Certain information contained in this report constitutes "Forward-Looking Statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which can be identified by the use of forward-looking terminology such as "may," "will," "would," "intend," "could," "believe," "expect," "anticipate," "estimate" or "continue" or the negative thereof or other variations thereon or comparable terminology. The Company cautions readers that forward-looking statements, including, without limitation, those relating to the Company's future business prospects, revenues, working capital, liquidity, capital needs, interest costs, and income, are subject to certain risks and uncertainties that could cause actual results to differ materially from those indicated in the forward-looking statements, due to several important factors herein identified. These factors include the Company's ability to find suitable acquisition properties at favorable terms, financing, licensing, business conditions, risks of downturn in economic conditions generally, satisfaction of closing conditions such as those pertaining to licensure, availability of insurance at commercially reasonable rates, and changes in accounting principles and interpretations, among others, and other risks and factors identified from time to time in the Company's reports filed with the SEC.

Overview

The following discussion and analysis addresses (i) the Company's results of operations on a historical consolidated basis for the years ended December 31, 2008, 2007 and 2006, and (ii) liquidity and capital resources of the Company and should be read in conjunction with the Company's historical consolidated financial statements and the selected financial data contained elsewhere in this report.

The Company is one of the largest operators of senior living communities in the United States. The Company's operating strategy is to provide quality senior living services to its residents, while achieving and sustaining a strong, competitive position within its chosen markets, as well as to continue to enhance the performance of its operations. The Company provides senior living services to the elderly, including independent living, assisted living, skilled nursing and home care services.

As of December 31, 2008, the Company operated 64 senior living communities in 23 states with an aggregate capacity of approximately 9,500 residents, including 38 senior living communities which the Company either owned or in which the Company had an ownership interest, 25 senior living communities that the Company leased and one senior living community it managed for a third party. As of December 31, 2008, the Company also operated one home care agency.

Significant Financial and Operational Highlights

The Company primarily derives its revenue by providing senior living and healthcare services to the elderly and managing senior living communities for other healthcare providers and under joint venture arrangements. Despite unfavorable economic conditions in the housing, financial and credit markets and a weakening overall economy during 2008, the Company was able to grow total revenue approximately 2.2%, of which approximately 89.0% of these revenues consisted of senior living and healthcare services.

During 2008, the Company sold two parcels of land, one in Carmichael, CA, and the other in Lincoln, NE, for approximately $1.4 million, net of closing costs, resulting in a gain on sale of approximately $0.7 million.

During 2008, total expenses increased $7.2 million primarily due to the addition of a new senior living community, labor and benefit cost adjustments, retirement and separation benefits paid to development department employees, write-offs of accumulated due diligence and expansion costs for projects no longer being pursued, increases in facility lease expenses combined with increases in contingent rent on certain leases, and increased depreciation and amortization for consolidated communities and leasehold improvements.

Despite the increases that occurred in expenses during fiscal 2008, the Company was able to repay $10.0 million of its outstanding debt obligations, further reducing its exposure to the volatility in the credit markets. These repayments combined with the note refinancings that occurred in fiscal 2007 and 2006 to fixed rate debt enabled the Company to reduce interest expense by approximately $0.5 million in fiscal 2008.

During 2008, the Company entered into a lease on the Whitley Place community located in Keller, TX. The Company has leased this community for a ten-year term with two five-year renewal options. Additionally, effective December 15, 2008, the Mountain Creek management contract was terminated by CGIM.

