emeritus10q1qtr2008.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

______________________

FORM 10-Q

(Mark One)
x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
	THE SECURITIES EXCHANGE ACT 1934

For the quarterly period ended March 31, 2008

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
	THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 1-14012

EMERITUS CORPORATION

(Exact name of registrant as specified in its charter)

WASHINGTON	91-1605464
(State or other jurisdiction	(I.R.S Employer
of incorporation or organization)	Identification No.)

3131 Elliott Avenue, Suite 500

Seattle, WA 98121

(Address of principal executive offices)

(206) 298-2909

(Registrant’s telephone number, including area code)

____________________________

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 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 þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer þ Non-accelerated filer o Smaller reporting company o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of April 30, 2008, there were 39,057,738 shares of the Registrant’s Common Stock, par value $0.0001, outstanding.


EMERITUS CORPORATION

Table of Contents

Part I. Financial Information
			Page No.

Item 1. Financial Statements (unaudited):			1

		Condensed Consolidated Balance Sheets as of March 31, 2008, and December 31, 2007	2

		Condensed Consolidated Statements of Operations for the three months ended March 31, 2008 and 2007	3

		Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2008 and 2007	4

		Notes to Unaudited Condensed Consolidated Financial Statements	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		15

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		30

Item 4.	Controls and Procedures		30

Part II. Other Information

Note:	Items 2, 3, 4, and 5 of Part II are omitted because they are not applicable.

Item 1.	Legal Proceedings		31

Item 1A.	Risk Factors		31

Item 6.	Exhibits		31


	Signature		32

	Index to Exhibits		33

PART I. Financial Information

Item 1. Financial Statements (unaudited)

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EMERITUS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)

ASSETS
	March 31,			December 31,
	2008			2007
Current Assets:	(unaudited)

Cash and cash equivalents	$	90,230		$	67,710
Short-term investments		2,001			2,453
Trade accounts receivable, net of allowance of $976 and $995		5,648			6,383
Other receivables		6,133			11,510
Tax, insurance and maintenance escrows		17,861			18,566
Prepaid workers' compensation		18,417			18,224
Other prepaid expenses		10,246			10,744
Property held for sale		12,864			–
Total current assets		163,400			135,590
Long-term investments		6,417			4,749
Property and equipment, net of accumulated depreciation of $198,066 and $179,620		1,394,193			1,418,152
Construction in progress		18,162			12,694
Restricted deposits		20,193			19,808
Lease and contract acquisition costs, net of amortization of $44,250 and $32,463		55,763			67,227
Goodwill		71,036			70,659
Other intangible assets, net of amortization of $6,904 and $3,944		139,814			142,774
Other assets, net		23,734			13,827
Total assets	$	1,892,712		$	1,885,480

LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities:
Current portion of long-term debt	$	24,067		$	22,613
Current portion of capital lease and financing obligations		24,760			23,774
Current portion of convertible debentures		10,455			10,455
Trade accounts payable		6,808			7,844
Accrued employee compensation and benefits		36,067			35,815
Accrued interest		4,242			4,527
Accrued real estate taxes		5,752			7,715
Accrued professional and general liability		15,207			13,545
Accrued income taxes		5,014			5,377
Other accrued expenses		9,016			10,610
Deferred revenue		12,042			10,446
Unearned rental income		15,487			14,302
Total current liabilities		168,917			167,023
Long-term debt, less current portion		741,718			711,664
Capital lease and financing obligations, less current portion		495,165			497,039
Deferred gain on sale of communities		20,757			21,259
Deferred rent		8,669			6,231
Other long-term liabilities		23,015			23,757
Total liabilities		1,458,241			1,426,973
Commitments and contingencies
Shareholders' Equity (Deficit):
Preferred stock, $.0001 par value. Authorized 20,000,000 shares, none issued
Common stock, $.0001 par value. Authorized 100,000,000 shares; issued and outstanding
39,057,738 and 39,030,597 shares at March 31, 2008, and December 31, 2007, respectively		4			4
Additional paid-in capital		715,926			714,258
Accumulated other comprehensive income		264			–
Accumulated deficit		(281,723	)		(255,755	)
Total shareholders' equity		434,471			458,507
Total liabilities and shareholders' equity	$	1,892,712		$	1,885,480

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements

EMERITUS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(In thousands, except per share data)


	Three Months Ended
	March 31,
	2008			2007
Revenues:
Community revenue	$	185,330		$	107,371
Management fees		1,159			877
Total operating revenues		186,489			108,248

Expenses:
Community operations (exclusive of depreciation and amortization
and facility lease expense shown separately below)		121,557			68,441
General and administrative		14,611			10,114
Depreciation and amortization		31,020			14,376
Facility lease expense		22,316			10,298
Total operating expenses		189,504			103,229
Operating income (loss) from continuing operations		(3,015	)		5,019

Other income (expense):
Interest income		855			591
Interest expense		(21,991	)		(13,533	)
Equity losses in unconsolidated joint ventures		(1,522	)		(569	)
Other, net		409			(677	)
Net other expense		(22,249	)		(14,188	)

Loss from continuing operations before income taxes		(25,264	)		(9,169	)
Provision for income taxes		(210	)		(276	)
Loss from continuing operations		(25,474	)		(9,445	)
Loss from discontinued operations		(494	)		(290	)
Net loss	$	(25,968	)	$	(9,735	)

Basic and diluted loss per common share:
Continuing operations	$	(0.66	)	$	(0.51	)
Discontinued operations		(0.01	)		(0.02	)
	$	(0.67	)	$	(0.53	)

Weighted average common shares outstanding: - basic and diluted		39,036			18,374

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements

EMERITUS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(In thousands)

	Three Months Ended March 31,
	2008			2007
Cash flows from operating activities:
Net loss	$	(25,968	)	$	(9,735	)
Adjustments to reconcile net loss to net cash provided by
operating activities
Depreciation and amortization		31,020			14,376
Amortization of above/below market rents		2,524			-
Amortization of deferred gain		(502	)		(554	)
Amortization of loan fees		511			137
Convertible debenture cost payable		-			1,329
Allowance for doubtful receivables		491			358
Equity investment losses and distributions		1,522			569
Stock option compensation		1,382			538
Change in fair value of interest rate swap		838			-
Other		256			339
Changes in operating assets and liabilities		8,180			(935	)
Net cash provided by operating activities		20,254			6,422
Cash flows from investing activities:
Acquisition of property and equipment		(9,463	)		(186,406	)
Acquisition deposits		(5,030	)		-
Lease and contract acquisition costs		(322	)		-
Payments from (advances to) affiliates and other managed communities, net		(235	)		464
Investment in affiliates/other		(2,925	)		(1,433	)
Net cash used in investing activities		(17,975	)		(187,375	)
Cash flows from financing activities:
Proceeds from sale of stock, net of issuance costs		286			275
Decrease (increase) in restricted deposits		(385	)		4,385
Debt issuance and other financing costs		(540	)		(2,183	)
Financing deposits		(4,938	)		-
Proceeds from long-term borrowings and financings		31,794			283,676
Repayment of long-term borrowings and financings		(286	)		(91,140	)
Repayment of capital lease and financing obligations		(5,690	)		(5,166	)
Tax benefit of stock compensation		–			271
Net cash provided by financing activities		20,241			190,118
Net increase in cash and cash equivalents		22,520			9,165
Cash and cash equivalents at the beginning of the period		67,710			14,049
Cash and cash equivalents at the end of the period	$	90,230		$	23,214
Supplemental disclosure of cash flow information -
Cash paid during the period for interest	$	21,440		$	13,233
Cash paid during the period for income taxes		600			24
Cash received during the period for income tax refunds		2,496			-
Non-cash financing and investing activities:
Capital and financing lease buyouts		-			20,818
Capital lease and financing obligations		4,802			23
Unrealized gain on investment in marketable equity securities		264			-
Conversion of convertible debentures		-			16,120
Debt assumed in acquisitions		-			90,000

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements

EMERITUS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2008

1.	Description of Business

Emeritus Corporation (Emeritus or the Company) is an assisted living and Alzheimer’s and dementia care service provider that operates residential style communities located throughout the United States. These communities provide a residential housing alternative for senior citizens who need help with the activities of daily living, with an emphasis on assisted living and personal care services. As of March 31, 2008, the Company owned 107 communities and leased 149 communities. These 256 communities comprise the communities included in the consolidated financial statements.

The Company also provides management services to independent and related-party owners of assisted living communities. At March 31, 2008, the Company managed 33 communities, of which 23 are owned by joint ventures in which the Company has a financial interest. Management agreements typically provide for fees of from 5% to 6% of gross revenues, although a few have fees based on occupancy that approximate 5% of gross revenues.

Effective September 1, 2007, Emeritus completed a merger transaction with Summerville Senior Living, Inc. (Summerville), pursuant to which the Company acquired all of the outstanding stock of Summerville (see Note 4). Summerville operated 81 communities comprising 7,935 units in 13 states, which provided independent living, assisted living, and Alzheimer’s and dementia-related services to senior citizens. Financial results for periods subsequent to the merger include the combined operations of Emeritus and Summerville.

Emeritus has one reportable segment, which is assisted living and related services.

2.	Summary of Significant Accounting Policies and Use of Estimates

The preparation of condensed consolidated financial statements requires Emeritus to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, Emeritus evaluates its estimates, including those related to resident programs and incentives such as move-in fees, bad debts, investments, intangible assets, impairment of long-lived assets, income taxes, restructuring, long-term service contracts, contingencies, self-insured retention, insurance deductibles, health insurance, inputs to the Black-Scholes option pricing model, and litigation. Emeritus bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Emeritus believes that certain critical accounting policies are most significant to the judgments and estimates used in the preparation of its condensed consolidated financial statements. Revisions in such estimates are charged to income in the period in which the facts that give rise to the revision become known. A detailed discussion of the Company’s significant accounting policies and use of estimates is contained in the Company’s 2007 Form 10-K filed on March 17, 2008.

Effective September 1, 2007, the Company changed its estimate of the maximum useful life of buildings from 40 years to 50 years and applied this new policy for all 2007 acquired properties. This change in estimate did not have a material impact on the periods presented herein.

Basis of Presentation

The unaudited interim financial information furnished herein, in the opinion of the Company’s management, reflects all adjustments, consisting of only normally recurring adjustments, which are necessary to state fairly the financial

position, results of operations, and cash flows of Emeritus as of March 31, 2008 and for all periods presented. The results of operations for the period ended March 31, 2008, are not necessarily indicative of the operating results that may be achieved for the full year ended December 31, 2008. The Company presumes that those reading this interim financial information have read or have access to its 2007 audited consolidated financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations that are contained in the Company’s 2007 Annual Report on Form 10-K filed on March 17, 2008. Therefore, the Company has omitted certain footnotes and other disclosures that are disclosed in the Form 10-K.

Recent Accounting Pronouncements Not Yet Adopted

In March 2008, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 161, Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133. SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, establishes, among other things, the disclosure requirements for derivative instruments and for hedging activities. SFAS No. 161 amends and expands the disclosure requirements of SFAS No. 133 with the intent to provide users of financial statements with an enhanced understanding of: (a) how and why an entity uses derivative instruments; (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations; and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. To meet those objectives, SFAS No. 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. SFAS No. 161 is effective for the Company on January 1, 2009, and will have no impact on the Company’s consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141(revised 2007), Business Combinations (SFAS No. 141R). SFAS No. 141R replaces the existing SFAS No. 141 but retains the fundamental requirements in SFAS No. 141 that the acquisition method of accounting be used for all business combinations and for an acquirer to be identified for each business combination. SFAS No. 141R defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves control. It also requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at their fair values at the acquisition date. The additional fair value measurements of SFAS No. 141R replace the cost-allocation process of SFAS No. 141, which required the cost of an acquisition to be allocated to the individual assets acquired and liabilities assumed based on their estimated fair values. In addition, expenses incurred for all acquisition-related costs are to be expensed and liabilities related to contingent consideration are to be remeasured to fair value each subsequent reporting period. Costs incurred by the acquirer to effect the acquisition are not allocated to the assets acquired or liabilities assumed, but are recognized separately. SFAS No. 141R is effective prospectively for Emeritus to business combinations for which the acquisition date is on or after January 1, 2009.

Reclassifications

Certain reclassifications have been made to the condensed consolidated financial statements to conform to the current period presentation.

3.	Stock-Based Compensation

The Company records compensation expense based on fair value for all awards, which is estimated using the Black-Scholes option pricing model. The Company recorded stock-based compensation expense based on the fair value of stock options and shares issued under the Company's various equity incentive plans and the Employee Stock Purchase (ESP) Plan of approximately $1.4 million and $538,000 for the three months ended March 31, 2008 and 2007, respectively.

During the first quarter of 2008, the Company granted options to purchase 10,000 shares of common stock from the 2006 equity incentive plan (the 2006 Plan) and none from the non-employee director plan.

The following table summarizes the Company’s stock option activity for the three months ended March 31, 2008:

	2008
				Weighted-		Aggregate
				Average		Intrinsic
				Exercise		Value
	Shares			Price		(000)
Outstanding at beginning of year		2,166,575		$	18.76
Granted		10,000		$	21.35
Exercised		(17,781	)	$	8.90	$	239
Canceled		(18,330	)	$	23.40

Outstanding at March 31, 2008		2,140,464		$	18.82	$	11,739
Options exercisable at March 31, 2008		1,016,980		$	10.21	$	11,499

Weighted-average fair value of options granted				$	8.84

The amount of cash received from the exercise of stock options under the Company's various equity incentive plans and stock purchased through the ESP Plan was $286,000 and $275,000 in the three months ended March 31, 2008 and 2007, respectively. As of March 31, 2008, there were 148,005 shares available for purchase under the ESP Plan, 1,504,990 shares available for grant under the 2006 Plan, and 121,500 shares available for grant under the 1995 Stock Incentive Plan, which includes options available under the non-employee director plan.

The Company offers eligible employees the option to purchase common stock of the Company under the ESP Plan at a 15% discount from the lower of the market price on (a) the first trading date of each calendar quarter or (b) the last trading date of each quarter. The following table shows the number of shares of common stock issued under the ESP Plan and purchase price of these shares for the first quarter of 2008:

	2008
	Shares		Price

Quarter 1		9,360	$	17.73

4.	Acquisitions and Other Significant Transactions

Summerville Acquisition

On September 1, 2007, the Company acquired all of the outstanding stock of Summerville through a merger of its wholly-owned subsidiary with Summerville. Under the terms of the merger agreement, a total of 8,392,656 shares of the Company’s common stock were issued: (i) to Apollo Real Estate Investment Funds III and IV (the Apollo Funds), two real estate funds managed by Apollo Real Estate Advisors, in satisfaction of certain loans from such entities, (ii) to certain employees of Summerville, in satisfaction of certain incentive compensation arrangements, and (iii) to the stockholders of Summerville, including the Apollo Funds. The total purchase price of Summerville was $278.2 million.

Summerville was a San Ramon, California-based operator of 81 communities comprising 7,935 units in 13 states, which provided independent living, assisted living, and Alzheimer’s and dementia-related services to seniors. Upon completion of the Summerville acquisition, Summerville became a wholly owned subsidiary of Emeritus and retained the brand name in the operation of its communities. Of the 81 communities operated by Summerville, 73 are leased from third parties and eight are owned by the Company.

2007 HCPI Communities Purchased

In March 2007, the Company completed the purchase of seven communities consisting of 453 units located in South Carolina for approximately $28.9 million, including transaction costs. The Company had operated these facilities pursuant to a master lease dated September 18, 2002, between Health Care Property Investors, Inc. (HCPI), and Emeritus. The Company accounted for this master lease as an operating lease.

In August 2007, Emeritus acquired 41 additional communities from HCPI, consisting of 3,732 units located in 17 states. The aggregate purchase price was $504.9 million, including transaction costs. Of the 41 communities, the Company leased 33 and Summerville leased eight of the communities pursuant to leases that were assigned to the Company when it purchased these communities. Summerville continued to operate the eight communities under existing leases until Emeritus completed its acquisition of Summerville in September 2007, at which time the leases terminated.

2007 HRT Communities Purchased

In March 2007, the Company purchased 12 communities consisting of 786 units located in five states for $100.2 million, including transaction costs. The Company had leased four of these communities from Healthcare Realty Trust (HRT) since May 2002 and eight since May 2003. Four of the leased communities had been accounted for as capital leases and eight as operating leases by the Company.

2007 Fretus Communities Purchased

In February 2007, the Company purchased 24 communities consisting of 1,651 units located in six states for $143.5 million, including transaction costs. The Company had leased these communities from Fretus Investors LLC (Fretus) since October 2002 and had accounted for them as operating leases.

Fretus was a private investment joint venture between Fremont Realty Capital, which held a 65% interest, and a Baty-related entity, which held a 35% minority interest. Daniel R. Baty, the Company’s founder, chairman, Co-CEO and a significant shareholder, held a 16% indirect interest in the minority entity, personally guaranteed $3.0 million of the Fretus mortgage debt covering the communities and controlled the administrative member of Fretus. In conjunction with this transaction, the Baty-related entity provided $18.0 million in short-term financing to the Company, of which approximately $5.1 million was used to fund the balance of the purchase price and the balance was used for general business purposes. The short-term debt was repaid in July 2007.

2007 HC REIT Purchase

In August 2007, the Company completed the acquisition of three Florida communities consisting of 431 units. The purchase price was $25.0 million, including transaction costs. The Company had leased these communities from Health Care REIT, Inc. and affiliates and accounted for them as capital leases.

2007 Wegman Purchase

In August 2007, the Company completed the acquisition of nine communities that the Company formerly leased, consisting of 711 units located in the State of New York, for an aggregate purchase price of $89.0 million including transaction costs.

Other 2007-2008 Community Acquisitions

In January 2008, the Company entered into a long-term lease for a newly constructed 38-unit Alzheimer’s community located in Joliet, IL. The lease term was 11 years, expiring in March 2019. This community is included in the NHP portfolio that the Company purchased in April 2008 as detailed in Note 12, and this lease was terminated in connection with such purchase.

