**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, 2007





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
                Employerof
                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, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
      (Check one):





Large
      accelerated filer  o  Accelerated
      filer  þ  Non-accelerated
      filer  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, 2007, there were  18,966,082 shares
      of the Registrant’s Common Stock, par value $.0001,
      outstanding.





**EMERITUS
                CORPORATION****Table
                of Contents****Part
                I. Financial
                Information**Page
                No.**Item
                1. Financial Statements (unaudited):**
            1Condensed
                Consolidated Balance Sheets as of March 31, 2007, and
                December 31, 2006
            2Condensed
                Consolidated Statements of Operations for the Three
                months ended March 31, 2007 and 2006
            3Condensed
                Consolidated Statements of Cash Flows for the Three
                months ended March 31, 2007 and 2006
            4Notes
                to Unaudited Condensed Consolidated Financial
                Statements
            5**Item
                2.**
            **Management’s
                Discussion and Analysis of Financial Condition
                and Results of Operations**
            13**Item
                3.**
            **Quantitative
                and Qualitative Disclosures About Market
                Risk**
            28**Item
                4.**
            **Controls
                and Procedures**
            28**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**
            29**Item
                1A.**
            **Risk
                Factors**
            29**Item
                6.**
            **Exhibits**30**Signature**
            32


Index
      to Exhibits








**PART
      I. Financial Information**





**Item
      1. Financial Statements****(unaudited)**








[The
      rest
      of this page is intentionally left blank]





**1**


**EMERITUS
                CORPORATION****CONDENSED
                CONSOLIDATED BALANCE SHEETS****(unaudited)****(In
                thousands, except share data)****ASSETS****March
                31,**
            
            **December
                31,****2007**
            
            **2006**Current
                Assets:Cash
                and cash equivalents
            
            $
            23,214
            
            $
            14,049Short-term
                investments
            
            
            2,045
            
            
            1,883Trade
                accounts receivable, net of allowance of $691 and $348
            
            
            4,940
            
            
            5,115Other
                receivables
            
            
            1,832
            
            
            3,488Tax
                and maintenance escrows
            
            
            5,657
            
            
            7,067Prepaid
                workers' compensation
            
            
            12,134
            
            
            11,112Other
                prepaid expenses
            
            
            9,071
            
            
            8,457Total
                current assets
            
            
            58,893
            
            
            51,171Long-term
                investments
            
            
            8,219
            
            
            7,504Property
                and equipment, net of accumulated depreciation of $157,477 and
                $151,919
            
            
            844,129
            
            
            600,693Property
                held for development
            
            
            735
            
            
            599Restricted
                deposits
            
            
            8,216
            
            
            12,601Lease
                and contract acquisition costs, net of amortization of $17,089 and
                $14,515
            
            
            23,188
            
            
            25,762Other
                assets, net
            
            
            9,639
            
            
            4,730Total
                assets
            
            $
            953,019
            
            $
            703,060**LIABILITIES
                AND SHAREHOLDERS' DEFICIT**Current
                Liabilities:Current
                portion of long-term debt
            
            $
            24,188
            
            $
            2,645Current
                portion of capital lease and financing obligations
            
            
            22,030
            
            
            22,472Trade
                accounts payable
            
            
            3,642
            
            
            6,718Accrued
                employee compensation and benefits
            
            
            21,517
            
            
            21,012Accrued
                interest
            
            
            1,790
            
            
            1,407Accrued
                real estate taxes
            
            
            3,663
            
            
            6,225Accrued
                professional and general liability
            
            
            12,253
            
            
            10,761Accrued
                income taxes
            
            
            264
            
            
            233Other
                accrued expenses
            
            
            7,860
            
            
            6,469Deferred
                revenue
            
            
            8,877
            
            
            8,951Unearned
                rental income
            
            
            7,448
            
            
            6,155Total
                current liabilities
            
            
            113,532
            
            
            93,048Long-term
                debt, less current portion
            
            
            344,327
            
            
            83,335Capital
                lease and financing obligations, less current portion
            
            
            560,633
            
            
            586,174Convertible
                debentures
            
            
            10,455
            
            
            26,575Deferred
                gain on sale of communities
            
            
            23,241
            
            
            23,795Deferred
                rent
            
            
            6,553
            
            
            6,389Other
                long-term liabilities
            
            
            5,841
            
            
            2,776Total
                liabilities
            
            
            1,064,582
            
            
            822,092Commitments
                and contingenciesShareholders'
                Deficit:Preferred
                stock, $.0001 par value. Authorized 5,000,000 shares, none
                issuedCommon
                stock, $.0001 par value. Authorized 40,000,000 shares; issued and
                outstanding18,938,247
                and 18,165,986 shares at March 31, 2007, and December 31, 2006,
                respectively
            
            
            2
            
            
            2Additional
                paid-in capital
            
            
            105,184
            
            
            87,980Accumulated
                deficit
            
            
            (216,749
            )
            
            (207,014
            )Total
                shareholders' deficit
            
            
            (111,563
            )
            
            (119,032
            )Total
                liabilities and shareholders' deficit
            
            $
            953,019
            
            $
            703,060










See
      accompanying Notes to Unaudited Condensed Consolidated Financial Statements
      and
      Management’s


Discussion
      and Analysis of Financial Condition and Results of Operations.





**2**


**EMERITUS
                CORPORATION****CONDENSED
                CONSOLIDATED STATEMENTS OF OPERATIONS****(unaudited)****(In
                thousands, except per share data)****Three
                Months ended March 31,****2007**
            
            **2006**Revenues:Community
                revenue
            
            $
            109,500
            
            $
            100,609Management
                fees
            
            
            877
            
            
            457Total
                operating revenues
            
            
            110,377
            
            
            101,066Expenses:Community
                operations (exclusive of depreciation and amortizationand
                facility lease expense shown separately below)
            
            
            70,498
            
            
            66,367Texas
                lawsuit settlement
            
            
            -
            
            
            (12,207
            )General
                and administrative
            
            
            10,114
            
            
            8,731Depreciation
                and amortization
            
            
            14,589
            
            
            12,150Facility
                lease expense
            
            
            10,370
            
            
            10,918Total
                operating expenses
            
            
            105,571
            
            
            85,959Operating
                income from continuing operations
            
            
            4,806
            
            
            15,107Other
                income (expense):Interest
                income
            
            
            591
            
            
            871Interest
                expense
            
            
            (13,615
            )
            
            (11,731
            )Equity
                losses in unconsolidated joint ventures
            
            
            (569
            )
            
            (96
            )Other,
                net
            
            
            (672
            )
            
            596Net
                other expense
            
            
            (14,265
            )
            
            (10,360
            )Income
                (loss) from continuing operations before income taxes
            
            
            (9,459
            )
            
            4,747Provision
                for income taxes
            
            
            (276
            )
            
            (10
            )Income
                (loss) from continuing operations
            
            
            (9,735
            )
            
            4,737Loss
                from discontinued operations (net of tax)
            
            
            -
            
            
            (10
            )Net
                income (loss)
            
            $
            (9,735
            )
            $
            4,727Basic
                income (loss) per common share:Continuing
                operations
            
            $
            (0.53
            )
            $
            0.28Discontinued
                operations
            
            
            -
            
            
            -$
            (0.53
            )
            $
            0.28Diluted
                income (loss) per common share:Continuing
                operations
            
            $
            (0.53
            )
            $
            0.25Discontinued
                operations
            
            
            -
            
            
            -$
            (0.53
            )
            $
            0.25Weighted
                average common shares outstanding:Basic
            
            
            18,374
            
            
            17,030Diluted
            
            
            18,374
            
            
            18,819




See
      accompanying Notes to Unaudited Condensed Consolidated Financial Statements
      and
      Management’s


Discussion
      and Analysis of Financial Condition and Results of Operations.








**3**


Table
      of
      Contents


**EMERITUS
                  CORPORATION****CONDENSED
                  CONSOLIDATED STATEMENTS OF CASH FLOWS****(unaudited)****(In
                  thousands)****Three
                  Months Ended March 31,****2007**
              
              **2006**Cash
                  flows from operating activities:Net
                  income (loss)
              
              $
              (9,735
              )
              $
              4,727Adjustments
                  to reconcile net income (loss)to
                  net cash provided by (used in) operating activities:Depreciation
                  and amortization
              
              
              14,589
              
              
              12,150Amortization
                  of deferred gain
              
              
              (554
              )
              
              (554
              )Amortization
                  of loan fees
              
              
              137
              
              
              51Convertible
                  debenture conversion costs
              
              
              1,329
              
              
              -Allowance
                  for doubtful receivables
              
              
              358
              
              
              230Equity
                  investment losses
              
              
              569
              
              
              96Stock
                  option compensation
              
              
              538
              
              
              135Other
              
              
              126
              
              
              -Changes
                  in operating assets and liabilities
              
              
              (935
              )
              
              (24,870
              )Net
                  cash provided by (used in) operating activities
              
              
              6,422
              
              
              (8,035
              )Cash
                  flows from investing activities:Acquisition
                  of property and equipment
              
              
              (186,034
              )
              
              (3,279
              )Construction
                  expenditures - leased properties
              
              
              (372
              )
              
              (1,139
              )Lease
                  and contract acquisition costs
              
              
              -
              
              
              (8
              )Payments
                  from affiliates and other managed communities
              
              
              464
              
              
              313Investment
                  in affiliates
              
              
              (1,433
              )
              
              (94
              )Net
                  cash used in investing activities
              
              
              (187,375
              )
              
              (4,207
              )Cash
                  flows from financing activities:Proceeds
                  from sale of stock
              
              
              275
              
              
              3,444Decrease
                  (increase) in restricted deposits
              
              
              4,385
              
              
              (307
              )Debt
                  issue and other financing costs
              
              
              (2,183
              )
              
              32Proceeds
                  from long-term borrowings and financings
              
              
              283,676
              
              
              -Repayment
                  of long-term borrowings and financings
              
              
              (91,140
              )
              
              (5,733
              )Repayment
                  of capital lease and financing obligations
              
              
              (5,166
              )
              
              (4,435
              )Tax
                  benefit of stock compensation
              
              
              271
              
              
              -Net
                  cash provided by (used in) financing activities
              
              
              190,118
              
              
              (6,999
              )Net
                  increase (decrease) in cash and cash equivalents
              
              
              9,165
              
              
              (19,241
              )Cash
                  and cash equivalents at the beginning of the period
              
              
              14,049
              
              
              56,413Cash
                  and cash equivalents at the end of the period
              
              $
              23,214
              
              $
              37,172Supplemental
                  disclosure of cash flow information -Cash
                  paid during the period for interest
              
              $
              13,233
              
              $
              13,130Cash
                  paid during the period for taxes
              
              $
              24
              
              $
              4,500Non-cash
                  financing and investing activities:HRT
                  capital lease buyout
              
              $
              20,818
              
              $
              -Debt
                  issued for acquisition of property and equipment
              
              $
              -
              
              $
              289Capital
                  lease and financing obligations
              
              $
              -
              
              $
              373Conversion
                  of convertible debentures
              
              $
              16,120
              
              $
              50Deferred
                  lease acquisition cost
              
              $
              -
              
              $
              178Debt
                  assumed in acquisitions
              
              $
              90,000
              
              $
              -







See
      accompanying Notes to Unaudited Condensed Consolidated Financial Statements
      and
      Management’s


Discussion
      and Analysis of Financial Condition and Results of Operations


**4**





**EMERITUS
      CORPORATION**


**NOTES
      TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**











**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, and litigation.
      Emeritus bases its estimates on historical experience and on various other
      assumptions that are believed 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 2006 Form 10-K filed March 16, 2007.





