecured Notes due July 15, 2000
in exchange for certain secured borrowings. The effective interest rate for the
unsecured notes is 8.8%, with interest-only payments due semi-annually through
July 2000.

Real estate investments with an original cost of approximately $33,367,000
are secured by outstanding secured borrowings totaling $21,784,000 at December
31, 1998. These borrowings are payable in aggregate monthly installments of
approximately $215,000, including interest at rates ranging from 6.5% to 10.0%.

F-12
<PAGE> 33
OMEGA HEALTHCARE INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (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, 1998 and the aggregate due thereafter are
set forth below:

<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1999........................................................ $ 1,116
2000........................................................ 89,109
2001........................................................ 48,977
2002........................................................ 125,620
2003........................................................ 677
Thereafter.................................................. 116,260
--------
$381,759
========
</TABLE>

The estimated fair values of the Company's long-term borrowings is
approximately $367,993,000 at December 31, 1998 and $270,539,000 at December 31,
1997. Fair values are based on the estimates of management and on rates
currently prevailing for comparable loans.

NOTE 8 -- FINANCIAL INSTRUMENTS

At December 31, 1998 and 1997, the carrying amounts and fair values of the
Company's financial instruments are as follows:

<TABLE>
<CAPTION>
1998 1997
------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ----- -------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS:
Cash and short-term investments........... $ 1,877 $ 1,877 $ 500 $ 500
Mortgage notes receivable................. 340,455 369,416 218,353 248,433
Other investments......................... 41,753 41,925 60,520 62,480
-------- -------- -------- --------
Totals................................. $384,085 $413,218 $279,373 $311,413
======== ======== ======== ========
LIABILITIES:
Acquisition line of credit................ $123,000 $123,000 $ 58,300 $ 58,300
6.95% Notes............................... 225,000 215,073 100,000 95,275
Senior Unsecured Notes.................... 81,381 79,220 81,381 83,320
Subordinated Convertible Debentures....... 48,405 46,727 62,485 64,107
Other long-term borrowings................ 26,973 26,973 27,585 27,837
-------- -------- -------- --------
Totals................................. $504,759 $490,993 $329,751 $328,839
======== ======== ======== ========
</TABLE>

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. 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.

F-13
<PAGE> 34
OMEGA HEALTHCARE INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 Retirement Plan for Directors, which
covered all members of the Board of Directors, and the 1993 Deferred
Compensation Plan, which covered all eligible employees and members of the Board
of Directors. The Retirement Plan for Directors and participation by the
directors in the Deferred Compensation Plan was terminated effective December
31, 1997. Accumulated benefits to the Directors under both plans were settled
and paid in 1998.

The Deferred Compensation Plan is an unfunded plan in 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 72,250 units have been awarded and 24,500 are
outstanding at December 31, 1998. 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 $346,000, $667,000 and $654,000 in 1998, 1997 and 1996,
respectively.

NOTE 10 -- SHAREHOLDERS' EQUITY AND STOCK OPTIONS

In January 1998, the Company adopted a stock purchase assistance plan,
whereby the Company extends credit to directors and employees to purchase the
Company's stock through the exercise of stock options. These loans are secured
by the shares acquired and are repayable under full recourse promissory notes.
The plan provides for repayment of a portion of the notes from annual incentive
compensation. The notes are otherwise repayable in their entirety at the
earliest to occur of five years from the date of the note or 90 days after
termination of employment. At December 31, 1998 a total of $2,863,000 is
outstanding, payable by 16 participants who have loans at amounts ranging from
$5,150 to $300,000.

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
("Preferred Stock") at $25 per share. Dividends on the 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 ("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, 1998, the aggregate liquidation
preference of preferred stock issued is $107,500,000.

Under the terms of the 1993 Amended and Restated Stock Option and
Restricted Stock Plan, the Company reserved 1,100,000 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 in 10 to 11 years from the date
of grant, and vest over 3 years. Directors, officers and employees are eligible
to participate in the Plan. Options for 755,816 shares have been granted to
eligible participants. Additionally, 67,344 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 has been recorded as unearned
compensation-restricted stock, with the unamortized balance shown as a separate
component of shareholders' equity. Unearned compensation is amortized to expense
generally over the vesting period, with charges to operations of $612,000,
$402,000, and $240,000 in 1998, 1997, and 1996, respectively.

At December 31, 1998, options currently exercisable (229,427) have a
weighted average exercise price of $28.442. Shares available for future grants
as of December 31, 1998 are 276,840.

F-14
<PAGE> 35
OMEGA HEALTHCARE INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (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 Worldwide.