In January 2008, the Company entered into a long-term lease for a 104-unit community located in Orangevale, CA. The lease term is 15 years, expiring in January 2023, with two 10-year renewal options available. The initial annual lease payment is approximately $901,000, with annual increases of 3.0%.

In December 2007, the Company purchased a 106-unit assisted living community located in Ohio for a price of $12.9 million.

In July 2007, the Company entered into a long-term lease for an 89-unit assisted living community in Ohio. The lease term is 12 years, expiring in July 2019, with one ten-year renewal option available. The initial annual lease payment is approximately $1.1 million, with annual increases based on the greater of 3% or the change in the Consumer Price Index (CPI).

2006 Blackstone Joint Venture

The Company holds a 19.0% interest in a joint venture (Blackstone JV) with Blackstone Real Estate Advisors that began operations in December 2006 and operates a portfolio of 24 properties as of March 31, 2008, 23 of which are managed by the Company. The Company recorded equity losses of approximately $1.5 million and $395,000 for the three months ended March 31, 2008 and 2007, respectively. The Company recorded management fee income of approximately $801,000 and $620,000 for the three months ended March 31, 2008 and 2007, respectively.

5.	Long-Term Debt

On April 2, 2008, the Company purchased the real estate underlying 24 communities that it leased from Nationwide Health Properties, Inc. (NHP) as described in Note 12, Subsequent Events. In connection with this transaction, NHP provided unsecured financing of $30.0 million pursuant to a promissory note dated as of March 31, 2008, between NHP and the Company. The NHP loan bears interest at an annual rate of 7.25% and is payable monthly on an interest-only basis for a term of not more than four years, at which time the entire principal amount and any accrued but unpaid interest is due and payable in full. The Company has the option to prepay the NHP loan at any time upon not less than 180 days prior written notice. The promissory note includes provisions whereby a default by the Company under its existing $21.4 million loan with NHP or its master lease agreement with NHP dated October 2, 2006, as amended, would constitute a default of this indebtedness.

On February 8, 2008, Emeritus entered into a credit agreement with Wells Fargo Bank, National Association, which provides a $25.0 million unsecured revolving line of credit. The credit agreement permits the Company to borrow from time to time up to $25.0 million on an unsecured basis. The credit agreement also allows the Company to obtain letters of credit from the lender, provided that outstanding letters of credit and any borrowings outstanding do not exceed $25.0 million. The line of credit matures on February 15, 2009. Outstanding borrowings will bear interest at a variable rate of 0.5% below Wells Fargo’s prime rate, payable monthly. The Company may partially or wholly repay borrowings and reborrow provided that the total outstanding borrowings may not at any time exceed $25.0 million. Emeritus is required to pay a commitment fee of 0.25% on the average daily unused amount of the line of credit, which is payable quarterly. In addition, the Company is required to pay fees equal to 1.0% of every letter of credit issued as well as the negotiation fees on each letter. The Company must maintain a zero balance on advances for 30 consecutive days during each fiscal year and a $20.0 million minimum balance in cash, cash equivalents and/or publicly traded marketable securities.

The line of credit agreement contains a fixed charge coverage ratio covenant. The agreement also contains customary affirmative and negative covenants and events of default. Upon an event of default, Wells Fargo may accelerate the loans and terminate lending. In the event of default, interest on the outstanding amount of the indebtedness shall bear interest at a rate per annum equal to 4.0% in excess of the interest rate in effect at that time.

The Company intends to use the line of credit for general business purposes. There were no outstanding borrowings under this credit facility as of March 31, 2008.

Effective February 1, 2008, Emeritus entered into an interest rate swap contract that has a notional amount of $12.4 million and matures on January 1, 2010. The swap effectively converts the interest rate on the related mortgage debt from a floating rate equal to the London Interbank Offered Rate (LIBOR) plus 225 basis points to a fixed rate of

4.965%, thus mitigating the impact of interest rate changes on future interest expense. The Company did not designate the swap as a hedging instrument.

6.	Stockholders’ Equity

Debenture Conversion

In February 2007, the Company offered to pay a cash incentive to debenture holders if they elected to convert their debentures into common stock by March 8, 2007. The incentive payment was equal to the amount of interest that the holders would have received if the debentures were held to the maturity date of July 1, 2008.

Of the $26.6 million principal amount of debentures outstanding when the Company made the offer, holders of $16.1 million principal amount converted their debentures into 732,725 shares of common stock at the debentures’ stated conversion rate of $22.00 per share. Of the debentures converted into common stock, $15.8 million principal amount was owned by entities controlled by Mr. Baty. On April 16, 2007, the Company paid the incentive fee of $1.3 million in connection with this conversion, which amount would have otherwise been paid in three installments on July 1, 2007, January 1, 2008, and July 1, 2008, if the debentures were held to maturity. The incentive payment was expensed to “Other, net” in the condensed consolidated statement of operations in the first quarter of 2007.

At March 31, 2008, the Company had $10.5 million principal amount of debentures outstanding, which mature on July 1, 2008.

7.	Loss Per Share

The capital structure of Emeritus includes convertible debentures and stock options. Basic loss per share is computed based on the weighted average shares outstanding and excludes any potential dilution. Diluted loss per share is computed based on the weighted average number of shares outstanding plus dilutive potential common shares. Options are included using the “treasury stock method” to the extent they are dilutive. Certain shares issuable upon the exercise of stock options and conversion of convertible debentures have been excluded from the computation because the effect of their inclusion would be anti-dilutive.

The following table summarizes those that are excluded in each period because they are anti-dilutive (in thousands):

	Three Months Ended
	March 31,
	2008		2007
Convertible Debentures		475		475
Options		2,140		1,476
		2,615		1,951

8.	Comprehensive Loss

The following table summarizes the comprehensive loss for the periods indicated (in thousands):

	Three Months Ended
	March 31,
	2008			2007

Net loss	$	(25,968	)	$	(9,735	)
Other comprehensive income:
Unrealized holding gains
on available-for-sale investment securities		264			–
Comprehensive loss	$	(25,704	)	$	(9,735	)

9.	Discontinued Operations

During the first quarter of 2008, the Company determined to discontinue operations at four of its communities and put the assets and businesses up for sale. The Company decided to sell these communities primarily because they have incurred significant operating losses due to geographic location and local market conditions over a sustained period of time. The expected disposal date is in the second quarter of 2008. Financial statements for the three months ended March 31, 2007, have been restated to present the operations of these communities as discontinued operations. In 2007, the Company determined that the carrying amounts of these communities were not recoverable from expected undiscounted cash flows generated from the use of the assets and recognized an aggregate loss of $4.8 million to write down the related carrying amounts of these properties to their estimated fair values. The assets to be sold, which consist of property and equipment, are presented separately under the caption “Property held for sale” in the accompanying condensed consolidated balance sheet at March 31, 2008.

The following table shows the revenues and net loss for the discontinued operations (in thousands):

	Three Months Ended
	March 31, 2008
	2008		2007

Total revenue	$	2,209	$	2,130

Net loss	$	494	$	290

10.

Liquidity

As of March 31, 2008, the Company has a working capital deficit of $5.5 million. The Company is able to operate in the position of a working capital deficit because revenues are collected more quickly, often in advance, than obligations are required to be paid. This can result in a low level of current assets to the extent cash has been deployed in business development opportunities or to pay down long-term liabilities. Along those lines, the working capital deficit includes, as part of current liabilities, $27.5 million of deferred revenue and unearned rental income. The level of current liabilities is not expected to change from period to period in such a way as to require the use of significant cash, except for (i) convertible debentures of $10.5 million, which are due and payable on July 1, 2008, except to the extent converted prior to such date by the holders of the debentures (Note 6), (ii) the current portion of debt maturities of $24.1 million due by March 31, 2009, and (iii) long-term debt maturities of $114.9 million due after March 2009 but prior to March 31, 2010, which the Company plans to refinance prior to their due dates or pay them off at maturity.

The Company reported net cash from operating activities in its condensed consolidated statements of cash flows of $20.3 million and $6.4 million for the three months ended March 31, 2008 and 2007, respectively. While the Company has reported positive cash flows from operating activities over the past three years, the cash flows have not always been sufficient to pay all of its long-term obligations and the Company has been dependent upon third-party financing or disposition of assets to fund operations. The Company cannot guarantee that, if necessary in the future, such transactions will be readily available, or on terms attractive to the Company.

Since 2002, the Company has refinanced substantially all of its debt obligations, extending the maturities of such financings to dates in 2008 or thereafter, at which time the Company will need to refinance or otherwise repay the obligations. Many of the Company's debt instruments and leases contain “cross-default” provisions pursuant to which a default under one obligation can cause a default under one or more other obligations to the same lender or lessor. Such cross-default provisions affect the majority of the Company’s properties, and as a result, any event of default could cause a material adverse effect on the Company's financial condition. At March 31, 2008, the Company was in violation of one or more covenants related to rent coverage ratio requirements in certain leases, but has obtained waivers from the owners related to these covenant defaults. The waivers expire on April 1, 2009.

Management believes that the Company will be able to generate sufficient operating cash flows and will have adequate cash for all necessary operating, investing, and financing activities including required debt service and capital expenditures for at least the next twelve months.

11.	Fair Value Disclosures

Investment securities available-for-sale. The carrying values of investment securities classified as available-for-sale are recorded at their fair values based on quoted market prices utilizing public information for the issuers (Note 8).

Derivative financial instruments. The Company enters into derivative financial instruments, specifically interest rate swaps, for non-trading purposes. The Company uses interest rate swaps to manage interest rate risk associated with floating rate debt. As of March 31, 2008, the Company was party to two interest rate swaps with a total notional amount of $32.0 million. The Company elected not to apply hedge accounting for these interest rate swaps even though they are economic hedges of the Company’s floating rate debt and the Company does not enter into derivatives for speculative purposes. These derivative contracts have negative net fair values and are recorded in other long-term liabilities.

The table that follows summarizes the interest rate swap contracts outstanding at March 31, 2008 (in thousands):

	Notional		Effective	Expiration	Estimated
	Amount		Date	Date	Fair Value
Interest rate swap	$	19,640	10/1/2007	8/6/2012	$	(1,465	)
Interest rate swap		12,405	2/1/2008	1/1/2010		(97	)

As of January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements. The standard defines fair value, establishes a framework for measuring fair value, and also expands disclosures about fair value measurements. Under this standard, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date. SFAS No. 157 also requires the Company to consider its own credit spreads when measuring the fair value of liabilities, including derivatives.

The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis as of March 31, 2008, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value (in thousands):

	Quoted Prices in		Significant
	Active Markets		Other		Significant		Balance at
	for Identical		Observable		Unobservable		March 31,
	Assets (Level 1)		Inputs (Level 2)		Inputs (Level 3)		2008
Assets
Investment securities – available-for-sale	$	3,190	$	-	$	-	$	3,190
Liabilities
Derivative financial instruments		-		1,562		-		1,562

In general, fair values determined by Level 1 inputs utilize quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. For example, the Company’s investment in available-for-sale equity securities is valued based on the quoted market price for that security.

Fair values determined by Level 2 inputs utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability. For example, the Company uses market interest rates and yield curves that are observable at commonly quoted intervals in the valuation of its interest rate swap contracts.

Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

At March 31, 2008, the Company believes that any unobservable inputs used to determine the fair value of its derivative financial instruments are not significant to the fair value measurement in its entirety, and therefore the Company does not consider its derivative financial instruments to be Level 3 liabilities.

For the three months ended March 31, 2008, interest expense includes an unrealized loss of $838,000, which represents the change in the fair value of the interest rate swaps.

The Company also has assets that under certain conditions are subject to measurement at fair value on a non-recurring basis. These assets include those associated with acquired businesses, including goodwill and other intangible assets. For these assets, measurement at fair value in periods subsequent to their initial recognition is applicable if one or more is determined to be impaired. During the three months ended March 31, 2008, there were no triggering events that suggested that the Company’s goodwill or other intangible assets were impaired.

The Company also adopted SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115, as of January 1, 2008, but has not made any fair value elections with respect to any of its eligible assets or liabilities as of March 31, 2008.

12.	Subsequent Events

2008 NHP Purchase

On February 6, 2008, the Company entered into a purchase and sale agreement with NHP to purchase 24 communities consisting of 1,672 units located in 13 states for a purchase price of $305.0 million, excluding transaction costs. The Company leased these communities from NHP and operated the communities as assisted living and dementia care facilities. On April 2, 2008, the Company closed on this transaction and financed it through mortgage debt of approximately $241.9 million originated by Capmark Finance, Inc. (Capmark) through a Fannie Mae credit facility with an interest rate of 5.9%, and seller-provided debt of $30.0 million with an interest rate of 7.25%. In addition, the seller agreed to a 12-month extension on an existing $21.4 million note originally maturing in March 2008, including a reduction in the interest rate from 10.0% to 8.5%. The Company also secured the ability to borrow up to an additional $8.1 million under this Fannie Mae credit facility based on portfolio performance.

This portfolio includes a memory loss community, which was financed separately with variable interest rate debt financing of $8.0 million provided by Capmark. Interest is based on monthly LIBOR plus 265 basis points with a floor of 5.65%. The interest rate as of the closing date was 5.65%.

Annual lease payments were approximately $18.9 million related to these 24 communities as of the closing date, including a newly constructed community opened in January 2008. We accounted for these leases as capital leases. Upon termination of the capital leases, the difference between the carrying amount of the capital lease assets and the capital lease obligations will be recorded as an adjustment to the carrying amount of the purchased communities. This reduction in the cost basis of the purchased assets will be approximately $19.6 million as of the closing date.

Fretus Mortgage Refinancing

On April 29, 2008, the Company refinanced the mortgage debt on 18 of its existing properties, which were purchased from Fretus Investors, LLC in February 2007. See Note 4, Acquisitions and Other Significant Transactions-2007 Fretus Communities Purchased. The original loan of $132.0 million bore interest at a fixed annual rate of 6.5475% and was secured by 24 properties. Of the $132.0 million principal balance outstanding, $112.0 million was paid down as part of this refinancing. The original loan agreement was amended to provide that: (i) the remaining balance of $20.0 million is secured by five properties, with one property released from the security

pool and (ii) the interest rate changed from a fixed rate of 6.5475% to a variable rate equal to LIBOR plus 280 basis points (5.80% at closing), adjusted monthly, but never less than 5.80%.

The new debt of $129.0 million has a term of 10 years at a fixed rate of 6.21%, with payments in the first three years of interest only and payments of principal and interest thereafter based on a 30-year amortization period. Both the existing and the new mortgages were provided by Capmark Bank and purchased by Freddie Mac. The notes on the 18 properties contain cross-default provisions. The new debt may be prepaid subject to a prepayment penalty based on a formula defined in the loan agreement. The loan agreement contains customary events of default, including payment defaults.

In connection with this transaction, the Company will record a one-time charge of approximately $3.0 million in the second quarter of 2008 related to prepayment penalties and the write-off of unamortized deferred loan fees on the original debt. The refinance results in an increase in annual interest expense of approximately $536,000. The Company received approximately $14.4 million in net cash proceeds as a result of this transaction, which will be used for general corporate purposes.

GMAC Mortgage Refinancing

On April 30, 2008, the Company repaid the $20.0 million outstanding balance of a mortgage loan (the GMAC Mortgage) secured by five of its existing communities. The interest rate on the GMAC Mortgage was 6.98% and the note was to mature in August 2008.

The Company refinanced the GMAC Mortgage with new credit facilities. Three of the five communities secure notes totaling $25.4 million at a fixed rate of 6.29%, (the “Fixed Rate Notes”), with a term of 10 years. The Fixed Rate Notes require payments in the first three years of interest only, and payments of principal and interest thereafter based on a 30-year amortization. The Fixed Rate Notes were originated by KeyCorp Real Estate Capital Markets, Inc. and were purchased by Fannie Mae. The Fixed Rate Notes may be prepaid subject to a prepayment penalty based on a formula defined in the loan agreements. The Fixed Rate Notes contain cross-default provisions and customary events of default, including those related to non-payment and the sale or transfer of collateral.

The remaining two communities secure variable rate notes (the “Variable Rate Notes”) totaling $13.3 million, of which $7.2 million was withheld at closing and is available for funding of construction projects on these two communities. The Variable Rate Notes have terms of three years and an initial weighted average annual interest rate of 5.06% based on the LIBOR rate at closing. KeyBank N.A. is the lender. The maturity dates may be extended for one additional year at the Company’s option (the “Extension Period”) depending upon the attainment of certain debt service coverage ratios as defined in the loan agreements. Monthly payments are interest only for three years and, if extended, include scheduled principal reductions during the Extension Period. The Variable Rate Notes may be prepaid at any time without penalty. The Variable Rate Notes contain various events of default, including non-payment and the maintenance of specified levels of occupancy and debt service coverage ratios.

The Company received approximately $11.2 million in cash from these transactions, which will be used for general corporate purposes.

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Forward-Looking Statements

This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. This Act provides a “safe harbor” for forward-looking statements to encourage companies to provide prospective information about themselves so long as they identify these statements as forward-looking and provide meaningful cautionary statements identifying important factors that could cause actual results to differ from the projected results. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “potential,” “predict,” “should” or “will,” or the negative of those terms, or comparable terminology. Some of the forward-looking statements included in this report and documents incorporated by reference and in some of our other public statements relate to, among other things: the effects of competition and economic conditions on the occupancy levels in our communities, including possible excess assisted living capacity; our ability under current market conditions to maintain and increase our resident charges without adversely affecting occupancy levels; our ability to control community operating expenses, including the management of costs largely beyond our control (such as insurance and utility costs) without adversely affecting the level of occupancy and resident charges; our ability to generate cash flow sufficient to service our debt and other fixed payment requirements; our vulnerability to defaults as a result of noncompliance with various debt and lease covenants, including the effects of cross-default provisions; uncertainties relating to competition, construction, licensing, environmental regulation, and other matters that affect acquisition, disposition, and development of assisted living communities; our ability to find sources of financing and capital on satisfactory terms to meet our cash requirements to the extent that they are not met by operations; and uncertainties related to professional liability claims.