**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 condensed
      consolidated financial position as of March 31, 2007, and the results of
      operations, and cash flows of Emeritus for the three month periods ended March
      31, 2007 and 2006. The results of operations for the period ended March 31,
      2007, are not necessarily indicative of the operating results for the full
      year.
      The Company presumes that those reading this interim financial information
      have
      read or have access to its 2006 audited consolidated financial statements and
      Management’s Discussion and Analysis of Financial Condition and Results of
      Operations that are contained in the Company’s 2006 Form 10-K filed March 16,
      2007. Therefore, the Company has omitted footnotes and other disclosures herein,
      which are disclosed in the Form 10-K.





**Recent
      Accounting Pronouncements**





In
      June
      2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
      No. 48 (FIN 48), *Accounting
      for Uncertainty in Income Taxes* ,
      an
      Interpretation of Statement of Financial Accounting Standards (SFAS) No. 109, *Accounting
      for Income Taxes* .
      FIN 48
      clarifies the accounting for income taxes by prescribing the recognition
      threshold a tax position is required to meet before being recognized in the
      financial statements. It also provides guidance on de-recognition, measurement,
      classification, interest and penalties, accounting in interim periods,
      disclosure and transition. The Interpretation requires that the Company
      recognize in the financial statements the impact of a tax position only if
      that
      position is more likely than not of being sustained upon examination, based
      on
      the technical merits of the position. FIN 48 is effective for fiscal years
      beginning after December 15, 2006. Differences between the amounts recognized
      in
      the statements of financial position prior to the adoption of FIN 48 and the
      amounts reported after adoption should be accounted for as a cumulative-effect
      adjustment recorded to the beginning balance of retained earnings. The Company
      adopted FIN 48 effective January 1, 2007. The adoption of this statement did
      not
      have any significant effect on the Company’s financial condition, results of
      operations, or cash flows.  On
      the
      date of adoption and at March 31, 2007, the Company identified unrecognized
      tax
      benefits of $225,000 relating to state tax liabilities. If the unrecognized
      tax
      benefits were recognized, it would not have a material affect on the Company’s
      effective tax rate. The Company recognizes interest and/or tax penalties related
      to income tax matters as a component of income tax expense. The Company believes
      it has appropriate support for the income tax positions taken or to be taken
      on
      tax returns and that the accruals for tax liabilities are adequate for all
      open
      years based on an assessment of relevant factors, including past experience
      and
      interpretations of tax law applied to the facts of each matter. The Company’s
      open years for federal tax returns are 2003 through 2006.





In
      February 2007, the FASB issued Statement of Financial Accounting Standards
      (SFAS) 159, *The
      Fair Value Option for Financial Assets and Financial
      Liabilities* .
      SFAS
      159 permits entities to choose to measure financial assets and liabilities
      (except for those that are specifically scoped out of the Statement) at fair
      value. The election to measure a financial asset or liability at fair value
      can
      be made on an instrument-by-instrument basis and is irrevocable. The difference
      between carrying value and fair value at the election date is recorded as a
      transition adjustment to opening retained earnings. Subsequent changes in fair
      value are recognized in earnings. The effective date for SFAS 159 is as of
      the
      beginning of an entity's first fiscal year that begins after November 15, 2007.
      The Company is evaluating SFAS 159 and has not yet determined the impact the
      adoption will have on its consolidated financial statements, but it is not
      expected to be significant.


**5**
 **EMERITUS
          CORPORATION**
 **NOTES
          TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **Continued**





**Reclassifications**





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





**Stock-Based
      Compensation**





The
      Company records compensation expense based on fair value for all awards. The
      Company recorded stock-based compensation expense based on the fair value of
      stock options and shares issued under the ESP Plan of approximately $538,000
      and
      $135,000 for the three months ended March 31, 2007 and 2006,
      respectively.





Stock-based
      compensation is recognized over the period from the date of grant to the date
      when the award is no longer contingent on the employee providing additional
      services (the “vesting period”). The Company’s stock incentive plans and the
      non-employee directors’ incentive plan provide that awards generally vest over a
      one to three year period. Any unexercised options expire between seven and
      ten
      years. The fair value of each grant is estimated as a single award and amortized
      into compensation expense on a straight-line basis over its vesting period.
      During the first quarter of 2007, the Company did not grant any
      options.





The
      following table summarizes the Company’s stock option activity for the three
      months ended March 31, 2007 and 2006:





**2007**
            
            **2006****Weighted-**
            
            **Aggregate**
            
            
            
            **Weighted-**
            
            **Aggregate****Average**
            
            **Intrinsic**
            
            
            
            **Average**
            
            **Intrinsic****Exercise**
            
            **Value**
            
            
            
            **Exercise**
            
            **Value****Shares**
            
            **Price**
            
            **($000)**
            
            **Shares**
            
            **Price**
            
            **($000)**Outstanding
                at beginning of year
            
            
            1,510,189
            
            $
            9.09
            
            
            
            
            
            1,349,381
            
            $
            3.81Granted
            
            
            -
            
            
            N/A
            
            
            
            
            
            -
            
            
            N/AExercised
            
            
            (34,578
            )
            $
            4.79
            
            $
            (843
            )
            
            (90,923
            )
            $
            3.45
            
            $
            (1,800
            )Canceled
            
            
            -
            
            $
            -
            
            
            
            
            
            (667
            )
            $
            3.95Outstanding
                at March 31,
            
            
            1,475,611
            
            $
            9.19
            
            $
            36,242
            
            
            1,257,791
            
            $
            3.84
            
            $
            22,343Options
                exercisable at March 31,
            
            
            1,112,968
            
            $
            6.03
            
            $
            30,856
            
            
            1,220,291
            
            $
            3.56
            
            $
            22,020Weighted-average
                fair value of options granted during first quarter
            
            
            
            
            
            N/A
            
            
            
            
            
            
            
            
            N/A





The
      weighted average remaining contractual life was 6.6 years at March 31, 2007,
      for
      stock options outstanding and exercisable. As of March 31, 2007, there was
      $1.9
      million of total unrecognized compensation expense related to unvested
      share-based compensation arrangements granted under the Plan. That expense
      is
      expected to be recognized over a weighted average period of two
      years.





The
      amount of cash received from the exercise of stock options and stock purchased
      through the ESP Plan was $275,000 and $313,000 in the first three months of
      2007
      and 2006, respectively.  As
      of
      March 31, 2007, there were 176,799 shares available for purchase under the
      Employee Stock Purchase Plan, 522,500 shares available for grant under the
      2006
      Equity Incentive Plan, and 169,000 shares available for grant under the 1995
      Stock Incentive Plan, which includes director stock
      options.





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 the first trading date at the beginning of the current calendar quarter,
      or
      the last trading date of the current quarter. The Company issued 4,958 and
      4,929
      shares of Common Stock under the ESP Plan during the three months ended March
      31, 2007 and 2006, respectively. The purchase


**6**
 **EMERITUS
          CORPORATION**
 **NOTES
          TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **Continued**


price
      of
      the shares was $22.10 and $18.36 for the first quarter of 2007 and 2006,
      respectively, which equals 85% of the market price on the first or the last
      trading day of each quarter, whichever is less.




The
      following table shows the assumptions used in calculating the compensation
      expense for the ESP Plan shares issued during the quarter:





**Three
                Months Ended March 31,****2007**
            
            **2006**Expected
                life from vest date (in months)
            
            
            3
            
            
            3Risk-free
                interest rate
            
            
            4.88
            %
            
            3.91
            %Volatility
            
            
            19.80
            %
            
            13.50
            %





**Proposed
      Merger**





On
      March
      29, 2007, the Company and Summerville Senior Living, Inc. (Summerville)
      announced they have reached a definitive agreement whereby the Company will
      acquire all of the outstanding stock of Summerville pursuant to an Agreement
      and
      Plan of Merger (the Agreement). Under the terms of the Agreement, 8,500,000
      shares of the Company’s common stock will be issued to the shareholders of
      Summerville, including Apollo Real Estate Investment Funds III and IV, (Apollo
      Funds), two real estate funds managed by Apollo Real Estate Advisors, and
      certain employees of Summerville. Certain loans outstanding from the Apollo
      Funds to Summerville will be satisfied through the distribution of the Company’s
      common stock issued in this transaction. After the merger, the former
      Summerville shareholders will hold approximately 31% of the Company’s
      outstanding stock.





The
      Apollo Funds, as holder of a majority of the voting stock of Summerville, have
      approved the merger. Saratoga Partners IV, LP and Daniel R. Baty, the Company’s
      chairman and chief executive officer, as combined holders of approximately
      65%
      of the Company’s voting stock, have agreed to vote in favor of the merger.
      Consummation of the transaction is subject to the Company’s shareholder approval
      and is anticipated to close in the third quarter of 2007.





Summerville
      is a San Ramon, California-based operator of 81 communities comprising 7,935
      units in 13 states, which provides independent living, assisted living, and
      Alzheimer’s and dementia related services to seniors. Upon completion of the
      merger, Summerville will be a wholly owned subsidiary of the Company and will
      retain the brand name in the operation of their communities. Granger Cobb,
      President and CEO of Summerville, will assume the titles of President and Co-CEO
      of Emeritus. Mr. Cobb and a representative designated by the Apollo Funds will
      each have a seat on the Company’s board of directors ,
      thus,
      increasing the size of the board from the current eight members to
      ten.





After
      the
      merger, the Company will operate 283 communities in 36 states comprising 24,398
      units with a capacity for over 28,000 residents. Mr. Baty will continue to
      serve
      as chairman and Co-CEO of the Company. The Company will continue to be traded
      on
      the AMEX under the symbol ESC.





**2007
      HCPI Communities Purchased**





On
      March
      26, 2007, the Company completed the purchase of seven communities consisting
      of
      453 units located in South Carolina for approximately $29.0 million, including
      closing costs. Pursuant to the leases described below, the Company had operated
      these facilities as assisted living and dementia care communities for
      seniors.





The
      seven
      acquired properties were part of an Amended and Restated Master Lease agreement
      dated September 18, 2002, between Health Care Property Investors, Inc. (HCPI),
      HCPI affiliates, Emeritus, and Emeritus affiliates. As a result of this asset
      purchase transaction, the master lease was amended to remove the purchased
      communities from the master lease effective March 26, 2007. The amendment also
      provided for the return of approximately $4.5
      million in cash security deposits held by HCPI, of which approximately $1.2
      million is considered a security deposit advance that is repayable in equal
      monthly installments of $20,000 or more. The cash security deposits were


**7**
 **EMERITUS
          CORPORATION**
 **NOTES
          TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **Continued**


applied
      against the purchase price for the seven acquired properties. This master lease
      is accounted for as an operating lease by the Company.





Capmark
      Finance, Inc. (Capmark) provided variable rate mortgage financing of $23.6
      million pursuant to a loan agreement dated March 26, 2007, by and among
      affiliated entities of Emeritus and Capmark Bank (the "Capmark Loan Facility").
      Under the Capmark Loan Facility, the variable rate loan has a term of three
      years and bears interest at 290 basis points over the LIBOR rate, adjusted
      monthly and rounded upwards to the nearest .125%. The interest rate on the
      closing date was 8.22%. Monthly interest-only payments are required for the
      first year and, thereafter, monthly payments of principal and interest are
      based
      on a 25-year amortization period. The balance is due in full in April 2010.
      The
      Capmark Loan Facility is secured by all real, personal, and intangible assets
      used in the operation of the acquired communities. The loan may be repaid at
      any
      time upon written notice, if no events of default are continuing. The Company
      paid a 1.0% loan fee at closing and will be required to pay a 2.0% exit fee
      upon
      full payment of the loans. However, if the loans are refinanced with Capmark,
      the exit fee will be waived. The exit fee was accrued as an additional loan
      fee
      included in “Other assets, net” and a long-term liability included in “Other
      long-term liabilities” in the Condensed Consolidated Balance Sheet as of March
      31, 2007. The loan agreement requires maintenance of a debt service coverage
      ratio, an aggregate minimum occupancy percentage, and payment of annual capital
      expenditures of at least $300 per unit.