<TABLE>
<CAPTION>
STOCK OPTIONS
----------------------------------------
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE PRICE
--------- -------------- --------
<S> <C> <C> <C>
Outstanding at January 1, 1996.................. 231,000 $19.866- $25.038 $22.513
Granted during 1996........................... 83,500 25.038- 28.212 25.238
Exercised..................................... (9,499) 19.866- 24.215 22.260
Canceled...................................... (27,001) 22.805- 25.038 24.274
-------- ----------------- -------
Outstanding at December 31, 1996................ 278,000 19.866- 28.212 23.169
Granted during 1997........................... 444,250 29.740- 34.795 32.895
Exercised..................................... (11,524) 19.866- 24.215 22.180
-------- ----------------- -------
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
======== ================= =======
</TABLE>

In 1995, the Financial Accounting Standards Board issued 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 and net earnings per share on a pro forma basis does not differ
significantly from that determined under APB 25. The estimated weighted average
fair value of options granted in 1998 and 1997 was $220,000 and $1,100,000,
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
6.0%; a dividend yield of 6.75%; volatility factors of the expected market price
of the Company's common stock at 15%; and a weighted-average expected life of
the options of 8 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 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.

F-15
<PAGE> 36
OMEGA HEALTHCARE INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 11 -- 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 shareholders. Per share distributions by the Company
were characterized in the following manner for income tax purposes:

<TABLE>
<CAPTION>
COMMON 1998 1997 1996
- ------ ---- ---- ----
<S> <C> <C> <C>
Ordinary income............................................ $2.275 $2.425 $2.232
Return of capital.......................................... 0.191 0.155 0.248
Long-term capital gain..................................... 0.214 -- --
------- ------ ------
Total dividends paid.................................. $2.680 $2.580 $2.480
======= ====== ======
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 $1.156 $ --
======= ====== ======
SERIES B PREFERRED
- -----------------------------------------------------------
Ordinary income............................................ $1.078 $ -- $ --
======= ====== ======
</TABLE>

NOTE 12 -- 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:

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Increase (decrease) in cash from changes in operating
assets and liabilities:
Operating assets, including $2,986 transferred to
assets held for sale in 1998........................ $(8,183) $(4,361) $ (211)
Accrued interest....................................... (70) 1,431 5,462
Other liabilities...................................... 4,273 368 646
------- ------- -------
$(3,980) $(2,562) $ 5,897
======= ======= =======
Other non-cash investing and financing transactions:
Acquisition of real estate:
Value of real estate acquired....................... $ 283 $ 2,430
Common stock issued................................. (283) (2,430)
Common stock issued for conversion of debentures....... 13,862 31,648 $ 182
Interest paid during the period.......................... 30,888 22,122 13,939
</TABLE>

NOTE 13 -- 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

F-16
<PAGE> 37
OMEGA HEALTHCARE INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

NOTE 14 -- COMMITMENTS

The Company has commitments, subject to certain conditions, to provide
additional financing totaling approximately $26 million as of December 31, 1998.

NOTE 15 -- SUBSEQUENT EVENTS

On January 14, 1999, the Securities and Exchange Commission declared
effective the Company's shelf registration statement on form S-3. The
registration statement permits the issuance from time to time of up to $300
million of common stock, unspecified debt, preferred stock and convertible
securities.

On January 18, 1999, the Company completed a $16.2 million
purchase/leaseback transaction with TLC Health Care, Inc. ("TLC"), which
involved four nursing home facilities containing 417 licensed nursing beds in
Illinois, Missouri and Ohio to affiliates of TLC. Simultaneously, the Company
made a $9.6 million mortgage loan to TLC secured by two facilities that contain
203 beds.

A quarterly dividend of $.70 per common share was declared by the Board of
Directors on January 19, 1999, payable on February 15, 1999 to shareholders of
record on January 29, 1999. In addition, the Board declared regular quarterly
dividends of $.578 per share and $.539 per share to be paid on February 15, 1999
to Series A and Series B Cumulative Preferred shareholders of record on January
29, 1999, respectively.

