<PAGE>
 
                                UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                                  FORM 10-K/A

(Mark One)
[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                            EXCHANGE ACT OF 1934.

For the fiscal year ended December 31, 1997
                                      OR
[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                            EXCHANGE ACT OF 1934.

For the transition period from _____________ to _____________

Commission File Number  0-22253
                        -------

                      BROOKDALE LIVING COMMUNITIES, INC.
            (Exact name of registrant as specified in its charter)

         Delaware                                               36-4103821
-------------------------------                            -------------------
(State or other jurisdiction of                             (I.R.S. Employer
incorporation or organization)                             Identification No.)



             77 West Wacker Drive, Suite 4400, Chicago, IL  60601
            (Address of principal executive offices and zip code)

                                (312) 977-3700
             (Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

                    Common Stock, par value $0.01 per share
                    ---------------------------------------
                               (Title of Class)

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.

Yes  X   No ___

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [ ].

As of March 26, 1998, there were 9,475,000 shares of the Registrant's common
stock outstanding. The aggregate market value of the Registrant's shares held
on such date by non-affiliates of the Registrant, based on the closing price
($22.125 per share) of the Registrant's common stock on the Nasdaq National
Market on such date, was $110,071,875.  

                     DOCUMENTS INCORPORATED BY REFERENCE

Part III:  Portions of the Registrant's Proxy Statement for the Annual Meeting
of Stockholders to be held on May 21, 1998.
<PAGE>
 
                      BROOKDALE LIVING COMMUNITIES, INC.

                                  FORM 10-K

                              DECEMBER 31, 1997

                              TABLE OF CONTENTS

                              -----------------
<TABLE> 
<CAPTION> 

PART I                                                                    PAGE
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<S>                                                                       <C>
Item 1.   Business..................................................        1
Item 2.   Properties................................................        9
Item 3.   Legal Proceedings.........................................       10
Item 4.   Submission of Matters to a Vote of Security Holders.......       10

PART II
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Item 5.   Market for Registrant's Common Equity and Related
            Stockholder Matters.....................................       10
Item 6.   Selected Financial Data...................................       11
Item 7.   Management's Discussion and Analysis of Financial
            Condition and Results of Operations.....................       12
Item 7A.  Quantitative and Qualitative Disclosures About
            Market Risk..............................................      18
Item 8.   Financial Statements and Supplementary Data................      18
Item 9.   Changes in and Disagreements with Accountants on
            Accounting and Financial Disclosure......................      18

PART III
--------

Item 10.  Directors and Executive Officers of the Registrant.........      18
Item 11.  Executive Compensation.....................................      18
Item 12.  Security Ownership of Certain Beneficial Owners and
            Management...............................................      18
Item 13.  Certain Relationships and Related Transactions.............      18

PART IV
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Item 14.  Exhibits, Financial Statement Schedules, and Reports on
            Form 8-K.................................................      18

Signatures...........................................................      27
</TABLE> 
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                                    PART I


ITEM 1. BUSINESS.

OVERVIEW

   Brookdale Living Communities, Inc. and its subsidiaries (collectively, the
"Company" or "Brookdale") provides senior independent and assisted living
services to the elderly through its facilities located in urban and suburban
areas of major metropolitan markets. As of December 31, 1997, the Company
operated 13 senior independent and assisted living facilities in nine states
containing a total of 2,808 units which, as of December 31, 1997, were 96.4%
occupied. The Company owns four of such facilities, leases seven facilities and
manages two facilities pursuant to management contracts. With facilities that
contained an average of approximately 216 units, the Company believes it is able
to achieve economies of scale within its facilities and provide senior
independent and assisted living services in a more cost-effective manner. The
Company plans to acquire or lease approximately four to six facilities per year
containing an aggregate of approximately 800 to 1,200 units, and to commence
development of two to three new facilities per year containing approximately 220
units each.