Any or all of our forward-looking statements in this report and in any other public statements we make may turn out to be inaccurate. Please review carefully Item 1A—Risk Factors of our 2007 Annual Report on Form 10-K for important factors that could cause our actual results to differ materially from the forward-looking statements included in this report and presented elsewhere by our management from time to time. Incorrect assumptions we might make and known or unknown risks and uncertainties may affect the accuracy of our forward-looking statements. Forward-looking statements reflect our current expectations or forecasts of future events or results and are inherently uncertain, and accordingly, you should not place undue reliance on forward-looking statements.

Although we believe that the expectations and forecasts reflected in the forward-looking statements are reasonable, we cannot guarantee future results, performance, or achievements. Consequently, no forward-looking statement can be guaranteed and future events and actual or suggested results may differ materially. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events, or otherwise. You are advised, however, to consult any further disclosures we make in our quarterly reports on Form 10-Q and current reports on Form 8-K.

Overview

During the first quarter of 2008, we continued to focus on implementing the growth strategy outlined in our 2007 Annual Report on Form 10-K. As previously disclosed, we are focusing on increasing our revenues and cash flows through a combination of: (i) organic growth in our existing operations; (ii) selected acquisitions of additional communities; and (iii) expansion of our existing communities.

In 2007, we acquired 88 communities that we previously had leased and eight communities previously leased by Summerville, leased one and purchased one additional community, and, as a result of our acquisition of Summerville, began operating another 73 communities leased by Summerville. So far in 2008, we have entered into leases for two additional communities. In 2007 and continuing into 2008, we have also focused more on internal growth through expansion of existing properties and construction of new communities. We currently have expansion projects underway in ten of our communities and will continue to look at other expansion opportunities where the market conditions are favorable. In addition, we have five development projects in various stages of completion in several locations.

EMERITUS CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Continued

March 31, 2008

The following table sets forth a summary of our property interests:

	As of March 31,		As of December 31,		As of March 31,
	2008		2007		2007
	Buildings	Units	Buildings	Units	Buildings	Units
Owned (1)	107	8,781	107	8,781	53	3,749
Leased (2 )	149	13,120	147	12,978	118	9,880
Consolidated Portfolio	256	21,901	254	21,759	171	13,629
Managed/Admin Services	10	1,184	10	1,184	9	1,084
Joint Venture/Partnership	23	1,737	23	1,737	22	1,750
Operated Portfolio	289	24,822	287	24,680	202	16,463

Percentage increase (decrease) (3)	0.7%	0.6%	41.4%	49.5%	(0.5%)	(0.3%)

(1) Owned communities increased from March 31, 2007, due to the acquisition of three communities on August 6, 2007, 41 communities on August 15, 2007, nine communities on August 31, 2007, and one community in December 2007. Of the owned communities, three are in discontinued operations, representing 266 units.

(2) Of the 149 leased communities at March 31, 2008, 72 are accounted for as operating leases, in which the assets and liabilities of the communities are not included in our condensed consolidated balance sheet and 73 are accounted for as capital leases, in which a long-term asset and corresponding liability is established on our balance sheet. The remaining four leased communities are reflected in our condensed consolidated financial statements as owned communities because of accounting requirements related to sale-leaseback accounting, notwithstanding the legal sale of the communities and their subsequent leasing by us. Of the leased communities, one is in discontinued operations, representing 94 units.

(3) The percentage increase (decrease) indicates the change from the prior year, or, in the case of March 31, 2008 and 2007, from the end of the prior year.

Two of the important factors affecting our financial results are the rates we charge our residents and the occupancy levels we achieve in our communities. In evaluating the rate component, we generally rely on the average monthly revenue per occupied unit, computed by dividing the total revenue for a particular period by the average number of occupied units for the same period. In evaluating the occupancy component, we generally rely on an average occupancy rate, computed by dividing the average units occupied during a particular period by the average number of units available during the period. We evaluate these and other operating components for our consolidated portfolio, which includes the communities we own and lease, and our operating portfolio, which also includes the communities we manage.

The table below shows for our consolidated portfolio the average monthly revenue per occupied unit and occupancy rate for the three months ended March 31, 2008 and 2007:

	Three Months Ended March 31,
	2008			2007			$D		% D

Average monthly revenue per occupied unit	$	3,325		$	3,181		$	144		4.5	%

Average occupancy rate		87.2	%		86.8	%				.4	ppt*

* percentage points

We believe that this increase in occupancy rates reflects industry-wide factors, such as the declining supply of vacant units, as well as our own actions and policies, including the various acquisitions we made in 2007 and 2008. We continue to evaluate the factors of rate and occupancy to find the optimum balance in each community, as indicated by the increase in occupancy rates and average monthly revenue per unit over the past year.

EMERITUS CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Continued

March 31, 2008

Since our inception in 1993, we have incurred operating losses totaling approximately $281.7 million as of March 31, 2008. We believe that these losses have resulted from our emphasis on expansion, financing costs arising from multiple financing and refinancing transactions related to this expansion, administrative and corporate expenses that we incurred in anticipation of further expansion and increased emphasis on risk management and financial reporting controls, the impact in the early years on many of our leases from capital and financing lease treatments, and occupancy rates remaining lower for longer periods than we anticipated. While we have realized growth in both our occupancy and average monthly rates, we anticipate continued losses in the near term until our occupancy stabilizes. Our current emphasis is on maximization of cash flows as we work toward improvements in occupancy and average rates, selective growth, and changes in our capital structure, such as acquisition of leased properties and refinancing of existing high-rate debt.

Significant Transactions

In recent periods, and continuing into 2008, we entered into a number of transactions that affected the number of communities we own, lease, and manage; our financing arrangements; and our capital structure. These transactions are summarized in Note 4 to the Unaudited Condensed Consolidated Financial Statements above.

The following table shows the changes in buildings from December 31, 2006, through March 31, 2008, including those transactions previously described:

	Month	Owned		Leased			Consolidated		Managed			Total
December 31, 2006			10		161			171		32			203
Walking Horse Meadows – disposition	Jan-07		–		–			–		(1	)		(1	)
Fretus Purchase	Feb-07		24		(24	)		–		–			–
HRT Purchase	Mar-07		12		(12	)		–		–			–
HCPI Purchase	Mar-07		7		(7	)		–		–			–
March 31, 2007			53		118			171		31			202
Additional JV– management agreements	May-07		–		–			–		3			3
June 30, 2007			53		118			171		34			205
Inn at Marietta	Jul-07		–		1			1		–			1
HC REIT Purchase	Aug-07		3		(3	)		–		–			–
HCPI Purchase (including 8 Summerville communities)	Aug-07		41		(33	)		8		–			8
Wegman Purchase	Aug-07		9		(9	)		–		–			–
Isle of Ledgewood	Sep-07		–		–			–		1			1
Summerville Merger	Sep-07		–		73			73		–			73
September 30, 2007			106		147			253		35			288
Cooper George - disposition	Oct-07		–		–			–		(1	)		(1	)
Gardens at Westlake - disposition	Oct-07		–		–			–		(1	)		(1	)
Pinnacle - purchase	Dec-07		1		–			1		–			1
December 31, 2007			107		147			254		33			287
Courtyard of Loyalton - acquisition	Jan-08		–		1			1		–			1
Summerville at Hazel Creek - acquisition	Jan-08		–		1			1		–			1
March 31, 2008			107		149			256		33			289

EMERITUS CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Continued

March 31, 2008

Results of Operations

Significant Accounting Policies and Use of Estimates

For a description of our significant accounting policies and estimates, see our Annual Report on Form 10-K for the year ended December 31, 2007.

Statements of Operations as Percentage of Revenues and Period-to-Period Percentage Change

The following table sets forth, for the periods indicated, certain items from our condensed consolidated statements of operations as a percentage of total revenues and the percentage change of the dollar amounts from period to period.

							Period-to-Period
							Percentage
							Change
	Percentage of Revenues						Fav / (Unfav)
							Three Months
	Three Months Ended						Ended
	March 31,						March 31,
	2008			2007			2008-2007

Revenues:		100.0	%		100.0	%		72.3	%
Expenses:
Community operations*		65.2			63.3			(77.6	)
General and administrative		7.8			9.3			(44.5	)
Depreciation and amortization		16.6			13.3			(115.8	)
Facility lease expense		12.0			9.5			(116.7	)
Total operating expenses		101.6			95.4			(83.6	)
Operating income (loss) from continuing operations		(1.6	)		4.6			(160.1	)
Other income (expense)
Interest income		0.5			0.5			44.7
Interest expense		(11.8	)		(12.5	)		(62.5	)
Equity losses in unconsolidated joint ventures		(0.8	)		(0.5	)		(167.5	)
Other, net		0.2			(0.6	)		(160.4	)
Net other expense		(11.9	)		(13.1	)		(56.8	)
Loss from continuing operations before income taxes		(13.5	)		(8.5	)		(175.5	)
Provision for income taxes		(0.1	)		(0.2	)		23.9
Loss from continuing operations		(13.6	)		(8.7	)		(169.7	)
Loss from discontinued operations		(0.3	)		(0.3	)		(70.3	)
Net loss		(13.9	%)		(9.0	%)		(166.7	%)

* exclusive of depreciation and amortization and facility lease expense shown separately below.

EMERITUS CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Continued

March 31, 2008

Comparison of the Three Months Ended March 31, 2008 and 2007

Total Operating Revenues:

	Three Months Ended March 31,
	2008		2007		$D		% D
	(in thousands, except percentages)

Community revenue	$	185,330	$	107,371	$	77,959	72.6	%
Management fees		1,159		877		282	32.2	%
Total operating revenues	$	186,489	$	108,248	$	78,241	72.3	%

	Three Months Ended March 31,
	2008			2007			$D		% D

Average monthly revenue per occupied unit	$	3,325		$	3,181		$	144		4.5	%

Average occupancy rate		87.2	%		86.8	%				.4	ppt*

* percentage points

Of the $78.0 million increase in community revenues for the three months ended March 31, 2008, compared to the three months ended March 31, 2007, approximately $74.0 million was due to the addition of 85 new communities, including the Summerville communities. Of the revenues related to the remaining communities, $3.3 million of the increased revenue was due to increases in the average monthly revenue per occupied unit and the balance was due to an increase in occupancy.

We continue our efforts to build our occupancy through increased marketing initiatives, programs that address resident mix and a focus on property improvements and other community-level enhancements to attract additional long-term residents and increase occupancy while maintaining growth in average monthly revenue per unit. We believe that these initiatives will continue to have a positive impact on operating performance over time.

The increase in management fee revenue is primarily due to the Blackstone joint venture (Blackstone JV) (see Note 4 to the Unaudited Condensed Consolidated Financial Statements above), from which we recorded $801,000 and $620,000 in the three-month periods ended March 31, 2008 and 2007, respectively.

Community Operations:

	Three Months Ended March 31,
	2008			2007			$D		% D
	(in thousands, except percentages)

Community operations	$	121,557		$	68,441		$	53,116		77.6	%
As a percent of revenue		65.2	%		63.3	%				1.9	ppt

Of the $53.1 million increase in community operations expenses, $49.1 million was due to the addition of 85 new communities, including the Summerville communities. The remaining increase of $4.0 million was primarily related to increases in employee salaries and benefits of $3.5 million and increases in contracted services, food costs, utilities, supplies and marketing costs.

EMERITUS CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Continued

March 31, 2008

General and Administrative:

	Three Months Ended March 31,
	2008			2007			$D		% D
	(in thousands, except percentages)

General and administrative	$	14,611		$	10,114		$	4,497		44.5	%
As a percent of revenue		7.8	%		9.3	%				(1.5	) ppt

The growth in general and administrative expenses of $4.5 million was primarily related to staffing costs for regional and corporate overhead positions, which is comprised of increases in the number of personnel and in average salaries, and consisted of approximately $3.3 million in salaries and benefits, including an increase of $844,000 in non-cash stock compensation expense. Much of the increase in staffing costs relates to the addition of the 85 new communities, including the Summerville communities. The remaining increase consisted primarily of increases in consulting fees, travel, telephone and payroll processing costs. Included in general and administrative expenses is non-cash stock compensation expense of $1.4 million and $538,000 for the three months ended March 31, 2008 and 2007, respectively. Ongoing stock option expense is approximately $1.4 million per quarter based on the current stock options outstanding.

Since approximately 33 of the communities we operated at March 31, 2008, are managed rather than owned or leased, as compared to 31 at March 31, 2007, general and administrative expense as a percentage of operating revenues for all communities, including managed communities, may be more meaningful for industry-wide comparisons. General and administrative as a percentage of operating revenues for all communities decreased to 6.9% for the three months ended March 31, 2008 from 7.8% for the three months ended March 31, 2007.

Depreciation and Amortization:

	Three Months Ended March 31,
	2008			2007			$D		% D
	(in thousands, except percentages)

Depreciation and amortization	$	31,020		$	14,376		$	16,644	115.8	%
As a percent of revenue		16.6	%		13.3	%			3.3	ppt

The increase in depreciation and amortization expense of $16.6 million is primarily the result of $14.1 million in depreciation and amortization expense related to new communities we acquired and a $2.9 million increase from the acquisition of properties formerly leased, partially offset by a decrease in depreciation expense for the remaining communities.

Facility Lease Expense:

	Three Months Ended March 31,
	2008			2007			$D		% D
	(in thousands, except percentages)

Facility lease expense	$	17,355		$	10,124		$	7,231	71.4	%
Above/below market rent		2,524			–			2,524	N/A
Straight-line rent		2,437			174			2,263	1,300.6	%
Total facility lease expense	$	22,316		$	10,298		$	12,018	116.7	%
As a percent of revenue		12.0	%		9.5	%			2.5	ppt

EMERITUS CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Continued

March 31, 2008

The increase in facility lease expense of $12.0 million was primarily due to the operating lease expense increase of $20.4 million due to the addition of new leased communities, partially offset by a decrease of $8.9 million due to the acquisitions of communities formerly leased. The remaining increase was primarily due to annual lease inflators on other leased communities. We leased 72 and 38 communities under operating leases as of March 31, 2008 and 2007, respectively.

Interest Income:

	Three Months Ended March 31,
	2008			2007			$D		% D
	(in thousands, except percentages)

Interest income	$	855		$	591		$	264		44.7	%
As a percent of revenue		0.5	%		0.5	%				.0	ppt

Interest income is primarily attributable to interest earned on invested cash balances, interest earned on collateral paid in advance for workers’ compensation, and interest earned on restricted deposits. Cash and restricted deposit balances were considerably higher in the first quarter of 2008 as compared to the first quarter of 2007.

Interest Expense:

	Three Months Ended March 31,
	2008			2007			$D			% D
	(in thousands, except percentages)

Interest expense	$	(21,991	)	$	(13,533	)	$	(8,458	)		62.5	%
As a percent of revenue		(11.8	%)		(12.5	%)					.7	ppt

The increase in interest expense of $8.5 million for the first quarter of 2008 as compared to the 2007 period is primarily due to an increase of $8.7 million in interest expense from financings on the acquisition of communities, debt assumed in the Summerville acquisition, and unrealized losses on interest rate swaps of $838,000, partially offset by reductions in other interest expense due to the paydowns on loans and mortgages.

Equity Losses in Unconsolidated Joint Ventures:

	Three Months Ended March 31,
	2008			2007			$D			% D
	(in thousands, except percentages)

Equity losses in
unconsolidated joint ventures	$	(1,522	)	$	(569	)	$	(953	)		167.5	%
As a percent of revenue		(0.8	%)		(0.5	%)					(.3	) ppt

The increase in equity losses in unconsolidated joint ventures of $953,000 primarily reflects an increase in net equity losses of $1.5 million from the Blackstone JV, partially offset by a decrease in equity losses in Senior Med. We sold our interest in Senior Med in May 2007. Included in the 2008 Blackstone JV equity loss is a $791,000 expense related to the change in the fair value of an interest rate swap.

EMERITUS CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Continued

March 31, 2008

Other, net:

	Three Months Ended March 31,
	2008			2007			$D		% D
	(in thousands, except percentages)

Other, net	$	409		$	(677	)	$	1,086		(160.4	%)
As a percent of revenue		0.2	%		(0.6	%)				.8	ppt

Other, net primarily reflects $502,000 of amortization of deferred gains in 2008. The balance in 2007 primarily reflects the incentive payment of $1.3 million from the debenture conversion discussed in Note 6 to the Unaudited Condensed Consolidated Financial Statements, offset by $554,000 of amortization of deferred gains.

Income Taxes:

	Three Months Ended March 31,
	2008			2007			$D		% D
	(in thousands, except percentages)

Provision for income taxes	$	(210	)	$	(276	)	$	66		N/A
As a percent of revenue		(0.1	%)		(0.2	%)				(0.1	) ppt

The income tax provision in both the current and prior year period represents estimated state income and franchise tax liabilities.

Net Loss and Property-Related Expense:

In comparing the net loss for the three months ended March 31, 2008 and 2007, it is important to consider our property-related expenses, which include depreciation and amortization, facility lease expense, and interest expense that are directly related to our communities, and which include capital lease accounting treatment, finance accounting treatment, or straight-line accounting treatment of rent escalators for many of our leases. These accounting treatments all result in greater property-related expense than actual lease payments made in the early years of the affected leases and less property-related expense than actual lease payments made in later years, as detailed in the tables below.

Detail of property-related expenses from lease accounting treatment:

	Three Months Ended March 31,
	2008		2007		$D		% D
	(in thousands, except percentages)
Total property-related expense:

Depreciation and amortization	$	31,020	$	14,376	$	16,644		115.8	%
Total facility lease expense		22,316		10,298		12,018		116.7	%
Interest expense		21,991		13,533		8,458		62.5	%
Total property-related expense	$	75,327	$	38,207	$	37,120		97.2	%

EMERITUS CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Continued

March 31, 2008

	Three Months Ended March 31,
	2008			2007			$D			% D
	(in thousands, except percentages)
Property-related expenses from lease accounting treatment:

Depreciation and amortization	$	9,593		$	9,543		$	50			0.5	%
Interest expense		8,688			10,092			(1,404	)		(13.9	%)
Straight-line lease expense		2,437			173			2,264			1,308.7	%
Operating lease expense		17,354			10,124			7,230			71.4	%
Total property-related lease expense		38,072			29,932			8,140			27.2	%
Actual lease payments		(31,580	)		(25,416	)		(6,164	)		24.3	%
Expense in excess of lease payments	$	6,492		$	4,516		$	1,976			43.8	%

EMERITUS CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Continued

March 31, 2008

Same Community Comparison

Of our 256 communities, we have operated 170 communities continuously since January 1, 2007, which we refer to as our “same communities”. The following table sets forth a comparison of same communities results of operations for the three months ended March 31, 2008 and 2007, respectively, excluding general and administrative expenses.