As of January 31, 1999, the bankruptcy court confirmed a plan of
reorganization ("Plan") of RainTree Healthcare Corporation ("RainTree"),
formerly known as Unison Healthcare Corporation. Pursuant to the Plan, all
amounts previously owing by RainTree to the Company have been paid. As part of
the Plan, the Company agreed to terminate its lease with RainTree as to six
facilities located in Indiana in which the Company's investment totals $12.2
million. In exchange for terminating its lease of these facilities, the Company
received $1 million in cash, a $3 million secured note and facilities available
for lease with a value exceeding $9 million. The Company's leases of other
facilities with Unison were ratified and confirmed with no change in rents
payable. Pursuant to the Plan, the Company completed a foreclosure of the
interest of BritWill Investments Texas, Ltd ("Brit Texas") in three facilities
located in Texas, which were leased by BritTexas to RainTree and secured by a
mortgage from the Company with a balance of $9.2 million. These facilities have
been leased directly to RainTree at an initial annual rent of $1,183,000. The
Company also purchased 7 facilities located in Colorado and Arizona from Unison
for $38.2 million, and leased these facilities back for an initial rent of
$3,629,000 per year. All leases with RainTree have been combined into a single
master lease with a 14-year term expiring in 2013. RainTree has an option to
renew the master lease only for all of the facilities for one 14-year renewal
period.

F-17
<PAGE> 38

SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION
OMEGA HEALTHCARE INVESTORS, INC.
DECEMBER 31, 1998
<TABLE>
<CAPTION>
GROSS AMOUNT AT
WHICH CARRIED AT
CLOSE OF PERIOD(5)
INITIAL COST ------------------
TO COMPANY COST CAPITALIZED
------------ SUBSEQUENT TO
ACQUISITION BUILDINGS
BUILDINGS ----------------------- AND LAND
AND LAND CARRYING IMPROVEMENTS ACCUMULATED
DESCRIPTION(1) ENCUMBRANCES IMPROVEMENTS IMPROVEMENTS COSTS TOTAL DEPRECIATION(6)
-------------- ------------ ------------ ------------ -------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Sun Healthcare Group, Inc.:
Alabama (LTC).................... $23,584,957 $ 23,584,957 $ 1,188,152
California (LTC, RH)............. 65,912,924 65,912,924 2,103,442
Florida (LTC).................... 10,796,688 10,796,688 543,924
Florida (LTC).................... 10,700,000 10,700,000 564,722
Idaho (LTC)...................... 600,000 600,000 31,667
Illinois (LTC)................... 4,900,000 4,900,000 362,053
Illinois (LTC)................... 3,942,726 3,942,726 198,630
Indiana (LTC).................... 3,000,000 3,000,000 221,665
Iowa (LTC)....................... 2,700,000 2,700,000 199,499
Kentucky (LTC)................... 10,000,000 10,000,000 1,421,061
Louisiana (LTC).................. 4,602,574 4,602,574 231,872
Massachusetts (LTC).............. 8,300,000 8,300,000 438,055
North Carolina (LTC)............. 19,970,418 19,970,418 2,696,992
North Carolina (LTC)............. 2,739,021 2,739,021 92,469
Ohio (LTC)....................... 11,884,567 11,884,567 384,008
Tennessee (LTC).................. 7,942,374 7,942,374 1,070,386
Texas (LTC)...................... 7,100,000 7,100,000 524,607
Texas (LTC)...................... 9,415,056 9,415,056 474,319
Washington (LTC)................. 5,900,000 5,900,000 311,388
West Virginia (LTC).............. 24,793,444 24,793,444 766,274
------------ ------------ -----------
238,784,749 238,784,749 13,825,185
Integrated Health Services, Inc:
Florida (LTC).................... 10,000,000 10,000,000 275,884
Florida (LTC).................... 29,000,000 29,000,000 626,136
Illinois (LTC)................... 14,700,000 14,700,000 405,549
New Hampshire (LTC).............. 5,800,000 5,800,000 160,013
Ohio (LTC)....................... 16,000,000 16,000,000 345,455
Pennsylvania (LTC)............... 14,400,000 14,400,000 397,273
Pennsylvania (LTC)............... 5,500,000 5,500,000 118,750
Washington (LTC)................. 10,000,000 10,000,000 1,545,833
------------ ------------ -----------
105,400,000 105,400,000 3,874,893
Advocat, Inc.:
Alabama (LTC).................... 11,638,797 11,638,797 2,262,555
Arkansas (LTC)................... 37,887,832 37,887,832 7,392,359
Kentucky (LTC)................... (3) 16,149,775 1,816,000 17,965,775 2,358,029
Ohio (LTC)....................... 5,854,186 5,854,186 613,245
Tennessee (LTC).................. (2) 9,542,121 9,542,121 1,861,750
West Virginia (LTC).............. 5,283,525 502,338 5,785,863 627,351
------------ ---------- ------------ -----------
86,356,236 2,318,338 88,674,574 15,115,289
Unison Healthcare Corp:
Arizona (LTC).................... 24,029,032 24,029,032 0
Colorado (LTC)................... 14,170,968 14,170,968 0
Indiana (LTC).................... 19,760,000 823,839 20,583,839 3,722,011
Texas (LTC)...................... 4,560,000 4,560,000 520,042
Texas (LTC)...................... 9,250,000 138,515 9,388,515 1,165,429
------------ ---------- ------------ -----------
71,770,000 962,354 72,732,354 5,407,482
Alden Management Services, Inc.:
Illinois......................... 31,000,000 23,937 31,023,937 4,344,075
The Graduate Hospital:
Pennsylvania (MOB)............... 30,031,250 30,031,250 5,649,416