   Brookdale's facilities are designed for middle to upper income residents who
desire an upscale residential environment providing the highest level of
quality, care and value. The Company's objective is to allow its residents to
age-in-place by providing them with a continuum of senior independent and
assisted living services. The residents in a Brookdale facility have the ability
to maintain their residency in such facility for an extended period of time due
to the range of service options available to such residents as their needs
change. An individual can move into a Brookdale facility while the individual is
able to live independently, requiring little or no assistance with the
activities of daily living. As the resident ages and requires more assistance
with the activities of daily living, the resident is able to receive an enhanced
level of services at the Brookdale facility and does not have to move to another
facility to receive such level of services. The ability to allow residents to
age-in-place is beneficial to Brookdale's residents as well as their families
who are burdened with care option decisions for their elderly relatives. In
addition to studio, one-bedroom and two-bedroom units, the Company provides all
residents with basic services, such as meal service, 24-hour emergency response,
housekeeping, concierge services, transportation and recreational activities.
For residents who require additional supplemental care services, the Company
provides assistance with activities of daily living. As of December 31, 1997,
the average age of Brookdale's residents was approximately 82 years old, and
many of these residents require some level of assistance with their activities
of daily living. The Company intends to bring "in-house" as many of these
services as practicable and has established a program providing various levels
and combinations of these services called "Personally Yours"SM. The levels of
care provided by the Company to residents vary depending upon the licensing
requirements of the state in which the facility is located.

   On May 7, 1997, the Company completed its initial public offering of its
common stock (the "IPO"), and on December 24, 1997, the Company completed a
follow-on public offering of its common stock pursuant to which the Company
offered and sold additional shares of its common stock to the public following
the IPO. Net proceeds to the Company from such offerings totaled approximately
$82.2 million. The Company used approximately $40.1 million of the net proceeds
from the IPO to fund (i) the purchase prices for facilities purchased in
connection with the IPO, (ii) cash collateral deposits required with respect to
financings assumed in connection with the IPO and (iii) expenses incurred in
connection with the IPO. The Company used approximately $20.0 million of the net
proceeds from the follow-on offering to repay outstanding indebtedness and
approximately $5.8 million of such net proceeds to fund deposits made in
connection with a facility operating lease transaction completed subsequent to
such offering. The remaining net proceeds from such offerings were used to fund
developments of senior independent and assisted living facilities and for
working capital and general corporate purposes.

   In March 1998, the Company entered into an operating lease transaction with
respect to The Harbor Village facility, a 272-unit senior independent and
assisted living facility located in Chicago, Illinois, pursuant to which the
Company leases and operates such facility. In February 1998, the Company entered
into an agreement to purchase The Atrium of San Jose, a 292-unit senior
independent and assisted living facility located in San Jose, California. The
Company expects to assign the purchase agreement for this facility to a third
party which will acquire the facility and in turn enter into an operating lease
with the Company. The closing of a purchase and subsequent operating lease
transaction involving The Atrium of San Jose facility is expected to occur prior
to April 30, 1998. There can be no assurance that such transaction will be
consummated in a timely manner, if at all. The Company has acquired development
sites located in Austin, Texas and Southfield, Michigan for the construction of
facilities with 209 and 219 units, respectively, at each site and has commenced
construction at both sites. In addition, the Company has entered into agreements
to acquire development sites located in Raleigh, North Carolina and Glen Ellyn,
Illinois for the construction of facilities with approximately 219 to 234 units
at each site, the closings of which are contingent upon the receipt of all
necessary approvals for the development of the respective sites and are expected
to occur by June 30, 1998. The Company has also been selected by the Battery
Park City Authority to be the developer and operator of a senior independent and
assisted living facility to be located in Battery Park City in New York, New
York. Construction on this project is expected to commence by late 1998.

   The Company was incorporated in Delaware on September 4, 1996 by an affiliate
of The Prime Group, Inc. The Company was formed to continue and expand the
business and operations of the senior independent and assisted living division
of The Prime Group, Inc. and certain of its affiliates (collectively, "PGI"),
which, since 1985, had been involved in the development, construction, marketing
and operation of senior independent and assisted living facilities for the
elderly. At the completion of the IPO, the shares of the Company owned by such
affiliate were repurchased by the Company at a nominal price in accordance with
a subscription agreement between the Company and such affiliate. In connection
with the completion of the IPO, PGI and senior management of the Company
contributed their interests in the senior independent and assisted living
division of PGI to the Company in exchange for 2,000,000 shares of the Company's
common stock. PGI also purchased 2,500,000 shares of the 4,500,000 shares of the
Company's common stock sold in the IPO. Since the IPO, the Company has managed,
and continues to manage, The Island on Lake Travis facility, which continues to
be owned by PGI.