	Three Months Ended March 31,
	(In thousands)
							$D				% D
	2008			2007			Fav / (Unfav)			Fav / (Unfav)
Revenue	$	110,799		$	106,743		$	4,056			3.8	%
Community operations *		(72,025	)		(67,970	)		(4,055	)		(6.0	)
Community operating income		38,774			38,773			1			0.0
Depreciation & amortization		(16,795	)		(14,101	)		(2,694	)		(19.1	)
Facility lease expense		(1,623	)		(10,104	)		8,481			83.9
Operating income		20,356			14,568			5,788			39.7
Interest expense, net		(18,460	)		(12,463	)		(5,997	)		(48.1	)
Operating income after interest expense	$	1,896		$	2,105		$	(209	)		(9.9	%)

* exclusive of depreciation and amortization and facility lease expense shown separately below

These same communities represented $110.8 million or 59.4% of our total revenue of $186.5 million for the first quarter of 2008. The increase in same community revenues of $4.1 million was primarily due to improvements in average revenue per occupied unit.

	Three Months Ended March 31,
	2008			2007			$D		% D

Average monthly revenue per occupied unit	$	3,287		$	3,186		$	101		3.2	%

Average occupancy rate		86.5	%		86.8	%				(.3	) ppt

The increase of $4.1 million in community operations expenses for our same communities was primarily related to increases in employee-related expenses of $3.2 million including salaries and workers’ compensation expense, and increases in contracted services, food costs, utilities, supplies, and marketing costs.

Operating income after interest expense for our same communities decreased from $2.1 million to $1.9 million for a total decrease of $209,000 from the comparable period of 2007 primarily as a result of the property-related expenses discussed above. We will continue our efforts to build our occupancy through increased marketing initiatives, programs that address resident mix and a focus on property improvements and other community-level enhancements to attract additional long-term residents and increase occupancy while maintaining growth in average monthly revenue per unit. We believe that these initiatives will have a positive impact on operating performance over time.

EMERITUS CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Continued

March 31, 2008

Liquidity and Capital Resources

At March 31, 2008, we had cash on hand of $90.2 million compared to $67.7 million at December 31, 2007. We had working capital deficits of $5.5 million and $31.4 million at March 31, 2008 and December 31, 2007, respectively.

We have incurred significant operating losses since our inception. Due to the nature of our business, it is not unusual to operate in the position of a working capital deficit because revenues are collected much more quickly, often in advance, than obligations are required to be paid. The result is a very low level of current assets to the extent cash has been deployed in business development opportunities or to pay down long-term liabilities. Along those lines, the working capital deficit at March 31, 2008, includes $27.5 million of deferred revenue and unearned rental income. The level of current liabilities is not expected to change from period to period in such a way as to require the use of significant cash in excess of normal requirements, except for (i) convertible debentures of $10.5 million, which are due and payable on July 1, 2008, except to the extent converted prior to such date by the holders of the debentures (See Note 6 to the Unaudited Condensed Consolidated Financial Statements above), and (ii) the current portion of long-term debt of $24.1 million due by March 31, 2009.

While we have reported positive cash flows from operating activities over the past three years, our cash flows have not always been sufficient to pay all of our long-term obligations and we have been dependent upon third-party financing or disposition of assets to fund operations. We cannot guarantee that, if necessary in the future, such transactions will be readily available to us, or on terms attractive to us, but we believe that we will be able to sustain positive operating cash flow or have adequate cash reserves and sources of capital for all necessary investing and financing activities including required debt service and capital expenditures through at least the next 12 months. In February 2008, we obtained a $25.0 million unsecured revolving line of credit as described below.

The following is a summary of cash flow information for the three months ended March 31, 2008 and 2007 (in thousands:

	Three Months Ended March 31,
	2008			2007
Cash provided by operating activities	$	20,254		$	6,422
Cash used in investing activities		(17,975	)		(187,375	)
Cash provided by financing activities		20,241			190,118
Increase in cash and cash equivalents		22,520			9,165
Cash and cash equivalents at the beginning of the period		67,710			14,049
Cash and cash equivalents at the end of the period	$	90,230		$	23,214

In the first quarter of 2008 and in each of the previous three years, we reported positive net cash from operating activities in our consolidated statements of cash flows. The increase in cash provided by operating activities in the first quarter of 2008 compared to the prior year period is due primarily to the completion of the Summerville acquisition in September 2007, the strength of the performance of the communities we operated during both periods, and fluctuations in the timing of receivables and payables. Additionally, by purchasing the real estate underlying leased facilities, we replaced lease payments with lower levels of debt service and also avoided scheduled lease escalators.

The decrease in cash used in investing activities was primarily due to the number of prior year acquisitions as compared to the current year. In the first quarter of 2007, we purchased the real estate of 53 communities that we previously operated under lease agreements. As a result, cash paid for acquisitions of property and equipment amounted to $186.0 million in the first quarter of 2007 compared to $9.5 million in the current year period.

The decrease in cash provided by financing activities was related to the decrease in acquisition activity described in the previous paragraph. As a result, proceeds from mortgage financings, net of repayments, amounted to $192.5

EMERITUS CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Continued

March 31, 2008

million in the first quarter of 2007 compared to $31.5 million in the current year period, and debt issuance costs decreased over these same periods by $1.6 million. The remaining decrease is due primarily to fluctuations in restricted cash balances ($4.0 million) and an increase in deposits paid related to pending financing transactions ($4.9 million).

At March 31, 2008, we had payment obligations for long-term debt, capital and financing leases, and convertible debentures due in the next 12 months totaling approximately $59.3 million. In addition, for the year ending December 31, 2008, we anticipate that we will make investments of approximately $19.9 million to $24.7 million for capital expenditures, comprised of approximately $13.9 million to $14.7 million of routine capital expenditures (including corporate capital expenditures) and approximately $6.0 million to $10.0 million of net capital expenditures in connection with our community expansion and development program. In the first quarter of 2008, our capital expenditures totaled $9.5 million, of which $5.2 million was for routine capital requirements and $4.3 million related to community expansion and development, including projects begun in 2007. We had $90.2 million of available cash at March 31, 2008, to fund any 2008 payment requirements in excess of cash generated from operations. The convertible debentures in the amount of $10.5 million due in July 2008 are convertible into common stock at $22.00 per share. On April 30, 2008, our stock price closed at $24.65. To the extent the debentures are not converted prior to the July 1, 2008, maturity date, we will need to use cash to repay them. However, we cannot be assured that the trading value of our common stock will continue to exceed the $22.00 conversion rate.

On April 30, 2008, we refinanced $20.0 million in long-term debt due in August 2008 that is secured by the assets of five communities owned by us. We also extended the term of a $21.4 million note payable due in March 2008 to March 2009. We will need to continue our improvements in operating performance or seek other sources of cash to meet our payment obligations in future years. The United States economy experienced a significant decline in the housing market and a related weakness in the availability and affordability of credit during 2007. We believe that the slowdown in the housing market and the constriction of credit are likely to continue well into 2008. Moreover, leading economic indicators such as employment levels and income growth predict a downward trend in the United States economy during 2008, and some commentators have predicted a recession. However, we believe that need-driven demand for our services continues to grow and remains resilient, in spite of the overall housing and economic concerns, as evidenced by our improvements in occupancy and cash flows, and our ability to finance the acquisition of 121 properties during 2007 and 2008, including the NHP acquisition of 24 communities completed in April 2008.

As a consequence of our property and lease transactions in 2007, our long-term debt, including convertible debentures, has increased from $113.0 million at December 31, 2006, to $776.2 million at March 31, 2008. Our obligations under operating leases have increased from $299.3 million to $851.8 million primarily due to the Summerville acquisition, and our capital lease and financing obligations have decreased from $608.6 million to $519.9 million. Many of our debt instruments and leases contain “cross-default” provisions pursuant to which a default under one obligation can cause a default under one or more other obligations to the same lender or lessor. Such cross-default provisions affect the majority of our properties and as a result, any event of default could cause a material adverse effect on our financial condition. Defaults can include certain financial covenants, which generally relate to lease coverage and cash flow. In addition, we are required to maintain the leased properties in a reasonable and prudent manner. For the three months ended March 31, 2008, we were in violation of one or more covenants in certain of our leases, but have obtained waivers from the owners related to these lease covenant defaults. The waivers expire on April 1, 2009.

On February 8, 2008, we entered into a credit agreement with Wells Fargo Bank, National Association, which provides a $25.0 million unsecured revolving line of credit. The credit agreement permits us to borrow from time to time up to $25.0 million on an unsecured basis. The credit agreement also allows us to obtain letters of credit from the lender, provided that outstanding letters of credit and any borrowings outstanding do not exceed $25.0 million. See Note 5, Long-Term Debt, for further details. There were no outstanding borrowings under the line of credit as of March 31, 2008.

EMERITUS CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Continued

March 31, 2008

The following table summarizes our contractual obligations at March 31, 2008, (in thousands):

	Principal and Lease Payments Due by Period
									After 5
Contractual Obligations	Total		1 year		2-3 years		4-5 years		years
Long-term debt, including current portion	$	765,785	$	24,067	$	125,193	$	295,937	$	320,588
Capital lease and financing obligations,
including current portion		519,925		24,760		57,993		71,889		365,283
Operating leases		851,790		68,358		139,897		143,194		500,341
Convertible debentures		10,455		10,455		-		-		-
	$	2,147,955	$	127,640	$	323,083	$	511,020	$	1,186,212

The following table summarizes interest on our contractual obligations at March 31, 2008, (in thousands):

	Interest Due by Period
									After 5
Contractual Obligations	Total		1 year		2-3 years		4-5 years		years
Long-term debt	$	270,149	$	48,344	$	82,089	$	60,429	$	79,287
Capital lease and financing obligations		268,797		33,991		63,266		55,500		116,040
Convertible debentures		327		327		-		-		-
	$	539,273	$	82,662	$	145,355	$	115,929	$	195,327

Recent Accounting Pronouncements

For a discussion of recently issued accounting pronouncements, see Note 2 to the Unaudited Condensed Consolidated Financial Statements included in this report.

Impact of Inflation

To date, inflation has not had a significant impact on us. Inflation could, however, affect our future revenues and operating income due to our dependence on the senior resident population, most of whom rely on relatively fixed incomes to pay for our services. The monthly charges for the resident's unit and assisted living services are influenced by the location of the community and local competition. Our ability to increase revenues in proportion to increased operating expenses may be limited. We typically do not rely to a significant extent on governmental reimbursement programs, which accounted for approximately 8.4% of revenues for the three months ended March 31, 2008. In pricing our services, we attempt to anticipate inflation levels, but there can be no assurance that we will be able to respond to inflationary pressures in the future. The near-term negative economic outlook in the United States may impact our ability to raise our prices.

Non-GAAP Measures

A non-GAAP financial measure is generally defined as one that purports to measure historical or future financial performance, financial position, or cash flows, but excludes or includes amounts that would not be included in most GAAP measures. In this report, we define and use the non-GAAP financial measure of Adjusted EBITDA, as set forth below:

EMERITUS CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Continued

March 31, 2008

Definition of Adjusted EBITDA:

We define Adjusted EBITDA as net loss adjusted for:

gains or losses, net of tax, in discontinued operations,

provision or benefit for income taxes,

equity earnings or losses in unconsolidated joint ventures,

gains or losses on sale of assets or investments,

depreciation and amortization,

impairment losses,

amortization of deferred gains,

non-cash stock option compensation expense,

interest expense,

interest income, and

other non-cash unusual adjustments

Management's Use of Adjusted EBITDA:

We use Adjusted EBITDA to assess our overall financial and operating performance. We believe this non-GAAP measure, as we have defined it, is useful in identifying trends in our day-to-day performance because it excludes items that have little or no significance to our day-to-day operations. This measure provides an assessment of controllable expenses and affords management the ability to make decisions, which are expected to facilitate meeting current financial goals, as well as achieve optimal financial performance. It provides an indicator for management to determine if adjustments to current spending levels are needed.

Adjusted EBITDA provides us with a measure of financial performance, independent of items that are beyond the control of management in the short-term, such as depreciation and amortization, taxation, and interest expense associated with our capital structure. This metric measures our financial performance based on operational factors that management can influence in the short-term, namely the cost structure or expenses of the organization. Adjusted EBITDA is one of the metrics used by senior management to review the financial performance of the business on a monthly basis and is used by research analysts and investors to evaluate the performance and value of the companies in our industry.

Limitations of Adjusted EBITDA:

Adjusted EBITDA has limitations as an analytical tool. It should not be viewed in isolation or as a substitute for GAAP measures of earnings. Material limitations in making the adjustments to our losses to calculate Adjusted EBITDA and using this non-GAAP financial measure as compared to GAAP net loss includes:

The items excluded from the calculation of Adjusted EBITDA generally represent income or expense items that may have a significant affect on our financial results,

Items determined to be non-recurring in nature could, nevertheless, re-occur in the future, and

Depreciation and amortization, while not directly affecting our current cash position, does represent wear and tear and/or reduction in value of our properties. If the cost to maintain our properties exceeds our expected routine capital expenditures, then this could affect our ability to attract and retain long-term residents at our communities.

An investor or potential investor may find this important in evaluating our performance and results of operations. We use this non-GAAP measure to provide a more complete understanding of the factors and trends affecting our business.

EMERITUS CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Continued

March 31, 2008

Adjusted EBITDA is not an alternative to net loss, loss from continuing operations, or cash flows provided by or used in operating activities as calculated and presented in accordance with GAAP. You should not rely on Adjusted EBITDA as a substitute for any such GAAP financial measure. We strongly urge you to review the reconciliation of GAAP net loss to Adjusted EBITDA presented below, along with our consolidated balance sheets, statements of operations, and cash flows. In addition, because Adjusted EBITDA is not a measure of financial performance under GAAP and is susceptible to varying calculations, this measure as presented may differ from and may not be comparable to similarly titled measures used by other companies.

The table below shows the reconciliation of net loss to Adjusted EBITDA for the three months ended March 31, 2008 and 2007:

	Three Months Ended
	March 31,
	2008			2007

Net loss	$	(25,968	)	$	(9,735	)
Provision for income taxes		210			276
Equity losses in unconsolidated joint ventures		1,522			569
Depreciation and amortization		31,020			14,376
Amortization of deferred gains		(502	)		(554	)
Non-cash stock option compensation expenses		1,382			538
Convertible debentures conversion costs		-			1,329
Interest expense		21,991			13,533
Interest income		(855	)		(591	)
Discontinued operations		494			290
Adjusted EBITDA	$	29,294		$	20,031

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our earnings are affected by changes in interest rates as a result of our short-term and long-term borrowings. At March 31, 2008, we had approximately $99.6 million of variable rate borrowings based on the LIBOR rate. As of March 31, 2008, our weighted average variable rate is 1.98% in excess of the LIBOR rate. For every 1% change in the LIBOR rate, our interest expense will change by approximately $996,000 annually. This analysis does not consider changes in the actual level of borrowings or operating lease obligations that may occur subsequent to March 31, 2008. This analysis also does not consider the effects of the reduced level of overall economic activity that could exist in such an environment, nor does it consider actions that management might be able to take with respect to our financial structure to mitigate the exposure to such a change.

We currently have a $19.6 million interest rate swap contract that matures in August 2012 and a $12.4 million interest rate swap contract that matures in January 2010. A 100 basis point increase in interest rates would increase the combined fair value of these swaps by approximately $995,000 and a 100 basis point decrease in interest rates would decrease the combined fair value of these swaps by approximately $1.0 million.

The downturn in the United States housing market in 2007 triggered a constriction in the availability of credit that is expected to continue in 2008. This could impact our ability to borrow money or refinance existing obligations at acceptable rates of interest. Thus far, we have experienced no significant barriers to obtaining credit and do not expect to in the near future. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources.”

Item 4. Controls and Procedures

(a) Evaluation of disclosure controls and procedures.

Our co-chief executive officers and our chief financial officer, after evaluating the effectiveness of our “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this quarterly report, have concluded that, as of that date, our disclosure controls and procedures were effective.

(b)	Changes in internal controls

We also carried out an evaluation of the internal control over financial reporting to determine whether any changes occurred during the period covered by this report. Based on such evaluation, there has been no change in our internal control over financial reporting that occurred during the most recently completed fiscal quarter ended March 31, 2008, that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

[The rest of this page is intentionally left blank]

PART II. OTHER INFORMATION

Items 2, 3, 4, and 5 are not applicable.

Item 1. Legal Proceedings

From time to time, we are subject to lawsuits and other matters in the normal course of business, including claims related to general and professional liability. Accruals for these claims are based upon actuarial and/or estimated exposure, taking into account self-insured retention or deductibles, as applicable. While we cannot predict the results with certainty, we do not believe that any liability from any such lawsuits or other matters will have a material effect on our financial position, results of operations, or liquidity.

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2007, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

Item 6. Exhibits

See Index to Exhibits, which is incorporated by reference.

SIGNATURE

Pursuant to the requirements 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.

