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) OFTHE
      SECURITIES EXCHANGE ACT 1934
 
 For the
quarterly period ended March 31, 2008
 
 o
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE
      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. YesþNoo
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer”, “accelerated filer”, and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
 
 Large
accelerated fileroAccelerated
filerþNon-accelerated
fileroSmaller
reporting company o
 
 Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). YesoNoþ
 
 As of
April 30, 2008, there were 39,057,738 shares of the Registrant’s Common Stock,
par value $0.0001, outstanding.
  
  EMERITUS
      CORPORATIONTable
      of ContentsPart I.  Financial
  InformationPage No.Item 1.  Financial Statements
      (unaudited):
              1Condensed Consolidated Balance Sheets as of March 31, 2008, and
      December 31, 2007
              2Condensed Consolidated Statements of Operations for the three
      months ended March 31, 2008 and 2007
              3Condensed Consolidated Statements of Cash Flows for the three
      months ended March 31, 2008 and 2007
              4Notes to Unaudited Condensed Consolidated Financial
      Statements
              5Item 2.
              Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
              15Item 3.
              Quantitative and Qualitative Disclosures About Market
      Risk
              30Item 4.
              Controls and Procedures
              30Part II.  Other
InformationNote:
              Items
      2, 3, 4, and 5 of Part II are omitted because they are not
      applicable.Item 1.
              Legal Proceedings
              31Item 1A.
              Risk Factors
              31Item 6.
              Exhibits
              31Signature
              32Index to Exhibits
              33
 
  
  PART I. Financial Information
 
 Item 1.  Financial Statements (unaudited)
 
 
 [The rest
of this page is intentionally left blank]
  1
  
 EMERITUS
      CORPORATIONCONDENSED
      CONSOLIDATED BALANCE SHEETS(In
      thousands, except share data)ASSETSMarch
      31,
              
              
              December
      31,2008
              
              
              2007Current
      Assets:
              
              (unaudited)Cash
      and cash equivalents
              
              $
              90,230
              
              
              $
              67,710Short-term
      investments
              
              
              2,001
              
              
              
              2,453Trade
      accounts receivable, net of allowance of $976 and $995
              
              
              5,648
              
              
              
              6,383Other
      receivables
              
              
              6,133
              
              
              
              11,510Tax,
      insurance and maintenance escrows
              
              
              17,861
              
              
              
              18,566Prepaid
      workers' compensation
              
              
              18,417
              
              
              
              18,224Other
      prepaid expenses
              
              
              10,246
              
              
              
              10,744Property
      held for sale
              
              
              12,864
              
              
              
              –Total
      current assets
              
              
              163,400
              
              
              
              135,590Long-term
      investments
              
              
              6,417
              
              
              
              4,749Property
      and equipment, net of accumulated depreciation of $198,066 and
      $179,620
              
              
              1,394,193
              
              
              
              1,418,152Construction
      in progress
              
              
              18,162
              
              
              
              12,694Restricted
      deposits
              
              
              20,193
              
              
              
              19,808Lease
      and contract acquisition costs, net of amortization of $44,250 and
      $32,463
              
              
              55,763
              
              
              
              67,227Goodwill
              
              
              71,036
              
              
              
              70,659Other
      intangible assets, net of amortization of $6,904 and
$3,944
              
              
              139,814
              
              
              
              142,774Other
      assets, net
              
              
              23,734
              
              
              
              13,827Total
      assets
              
              $
              1,892,712
              
              
              $
              1,885,480LIABILITIES
      AND SHAREHOLDERS' EQUITYCurrent
      Liabilities:Current
      portion of long-term debt
              
              $
              24,067
              
              
              $
              22,613Current
      portion of capital lease and financing obligations
              
              
              24,760
              
              
              
              23,774Current
      portion of convertible debentures
              
              
              10,455
              
              
              
              10,455Trade
      accounts payable
              
              
              6,808
              
              
              
              7,844Accrued
      employee compensation and benefits
              
              
              36,067
              
              
              
              35,815Accrued
      interest
              
              
              4,242
              
              
              
              4,527Accrued
      real estate taxes
              
              
              5,752
              
              
              
              7,715Accrued
      professional and general liability
              
              
              15,207
              
              
              
              13,545Accrued
      income taxes
              
              
              5,014
              
              
              
              5,377Other
      accrued expenses
              
              
              9,016
              
              
              
              10,610Deferred
      revenue
              
              
              12,042
              
              
              
              10,446Unearned
      rental income
              
              
              15,487
              
              
              
              14,302Total
      current liabilities
              
              
              168,917
              
              
              
              167,023Long-term
      debt, less current portion
              
              
              741,718
              
              
              
              711,664Capital
      lease and financing obligations, less current portion
              
              
              495,165
              
              
              
              497,039Deferred
      gain on sale of communities
              
              
              20,757
              
              
              
              21,259Deferred
      rent
              
              
              8,669
              
              
              
              6,231Other
      long-term liabilities
              
              
              23,015
              
              
              
              23,757Total
      liabilities
              
              
              1,458,241
              
              
              
              1,426,973Commitments
      and contingenciesShareholders'
      Equity (Deficit):Preferred
      stock, $.0001 par value. Authorized 20,000,000 shares, none
      issuedCommon
      stock, $.0001 par value. Authorized 100,000,000 shares; issued and
      outstanding39,057,738
      and 39,030,597 shares at March 31, 2008, and December 31, 2007,
      respectively
              
              
              4
              
              
              
              4Additional
      paid-in capital
              
              
              715,926
              
              
              
              714,258Accumulated
      other comprehensive income
              
              
              264
              
              
              
              –Accumulated
      deficit
              
              
              (281,723
              )
              
              
              (255,755
              )Total
      shareholders' equity
              
              
              434,471
              
              
              
              458,507Total
      liabilities and shareholders' equity
              
              $
              1,892,712
              
              
              $
              1,885,480
 
 See
accompanying Notes to Unaudited Condensed Consolidated Financial
Statements
 
  2
  
 EMERITUS
      CORPORATIONCONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS(unaudited)(In
      thousands, except per share data)Three
      Months EndedMarch
      31,2008
              
              
              2007Revenues:Community
      revenue
              
              $
              185,330
              
              
              $
              107,371Management
      fees
              
              
              1,159
              
              
              
              877Total
      operating revenues
              
              
              186,489
              
              
              
              108,248Expenses:Community
      operations (exclusive of depreciation and amortizationand
      facility lease expense shown separately below)
              
              
              121,557
              
              
              
              68,441General
      and administrative
              
              
              14,611
              
              
              
              10,114Depreciation
      and amortization
              
              
              31,020
              
              
              
              14,376Facility
      lease expense
              
              
              22,316
              
              
              
              10,298Total
      operating expenses
              
              
              189,504
              
              
              
              103,229Operating
      income (loss) from continuing operations
              
              
              (3,015
              )
              
              
              5,019Other
      income (expense):Interest
      income
              
              
              855
              
              
              
              591Interest
      expense
              
              
              (21,991
              )
              
              
              (13,533
              )Equity
      losses in unconsolidated joint ventures
              
              
              (1,522
              )
              
              
              (569
              )Other,
      net
              
              
              409
              
              
              
              (677
              )Net
      other expense
              
              
              (22,249
              )
              
              
              (14,188
              )Loss
      from continuing operations before income taxes
              
              
              (25,264
              )
              
              
              (9,169
              )Provision
      for income taxes
              
              
              (210
              )
              
              
              (276
              )Loss
      from continuing operations
              
              
              (25,474
              )
              
              
              (9,445
              )Loss
      from discontinued operations
              
              
              (494
              )
              
              
              (290
              )Net
      loss
              
              $
              (25,968
              )
              
              $
              (9,735
              )Basic
      and diluted loss per common share:Continuing
      operations
              
              $
              (0.66
              )
              
              $
              (0.51
              )Discontinued
      operations
              
              
              (0.01
              )
              
              
              (0.02
              )$
              (0.67
              )
              
              $
              (0.53
              )Weighted
      average common shares outstanding: - basic and diluted
              
              
              39,036
              
              
              
              18,374
 
 
 See
accompanying Notes to Unaudited Condensed Consolidated Financial
Statements
  3
  
 EMERITUS
      CORPORATIONCONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS(unaudited)(In
      thousands)Three
      Months Ended March 31,2008
              
              
              2007Cash
      flows from operating activities:Net
      loss
              
              $
              (25,968
              )
              
              $
              (9,735
              )Adjustments
      to reconcile net loss to net cash provided byoperating
      activitiesDepreciation
      and amortization
              
              
              31,020
              
              
              
              14,376Amortization
      of above/below market rents
              
              
              2,524
              
              
              
              -Amortization
      of deferred gain
              
              
              (502
              )
              
              
              (554
              )Amortization
      of loan fees
              
              
              511
              
              
              
              137Convertible
      debenture cost payable
              
              
              -
              
              
              
              1,329Allowance
      for doubtful receivables
              
              
              491
              
              
              
              358Equity
      investment losses and distributions
              
              
              1,522
              
              
              
              569Stock
      option compensation
              
              
              1,382
              
              
              
              538Change
      in fair value of interest rate swap
              
              
              838
              
              
              
              -Other
              
              
              256
              
              
              
              339Changes
      in operating assets and liabilities
              
              
              8,180
              
              
              
              (935
              )Net
      cash provided by operating activities
              
              
              20,254
              
              
              
              6,422Cash
      flows from investing activities:Acquisition
      of property and equipment
              
              
              (9,463
              )
              
              
              (186,406
              )Acquisition
      deposits
              
              
              (5,030
              )
              
              
              -Lease
      and contract acquisition costs
              
              
              (322
              )
              
              
              -Payments
      from (advances to) affiliates and other managed communities,
      net
              
              
              (235
              )
              
              
              464Investment
      in affiliates/other
              
              
              (2,925
              )
              
              
              (1,433
              )Net
      cash used in investing activities
              
              
              (17,975
              )
              
              
              (187,375
              )Cash
      flows from financing activities:Proceeds
      from sale of stock, net of issuance costs
              
              
              286
              
              
              
              275Decrease
      (increase) in restricted deposits
              
              
              (385
              )
              
              
              4,385Debt
      issuance and other financing costs
              
              
              (540
              )
              
              
              (2,183
              )Financing
      deposits
              
              
              (4,938
              )
              
              
              -Proceeds
      from long-term borrowings and financings
              
              
              31,794
              
              
              
              283,676Repayment
      of long-term borrowings and financings
              
              
              (286
              )
              
              
              (91,140
              )Repayment
      of capital lease and financing obligations
              
              
              (5,690
              )
              
              
              (5,166
              )Tax
      benefit of stock compensation
              
              
              –
              
              
              
              271Net
      cash provided by financing activities
              
              
              20,241
              
              
              
              190,118Net
      increase in cash and cash equivalents
              
              
              22,520
              
              
              
              9,165Cash
      and cash equivalents at the beginning of the period
              
              
              67,710
              
              
              
              14,049Cash
      and cash equivalents at the end of the period
              
              $
              90,230
              
              
              $
              23,214Supplemental
      disclosure of cash flow information -Cash
      paid during the period for interest
              
              $
              21,440
              
              
              $
              13,233Cash
      paid during the period for income taxes
              
              
              600
              
              
              
              24Cash
      received during the period for income tax refunds
              
              
              2,496
              
              
              
              -Non-cash
      financing and investing activities:Capital
      and financing lease buyouts
              
              
              -
              
              
              
              20,818Capital
      lease and financing obligations
              
              
              4,802
              
              
              
              23Unrealized
      gain on investment in marketable equity securities
              
              
              264
              
              
              
              -Conversion
      of convertible debentures
              
              
              -
              
              
              
              16,120Debt
      assumed in acquisitions
              
              
              -
              
              
              
              90,000
 
 
 See
accompanying Notes to Unaudited Condensed Consolidated Financial
Statements
  4
  
 EMERITUS CORPORATION
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 March 31,
2008
 
 1.
              Description
      of Business
 
 Emeritus
Corporation (Emeritus or the Company) is an assisted living and Alzheimer’s and
dementia care service provider that operates residential style communities
located throughout the United States.  These communities provide a
residential housing alternative for senior citizens who need help with the
activities of daily living, with an emphasis on assisted living and personal
care services.  As of March 31, 2008, the Company owned 107
communities and leased 149 communities.  These 256 communities
comprise the communities included in the consolidated financial
statements.
 