During 2008, the Company announced that a Special Committee of its Board of Directors ("the Special Committee") had engaged Banc of America Securities LLC ("BAS") as its financial advisor to assist the Special Committee in exploring and considering a range of strategic alternatives for the Company that would enhance shareholder value. BAS is a nationally recognized investment banking firm with expertise in the senior living industry and is prominent in both healthcare and real estate. The strategic alternatives explored by BAS included the following considerations: (A) a sale of the Company for cash or stock, (B) a going private transaction, (C) a restructuring of the Company's portfolio, which may include sales and/or acquisitions of assets, (D) a merger with a private company in which the Company's stockholders may or may not retain a majority equity interest in the surviving entity, (E) the institution of a share buyback or dividend (recurring or extraordinary), (F) the execution of the Company's existing business plan without alteration, and (G) any other alternative or combination of alternatives that has the potential to enhance shareholder value. Subsequent to December 31, 2008, the Special Committee recommended, and the Company's Board of Directors approved, the implementation of a stock repurchase program of up to $10 million of the Company's common stock. Under the stock repurchase program, the Company is authorized to repurchase shares of its common stock in the open market and in privately negotiated transactions. The timing and extent to which the Company may repurchase its shares of common stock will depend upon market conditions and other corporate considerations. The Company anticipates that it will finance the stock repurchase program with available cash. The strategic alternatives review process has not led to a material modification in the operational direction of the Company or a change in management style or intent.

The senior living industry has been negatively impacted by unfavorable conditions in the housing, credit and financial markets and by deteriorating conditions in the overall economy, generally resulting in lower than anticipated occupancy rates. During 2008, in response to these conditions, the Company announced that it plans to suspend new development activities until economic conditions improve following the opening of two senior housing communities in the first half of 2009. Consequently, the Company is taking steps to reduce overhead in conjunction with these revised plans and has eliminated three related positions in the development area as of December 31, 2008. While the Company is excluding development from its 2009 Business Plan, it continues to focus on occupancy increases, improvement in rental rates, expense management and growth in net operating income per unit; increasing levels of care through conversions; and other opportunities to enhance shareholder value. Additionally, this will provide an opportunity for the Company to shift its focus to renovating and updating the amenities at existing senior living communities currently owned and operated.

Management Agreements

As of December 31, 2008, the Company managed 13 communities owned by joint ventures in which the Company has a minority interest and one community owned by a third party. For communities owned by joint ventures and third parties, the Company typically receives a management fee of 5% of gross revenues. In addition, certain of the contracts provide for supplemental incentive fees that vary by contract based upon the financial performance of the managed community.

The Company believes that the factors affecting the financial performance of communities managed under contracts with third parties do not vary substantially from the factors affecting the performance of owned and leased communities, although there are different business risks associated with these activities.

The Company's third-party management fees are primarily based on a percentage of gross revenues. As a result, the cash flow and profitability of such contracts to the Company are more dependent on the revenues generated by such communities and less dependent on net cash flow than for owned communities. Further, the Company is not responsible for capital investments in managed communities. The management contracts are generally terminable only for cause and upon the sale of a community, subject to the Company's rights to offer to purchase such community.

Lease Transactions

The Company currently leases 25 senior living communities with certain real estate investment trusts ("REITs"). The lease terms are generally for ten years with renewal options for 10-20 years at the Company's option. Under these lease agreements the Company is responsible for all operating costs, maintenance and repairs, insurance and property taxes.

As of December 31, 2008, the Company leased ten senior living facilities (collectively the "Ventas Lease Agreements'), from Ventas Healthcare Properties, Inc. ("Ventas"). The Ventas Lease Agreements each have an initial term of approximately ten years, with two five-year renewal extensions available at the Company's option. The initial lease rate under each of the Ventas Lease Agreements range from 7.75% to 8% and are subject to certain conditional escalation clauses which will be recognized when estimatable or incurred. The initial terms on the Ventas Lease Agreements expire on various dates through January 2018. The Company incurred $2.2 million in lease acquisition costs related to the Ventas Lease Agreements. These deferred lease acquisition costs are being amortized over the initial 10 year lease terms and are included in facility lease expense in the Company's statement of operations. The Company accounts for each of the Ventas Lease Agreements as operating leases.

As of December 31, 2008, the Company leased 15 senior living facilities (collectively the "HCP Lease Agreements"), from HCP, Inc. ("HCP"). The HCP Lease Agreements each have an initial term of ten years, with two ten year renewal extensions available at the Company's option. The initial lease rate under the HCP Lease Agreements range from 7.25% to 8% and are subject to certain conditional escalation clauses, which will be recognized when estimatable or incurred. The initial terms on the HCP Lease Agreements expire on various dates through December 2017. The Company incurred $1.5 million in lease acquisition costs related to the HCP Lease Agreements. These deferred lease acquisition costs are being amortized over the initial 10 year lease terms and are included in facility lease expense in the Company's statement of operations. The Company accounts for each of the HCP Lease Agreements as operating leases.