LIFE ON WHICH
DEPRECIATION
IN LATEST
DATE OF DATE INCOME STATEMENTS
DESCRIPTION(1) RENOVATION ACQUIRED IS COMPUTED
-------------- ---------- -------- -----------------
<S> <C> <C> <C>
Sun Healthcare Group, Inc.: 1964-1995
Alabama (LTC).................... March 31, 1997 33 years
California (LTC, RH)............. October 8, 1997 33 years
Florida (LTC).................... March 31, 1997 33 years
Florida (LTC).................... February 28, 1997 33 years
Idaho (LTC)...................... February 28, 1997 33 years
Illinois (LTC)................... August 30, 1996 30 years
Illinois (LTC)................... March 31, 1997 33 years
Indiana (LTC).................... August 30, 1996 30 years
Iowa (LTC)....................... August 30, 1996 30 years
Kentucky (LTC)................... September 30, 1994 30 years
Louisiana (LTC).................. March 31, 1997 33 years
Massachusetts (LTC).............. February 28, 1997 33 years
North Carolina (LTC)............. June 4, 1994 39 years
North Carolina (LTC)............. October 8, 1997 33 years
Ohio (LTC)....................... October 8, 1997 33 years
Tennessee (LTC).................. September 30, 1994 30 years
Texas (LTC)...................... August 30, 1996 30 years
Texas (LTC)...................... March 31, 1997 33 years
Washington (LTC)................. March 31, 1997 33 years
West Virginia (LTC).............. October 8, 1997 33 years
Integrated Health Services, Inc: 1979-1993
Florida (LTC).................... January 13, 1998 33 years
Florida (LTC).................... March 31, 1998 33 years
Illinois (LTC)................... January 13, 1998 33 years
New Hampshire (LTC).............. January 13, 1998 33 years
Ohio (LTC)....................... March 31, 1998 33 years
Pennsylvania (LTC)............... January 13, 1998 33 years
Pennsylvania (LTC)............... March 31, 1998 33 years
Washington (LTC)................. September 1, 1996 20 years
Advocat, Inc.: 1972-1994
Alabama (LTC).................... August 14, 1992 31.5 years
Arkansas (LTC)................... August 14, 1992 31.5 years
Kentucky (LTC)................... July 1, 1994 33 years
Ohio (LTC)....................... July 1, 1994 33 years
Tennessee (LTC).................. August 14, 1992 31.5 years
West Virginia (LTC).............. July 1, 1994 33 years
Unison Healthcare Corp: 1980-1994
Arizona (LTC).................... December 31, 1998 33 years
Colorado (LTC)................... December 31, 1998 33 years
Indiana (LTC).................... December 23, 1992 31.5 years
Texas (LTC)...................... December 1, 1993 39 years
Texas (LTC)...................... December 1, 1993 39 years
Alden Management Services, Inc.: 1978
Illinois......................... September 30, 1994 30 years
The Graduate Hospital:
Pennsylvania (MOB)............... October 28, 1993 27.5 years
</TABLE>

F-18
<PAGE> 39
<TABLE>
<CAPTION>
GROSS AMOUNT AT
WHICH CARRIED AT
CLOSE OF
PERIOD(5)
INITIAL COST TO ----------------
COMPANY COST CAPITALIZED
--------------- SUBSEQUENT TO
ACQUISITION BUILDINGS
BUILDINGS ----------------------- AND LAND
AND LAND CARRYING IMPROVEMENTS ACCUMULATED
DESCRIPTION(1) ENCUMBRANCES IMPROVEMENTS IMPROVEMENTS COSTS TOTAL DEPRECIATION(6)
-------------- ------------ ------------ ------------ -------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Res-Care, Inc.:
Indiana (LTC).................. 15,261,290 15,261,290 2,243,893
Kentucky (LTC)................. 8,029,033 8,029,033 1,166,084
------------ ------------ -----------
23,290,323 23,290,323 3,409,977
USA Healthcare:
Iowa(LTC)...................... 14,344,797 14,344,797 435,572
Senior Care Properties, Inc.:
Texas (LTC).................... 5,200,000 5,200,000 590,768
Texas (LTC).................... 6,557,143 6,557,143 251,688
Texas (LTC).................... 2,442,857 2,442,857 58,604
------------ ------------ -----------
14,200,000 14,200,000 901,060
Hunter Management Group, Inc.:
Florida (LTC).................. 8,150,000 866 8,150,866 980,810
Meadowbrook Healthcare of North
Carolina:
North Carolina (AL)............ (4) 7,500,000 7,500,000 1,031,663
Liberty Assisted Living Center:
Florida (AL)................... 5,994,730 760 5,995,490 1,030,551
Kansas & Missouri, Inc.:
Kansas (LTC)................... 2,500,000 2,500,000 349,198
Tutera Evergreen, LLC.:
Colorado (LTC)................. 750,000 750,000 30,682
------------ ---------- ------------ -----------
$640,072,085 $3,306,255 $0 $643,378,340 $56,385,853
============ ========== == ============ ===========