   The Company's principal executive offices are located at 77 West Wacker
Drive, Suite 4400, Chicago, Illinois 60601, and its telephone number is (312)
977-3700.

CAUTIONARY STATEMENTS

   This annual report on Form 10-K contains "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
When used in this report, the words "believes," "expects," "anticipates,"
"estimates" and similar words and expressions are generally intended to
identify forward-looking statements.  Statements that describe the Company's
future strategic plans, goals or objectives are also forward-looking
statements.  Readers of this report are cautioned that any forward-looking
statements, including those regarding the intent, belief, or current
expectations of the Company or management, are not guarantees of future
performance, results or events and involve risks and uncertainties, and that
actual results and events may differ materially from those in the
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forward-looking statements as a result of various factors, including, but not
limited to (i) general economic conditions in the markets in which the Company
operates, (ii) competitive pressures within the industry and/or the markets in
which the Company operates, (iii) the effect of future legislation or
regulatory changes on the Company's operations and (iv) other factors
described from time to time in the Company's filings with the Securities and
Exchange Commission.  The forward-looking statements included in this report
are made only as of the date hereof.  Except as required by law, the Company
undertakes no obligation to update such forward-looking statements to reflect
subsequent events or circumstances.

THE SENIOR INDEPENDENT AND ASSISTED LIVING INDUSTRY

   The senior independent and assisted living industry is a rapidly growing
component of the non-acute health care system for the elderly. The senior
independent and assisted living industry serves the needs of the elderly who
benefit from living in a supportive environment and may require or prefer
occasional assistance with the activities of daily living, and who no longer
desire, or cannot live alone. It is estimated that 35% of the people over age
85 require assistance with more than one activity of daily living, such as
bathing, eating, personal hygiene, grooming and dressing.

   The rapid growth of the senior independent and assisted living industry is
supported by several significant trends, including the following:

   FAVORABLE DEMOGRAPHICS. The primary consumers of senior independent and
assisted living services are persons over age 65. This group represents one of
the fastest growing segments of the U.S. population. According to U.S. Bureau
of the Census data, the number of people in the U.S. age 65 and older
increased by more than 27% from 1981 to 1994, growing from 26.2 million to
33.2 million. The segment of the population over 85 years of age, which
comprises the largest percentage of residents at senior care facilities, is
projected to increase by more than 40% between the years 1990 and 2000.
Brookdale believes that these trends will contribute to continued strong
demand for senior independent and assisted living services.

   CONSUMER PREFERENCE. The Company believes that senior independent and
assisted living facilities provide prospective residents and their families
with an attractive alternative to home care or skilled nursing facilities,
particularly those prospective residents who do not require the level of care
or institutional setting provided by skilled nursing facilities. Senior
independent and assisted living facilities allow residents, who typically
furnish their own units, to age-in-place and preserve their independence in a
more residential setting. The Company believes these factors result in a
higher quality of life than that experienced in the more institutional or
clinical settings.

   COST-EFFECTIVE ALTERNATIVE. The annual per resident cost for senior
independent and assisted living care is significantly less than the annual per
resident cost for skilled nursing care. The Company believes that the cost of
senior independent and assisted living care (which includes housing and meal
preparation) compares favorably with home health care when the costs
associated with housing and meal preparation are added to the costs of home
health care. Pricing pressure is also forcing skilled nursing facilities to
shift their focus toward providing more intense levels of care enabling them
to charge higher fees, thus adding to the shortage of facilities providing
less intensive care. The rapid growth of the elderly population coupled with
continuing constraints on the supply and availability of long-term care beds
is leading to a continued shortage of long-term care beds for the elderly.