The following table summarizes each of the Company's lease agreements (dollars in millions):

                                                                                                                             Lease             Deferred
                                        Number of         Value of                                       Initial          Acquisition        Gains/Lease
   Landlord        Date of Lease       Communities       Transaction                Term              Lease Rate(1)        Costs(2)         Concessions(3)

Ventas           September 30, 2005               6     $        84.6             10 years                         8 %   $         1.3     $            4.6
                                                                          (Two five-year renewals)
Ventas            October 18, 2005                1              19.5             10 years                         8 %             0.2                    -
                                                                          (Two five-year renewals)
Ventas             March 31,2006                  1              29.0             10 years                         8 %             0.1                 14.3
                                                                          (Two five-year renewals)
Ventas              June 8, 2006                  1              19.1            9.5 years                         8 %             0.4                    -
                                                                          (Two five-year renewals)
Ventas            January 31, 2008                1               5.0             10 years                      7.75 %             0.2                    -
                                                                          (Two five-year renewals)
HCP                 May 1, 2006                   3              54.0             10 years                         8 %             0.2                 12.8
                                                                          (Two ten-year renewals)
HCP                 May 31, 2006                  6              43.0             10 years                         8 %             0.2                  0.6
                                                                          (Two ten-year renewals)
HCP               December 1, 2006                4              51.0             10 years                         8 %             0.7                    -
                                                                          (Two ten-year renewals)
HCP              December 14, 2006                1              18.0             10 years                      7.75 %             0.3                    -
                                                                          (Two ten-year renewals)
HCP                April 11, 2007                 1               8.0             10 years                      7.25 %             0.1                    -
                                                                          (Two ten-year renewals)

Subtotal                                                                                                                           3.7                 32.3
Accumulated amortization                                                                                                          (1.0 )                  -
Accumulated deferred gain recognized                                                                                                 -                 (9.1 )

Net lease acquisition costs/deferred gains as of December 31, 2008                                                       $         2.7     $           23.2

(1) Initial lease rates are subject to conditional lease escalation provisions as forth in each lease agreement.

(2) Lease acquisition costs are being amortized over the leases' initial term.

(3) Deferred gains of $31.7 million and lease concessions of $0.6 million are being recognized in the Company's statement of operations as a reduction in facility rent expense over the leases' initial term. Lease concessions relate to the HCP transaction on May 31, 2006.

Joint Venture Transactions

Midwest I Transaction

In January 2006, the Company and GE Healthcare formed Midwest I to acquire five senior housing communities from a third party. Midwest I is owned approximately 89% by GE Healthcare and 11% by the Company. As of December 31, 2008, the Company has contributed $2.7 million for its interest in Midwest I. Midwest I paid approximately $46.9 million for the five communities. The five communities comprise 293 assisted living units with a resident capacity of 389. The Company manages the five acquired communities under long-term management agreements with Midwest I. The Company accounts for its investment in Midwest I under the equity method of accounting and the Company recognized earnings in the equity of Midwest I of $0.2 million and $8,000 for fiscal 2008 and 2007, respectively, and a loss in the equity of Midwest I of $9,000 for fiscal 2006. The Company earned $0.5 million in management fees on the Midwest I communities in both fiscal 2008 and 2007 and $0.4 million in management fees on the Midwest I communities in fiscal 2006.

Midwest II Transaction

In August 2006, the Company and GE Healthcare formed Midwest II to acquire three senior housing communities from a third party. Midwest II is owned approximately 85% by GE Healthcare and 15% by the Company. As of December 31, 2008, the Company has contributed $1.6 million for its interest in Midwest II. Midwest II paid approximately $38.2 million for the three communities. The three communities comprise 300 assisted living and memory care units with a resident capacity of 319. The Company manages the three acquired communities under long-term management agreements with Midwest II. The Company accounts for its investment in Midwest II under the equity method of accounting and the Company recognized a loss in the equity of Midwest II of $0.1 million, $0.3 million and $0.1 million for fiscal 2008, 2007 and 2006, respectively. The Company earned $0.5 million in management fees on the Midwest II communities in both fiscal 2008 and 2007 and $0.2 million in management fees on the Midwest I communities in fiscal 2006.