LIFE ON WHICH
DEPRECIATION
IN LATEST
DATE OF DATE INCOME STATEMENTS
DESCRIPTION(1) RENOVATION ACQUIRED IS COMPUTED
-------------- ---------- -------- -----------------
<S> <C> <C> <C>
Res-Care, Inc.: 1970
Indiana (LTC).................. September 30, 1994 25-30 years
Kentucky (LTC)................. September 30, 1994 30 years
USA Healthcare: 1974-1997
Iowa(LTC)...................... October 7, 1997 33 years
Senior Care Properties, Inc.: 1994-1996
Texas (LTC).................... January 1, 1995 31.5 years
Texas (LTC).................... September 5, 1997 33 years
Texas (LTC).................... March 4, 1998 33 years
Hunter Management Group, Inc.: 1984
Florida (LTC).................. September 13, 1993 39 years
Meadowbrook Healthcare of North
Carolina:
North Carolina (AL)............ September 30, 1994 31.5 years
Liberty Assisted Living Center:
Florida (AL)................... September 30, 1994 27 years
Kansas & Missouri, Inc.:
Kansas (LTC)................... September 30, 1994 30 years
Tutera Evergreen, LLC.: 1976
Colorado (LTC)................. June 3, 1994 30 years
</TABLE>

- -------------------------
(1) All of the real estate included in this schedule are being used in either
the operation of long term care facilities (LTC), rehabilitation hospital
(RH) or medical office buildings (MOB) located in the states indicated.
(2) Certain of the real estate indicated are security for Industrial Development
Revenue bonds totaling $8,795,000 at December 31, 1998.
(3) Certain of the real estate indicated are security for notes payable totaling
$7,635,282 at December 31, 1998.
(4) Certain of the real estate indicated are security for HUD loans totaling
$5,353,285 at December 31, 1998.

<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
(5) Balance at beginning of period.......................... $357,556,246 $376,177,045 $561,054,194
Additions during period:
Acquisitions........................................... 17,700,000 183,229,915 157,474,363
Improvements and other................................. 920,799 1,647,234 --
Disposals and transfer to assets held for sale........... -- -- (75,150,217)
------------ ------------ ------------
Balance at close of period............................... $376,177,045 $561,054,194 $643,378,340
============ ============ ============
</TABLE>

<TABLE>
<CAPTION>
1996 1997 1998
----------- ----------- ------------
<S> <C> <C> <C>
(6) Balance at beginning of period.......................... $20,836,153 $32,884,104 $ 48,147,275
Additions during period:
Provisions for depreciation............................ 12,047,951 15,263,171 19,749,781
Dispositions........................................... -- -- (11,511,203)
----------- ----------- ------------
Balance at close of period............................... $32,884,104 $48,147,275 $ 56,385,853
=========== =========== ============
</TABLE>