**2007
      HRT Communities Purchased**





On
      March
      15, 2007, the Company purchased 12 communities consisting of 786 units located
      in five states for a price of $99.0 million, plus transaction costs. The
      Company had leased four of these communities from Healthcare Realty Trust (HRT)
      since May 2002 and eight since May 2003. The four leases had been accounted
      for
      as capital leases and the eight leases had been accounted for as operating
      leases by the Company. As a result of this asset purchase transaction, the
      HRT
      leases were terminated. Upon termination of the four capital leases, the
      difference between the carrying amount of the leased assets and the lease
      obligation was recorded as an adjustment to the carrying amount of the assets
      purchased,  which represented a $3.5 million reduction to the cost basis of
      the purchased assets. Capmark Finance, Inc. provided fixed rate senior mortgage
      financing of $88.0 million at 6.515% per annum and second mortgage
      financing of $13.6 million at a variable rate equal to the LIBOR rate plus
      325 basis points, rounded up to the nearest .125%, which equaled 8.625% per
      annum at the closing date. The senior mortgage has a term of five years, (with
      1% exit fee if the debt is paid off or refinanced by anyone except Capmark),
      and
      monthly interest-only payments for three years and, thereafter, monthly payments
      of principal and interest based on a 25-year amortization, with the remaining
      balance due in full in April 2012. The second mortgage has a term of two years
      with monthly interest-only payments and is due in full in April 2009. The second
      mortgage has a 1% exit fee if paid off prior to the first anniversary date
      or a
      2% exit fee is paid off after the first anniversary date, unless it is
      refinanced with Capmark. The exit fees were accrued as additional loan fees
      included in “Other assets, net” and a long-term liability included in “Other
      long-term liabilities” in the Condensed Consolidated Balance Sheet as of March
      31, 2007. The total Capmark loan commitment of $101.6 million was used to pay
      the purchase price, transaction and financing costs, and to retire a $600,000
      loan, as described below.





At
      the
      time of closing, the Company had approximately $32.8 million in loans
      outstanding with Healthcare Realty Trust, of which $11.4 million was secured
      by
      the leases on the 12 communities described above. Of the $11.4 million, $10.8
      relates to the Series B Convertible Preferred Stock transaction in which
      Healthcare Realty Trust loaned such amount to pay the accumulated dividends
      due
      upon conversion of the Series B Preferred Stock. As part of this transaction,
      the $10.8 million loan was acquired by Mr. Baty on similar terms and conditions
      as the original loan, and the remaining $600,000 was paid off at
      closing.





**2007
      Fretus Communities Purchased**





On
      February 22, 2007, the Company purchased 24 communities consisting of 1,651
      units located in six states for a price of $145.1 million,
      including transaction costs. The Company had leased these communities from
      Fretus Investors LLC since October 2002. All leases had been accounted for
      as
      operating leases. As a result of this asset purchase transaction, the Fretus
      lease was terminated. Capmark Finance, Inc. provided fixed rate mortgage


**8**
 **EMERITUS
          CORPORATION**
 **NOTES
          TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **Continued**


financing
      of $132.0 million and variable rate mortgage financing of
      $8.0 million. The fixed rate component has a term of five years and bears
      interest at 6.55% per annum (with a 1% exit fee payable if the debt is paid
      off
      or refinanced by anyone except Capmark), with monthly interest-only payments
      for
      two years and thereafter, monthly payments of principal and interest based
      on a
      25-year amortization. The remaining balance is due in full in February 2012.
      The
      variable rate component has a term of three years and interest at 30-day LIBOR
      plus 1.8%, which was 7.12% at closing, and the same exit fee and payment
      schedule as for the fixed component. The exit fee was accrued as an additional
      loan fee included in “Other assets, net” and a long-term liability included in
“Other long-term liabilities” in the Condensed Consolidated Balance Sheet as of
      March 31, 2007.





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. Mr. Baty 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 is available
      for general business purposes. The short-term debt is due in February 2009,
      bears interest at 9.0% per annum.





The
      allocation of the purchase price for the acquisitions discussed above was based
      on property appraisals. Aggregate purchase cost allocations were as follows
      (in
      thousands):





**HCPI**
            
            **HRT**
            
            **Fretus****Acquisition**
            
            **Acquisition**
            
            **Acquisition**
            
            **Total**Land
            
            
            1,546
            
            
            13,128
            
            
            31,447
            
            
            46,121Building
            
            
            23,715
            
            
            80,912
            
            
            108,418
            
            
            213,045Equipment
            
            
            3,633
            
            
            2,581
            
            
            3,760
            
            
            9,974Properties
                under capital leases, net
            
            
            -
            
            
            (17,304
            )
            
            -
            
            
            (17,304
            )
            (a)Restricted
                deposits
            
            
            (4,543
            )
            
            -
            
            
            -
            
            
            (4,543
            )
            (b)Loan
                fees
            
            
            790
            
            
            1,973
            
            
            2,344
            
            
            5,107Long-term
                debt, net
            
            
            23,600
            
            
            101,000
            
            
            158,000
            
            
            282,600Capital
                lease obligations
            
            
            -
            
            
            (20,818
            )
            
            -
            
            
            (20,818
            )
            (a)Other
                long-term liabilities
            
            
            472
            
            
            1,016
            
            
            1,400
            
            
            2,888
            
            (c)





(a)
            Four
                HRT properties were accounted for as capital leases. The termination
                of
                the leases created a $3.5 million difference between the carrying
                amount
                of the leased assets and the lease obligation, which was offset against
                the cost basis of the four properties acquired in this
                transaction.


(b)
            Restricted
                deposits held by HCPI were refunded and used to pay a portion of
                the
                purchase price.


(c)
            The
                Capmark loans require the payment of exit fees upon retirement or
                maturity
                of the debt. These were recorded as loan fees with a corresponding
                long-term liability.





**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 giving written
      notice 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, 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 been paid in three installments on July 1, 2007,
      January 1, 2008, and


**9**
 **EMERITUS
          CORPORATION**
 **NOTES
          TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **Continued**


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.





**2006
      Blackstone Joint Venture**





The
      Company holds a 19.0% interest in a joint venture (Blackstone JV) with
      Blackstone Real Property Group that acquired 22 of a portfolio of 25 properties
      as of March 31, 2007. The Blackstone JV expects to acquire the three additional
      properties in the second quarter of 2007 after licensing approvals are
      obtained.





The
      Company contributed $704,000 to the Blackstone JV and recorded equity losses
      of
      approximately $395,000 and management fee income of approximately $502,000
      for
      the three months ended March 31, 2007.





**Senior
      Med Transaction**





The
      Company owns a 9.5% indirect interest in Senior Med, a pharmacy services
      provider. In April 2007, the Company received written notice from Walgreen
      to
      exercise their purchase option rights and expects to close the transaction
      by
      May 31, 2007. The Company will receive approximately $8.5 million in cash for
      its equity share of the business and record a gain of approximately $7.0
      million.





The
      Company recognized equity losses of $125,000 and $53,000 in its condensed
      consolidated statements of operations in the line item entitled “Equity losses
      in unconsolidated joint ventures” for the three months ended March 31, 2007 and
      2006, respectively.





**Emeritrust
      Transactions**





As
      a part
      of a 2003 transaction in which the Company leased a separate group of Emeritrust
      communities that the Company had managed since 1999, the Company issued
      seven-year warrants to purchase 500,000 shares of its common stock at an
      exercise price of $7.60 per share to the owners of the communities, which
      included Mr. Baty. Warrants to purchase 400,000 shares were exercised in
      February 2006 and the Company received proceeds of $3.0 million. In March
      2006, warrants to purchase 100,000 shares were exercised pursuant to a “net
      exercise” provision in which the Company issued 69,169 shares to the holders and
      30,831 shares were used to pay the exercise price of $760,000, based on a price
      of $24.65 per share.





**Series
      B Convertible Preferred Stock**





On
      March 6, 2006, we issued 829,597 shares of common stock pursuant to the
      exercise of warrants for the purchase of 1.0 million common shares. The shares
      were purchased by the holders of the warrants pursuant to a “net exercise”
provision of the warrants in which 170,403 shares subject to the warrants were
      used to pay the exercise price of $4.2 million. We received no cash
      proceeds from this transaction.





**Income
      (Loss) Per Share**





The
      capital structure of Emeritus includes convertible debentures and stock options.
      In addition, the capital structure included common stock warrants in prior
      periods, which were exercised in February and March 2006. Basic net income
      (loss) per share is computed based on the weighted average shares outstanding
      and excludes any potential dilution. Net income (loss) per share is computed
      based on the weighted average number of shares outstanding plus dilutive
      potential common shares. Options and warrants 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.


**10**
 **EMERITUS
          CORPORATION**
 **NOTES
          TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **Continued**





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


**Three
                Months ended****March
                31,****2007**
            
            **2006**Convertible
                Debentures(1)
            
            
            475
            
            
            1,208Options
            
            
            1,476
            
            
            -1,951
            
            
            1,208(1)Approximately
                $5.4 million principal amount paid at maturity on January 3, 2006,and
                $16.1 million principal amount converted to common stock on March
                8,
                2007.





**Comprehensive
      Income (Loss** **)**





Comprehensive
      income (loss) is the same as net income (loss) for the three-month periods
      ended
      March 31, 2007 and 2006.




**Liquidity** ****





As
        of
        March 31, 2007, the Company has a working capital deficit of $54.6 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, $16.3 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 the current portion of debt maturities of $24.2 million
        due by
        March 31, 2008, in addition to long-term debt maturities of $61.7 million
        due
        after March 2008 but prior to March 31, 2009, which the Company plans to
        refinance prior to their due dates or pay them off at maturity.
 
 The
        Company has incurred significant losses since its inception and has an
        accumulated deficit of $216.7 million as of March 31, 2007. The Company believes
        these losses have resulted from its early emphasis on expansion, financing
        costs
        arising from multiple financing and refinancing transactions related to this
        expansion, occupancy rates remaining lower for longer periods than anticipated,
        and depreciation expense primarily from multiple capital leases.
 
 The
        cash
        flows from operating activities have not always been sufficient to pay all
        of
        the Company’s 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
        available timely or at all, or on terms attractive to the Company.
 
 Substantially
        all of the Company’s debt obligations mature at various dates beginning in March
        2008, at which time the Company will need to refinance or otherwise repay
        the
        obligations. As a consequence of the Company’s property and lease transactions
        in 2007, its long-term debt has increased from $86.0 million at December
        31,
        2006, to $368.5 million **** at
        March
        31, 2007. The Company’s obligations under operating leases have decreased from
        $299.3 million to $218.8 million, and its capital lease and financing
        obligations have decreased from $608.6 million to $582.7 million. 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. Accordingly, any
        event of default could cause a material adverse effect on the Company’s
        financial condition if such debt or leases are cross-defaulted. Defaults
        can
        include certain financial covenants, which generally relate to lease coverage
        and cash flow. In addition, the Company is required to maintain the leased
        properties in a reasonable and prudent manner. For the three months ended
        March
        31, 2007, the Company was in violation of one or more covenants in certain
        of
        its leases, but obtained waivers from the owners such that it was still deemed
        to be in compliance and thus, were not in default. The waivers expire on
        April
        1, 2008.