 The
Company also provides management services to independent and related-party
owners of assisted living communities.  At March 31, 2008, the Company
managed 33 communities, of which 23 are owned by joint ventures in which the
Company has a financial interest.  Management agreements typically
provide for fees of from 5% to 6% of gross revenues, although a few have fees
based on occupancy that approximate 5% of gross revenues.
 
 Effective
September 1, 2007, Emeritus completed a merger transaction with Summerville
Senior Living, Inc. (Summerville), pursuant to which the Company acquired all of
the outstanding stock of Summerville (see Note 4).  Summerville
operated 81 communities comprising 7,935 units in 13 states, which provided
independent living, assisted living, and Alzheimer’s and dementia-related
services to senior citizens.  Financial results for periods subsequent
to the merger include the combined operations of Emeritus and
Summerville.
 
 Emeritus
has one reportable segment, which is assisted living and related
services.
 
 2.
              Summary
      of Significant Accounting Policies and Use of
  Estimates
 
 The
preparation of condensed consolidated financial statements requires Emeritus to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities.  On an ongoing basis, Emeritus evaluates its
estimates, including those related to resident programs and incentives such as
move-in fees, bad debts, investments, intangible assets, impairment of
long-lived assets, income taxes, restructuring, long-term service contracts,
contingencies, self-insured retention, insurance deductibles, health insurance,
inputs to the Black-Scholes option pricing model, and
litigation.  Emeritus bases its estimates on historical experience and
on various other assumptions that it believes to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources.  Actual results may differ from these estimates under
different assumptions or conditions.
 
 Emeritus
believes that certain critical accounting policies are most significant to the
judgments and estimates used in the preparation of its condensed consolidated
financial statements.  Revisions in such estimates are charged to
income in the period in which the facts that give rise to the revision become
known.  A detailed discussion of the Company’s significant accounting
policies and use of estimates is contained in the Company’s 2007 Form 10-K filed
on March 17, 2008.
 
 Effective
September 1, 2007, the Company changed its estimate of the maximum useful life
of buildings from 40 years to 50 years and applied this new policy for all 2007
acquired properties.  This change in estimate did not have a material
impact on the periods presented herein.
 
 Basis
of Presentation
 
 The
unaudited interim financial information furnished herein, in the opinion of the
Company’s management, reflects all adjustments, consisting of only normally
recurring adjustments, which are necessary to state fairly the
financial
  5
  position,
results of operations, and cash flows of Emeritus as of March 31, 2008 and for
all periods presented.  The results of operations for the period ended
March 31, 2008, are not necessarily indicative of the operating results that may
be achieved for the full year ended December 31, 2008.  The Company
presumes that those reading this interim financial information have read or have
access to its 2007 audited consolidated financial statements and Management’s
Discussion and Analysis of Financial Condition and Results of Operations that
are contained in the Company’s 2007 Annual Report on Form 10-K filed on March
17, 2008.  Therefore, the Company has omitted certain footnotes and
other disclosures that are disclosed in the Form 10-K.
 
 Recent
Accounting Pronouncements Not Yet Adopted
 
 In March
2008, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 161, Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement No.
133.  SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, establishes, among other things, the
disclosure requirements for derivative instruments and for hedging
activities.  SFAS No. 161 amends and expands the disclosure
requirements of SFAS No. 133 with the intent to provide users of financial
statements with an enhanced understanding of:  (a) how and why an
entity uses derivative instruments; (b) how derivative instruments and related
hedged items are accounted for under SFAS No. 133 and its related
interpretations; and (c) how derivative instruments and related hedged items
affect an entity’s financial position, financial performance, and cash
flows.  To meet those objectives, SFAS No. 161 requires qualitative
disclosures about objectives and strategies for using derivatives, quantitative
disclosures about fair value amounts of and gains and losses on derivative
instruments, and disclosures about credit-risk-related contingent features in
derivative agreements.  SFAS No. 161 is effective for the Company on
January 1, 2009, and will have no impact on the Company’s consolidated financial
statements.
 
 In
December 2007, the FASB issued SFAS No. 141(revised 2007), Business Combinations(SFAS
No. 141R).  SFAS No. 141R replaces the existing SFAS No. 141 but
retains the fundamental requirements in SFAS No. 141 that the acquisition method
of accounting be used for all business combinations and for an acquirer to be
identified for each business combination.  SFAS No. 141R defines the
acquirer as the entity that obtains control of one or more businesses in the
business combination and establishes the acquisition date as the date that the
acquirer achieves control.  It also requires an acquirer to recognize
the assets acquired, the liabilities assumed, and any noncontrolling interest in
the acquiree at their fair values at the acquisition date.  The
additional fair value measurements of SFAS No. 141R replace the cost-allocation
process of SFAS No. 141, which required the cost of an acquisition to be
allocated to the individual assets acquired and liabilities assumed based on
their estimated fair values.  In addition, expenses incurred for all
acquisition-related costs are to be expensed and liabilities related to
contingent consideration are to be remeasured to fair value each subsequent
reporting period.  Costs incurred by the acquirer to effect the
acquisition are not allocated to the assets acquired or liabilities assumed, but
are recognized separately.  SFAS No. 141R is effective prospectively
for Emeritus to business combinations for which the acquisition date is on or
after January 1, 2009.
 
 Reclassifications
 
 Certain
reclassifications have been made to the condensed consolidated financial
statements to conform to the current period presentation.
 
 3.
              Stock-Based
      Compensation
 
 The
Company records compensation expense based on fair value for all awards, which
is estimated using the Black-Scholes option pricing model.  The
Company recorded stock-based compensation expense based on the fair value of
stock options and shares issued under the Company's various equity
incentive plans and the Employee Stock Purchase (ESP) Plan of approximately $1.4
million and $538,000 for the three months ended March 31, 2008 and 2007,
respectively.
 
 During
the first quarter of 2008, the Company granted options to purchase 10,000 shares
of common stock from the 2006 equity incentive plan (the 2006 Plan) and none
from the non-employee director plan.
  6
  
 The
following table summarizes the Company’s stock option activity for the three
months ended March 31, 2008:
  2008Weighted-
              
              
              AggregateAverage
              
              
              IntrinsicExercise
              
              
              ValueShares
              
              
              Price
              
              
              (000)Outstanding
      at beginning of year
              
              
              2,166,575
              
              
              $
              18.76Granted
              
              
              10,000
              
              
              $
              21.35Exercised
              
              
              (17,781
              )
              
              $
              8.90
              
              
              $
              239Canceled
              
              
              (18,330
              )
              
              $
              23.40Outstanding
      at March 31, 2008
              
              
              2,140,464
              
              
              $
              18.82
              
              
              $
              11,739Options
      exercisable at March 31, 2008
              
              
              1,016,980
              
              
              $
              10.21
              
              
              $
              11,499Weighted-average
      fair value of options granted
              
              
              
              
              
              $
              8.84
 
 The
amount of cash received from the exercise of stock options under
the Company's various equity incentive plans and stock purchased through
the ESP Plan was $286,000 and $275,000 in the three months ended March 31, 2008
and 2007, respectively.  As of March 31, 2008, there were 148,005
shares available for purchase under the ESP Plan, 1,504,990 shares available for
grant under the 2006 Plan, and 121,500 shares available for grant under the 1995
Stock Incentive Plan, which includes options available under the non-employee
director plan.
 
  The
Company offers eligible employees the option to purchase common stock of the
Company under the ESP Plan at a 15% discount from the lower of the market price
on (a) the first trading date of each calendar quarter or (b) the last trading
date of each quarter.  The following table shows the number of shares
of common stock issued under the ESP Plan and purchase price of these shares for
the first quarter of 2008:
 
 2008Shares
              
              
              PriceQuarter
      1
              
              
              9,360
              
              
              $
              17.73
 
 
 4.
              Acquisitions
      and Other Significant Transactions
 
 Summerville
Acquisition
 
 On
September 1, 2007, the Company acquired all of the outstanding stock of
Summerville through a merger of its wholly-owned subsidiary with
Summerville.  Under the terms of the merger agreement, a total of
8,392,656 shares of the Company’s common stock were issued: (i) to Apollo Real
Estate Investment Funds III and IV (the Apollo Funds), two real estate funds
managed by Apollo Real Estate Advisors, in satisfaction of certain loans from
such entities, (ii) to certain employees of Summerville, in satisfaction of
certain incentive compensation arrangements, and (iii) to the stockholders of
Summerville, including the Apollo Funds.  The total purchase price of
Summerville was $278.2 million.
 
 Summerville
was a San Ramon, California-based operator of 81 communities comprising 7,935
units in 13 states, which provided independent living, assisted living, and
Alzheimer’s and dementia-related services to seniors.  Upon completion
of the Summerville acquisition, Summerville became a wholly owned subsidiary of
Emeritus and retained the brand name in the operation of its
communities.  Of the 81 communities operated by Summerville, 73 are
leased from third parties and eight are owned by the Company.
  7
  2007 HCPI
Communities Purchased
 
 In March
2007, the Company completed the purchase of seven communities consisting of 453
units located in South Carolina for approximately $28.9 million, including
transaction costs.  The Company had operated these facilities pursuant
to a master lease dated September 18, 2002, between Health Care Property
Investors, Inc. (HCPI), and Emeritus.  The Company accounted for this
master lease as an operating lease.
 
 In
August 2007, Emeritus acquired 41 additional communities from HCPI,
consisting of 3,732 units located in 17 states.  The aggregate
purchase price was $504.9 million, including transaction costs.  Of
the 41 communities, the Company leased 33 and Summerville leased eight of the
communities pursuant to leases that were assigned to the Company when it
purchased these communities.  Summerville continued to operate the
eight communities under existing leases until Emeritus completed its acquisition
of Summerville in September 2007, at which time the leases
terminated.
 
 2007
HRT Communities Purchased
 
 In March
2007, the Company purchased 12 communities consisting of 786 units located in
five states for $100.2 million, including transaction costs.  The
Company had leased four of these communities from Healthcare Realty Trust (HRT)
since May 2002 and eight since May 2003.  Four of the leased
communities had been accounted for as capital leases and eight as operating
leases by the Company.
 
 2007
Fretus Communities Purchased
 
 In
February 2007, the Company purchased 24 communities consisting of 1,651
units located in six states for $143.5 million, including transaction
costs.  The Company had leased these communities from Fretus Investors
LLC (Fretus) since October 2002 and had accounted for them as operating
leases.
 
 Fretus
was a private investment joint venture between Fremont Realty Capital, which
held a 65% interest, and a Baty-related entity, which held a 35% minority
interest.  Daniel R. Baty, the Company’s founder, chairman, Co-CEO and
a significant shareholder, held a 16% indirect interest in the minority entity,
personally guaranteed $3.0 million of the Fretus mortgage debt covering the
communities and controlled the administrative member of Fretus.  In
conjunction with this transaction, the Baty-related entity provided $18.0
million in short-term financing to the Company, of which approximately
$5.1 million was used to fund the balance of the purchase price and the
balance was used for general business purposes.  The short-term debt
was repaid in July 2007.
 
 2007
HC REIT Purchase
 
 In August
2007, the Company completed the acquisition of three Florida communities
consisting of 431 units.  The purchase price was $25.0 million,
including transaction costs.  The Company had leased these communities
from Health Care REIT, Inc. and affiliates and accounted for them as capital
leases.
 
 2007
Wegman Purchase
 
 In August
2007, the Company completed the acquisition of nine communities that the Company
formerly leased, consisting of 711 units located in the State of New York,
for an aggregate purchase price of $89.0 million including transaction
costs.
 