F-19
<PAGE> 40

SCHEDULE IV MORTGAGE LOANS ON REAL ESTATE
OMEGA HEALTHCARE INVESTORS, INC.
DECEMBER 31, 1998
<TABLE>
<CAPTION>

FINAL
INTEREST MATURITY
DESCRIPTION(1) RATE DATE PERIODIC PAYMENT TERMS
-------------- -------- -------- ----------------------
<S> <C> <C> <C>
Michigan (13 LTC facilities)... 15.84% August 13, 2007 Interest payable at 15.84% payable monthly
North Carolina (3 LTC
facilities)................... Deferred interest at 1% accrues monthly and is
payable at maturity of the note
Quarterly amortization of $1,470,000 commencing in
the year 2002
Florida (3 LTC facilities)..... 13.53% August 4, 2012 Interest payable monthly
Quarterly amortization of $50,000 commencing in the
year 2002
Florida (4 LTC facilities)..... 11.50% February 28, 2010 Interest plus $1,850 of principal payable monthly
Florida (2 LTC facilities)..... 11.50% June 4, 2006 Interest plus $1,500 of principal payable monthly
Maine (11 LTC facilities)
Massachusetts (1 LTC
facility)..................... 11.87% September 30, 2000 Interest payable monthly
Quarterly payment of $37,500 commencing in 1996
Texas (6 LTC facilities)....... 12.44% December 31, 2005 Interest payable monthly
Annual amortization of $60,000 commencing in years
1997-1999 and $120,000 commencing in year 2000
Kentucky (3 LTC facilities).... 10.92% July 31, 2011 Interest payable monthly
Texas (8 LTC facilities)....... 10.75% various Interest plus $86,000 of principal payable monthly
Tennessee (2 LTC facilities)... 15.23% April 29, 2001 Interest payable monthly
Tennessee (2 LTC facilities)... 13.50% August 1, 2016 Interest payable monthly
Ohio (7 LTC facilities)........ 11.01% January 1, 2015 Interest plus $37,450 of principal payable monthly
Massachusetts (6 LTC
facilities)................... 14.00% December 31, 1999 Interest payable monthly
Connecticut (5 LTC
facilities)................... 10.25% February 1, 2004 Interest payable monthly
Massachusetts (7 LTC
facilities)
Georgia (2 LTC facilities)..... 9.50% March 13, 2008 Interest payable monthly
Florida (5 LTC facilities)..... 9.95% December 3, 2003 Interest payable monthly
Texas (2 LTC facilities)
Other Mortgage Notes:
Various........................ 9.00% to 13.50% 2001 to 2010 Interest payable monthly

<CAPTION>
PRINCIPAL AMOUNT
ORIGINAL OF LOANS SUBJECT
FACE CARRYING TO DELINQUENT
PRIOR AMOUNT OF AMOUNT OF PRINCIPAL OR
DESCRIPTION(1) LIENS MORTGAGES MORTGAGES(2)(3) INTEREST
-------------- ----- --------- --------------- ----------------
<S> <C> <C> <C> <C>
Michigan (13 LTC facilities)... None $ 58,800,000 $ 58,800,000 None
North Carolina (3 LTC
facilities)...................
Florida (3 LTC facilities)..... None 7,031,250 7,031,250 None
Florida (4 LTC facilities)..... None 12,891,500 12,847,031 None
Florida (2 LTC facilities)..... None 11,090,000 11,053,294 None
Maine (11 LTC facilities)
Massachusetts (1 LTC
facility)..................... None 26,500,000 26,002,744 None
Texas (6 LTC facilities)....... None 10,200,000 10,074,337 None
Kentucky (3 LTC facilities).... None 10,250,000 10,250,000 None
Texas (8 LTC facilities)....... None 10,370,450 8,095,933 None
Tennessee (2 LTC facilities)... None 8,932,000 8,932,000 None
Tennessee (2 LTC facilities)... None 12,650,000 12,627,634 None
Ohio (7 LTC facilities)........ None 20,031,888 18,738,359 None
Massachusetts (6 LTC
facilities)................... None 6,000,000 6,000,000 None
Connecticut (5 LTC
facilities)................... None 67,000,000 67,000,000 None
Massachusetts (7 LTC
facilities)
Georgia (2 LTC facilities)..... None 12,000,000 12,000,000 None
Florida (5 LTC facilities)..... None 37,500,000 37,500,000 None
Texas (2 LTC facilities)
Other Mortgage Notes:
Various........................ None 36,188,898 33,502,750 None
------------ ------------
$347,435,986 $340,455,332
============ ============
</TABLE>

- -------------------------
(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.

<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C> <C>
(3) Balance at beginning of period................... $158,289,097 $217,474,072 $218,353,007
Additions during period -- Placements............ 66,222,620 11,155,491 125,850,000
Deductions during period -- Collection of
principal........................................ (956,646) (13,365,432) (3,747,675)
Conversion to purchase leaseback/other changes... (6,080,999) 3,088,876 0
------------ ------------ ------------
Balance at close of period....................... $217,474,072 $218,353,007 $340,455,332
============ ============ ============
</TABLE>

F-20
<PAGE> 41

SIGNATURES

Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

OMEGA HEALTHCARE INVESTORS, INC.

By: /s/ DAVID A. STOVER

------------------------------------
David A. Stover
Chief Financial Officer
Dated: February 12, 1999

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities on the date indicated.