   INCREASING AWARENESS OF BENEFITS OF CONGREGATE LIVING. The Company believes
that consumers and their adult children are becoming increasingly aware of the
benefits of living in senior independent or congregate living facilities which
provide assisted living services. For the potential resident who may not
necessarily require assistance with activities of daily living, senior
independent living facilities can provide significant benefits to improve
quality of life. By receiving proper nutrition and the enhanced physical,
mental, and social stimulation, which are provided in a senior independent or
congregate living facility, residents may realize such improved quality of
living. In facilities, such as the Company's facilities, which also provide
assistance with activities of daily living, residents and their adult children
can take comfort in knowing that such residents can age-in-place in a more
secure and structured environment than typically available in the home.

   CHANGING FAMILY DYNAMICS. As a result of the growing number of two-income
families, many children are not able to care for elderly parents in their own
homes. Two-income families are, however, better able to provide financial
support for elderly parents. In addition, other factors, such as the growth in
the divorce rate and single-parent households, as well as the increasing
geographic dispersion of families, have contributed to the growing inability
of children to care for aging parents in the home.

BUSINESS AND GROWTH STRATEGY

   The Company's business and growth strategy is based on the following key
elements:

   ACQUIRE AND LEASE EXISTING SENIOR INDEPENDENT AND ASSISTED LIVING
FACILITIES. The Company believes that significant opportunities exist to take
advantage of the fragmented senior independent and assisted living industry by
selectively acquiring or leasing existing facilities. The Company's
acquisition and leasing strategy has focused, and will continue to focus,
primarily on facilities that are designed or can be repositioned by the
Company, by improving or enhancing available services and amenities, for
middle to upper-income, private pay residents. Facilities which the Company
expects to acquire or lease will primarily consist of large facilities,
similar to the Company's

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current facilities that contain an average of approximately 216 units, located
in urban and suburban areas of major metropolitan markets. See "-Acquisitions,
Leases and Development."

   DEVELOP THE BROOKDALE PROTOTYPE FACILITY IN TARGETED MARKETS. The Company
intends to continue to leverage its development expertise and construct its
prototype facility on selected sites located in urban and suburban areas of
major metropolitan markets. The Company's prototype facility, which is
flexible and can be adapted to the specific requirements of individual markets
and site requirements, contains 220 units, but can be constructed to
accommodate between 150 and 250 units. The prototype offers a mix of studio,
one-bedroom and two-bedroom units and common areas providing premium
amenities. The Company intends to begin development of 2 to 3 facilities in each
of the next five years and anticipates that each development will require
approximately 22 to 24 months to complete. See "-Acquisitions, Leases and
Development."

   PROVIDE ACCESS TO A FULL CONTINUUM OF SENIOR INDEPENDENT AND ASSISTED LIVING
SERVICES. The Company's strategy is to provide access to a full continuum of
senior independent and assisted living services that allows its residents to 
age-in-place. These services are provided either by the Company or by outside
agencies. It is the Company's strategy to increase the availability of
additional services and to capture the incremental revenue generated by
providing these services through Company employees. In addition, one of
Brookdale's goals is to establish hospital or health care network affiliations
for each of its facilities. Hospital and health care network affiliations
provide for on-site physician and nursing services and facilitate the provision
of health care services and wellness programs to the Company's residents. In
addition, the Company is presently developing an 82-bed skilled nursing facility
on the campus of The Devonshire facility located in Lisle, Illinois. The Company
may pursue the development of additional skilled nursing facilities at its other
facilities in selected markets. See "-Company Operations-Hospital and Health
Care Network Affiliations."

   UTILIZE SOPHISTICATED MARKETING PROGRAMS TO MAINTAIN HIGH OCCUPANCY RATES.
The Company utilizes sophisticated marketing programs to achieve high occupancy
rates. As of December 31, 1997, the Company's facilities were 96.4% occupied.
The Company believes that its marketing programs will improve the occupancy
rates of facilities that the Company acquires or leases in the future. The
Company's marketing programs are designed to create community awareness of the
Company, its facilities and its services, and to cultivate relationships with
referral sources such as health care providers, physicians, clergy, area
agencies for the elderly, home health agencies and social workers. In addition,
hospital affiliations have been successfully implemented by the Company at three
of its facilities, which provide referrals of prospective residents. The Company
believes that the success of its marketing programs is demonstrated not only by
its high occupancy rates, but also by the Company's ability to maintain waiting
lists at its facilities for prospective residents who pay a deposit in order to
be included on such lists. See "-Company Operations-Marketing and Sales."