Dated: May 9, 2008	EMERITUS CORPORATION
	(Registrant)


	/s/ Raymond R. Brandstrom
	Raymond R. Brandstrom, Executive Vice President - Finance, Chief Financial Officer, and Secretary

Index to Exhibits

			Footnote
Number	Description		Number

10.2	Amended and Restated Stock Option Plan for Nonemployee Directors (as amended through
	December 7, 2005).		(1)
10.3	Amended and Restated 1998 Employee Stock Purchase Plan (as amended and restated
	as of March 26, 2008).
10.7	Documents Relating to the Purchase of communities from Nationwide Health Properties, Inc. (NHP)
	(24 communities)
	10.70.02	First Amendment to Purchase and Sale Agreement dated March 25, 2008, by and among Nationwide
		Health Properties, Inc. (NHP) and its affiliated signatories and Emeritus Corporation	(1)
	10.70.03	Master Credit Facility Agreement dated April 1, 2008, by and among Borrowers signatory
		hereto and Capmark Finance, Inc.	(1)
	10.70.04	Master Promissory Note dated April 1, 2008, in the principal amount of $241,889,868. payable to
		Capmark Bank.	(1)
	10.70.05	Promissory Note of Emeritus Corporation dated March 31, 2008, in the principal
		amount of $30 million payable to Nationwide Health Properties, Inc.	(1)
31.1		Certification of Periodic Reports
	31.1.1	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302
		of the Sarbanes-Oxley Act of 2002 for Daniel R. Baty dated May 9, 2008.	(1)
	31.1.2	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302
		of the Sarbanes-Oxley Act of 2002 for L. Granger Cobb dated May 9, 2008.	(1)
	31.1.3	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302
		of the Sarbanes-Oxley Act of 2002 for Raymond R. Brandstrom dated May 9, 2008.	(1)
32.1		Certification of Periodic Reports
	32.1.1	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906
		of the Sarbanes-Oxley Act of 2002 for Daniel R. Baty dated May 9, 2008.	(1)
	32.1.2	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906
		of the Sarbanes-Oxley Act of 2002 for L. Granger Cobb dated May 9, 2008.	(1)
	32.1.3	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906
		of the Sarbanes-Oxley Act of 2002 for Raymond R. Brandstrom dated May 9, 2008.	(1)

Footnotes:

(1)	Filed herewith.

EMERITUS CORPORATION

AMENDED AND RESTATED STOCK OPTION PLAN FOR NONEMPLOYEE DIRECTORS

SECTION 1 PURPOSES

The purpose of the Emeritus Corporation Stock Option Plan for Nonemployee Directors (this "Plan") is to attract and retain the services of experienced and knowledgeable nonemployee directors for Emeritus Corporation (the "Company") and to provide added incentive to such directors by providing an opportunity for stock ownership in the Company.

SECTION 2 ADMINISTRATION

The administrator of this Plan (the "Plan Administrator") shall be the Board of Directors of the Company (the "Board"). Subject to the terms of this Plan, the Plan Administrator shall have the power to construe the provisions of this Plan, to determine all questions arising thereunder and to adopt and amend such rules and regulations for the administration of this Plan as it may deem desirable. No member of the Plan Administrator shall participate in any vote by the Plan Administrator on any matter materially affecting the rights of any such member under this Plan.

SECTION 3 SHARES SUBJECT TO THE PLAN

Subject to adjustment in accordance with Section 6 hereof, the total number of shares of the Company's common stock (the "Common Stock") for which options may be granted under this Plan is 350,000 as such Common Stock was constituted on the effective date of this Plan (the "Shares"). The Shares shall be shares currently authorized but unissued or subsequently acquired by the Company and shall include shares representing the unexercised portion of any option granted under this Plan which expires or terminates without being exercised in full.

SECTION 4 ELIGIBILITY

Each member of the Board elected or appointed who is not otherwise an employee of the Company or any parent or subsidiary corporation (an "Eligible Director").

4.1

New Director Grants

Each member of the Board who is an Eligible Director shall automatically receive a nonqualified stock option to purchase 2,500 Shares immediately following

his or her initial election or appointment to the Board (each a "New Director Grant"). New Director Grants shall be fully vested on the date of grant.

4.2

Annual Grants

Commencing with the 1997 annual meeting of shareholders, each Eligible Director shall automatically receive a nonqualified stock option to purchase 7,500 Shares immediately following each year's annual meeting of shareholders (each an "Annual Grant"). Annual Grants shall fully vest on the day immediately prior to the next succeeding annual meeting of shareholders.

SECTION 5 TERMS AND CONDITIONS OF OPTIONS

Each option granted to an Eligible Director under this Plan and the issuance of Shares thereunder shall be subject to the following terms:

5.1

Option Agreement

Each option shall be evidenced by an option agreement (an "Agreement") duly executed on behalf of the Company. Each Agreement shall comply with and be subject to the terms and conditions of this Plan. Any Agreement may contain such other terms, provisions and conditions not inconsistent with this Plan as may be determined by the Plan Administrator.

5.2

Option Exercise Price

The option exercise price for an option shall be the closing price, or if there is no closing price, the mean between the high and the low sale price of shares of Common Stock on the American Stock Exchange on the day the option is granted or, if no Common Stock was traded on such date, on the next succeeding day on which Common Stock is so traded.

5.3

Vesting and Exercisability

Each Initial Grant and New Director Grant shall be fully vested on the date of grant and each Annual Grant shall fully vest on the day immediately prior to the first annual shareholders meeting occurring after such Annual Grant; provided, however, that the Plan Administrator shall have the authority, at any time following the date of an Annual Grant, to allow such Annual Grant to vest at an earlier date or to waive the vesting requirement of such Annual Grant entirely.

5.4 Time and Manner of Exercise of Option

Each option may be exercised in whole or in part at any time and from time to time, subject to shareholder approval of this Plan; provided, however, that no fewer than 100 of the Shares purchasable under the option (or the remaining Shares then purchasable under the option, if less than 100) may be purchased upon any exercise of any option hereunder and that only whole Shares will be issued pursuant to the exercise of any option.

Any option may be exercised by giving written notice, signed by the person exercising the option, to the Company stating the number of Shares with respect to which the option is being exercised, accompanied by payment in full for such Shares, which payment may be in whole or in part (a) in cash or by check, (b) in shares of Common Stock already owned for at least six months by the person exercising the option, valued at fair market value at the time of such exercise, or (c) to the extent permitted by law, by delivery of a properly executed exercise notice, together with irrevocable instructions to a broker, to properly deliver to the Company the amount of sale proceeds to pay the exercise price, all in accordance with the regulations of the Federal Reserve Board.

5.5

Term of Options

Each option shall expire ten years from the date of the granting thereof, but shall be subject to earlier termination as follows:

(a) In the event that an Optionee ceases to be a director of the Company for any reason other than the death of the Optionee, the Optionee's vested options may be exercised by him or her only within three months after the date such Optionee ceases to be a director of the Company.

(b) In the event of the death of an Optionee, whether during the Optionee's service as a director or during the three-month period referred to in Section 5.5(a), the Optionee's vested options shall be exercisable, and such options shall expire unless exercised within twelve months after the date of the Optionee's death, by the legal representatives or the estate of such Optionee, by any person or persons whom the Optionee shall have designated in writing on forms prescribed by and filed with the Company or, if no such designation has been made, by the person or persons to whom the Optionee's rights have passed by will or the laws of descent and distribution.

5.6

Transferability

During an Optionee's lifetime, an option may be exercised only by the Optionee. Options granted under this Plan and the rights and privileges conferred

thereby shall not be subject to execution, attachment or similar process and may not be transferred, assigned, pledged or hypothecated in any manner (whether by operation of law or otherwise) other than by will or by the applicable laws of descent and distribution except that, to the extent permitted by applicable law and Rule 16b-3 promulgated under Section 16(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Plan Administrator may permit an Optionee to designate in writing during the Optionee's lifetime a beneficiary to receive and exercise options in the event of the Optionee's death (as provided in Section 5.5(b)). Any attempt to transfer, assign, pledge, hypothecate or otherwise dispose of any option under this Plan or of any right or privilege conferred thereby, contrary to the provisions of this Plan, or the sale or levy or any attachment or similar process upon the rights and privileges conferred hereby, shall be null and void.

5.7

Participant's or Successor's Rights as Shareholder

Neither an Optionee nor the Optionee's successor in interest shall have any rights as a shareholder of the Company with respect to any Shares subject to an option granted to such person until such person becomes a holder of record of such Shares.

5.8

Limitation as to Directorship

Neither this Plan, nor the granting of an option, nor any other action taken pursuant to this Plan shall constitute or be evidence of any agreement or understanding, express or implied, that an Optionee has a right to continue as a director for any period of time or at any particular rate of compensation.

5.9

Regulatory Approval and Compliance

The Company shall not be required to issue any certificate or certificates for Shares upon the exercise of an option granted under this Plan, or record as a holder of record of Shares the name of the individual exercising an option under this Plan, without obtaining to the complete satisfaction of the Plan Administrator the approval of all regulatory bodies deemed necessary by the Plan Administrator, and without complying, to the Plan Administrator's complete satisfaction, with all rules and regulations under federal, state or local law deemed applicable by the Plan Administrator.

SECTION 6 ADJUSTMENTS UPON CHANGES IN CAPITALIZATION

6.1

Recapitalization

The aggregate number and class of shares for which options may be granted under this Plan, the number and class of shares covered by each outstanding option

and the exercise price per share thereof (but not the total price), and each such option, shall all be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock of the Company resulting from a split or consolidation of shares or any like capital adjustment, or the payment of any stock dividend.

6.2

Effect of Liquidation, Reorganization or Change in Control

6.2.1

Cash, Stock or Other Property for Stock

Except as provided in subsection 6.2.2, upon a merger (other than a merger of the Company in which the holders of shares of Common Stock immediately prior to the merger have the same proportionate ownership of shares of Common Stock in the surviving corporation immediately after the merger), consolidation, acquisition of property or stock, separation, reorganization (other than a mere reincorporation or the creation of a holding company) or liquidation of the Company, as a result of which the shareholders of the Company receive cash, stock or other property in exchange for or in connection with their shares of Common Stock, each option shall terminate, but the Optionee shall have the right immediately prior to any such merger, consolidation, acquisition of property or stock, reorganization or liquidation to exercise such option in whole or in part whether or not the vesting requirements set forth in the option agreement have been satisfied.

6.2.2

Conversion of Options on Stock for Stock Exchange

If the shareholders of the Company receive capital stock of another corporation ("Exchange Stock") in exchange for their shares of Common Stock in any transaction involving a merger, consolidation, acquisition of property or stock, or reorganization, all options shall be converted into options to purchase shares of Exchange Stock unless the Company and the corporation issuing the Exchange Stock, in their sole discretion, determine that any or all such options shall not be converted into options to purchase shares of Exchange Stock but instead shall terminate in accordance with the provisions of subsection 6.2.1. The amount and price of converted options shall be determined by adjusting the amount and price of the options granted hereunder in the same proportion as used for determining the number of shares of Exchange Stock the holders of shares of the Common Stock receive in such merger, consolidation, acquisition of property or stock, or reorganization.

6.3

Fractional Shares

In the event of any adjustment in the number of shares covered by any option, any fractional shares resulting from such adjustment shall be disregarded and each such option shall cover only the number of full shares resulting from such adjustment.

SECTION 7 EXPENSES

All costs and expenses of the adoption and administration of this Plan shall be borne by the Company; none of such expenses shall be charged to any Optionee.

SECTION 8 COMPLIANCE WITH RULE 16b-3

It is the intention of the Company that this Plan comply in all respects with Rule 16b-3 promulgated under Section 16(b) of the Exchange Act and that Plan participants remain disinterested persons ("Disinterested Persons") for purposes of administering other employee benefit plans of the Company and having such other plans be exempt from Section 16(b) of the Exchange Act. Therefore, if any Plan provision is later found not to be in compliance with Rule 16b-3 or if any Plan provision would disqualify Plan participants from remaining Disinterested Persons, that provision shall be deemed null and void, and in all events this Plan shall be construed in favor of its meeting the requirements of Rule 16b-3.

SECTION 9 AMENDMENT AND TERMINATION

The Board may amend, terminate or suspend this Plan at any time, in its sole and absolute discretion; provided, however, that if required to qualify this Plan under Rule 16b-3 under Section 16(b) of the Exchange Act, no amendment may be made more than once every six months that would change the amount, price, timing or vesting of the options, other than to comply with changes in the Internal Revenue Code of 1986, as amended, or the rules and regulations thereunder; provided further that if required to qualify this Plan under Rule 16b-3, no amendment that would

(a) materially increase the number of Shares that may be issued under this Plan,

(b) materially modify the requirements as to eligibility for participation in this Plan,

(d) otherwise require shareholder approval under any applicable law or regulation

shall be made without the approval of the Company's shareholders.

SECTION 10 EFFECTIVE DATE AND DURATION

This Plan shall be effective on November 20, 1995, the effective date of the Company’s registration statement filed by the Company under the Securities Act of 1933, as amended, in connection with the Company’s initial underwritten public offering. This Plan shall continue in effect until it is terminated by action of the Board or the Company's shareholders, but such termination shall not affect the then-outstanding terms of any options.

Amended and restated as of December 7, 2005.

EMERITUS CORPORATION

AMENDED 1998 EMPLOYEE STOCK PURCHASE PLAN

(as amended and restated as of March 26, 2008)

The purposes of the Emeritus Corporation 1998 Employee Stock Purchase Plan (the "Plan") are to (a) assist qualified employees of Emeritus Corporation, a Washington corporation (the "Company"), and its designated subsidiary corporations in acquiring a stock ownership interest in the Company pursuant to a plan that is intended to qualify as an "employee stock purchase plan" under Section 423 of the Internal Revenue Code of 1986, as amended (the "Code"), and (b) help employees provide for their future security and encourage them to remain in the employ of the Company and its subsidiary corporations. Stock purchased under the Plan may be paid for by regular payroll deductions. Only employees of the Company and its designated subsidiary corporations are eligible to participate in the Plan, and participation is voluntary.

SECTION 2. DEFINITIONS

For purposes of the Plan, the following terms shall be defined as set forth below.

"Board" means the Board of Directors of the Company.

"Code" means the Internal Revenue Code of 1986, as amended.

"Committee" means the Company's Compensation Committee or another committee appointed by the Board and given authority by the Board to administer the Plan.

"Company" means Emeritus Corporation, a Washington corporation.

"Designated Subsidiary" includes all domestic Subsidiary Corporations and such other Subsidiary Corporations as may be designated from time to time by the Board or the Committee as eligible to participate in the Plan.

"Eligible Compensation" means all regular cash compensation, including overtime, cash bonuses and commissions. Regular cash compensation does not include severance pay, hiring and relocation bonuses, pay in lieu of vacation or sick leave, or any other special payments, or any gain from stock option exercises.

"Eligible Employee" means any employee of the Company or any Designated Subsidiary who is in the employ of the Company or a Designated Subsidiary on one or more Offering Dates and who meets the following criteria:

(a) the employee does not, immediately after the Option is granted, own stock (as defined by the Code) possessing 5% or more of the total combined voting power or value of all classes of stock of the Company or of its Parent or Subsidiary Corporations;

(b) the employee has been employed for at least six months; provided, however, that the Plan Administrator, in its sole discretion, may reduce or increase (to up to two years) this minimum requirement for future Offering Periods;

(c) the employee's customary employment is for more than 20 hours per week; provided, however, that the Plan Administrator, in its sole discretion, may reduce this minimum hourly requirement for future Offering Periods; and

(d) the employee's customary employment is for more than five months in any calendar year; provided, however, that the Plan Administrator, in its sole discretion, may reduce this minimum requirement for future Offering Periods.

If the Company permits any employee of a Designated Subsidiary to participate in the Plan, then all employees of that Designated Subsidiary who meet the requirements of this paragraph shall also be considered Eligible Employees.

"Enrollment Period" has the meaning set forth in Section 6.1.

"ESPP Broker" has the meaning set forth in Section 10.

"Offering" has the meaning set forth in Section 5.1.

"Offering Date" means the first day of an Offering.

"Offering Period" has the meaning set forth in Section 5.1.

"Option" means an option granted under the Plan to an Eligible Employee to purchase shares of Stock.

"Parent Corporation" means any corporation, other than the Company, in an unbroken chain of corporations ending with the Company if, at the time of the granting of the Option, each of the corporations, other than the Company, owns stock

possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.

"Participant" means any Eligible Employee who has elected to participate in an Offering in accordance with the procedures set forth in Section 6.1 and who has not withdrawn from the Plan or whose participation in the Plan is not terminated.

"Plan" means the Emeritus Corporation 1998 Employee Stock Purchase Plan, as it may be amended from time to time.

"Plan Administrator" has the meaning set forth in Section 3.1.

"Purchase Date" means the last day of each Purchase Period.

"Purchase Period" has the meaning set forth in Section 5.2.

"Purchase Price" has the meaning set forth in Section 8.

"Stock" means the Common Stock, $.0001 par value per share, of the Company.

"Subscription" has the meaning set forth in Section 6.1.

"Subsidiary Corporation" means any corporation, other than the Company, in an unbroken chain of corporations beginning with the Company if, at the time of the granting of the Option, each of the corporations, other than the last corporation in the unbroken chain, owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.

SECTION 3. ADMINISTRATION

3.1	Plan Administrator

The Plan shall be administered by the Company's Office of Compensation and Benefits or any other Company group or executive officer designated by the Board or the Committee, except for those items expressly reserved to the Board or the Committee under the Plan. Any decisions made by the Board, the Committee or the Plan Administrator shall be applicable equally to all Eligible Employees.

3.2	Administration and Interpretation by the Plan Administrator

Subject to the provisions of the Plan, the Plan Administrator shall have the authority, in its sole discretion, to determine all matters relating to Options granted under the Plan, including all terms, conditions, restrictions and limitations of Options;

provided, however, that all Participants granted Options pursuant to the Plan shall have the same rights and privileges within the meaning of Code Section 423. The Plan Administrator shall also have exclusive authority to interpret the Plan and may from time to time adopt, and change, rules and regulations of general application for the Plan's administration. The Plan Administrator's interpretation of the Plan and its rules and regulations, and all actions taken and determinations made by the Plan Administrator pursuant to the Plan, unless reserved to the Board or the Committee, shall be conclusive and binding on all parties involved or affected. The Plan Administrator may delegate administrative duties to such of the Company's other officers or employees as the Plan Administrator so determines.