**11**
 **EMERITUS
          CORPORATION**
 **NOTES
          TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **Continued**





Based
      on
      the Company’s current operating initiatives and the current cash position,
      management believes that the Company will be able to generate positive operating
      cash flow, or will have adequate cash reserves, or the ability to obtain
      adequate financing to cover any potential operating shortfalls and necessary
      investing and financing activities, including required debt service and capital
      expenditures for at least the next twelve months.





**Discontinued
      Operations**





In
      December 2005, the Company sold a community in Las Vegas, Nevada. This
      transaction qualifies for discontinued operations treatment under SFAS No.
      144
      and the results of discontinued operations for the first quarter of 2006 is
      reported as a separate line item in the Condensed Consolidated Statements of
      Operations.





**Subsequent
      Event**





As
      discussed under the caption “Senior Med Transaction,” in April 2007, the Company
      received written notice from Walgreen to exercise their purchase option rights
      under the agreement and expect to close the transaction by May 31, 2007. The
      Company will receive approximately $8.5 million in cash for its equity share
      of
      the business and record a gain of approximately $7.0 million.










**12**


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





**Forward-Looking
      Statements**





“Safe
      Harbor” Statement under the Private Securities Litigation Reform Act of 1995: A
      number of the matters and subject areas discussed in this report that are not
      historical or current facts deal with potential future circumstances,
      operations, and prospects. The discussion of such matters and subject areas
      is
      qualified by the inherent risks and uncertainties surrounding future
      expectations generally, and also may materially differ from our actual future
      experience as a result of such factors as: the effects of competition and
      economic conditions on the occupancy levels in our communities; our ability
      under current market conditions to maintain and increase our resident charges
      in
      accordance with our rate enhancement programs without adversely affecting
      occupancy levels; increases in interest costs as a result of re-financings;
      our
      ability to control community operation expenses, including insurance and utility
      costs, without adversely affecting the level of occupancy and the level of
      resident charges; our ability to generate cash flow sufficient to service our
      debt and other fixed payment requirements; 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, uncertainties related to
      professional liability claims; and uncertainties about our ability to
      successfully integrate our company with Summerville Senior Living, Inc. after
      consummating our pending merger with them. We have attempted to identify, in
      context, certain of the factors that we currently believe may cause actual
      future experience and results to differ from our current expectations regarding
      the relevant matter or subject area. These and other risks and uncertainties
      are
      detailed in our reports filed with the Securities and Exchange Commission (SEC),
      including “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year
      ended December 31, 2006.





**Overview**





Emeritus
      is a Washington corporation founded by Daniel R. Baty and two other long-time
      associates in 1993. Mr. Baty is chairman of our board of directors, chief
      executive officer, and one of our largest shareholders. He is also a party
      to a
      number of agreements with us and is referred to frequently in discussions of
      the
      business. In November 1995, we completed our initial public
      offering.





From
      1995
      through 1999, we expanded rapidly through acquisition and internal development
      and by December 31, 1999, operated 129 assisted living communities with
      11,726 units. We believe, however, that during this expansion, the assisted
      living industry became over-built, creating an environment characterized by
      sluggish or falling occupancy and market resistance to rate increases caused
      by
      the oversupply. As a result, in 2000 we began an increased focus first on
      raising our occupancy and later on rate development, operating efficiencies,
      and
      cost controls. This focus continues into 2007.





We
      believe the operating environment of the assisted living industry has been
      improving over the past several years resulting in occupancy gains and increases
      in the average monthly rate. These operating improvements have also resulted
      in
      greater access to capital. We believe these dynamics have resulted in the
      consolidation of smaller local and regional operators into the larger national
      operators, and anticipate this consolidation of the industry will continue.
      Because of these circumstances, we have been able to complete several
      acquisitions or leases in the last several years, although at a slower pace
      in
      2005 and 2006 than in 2003 and 2004. Although opportunities for further
      expansion have been available over the past two years, we have been selective
      in
      our growth as we have seen a sharp increase in market prices. As a result,
      we
      have focused more on internal growth through expansion of existing properties
      and construction of new communities. We currently have expansion projects 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.





Since
      the
      beginning of 2003 through March 31, 2007, we have increased our owned and leased
      communities by 35 and 51, respectively, for a net increase in our consolidated
      portfolio of 86. In addition, we have decreased our number of managed
      communities by 64, thereby increasing our total operated portfolio by 22
      communities. Those communities we own and lease, and which are included in
      our
      consolidated portfolio, increased from 85 at the beginning of 2003 to 171 at
      March 31, 2007, reflecting both our increasing confidence in the assisted living
      industry and the availability of capital.


**13**
 **MANAGEMENT’S
          DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION**
 **AND
          RESULTS OF OPERATIONS - CONTINUED**





In
      2007,
      we expect to continue our focus on increasing occupancy and rates, as well
      as
      reviewing acquisition opportunities that meet our criteria.




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





**As
                of March 31,**
            
            **As
                of December 31,**
            
            **As
                of March 31,****2007**
            
            **2006**
            
            **2006****Buildings**
            
            **Units**
            
            **Buildings**
            
            **Units**
            
            **Buildings**
            
            **Units**Owned
                (1)
            53
            
            3,749
            
            10
            
            808
            
            9
            
            707Leased
                (2 )
            118
            
            9,880
            
            161
            
            12,821
            
            161
            
            12,805Consolidated
                Portfolio
            171
            
            13,629
            
            171
            
            13,629
            
            170
            
            13,512Managed/Admin
                Services (3)
            9
            
            1,084
            
            11
            
            1,232
            
            12
            
            1,355Joint
                Venture/Partnership (4)
            22
            
            1,750
            
            21
            
            1,652
            
            1
            
            140Operated
                Portfolio
            202
            
            16,463
            
            203
            
            16,513
            
            183
            
            15,007Percentage
                increase (decrease) (5)
            (0.5%)
            
            (0.3%)
            
            10.3%
            
            9.4%
            
            (0.5%)
            
            (0.6%)




(1)
        Owned
        communities increased from March 31, 2006, due to the acquisition of one
        community in Washington acquired in July 2006, 24 communities in six states
        acquired in February 2007, and 19 communities in six states acquired in March
        2007.
 (2)
        Of
        the 118 leased communities at March 31, 2007, 38 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 66 are accounted for as capital
        leases, in which a long-term asset and corresponding liability is established
        on
        our balance sheet. The remaining 14 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.
 (3)
        Managed communities declined by three from March 31, 2006, because we
        discontinued management of one community in April 2006, another in January
        2007,
        and reclassified one from managed to the joint venture group in March
        2007.
 (4)
        Since
        March 31, 2006, we have added 21 communities to our joint venture managed
        group,
        20 from the Blackstone joint venture in December 2006, and one additional
        Blackstone community in March 2007 that was formerly managed by the
        Company.
 (5)
        The
        percentage increase (decrease) indicates the change from the prior year,
        or, in
        the case of March 31, 2007 and 2006, 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. We
        rely
        primarily on our residents’ ability to pay our charges for services from their
        own or familial resources and expect that we will do so for the foreseeable
        future. Although care in an assisted living community is typically less
        expensive than in a skilled nursing facility, we believe that generally only
        seniors with income or assets meeting or exceeding the regional median can
        afford to reside in our communities. In this context, we must be sensitive
        to
        our residents’ financial circumstances and remain aware that rates and occupancy
        are often interrelated.
 
 In
        evaluating the rate component, we generally rely on the average monthly revenue
        per 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.


In
      our
      consolidated portfolio, our average monthly revenue per unit for the three
      months ended March 31, 2007, increased to $3,176 from $3,046 for the same period
      in 2006. This change represents an increase of $130 or 4.3%.





In
      our
      consolidated portfolio, our average occupancy rate was 86.3% and 83.9% the
      three
      months ended March 31, 2007 and 2006, respectively, an increase of 2.4
      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.


**14**
 **MANAGEMENT’S
          DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION**
 **AND
          RESULTS OF OPERATIONS - CONTINUED**


We
      continue to evaluate the factors of rate and occupancy to find the optimum
      balance in each community, as witnessed by the increase in occupancy rates
      and
      average monthly revenue per unit over the past year.




Since
      our
      inception in 1993, we have incurred operating losses totaling approximately
      $216.9 million as of March 31, 2007. We believe that these losses have resulted
      from our early 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 at levels of approximately 93%. 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**





From
      2004
      through 2006, and continuing into 2007, 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
      the “Notes to Unaudited Condensed Consolidated Financial Statements”
above.





The
      following table shows the changes in buildings from December 31, 2005, through
      March 31, 2007, including those transactions described above:





**Month**
            
            **Owned**
            
            **Leased**
            
            **Consolidated**
            
            **Managed**
            
            **Total****December
                31, 2005**
            
            
            
            
            
            **9**
            
            
            **161**
            
            
            **170**
            
            
            **14**
            
            
            **184**Isle
                at Emerald Court
            
            
            Jan-06
            
            
            -
            
            
            -
            
            
            -
            
            
            1
            
            
            1Park
                Lane - disposition
            
            
            Jan-06
            
            
            -
            
            
            -
            
            
            -
            
            
            (1
            )
            
            (1
            )La
                Villita - disposition
            
            
            Mar-06
            
            
            -
            
            
            -
            
            
            -
            
            
            (1
            )
            
            (1
            )**March
                31, 2006**
            
            
            
            
            
            **9**
            
            
            **161**
            
            
            **170**
            
            
            **13**
            
            
            **183**Emerald
                Estates - disposition
            
            
            Apr-06
            
            
            -
            
            
            -
            
            
            -
            
            
            (1
            )
            
            (1
            )**June
                30, 2006**
            
            
            
            
            
            **9**
            
            
            **161**
            
            
            **170**
            
            
            **12**
            
            
            **182**Arbor
                Place
            
            
            Jul-06
            
            
            1
            
            
            -
            
            
            1
            
            
            (1
            )
            
            -**September
                30, 2006**
            
            
            
            
            
            **10**
            
            
            **161**
            
            
            **171**
            
            
            **11**
            
            
            **182**Westlake
                - management agreement
            
            
            Dec-06
            
            
            -
            
            
            -
            
            
            -
            
            
            1
            
            
            1JV
                - management agreements
            
            
            Dec-06
            
            
            -
            
            
            -
            
            
            -
            
            
            20
            
            
            20**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**





**15**
 **MANAGEMENT’S
            DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION**
 **AND
            RESULTS OF OPERATIONS - CONTINUED**





**Results
      of Operations**





**Summary
      of Significant Accounting Policies and Use of Estimates**





Our
      discussion and analysis of our financial condition and results of operations
      are
      based upon our unaudited condensed consolidated financial statements, which
      have
      been prepared in accordance with accounting principles generally accepted in
      the
      United States. The preparation of these financial statements requires us 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, we evaluate our 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, and litigation. We base
      our
      estimates on historical experience and on various other assumptions that are
      believed 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.





We
      believe that certain critical accounting policies are most significant to the
      judgments and estimates used in the preparation of our 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 our significant accounting policies and use of estimates
      is contained in our 2006 Form 10-K filed March 16, 2007.