   UTILIZE OPERATIONAL EXPERTISE TO ENHANCE PROFITABILITY. The Company has
developed and implemented sophisticated management and operational procedures
resulting in strong operating margins and occupancy rates. These procedures
include securing national vendor contracts to ensure consistent low pricing,
implementing sophisticated budgeting and financial controls at each facility and
establishing standardized training and operations procedures. Although
Brookdale's business is not dependent on its national vendor contracts, such
contracts provide Brookdale with better pricing on required goods and services
due to high volume purchases from a few national vendors. There are, however,
several other vendors from whom Brookdale could purchase its required goods and
services if the national vendor contracts were to be terminated or were to
expire. The Company believes that the systematic implementation of its
management and operating policies will enable the Company to enhance the
financial performance of its existing and future facilities and will continue to
improve the profitability of its stabilized facilities.

   EXPAND FACILITIES WHERE ECONOMICALLY ADVANTAGEOUS. The Company has found that
certain of its facilities with stabilized occupancies benefit from additions and
expansions offering increased capacity, as well as additional levels of service
for residents requiring higher levels of care. Furthermore, the expansion of
existing facilities allows the Company to enhance its economies of scale by
increasing the revenue base at a facility while leveraging such facility's
existing infrastructure such as the laundry equipment and the kitchen. In
addition to the planned 82-bed skilled nursing facility on the campus of the
Devonshire facility, the Company is currently planning to expand its Hawthorn
Lakes facility located in Vernon Hills, Illinois with an additional 57 assisted
living units.

SERVICES

   The Company's senior independent and assisted living facilities offer
residents personal support services and assistance with certain activities of
daily living in a supportive, home-like setting. Residents of the Company's
facilities are typically unable or choose not to live alone, but do not
require the 24-hour nursing care provided in skilled nursing facilities. The
Company's service options are designed to meet residents' changing needs and
to achieve a continuity of care, enabling seniors to age-in-place and thereby
maintain their residency for a longer time period.

  BASIC CARE PROGRAM

   The basic care package, which is received by all residents, includes meal
service, housekeeping services within the resident's unit, social and
recreational activities, scheduled transportation to medical centers and
shopping, security, emergency call response, access to on-site medical
services and medical education and wellness programs.

  SUPPLEMENTAL CARE SERVICES

   In addition to the basic care program, the Company offers custom tailored
supplemental care services for residents who desire or need such services.
Optional supplemental care services include check-in services and escort and
companion services. Residents with cognitive or physical frailties and higher
level service needs are either accommodated with supplemental services in
their own units or, in certain

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facilities, are cared for in a more structured and supervised environment on a
separate wing or floor of the facility with a dedicated staff and with
separate dining room and activity areas.

   Depending on the particular facility and as dictated by state licensing
requirements, the Company also provides assistance with activities of daily
living such as dressing and bathing and medication administration or reminders.
The Company plans to expand its supplemental service offerings, as permitted by
licensing, in order to capture incremental revenue and enable its residents to
remain in its facilities longer. In addition, where practicable, the Company
intends to obtain licensing to provide home health services to residents. At
present, many residents receive supplemental health care services from outside
third parties. The Company's ability to provide certain services depends on the
licensing requirements of particular states. However, the Company's general
strategy is to provide assistance with activities of daily living, subject to
state licensing limitations.

   Certain services, such as physician care, infusion therapy, which includes
intravenous delivery of medication, physical and speech therapy and other more
intensive home health care services, are provided to many of Brookdale's
residents by third parties. The Company assists residents in locating qualified
providers for such health care services.