 Other
2007-2008 Community Acquisitions
 
 In
January 2008, the Company entered into a long-term lease for a newly constructed
38-unit Alzheimer’s community located in Joliet, IL.  The lease term
was 11 years, expiring in March 2019.  This community is included in
the NHP portfolio that the Company purchased in April 2008 as detailed in Note
12, and this lease was terminated in connection with such
purchase.
  8
  In
January 2008, the Company entered into a long-term lease for a 104-unit
community located in Orangevale, CA.  The lease term is 15 years,
expiring in January 2023, with two 10-year renewal options
available.  The initial annual lease payment is approximately
$901,000, with annual increases of 3.0%.
 
 In
December 2007, the Company purchased a 106-unit assisted living community
located in Ohio for a price of $12.9 million.
 
 In July
2007, the Company entered into a long-term lease for an 89-unit assisted living
community in Ohio.  The lease term is 12 years, expiring in July 2019,
with one ten-year renewal option available.  The initial annual lease
payment is approximately $1.1 million, with annual increases based on the
greater of 3% or the change in the Consumer Price Index (CPI).
 
 2006
Blackstone Joint Venture
 
 The
Company holds a 19.0% interest in a joint venture (Blackstone JV) with
Blackstone Real Estate Advisors that began operations in December 2006 and
operates a portfolio of 24 properties as of March 31, 2008, 23 of which are
managed by the Company.  The Company recorded equity losses of
approximately $1.5 million and $395,000 for the three months ended March 31,
2008 and 2007, respectively.  The Company recorded management fee
income of approximately $801,000 and $620,000 for the three months ended March
31, 2008 and 2007, respectively.
 
 5.
              Long-Term
      Debt
 
 On April
2, 2008, the Company purchased the real estate underlying 24 communities that it
leased from Nationwide Health Properties, Inc. (NHP) as described in Note 12,
Subsequent
Events.In connection with this transaction, NHP provided
unsecured financing of $30.0 million pursuant to a promissory note dated as of
March 31, 2008, between NHP and the Company.  The NHP loan bears
interest at an annual rate of 7.25% and is payable monthly on an interest-only
basis for a term of not more than four years, at which time the entire principal
amount and any accrued but unpaid interest is due and payable in
full.  The Company has the option to prepay the NHP loan at any time
upon not less than 180 days prior written notice.  The promissory note
includes provisions whereby a default by the Company under its existing $21.4
million loan with NHP or its master lease agreement with NHP dated October 2,
2006, as amended, would constitute a default of this indebtedness.
 
 On
February 8, 2008, Emeritus entered into a credit agreement with Wells Fargo
Bank, National Association, which provides a $25.0 million unsecured revolving
line of credit.  The credit agreement permits the Company to borrow
from time to time up to $25.0 million on an unsecured basis.  The
credit agreement also allows the Company to obtain letters of credit from the
lender, provided that outstanding letters of credit and any borrowings
outstanding do not exceed $25.0 million.  The line of credit matures
on February 15, 2009.  Outstanding borrowings will bear interest at a
variable rate of 0.5% below Wells Fargo’s prime rate, payable
monthly.  The Company may partially or wholly repay borrowings and
reborrow provided that the total outstanding borrowings may not at any time
exceed $25.0 million.  Emeritus is required to pay a commitment fee of
0.25% on the average daily unused amount of the line of credit, which is payable
quarterly.  In addition, the Company is required to pay fees equal to
1.0% of every letter of credit issued as well as the negotiation fees on each
letter.  The Company must maintain a zero balance on advances for 30
consecutive days during each fiscal year and a $20.0 million minimum balance in
cash, cash equivalents and/or publicly traded marketable
securities.
 
 The line
of credit agreement contains a fixed charge coverage ratio
covenant.  The agreement also contains customary affirmative and
negative covenants and events of default.  Upon an event of default,
Wells Fargo may accelerate the loans and terminate lending.  In the
event of default, interest on the outstanding amount of the indebtedness shall
bear interest at a rate per annum equal to 4.0% in excess of the interest rate
in effect at that time.
 
 The
Company intends to use the line of credit for general business
purposes.  There were no outstanding borrowings under this credit
facility as of March 31, 2008.
 
 Effective
February 1, 2008, Emeritus entered into an interest rate swap contract that has
a notional amount of $12.4 million and matures on January 1,
2010.  The swap effectively converts the interest rate on the related
mortgage debt from a floating rate equal to the London Interbank Offered Rate
(LIBOR) plus 225 basis points to a fixed rate of
  9
  4.965%,
thus mitigating the impact of interest rate changes on future interest
expense.  The Company did not designate the swap as a hedging
instrument.
 
 6.
              Stockholders’
      Equity
 
 Debenture
Conversion
 
 In
February 2007, the Company offered to pay a cash incentive to debenture holders
if they elected to convert their debentures into common stock by March 8,
2007.  The incentive payment was equal to the amount of interest that
the holders would have received if the debentures were held to the maturity date
of July 1, 2008.
 
 Of the
$26.6 million principal amount of debentures outstanding when the Company made
the offer, holders of $16.1 million principal amount converted their debentures
into 732,725 shares of common stock at the debentures’ stated conversion rate of
$22.00 per share.  Of the debentures converted into common stock,
$15.8 million principal amount was owned by entities controlled by Mr.
Baty.  On April 16, 2007, the Company paid the incentive fee of $1.3
million in connection with this conversion, which amount would have otherwise
been paid in three installments on July 1, 2007, January 1, 2008, and
July 1, 2008, if the debentures were held to maturity.  The
incentive payment was expensed to “Other, net” in the condensed consolidated
statement of operations in the first quarter of 2007.
 
 At March
31, 2008, the Company had $10.5 million principal amount of debentures
outstanding, which mature on July 1, 2008.
 
 7.
              Loss
      Per Share
 
 The
capital structure of Emeritus includes convertible debentures and stock
options.  Basic loss per share is computed based on the weighted
average shares outstanding and excludes any potential
dilution.  Diluted loss per share is computed based on the weighted
average number of shares outstanding plus dilutive potential common
shares.  Options are included using the “treasury stock method” to the
extent they are dilutive.  Certain shares issuable upon the exercise
of stock options and conversion of convertible debentures have been excluded
from the computation because the effect of their inclusion would be
anti-dilutive.
 
 The
following table summarizes those that are excluded in each period because they
are anti-dilutive (in thousands):
 
 Three
      Months EndedMarch
      31,2008
              
              
              2007Convertible
      Debentures
              
              
              475
              
              
              
              475Options
              
              
              2,140
              
              
              
              1,4762,615
              
              
              
              1,951
 
 8.
              Comprehensive
      Loss
 
 The
following table summarizes the comprehensive loss for the periods indicated (in
thousands):
  Three
      Months EndedMarch
      31,2008
                
                
                2007Net
      loss
                
                $
                (25,968
                )
                
                $
                (9,735
                )Other
      comprehensive income:Unrealized
      holding gainson
      available-for-sale investment securities
                
                
                264
                
                
                
                –Comprehensive
      loss
                
                $
                (25,704
                )
                
                $
                (9,735
                )
 
 10
 9.
              Discontinued
      Operations
 
 During
the first quarter of 2008, the Company determined to discontinue operations at
four of its communities and put the assets and businesses up for
sale.  The Company decided to sell these communities primarily because
they have incurred significant operating losses due to geographic location and
local market conditions over a sustained period of time.  The expected
disposal date is in the second quarter of 2008.  Financial statements
for the three months ended March 31, 2007, have been restated to present the
operations of these communities as discontinued operations.  In 2007,
the Company determined that the carrying amounts of these communities were not
recoverable from expected undiscounted cash flows generated from the use of the
assets and recognized an aggregate loss of $4.8 million to write down the
related carrying amounts of these properties to their estimated fair
values.  The assets to be sold, which consist of property and
equipment, are presented separately under the caption “Property held for sale”
in the accompanying condensed consolidated balance sheet at March 31,
2008.
 
 The
following table shows the revenues and net loss for the discontinued operations
(in thousands):
 
 Three
      Months EndedMarch
      31, 20082008
              
              
              2007Total
      revenue
              
              $
              2,209
              
              
              $
              2,130Net
      loss
              
              $
              494
              
              
              $
              290
 
 10.
              Liquidity
 
 As of
March 31, 2008, the Company has a working capital deficit of $5.5
million.  The Company is able to operate in the position of a working
capital deficit because revenues are collected more quickly, often in advance,
than obligations are required to be paid.  This can result in a low
level of current assets to the extent cash has been deployed in business
development opportunities or to pay down long-term liabilities.  Along
those lines, the working capital deficit includes, as part of current
liabilities, $27.5 million of deferred revenue and unearned rental
income.  The level of current liabilities is not expected to change
from period to period in such a way as to require the use of significant cash,
except for (i) convertible debentures of $10.5 million, which are due and
payable on July 1, 2008, except to the extent converted prior to such date by
the holders of the debentures (Note 6), (ii) the current portion of debt
maturities of $24.1 million due by March 31, 2009, and (iii) long-term debt
maturities of $114.9 million due after March 2009 but prior to March 31, 2010,
which the Company plans to refinance prior to their due dates or pay them off at
maturity.
 
 The
Company reported net cash from operating activities in its condensed
consolidated statements of cash flows of $20.3 million and $6.4 million for the
three months ended March 31, 2008 and 2007, respectively.  While the
Company has reported positive cash flows from operating activities over the past
three years, the cash flows have not always been sufficient to pay all of its
long-term obligations and the Company has been dependent upon third-party
financing or disposition of assets to fund operations.  The Company
cannot guarantee that, if necessary in the future, such transactions will be
readily available, or on terms attractive to the Company.
 
 Since
2002, the Company has refinanced substantially all of its debt obligations,
extending the maturities of such financings to dates in 2008 or thereafter, at
which time the Company will need to refinance or otherwise repay the
obligations.  Many of the Company's debt instruments and leases
contain “cross-default” provisions pursuant to which a default under one
obligation can cause a default under one or more other obligations to the same
lender or lessor.  Such cross-default provisions affect the majority
of the Company’s properties, and as a result, any event of default could cause a
material adverse effect on the Company's financial condition.  At
March 31, 2008, the Company was in violation of one or more covenants related to
rent coverage ratio requirements in certain leases, but has obtained waivers
from the owners related to these covenant defaults.  The waivers
expire on April 1, 2009.
  11
  Management
believes that the Company will be able to generate sufficient operating cash
flows and will have adequate cash for all necessary operating, investing, and
financing activities including required debt service and capital expenditures
for at least the next twelve months.
 
 11.
              Fair
      Value Disclosures
  Investment securities
available-for-sale. The carrying values of investment securities
classified as available-for-sale are recorded at their fair values based on
quoted market prices utilizing public information for the issuers (Note
8).
  Derivative financial
instruments.  The Company enters into derivative financial
instruments, specifically interest rate swaps, for non-trading
purposes.  The Company uses interest rate swaps to manage interest
rate risk associated with floating rate debt.  As of March 31, 2008,
the Company was party to two interest rate swaps with a total notional amount of
$32.0 million.  The Company elected not to apply hedge accounting for
these interest rate swaps even though they are economic hedges of the Company’s
floating rate debt and the Company does not enter into derivatives for
speculative purposes.  These derivative contracts have negative net
fair values and are recorded in other long-term liabilities.
 
 The table
that follows summarizes the interest rate swap contracts outstanding at March
31, 2008 (in thousands):
 
 Notional
              
              Effective
              Expiration
              
              EstimatedAmount
              
              Date
              Date
              
              Fair
      ValueInterest
      rate swap
              
              $
              19,640
              
              10/1/2007
              8/6/2012
              
              $
              (1,465
              )Interest
      rate swap
              
              
              12,405
              
              2/1/2008
              1/1/2010
              
              
              (97
              )
 
  As of
January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements.The
standard defines fair value, establishes a framework for measuring fair value,
and also expands disclosures about fair value measurements.  Under
this standard, fair value is defined as the price that would be received to sell
an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly
transaction between market participants at the measurement date.  SFAS
No. 157 also requires the Company to consider its own credit spreads when
measuring the fair value of liabilities, including derivatives.
 