SECTION 4. STOCK SUBJECT TO PLAN

Subject to adjustment from time to time as provided in Section 19, a maximum of 400,000 shares of Stock may be sold under the Plan. Shares sold under the Plan shall be drawn from authorized and unissued shares or shall be shares acquired by the Company. Any shares of Stock subject to an Option that cease to be subject to the Option (other than by reason of exercise of the Option), including, without limitation, in connection with the cancellation or termination of the Option, shall again be available for sale in connection with future grants of Options under the Plan.

SECTION 5. OFFERING DATES

5.1	Offering Periods

(a) The Plan shall be implemented by a series of offerings (each, an "Offering"). Except as otherwise set forth below, Offerings shall commence on July 1, October 1, January 1 and April 1 of each year and end on the next September 30, December 31, March 31 and June 30, respectively, occurring thereafter.

(b) Notwithstanding the foregoing, the Board or the Committee may establish (i) a different term for one or more future Offerings and (ii) different commencing and ending dates for such Offerings; provided, however, that an Offering Period may not exceed five years; and provided, further, that if the Purchase Price may be less than 85% of the fair market value of the Stock on the Purchase Date, the Offering Period may not exceed 27 months.

(c) In the event the first or the last day of an Offering Period is not a regular business day, then the first day of the Offering Period shall be deemed to be the next regular business day and the last day of the Offering Period shall be deemed to be the last preceding regular business day.

(d) An employee who becomes eligible to participate in the Plan after an Offering Period has commenced shall not be eligible to participate in such Offering but may participate in any subsequent Offering, provided that such Eligible Employee is still an Eligible Employee as of the commencement of any such subsequent Offering. Eligible Employees may not participate in more than one Offering at a time.

5.2	Purchase Periods

(a) Each Offering Period shall consist of one or more consecutive purchase periods (each, a "Purchase Period"). Except as otherwise set forth below, Purchase Periods shall continue for three calendar months and shall be coterminous with an Offering Period. Purchase Periods shall commence on July 1, October 1, January 1 and April 1 of each year and end on the next September 30, December 31, March 31 and June 30, respectively, occurring thereafter. The last day of each Purchase Period shall be the Purchase Date for such Purchase Period.

(b) Notwithstanding the foregoing, the Board or the Committee may establish for any future Offering (a) different terms for one or more Purchase Periods within the Offering Period and (b) different commencing dates and Purchase Dates for any such Purchase Periods.

(c) In the event the first or last day of a Purchase Period is not a regular business day, then the first day of the Purchase Period shall be deemed to be the next regular business day and the last day of the Purchase Period shall be deemed to be the last preceding regular business day.

SECTION 6. PARTICIPATION IN THE PLAN

6.1	Initial Participation

An Eligible Employee shall become a Participant on the first Offering Date after satisfying the eligibility requirements and delivering to the Plan Administrator during the enrollment period established by the Plan Administrator (the "Enrollment Period") a subscription (the "Subscription"):

(a) indicating the Eligible Employee's election to participate in the Plan;

(b) authorizing payroll deductions and stating the amount to be deducted regularly from the Participant's pay; and

An Eligible Employee who does not deliver a Subscription to the Plan Administrator during the Enrollment Period shall not participate in the Plan for that Offering Period or any subsequent Offering Period unless such Eligible Employee subsequently enrolls in the Plan by delivering a Subscription to the Plan Administrator during the Enrollment Period for such subsequent Offering Period. The Plan Administrator may, from time to time, change the Enrollment Period for any future Offering as deemed advisable by the Plan Administrator in its sole discretion for the proper administration of the Plan.

6.2	Continued Participation

Unless the Plan Administrator determines otherwise for any future Offering, a Participant shall automatically participate in the next Offering Period until such time as the Participant withdraws from the Plan pursuant to Section 11.2 or terminates employment as provided in Section 12.

SECTION 7. LIMITATIONS ON RIGHT TO PURCHASE SHARES

7.1	$25,000 Limitation

On each Offering Date, a Participant shall be deemed to have been granted an Option to purchase a maximum number of shares of the Stock of the Company equal to an amount determined as follows: an amount equal to $25,000 divided by the fair market value of the Stock of the Company on the applicable Offering Date; provided, however, no Participant shall be entitled to purchase Stock under the Plan (or any other employee stock purchase plan that is intended to meet the requirements of Code Section 423 sponsored by the Company, any Parent Corporation or any Subsidiary Corporation) at a rate that exceeds $25,000 in fair market value, determined as of the Offering Date for each Offering Period (or such other limit as may be imposed by the Code), for each calendar year in which a Participant participates in the Plan (or any other employee stock purchase plan described in this Section 7.1).

7.2	Pro Rata Allocation

In the event the number of shares of Stock that might be purchased by all Participants in the Plan exceeds the number of shares of Stock available in the Plan, the Plan Administrator shall make a pro rata allocation of the remaining shares of

Stock in as uniform a manner as shall be practicable and as the Plan Administrator shall determine to be equitable. Fractional shares may be issued under the Plan unless the Board or the Committee determines otherwise.

SECTION 8. PURCHASE PRICE

(a) The purchase price (the "Purchase Price") at which Stock may be acquired in an Offering pursuant to the exercise of all or any portion of an Option granted under the Plan shall be 85% of the lesser of (i) the fair market value of the Stock on the Offering Date of such Offering and (ii) the fair market value of the Stock on the Purchase Date. Notwithstanding the foregoing, the Board or the Committee may establish a different Purchase Price for any future Offering, which shall not be less than the Purchase Price previously stated.

(b) The fair market value of the Stock on the Offering Date or on the Purchase Date shall be the closing price for the Stock as reported for such day by the American Stock Exchange. If no sales of the Stock were made on the American Stock Exchange on the transaction date, fair market value shall mean the closing price for the Stock as reported for the next preceding day on which sales of the Stock were made on the American Stock Exchange.

(c) Notwithstanding the foregoing, if an increase in the number of shares authorized for issuance under the Plan is approved and all or a portion of such additional shares are to be issued during one or more Offerings that are underway at the time of shareholder approval of such increase (the "Additional Shares"), then, if as of the date of such shareholder approval, the fair market value of a share of Stock is higher than the fair market value on the Offering Date for any such Offering, the Purchase Price for the Additional Shares shall be 85% of the lesser of (i) the Stock's fair market value on the date of such shareholder approval and (ii) the fair market value of the Stock on the Purchase Date.

SECTION 9. PAYMENT OF PURCHASE PRICE

Subject to Section 9.12, Stock that is acquired pursuant to the exercise of all or any portion of an Option may be paid for only by means of payroll deductions from the Participant's Eligible Compensation. Except as set forth in this Section 9, the amount of compensation to be withheld from a Participant's Eligible Compensation during each pay period shall be determined by the Participant's Subscription.

(a) Except as set forth in Section 11.1 and unless the Plan Administrator determines otherwise for an Offering, a Participant may not elect during an Offering Period to increase or decrease the amount withheld from his or her compensation for future pay periods within such Offering Period. Unless otherwise determined by the Plan Administrator for a future Offering, a Participant may elect to increase or decrease the amount to be withheld from his or her compensation for future Offerings; provided, however, that notice of such election must be delivered to the Plan Administrator in such form and in accordance with such terms as the Plan Administrator may establish for an Offering.

(b) Notwithstanding the foregoing, to the extent necessary to comply with Code Section 423 and Section 7.1, a Participant’s payroll deductions may be decreased during any Purchase Period scheduled to end during the current calendar year to 0% at such time that the aggregate of all payroll deductions accumulated with respect to the Offering to which such Purchase Period applies and any other Offering ending within the same calendar year exceed $21,250. Payroll deductions shall re-commence at the rate provided in such Participant’s Subscription at the beginning of the first Purchase Period that is scheduled to end in the following calendar year, unless the Participant terminates participation in the Plan as provided in Section 11.1 or Section 11.2 below.

9.3	Percent Withheld

The amount of payroll withholding with respect to the Plan for any Participant during any pay period shall be at least $5, but not more than 15%, of the Participant's Eligible Compensation for such pay period, but in no event shall the amount of a Participant's payroll withholding exceed the limits of Section 7.1. Amounts shall be withheld in whole dollar or percentage amounts only.

9.4	Payroll Deductions

Payroll deductions shall commence on the first payday following the Offering Date and shall continue through the last payday of the Offering Period unless sooner altered or terminated as provided in the Plan.

9.5	Memorandum Accounts

Individual accounts shall be maintained for each Participant for memorandum purposes only. All payroll deductions from a Participant's compensation shall be

credited to such account but shall be deposited with the general funds of the Company. All payroll deductions received or held by the Company may be used by the Company for any corporate purpose.

No interest shall be paid on payroll deductions received or held by the Company.

9.7	Acquisition of Stock

On each Purchase Date of an Offering Period, each Participant shall automatically acquire, pursuant to the exercise of the Participant's Option, the number of shares of Stock arrived at by dividing the total amount of the Participant's accumulated payroll deductions for the Purchase Period by the Purchase Price; provided, however, that the number of shares of Stock purchased by the Participant shall not exceed the number of whole shares of Stock so determined, if the Board or the Committee has determined for any future Offering that fractional shares may not be issued under the Plan; and provided, further, that the number of shares of Stock purchased by the Participant shall not exceed the number of shares for which Options have been granted to the Participant pursuant to Section 7.1.

9.8	Carryover of Account

Any cash balance remaining in the Participant's account at the termination of each Offering shall be refunded to the Participant as soon as practical after the Purchase Date without the payment of any interest; provided, however, that if the Participant participates in the next Offering, any cash balance remaining in the Participant's account shall be applied to the purchase of Stock in the new Offering, provided such purchase complies with Section 7.1.

9.9	Withholding Obligations

At the time the Option is exercised, in whole or in part, or at the time some or all of the Stock is disposed of, the Participant shall make adequate provision for federal and state withholding obligations of the Company, if any, that arise upon exercise of the Option or upon disposition of the Stock. The Company may withhold from the Participant's compensation the amount necessary to meet such withholding obligations.

9.10 Termination of Participation

No Stock shall be purchased on behalf of a Participant on a Purchase Date if his or her participation in the Plan has terminated prior to such Purchase Date.

9.11	Procedural Matters

The Plan Administrator may, from time to time, establish (a) limitations on the frequency and/or number of any permitted changes in the amount withheld during an Offering, (b) an exchange ratio applicable to amounts withheld in a currency other than U.S. dollars, (c) payroll withholding in excess of the amount designated by a Participant in order to adjust for delays or mistakes in the Company's processing of properly completed withholding elections, and (d) such other limitations or procedures as deemed advisable by the Plan Administrator, in its sole discretion, that are consistent with the Plan and in accordance with the requirements of Code Section 423.

9.12	Leaves of Absence

During leaves of absence approved by the Company and meeting the requirements of the applicable Treasury Regulations promulgated under the Code, a Participant may continue participation in the Plan by delivering cash payments to the Plan Administrator on the Participant's normal paydays equal to the amount of his or her payroll deduction under the Plan had the Participant not taken a leave of absence.

SECTION 10. STOCK PURCHASED UNDER THE PLAN

If the Plan Administrator designates or approves a stock brokerage or other financial services firm (the "ESPP Broker") to hold shares purchased under the Plan for the accounts of Participants, the following procedures shall apply. Promptly following each Purchase Date, the number of shares of Stock purchased by each Participant shall be deposited into an account established in the Participant's name with the ESPP Broker. A Participant shall be free to undertake a disposition of the shares of Stock in his or her account at any time, but, in the absence of such a disposition, the shares of Stock must remain in the Participant's account at the ESPP Broker until the holding period set forth in Code Section 423 has been satisfied. With respect to shares of Stock for which the Code Section 423 holding periods have been satisfied, the Participant may move those shares of Stock to another brokerage account of the Participant' s choosing or request that a stock certificate be issued and

delivered to him or her. A Participant who is not subject to payment of U.S. income taxes may move his or her shares of Stock to another brokerage account of his or her choosing or request that a stock certificate be delivered to him or her at any time, without regard to the Code Section 423 holding period.

10.2	Notice of Disposition

By entering the Plan, each Participant agrees to promptly give the Company notice of any Stock disposed of within the later of one year from the Purchase Date and two years from the Offering Date for such Stock, showing the number of such shares disposed of and the Purchase Date and Offering Date for such Stock. This notice shall not be required if and so long as the Company has a designated ESPP Broker.

SECTION 11. VOLUNTARY WITHDRAWAL

11.1	Withdrawal From an Offering

A Participant may withdraw from an Offering by delivering to the Plan Administrator a notice of withdrawal in the form required by the Plan Administrator for such purpose. Such withdrawal must be elected at least ten days prior to the end of the Purchase Period for which such withdrawal is to be effective or by any other date specified by the Plan Administrator for any future Offering. If a Participant withdraws after the Purchase Date for a Purchase Period of an Offering, the withdrawal shall not affect Stock acquired by the Participant in that Purchase Period and any earlier Purchase Periods. Unless the Plan Administrator establishes a different rule for any future Offering, withdrawal from an Offering shall not result in withdrawal from the Plan and any succeeding Offering therein. A Participant is prohibited from again participating in the same Offering at any time upon withdrawal from such Offering.

11.2	Withdrawal From the Plan

A Participant may withdraw from the Plan by delivering to the Plan Administrator a notice of withdrawal in the form required by the Plan Administrator for such purpose. Such notice must be delivered at least ten days prior to the end of the Purchase Period for which such withdrawal is to be effective or by any other date specified by the Plan Administrator for any future Offering. If a Participant withdraws after the Purchase Date for a Purchase Period of an Offering, the withdrawal shall not affect Stock acquired by the Participant in that Purchase Period and any earlier Purchase Periods. In the event a Participant voluntarily elects to withdraw from the Plan, the withdrawing Participant may not resume participation in

the Plan during the same Offering Period but may participate in any subsequent Offering under the Plan by again satisfying the definition of a Participant.

11.3	Return of Payroll Deductions

Upon withdrawal from an Offering pursuant to Section 11.1 or withdrawal from the Plan pursuant to Section 11.2, the withdrawing Participant's accumulated payroll deductions that have not been applied to the purchase of Stock shall be returned as soon as practical after the withdrawal, without the payment of any interest to the Participant and the Participant's interest in the Offering shall terminate. Such accumulated payroll deductions may not be applied to any other Offering under the Plan.

SECTION 12. TERMINATION OF EMPLOYMENT

Termination of a Participant's employment with the Company for any reason, including retirement, disability or death, or the failure of a Participant to remain an Eligible Employee, shall immediately terminate the Participant's participation in the Plan. The payroll deductions credited to the Participant's account since the last Purchase Date shall, as soon as practical, be returned to the Participant or, in the case of a Participant's death, to the Participant's legal representative, and all the Participant's rights under the Plan shall terminate. Interest shall not be paid on sums returned to a Participant pursuant to this Section 12.

SECTION 13. RESTRICTIONS UPON ASSIGNMENT

An Option granted under the Plan shall not be transferable otherwise than by will or by the applicable laws of descent and distribution and shall be exercisable during the Participant's lifetime only by the Participant. The Plan Administrator will not recognize, and shall be under no duty to recognize, any assignment or purported assignment by a Participant, other than by will or by the applicable laws of descent and distribution, of the Participant's interest in the Plan, of his or her Option, or of any rights under his or her Option.

SECTION 14. NO RIGHTS OF SHAREHOLDER UNTIL SHARES ISSUED

With respect to shares of Stock subject to an Option, a Participant shall not be deemed to be a shareholder of the Company, and he or she shall not have any of the rights or privileges of a shareholder. A Participant shall have the rights and privileges of a shareholder of the Company when, but not until, the shares have been issued following exercise of the Participant's Option.

SECTION 15. AMENDMENT OF THE PLAN

The Board or the Committee may amend the Plan in such respects as it shall deem advisable; provided, however, that, to the extent required for compliance with Code Section 423 or any applicable law or regulation, shareholder approval will be required for any amendment that will (a) increase the total number of shares as to which Options may be granted under the Plan, (b) modify the class of employees eligible to receive Options, or (c) otherwise require shareholder approval under any applicable law or regulation.

SECTION 16. TERMINATION OF THE PLAN

(a) The Board may suspend or terminate the Plan at any time. Unless the Plan shall theretofore have been terminated by the Board, the Plan shall terminate on, and no Options shall be granted after, May 20, 2013. Except as provided in Section 19, no such termination may affect any Options granted prior thereto. No Options shall be granted during any period of suspension of the Plan.

(b) Notwithstanding the foregoing, the Plan or an Offering may be terminated by the Board on a Purchase Date or by the Board's setting a new Purchase Date with respect to an Offering and a Purchase Period then in progress if the Board determines that termination of the Plan and/or the Offering is in the best interests of the Company and the shareholders or if continuation of the Plan and/or the Offering would cause the Company to incur adverse accounting charges as a result of a change after the effective date of the Plan in the generally accepted accounting rules applicable to the Plan.

SECTION 17. NO RIGHTS AS AN EMPLOYEE

Nothing in the Plan shall be construed to give any person (including any Eligible Employee or Participant) the right to remain in the employ of the Company or a Subsidiary Corporation or to affect the right of the Company and a Subsidiary Corporation to terminate the employment of any person (including any Eligible Employee or Participant) at any time with or without cause.

SECTION 18. EFFECT UPON OTHER PLANS

The adoption of the Plan shall not affect any other compensation or incentive plans in effect for the Company or any Subsidiary Corporation. Nothing in the Plan shall be construed to limit the right of the Company or any Subsidiary Corporation to (a) establish any other forms of incentives or compensation for employees of the

Company or any Subsidiary Corporation or (b) grant or assume options otherwise than under the Plan in connection with any proper corporate purpose, including, but not by way of limitation, the grant or assumption of options in connection with the acquisition, by purchase, lease, merger, consolidation or otherwise, of the business, stock or assets of any corporation, firm or association.