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


**16**
 **MANAGEMENT’S
          DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION**
 **AND
          RESULTS OF OPERATIONS - CONTINUED**





**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,****2007**
            
            **2006**
            
            **2007-2006**Revenues:
            
            
            100.0
            %
            
            100.0
            %
            
            9.2
            %Expenses:Community
                operations*
            
            
            63.8
            
            
            65.7
            
            
            (6.2
            )Texas
                lawsuit settlement
            
            
            -
            
            
            (12.1
            )
            
            N/AGeneral
                and administrative
            
            
            9.2
            
            
            8.6
            
            
            (15.8
            )Depreciation
                and amortization
            
            
            13.2
            
            
            12.0
            
            
            (20.1
            )Facility
                lease expense
            
            
            9.4
            
            
            10.8
            
            
            5.0Total
                operating expenses
            
            
            95.6
            
            
            85.0
            
            
            (22.8
            )Operating
                income from continuing operations
            
            
            4.4
            
            
            15.0
            
            
            (68.2
            )Other
                income (expense)Interest
                income
            
            
            0.5
            
            
            0.9
            
            
            (32.1
            )Interest
                expense
            
            
            (12.4
            )
            
            (11.6
            )
            
            (16.1
            )Equity
                losses in unconsolidated joint ventures
            
            
            (0.5
            )
            
            (0.1
            )
            
            N/AOther,
                net
            
            
            (0.6
            )
            
            0.5
            
            
            N/ANet
                other expense
            
            
            (13.0
            )
            
            (10.3
            )
            
            (37.7
            )Income
                (loss) from continuing operationsbefore
                income taxes
            
            
            (8.6
            )
            
            4.7
            
            
            N/AProvision
                for income taxes
            
            
            (0.2
            )
            
            -
            
            
            N/AIncome
                (loss) from continuing operations
            
            
            (8.8
            )
            
            4.7
            
            
            N/ALoss
                from discontinued operations (net of tax)
            
            
            -
            
            
            -
            
            
            N/ANet
                income (loss)
            
            
            (8.8
            %)
            
            4.7
            %
            
            N/A*
                exclusive of depreciation and amortization and facility lease expense
                shown separately below





**17**
 **MANAGEMENT’S
          DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION**
 **AND
          RESULTS OF OPERATIONS - CONTINUED**


**Comparison
      of the three months ended March 31, 2007 and 2006**





**Total
      Operating Revenues:**





**Three
                Months ended March 31,****2007**
            
            **2006**
            
            **$****D**
            
            **%****D****(in
                thousands, except percentages)**Community
                revenue
            
            **$**
            **109,500**
            
            $
            100,609
            
            $
            8,891
            
            
            8.8
            %Management
                fees
            
            
            **877**
            
            
            457
            
            
            420
            
            
            91.9
            %Total
                operating revenues
            
            **$**
            **110,377**
            
            $
            101,066
            
            $
            9,311
            
            
            9.2
            %





**Three
                Months ended March 31,****2007**
            
            **2006**
            
            **$****D**
            
            **%****D**Average
                monthly revenue per occupied unit
            
            **$**
            **3,176**
            
            $
            3,046
            
            $
            130
            
            
            4.3
            %Average
                occupancy rate
            
            
            **86.3**
            **%**
            
            83.9
            %
            
            
            
            
            2.4
            
            ppt*





*
      percentage points





Of
      the
      increase in revenues of $9.3 million for the three months ended March 31, 2007,
      compared to the three months ended March 31, 2006, approximately $4.3 million
      was due to increases in the average monthly revenue per unit and approximately
      $4.6 million was due to an increase in occupancy, including an increase of
      $649,000 from the reopening of our Biloxi community that was temporarily closed
      due to hurricane damage in 2005.





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, from which we received $502,000 in the three month period ended March
      31, 2007, partially offset by several other management agreements that were
      terminated during and since the three month period ended March 31,
      2006





**Community
      Operations:**





**Three
                Months ended March 31,****2007**
            
            **2006**
            
            **$****D**
            
            **%****D****(in
                thousands, except percentages)**Community
                operations
            
            **$**
            **70,498**
            
            $
            66,367
            
            $
            4,131
            
            
            6.2
            %As
                a percent of revenue
            
            
            **63.8**
            **%**
            
            65.7
            %
            
            
            
            
            (1.9
            )
            ppt





Of
      the
      $4.1 million increase in community operating expense, $2.7 million was primarily
      due to increases in labor-related costs. The remaining increase of $1.4 million
      was primarily related to increases in utilities, food costs, contracted
      services, insurance, and bad debts.





For
      the
      three months ended March 31, 2006, community operations expense excludes a
      $12.2 million reduction in our professional and general liability insurance
      accrual that resulted from the settlement of a lawsuit for an amount


**18**
 **MANAGEMENT’S
          DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION**
 **AND
          RESULTS OF OPERATIONS - CONTINUED**


less
      than
      the original accrual for the action, which is shown as a separate line item
      on
      the condensed consolidated statement of operations and is further discussed
      under “Legal Proceedings.”





**General
      and Administrative:**





**Three
                Months ended March 31,****2007**
            
            **2006**
            
            **$****D**
            
            **%****D****(in
                thousands, except percentages)**General
                and administrative
            
            **$**
            **10,114**
            
            $
            8,731
            
            $
            1,383
            
            
            15.8
            %As
                a percent of revenue
            
            
            **9.2**
            **%**
            
            8.6
            %
            
            
            
            
            .6
            
            ppt





The
      increase in G&A expenses of $1.4 million was primarily related to staffing
      costs for regional and corporate overhead positions of approximately
      $1.1 million and
      non-cash stock option compensation expenses of approximately $403,000. These
      increases were partially offset by a decrease in legal fees of $192,000 in
      2007
      as compared to 2006. In addition, our accounting and consulting fees decreased
      by $124,000, primarily because project costs in 2007 related to compliance
      work
      for internal control requirements under the Sarbanes-Oxley Act of 2002 declined
      from expense levels in 2006.





**Depreciation
      and Amortization:**





**Three
                Months ended March 31,****2007**
            
            **2006**
            
            **$****D**
            
            **%****D****(in
                thousands, except percentages)**Depreciation
                and amortization
            
            **$**
            **14,589**
            
            $
            12,150
            
            $
            2,439
            
            
            20.1
            %As
                a percent of revenue
            
            
            **13.2**
            **%**
            
            12.0
            %
            
            
            
            
            1.2
            
            ppt





The
      increase is primarily the result of the write off of approximately $1.5 million
      of unamortized lease acquisition costs upon completion of the Fretus, HRT,
      and
      HCPI acquisitions and a $159,000 increase in contract acquisition cost
      amortization from the July 2006 acquisition of one Washington community. In
      addition, due to the same acquisitions, depreciation expense increased $329,000.
      The remainder was due to leasehold improvement depreciation on capital
      expenditures to improve our properties.





**Facility
      Lease Expense:**





**Three
                Months ended March 31,****2007**
            
            **2006**
            
            **$****D**
            
            **%****D****(in
                thousands, except percentages)**Facility
                lease expense
            
            **$**
            **10,370**
            
            $
            10,918
            
            $
            (548
            )
            
            (5.0
            %)As
                a percent of revenue
            
            
            **9.4**
            **%**
            
            10.8
            %
            
            
            
            
            (1.4
            )
            ppt
            t





The
      decrease in facility lease expense of $548,000 was primarily due to the
      operating lease expense decrease of $629,000 due to the Fretus, HRT, and HCPI
      acquisitions, partially offset by lease terms that provide for periodic
      increases in rent. We leased 38 and 77 communities under operating leases as
      of
      March 31, 2007 and 2006, respectively.


**19**
 **MANAGEMENT’S
          DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION**
 **AND
          RESULTS OF OPERATIONS - CONTINUED**





**Interest
      Income:**





**Three
                Months ended March 31,****2007**
            
            **2006**
            
            **$****D**
            
            **%****D****(in
                thousands, except percentages)**Interest
                income
            
            **$**
            **591**
            
            $
            871
            
            $
            (280
            )
            
            (32.1
            %)As
                a percent of revenue
            
            
            **0.5**
            **%**
            
            0.9
            %
            
            
            
            
            (.4
            )
            ppt





The
      decrease in interest income of $280,000 was primarily attributable to interest
      earned in 2006 on investments of cash that was received in the sale of our
      ownership interest in Alterra. In 2007, cash balances were significantly lower
      than in 2006 as was interest income earned on restricted deposits, which were
      also lower in 2007 as compared to 2006.





**Interest
      Expense:**





**Three
                Months ended March 31,****2007**
            
            **2006**
            
            **$****D**
            
            **%****D****(in
                thousands, except percentages)**Interest
                expense
            
            **$**
            **13,615**
            
            $
            11,731
            
            $
            1,884
            
            
            16.1
            %As
                a percent of revenue
            
            
            **12.4**
            **%**
            
            11.6
            %
            
            
            
            
            0.8
            
            ppt





The
      increase in interest expense of $1.9 million for the first quarter of 2007
      as
      compared to the comparable period in 2006 is primarily due to an increase of
      $1.4 million in interest expense from the Fretus, HRT, and HCPI acquisitions
      and
      the new Washington community acquired in July 2006, partially offset by
      reductions in other interest expense due to normal pay downs on mortgages.
      In
      addition, in 2006 there was a reduction in our interest payable accrual of
      $766,000 that was recorded in 2005 due to the settlement of a lawsuit for less
      than the anticipated amount.





**Equity
      losses in unconsolidated joint ventures:**





**Three
                Months ended March 31,****2007**
            
            **2006**
            
            **$****D**
            
            **%****D****(in
                thousands, except percentages)**Equity
                losses inunconsolidated
                joint ventures
            
            **$**
            **(569**
            **)**
            $
            (96
            )
            $
            (473
            )
            
            492.7
            %As
                a percent of revenue
            
            
            **(0.5**
            **%)**
            
            (0.1
            %)
            
            
            
            
            (.4
            )
            ppt





The
      increase in equity losses in unconsolidated joint ventures of $473,000 is
      primarily from equity losses in the Blackstone Joint Venture of $395,000 and
      an
      increase in equity losses of $72,000 in Senior Healthcare Partners, LLC for
      the
      three months ended March 31, 2007.





**Other,
      net:**





**Three
                Months ended March 31,****2007**
            
            **2006**
            
            **$****D**
            
            **%****D****(in
                thousands, except percentages)**Other,
                net
            
            **$**
            **(672**
            **)**
            $
            596
            
            $
            (1,268
            )
            
            (212.8
            %)As
                a percent of revenue
            
            
            **(0.6**
            **%)**
            
            0.5
            %
            
            
            
            
            (1.1
            )
            ppt


**20**
 **MANAGEMENT’S
          DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION**
 **AND
          RESULTS OF OPERATIONS - CONTINUED**


Other,
      net primarily reflects the incentive payment of $1.3 million related to the
      early conversion of our Convertible Debentures into common stock, offset by
      $554,000 of amortization of deferred gains in 2007. The balance in 2006
      primarily relates to $554,000 of amortization of deferred gains.





**Income
        taxes:**
 
 **Three
                  Months ended March 31,****2007**
              
              **2006**
              
              **$****D**
              
              **%****D****(in
                  thousands, except percentages)**Provision
                  for income taxes
              
              **$**
              **276**
              
              $
              10
              
              $
              266
              
              
              N/AAs
                  a percent of revenue
              
              
              **0.2**
              **%**
              
              -
              
              
              
              
              
              0.2
              
              ppt


The
        provision for income taxes for the quarter ended March 31, 2007, is principally
        due to federal taxes on taxable income without the effect of the tax benefit
        of
        excess stock compensation deductions of $271,000, which has been recorded
        as
        additional paid in capital. The provision for income taxes for the quarter
        ended
        March 31, 2006, is principally due to state income and franchise tax
        liabilities. As of March 31, 2007 and 2006, we have a 100% allowance on our
        net
        deferred tax assets.  The
        valuation allowance increased by $3.4 million since December 31,
        2006.