 The
following table presents information about the Company’s assets and liabilities
measured at fair value on a recurring basis as of March 31, 2008, and indicates
the fair value hierarchy of the valuation techniques utilized by the Company to
determine such fair value (in thousands):
 
 Quoted Prices in
              
              
              SignificantActive
      Markets
              
              
              Other
              
              
              Significant
              
              
              Balance
      atfor
      Identical
              
              
              Observable
              
              
              Unobservable
              
              
              March
      31,Assets
      (Level 1)
              
              
              Inputs (Level 2)
              
              
              Inputs (Level 3)
              
              
              2008AssetsInvestment
      securities – available-for-sale
              
              $
              3,190
              
              
              $
              -
              
              
              $
              -
              
              
              $
              3,190LiabilitiesDerivative
      financial instruments
              
              
              -
              
              
              
              1,562
              
              
              
              -
              
              
              
              1,562
 
 In
general, fair values determined by Level 1 inputs utilize quoted prices in
active markets for identical assets or liabilities that the Company has the
ability to access.  For example, the Company’s investment in
available-for-sale equity securities is valued based on the quoted market price
for that security.
 
 Fair
values determined by Level 2 inputs utilize inputs other than quoted prices
included in Level 1 that are observable for the asset or liability, either
directly or indirectly.  Level 2 inputs include quoted prices for
similar assets and liabilities in active markets, and inputs other than quoted
prices that are observable for the asset or liability.  For example,
the Company uses market interest rates and yield curves that are observable at
commonly quoted intervals in the valuation of its interest rate swap
contracts.
  12
  
 Level 3
inputs are unobservable inputs for the asset or liability, and include
situations where there is little, if any, market activity for the asset or
liability.  The Company’s assessment of the significance of a
particular input to the fair value measurement in its entirety requires
judgment, and considers factors specific to the asset or liability.
 
 At March
31, 2008, the Company believes that any unobservable inputs used to determine
the fair value of its derivative financial instruments are not significant to
the fair value measurement in its entirety, and therefore the Company does not
consider its derivative financial instruments to be Level 3
liabilities.
 
 For the
three months ended March 31, 2008, interest expense includes an unrealized loss
of $838,000, which represents the change in the fair value of the interest rate
swaps.
 
 The
Company also has assets that under certain conditions are subject to measurement
at fair value on a non-recurring basis.  These assets include those
associated with acquired businesses, including goodwill and other intangible
assets.  For these assets, measurement at fair value in periods
subsequent to their initial recognition is applicable if one or more is
determined to be impaired.  During the three months ended March 31,
2008, there were no triggering events that suggested that the Company’s goodwill
or other intangible assets were impaired.
 
 The
Company also adopted SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities—Including an amendment of FASB Statement
No. 115, as of January 1, 2008, but has not made any fair value
elections with respect to any of its eligible assets or liabilities as of March
31, 2008.
 
 12.
              Subsequent
      Events
 
 2008
NHP Purchase
 
 On
February 6, 2008, the Company entered into a purchase and sale agreement with
NHP to purchase 24 communities consisting of 1,672 units located in 13 states
for a purchase price of $305.0 million, excluding transaction
costs.  The Company leased these communities from NHP and operated the
communities as assisted living and dementia care facilities.  On April
2, 2008, the Company closed on this transaction and financed it through mortgage
debt of approximately $241.9 million originated by Capmark Finance, Inc.
(Capmark) through a Fannie Mae credit facility with an interest rate of 5.9%,
and seller-provided debt of $30.0 million with an interest rate of
7.25%.  In addition, the seller agreed to a 12-month extension on an
existing $21.4 million note originally maturing in March 2008, including a
reduction in the interest rate from 10.0% to 8.5%.  The Company also
secured the ability to borrow up to an additional $8.1 million under this Fannie
Mae credit facility based on portfolio performance.
 
 This
portfolio includes a memory loss community, which was financed separately with
variable interest rate debt financing of $8.0 million provided by
Capmark.  Interest is based on monthly LIBOR plus 265 basis points
with a floor of 5.65%.  The interest rate as of the closing date was
5.65%.
 
 Annual
lease payments were approximately $18.9 million related to these 24 communities
as of the closing date, including a newly constructed community opened in
January 2008.  We accounted for these leases as capital
leases.  Upon termination of the capital leases, the difference
between the carrying amount of the capital lease assets and the capital lease
obligations will be recorded as an adjustment to the carrying amount of the
purchased communities.  This reduction in the cost basis of the
purchased assets will be approximately $19.6 million as of the closing
date.
 
 Fretus
Mortgage Refinancing
 
 On April
29, 2008, the Company refinanced the mortgage debt on 18 of its existing
properties, which were purchased from Fretus Investors, LLC in February
2007.  See Note 4, Acquisitions and Other Significant
Transactions-2007 Fretus Communities Purchased.The original
loan of $132.0 million bore interest at a fixed annual rate of 6.5475% and was
secured by 24 properties. Of the $132.0 million principal balance outstanding,
$112.0 million was paid down as part of this refinancing.  The
original loan agreement was amended to provide that: (i) the remaining balance
of $20.0 million is secured by five properties, with one property released from
the security
  13
  pool and
(ii) the interest rate changed from a fixed rate of 6.5475% to a variable rate
equal to LIBOR plus 280 basis points (5.80% at closing), adjusted monthly, but
never less than 5.80%.
 
 The new
debt of $129.0 million has a term of 10 years at a fixed rate of 6.21%, with
payments in the first three years of interest only and payments of principal and
interest thereafter based on a 30-year amortization period.  Both the
existing and the new mortgages were provided by Capmark Bank and purchased by
Freddie Mac.  The notes on the 18 properties
contain cross-default provisions.  The new debt may be prepaid
subject to a prepayment penalty based on a formula defined in the loan
agreement.  The loan agreement contains customary events of default,
including payment defaults.
 
 In
connection with this transaction, the Company will record a one-time charge of
approximately $3.0 million in the second quarter of 2008 related to prepayment
penalties and the write-off of unamortized deferred loan fees on the original
debt.  The refinance results in an increase in annual interest expense
of approximately $536,000.  The Company received approximately $14.4
million in net cash proceeds as a result of this transaction, which will be used
for general corporate purposes.
 
 GMAC
Mortgage Refinancing
 
 On April
30, 2008, the Company repaid the $20.0 million outstanding balance of a mortgage
loan (the GMAC Mortgage) secured by five of its existing
communities.  The interest rate on the GMAC Mortgage was 6.98% and the
note was to mature in August 2008.
 
 The
Company refinanced the GMAC Mortgage with new credit
facilities.  Three of the five communities secure notes totaling $25.4
million at a fixed rate of 6.29%, (the “Fixed Rate Notes”), with a term of 10
years.  The Fixed Rate Notes require payments in the first three years
of interest only, and payments of principal and interest thereafter based on a
30-year amortization.  The Fixed Rate Notes were originated by KeyCorp
Real Estate Capital Markets, Inc. and were purchased by Fannie
Mae.  The Fixed Rate Notes may be prepaid subject to a prepayment
penalty based on a formula defined in the loan agreements.  The Fixed
Rate Notes contain cross-default provisions and customary events
of default, including those related to non-payment and the sale or transfer of
collateral.
 
 The
remaining two communities secure variable rate notes (the “Variable Rate Notes”)
totaling $13.3 million, of which $7.2 million was withheld at closing and is
available for funding of construction projects on these two
communities.  The Variable Rate Notes have terms of three years and an
initial weighted average annual interest rate of 5.06% based on the LIBOR rate
at closing.  KeyBank N.A. is the lender.  The maturity dates
may be extended for one additional year at the Company’s option (the “Extension
Period”) depending upon the attainment of certain debt service coverage ratios
as defined in the loan agreements.  Monthly payments are interest only
for three years and, if extended, include scheduled principal reductions during
the Extension Period.  The Variable Rate Notes may be prepaid at any
time without penalty.  The Variable Rate Notes contain various events
of default, including non-payment and the maintenance of specified levels of
occupancy and debt service coverage ratios.
 
 The
Company received approximately $11.2 million in cash from these transactions,
which will be used for general corporate purposes.
 
 
  14
  Item 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND
 RESULTS OF OPERATIONS
 
 Forward-Looking
Statements
 
 This
report contains “forward-looking statements” within the meaning of the Private
Securities Litigation Reform Act of 1995, as amended.  This Act
provides a “safe harbor” for forward-looking statements to encourage companies
to provide prospective information about themselves so long as they identify
these statements as forward-looking and provide meaningful cautionary statements
identifying important factors that could cause actual results to differ from the
projected results.  In some cases, you can identify forward-looking
statements by terminology such as “anticipate,” “believe,” “continue,” “could,”
“estimate,” “expect,” “intend,” “may,” “might,” “plan,” “potential,” “predict,”
“should” or “will,” or the negative of those terms, or comparable
terminology.  Some of the forward-looking statements included in this
report and documents incorporated by reference and in some of our other public
statements relate to, among other things: the effects of competition and
economic conditions on the occupancy levels in our communities, including
possible excess assisted living capacity; our ability under current market
conditions to maintain and increase our resident charges without adversely
affecting occupancy levels; our ability to control community operating expenses,
including the management of costs largely beyond our control (such as insurance
and utility costs) without adversely affecting the level of occupancy and
resident charges; our ability to generate cash flow sufficient to service our
debt and other fixed payment requirements; our vulnerability to defaults as a
result of noncompliance with various debt and lease covenants, including the
effects of cross-default provisions; uncertainties relating to competition,
construction, licensing, environmental regulation, and other matters that affect
acquisition, disposition, and development of assisted living communities; our
ability to find sources of financing and capital on satisfactory terms to meet
our cash requirements to the extent that they are not met by operations; and
uncertainties related to professional liability claims.
 
 Any or
all of our forward-looking statements in this report and in any other public
statements we make may turn out to be inaccurate.  Please review
carefully Item 1A—Risk
Factors of our 2007 Annual Report on Form 10-K for important factors that
could cause our actual results to differ materially from the forward-looking
statements included in this report and presented elsewhere by our management
from time to time.  Incorrect assumptions we might make and known or
unknown risks and uncertainties may affect the accuracy of our forward-looking
statements.  Forward-looking statements reflect our current
expectations or forecasts of future events or results and are inherently
uncertain, and accordingly, you should not place undue reliance on
forward-looking statements.
 
 Although
we believe that the expectations and forecasts reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, performance, or
achievements.  Consequently, no forward-looking statement can be
guaranteed and future events and actual or suggested results may differ
materially.  We undertake no obligation to publicly update any
forward-looking statements, whether as a result of new information, future
events, or otherwise.  You are advised, however, to consult any
further disclosures we make in our quarterly reports on Form 10-Q and
current reports on Form 8-K.
 
 Overview
 
 During
the first quarter of 2008, we continued to focus on implementing the growth
strategy outlined in our 2007 Annual Report on Form 10-K.  As
previously disclosed, we are focusing on increasing our revenues and cash flows
through a combination of: (i) organic growth in our existing operations; (ii)
selected acquisitions of additional communities; and (iii) expansion of our
existing communities.
 
 In 2007,
we acquired 88 communities that we previously had leased and eight communities
previously leased by Summerville, leased one and purchased one additional
community, and, as a result of our acquisition of Summerville, began operating
another 73 communities leased by Summerville.  So far in 2008, we have
entered into leases for two additional communities.  In 2007 and
continuing into 2008, we have also focused more on internal growth through
expansion of existing properties and construction of new
communities.  We currently have expansion projects underway in ten of
our communities and will continue to look at other expansion opportunities where
the market conditions are favorable.  In addition, we have five
development projects in various stages of completion in several
locations.
 