SECTION 19. ADJUSTMENTS

19.1	Adjustment of Shares

In the event that, at any time or from time to time, a stock dividend, stock split, spin-off, combination or exchange of shares, recapitalization, merger, consolidation, distribution to shareholders other than a normal cash dividend, or other change in the Company's corporate or capital structure results in (a) the outstanding shares, or any securities exchanged therefor or received in their place, being exchanged for a different number or class of securities of the Company or of any other corporation or (b) new, different or additional securities of the Company or of any other corporation being received by the holders of shares of Stock, then (subject to any required action by the Company's shareholders), the Board or the Committee, in its sole discretion, shall make such equitable adjustments as it shall deem appropriate in the circumstances in (i) the maximum number and kind of securities subject to the Plan as set forth in Section 4 and (ii) the number and kind of securities that are subject to any outstanding Option and the per share price of such securities. The determination by the Board or the Committee as to the terms of any of the foregoing adjustments shall be conclusive and binding.

19.2	Merger, Acquisition or Liquidation of the Company

In the event of the merger or consolidation of the Company into another corporation, the acquisition by another corporation of all or substantially all of the Company's assets, or the liquidation or dissolution of the Company, the Purchase Date with respect to outstanding Options shall be the business day immediately preceding the effective date of such merger, consolidation, acquisition, liquidation or dissolution unless the Board or the Committee shall, in its sole discretion, provide for the assumption or substitution of such Options in a manner complying with Code Section 424(a).

The grant of Options will in no way affect the Company's right to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge,

consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets.

SECTION 20. REGISTRATION

The Company shall be under no obligation to any Participant to register for offering or resale under the Securities Act of 1933, as amended, or register or qualify under state securities laws, any shares of Stock. The Company may issue certificates for shares with such legends and subject to such restrictions on transfer and stop-transfer instructions as counsel for the Company deems necessary or desirable for compliance by the Company with federal and state securities laws.

SECTION 21. EFFECTIVE DATE

The Plan's effective date is the date on which it is approved by the Company's shareholders.

FIRST AMENDMENT TO

PURCHASE AND SALE AGREEMENT

THIS FIRST AMENDMENT TO PURCHASE AND SALE AGREEMENT (this “Agreement”) is made as of March 25, 2008, by and among NATIONWIDE HEALTH PROPERTIES, INC., a Maryland corporation (“NHP”), and its Affiliated signatories hereto that are listed in Schedule 1, as “Seller” (collectively, “Seller”), and EMERITUS CORPORATION, a Washington corporation (“Buyer”), with respect to the following Recitals:

R E C I T A L S:

A. Seller and Buyer have entered into that certain Purchase and Sale Agreement dated as of February 6, 2008 (the “Purchase Agreement”), with respect to certain real property and the improvements located thereon, all as more particularly described in the Purchase Agreement. All initially-capitalized terms used herein shall have the same meaning given to such terms in the Purchase Agreement, unless otherwise defined herein.

B. Pursuant to the terms of the Purchase Agreement, Buyer is required to pay any loan costs, including without limitation, assumption fees or prepayment penalties/defeasance fees associated with the assumption or payoff/defeasance of the Existing Debt.

C. The parties currently intend that the Closing Date will occur on April 2, 2008. The parties have been informed that if the portion of the Existing Debt encumbering the facilities known as (i) Loyalton of Cape May (the “Cape May Debt”) and (ii) Loyalton of Joliet (the “Joliet Debt”) is not prepaid on the last day of a calendar month, accrued interest will be due and payable to the respective lenders for the entire month in which such prepayment occurs.

D. In order to avoid any obligation to pay such additional interest with respect to the Cape May Debt and Joliet Debt, Buyer and Seller have agreed to enter into this Agreement in order to set forth the terms under which the Cape May Debt and Joliet Debt will be prepaid on March 31, 2008.

NOW, THEREFORE, taking into account the foregoing Recitals, and in consideration of the mutual covenants and agreements contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree to amend the Agreement in the following particulars only:

1. Release of Earnest Money Deposit. Notwithstanding anything set forth in the Purchase Agreement, Escrow Agent is hereby instructed to disburse the Deposit to Seller on March 28, 2008 in accordance with the wire transfer instructions set forth on Schedule 2 attached hereto; provided, however, the foregoing shall not be deemed or construed to release Seller from its obligation to return the Deposit to Buyer in the event the Purchase Agreement is terminated pursuant to any of the following provisions thereof: (a) pursuant to Section 10(a)(i), (b) pursuant to Section 10(a)(ii) if the failure of the condition to Closing either (I) is the result of a material breach by Seller of its obligations under the Purchase Agreement, beyond any applicable cure period provided for in Section 10 thereof, or (II) regardless of the fault of Seller, arises out of any

event or circumstance that prevents Seller from consummating the transaction provided for herein, (c) pursuant to Section 10(a)(iv), or (d) pursuant to Section 10(a)(vi).

2. Prepayment of Debt by NHP. At or before 11:00 AM (Pacific) on March 31, 2008, NHP shall wire transfer such amounts to the lenders or applicable loan servicer(s) (the “Lenders”) as is required to prepay the Cape May Debt and Joliet Debt in full as of March 31, 2008 pursuant to Lenders’ written payoff demands delivered to NHP. Buyer hereby acknowledges and agrees that, upon disbursement of such payoff amounts by NHP, the amount of One Million Nine Hundred Eighty-Two Thousand Seven Hundred Seventy-Six and 84/100ths Dollars ($1,982,776.84) shall be deemed to have been advanced by NHP on behalf of Buyer pursuant to the terms of that certain Promissory Note dated as of March 31, 2008 in the original face amount of Thirty Million Dollars ($30,000,000) executed by Buyer in favor of NHP, which amount shall be applied to the prepayment premiums due and payable in connection with the payoff of the Cape May Debt and Joliet Debt.

3. Incorporation of Recitals.

The Recitals to this Agreement are incorporated herein by this reference.

4. Counterparts.

This Agreement may be executed in several original counterparts. Each counterpart shall be deemed to be an original for all purposes, and all counterparts shall together constitute but one and the same instrument.

5. Effect of Agreement.

Except as specifically amended pursuant to the terms of this Agreement, the Purchase Agreement shall remain unmodified and in full force and effect.

[The remainder of this page is intentionally left blank.]

IN WITNESS WHEREOF, the parties hereby execute this Agreement as of the day and year first set forth above.

	“SELLER”
WITNESSES: /s/ Kevin Sherry Printed name: Kevin Sherry /s/ Jan Eckhardt Printed name: Jan Eckhardt	NATIONWIDE HEALTH PROPERTIES, INC., a Maryland corporation By: /s/ Brent P. Chappell Name: Brent P. Chappell ______________ Title: _VP Portfolio Management___________
WITNESSES: /s/ Kevin Sherry Printed name: Kevin Sherry /s/ Jan Eckhardt Printed name: Jan Eckhardt	NH TEXAS PROPERTIES LIMITED PARTNERSHIP, a Texas limited partnership By:MLD TEXAS CORPORATION, a Texas corporation, its General Partner By: /s/ Brent P. Chappell Name: _ Brent P. Chappell ________ Title: _ VP Portfolio Management __
WITNESSES: /s/ Kevin Sherry Printed name: Kevin Sherry /s/ Jan Eckhardt Printed name: Jan Eckhardt	MLD DELAWARE TRUST, a Delaware business trust By: /s/ Brent P. Chappell __ Name: Brent P. Chappell _______ Title: Not in his individual capacity, but solely as Trustee

S-1

WITNESSES: /s/ Kevin Sherry Printed name: Kevin Sherry /s/ Jan Eckhardt Printed name: Jan Eckhardt	MLD PROPERTIES, LLC, a Delaware limited liability company By: MLD PROPERTIES, INC., a Delaware corporation, its Sole Member By: _/s/ Brent P. Chappell ________ Name: __ Brent P. Chappell _______ Title: __ VP Portfolio Management _____
WITNESSES: /s/ Kevin Sherry Printed name: Kevin Sherry /s/ Jan Eckhardt Printed name: Jan Eckhardt	NHP SENIOR HOUSING, INC., a California corporation By: __/s/ Brent P. Chappell _______ Name: __ Brent P. Chappell _______ Title: __ VP Portfolio Management _____
WITNESSES: /s/ Kevin Sherry Printed name: Kevin Sherry /s/ Jan Eckhardt Printed name: Jan Eckhardt	NHP CM INVESTMENT, INC., a Delaware corporation By: _/s/ Brent P. Chappell ________ Name: __ Brent P. Chappell ________ Title: __ VP Portfolio Management ______
WITNESSES: /s/ Kevin Sherry Printed name: Kevin Sherry /s/ Jan Eckhardt Printed name: Jan Eckhardt	NHP JOLIET, INC., an Illinois corporation By: __/s/ Brent P. Chappell _____ Name: __ Brent P. Chappell ______ Title: __ VP Portfolio Management ____

S-2

WITNESSES: /s/ Kevin Sherry Printed name: Kevin Sherry s/ Jan Eckhardt Printed name: Jan Eckhardt	QR LUBBOCK TEXAS PROPERTIES, L.P., a Texas limited partnership By:QR LUBBOCK GP, LLC, a Texas limited liability company, its General Partner By:Nationwide Health Properties, Inc., a Maryland corporation, its sole member By: __/s/ Brent P. Chappell Name: __ Brent P. Chappell _______ Title: __ VP Portfolio Management _____
WITNESSES: /s/ Kevin Sherry Printed name: Kevin Sherry s/ Jan Eckhardt Printed name: Jan Eckhardt	BIP SUB I, INC., a Delaware corporation By: ___/s/ Brent P. Chappell _______ Name: ___ Brent P. Chappell ____ Title: VP Portfolio Management

S-3

	“BUYER”
WITNESSES: /s/ Shanda M. London Printed name: Shanda London /s/ Susannah M. Lynn Printed name: Susannah M. Lynn	EMERITUS CORPORATION, a Washington corporation By: _/s/ Eric Mendelsohn_____ Name: _ Eric Mendelsohn _________ Title: _SVP Corporate Development____

ACKNOWLEDGED AND AGREED:

Chicago Title Insurance Company

By: /s/ illegible

Its: AUP & Commercial Credit Manager

S-4

SCHEDULE 1

ENTITIES COMPRISING “SELLER”

1. Nationwide Health Properties, Inc., a Maryland corporation

Fee owner of:

Charleston Gardens - Charleston, WV;

Silverleaf Manor - Meridian, MS;

Loyalton of Rockford - Rockford, IL;

Heritage Hills ALZ - Columbus, GA;

Pine Meadow - Hattiesburg, MS;

Austin Gardens ALZ - Lodi, CA; and

Clare Bridge - Corona, CA.

2. NH Texas Properties Limited Partnership, a Texas limited partnership

Fee owner of:

Beckett Meadows - Austin, TX;

Creekside ALZ - Plano, TX;

Oak Hollow ALZ - Bedford, TX;

Pinehurst ALZ - Tyler, TX;

Stonebridge ALZ - Dallas, TX; and

Desert Springs ALZ - El Paso, TX.

3. MLD Delaware Trust, a Delaware business trust

Fee owner of:

Autumn Ridge - Herculaneum, MO

4. MLD Properties, LLC, a Delaware limited liability company

Fee owner of:

Kingsley Place of Shreveport - Shreveport; LA; and

Pines of Goldsboro - Goldsboro, NC.

Schedule 1-1

5. NHP Senior Housing, Inc., a California corporation

Fee owner of:

The Lakes - Fort Myers, FL;

Loyalton of Folsom - Folsom, CA; and

Canterbury Woods - Attleboro, MA.

6. NHP CM Investment, Inc., a Delaware corporation

Fee owner of:

Loyalton of Cape May - Cape May, NJ

7. NHP Joliet, Inc., an Illinois corporation

Fee owner of:

Loyalton of Joliet - Joliet, IL; and

Joliet ALZ Expansion - Joliet, IL.

8. QR Lubbock Texas Properties, L.P., a Texas limited partnership

Fee owner of:

Quail Ridge ALZ - Lubbock, Texas

9. BIP Sub I, Inc., a Delaware corporation

Fee owner of:

Richland Gardens - Richland, WA

Schedule 1-2

SCHEDULE 2

WIRE TRANSFER INSTRUCTIONS

Schedule 2-1

MASTER CREDIT FACILITY AGREEMENT

BORROWERS SIGNATORY HERETO

CAPMARK FINANCE INC.,

a California corporation

TABLE OF CONTENTS
		Page
ARTICLE 1 THE COMMITMENT		2
Section 1.01.	The Commitment to Make Fixed Advances.	2
Section 1.02.	Requests for Advances.	2
Section 1.03.	Maturity Date of Advances; Amortization.	2
Section 1.04.	Annual Interest Rate for Advances.	3
Section 1.05.	Notes.	3
ARTICLE 2 THE ADVANCES		3
Section 2.01.	Rate Setting for an Advance.	3
Section 2.02.	Advances.	4
Section 2.03.	Determination of Allocable Facility Amount and Valuations.	4
Section 2.04.	Additional Advances Made on Increased Values.	5
Section 2.05.	Advances made for Additional Units	5
ARTICLE 3 COLLATERAL CHANGES		6
Section 3.01.	Obligation to Add Collateral.	6
Section 3.02.	Right to Add Collateral.	6
Section 3.03.	Procedure for Adding Collateral.	6
Section 3.04.	Right to Obtain Releases of Collateral.	7
Section 3.05.	Procedure for Obtaining Releases of Collateral.	8
Section 3.06.	Substitutions.	9
ARTICLE 4 INCREASE OF CREDIT FACILITY		12
Section 4.01.	Right to Increase Commitment.	12
Section 4.02.	Procedure for Obtaining Increases in Commitment.	12
Section 4.03.	Closing.	12
ARTICLE 5 CONDITIONS PRECEDENT TO ALL REQUESTS		12
Section 5.01.	Conditions Applicable to All Requests.	12
Section 5.02.	Conditions Precedent to Initial Advance.	14
Section 5.03.	Conditions Precedent to Future Advances.	14
Section 5.04.	Conditions Precedent to Addition of an Additional Mortgaged Property to the Collateral Pool.	15
Section 5.05.	Conditions Precedent to Release of Property from the Collateral Pool.	16
Section 5.06.	Conditions Precedent to Increase in Commitment.	17
Section 5.07.	Delivery of Opinion Relating to Advance Request, Addition Request or Expansion Request.	17
Section 5.08.	Delivery of Property-Related Documents.	17
ARTICLE 6 REPRESENTATIONS AND WARRANTIES		18
Section 6.01.	Representations and Warranties of Borrower.	18
Section 6.02.	Representations and Warranties of Lender.	18
ARTICLE 7 AFFIRMATIVE COVENANTS OF BORROWER		19
Section 7.01.	Compliance with Agreements.	19
Section 7.02.	Maintenance of Existence.	19
Section 7.03.	Financial Statements; Accountants’ Reports; Other Information.	19
Section 7.04.	Certificate of Compliance.	20


Section 7.05.	Alterations to the Mortgaged Properties.	20
Section 7.06.	Loan Document Taxes.	21
Section 7.07.	Further Assurances.	21
Section 7.08.	Transfer of Ownership Interests in Borrower.	22
Section 7.09.	Transfer of Ownership of Mortgaged Property.	22
Section 7.10.	Change in Senior Management.	22
Section 7.11.	Liquidity and Net Worth Tests.	22
ARTICLE 8 NEGATIVE COVENANTS OF BORROWER		22
Section 8.01.	Other Activities.	22
Section 8.02.	Indebtedness.	22
Section 8.03.	Principal Place of Business.	23
Section 8.04.	Restrictions on Distributions.	23
Section 8.05.	Changes to Operating Leases.	23
Section 8.06.	Alzheimer’s Beds.	23
ARTICLE 9 FEES		23
Section 9.01.	Origination Fees.	23
Section 9.02.	Due Diligence Fees.	24
Section 9.03.	Legal Fees and Expenses.	24
Section 9.04.	Failure to Close any Request.	25
ARTICLE 10 EVENTS OF DEFAULT		25
Section 10.01.	Events of Default.	25
ARTICLE 11 REMEDIES		27
Section 11.01.	Remedies; Waivers.	27
Section 11.02.	Waivers; Rescission of Declaration.	27
Section 11.03.	Lender’s Right to Protect Collateral and Perform Covenants and Other Obligations.	28
Section 11.04.	No Remedy Exclusive.	28
Section 11.05.	No Waiver.	28
Section 11.06.	No Notice.	28
ARTICLE 12 LIMITS ON PERSONAL LIABILITY		29
Section 12.01.	Personal Liability of Borrower.	29
ARTICLE 13 MISCELLANEOUS PROVISIONS		29
Section 13.01.	Counterparts.	29
Section 13.02.	Amendments, Changes and Modifications.	29
Section 13.03.	Payment of Costs, Fees and Expenses.	29
Section 13.04.	Payment Procedure.	30
Section 13.05.	Payments on Business Days.	30
Section 13.06.	Choice of Law; Consent to Jurisdiction; Waiver of Jury Trial.	30
Section 13.07.	Severability.	32
Section 13.08.	Notices.	32
Section 13.09.	Further Assurances and Corrective Instruments.	34
Section 13.10.	Term of this Agreement.	34
Section 13.11.	Assignments; Third-Party Rights.	34
Section 13.12.	Headings.	34
Section 13.13.	General Interpretive Principles.	34
Section 13.14.	Interpretation.	35


Section 13.15.	Standards for Decisions, Etc.	35
Section 13.16.	Decisions in Writing.	35
Section 13.17.	Approval of Waivers.	35
Section 13.18.	USA Patriot Act.	35

EXHIBIT A

Schedule of Initial Mortgaged Properties and Initial Valuations

EXHIBIT D

Confirmation of Guaranty

EXHIBIT E

Compliance Certificate

EXHIBIT F

Organizational Certificate

EXHIBIT G

Rate Form

EXHIBIT H

Advance Request

EXHIBIT I

Request (Addition/Release)

EXHIBIT J

Confirmation of Obligations

EXHIBIT K

Certificate of Borrower

EXHIBIT L

Expansion Request

APPENDIX I Definitions

MASTER CREDIT FACILITY AGREEMENT

THIS MASTER CREDIT FACILITY AGREEMENT is made as of the 1st day of April, 2008, by and among (i) (a) PHNTUS ARBOR GARDENS INC., a California corporation, (b) PHNTUS AUSTIN GARDENS INC, a California corporation, (c) PHNTUS BECKETT MEADOWS LLC, a Delaware limited liability company, (d) PHNTUS CANTERBURY WOODS LLC, a Delaware limited liability company, (e) PHNTUS CHARLESTON GARDENS LLC, a Delaware limited liability company, (f) PHNTUS CREEKSIDE LLC, a Delaware limited liability company, (g) PHNTUS DESERT SPRINGS LLC, a Delaware limited liability company, (h) PHNTUS HERITAGE HILLS LLC, a Delaware limited liability company, (i) PHNTUS KP SHREVEPORT LLC, a Delaware limited liability company, (j) PHNTUS LAKES LLC, a Delaware limited liability company, (k) PHNTUS LO CAPE MAY LLC, a Delaware limited liability company, (l) PHNTUS LO FOLSOM INC, a California corporation, (m) PHNTUS LO JOLIET LLC, a Delaware limited liability company, (n) PHNTUS LO ROCKFORD LLC, a Delaware limited liability company, (o) PHNTUS OAK HOLLOW LLC, a Delaware limited liability company, (p) PHNTUS PINEHURST LLC, a Delaware limited liability company, (q) PHNTUS PINE MEADOW LLC, a Delaware limited liability company, (r) PHNTUS PINES AT GOLDSBORO LLC, a Delaware limited liability company, (s) PHNTUS QUAIL RIDGE LLC, a Delaware limited liability company, (t) PHNTUS RICHLAND GARDENS LLC, a Delaware limited liability company, (u) PHNTUS SILVERLEAF MANOR LLC, a Delaware limited liability company, and (w) PHNTUS STONEBRIDGE LLC, a Delaware limited liability company (individually and collectively, together with any Additional Borrower becoming a party hereto, “Borrower”); (ii) CAPMARK FINANCE INC., a California corporation (“Lender”); and (iii) EMERITUS CORPORATION, a Washington corporation (“Guarantor”; together with Borrower, “Borrower Parties”).