SHPII/CSL Transactions

In November 2004, the Company formed SHPII/CSL with SHPII. Effective as of November 30, 2004, SHPII/CSL acquired the Spring Meadows Communities which have a combined capacity of 698 residents. As of December 31, 2008, the Company has contributed $1.3 million for its interests in SHPII/CSL. The Company manages the Spring Meadows Communities under long-term management contracts with SHPII/CSL. The Company accounts for its investment in SHPII/CSL under the equity method of accounting and the Company recognized earnings in the equity of SHPII/CSL of $0.3 million for both fiscal 2008 and 2007 and $0.1 million for fiscal 2006. The Company earned $1.2 million in management fees on the SHPII/CSL communities in both fiscal 2008 and 2007 and $1.1 million in management fees on the SHPII/CSL communities in fiscal 2006.

SHP III Transactions

In May 2007, the Company and SHPIII entered into SHPIII/CSL Miami to develop a senior housing community in Miamisburg, Ohio. Under the joint venture and related agreements, the Company will earn development and management fees and may receive incentive distributions. The senior housing community consists of 101 independent living units and 45 assisted living units and was opened in August 2008. As of December 31, 2008, the Company has contributed $0.8 million to SHPIII/CSL Miami for its 10% interest. The Company accounts for its investment in SHPIII/CSL Miami under the equity method of accounting and the Company recognized a loss in the equity of SHPIII/CSL Miami of $0.1 million for fiscal 2008. The Company

earned $0.2 million and $0.7 million in development fees from SHPIII/CSL Miami in fiscal 2008 and 2007, respectively. In addition, the Company earned $0.1 million in pre-marketing fees and $0.1 million in management fees on the community in fiscal 2008.

In November 2007, the Company and SHPIII entered into SHPIII/CSL Richmond Heights to develop a senior housing community in Richmond Heights, Ohio. Under the joint venture and related agreements, the Company will earn development and management fees and may receive incentive distributions. The senior housing community will consist of 97 independent living units and 45 assisted living units and is expected to open in the first half of 2009. As of December 31, 2008, the Company has contributed $0.8 million to SHPIII/CSL Richmond Heights for its 10% interest and will account for its investment in SHPIII/CSL Richmond Heights under the equity method of accounting. The Company earned $1.0 million and $0.1 million in development fees from SHPIII/CSL Richmond Heights in fiscal 2008 and 2007, respectively. In addition, the Company earned $0.1 million in pre-marketing fees on the community in fiscal 2008.

In December 2007, the Company and SHPIII entered into SHPIII/CSL Levis Commons to develop a senior housing community near Toledo, Ohio. Under the joint venture and related agreements, the Company will earn development and management fees and may receive incentive distributions. The senior housing community will consist of 101 independent living units and 45 assisted living units and is expected to open in the first half of 2009. As of December 31, 2008, the Company has contributed $0.8 million to SHPIII/CSL Levis Commons for its 10% interest and will account for its investment in SHPIII/CSL Levis Commons under the equity method of accounting. The Company earned $1.1 million and $22,000 in development fees from SHPIII/CSL Levis Commons in fiscal 2008 and 2007, respectively. In addition, the Company earned $0.1 million in pre-marketing fees on the community in fiscal 2008.