  15
 EMERITUS
CORPORATION
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
 RESULTS
OF OPERATIONS
 Continued
 March 31,
2008
  
 
 The
following table sets forth a summary of our property interests:
 
 As
      of March 31,
              
              As
      of December 31,
              
              As
      of March 31,2008
              
              2007
              
              2007Buildings
              
              Units
              
              Buildings
              
              Units
              
              Buildings
              
              UnitsOwned
      (1)
              107
              
              8,781
              
              107
              
              8,781
              
              53
              
              3,749Leased
      (2 )
              149
              
              13,120
              
              147
              
              12,978
              
              118
              
              9,880Consolidated
      Portfolio
              256
              
              21,901
              
              254
              
              21,759
              
              171
              
              13,629Managed/Admin
      Services
              10
              
              1,184
              
              10
              
              1,184
              
              9
              
              1,084Joint
      Venture/Partnership
              23
              
              1,737
              
              23
              
              1,737
              
              22
              
              1,750Operated
      Portfolio
              289
              
              24,822
              
              287
              
              24,680
              
              202
              
              16,463Percentage
      increase (decrease) (3)
              0.7%
              
              0.6%
              
              41.4%
              
              49.5%
              
              (0.5%)
              
              (0.3%)
 
 (1)   Owned
      communities increased from March 31, 2007, due to the acquisition of three
      communities on August 6, 2007, 41 communities on August 15, 2007, nine
      communities on August 31, 2007, and one community in December
      2007.  Of the owned communities, three are in discontinued
      operations, representing 266 units.
 (2)   Of
      the 149 leased communities at March 31, 2008, 72 are accounted for as
      operating leases, in which the assets and liabilities of the communities
      are not included in our condensed consolidated balance sheet and 73 are
      accounted for as capital leases, in which a long-term asset and
      corresponding liability is established on our balance
      sheet.  The remaining four leased communities are reflected in
      our condensed consolidated financial statements as owned communities
      because of accounting requirements related to sale-leaseback accounting,
      notwithstanding the legal sale of the communities and their subsequent
      leasing by us.  Of the leased communities, one is in
      discontinued operations, representing 94
units.
 (3)   The
      percentage increase (decrease) indicates the change from the prior year,
      or, in the case of March 31, 2008 and 2007, from the end of the prior
      year.
 
 Two of
the important factors affecting our financial results are the rates we charge
our residents and the occupancy levels we achieve in our
communities.  In evaluating the rate component, we generally rely on
the average monthly revenue per occupied unit, computed by dividing the total
revenue for a particular period by the average number of occupied units for the
same period.  In evaluating the occupancy component, we generally rely
on an average occupancy rate, computed by dividing the average units occupied
during a particular period by the average number of units available during the
period.  We evaluate these and other operating components for our
consolidated portfolio, which includes the communities we own and lease, and our
operating portfolio, which also includes the communities we manage.
 
 The table
below shows for our consolidated portfolio the average monthly revenue per
occupied unit and occupancy rate for the three months ended March 31, 2008 and
2007:
  
 Three
      Months Ended March 31,2008
              
              
              2007
              
              
              $D
              
              
              %
      DAverage
      monthly revenue per occupied unit
              
              $
              3,325
              
              
              $
              3,181
              
              
              $
              144
              
              
              
              4.5
              %Average
      occupancy rate
              
              
              87.2
              %
              
              
              86.8
              %
              
              
              
              
              
              
              .4
              ppt*
 
 *
percentage points
 
 We
believe that this increase in occupancy rates reflects industry-wide factors,
such as the declining supply of vacant units, as well as our own actions and
policies, including the various acquisitions we made in 2007 and
2008.  We continue to evaluate the factors of rate and occupancy to
find the optimum balance in each community, as indicated by the increase in
occupancy rates and average monthly revenue per unit over the past
year.
 
  16
 EMERITUS
CORPORATION
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
 RESULTS
OF OPERATIONS
 Continued
 March 31,
2008
  Since our
inception in 1993, we have incurred operating losses totaling approximately
$281.7 million as of March 31, 2008.  We believe that these losses
have resulted from our emphasis on expansion, financing costs arising from
multiple financing and refinancing transactions related to this expansion,
administrative and corporate expenses that we incurred in anticipation of
further expansion and increased emphasis on risk management and financial
reporting controls, the impact in the early years on many of our leases from
capital and financing lease treatments, and occupancy rates remaining lower for
longer periods than we anticipated.   While we have realized
growth in both our occupancy and average monthly rates, we anticipate continued
losses in the near term until our occupancy stabilizes.  Our current
emphasis is on maximization of cash flows as we work toward improvements in
occupancy and average rates, selective growth, and changes in our capital
structure, such as acquisition of leased properties and refinancing of existing
high-rate debt.
 
 Significant
Transactions
 
 In recent
periods, and continuing into 2008, we entered into a number of transactions that
affected the number of communities we own, lease, and manage; our financing
arrangements; and our capital structure.  These transactions are
summarized in Note 4 to the Unaudited Condensed Consolidated Financial
Statements above.
 
 The
following table shows the changes in buildings from December 31, 2006, through
March 31, 2008, including those transactions previously described:
   Month
                
                Owned
                
                
                Leased
                
                
                Consolidated
                
                
                Managed
                
                
                TotalDecember
      31, 2006
                
                
                
                10
                
                
                
                161
                
                
                
                171
                
                
                
                32
                
                
                
                203Walking
      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
                
                
                
                202Additional
      JV– management agreements
                May-07
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                3
                
                
                
                3June
      30, 2007
                
                
                
                53
                
                
                
                118
                
                
                
                171
                
                
                
                34
                
                
                
                205Inn
      at Marietta
                Jul-07
                
                
                –
                
                
                
                1
                
                
                
                1
                
                
                
                –
                
                
                
                1HC
      REIT Purchase
                Aug-07
                
                
                3
                
                
                
                (3
                )
                
                
                –
                
                
                
                –
                
                
                
                –HCPI
      Purchase (including 8 Summerville communities)
                Aug-07
                
                
                41
                
                
                
                (33
                )
                
                
                8
                
                
                
                –
                
                
                
                8Wegman
      Purchase
                Aug-07
                
                
                9
                
                
                
                (9
                )
                
                
                –
                
                
                
                –
                
                
                
                –Isle
      of Ledgewood
                Sep-07
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                1
                
                
                
                1Summerville
      Merger
                Sep-07
                
                
                –
                
                
                
                73
                
                
                
                73
                
                
                
                –
                
                
                
                73September
      30, 2007
                
                
                
                106
                
                
                
                147
                
                
                
                253
                
                
                
                35
                
                
                
                288Cooper
      George - disposition
                Oct-07
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                (1
                )
                
                
                (1
                )Gardens
      at Westlake - disposition
                Oct-07
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                (1
                )
                
                
                (1
                )Pinnacle
      - purchase
                Dec-07
                
                
                1
                
                
                
                –
                
                
                
                1
                
                
                
                –
                
                
                
                1December
      31, 2007
                
                
                
                107
                
                
                
                147
                
                
                
                254
                
                
                
                33
                
                
                
                287Courtyard
      of Loyalton - acquisition
                Jan-08
                
                
                –
                
                
                
                1
                
                
                
                1
                
                
                
                –
                
                
                
                1Summerville
      at Hazel Creek - acquisition
                Jan-08
                
                
                –
                
                
                
                1
                
                
                
                1
                
                
                
                –
                
                
                
                1March
      31, 2008
                
                
                
                107
                
                
                
                149
                
                
                
                256
                
                
                
                33
                
                
                
                289
   17
 EMERITUS
CORPORATION
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
 RESULTS
OF OPERATIONS
 Continued
 March 31,
2008
  Results
of Operations
 
 Significant
Accounting Policies and Use of Estimates
 
 For a
description of our significant accounting policies and estimates, see our Annual
Report on Form 10-K for the year ended December 31, 2007.
 
 Statements
of Operations as Percentage of Revenues and Period-to-Period Percentage
Change
 
 The
following table sets forth, for the periods indicated, certain items from our
condensed consolidated statements of operations as a percentage of total
revenues and the percentage change of the dollar amounts from period to
period.
 
 Period-to-PeriodPercentageChangePercentage
      of Revenues
              
              
              Fav
      / (Unfav)Three
      MonthsThree
      Months Ended
              
              
              EndedMarch
      31,
              
              
              March
      31,2008
              
              
              2007
              
              
              2008-2007Revenues:
              
              
              100.0
              %
              
              
              100.0
              %
              
              
              72.3
              %Expenses:Community
      operations*
              
              
              65.2
              
              
              
              63.3
              
              
              
              (77.6
              )General
      and administrative
              
              
              7.8
              
              
              
              9.3
              
              
              
              (44.5
              )Depreciation
      and amortization
              
              
              16.6
              
              
              
              13.3
              
              
              
              (115.8
              )Facility
      lease expense
              
              
              12.0
              
              
              
              9.5
              
              
              
              (116.7
              )Total
      operating expenses
              
              
              101.6
              
              
              
              95.4
              
              
              
              (83.6
              )Operating
      income (loss) from continuing operations
              
              
              (1.6
              )
              
              
              4.6
              
              
              
              (160.1
              )Other
      income (expense)Interest
      income
              
              
              0.5
              
              
              
              0.5
              
              
              
              44.7Interest
      expense
              
              
              (11.8
              )
              
              
              (12.5
              )
              
              
              (62.5
              )Equity
      losses in unconsolidated joint ventures
              
              
              (0.8
              )
              
              
              (0.5
              )
              
              
              (167.5
              )Other,
      net
              
              
              0.2
              
              
              
              (0.6
              )
              
              
              (160.4
              )Net
      other expense
              
              
              (11.9
              )
              
              
              (13.1
              )
              
              
              (56.8
              )Loss
      from continuing operations before income taxes
              
              
              (13.5
              )
              
              
              (8.5
              )
              
              
              (175.5
              )Provision
      for income taxes
              
              
              (0.1
              )
              
              
              (0.2
              )
              
              
              23.9Loss
      from continuing operations
              
              
              (13.6
              )
              
              
              (8.7
              )
              
              
              (169.7
              )Loss
      from discontinued operations
              
              
              (0.3
              )
              
              
              (0.3
              )
              
              
              (70.3
              )Net
      loss
              
              
              (13.9
              %)
              
              
              (9.0
              %)
              
              
              (166.7
              %)
 
 *  exclusive
of depreciation and amortization and facility lease expense shown separately
below.
 
 
  18
 EMERITUS
CORPORATION
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
 RESULTS
OF OPERATIONS
 Continued
 March 31,
2008
  Comparison of the Three
Months Ended March 31, 2008 and 2007
  Total
Operating Revenues:
 
 Three
      Months Ended March 31,2008
              
              
              2007
              
              
              $D
              
              
              
              %
      D(in
      thousands, except percentages)Community
      revenue
              
              $
              185,330
              
              
              $
              107,371
              
              
              $
              77,959
              
              
              
              72.6
              %Management
      fees
              
              
              1,159
              
              
              
              877
              
              
              
              282
              
              
              
              32.2
              %Total
      operating revenues
              
              $
              186,489
              
              
              $
              108,248
              
              
              $
              78,241
              
              
              
              72.3
              %
 
 Three
      Months Ended March 31,2008
              
              
              2007
              
              
              $D
              
              
              %
      DAverage
      monthly revenue per occupied unit
              
              $
              3,325
              
              
              $
              3,181
              
              
              $
              144
              
              
              
              4.5
              %Average
      occupancy rate
              
              
              87.2
              %
              
              
              86.8
              %
              
              
              
              
              
              
              .4
              ppt*
 
 *
percentage points
 
 Of the
$78.0 million increase in community revenues for the three months ended March
31, 2008, compared to the three months ended March 31, 2007, approximately $74.0
million was due to the addition of 85 new communities, including the Summerville
communities.  Of the revenues related to the remaining communities,
$3.3 million of the increased revenue was due to increases in the average
monthly revenue per occupied unit and the balance was due to an increase in
occupancy.
 
 We
continue our efforts to build our occupancy through increased marketing
initiatives, programs that address resident mix and a focus on property
improvements and other community-level enhancements to attract additional
long-term residents and increase occupancy while maintaining growth in average
monthly revenue per unit.  We believe that these initiatives will
continue to have a positive impact on operating performance over
time.
 
 The
increase in management fee revenue is primarily due to the Blackstone joint
venture (Blackstone JV) (see Note 4 to the Unaudited Condensed Consolidated
Financial Statements above), from which we recorded $801,000 and $620,000 in the
three-month periods ended March 31, 2008 and 2007, respectively.
 