<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
PRINCIPAL EXECUTIVE OFFICER

/s/ ESSEL W. BAILEY, JR. Chairman, President, Chief February 12, 1999
- ------------------------------------------------ Executive Officer and Director
Essel W. Bailey, Jr.

PRINCIPAL FINANCIAL OFFICER and
PRINCIPAL ACCOUNTING OFFICER

/s/ DAVID A. STOVER Vice President, Chief Financial February 12, 1999
- ------------------------------------------------ Officer and Chief Accounting
David A. Stover Officer

DIRECTORS

/s/ MARTHA A. DARLING Director February 12, 1999
- ------------------------------------------------
Martha A. Darling

/s/ JAMES A. EDEN Director February 12, 1999
- ------------------------------------------------
James A. Eden

/s/ THOMAS F. FRANKE Director February 12, 1999
- ------------------------------------------------
Thomas F. Franke

/s/ HENRY H. GREER Director February 12, 1999
- ------------------------------------------------
Henry H. Greer

/s/ HAROLD J. KLOOSTERMAN Director February 12, 1999
- ------------------------------------------------
Harold J. Kloosterman

/s/ BERNARD J. KORMAN Director February 12, 1999
- ------------------------------------------------
Bernard J. Korman

/s/ EDWARD LOWENTHAL Director February 12, 1999
- ------------------------------------------------
Edward Lowenthal

/s/ ROBERT L. PARKER Director February 12, 1999
- ------------------------------------------------
Robert L. Parker
</TABLE>
<PAGE> 42

INDEX TO EXHIBITS

<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGES
- ------- ----------- ------------
<C> <S> <C>
3.1 Articles of Incorporation, as amended (Incorporated by
reference to the Registrant's Form 10-Q for the quarter
ended March 31, 1995).......................................
3.2 Amended and Restated Bylaws, as amended July 7,
1998(Incorporated by reference to Exhibit 3 to the Company's
Form 10-Q for the quarterly period ended September 30,
1998).......................................................
4.1 Form of Convertible Debenture (Incorporated by reference to
Exhibit 4.2 to the Company's Form S-3 dated February 3,
1997).......................................................
4.2 Form of Indenture (Incorporated by reference to Exhibit 4.2
to the Company's Form S-3 dated February 3, 1997)...........
4.3 Indenture dated December 27, 1993 (Incorporated by reference
to Exhibit 4.2 to the Company's Form S-3 dated December 29,
1993).......................................................
4.4 First Supplemental Indenture dated January 23, 1996
(Incorporated by reference to Exhibit 4 to the Company's
Form 8-K dated January 19, 1996)............................
4.5 1993 Stock Option and Restricted Stock Plan, as amended and
restated (Incorporated by reference to Exhibit A to the
Company's Proxy Statement dated April 6, 1998)..............
4.6 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)....
4.7 Articles Supplementary for Series B Preferred Stock
(Incorporated by reference to Exhibit 4 to the Company's
Form 8-K dated April 27, 1998)..............................
4.8 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)....................................................
8 Opinion of Counsel to the Registrant regarding tax
consequences. (Incorporated by reference to Exhibit 8 to the
Company's Registration Statement (#333-69675) on Form S-3
effective January 14, 1999).................................
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 Purchase 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 Second Amended and Restated Loan Agreement by and among
Omega Healthcare Investors, Inc., the banks signatory hereto
and Fleet Bank, N.A., as agent for such banks, dated
September 30, 1997 (Incorporated by reference to Exhibit 10
to the Company's Form 8-K dated November 10, 1997)..........
10.6 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)....................
</TABLE>

I-1
<PAGE> 43

<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGES
- ------- ----------- ------------
<C> <S> <C>
11 Statement re: computation of per share earnings*............
12 Ratio of Earnings to Combined Fixed Charges and Preferred
Stock Dividends*............................................
21 Subsidiaries of the Registrant*.............................
23 Consent of Ernst & Young LLP*
27 Financial Data Schedule*
</TABLE>

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

* Exhibits which are filed herewith on the indicated sequentially numbered page.