CGIM Transaction

In August 2004, the Company acquired from Covenant Group of Texas, Inc. ("Covenant") all of the outstanding stock of Covenant's wholly owned subsidiary, CGIM. The Company paid approximately $2.3 million in cash (including closing costs of approximately $0.1 million) and issued a non-interest bearing note with a fair value of approximately $1.1 million (face amount $1.4 million discounted at 5.7%), subject to various adjustments set forth in the purchase agreement, to acquire all of the outstanding stock of CGIM. The note was due in three installments of approximately $0.3 million, $0.4 million and $0.7 million due on the first, third and fifth anniversaries of the closing, respectively, subject to reduction if the management fees earned from the third party owned communities with various terms are terminated and not replaced by substitute agreements during the period, and certain other adjustments. This acquisition resulted in the Company assuming the management contracts on 14 senior living communities with a combined resident capacity of approximately 1,800 residents. The acquisition was accounted for as a purchase and the entire purchase price of $3.5 million was allocated to management contract rights. The Company's first installment payment under the Covenant note was reduced by $0.2 million under the terms of the stock purchase agreement and the $0.2 million installment reduction was recorded as an adjustment to the purchase price. The second installment, which was due on August 15, 2007, was reduced by $0.4 million, resulting in no amount due to Covenant and a reduction in the Company's note payable to Covenant of approximately $0.3 million, which was reflected as management fee income in the Company's consolidated statement of operations. In addition, under the terms of the purchase agreement, the Company has the right to recapture certain contingent payments made to Covenant if the Company did not receive the required minimum management fee income set forth in the purchase agreement. As a result of these provisions, the Company recorded a receivable and management fee income of approximately $0.4 million. During the fourth quarter of fiscal 2007, Covenant paid this receivable and executed an amendment to the stock purchase agreement releasing the Company from any future obligations under the Company's note payable to Covenant. As a result, the Company recognized additional management fee income of approximately $0.6 million in the fourth quarter of fiscal 2007. As of December 31, 2008, the Company managed one community under the management agreement with CGIM.

BRE/CSL Transactions

In March 2007, the Company received a final distribution from three joint ventures (collectively "BRE/CSL") of $0.4 million relating to the sale of the six communities owned by BRE/CSL to Ventas Healthcare Properties, Inc.

("Ventas"). This distribution resulted in the recognition of an additional gain of $0.4 million, which has been deferred and is being amortized in the Company's statement of operations as a reduction in facility rent expense over the remaining initial lease term.

Community Refinancings and Other Debt Transactions

On December 1, 2008, the Company renewed certain insurance policies and entered into a finance agreement totaling $2.7 million. The finance agreement has a fixed interest rate of 4.78% with principal being repaid over a 10-month term.

On November 21, 2008, the Company repaid the Lehman Brothers' ("Lehman") acquisition financing non-interest bearing note in its entirety for a total cost of $3.5 million.

On October 31, 2008 and 2007, the Company renewed certain insurance policies and entered into finance agreements totaling $0.5 million and $0.6 million, respectively. The finance agreements have fixed interest rates of 4.78% and 5.50%, respectively, with principal being repaid over 10-month terms.

On May 31, 2008 and 2007, the Company renewed certain insurance policies and entered into finance agreements totaling $1.5 million and $4.5 million, respectively. The finance agreements have fixed interest rates of 3.75% and 5.60%, respectively, with principal being repaid over 10-month terms.

The Company's second installment on its note payable to Covenant, which was due on August 15, 2007, was reduced by $0.4 million pursuant to the terms of the stock purchase agreement, resulting in no amount due to Covenant and a reduction in the Company's note payable to Covenant of approximately $0.3 million, which was reflected as management services revenue in the Company's consolidated statement of operations. In addition, under the terms of the purchase agreement, the Company had the right to recapture certain contingent payments made to Covenant if the Company did not receive the required minimum management services revenue set forth in the stock purchase agreement. As a result of these provisions, during the third quarter of fiscal 2007, the Company recorded a receivable and management services revenue of approximately $0.4 million. During the fourth quarter of fiscal 2007, Covenant paid this receivable and executed an amendment to the stock purchase agreement releasing the Company from any future obligations under the Company's note payable to Covenant. As a result the Company recognized additional management services revenue of approximately $0.6 million in the fourth quarter of fiscal 2007.

On May 3, 2007, the Company refinanced $30.0 million of mortgage debt on four senior living communities with Federal National Mortgage Association ("Fannie Mae"). As part of the refinancing, the Company repaid approximately $2.7 million of mortgage debt on the four communities. The new mortgage loans have a ten-year term with interest fixed at 5.91% and principal amortized over a 30-year term. The Company incurred $0.5 million in deferred financing costs related to this loan, which is being amortized over ten years. In addition, as part of this refinancing, the Company wrote-off $0.4 million in deferred loan costs. The new . . .