**Net
      Income (Loss) and Property-Related Expense:** **





In
      comparing the net income (loss) for the three months ended March 31, 2007 and
      2006, 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,****2007**
            
            **2006**
            
            **$****D**
            
            **%****D****(in
                thousands, except percentages)****Total
                property-related expense:**Depreciation
                and amortization
            
            **$**
            **14,589**
            
            $
            12,150
            
            $
            2,439
            
            
            20.1
            %Facility
                lease expense
            
            
            **10,370**
            
            
            10,918
            
            
            (548
            )
            
            (5.0
            %)Interest
                expense
            
            
            **13,615**
            
            
            11,731
            
            
            1,884
            
            
            16.1
            %Total
                property-related expense
            
            **$**
            **38,574**
            
            $
            34,799
            
            $
            3,775
            
            
            10.8
            %


**21**
 **MANAGEMENT’S
          DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION**
 **AND
          RESULTS OF OPERATIONS - CONTINUED**


Table
      of
      Contents




**Three
                Months ended March 31,****2007**
            
            **2006**
            
            **$****D**
            
            **%****D****(in
                thousands, except percentages)**


**Property-related
                expenses from lease accounting treatment:**Depreciation
                and amortization
            
            **$**
            **9,543**
            
            $
            9,699
            
            $
            (156
            )
            
            (1.6
            %)Interest
                expense
            
            
            **10,092**
            
            
            10,400
            
            
            (308
            )
            
            (3.0
            %)Straight-line
                lease expense
            
            
            **165**
            
            
            266
            
            
            (101
            )
            
            (38.0
            %)Operating
                lease expense
            
            
            **10,205**
            
            
            10,652
            
            
            (447
            )
            
            (4.2
            %)Total
                property-related lease expense
            
            
            **30,005**
            
            
            31,017
            
            
            (1,012
            )
            
            (3.3
            %)Actual
                lease payments
            
            
            **(25,425**
            **)**
            
            (25,487
            )
            
            62
            
            
            (0.2
            %)Expense
                in excess of lease payments
            
            **$**
            **4,580**
            
            $
            5,530
            
            $
            (950
            )
            
            (17.2
            %)





Our
      property-related expense associated with our leases exceeded our actual lease
      payments by $4.6 million and $5.5 million for the three months ended March
      31,
      2007 and 2006, respectively. The impact of lease accounting declined by $950,000
      in the current year quarter from the comparable quarter last year due primarily
      to the reduction in interest expense on the capital leases due to the normal
      pay
      down of the lease obligation. While the lease accounting impact has declined
      since the comparable quarter last year, the total impact in both periods is
      significant to our overall operating results. It should be noted that,
      notwithstanding the effects of lease accounting treatment, the actual lease
      payments required under most of our leases will continue to increase annually
      and, as a result, we will need to improve our results from community operations
      to cover these increases. However, in the quarter ended March 31, 2007, the
      actual lease payments decreased due to the acquisition transactions discussed
      in
      the “Notes to Unaudited Condensed Consolidated Financial Statements’
above.




**Loss
      from Discontinued Operations:**





**Three
                Months ended March 31,****2007**
            
            **2006**
            
            **$****D**
            
            **%****D****(in
                thousands, except percentages)**Loss
                from discontinued operations,net
                of tax benefit
            
            **$**
            **-**
            
            $
            (10
            )
            $
            10
            
            
            (100.0
            %)As
                a percent of revenue
            
            
            **-**
            
            
            -
            
            
            
            
            
            0.0
            
            ppt





The
      loss
      from discontinued operations for the three months ended March 31, 2006, is
      due
      to the sale of a facility in Nevada.











**22**
 **MANAGEMENT’S
          DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION**
 **AND
          RESULTS OF OPERATIONS - CONTINUED**





**Same
      Community Comparison**





Of
      our
      171 communities, we have operated 169 communities continuously since January
      1,
      2006, and define these as “Same Communities.” Generally, in the past, there has
      been a significant difference between our Same Communities portfolio and our
      consolidated portfolio and we provided a separate analysis of the Same
      Communities. Since this disparity no longer exists, any analysis of the Same
      Communities adds little to the understanding of our business and we will forego
      any such additional analysis until a meaningful disparity should exist.





**Liquidity
      and Capital Resources**


For
      the
      three months ended March 31, 2007, net cash provided by operating activities
      was
      $6.4 million. The primary components were depreciation and amortization of
      $14.6
      million, incentive payment accrual for early conversion of debentures of $1.3
      million, losses in equity investments of $569,000, non-cash stock option
      compensation of $538,000, allowance for doubtful receivables of $358,000, and
      amortization of loan fees of $137,000, partially offset by a net change in
      operating assets and liabilities of $935,000, amortization of deferred gain
      of
      $554,000, and $9.7 million of net loss from operations.


Cash
        used
        in operating activities was $8.0 million for the three months ended March
        31,
        2006. The primary components were net increases in operating assets and
        liabilities of $24.9 million and amortization of deferred gain of $554,000,
        partially offset by $4.7 million of net income from operations and $12.2
        million
        of depreciation and amortization. The $24.9 million use of cash related to
        operating assets and liabilities is primarily comprised of the
        following:







**Significant
                components of changes in operating assets and
                liabilities:****Three
                Months Ended March 31,****2006**Reduction
                of Texas settlement liability accruals, including accrued
                interest
            
            $
            (12,973
            )Payment
                of Texas settlement
            
            
            (5,600
            )Texas
                settlement subtotal
            
            
            (18,573
            )Federal
                tax deposits, principally related to the Alterra transaction
                gain
            
            
            (4,200
            )Payment
                of semi-annual debenture interest
            
            
            (1,000
            )Initial
                payment of annual insurance premiums
            
            
            (3,450
            )All
                other activity, net
            
            
            2,353Net
                change in operating assets and liabilities
            
            $
            (24,870
            )





The
        Texas
        settlement impact of $18.6 million and the federal tax deposits of $4.2 million
        related to the Alterra transaction gain, a total of $22.8 million, are
        non-recurring items.
 
 For
        the
        three months ended March 31, 2007, cash used in investing activities was
        $187.4
        million. The activities that used cash include $186.4 million for the
        acquisition or construction of property and equipment and net investment
        in
        affiliates and other managed communities of $969,000. Net cash used in investing
        activities amounted to $4.2 million for the three months ended March 31,
        2006,
        and was comprised primarily of $4.4 million for the acquisition or construction
        of property and equipment offset by net cash provided of $219,000 from
        affiliates and other managed communities.
 
 For
        the
        three months ended March 31, 2007, net cash provided by financing activities
        was
        $190.1 million. Activities resulting in a net cash increase include $283.7
        million of proceeds from long-term borrowings and financings, $4.4 million
        for
        the decrease in restricted deposits, $271,000 tax benefit of stock compensation,
        and proceeds from the issuance of common stock of approximately $275,000,
        partially offset by $96.3 million for repayment of long-term borrowings and
        financings, and $2.2 million of debt issue and other financing costs. For
        the







**23**
 **MANAGEMENT’S
          DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION**
 **AND
          RESULTS OF OPERATIONS - CONTINUED**


three
        months ended March 31, 2006, net cash used in financing activities was $7.0
        million, consisting primarily of $10.2 million repayment of long-term borrowings
        and financings and an increase in restricted deposits of $307,000, partially
        offset by proceeds from the issuance of common stock of approximately $3.4
        million.
 
 As
        of
        March 31, 2007, we had a working capital deficit of $54.6 million. We are
        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, $16.3 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
        the current portion of debt maturities of $24.2 million due by March 31,
        2008,
        in addition to long-term debt maturities of $61.7 million due after March
        2008
        but prior to March 31, 2009, which the Company plans to refinance prior to
        their
        due dates or pay them off at maturity.
 
 We
        have
        incurred significant losses since our inception and have an accumulated deficit
        of $216.7 million as of March 31, 2007. We believe these losses have resulted
        from our early emphasis on expansion, financing costs arising from multiple
        financing and refinancing transactions related to this expansion, occupancy
        rates remaining lower for longer periods than anticipated, and depreciation
        expense primarily from multiple capital and financing leases.
 
 Substantially
        all of our debt obligations mature at various dates beginning in March 2008,
        at
        which time we will need to refinance or otherwise repay the obligations.
        As a
        consequence of our property and lease transactions in 2007, our long-term
        debt
        has increased from $86.0 million at December 31, 2006, to $368.5
        million **** at
        March
        31, 2007. Our obligations under operating leases have decreased from $299.3
        million to $218.8 million, and our capital lease and financing obligations
        have
        decreased from $608.6 million to $582.7 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. Accordingly, any event of default could cause a material adverse
        effect on our financial condition if such debt or leases are cross-defaulted.
        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, 2007, we were in violation of one or more covenants in certain
        of our
        leases, but obtained waivers from the owners such that we were still deemed
        to
        be in compliance and thus, were not in default. The waivers expire on April
        1,
        2008.
 
 Based
        on
        our current operating initiatives and our current cash position, management
        believes that we will be able to generate positive operating cash flow, or
        will
        have adequate cash reserves, or the ability to obtain adequate financing
        to
        cover any potential operating shortfalls and necessary investing and financing
        activities, including required debt service and capital expenditures for
        at
        least the next twelve months.




**24**
 **MANAGEMENT’S
          DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION**
 **AND
          RESULTS OF OPERATIONS - CONTINUED**


The
      following table summarizes our contractual obligations at March 31, 2007, (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
            
            $
            368,517
            
            $
            24,188
            
            $
            77,177
            
            $
            160,523
            
            $
            106,629Capital
                lease and financing obligations,including
                current portion
            
            
            582,661
            
            
            22,030
            
            
            53,663
            
            
            67,962
            
            
            439,006Operating
                leases
            
            
            218,836
            
            
            29,985
            
            
            57,394
            
            
            53,779
            
            
            77,678Convertible
                debentures
            
            
            10,455
            
            
            -
            
            
            10,455
            
            
            -
            
            
            -$
            1,180,469
            
            $
            76,203
            
            $
            198,689
            
            $
            282,264
            
            $
            623,313





The
      following table summarizes interest on our contractual obligations at March
      31,
      2007, (in thousands):








**Interest
                Due by Period****After
                5****Contractual
                Obligations**
            
            **Total**
            
            **1
                year**
            
            **2-3
                years**
            
            **4-5
                years**
            
            **years**Long-term
                debt
            
            $
            100,517
            
            $
            26,682
            
            $
            41,454
            
            $
            31,108
            
            $
            1,273Capital
                lease and financing obligations
            
            
            303,999
            
            
            37,739
            
            
            70,993
            
            
            63,521
            
            
            131,746Convertible
                debentures
            
            
            980
            
            
            653
            
            
            327
            
            
            -
            
            
            -$
            405,496
            
            $
            65,074
            
            $
            112,774
            
            $
            94,629
            
            $
            133,019








**Recent
      Accounting Pronouncements**





In
      June
      2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
      No. 48 (FIN 48), *Accounting
      for Uncertainty in Income Taxes* ,
      an
      Interpretation of Statement of Financial Accounting Standards (SFAS) No. 109, *Accounting
      for Income Taxes* .
      FIN 48
      clarifies the accounting for income taxes by prescribing the recognition
      threshold a tax position is required to meet before being recognized in the
      financial statements. It also provides guidance on de-recognition, measurement,
      classification, interest and penalties, accounting in interim periods,
      disclosure and transition. The Interpretation requires that we recognize in
      the
      financial statements the impact of a tax position only if that position is
      more
      likely than not of being sustained upon examination, based on the technical
      merits of the position. FIN 48 is effective for fiscal years beginning after
      December 15, 2006. Differences between the amounts recognized in the statements
      of financial position prior to the adoption of FIN 48 and the amounts reported
      after adoption should be accounted for as a cumulative-effect adjustment
      recorded to the beginning balance of retained earnings. We adopted FIN 48
      effective January 1, 2007. The adoption of this statement did not have any
      significant effect on our financial condition, results of operations, or cash
      flows.