A. Borrower owns one (1) or more Seniors Housing Facilities (unless otherwise defined or the context clearly indicates otherwise, capitalized terms shall have the meanings ascribed to such terms in Appendix I of this Agreement) as more particularly described in Exhibit A to this Agreement.

B. Borrower has requested that Lender establish a Credit Facility in favor of Borrower.

C. To secure the obligations of Borrower under this Agreement and the other Loan Documents issued in connection with the Credit Facility, Borrower shall create a Collateral Pool in favor of Lender. The Collateral Pool shall be comprised of (i) the Seniors Housing Facilities listed on Exhibit A and (ii) any other collateral pledged to Lender from time to time by Borrower pursuant to this Agreement or any other Loan Documents.

D. Each Note and Security Document related to the Mortgaged Properties comprising the Collateral Pool shall be cross-defaulted (i.e., a default under any Note, Security Document relating to the Collateral Pool and under this Agreement, shall constitute a default

under each Note, Security Document and this Agreement related to the Mortgaged Properties comprising the Collateral Pool) and cross-collateralized (i.e., each Security Instrument related to the Mortgaged Properties within the Collateral Pool shall secure all of Borrower’s obligations under this Agreement and the other Loan Documents) and it is the intent of the parties to this Agreement that, after an Event of Default, Lender may accelerate any Note without needing to accelerate any other Note and that in the exercise of its rights and remedies under the Loan Documents, Lender may, except as provided in this Agreement, exercise and perfect any and all of its rights in and under the Loan Documents with regard to any Mortgaged Property without needing to exercise and perfect its rights and remedies with respect to any other Mortgaged Property and that any such exercise shall be without regard to the Allocable Facility Amount assigned to such Mortgaged Property and that Lender may recover an amount equal to the full amount outstanding in respect of any of the Notes in connection with such exercise and any such amount shall be applied as determined by Lender in its sole and absolute discretion.

E. Subject to the terms, conditions and limitations of this Agreement, Lender has agreed to establish the Credit Facility.

NOW, THEREFORE, Borrower and Lender, in consideration of the mutual promises and agreements contained in this Agreement, hereby agree as follows:

Section 1.01.

The Commitment to Make Fixed Advances.

Subject to the terms, conditions and limitations of this Agreement, Lender agrees to make Advances to Borrower from time to time during the Facility Availability Period, pursuant to the terms of this Agreement and, in the case of $200,000,000 of the $241,889,868 Initial Advance pursuant to that certain loan commitment dated as of February 7, 2008 for each Initial Mortgaged Property set forth on Exhibit A to this Agreement. The aggregate original principal of the Advances shall not exceed the Commitment. The borrowing of an Advance shall permanently reduce the Commitment by the original principal amount of such Advance. Borrower may not re-borrow any part of the Advance which it has previously borrowed and repaid. Except as set forth in Section 2.04 of this Agreement, no Advances shall be made as a result of increases in the Debt Service Coverage Ratio or decreases in the Loan to Value Ratio of any Mortgaged Property. Each Advance shall have conventional fixed rate financing and is anticipated to be purchased by Fannie Mae for cash.

Section 1.02.

Requests for Advances.

Borrower shall request an Advance by giving Lender an Advance Request in accordance with Section 2.02.

Section 1.03.

Maturity Date of Advances; Amortization.

(a) Advances; Amortization.

(i) The maturity date of all Advances shall be April 1, 2018.

(ii) Each Advance shall require amortization based on the Amortization Period unless otherwise waived by Lender.

(b) Prepayment. Subject to the terms and conditions of Section 3.05, Borrower may prepay all or a portion of any Advance pursuant to the prepayment provisions of the applicable Note. Any repaid Advances shall automatically result in a reduction of the Commitment.

Section 1.04.

Annual Interest Rate for Advances.

(a) The Initial Advance made in connection with the closing of the Initial Mortgaged Properties shall bear interest at the Interest Rate set forth in the Note dated as of even date with this Agreement.

(b) Each Future Advance obtained pursuant to this Agreement shall bear interest at a rate, per annum, equal to the sum of (1) the Cash Interest Rate for such Advance, as determined pursuant to Section 2.01(b) plus (2) the Facility Fee.

Section 1.05.

Notes.

The obligation of Borrower to repay the Advances shall be evidenced by one (1) or more Notes. Each Note shall be payable to the order of Lender and shall be made in the original principal amount of such Advance.

Section 2.01.

Rate Setting for an Advance.

(a) As of the Initial Closing Date, Borrower and Lender have determined the Interest Rate for the Initial Advance. Such Interest Rate is set forth in the Note dated as of even date with this Agreement.

(b) Interest Rates for any Future Advance shall be set in accordance with the following procedures:

(i) Preliminary, Nonbinding Quote. At Borrower’s request Lender shall quote an estimate of the Interest Rate. Lender’s quote shall be based on (1) the rate quoted by Fannie Mae in the case of a cash execution and (2) the proposed terms and amount of the Advance selected by Borrower. The quote shall not be binding upon Lender.

(ii) Rate Setting. If Borrower satisfies all of the conditions to Lender’s obligation to make the Future Advance, then Borrower may submit to Lender, by facsimile transmission before 1:00 p.m. Washington, D.C. time on any Business Day (“Rate Setting Date”), a completed and executed Rate Form. The Rate Form shall specify the amount, term, Facility Fee, the proposed maximum Interest Rate, and Closing Date for the Advance.

(iii) Rate Confirmation. Within one (1) Business Day after receipt of the Rate Form, Lender shall obtain a commitment from Fannie Mae (“Fannie Mae Commitment”) for the purchase of the proposed Advance having the terms described in the related Rate Form. Subject to the limitations set forth in the Rate Form, Lender shall then complete and countersign the Rate Form thereby confirming the amount, term, Cash Interest Rate, the Facility Fee, and Closing Date for the Advance and shall immediately deliver by facsimile transmission the Rate Form to Borrower.

(c) Breakage and Other Costs. If Lender obtains, and then fails to fulfill, the Fannie Mae Commitment because the Advance is not made (for a reason other than Lender’s default), Borrower shall pay all reasonable out-of-pocket costs payable to the potential investor and other reasonable costs, fees and damages incurred by Lender in connection with its failure to fulfill the Fannie Mae Commitment. Lender reserves the right to require Borrower to post a deposit at the time the Fannie Mae Commitment is obtained. Such deposit shall be refundable to Borrower upon the delivery of the applicable Note to Fannie Mae and acceptance of such Note by Fannie Mae.

Section 2.02.

Advances.

Borrower may deliver an Advance Request to Lender.

(a) If the Advance Request is to obtain the Initial Advance and all conditions precedent contained in Section 5.02 and the General Conditions contained in Section 5.01 are satisfied on or before the Initial Closing Date, Lender shall make the Initial Advance on the Initial Closing Date or on such other date as Borrower and Lender may agree.

(b) Any Future Advance shall be in the minimum amount of $3,000,000. If all conditions precedent contained in Section 5.03 and Section 5.04 (if applicable) and the General Conditions contained in Section 5.01 are satisfied, Lender shall make the requested Future Advance, at a closing to be held at offices designated by Lender on a Closing Date selected or approved by Lender, which date shall be not more than ten (10) Business Days after Borrower’s receipt from Lender of the confirmed Rate Form (or on such other date as Borrower and Lender may agree).

Section 2.03.

Determination of Allocable Facility Amount and Valuations.

(a) Initial Determinations. On or before the Initial Closing Date, Lender shall determine (1) the Allocable Facility Amount and Valuation for each Mortgaged Property, (2) the Aggregate Debt Service Coverage Ratio and the Aggregate Loan to Value Ratio, (3) the Advance Amount, and (4) the Commitment amount. The determinations made as of the Initial Closing Date shall remain unchanged until the First Anniversary. Changes in Allocable Facility Amount, Valuations, the Aggregate Debt Service Coverage Ratio and the Aggregate Loan to Value Ratio shall be made pursuant to Section 2.03 (b).

(b) Monitoring Determinations. Once each Calendar Year, within twenty (20) Business Days after Borrower has delivered to Lender the reports required in Section 7.03, Lender shall determine the Aggregate Debt Service Coverage Ratio and the Aggregate Loan to Value Ratio, the Valuations and whether Borrower is in compliance with the other covenants set

forth in the Loan Documents. After the First Anniversary, on an annual basis, and if Lender reasonably decides that changed market or property conditions warrant, Lender shall determine Valuations. In determining Valuations, Lender shall use Cap Rates based on its internal survey and analysis of cap rates for comparable sales in the vicinity of the Mortgaged Property, with such adjustments as Lender deems appropriate and without any obligation to use any information provided by Borrower. If Lender is unable to determine a Cap Rate for a Mortgaged Property, Lender shall have the right, not more than once annually, to obtain, at Borrower’s expense (at a cost not to exceed the cost for similar studies required by Lender for loans sold to Fannie Mae), a market study in order to establish a Cap Rate. Lender shall promptly disclose its determinations to Borrower. Until redetermined, the outstanding Valuations shall remain in effect. Notwithstanding anything in this Agreement to the contrary, no change in the Aggregate Loan to Value Ratio or the Aggregate Debt Service Coverage Ratio shall, unless resulting from the removal of Collateral from the Collateral Pool, (5) result in a Potential Event of Default or Event of Default, (6) require the prepayment of any Advances, or (7) require the addition of Collateral to the Collateral Pool.

Section 2.04.

Additional Advances Made on Increased Values.

(a) Notwithstanding anything to the contrary in this Agreement, after the First Anniversary, no more than one (1) time during the Facility Availability Period, and provided Borrower has increased the Commitment prior to the First Anniversary pursuant to Article 4 of this Agreement, Borrower shall be entitled to a Future Advance based on decreases in the Aggregate Loan to Value Ratio and increases in the Aggregate Debt Service Coverage Ratio as determined by Lender in accordance with this Agreement. The minimum aggregate amount of such Future Advances shall be $3,000,000. The maximum aggregate amount of such Future Advance shall be equal to the amount which, when combined with Advances already Outstanding, equals the maximum amount of Advances that could be Outstanding that would result in an Aggregate Loan to Value Ratio less than or equal to seventy-five percent (75%) and an Aggregate Debt Service Coverage Ratio greater than or equal to 1.30:1.0.

(b) Borrower shall request a Future Advance pursuant to this Section 2.04 by giving Lender an Advance Request in accordance with Section 2.02. Upon the closing of such Future Advance, the Allocable Facility Amount attributed to each Mortgaged Property shall be increased as determined by Lender. Each Borrower shall enter into a new Note evidencing such Future Advance.

(c) In connection with the closing of any Future Advance pursuant to this Section 2.04, Borrower shall pay the Re-Underwriting Fee and Additional Origination Fee.

Section 2.05.

Advances made for Additional Units

Multifamily Partial Interest Only Fixed Rate Note – District of Columbia	Form 4109-PIO	Page 1
Modified for Master Credit Facility Agreement	10-05	© 2005 Fannie Mae

Multifamily Partial Interest Only Fixed Rate Note – District of Columbia	Form 4109-PIO	Page 2
Modified for Master Credit Facility Agreement	10-05	© 2005 Fannie Mae

Multifamily Partial Interest Only Fixed Rate Note – District of Columbia	Form 4109-PIO	Page 3
Modified for Master Credit Facility Agreement	10-05	© 2005 Fannie Mae

Multifamily Partial Interest Only Fixed Rate Note – District of Columbia	Form 4109-PIO	Page 4
Modified for Master Credit Facility Agreement	10-05	© 2005 Fannie Mae

Multifamily Partial Interest Only Fixed Rate Note – District of Columbia	Form 4109-PIO	Page 5
Modified for Master Credit Facility Agreement	10-05	© 2005 Fannie Mae

Multifamily Partial Interest Only Fixed Rate Note – District of Columbia	Form 4109-PIO	Page 6
Modified for Master Credit Facility Agreement	10-05	© 2005 Fannie Mae

Multifamily Partial Interest Only Fixed Rate Note – District of Columbia	Form 4109-PIO	Page 7
Modified for Master Credit Facility Agreement	10-05	© 2005 Fannie Mae

Multifamily Partial Interest Only Fixed Rate Note – District of Columbia	Form 4109-PIO	Page 8
Modified for Master Credit Facility Agreement	10-05	© 2005 Fannie Mae

Multifamily Partial Interest Only Fixed Rate Note – District of Columbia	Form 4109-PIO	Page 9
Modified for Master Credit Facility Agreement	10-05	© 2005 Fannie Mae

X	Schedule A	Prepayment Premium (required)

X	Schedule B	Modifications to Multifamily Note

Multifamily Partial Interest Only Fixed Rate Note – District of Columbia	Form 4109-PIO	Page 10
Modified for Master Credit Facility Agreement	10-05	© 2005 Fannie Mae

Multifamily Partial Interest Only Fixed Rate Note – District of Columbia	Form 4109-PIO	Page 11
Modified for Master Credit Facility Agreement	10-05	© 2005 Fannie Mae

Multifamily Partial Interest Only Fixed Rate Note – District of Columbia	Form 4109-PIO	Page 12
Modified for Master Credit Facility Agreement	10-05	© 2005 Fannie Mae

Multifamily Partial Interest Only Fixed Rate Note – District of Columbia	Form 4109-PIO	Page 13
Modified for Master Credit Facility Agreement	10-05	© 2005 Fannie Mae

Multifamily Partial Interest Only Fixed Rate Note – District of Columbia	Form 4109-PIO	Page 14
Modified for Master Credit Facility Agreement	10-05	© 2005 Fannie Mae

Multifamily Partial Interest Only Fixed Rate Note – District of Columbia	Form 4109-PIO	Page 15
Modified for Master Credit Facility Agreement	10-05	© 2005 Fannie Mae

Multifamily Partial Interest Only Fixed Rate Note – District of Columbia	Form 4109-PIO	Page 16
Modified for Master Credit Facility Agreement	10-05	© 2005 Fannie Mae

Multifamily Partial Interest Only Fixed Rate Note – District of Columbia	Form 4109-PIO	Page 17
Modified for Master Credit Facility Agreement	10-05	© 2005 Fannie Mae

Multifamily Partial Interest Only Fixed Rate Note – District of Columbia	Form 4109-PIO	Page 18
Modified for Master Credit Facility Agreement	10-05	© 2005 Fannie Mae

Multifamily Partial Interest Only Fixed Rate Note – District of Columbia	Form 4109-PIO	Page 19
Modified for Master Credit Facility Agreement	10-05	© 2005 Fannie Mae

Multifamily Partial Interest Only Fixed Rate Note – District of Columbia	Form 4109-PIO	Page 20
Modified for Master Credit Facility Agreement	10-05	© 2005 Fannie Mae

Multifamily Partial Interest Only Fixed Rate Note – District of Columbia	Form 4109-PIO	Page 21
Modified for Master Credit Facility Agreement	10-05	© 2005 Fannie Mae

Multifamily Partial Interest Only Fixed Rate Note – District of Columbia	Form 4109-PIO	Page 22
Modified for Master Credit Facility Agreement	10-05	© 2005 Fannie Mae

Multifamily Partial Interest Only Fixed Rate Note – District of Columbia	Form 4109-PIO	Page 23
Modified for Master Credit Facility Agreement	10-05	© 2005 Fannie Mae

Multifamily Partial Interest Only Fixed Rate Note – District of Columbia	Form 4109-PIO	Page 24
Modified for Master Credit Facility Agreement	10-05	© 2005 Fannie Mae

Multifamily Partial Interest Only Fixed Rate Note – District of Columbia	Form 4109-PIO	Page A-1
Fannie Mae	10-05	© 2005 Fannie Mae

Multifamily Partial Interest Only Fixed Rate Note – District of Columbia	Form 4109-PIO	Page A-2
Fannie Mae	10-05	© 2005 Fannie Mae

Multifamily Partial Interest Only Fixed Rate Note – District of Columbia	Form 4109-PIO	Page B-1
Fannie Mae	10-05	© 2005 Fannie Mae

	/s/ Daniel R. Baty
	Daniel R. Baty
	Co-Chief Executive Officer
	May 9, 2008

	/s/ Granger Cobb
	Granger Cobb
	Co-Chief Executive Officer
	May 9, 2008

	/s/ Raymond R. Brandstrom
	Raymond R. Brandstrom
	Chief Financial Officer
	May 9, 2008