 Community
Operations:
 
 Three
      Months Ended March 31,2008
              
              
              2007
              
              
              $D
              
              
              %
      D(in
      thousands, except percentages)Community
      operations
              
              $
              121,557
              
              
              $
              68,441
              
              
              $
              53,116
              
              
              
              77.6
              %As
      a percent of revenue
              
              
              65.2
              %
              
              
              63.3
              %
              
              
              
              
              
              
              1.9
              ppt
 
 Of
the $53.1 million increase in community operations expenses, $49.1 million was
due to the addition of 85 new communities, including the Summerville
communities.  The remaining increase of $4.0 million was primarily
related to increases in employee salaries and benefits of $3.5 million and
increases in contracted services, food costs, utilities, supplies and marketing
costs.
  19
 EMERITUS
CORPORATION
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
 RESULTS
OF OPERATIONS
 Continued
 March 31,
2008
  General
and Administrative:
 
 Three
      Months Ended March 31,2008
              
              
              2007
              
              
              $D
              
              
              %
      D(in
      thousands, except percentages)General
      and administrative
              
              $
              14,611
              
              
              $
              10,114
              
              
              $
              4,497
              
              
              
              44.5
              %As
      a percent of revenue
              
              
              7.8
              %
              
              
              9.3
              %
              
              
              
              
              
              
              (1.5
              )
      ppt
 
 The
growth in general and administrative expenses of $4.5 million was primarily
related to staffing costs for regional and corporate overhead positions, which
is comprised of increases in the number of personnel and in average salaries,
and consisted of approximately $3.3 million in salaries and benefits, including
an increase of $844,000 in non-cash stock compensation expense.  Much
of the increase in staffing costs relates to the addition of the 85 new
communities, including the Summerville communities.  The remaining
increase consisted primarily of increases in consulting fees, travel, telephone
and payroll processing costs.  Included in general and administrative
expenses is non-cash stock compensation expense of $1.4 million and $538,000 for
the three months ended March 31, 2008 and 2007, respectively.  Ongoing
stock option expense is approximately $1.4 million per quarter based on the
current stock options outstanding.
 
 Since
approximately 33 of the communities we operated at March 31, 2008, are managed
rather than owned or leased, as compared to 31 at March 31, 2007, general and
administrative expense as a percentage of operating revenues for all
communities, including managed communities, may be more meaningful for
industry-wide comparisons.  General and administrative as a percentage
of operating revenues for all communities decreased to 6.9% for the three months
ended March 31, 2008 from 7.8% for the three months ended March 31,
2007.
 
 Depreciation
and Amortization:
 
 Three
      Months Ended March 31,2008
              
              
              2007
              
              
              $D
              
              
              
              %
      D(in
      thousands, except percentages)Depreciation
      and amortization
              
              $
              31,020
              
              
              $
              14,376
              
              
              $
              16,644
              
              
              
              115.8
              %As
      a percent of revenue
              
              
              16.6
              %
              
              
              13.3
              %
              
              
              
              
              
              
              3.3
              ppt
 
 The
increase in depreciation and amortization expense of $16.6 million is primarily
the result of $14.1 million in depreciation and amortization expense related to
new communities we acquired and a $2.9 million increase from the acquisition of
properties formerly leased, partially offset by a decrease in depreciation
expense for the remaining communities.
 
 Facility
Lease Expense:
 
 Three
      Months Ended March 31,2008
              
              
              2007
              
              
              $D
              
              
              
              %
      D(in
      thousands, except percentages)Facility
      lease expense
              
              $
              17,355
              
              
              $
              10,124
              
              
              $
              7,231
              
              
              
              71.4
              %Above/below
      market rent
              
              
              2,524
              
              
              
              –
              
              
              
              2,524
              
              
              
              N/AStraight-line
      rent
              
              
              2,437
              
              
              
              174
              
              
              
              2,263
              
              
              
              1,300.6
              %Total
      facility lease expense
              
              $
              22,316
              
              
              $
              10,298
              
              
              $
              12,018
              
              
              
              116.7
              %As
      a percent of revenue
              
              
              12.0
              %
              
              
              9.5
              %
              
              
              
              
              
              
              2.5
              ppt
 
  20
 EMERITUS
CORPORATION
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
 RESULTS
OF OPERATIONS
 Continued
 March 31,
2008
  The
increase in facility lease expense of $12.0 million was primarily due to the
operating lease expense increase of $20.4 million due to the addition of new
leased communities, partially offset by a decrease of $8.9 million due to the
acquisitions of communities formerly leased.  The remaining increase
was primarily due to annual lease inflators on other leased
communities.  We leased 72 and 38 communities under operating leases
as of March 31, 2008 and 2007, respectively.
 
 Interest
Income:
 
 Three
      Months Ended March 31,2008
              
              
              2007
              
              
              $D
              
              
              %
      D(in
      thousands, except percentages)Interest
      income
              
              $
              855
              
              
              $
              591
              
              
              $
              264
              
              
              
              44.7
              %As
      a percent of revenue
              
              
              0.5
              %
              
              
              0.5
              %
              
              
              
              
              
              
              .0
              ppt
 
 Interest
income is primarily attributable to interest earned on invested cash balances,
interest earned on collateral paid in advance for workers’ compensation, and
interest earned on restricted deposits.  Cash and restricted deposit
balances were considerably higher in the first quarter of 2008 as compared to
the first quarter of 2007.
 
 Interest
Expense:
 
 Three
      Months Ended March 31,2008
              
              
              2007
              
              
              $D
              
              
              %
      D(in
      thousands, except percentages)Interest
      expense
              
              $
              (21,991
              )
              
              $
              (13,533
              )
              
              $
              (8,458
              )
              
              
              62.5
              %As
      a percent of revenue
              
              
              (11.8
              %)
              
              
              (12.5
              %)
              
              
              
              
              
              
              .7
              ppt
 
 The
increase in interest expense of $8.5 million for the first quarter of 2008 as
compared to the 2007 period is primarily due to an increase of $8.7 million in
interest expense from financings on the acquisition of communities, debt assumed
in the Summerville acquisition, and unrealized losses on interest rate swaps of
$838,000, partially offset by reductions in other interest expense due to the
paydowns on loans and mortgages.
 
 Equity
Losses in Unconsolidated Joint Ventures:
 
 Three
      Months Ended March 31,2008
              
              
              2007
              
              
              $D
              
              
              %
      D(in
      thousands, except percentages)Equity
      losses inunconsolidated
      joint ventures
              
              $
              (1,522
              )
              
              $
              (569
              )
              
              $
              (953
              )
              
              
              167.5
              %As
      a percent of revenue
              
              
              (0.8
              %)
              
              
              (0.5
              %)
              
              
              
              
              
              
              (.3
              )
      ppt
  The
increase in equity losses in unconsolidated joint ventures of $953,000 primarily
reflects an increase in net equity losses of $1.5 million from the Blackstone
JV, partially offset by a decrease in equity losses in Senior Med.  We
sold our interest in Senior Med in May 2007.  Included in the 2008
Blackstone JV equity loss is a $791,000 expense related to the change in the
fair value of an interest rate swap.
  21
 EMERITUS
CORPORATION
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
 RESULTS
OF OPERATIONS
 Continued
 March 31,
2008
  
 Other,
net:
 
 Three
      Months Ended March 31,2008
              
              
              2007
              
              
              $D
              
              
              %
      D(in
      thousands, except percentages)Other,
      net
              
              $
              409
              
              
              $
              (677
              )
              
              $
              1,086
              
              
              
              (160.4
              %)As
      a percent of revenue
              
              
              0.2
              %
              
              
              (0.6
              %)
              
              
              
              
              
              
              .8
              ppt
 
 Other,
net primarily reflects $502,000 of amortization of deferred gains in 2008. 
The balance in 2007 primarily reflects the incentive payment of $1.3 million
from the debenture conversion discussed in Note 6 to the Unaudited Condensed
Consolidated Financial Statements, offset by $554,000 of amortization of
deferred gains.
 
 Income
Taxes:
 
 Three
      Months Ended March 31,2008
              
              
              2007
              
              
              $D
              
              
              %
      D(in
      thousands, except percentages)Provision
      for income taxes
              
              $
              (210
              )
              
              $
              (276
              )
              
              $
              66
              
              
              
              N/AAs
      a percent of revenue
              
              
              (0.1
              %)
              
              
              (0.2
              %)
              
              
              
              
              
              
              (0.1
              )
      ppt
 
 The
income tax provision in both the current and prior year period represents
estimated state income and franchise tax liabilities.
 
 Net Loss and Property-Related
Expense:
 
 In
comparing the net loss for the three months ended March 31, 2008 and 2007, it is
important to consider our property-related expenses, which include depreciation
and amortization, facility lease expense, and interest expense that are directly
related to our communities, and which include capital lease accounting
treatment, finance accounting treatment, or straight-line accounting treatment
of rent escalators for many of our leases.  These accounting
treatments all result in greater property-related expense than actual lease
payments made in the early years of the affected leases and less
property-related expense than actual lease payments made in later years, as
detailed in the tables below.
 
 Detail
      of property-related expenses from lease accounting
    treatment:Three
      Months Ended March 31,2008
              
              
              2007
              
              
              $D
              
              
              %
      D(in
      thousands, except percentages)Total
      property-related expense:Depreciation
      and amortization
              
              $
              31,020
              
              
              $
              14,376
              
              
              $
              16,644
              
              
              
              115.8
              %Total
      facility lease expense
              
              
              22,316
              
              
              
              10,298
              
              
              
              12,018
              
              
              
              116.7
              %Interest
      expense
              
              
              21,991
              
              
              
              13,533
              
              
              
              8,458
              
              
              
              62.5
              %Total
      property-related expense
              
              $
              75,327
              
              
              $
              38,207
              
              
              $
              37,120
              
              
              
              97.2
              %
 
  22
 EMERITUS
CORPORATION
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
 RESULTS
OF OPERATIONS
 Continued
 March 31,
2008
  Three
      Months Ended March 31,2008
                
                
                2007
                
                
                $D
                
                
                %
      D(in
      thousands, except percentages)Property-related
      expenses from lease accounting treatment:Depreciation
      and amortization
                
                $
                9,593
                
                
                $
                9,543
                
                
                $
                50
                
                
                
                0.5
                %Interest
      expense
                
                
                8,688
                
                
                
                10,092
                
                
                
                (1,404
                )
                
                
                (13.9
                %)Straight-line
      lease expense
                
                
                2,437
                
                
                
                173
                
                
                
                2,264
                
                
                
                1,308.7
                %Operating
      lease expense
                
                
                17,354
                
                
                
                10,124
                
                
                
                7,230
                
                
                
                71.4
                %Total
      property-related lease expense
                
                
                38,072
                
                
                
                29,932
                
                
                
                8,140
                
                
                
                27.2
                %Actual
      lease payments
                
                
                (31,580
                )
                
                
                (25,416
                )
                
                
                (6,164
                )
                
                
                24.3
                %Expense
      in excess of lease payments
                
                $
                6,492
                
                
                $
                4,516
                
                
                $
                1,976
                
                
                
                43.8
                %
   Our
property-related expense associated with our leases exceeded our actual lease
payments by $6.5 million and $4.5 million for the three months ended March 31,
2008 and 2007, respectively.  The impact of lease accounting increased
by $2.0 million in the current year quarter from the comparable quarter last
year due primarily to the Summerville acquisition, partially offset by a
reduction in interest expense on the capital leases in connection with the
normal paydown of the lease obligation and the termination of leases from the
acquisition of the formerly leased communities.  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, 2008, the actual
lease payments increased due to the acquisition transactions discussed in Note 4
to the Unaudited Condensed Consolidated Financial Statements.
 
 
 
  23
 EMERITUS
CORPORATION
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
 RESULTS
OF OPERATIONS
 Continued
 March 31,
2008
  Same
Community Comparison
 
 Of our
256 communities, we have operated 170 communities continuously since January 1,
2007, which we refer to as our “same communities”.  The following
table sets forth a comparison of same communities results of operations for the
three months ended March 31, 2008 and 2007, respectively, excluding general and
administrative expenses.
 