In
      February 2007, the FASB issued Statement of Financial Accounting Standards
      (SFAS) 159, *The
      Fair Value Option for Financial Assets and Financial
      Liabilities* .
      SFAS
      159 permits entities to choose to measure financial assets and liabilities
      (except for those that are specifically scoped out of the Statement) at fair
      value. The election to measure a financial asset or liability at fair value
      can
      be made on an instrument-by-instrument basis and is irrevocable. The difference
      between carrying value and fair value at the election date is recorded as a
      transition adjustment to opening retained earnings. Subsequent changes in fair
      value are recognized in earnings. The effective date for SFAS 159 is as of
      the
      beginning of an entity's first fiscal year that begins after November 15, 2007.
      We are evaluating SFAS 159 and have not yet determined the impact the adoption
      will have on our consolidated financial statements, but it is not expected
      to be
      significant.


**25**
 **MANAGEMENT’S
          DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION**
 **AND
          RESULTS OF OPERATIONS - CONTINUED**





**Impact
      of Inflation**





To
      date,
      inflation has not had a significant impact on us. However, inflation could
      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 a 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. To the extent we rely upon governmental reimbursement programs,
      we have a limited ability to increase rates. 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.





**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:





Definition
      of Adjusted EBITDA:





We
      define
      Adjusted EBITDA as follows:





Net
      income (loss):


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


=
      Adjusted EBITDA





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 on 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.


**26**
 **MANAGEMENT’S
          DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION**
 **AND
          RESULTS OF OPERATIONS - CONTINUED**





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 earnings (losses) to calculate Adjusted EBITDA
      and using this non-GAAP financial measure as compared to GAAP net income (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.





Adjusted
      EBITDA is not an alternative to net income (loss), income 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 income (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 income (loss) to Adjusted EBITDA for
      the
      three months ended March 31, 2007 and 2006:





**Three
                Months ended March 31,****2007**
            
            **2006****Net
                income (loss)**
            
            $
            (9,735
            )
            $
            4,727Provision
                for income taxes
            
            
            276
            
            
            10Equity
                losses in unconsolidated joint ventures
            
            
            569
            
            
            96Depreciation
                and amortization
            
            
            14,589
            
            
            12,150Amortization
                of deferred gains
            
            
            (554
            )
            
            (554
            )Non-cash
                stock option compensation expenses
            
            
            538
            
            
            135Convertible
                debentures conversion costs
            
            
            1,329
            
            
            -Interest
                expense
            
            
            13,615
            
            
            11,731Interest
                income
            
            
            (591
            )
            
            (871
            )Other
                non-cash unusual activity:Reversal
                of Texas settlement accrued in 2004
            
            
            -
            
            
            (12,207
            )**Adjusted
                EBITDA**
            
            $
            20,036
            
            $
            15,217





**Subsequent
      Event**





As
      discussed under the caption “Senior Med Transaction,” in April 2007, we received
      written notice from Walgreen to exercise their purchase option rights under
      the
      agreement and expect to close the transaction by May 31, 2007. We will receive
      approximately $8.5 million in cash for our equity share of the business and
      record a gain of approximately $7.0 million.








**27**


**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, 2007, we had approximately $45.2 million
      of variable rate borrowings based on the LIBOR rate. As of March 31, 2007,
      our
      weighted average variable rate is 2.81% in excess of the LIBOR rate. For every
      1% change in the LIBOR rate, our interest expense will change by approximately
      $452,000 annually. We also have certain operating lease obligations based on
      LIBOR, with a LIBOR cap of approximately 5.3%. As of March 31, 2007, the LIBOR
      rate was at the 5.3% cap and we currently have no variable rate exposure for
      additional lease expense. This analysis does not consider changes in the actual
      level of borrowings or operating lease obligations that may occur subsequent
      to
      March 31, 2007. 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.





**Item
      4. Controls and Procedures******





(a) *Evaluation
      of disclosure controls and procedures.*





Our
      chief
      executive officer 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, 2007, 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]





**28**


**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, except as noted below, 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.





In
      February 2005, a San Antonio, Texas, jury found one of our assisted living
      communities negligent in the care of a resident. The jury awarded a verdict
      against us in the amount of $1.5 million in compensatory damages and $18.0
      million in punitive damages. We appealed the verdict but recorded a liability
      accrual of $18.7 million in the fourth quarter of 2004 and accrued interest
      of
      $766,000 on the unpaid judgment at the rate of 5% per annum during 2005. In
      March 2006, we settled the action for $5.6 million. In the first quarter of
      2006, we reduced the accrued interest by $766,000 and the liability accrual
      recorded in 2004 by $12.2 million.





In
      March
      2006, the Texas attorney general’s office began an inquiry into compliance with
      certain Medicaid regulations at six of our communities in Texas that participate
      in the Community Based Alternative program of the Texas Department of Aging
      and
      Disability. Participation in the program requires eligible rooms to have an
      area
      equipped with a sink, refrigerator, cooking appliance, adequate space for food
      preparation, and storage space for utensils and supplies. An audit by the
      department revealed that some of the rooms used for residents in the program
      did
      not have some or all of those items. We addressed the State's concerns raised
      in
      the audits and all rooms were equipped with the above regulatory requirements
      as
      of April 2006.




The
      attorney general’s office originally sought $6.6 million related to the
      compliance issue, which equates to three times the total amount of all payments
      made to us by the State of Texas since the inception of our Medicaid contract,
      plus interest and attorney fees. We took the position with the State that all
      services for which Medicaid lawfully paid us were provided to the program
      residents despite the absence of some of the kitchen items and therefore,
      recovery of the total of all payments made to us was unjustified. As a result
      of
      continuing settlement discussions with the attorney general’s office, there is a
      tentative agreement to settle the claim for approximately $1.9 million.





We
      recorded a liability of $1.9 million in 2006, as our best estimate of the
      ultimate outcome based on this tentative agreement. We will assess our liability
      as final agreements are negotiated and will make adjustments, if any, to our
      recorded liability as more information becomes available to us.





**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, 2006, 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.


**29**





**Item
      6. Exhibits**




**Footnote****Number**
              
              **Description**
              
              **Number****4.1**
              
              **Indenture
                  for Debt Securities S-3**
              
              (1)**4.12**
              
              **Indenture
                  for Subordinated Debt Securities S-3**
              
              (1)**4.13**
              
              **Indenture
                  for Convertible Debt Securities S-3**
              
              (1)**4.14**
              
              **Indenture
                  for Subordinated Convertible Debt Securities S-3**
              
              (1)**4.15**
              
              **Form
                  of Debt Securities S-3**
              
              (1)**4.16**
              
              **Form
                  of Subordinated Debt Securities S-3**
              
              (1)**4.17**
              
              **Form
                  of Convertible Debt Securities S-3**
              
              (1)**4.18**
              
              **Form
                  of Subordinated Convertible Debt Securities S-3**
              
              (1)**10.12**
              
              **Purchase
                  of 12 communities consisting of 786 units in five states from Healthcare
                  Realty Trust (HRT)**10.12.1
              Agreement
                  of Sale and Purchase entered into by Sellers HR Acquisition I Corporation,
                  HR Acquisition forPennsylvania,
                  Inc., HR Acquisition of San Antonio LTD., Healthcare Acquisition
                  of Texas,
                  Inc. HRTand
                  Emeritus Corporation Holdings, Inc., and Healthcare Reality Trust
                  Incorporated
              
              (3)10.12.2
              Loan
                  Agreement by and among 12 Delaware limited liability companies
                  or limited
                  partnerships listed onSchedule
                  A together with their respective successors (borrowers) and Capmark
                  Bank
                  (lender) for $88.0 million
              (3)10.12.3
              Loan
                  Agreement by and among 12 Delaware limited liability companies
                  or limited
                  partnerships listed onSchedule
                  A together with their respective successors (borrowers) and Capmark
                  Bank
                  (lender) for $13.6 million
              (3)10.12.4
              Promissory
                  Note for $88,000,000;the undersigned limited liability companies
                  and
                  limited partnerships(borrower)
                  promises to pay to Capmark Bank (Lender) principal amount
              
              (3)10.12.5
              Promissory
                  Note for $13,600,000;the undersigned limited liability companies
                  and
                  limited partnerships(borrower)
                  promises to pay to Capmark Bank (Lender) principal amount
              
              (3)10.12.6
              Assisgnment
                  and Assumption of Loan and Loan Documents by and between Healthcare
                  Reality TrustIncorporated
                  and Columbia Pacific Opportunity Fund, LP
              
              (3)**10.14**
              
              **Purchase
                  of 3 communities consisting of 453 units located in South Carolina
                  from
                  Health Care Property****Investors,
                  Inc. (HCPI)**10.14.1
              Purchase
                  and Sale Agreement and Joint Escrow Instructions by and Between
                  HCPI Trust
                  "Seller" andEmeritus
                  Corporation "Buyer"
              
              (3)10.14.2
              Loan
                  Agreement by and among Emeri-Sky SC LLC, Emerivell SC LLC, and
                  Emeripark
                  SC LLC "Borrowers"and
                  CAPMARK BANK
              
              (3)10.14.3
              Promissory
                  Note $13.12 million Emeri-Sky (Skylyn) promises to pay to the order
                  of
                  CAPMARK BANK
              
              (3)10.14.4
              Promissory
                  Note $6.0 million Emerivill SC LLC (Village) promises to pay to
                  the order
                  of CAPMARK BANK
              (3)10.14.5
              Promissory
                  Note $4.48 million Emeripark SC LLC (Park) promises to pay to the
                  order of
                  CAPMARK BANK
              (3)**10.15**
              
              **Executive
                  Separation Agreements**10.15.1
              Frank
                  Ruffo
              
              (3)10.15.2
              Gary
                  Becker
              
              (3)**10.5**
              
              **Agreement
                  and Plan of Merger dated as of March 29, 2007, by and among Emeritus
                  Corporation,****Boston
                  Project Acquisition Corp., Summerville Senior Living, Inc. AP Summerville,
                  LLC,****AP
                  Summerville II, LLC, Daniel R. Baty, and Saratoga Partners IV,
                  L.P.**
              
              (2)**10.6**
              
              **Amended
                  and Restated Shareholders Agreement dated as of March 29, 2007,
                  by and
                  among****Emeritus
                  Corporation, AP Summerville, LLC, AP Summerville II, LLC, Apollo
                  Real
                  Estate****Investment
                  Fund III, L.P., Apollo Real Estate Investment Fund IV, L.P., Daniel
                  R.
                  Baty,****Catalina
                  General Partnership, L.P., Columbia Select, L.P., B.F., Limited
                  Partnership, Saratoga****Partners
                  IV, L.P., Saratoga Coinvestment Company, LLC and Saratoga Management
                  Company, LLC.**
              
              (2)**10.68**
              
              10.68.29
              Lease
                  Termination Agreement by and among HR Acquisition I Corporation,
                  HR
                  Acquisition ofPennsylvania,
                  Inc., and HRT Holdings, Inc. and Emeritus Corporation
              
              (3)10.68.30
              Lease
                  Termination Agreement by and among HR Acquisition I Corporation,
                  HR
                  Acquisition ofPennsylvania,
                  Inc., and HRT Holdings, Inc. and Emeritus Corporation
                  Roanoke
              
              (3)10.68.31
              Lease
                  Termination Agreement by and among HR Acquisition I Corporation,
                  HR
                  Acquisition ofPennsylvania,
                  Inc., and HRT Holdings, Inc. and Emeritus Corporation
                  Ravenna
              