I-2

<PAGE> 1

EXHIBIT 11

STATEMENT RE: COMPUTATION OF PER-SHARE EARNINGS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net earnings available to common before gain on asset
dispositions........................................... $41,777 $41,305 $34,590
======= ======= =======
Net earnings.............................................. $68,015 $41,305 $34,590
======= ======= =======
Average shares outstanding................................ 20,034 19,085 17,196
Basic per-share amounts:
Net earnings.............................................. $ 3.39 $ 2.16 $ 2.01
======= ======= =======
Net earnings before gain on asset dispositions............ $ 2.09 $ 2.16 $ 2.01
======= ======= =======
Average shares outstanding................................ 20,034 19,085 17,196
Stock option incremental shares........................... 7 52 44
------- ------- -------
Average shares outstanding, diluted.................... 20,041 19,137 17,240
======= ======= =======
Diluted per-share amounts:
Net earnings.............................................. $ 3.39 $ 2.16 $ 2.01
======= ======= =======
Net earnings before asset dispositions.................... $ 2.08 $ 2.16 $ 2.01
======= ======= =======
Diluted assuming conversion of debt:
Net earnings before gain on asset dispositions............ $41,777 $41,305 $34,590
Add interest expense associated with Convertible
Debentures............................................. 4,714 6,279 7,778
------- ------- -------
Total............................................. $46,491 $47,584 $42,368
======= ======= =======
Average shares outstanding................................ 20,034 19,085 17,196
Assumed conversion of debentures.......................... 1,899 2,583 3,095
Stock option incremental shares........................... 7 52 72
------- ------- -------
Total............................................. 21,940 21,720 20,363
======= ======= =======
Per-share amount (antidilutive)........................... $ 2.12 $ 2.19 $ 2.08
======= ======= =======
</TABLE>

<PAGE> 1

EXHIBIT 12

RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS (1)

The ratio of earnings to combined fixed charges and preferred stock
dividends are as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Ratio of Earnings to Combined Fixed Charges and
Preferred Stock Dividends (1)......................... 2.04X 2.48X 2.66X 2.92X 2.69X
</TABLE>

- -------------------------
(1) For purposes of calculating the ratio of earnings to combined fixed charges
and preferred stock dividends, net earnings (before non-recurring items) has
been added to fixed charges and that sum has been divided by such fixed
charges. Fixed charges consist of interest expense and amortization of
deferred financing costs and for the years ended December 31, 1997 and 1998,
cumulative preferred stock dividends are included starting as of the date of
issuance of the Series A Cumulative Preferred Stock and Series B Cumulative
Preferred Stock.

<PAGE> 1

EXHIBIT 21

LIST OF SUBSIDIARIES

OMEGA HEALTHCARE INVESTORS, INC.

<TABLE>
<CAPTION>
JURISDICTION OF
NAMES INCORPORATION
----- ---------------
<S> <C>
Bayside Street, Inc. ....................................... Maryland
Delta Investors I, LLC ..................................... Maryland
Delta Investors II, LLC .................................... Maryland
Jefferson Clark, Inc. ...................................... Maryland
OHI (Clemmons), Inc. ....................................... North Carolina
OHI (Florida), Inc. ........................................ Florida
OHI (Greensboro), Inc. ..................................... North Carolina
OHI (Illinois), Inc. ....................................... Illinois
OHI (Iowa), Inc. ........................................... Iowa
OHI (Kansas), Inc. ......................................... Kansas
OS Leasing ................................................. Kentucky
Sterling Acquisition Corp. ................................. Kentucky
Sterling Acquisition Corp. II .............................. Kentucky
</TABLE>

<PAGE> 1

EXHIBIT 23

CONSENT OF INDEPENDENT AUDITORS

We consent to the incorporation by reference in (1) Registration Statement
No. 33-308415 on Form S-3 dated July 19, 1996 related to the Dividend
Reinvestment and Common Stock Purchase Plan, (2) Shelf Registration Statement
No. 33-32119 on Form S-4 dated February 4, 1997, (3) Registration Statement No.
333-69807 dated December 29, 1998 related to the 1993 Amended and Restated Stock
Option and Restricted Stock Plan, and (4) Shelf Registration Statement No.
333-69675 on Form S-3 dated January 14, 1999 of our report dated January 22,
1999 (except for Note 15, as to which the date is January 31, 1999) with respect
to the consolidated financial statements and schedules of Omega Healthcare
Investors, Inc. included in this Annual Report (Form 10-K) for the year ended
December 31, 1998.

/s/ Ernst & Young LLP

Detroit, Michigan
February 12, 1999

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FILED AS PART OF THE ANNUAL REPORT ON FORM
10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH INFORMATION IN FORM
10-K.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,877
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,032,645
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
107,500
<COMMON> 2,006
<OTHER-SE> 396,256
<TOTAL-LIABILITY-AND-EQUITY> 1,032,645
<SALES> 0
<TOTAL-REVENUES> 108,738
<CGS> 0
<TOTAL-COSTS> 58,767
<OTHER-EXPENSES> 5,365
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 31,860
<INCOME-PRETAX> 68,015
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 68,015
<EPS-PRIMARY> 3.39
<EPS-DILUTED> 3.39

</TABLE>