 Three
      Months Ended March 31,(In
      thousands)$D
              
              
              
              %
      D2008
              
              
              2007
              
              
              Fav
      / (Unfav)
              
              
              Fav
      / (Unfav)Revenue
              
              $
              110,799
              
              
              $
              106,743
              
              
              $
              4,056
              
              
              
              3.8
              %Community
      operations *
              
              
              (72,025
              )
              
              
              (67,970
              )
              
              
              (4,055
              )
              
              
              (6.0
              )Community
      operating income
              
              
              38,774
              
              
              
              38,773
              
              
              
              1
              
              
              
              0.0Depreciation
      & amortization
              
              
              (16,795
              )
              
              
              (14,101
              )
              
              
              (2,694
              )
              
              
              (19.1
              )Facility
      lease expense
              
              
              (1,623
              )
              
              
              (10,104
              )
              
              
              8,481
              
              
              
              83.9Operating
      income
              
              
              20,356
              
              
              
              14,568
              
              
              
              5,788
              
              
              
              39.7Interest
      expense, net
              
              
              (18,460
              )
              
              
              (12,463
              )
              
              
              (5,997
              )
              
              
              (48.1
              )Operating
      income after interest expense
              
              $
              1,896
              
              
              $
              2,105
              
              
              $
              (209
              )
              
              
              (9.9
              %)* exclusive
      of depreciation and amortization and facility lease expense shown
      separately below
 
 These
same communities represented $110.8 million or 59.4% of our total revenue of
$186.5 million for the first quarter of 2008.  The increase in same
community revenues of $4.1 million was primarily due to improvements in average
revenue per occupied unit.
 
 Three
      Months Ended March 31,2008
              
              
              2007
              
              
              $D
              
              
              %
      DAverage
      monthly revenue per occupied unit
              
              $
              3,287
              
              
              $
              3,186
              
              
              $
              101
              
              
              
              3.2
              %Average
      occupancy rate
              
              
              86.5
              %
              
              
              86.8
              %
              
              
              
              
              
              
              (.3
              )
      ppt
 
 The
increase of $4.1 million in community operations expenses for our same
communities was primarily related to increases in employee-related expenses of
$3.2 million including salaries and workers’ compensation expense, and increases
in contracted services, food costs, utilities, supplies, and marketing
costs.
 
 Property-related
expenses (depreciation and amortization, facility lease expense, and interest
expense, net of interest income) for our same communities increased by
approximately $210,000, which primarily reflects the effect of the termination
of leases from the acquisition of communities formerly leased, which increased
depreciation and amortization by $2.7 million and increased interest expense by
$6.0 million, while decreasing facility lease expense by $8.5
million.
 
 Operating
income after interest expense for our same communities decreased from $2.1
million to $1.9 million for a total decrease of $209,000 from the comparable
period of 2007 primarily as a result of the property-related expenses discussed
above.  We will continue our efforts to build our occupancy through
increased marketing initiatives, programs that address resident mix and a focus
on property improvements and other community-level enhancements to attract
additional long-term residents and increase occupancy while maintaining growth
in average monthly revenue per unit.  We believe that these
initiatives will have a positive impact on operating performance over
time.
  24
 EMERITUS
CORPORATION
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
 RESULTS
OF OPERATIONS
 Continued
 March 31,
2008
  
 Liquidity
and Capital Resources
 
 At March
31, 2008, we had cash on hand of $90.2 million compared to $67.7 million at
December 31, 2007.  We had working capital deficits of $5.5 million
and $31.4 million at March 31, 2008 and December 31, 2007,
respectively.
 
 We have
incurred significant operating losses since our inception.  Due to the
nature of our business, it is not unusual to operate in the position of a
working capital deficit because revenues are collected much more quickly, often
in advance, than obligations are required to be paid.  The result is a
very low level of current assets to the extent cash has been deployed in
business development opportunities or to pay down long-term
liabilities.  Along those lines, the working capital deficit at March
31, 2008, includes $27.5 million of deferred revenue and unearned rental
income.  The level of current liabilities is not expected to change
from period to period in such a way as to require the use of significant cash in
excess of normal requirements, except for (i) convertible debentures of $10.5
million, which are due and payable on July 1, 2008, except to the extent
converted prior to such date by the holders of the debentures (See Note 6 to the
Unaudited Condensed Consolidated Financial Statements above), and (ii) the
current portion of long-term debt of $24.1 million due by March 31,
2009.
 
 While we
have reported positive cash flows from operating activities over the past three
years, our cash flows have not always been sufficient to pay all of our
long-term obligations and we have been dependent upon third-party financing or
disposition of assets to fund operations.  We cannot guarantee that,
if necessary in the future, such transactions will be readily available to us,
or on terms attractive to us, but we believe that we will be able to sustain
positive operating cash flow or have adequate cash reserves and sources of
capital for all necessary investing and financing activities including required
debt service and capital expenditures through at least the next 12
months.  In February 2008, we obtained a $25.0 million unsecured
revolving line of credit as described below.
 
 The
following is a summary of cash flow information for the three months ended March
31, 2008 and 2007 (in thousands:
 
 Three
      Months Ended March 31,2008
              
              
              2007Cash
      provided by operating activities
              
              $
              20,254
              
              
              $
              6,422Cash
      used in investing activities
              
              
              (17,975
              )
              
              
              (187,375
              )Cash
      provided by financing activities
              
              
              20,241
              
              
              
              190,118Increase
      in cash and cash equivalents
              
              
              22,520
              
              
              
              9,165Cash
      and cash equivalents at the beginning of the period
              
              
              67,710
              
              
              
              14,049Cash
      and cash equivalents at the end of the period
              
              $
              90,230
              
              
              $
              23,214
 
 In the
first quarter of 2008 and in each of the previous three years, we reported
positive net cash from operating activities in our consolidated statements of
cash flows.  The increase in cash provided by operating activities in
the first quarter of 2008 compared to the prior year period is due primarily to
the completion of the Summerville acquisition in September 2007, the strength of
the performance of the communities we operated during both periods, and
fluctuations in the timing of receivables and payables.  Additionally,
by purchasing the real estate underlying leased facilities, we replaced lease
payments with lower levels of debt service and also avoided scheduled lease
escalators.
 
 The
decrease in cash used in investing activities was primarily due to the number of
prior year acquisitions as compared to the current year.  In the first
quarter of 2007, we purchased the real estate of 53 communities that we
previously operated under lease agreements.  As a result, cash paid
for acquisitions of property and equipment amounted to $186.0 million in the
first quarter of 2007 compared to $9.5 million in the current year
period.
 
 The
decrease in cash provided by financing activities was related to the decrease in
acquisition activity described in the previous paragraph.  As a
result, proceeds from mortgage financings, net of repayments, amounted to
$192.5
  25
 EMERITUS
CORPORATION
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
 RESULTS
OF OPERATIONS
 Continued
 March 31,
2008
  million
in the first quarter of 2007 compared to $31.5 million in the current year
period, and debt issuance costs decreased over these same periods by $1.6
million.  The remaining decrease is due primarily to fluctuations in
restricted cash balances ($4.0 million) and an increase in deposits paid related
to pending financing transactions ($4.9 million).
 
 At March
31, 2008, we had payment obligations for long-term debt, capital and financing
leases, and convertible debentures due in the next 12 months totaling
approximately $59.3 million.  In addition, for the year ending
December 31, 2008, we anticipate that we will make investments
of approximately $19.9 million to $24.7 million for capital expenditures,
comprised of approximately $13.9 million to $14.7 million of routine capital
expenditures (including corporate capital expenditures) and approximately $6.0
million to $10.0 million of net capital expenditures in connection with our
community expansion and development program.  In the first quarter of
2008, our capital expenditures totaled $9.5 million, of which $5.2 million was
for routine capital requirements and $4.3 million related to community expansion
and development, including projects begun in 2007.  We had $90.2
million of available cash at March 31, 2008, to fund any 2008 payment
requirements in excess of cash generated from operations.  The
convertible debentures in the amount of $10.5 million due in July 2008 are
convertible into common stock at $22.00 per share.  On April 30, 2008,
our stock price closed at $24.65.  To the extent the debentures are
not converted prior to the July 1, 2008, maturity date, we will need to use cash
to repay them.  However, we cannot be assured that the trading value
of our common stock will continue to exceed the $22.00 conversion
rate.
  On April
30, 2008, we refinanced $20.0 million in long-term debt due in August 2008 that
is secured by the assets of five communities owned by us.  We also
extended the term of a $21.4 million note payable due in March 2008 to March
2009.  We will need to continue our improvements in operating
performance or seek other sources of cash to meet our payment obligations in
future years.  The United States economy experienced a significant
decline in the housing market and a related weakness in the availability and
affordability of credit during 2007.  We believe that the slowdown in
the housing market and the constriction of credit are likely to continue well
into 2008.  Moreover, leading economic indicators such as employment
levels and income growth predict a downward trend in the United States economy
during 2008, and some commentators have predicted a
recession.  However, we believe that need-driven demand for our
services continues to grow and remains resilient, in spite of the overall
housing and economic concerns, as evidenced by our improvements in occupancy and
cash flows, and our ability to finance the acquisition of 121 properties during
2007 and 2008, including the NHP acquisition of 24 communities completed in
April 2008.
 
 As a
consequence of our property and lease transactions in 2007, our long-term debt,
including convertible debentures, has increased from $113.0 million at December
31, 2006, to $776.2 million at March 31, 2008.  Our obligations under
operating leases have increased from $299.3 million to $851.8 million primarily
due to the Summerville acquisition, and our capital lease and financing
obligations have decreased from $608.6 million to $519.9
million.  Many of our debt instruments and leases contain
“cross-default” provisions pursuant to which a default under one obligation can
cause a default under one or more other obligations to the same lender or
lessor.  Such cross-default provisions affect the majority of our
properties and as a result, any event of default could cause a material adverse
effect on our financial condition.  Defaults can include certain
financial covenants, which generally relate to lease coverage and cash
flow.  In addition, we are required to maintain the leased properties
in a reasonable and prudent manner.  For the three months ended March
31, 2008, we were in violation of one or more covenants in certain of our
leases, but have obtained waivers from the owners related to these lease
covenant defaults.  The waivers expire on April 1, 2009.
 
 On
February 8, 2008, we entered into a credit agreement with Wells Fargo Bank,
National Association, which provides a $25.0 million unsecured revolving line of
credit.  The credit agreement permits us to borrow from time to time
up to $25.0 million on an unsecured basis.  The credit agreement also
allows us to obtain letters of credit from the lender, provided that outstanding
letters of credit and any borrowings outstanding do not exceed $25.0
million.  See Note 5, Long-Term Debt, for further
details.  There were no outstanding borrowings under the line of
credit as of March 31, 2008.
 
 
  26
 EMERITUS
CORPORATION
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
 RESULTS
OF OPERATIONS
 Continued
 March 31,
2008
  The
following table summarizes our contractual obligations at March 31, 2008, (in
thousands):
 
 Principal
      and Lease Payments Due by PeriodAfter
      5Contractual Obligations
              
              Total
              
              
              1 year
              
              
              2-3 years
              
              
              4-5 years
              
              
              yearsLong-term
      debt, including current portion
              
              $
              765,785
              
              
              $
              24,067
              
              
              $
              125,193
              
              
              $
              295,937
              
              
              $
              320,588Capital
      lease and financing obligations,including
      current portion
              
              
              519,925
              
              
              
              24,760
              
              
              
              57,993
              
              
              
              71,889
              
              
              
              365,283Operating
      leases
              
              
              851,790
              
              
              
              68,358
              
              
              
              139,897
              
              
              
              143,194
              
              
              
              500,341Convertible
      debentures
              
              
              10,455
              
              
              
              10,455
              
              
              
              -
              
              
              
              -
              
              
              
              -$
              2,147,955
              
              
              $
              127,640
              
              
              $
              323,083
              
              
              $
              511,020
              
              
              $
              1,186,212
 
 The
following table summarizes interest on our contractual obligations at March 31,
2008, (in thousands):
 
 
 Interest
      Due by PeriodAfter
      5Contractual Obligations
              
              Total
              
              
              1 year
              
              
              2-3 years
              
              
              4-5 years
              
              
              yearsLong-term
      debt
              
              $
              270,149
              
              
              $
              48,344
              
              
              $
              82,089
              
              
              $
              60,429
              
              
              $
              79,287Capital
      lease and financing obligations
              
              
              268,797
              
              
              
              33,991
              
              
              
              63,266
              
              
              
              55,500
              
              
              
              116,040Convertible
      debentures
              
              
              327
              
              
              
              327
              
              
              
              -
              
              
              
              -
              
              
              
              -$
              539,273
              
              
              $
              82,662
              
              
              $
              145,355
              
              
              $
              115,929
              
              
              $
              195,327
 
 
 Recent
Accounting Pronouncements
 
 For a
discussion of recently issued accounting pronouncements, see Note 2 to the
Unaudited Condensed Consolidated Financial Statements included in this
report.
 