              (3)
  **30**
 Table
          of
          Contents
   **Footnote****Number**
                
                **Description**
                
                **Number**
 10.68.32
              Lease
                  Termination Agreement by and among HR Acquisition I Corporation,
                  HR
                  Acquisition ofPennsylvania,
                  Inc., and HRT Holdings, Inc. and Emeritus Corporation
                  Harrisburg
              
              (3)10.68.33
              Lease
                  Termination Agreement by and among HR Acquisition I Corporation,
                  HR
                  Acquisition ofPennsylvania,
                  Inc., and HRT Holdings, Inc. and Emeritus Corporation
                  Danville
              
              (3)10.68.34
              Lease
                  Termination Agreement by and among HR Acquisition I Corporation,
                  HR
                  Acquisition ofPennsylvania,
                  Inc., and HRT Holdings, Inc. and Emeritus Corporation
                  Harrisonburg
              
              (3)10.68.35
              Lease
                  Termination Agreement by and among HR Acquisition I Corporation,
                  HR
                  Acquisition ofPennsylvania,
                  Inc., and HRT Holdings, Inc. and Emeritus Corporation
                  Mechanicsburg
              
              (3)10.68.36
              Lease
                  Termination Agreement by and among HR Acquisition I Corporation,
                  HR
                  Acquisition ofPennsylvania,
                  Inc., and HRT Holdings, Inc. and Emeritus Corporation
                  Bloomsburg
              
              (3)10.68.37
              Lease
                  Termination Agreement by HR Acquisition of San Antonio, LTD, and
                  ESC IV,
                  LPKingsley
                  Place Oakwell
              
              (3)10.68.38
              Lease
                  Termination Agreement by HR Acquisition of San Antonio, LTD, and
                  ESC IV,
                  LPKingsley
                  Place Oakwell Medical Center
              
              (3)10.68.39
              Lease
                  Termination Agreement by HR Acquisition of San Antonio, LTD, and
                  ESC IV,
                  LPKingsley
                  Place McKinney
              
              (3)10.68.40
              Lease
                  Termination Agreement by HR Acquisition of San Antonio, LTD, and
                  ESC IV,
                  LPKingsley
                  Place Henderson
              
              (3)**10.7**
              
              **Registration
                  Rights Agreement dated as of March 29, 2007, by and among Emeritus
                  Corporation,****AP
                  Summerville, LLC, AP Summerville II, LLC, Apollo Real Estate Investment
                  Fund III, L.P.,****Apollo
                  Real Estate Investment Fund IV, L.P., Daniel R. Baty, Catalina
                  General
                  Partnership, L.P.,****Columbia
                  Select, L.P., B.F., Limited Partnership, Saratoga Partners IV,
                  L.P.,
                  Saratoga Coinvestment****Company,
                  LLC, Saratoga Management Company, LLC and Granger
                  Cobb.**
              
              (2)**10.82**
              
              10.82.5
              Sixth
                  Amendment to Amended and Restated Master Lease is among Health
                  Care
                  Property Investors, Inc.HCPI
                  Trust, Emeritus Realty V, LLC, ESC-LA Casa Grande, LLC, and Texas
                  HCP
                  Holding, LP and togetherwith
                  HCP, HCP Trust, ER-V and La Casa Gande "Lessor on the one hand,
                  and
                  Emeritus CorporationESC
                  III, LP, Emeritus Properties II Inc., Emeritus Properties III,
                  Inc.,
                  Emeritus Properties V, IncEmeritus
                  Properties XIV, LLC, ESC-Bozeman, LLC, ESC-New Port Richey, LLC
                  "Lessee"on
                  the other hand
              
              (3)31.1
              
              
              Certification
                  of Periodic Reports31.1.1
              Certification
                  Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
                  302of
                  the Sarbanes-Oxley Act of 2002 for Daniel R. Baty dated May 10,
                  2007.
              
              (3)31.1.2
              Certification
                  Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
                  302of
                  the Sarbanes-Oxley Act of 2002 for Raymond R. Brandstrom dated
                  May 10,
                  2007.
              
              (3)32.1
              
              
              Certification
                  of Periodic Reports32.1.1
              Certification
                  Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
                  906of
                  the Sarbanes-Oxley Act of 2002 for Daniel R. Baty dated May 10,
                  2007.
              
              (3)32.1.2
              Certification
                  Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
                  906of
                  the Sarbanes-Oxley Act of 2002 for Raymond R. Brandstrom dated
                  May 10,
                  2007.
              
              (3)





Footnotes:(1)
            Incorporated
                by reference to the indicated exhibit filed with the Company’s Shelf
                Registration Statementon
                Form S-3 (File No.  1-14012)(2)
            Incorporated
                by reference to the indicated exhibit filed with the Company’s Form 8-K
                (File No. 1-14012)on
                April 2, 2007.(3)
            Filed
                herewith.











**31**








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 10, 2007
            EMERITUS
                CORPORATION(Registrant)/s/
                Raymond R. BrandstromRaymond
                R. Brandstrom, Vice President of Finance,Chief
                Financial Officer, and Secretary





**32**


Table
      of
      Contents




Index to Exhibits





**10.12**
            
            **Purchase
                of 12 communities consisting of 786 units in five states from Healthcare
                Realty Trust (HRT)**10.12.1
            Agreement
                of Sale and Purchase entered into by
                Sellers HR Acquisition I Corporation, HR Acquisition forPennsylvania,
                Inc., HR Acquisition of San Antonio
                LTD., Healthcare Acquisition of Texas, Inc. HRTand
                Emeritus Corporation Holdings, Inc., and
                Healthcare Reality Trust Incorporated10.12.2
            Loan
                Agreement by and among 12
                Delaware limited liability companies or limited partnerships listed
                onSchedule
                A together with their
                respective successors (borrowers) and Capmark Bank (lender) for $88.0
                million10.12.3
            Loan
                Agreement by and among 12
                Delaware limited liability companies or limited partnerships listed
                onSchedule
                A together with their
                respective successors (borrowers) and Capmark Bank (lender) for $13.6
                million10.12.4
            Promissory
                Note for $88,000,000;the
                undersigned limited liability companies and limited partnerships(borrower)
                promises to pay to
                Capmark Bank (Lender) principal amount10.12.5
            Promissory
                Note for
                $13,600,000;the undersigned limited liability companies and limited
                partnerships(borrower)
                promises to pay to
                Capmark Bank (Lender) principal amount10.12.6
            Assisgnment
                and Assumption of Loan
                and Loan Documents by and between Healthcare Reality
                TrustIncorporated
                and Columbia Pacific
                Opportunity Fund, LP**10.14**
            
            **Purchase
                of 3 communities consisting of 453 units located in South Carolina
                from
                Health Care Property****Investors,
                Inc. (HCPI)**10.14.1
            Purchase
                and Sale Agreement and Joint Escrow
                Instructions by and Between HCPI Trust "Seller" andEmeritus
                Corporation
                "Buyer"10.14.2
            Loan
                Agreement by and among
                Emeri-Sky SC LLC, Emerivell SC LLC, and Emeripark SC LLC "Borrowers"and
                CAPMARK
                BANK10.14.3
            Promissory
                Note $13.12 million
                Emeri-Sky (Skylyn) promises to pay to the order of CAPMARK
                BANK10.14.4
            Promissory
                Note $6.0 million
                Emerivill SC LLC (Village) promises to pay to the order of CAPMARK
                BANK10.14.5
            Promissory
                Note $4.48 million
                Emeripark SC LLC (Park) promises to pay to the order of CAPMARK
                BANK**10.15**
            
            **Executive
                Separation Agreements**10.15.1
            Frank
                Ruffo10.15.2
            Gary
                Becker**10.68**
            
            10.68.29
            Lease
                Termination Agreement by and
                among HR Acquisition I Corporation, HR Acquisition ofPennsylvania,
                Inc., and HRT
                Holdings, Inc. and Emeritus Corporation10.68.30
            Lease
                Termination Agreement by and
                among HR Acquisition I Corporation, HR Acquisition ofPennsylvania,
                Inc., and HRT
                Holdings, Inc. and Emeritus Corporation Roanoke10.68.31
            Lease
                Termination Agreement by and
                among HR Acquisition I Corporation, HR Acquisition ofPennsylvania,
                Inc., and HRT
                Holdings, Inc. and Emeritus Corporation Ravenna10.68.32
            Lease
                Termination Agreement by and
                among HR Acquisition I Corporation, HR Acquisition ofPennsylvania,
                Inc., and HRT
                Holdings, Inc. and Emeritus Corporation Harrisburg10.68.33
            Lease
                Termination Agreement by and
                among HR Acquisition I Corporation, HR Acquisition ofPennsylvania,
                Inc., and HRT Holdings,
                Inc. and Emeritus Corporation Danville10.68.34
            Lease
                Termination Agreement by and
                among HR Acquisition I Corporation, HR Acquisition ofPennsylvania,
                Inc., and HRT
                Holdings, Inc. and Emeritus Corporation
                Harrisonburg10.68.35
            Lease
                Termination Agreement by and
                among HR Acquisition I Corporation, HR Acquisition ofPennsylvania,
                Inc., and HRT Holdings,
                Inc. and Emeritus Corporation Mechanicsburg10.68.36
            Lease
                Termination Agreement by and
                among HR Acquisition I Corporation, HR Acquisition ofPennsylvania,
                Inc., and HRT
                Holdings, Inc. and Emeritus Corporation Bloomsburg10.68.37
            Lease
                Termination Agreement by HR
                Acquisition of San Antonio, LTD, and ESC IV, LPKingsley
                Place
                Oakwell10.68.38
            Lease
                Termination Agreement by HR
                Acquisition of San Antonio, LTD, and ESC IV, LPKingsley
                Place Oakwell Medical
                Center10.68.39
            Lease
                Termination Agreement by HR
                Acquisition of San Antonio, LTD, and ESC IV, LPKingsley
                Place
                McKinney10.68.40
            Lease
                Termination Agreement by HR
                Acquisition of San Antonio, LTD, and ESC IV, LPKingsley
                Place
                Henderson**10.82**
            
            10.82.5
            Sixth
                Amendment to Amended and
                Restated Master Lease is among Health Care Property Investors,
                Inc.HCPI
                Trust, Emeritus Realty V,
                LLC, ESC-LA Casa Grande, LLC, and Texas HCP Holding, LP and
                togetherwith
                HCP, HCP Trust, ER-V and La
                Casa Gande "Lessor on the one hand, and Emeritus
                CorporationESC
                III, LP, Emeritus Properties
                II Inc., Emeritus Properties III, Inc., Emeritus Properties V,
                IncEmeritus
                Properties XIV, LLC,
                ESC-Bozeman, LLC, ESC-New Port Richey, LLC "Lessee"on the other
                hand31.1
            
            
            Certification
                of Periodic Reports31.1.1
            Certification
                Pursuant to 18 U.S.C. Section
                1350, as Adopted Pursuant to Section 302of
                the Sarbanes-Oxley Act of 2002 for
                Daniel R. Baty dated May 10, 2007.31.1.2
            Certification
                Pursuant to 18 U.S.C. Section
                1350, as Adopted Pursuant to Section 302of
                the Sarbanes-Oxley Act of 2002 for
                Raymond R. Brandstrom dated May 10, 2007.32.1
            
            
            Certification
                of Periodic Reports32.1.1
            Certification
                Pursuant to 18 U.S.C. Section
                1350, as Adopted Pursuant to Section 906of
                the Sarbanes-Oxley Act of 2002 for
                Daniel R. Baty dated May 10, 2007.32.1.2
            Certification
                Pursuant to 18 U.S.C. Section
                1350, as Adopted Pursuant to Section 906of
                the Sarbanes-Oxley Act of 2002 for
                Raymond R. Brandstrom dated May 10,
                2007.