 Impact of Inflation
 
 To date,
inflation has not had a significant impact on us.  Inflation could,
however, affect our future revenues and operating income due to our dependence
on the senior resident population, most of whom rely on relatively fixed incomes
to pay for our services.  The monthly charges for the resident's unit
and assisted living services are influenced by the location of the community and
local competition.  Our ability to increase revenues in proportion to
increased operating expenses may be limited.  We typically do not rely
to a significant extent on governmental reimbursement programs, which accounted
for approximately 8.4% of revenues for the three months ended March 31,
2008.  In pricing our services, we attempt to anticipate inflation
levels, but there can be no assurance that we will be able to respond to
inflationary pressures in the future.  The near-term negative economic
outlook in the United States may impact our ability to raise our
prices.
 
 Non-GAAP
Measures
 
 A
non-GAAP financial measure is generally defined as one that purports to measure
historical or future financial performance, financial position, or cash flows,
but excludes or includes amounts that would not be included in most GAAP
measures.  In this report, we define and use the non-GAAP financial
measure of Adjusted EBITDA, as set forth below:
  27
 EMERITUS
CORPORATION
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
 RESULTS
OF OPERATIONS
 Continued
 March 31,
2008
  
 Definition of Adjusted
EBITDA:
 
 We define
Adjusted EBITDA as net loss adjusted for:
 
 
 ·
              gains
      or losses, net of tax,  in discontinued
  operations,
 ·
              provision
      or benefit for income taxes,
 ·
              equity
      earnings or losses in unconsolidated joint
  ventures,
 ·
              gains
      or losses on sale of assets or
investments,
 ·
              depreciation
      and amortization,
 ·
              impairment
      losses,
 ·
              amortization
      of deferred gains,
 ·
              non-cash
      stock option compensation expense,
 ·
              interest
      expense,
 ·
              interest
      income, and
 ·
              other
      non-cash unusual adjustments
 
 Management's Use of Adjusted
EBITDA:
 
 We use
Adjusted EBITDA to assess our overall financial and operating
performance.  We believe this non-GAAP measure, as we have defined it,
is useful in identifying trends in our day-to-day performance because it
excludes items that have little or no significance to our day-to-day
operations.  This measure provides an assessment of controllable
expenses and affords management the ability to make decisions, which are
expected to facilitate meeting current financial goals, as well as achieve
optimal financial performance.  It provides an indicator for
management to determine if adjustments to current spending levels are
needed.
 
 Adjusted
EBITDA provides us with a measure of financial performance, independent of items
that are beyond the control of management in the short-term, such as
depreciation and amortization, taxation, and interest expense associated with
our capital structure.  This metric measures our financial performance
based on operational factors that management can influence in the short-term,
namely the cost structure or expenses of the organization.  Adjusted
EBITDA is one of the metrics used by senior management to review the financial
performance of the business on a monthly basis and is used by research analysts
and investors to evaluate the performance and value of the companies in our
industry.
 
 Limitations of Adjusted
EBITDA:
 
 Adjusted
EBITDA has limitations as an analytical tool.  It should not be viewed
in isolation or as a substitute for GAAP measures of
earnings.  Material limitations in making the adjustments to our
losses to calculate Adjusted EBITDA and using this non-GAAP financial measure as
compared to GAAP net loss includes:
 
 ·
              The
      items excluded from the calculation of Adjusted EBITDA generally represent
      income or expense items that may have a significant affect on our
      financial results,
 ·
              Items
      determined to be non-recurring in nature could, nevertheless, re-occur in
      the future, and
 ·
              Depreciation
      and amortization, while not directly affecting our current cash position,
      does represent wear and tear and/or reduction in value of our
      properties.  If the cost to maintain our properties exceeds our
      expected routine capital expenditures, then this could affect our ability
      to attract and retain long-term residents at our
    communities.
 
 An
investor or potential investor may find this important in evaluating our
performance and results of operations.  We use this non-GAAP measure
to provide a more complete understanding of the factors and trends affecting our
business.
  28
 EMERITUS
CORPORATION
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
 RESULTS
OF OPERATIONS
 Continued
 March 31,
2008
  Adjusted
EBITDA is not an alternative to net loss, loss from continuing operations, or
cash flows provided by or used in operating activities as calculated and
presented in accordance with GAAP.  You should not rely on Adjusted
EBITDA as a substitute for any such GAAP financial measure.  We
strongly urge you to review the reconciliation of GAAP net loss to Adjusted
EBITDA presented below, along with our consolidated balance sheets, statements
of operations, and cash flows.  In addition, because Adjusted EBITDA
is not a measure of financial performance under GAAP and is susceptible to
varying calculations, this measure as presented may differ from and may not be
comparable to similarly titled measures used by other companies.
 
 The table
below shows the reconciliation of net loss to Adjusted EBITDA for the three
months ended March 31, 2008 and 2007:
 
 Three
      Months EndedMarch
      31,2008
              
              
              2007Net
      loss
              
              $
              (25,968
              )
              
              $
              (9,735
              )Provision
      for income taxes
              
              
              210
              
              
              
              276Equity
      losses in unconsolidated joint ventures
              
              
              1,522
              
              
              
              569Depreciation
      and amortization
              
              
              31,020
              
              
              
              14,376Amortization
      of deferred gains
              
              
              (502
              )
              
              
              (554
              )Non-cash
      stock option compensation expenses
              
              
              1,382
              
              
              
              538Convertible
      debentures conversion costs
              
              
              -
              
              
              
              1,329Interest
      expense
              
              
              21,991
              
              
              
              13,533Interest
      income
              
              
              (855
              )
              
              
              (591
              )Discontinued
      operations
              
              
              494
              
              
              
              290Adjusted
      EBITDA
              
              $
              29,294
              
              
              $
              20,031
 
 
  29
  
 Item 3.  Quantitative and Qualitative Disclosures About
Market Risk
 
 Our
earnings are affected by changes in interest rates as a result of our short-term
and long-term borrowings.  At March 31, 2008, we had approximately
$99.6 million of variable rate borrowings based on the LIBOR rate.  As
of March 31, 2008, our weighted average variable rate is 1.98% in excess of the
LIBOR rate.  For every 1% change in the LIBOR rate, our interest
expense will change by approximately $996,000 annually.  This analysis
does not consider changes in the actual level of borrowings or operating lease
obligations that may occur subsequent to March 31, 2008.  This
analysis also does not consider the effects of the reduced level of overall
economic activity that could exist in such an environment, nor does it consider
actions that management might be able to take with respect to our financial
structure to mitigate the exposure to such a change.
 
 We
currently have a $19.6 million interest rate swap contract that matures in
August 2012 and a $12.4 million interest rate swap contract that matures in
January 2010.  A 100 basis point increase in interest rates would
increase the combined fair value of these swaps by approximately $995,000 and a
100 basis point decrease in interest rates would decrease the combined fair
value of these swaps by approximately $1.0 million.
 
 The
downturn in the United States housing market in 2007 triggered a constriction in
the availability of credit that is expected to continue in 2008.  This
could impact our ability to borrow money or refinance existing obligations at
acceptable rates of interest.  Thus far, we have experienced no
significant barriers to obtaining credit and do not expect to in the near
future.  See “Management’s Discussion and Analysis of Financial
Condition and Results of Operations-Liquidity and Capital
Resources.”
 
 Item 4.  Controls and Procedures
 
 (a)  Evaluation of disclosure controls
and procedures.
 
 Our
co-chief executive officers and our chief financial officer, after evaluating
the effectiveness of our “disclosure controls and procedures” (as defined in
Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the
period covered by this quarterly report, have concluded that, as of that date,
our disclosure controls and procedures were effective.
 
 (b)
              Changes in internal
      controls
 
 We also
carried out an evaluation of the internal control over financial reporting to
determine whether any changes occurred during the period covered by this
report.  Based on such evaluation, there has been no change in our
internal control over financial reporting that occurred during the most recently
completed fiscal quarter ended March 31, 2008, that materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
 
 
 
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of this page is intentionally left blank]
  30
  PART II.  OTHER INFORMATION
 
 Items
2, 3, 4, and 5 are not applicable.
 
 Item 1.  Legal Proceedings
 
 From time
to time, we are subject to lawsuits and other matters in the normal course of
business, including claims related to general and professional
liability.  Accruals for these claims are based upon actuarial and/or
estimated exposure, taking into account self-insured retention or deductibles,
as applicable.  While we cannot predict the results with certainty, we
do not believe that any liability from any such lawsuits or other matters will
have a material effect on our financial position, results of operations, or
liquidity.
 
 Item 1A.  Risk Factors
 
 In
addition to the other information set forth in this report, you should carefully
consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual
Report on Form 10-K for the year ended December 31, 2007, which could materially
affect our business, financial condition or future results.  The risks
described in our Annual Report on Form 10-K are not the only risks facing our
Company.  Additional risks and uncertainties not currently known to us
or that we currently deem to be immaterial also may materially adversely affect
our business, financial condition and/or operating results.
 
 
 Item 6.  Exhibits
 
 See
      Index to Exhibits, which is incorporated by
  reference.
  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
      9, 2008
              EMERITUS
      CORPORATION(Registrant)/s/
      Raymond R. BrandstromRaymond
      R. Brandstrom, Executive Vice President - Finance, Chief Financial
      Officer, and Secretary
  32
  Index to Exhibits
 
 FootnoteNumber
              
              Description
              
              Number10.2
              
              Amended and Restated Stock Option
      Plan for Nonemployee Directors (as amended throughDecember
      7, 2005).
              
              (1)10.3
              
              Amended and Restated 1998 Employee Stock Purchase
      Plan (as amended and restatedas
      of March 26, 2008).10.7
              
              Documents
      Relating to the Purchase of communities from Nationwide Health Properties,
      Inc. (NHP)(24
      communities)10.70.02
              First Amendment to Purchase and Sale
      Agreement dated March 25, 2008, by and among
NationwideHealth
      Properties, Inc. (NHP) and its affiliated signatories and Emeritus
      Corporation
              
              (1)10.70.03
              Master Credit Facility Agreement dated
      April 1, 2008, by and among Borrowers signatoryhereto
      and Capmark Finance, Inc.
              
              (1)10.70.04
              Master Promissory Note dated April 1, 2008,
      in the principal amount of $241,889,868. payable toCapmark
      Bank.
              
              (1)10.70.05
              Promissory Note of Emeritus Corporation dated March 31,
      2008, in the principalamount
      of $30 million payable to Nationwide Health Properties,
    Inc.
              
              (1)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 9,
      2008.
              
              (1)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 L. Granger Cobb dated May 9,
      2008.
              
              (1)31.1.3
              Certification Pursuant to 18 U.S.C. Section
      1350, as Adopted Pursuant to Section 302of
      the Sarbanes-Oxley Act of 2002 for Raymond R. Brandstrom dated May 9,
      2008.
              
              (1)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 9,
      2008.
              
              (1)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 L. Granger Cobb dated May 9,
      2008.
              
              (1)32.1.3
              Certification Pursuant to 18 U.S.C.
      Section 1350, as Adopted Pursuant to Section 906of
      the Sarbanes-Oxley Act of 2002 for Raymond R. Brandstrom dated May 9,
      2008.
              
              (1)
 
 
 Footnotes:(1)
              Filed
      herewith.
 
 
  33