COMPANY OPERATIONS

  OVERVIEW

   The Company continually reviews opportunities to expand the amount of
services it provides to its residents. To date, the Company has been able to
increase its monthly service fees on an annual basis and has experienced
increasing facility operating margins through a combination of the
implementation of efficient operating procedures and the economies of scale
associated with the size of its facilities. To date, the Company's ability to
increase its monthly service fees has not been adversely affected in any
material way by local rental ordinances. The Company's operating procedures
include securing national vendor contracts to obtain consistent low pricing for
certain services such as food and energy, implementing strict budgeting and
financial controls at each facility and establishing standardized training and
operations procedures. The Company believes that successful senior independent
and assisted living operators must effectively combine the business disciplines
of hospitality, health care, marketing, finance and real estate expertise.

   Brookdale has implemented intensive standards, policies and procedures and
systems, including detailed staff manuals, which the Company believes have
contributed to Brookdale's facility operating margins. The Company has
centralized accounting controls, finance and other operating functions at its
corporate headquarters so that, consistent with its operating philosophy,
facility-based personnel can focus on resident care and efficient operations.
Headquarters staff in Chicago, Illinois are responsible for the establishment of
Company-wide policies and procedures relating to, among other things, resident
care, facility design and facility operations; billings and collections;
accounts payable; finance and accounting; development of employee training
materials and programs; marketing activities; the hiring and training of
management and other facility-based personnel; compliance with applicable local
and state regulatory requirements; and implementation of the Company's
acquisition, development and leasing plans.

  FACILITY STAFFING AND TRAINING

   Each facility has an Executive Director responsible for the day-to-day
operations of the facility, including quality of care, social services and
financial performance. Each Executive Director receives specialized training
from the Company. In addition, a portion of each Executive Director's
compensation is directly tied to the operating performance of the facility and
to the maintenance of high occupancy levels. The Company believes that the
quality and size of its facilities, coupled with its competitive compensation
philosophy, have enabled it to attract high-quality, professional
administrators. Each Executive Director is supported by a Resident Services
Director who is directly responsible for day-to-day care of the residents and
a Marketing Director who oversees the facility's marketing and community
outreach programs. Other key positions at each facility include the Food
Service Director, the Activities Director, the Housekeeping Director, the
Engineering Director and the Business Manager.

   The Company believes that quality of care and operating efficiency can be
maximized by direct resident and staff contact. Employees involved in resident
care, including the administrative staff, are trained in the support and care
needs of the residents and emergency response techniques. The Company has
adopted formal training and evaluation procedures to help ensure quality care
for its residents. The Company has extensive policy and procedure manuals for
each department and holds frequent training sessions for management and staff
at each site.

  QUALITY ASSURANCE

   The Company maintains quality assurance programs at each of its facilities
through its corporate headquarters staff. The Company's quality assurance
program is designed to achieve a high degree of resident and family member
satisfaction with the care and services provided by the Company. The Company's
quality control measures include, among other things, facility inspections
conducted by corporate staff on at least a monthly basis. These inspections
cover the appearance of the exterior and grounds; the appearance and
cleanliness of the interior; the professionalism and friendliness of staff;
resident care plans; the quality of activities and the dining program;
observance of residents in their daily living activities; and compliance with
government regulations.

   The Company's quality control measures also include the survey of residents
and family members on a regular basis to monitor the quality of services
provided to residents. The survey process begins with a visitor's survey sent
one week following a potential resident's

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visit to a facility to ascertain his or her opinions and initial impressions.
Detailed annual written surveys and exit surveys are used to appraise and
monitor the level of satisfaction of residents and their families with
facility operations and services.

   In order to foster a sense of community as well as to respond to residents'
desires, the Company has established at each facility a resident council, an
advisory committee elected by the residents, that meets monthly with the
Executive Director of the facility. Separate resident committees also exist or
are being initiated for food service, activities, marketing and hospitality.
These committees promote resident involvement and satisfaction and enable
facility management to be more responsive to the residents' needs and desires.

  MARKETING AND SALES

   The Company's marketing strategy is intended to create awareness of the
Company, its facilities and its services among potential residents and their
family members and among referral sources, such as hospital discharge
planners, physicians, clergy, area agencies for the elderly, skilled nursing
facilities, home health agencies and social workers. Brookdale's marketing
staff develops overall strategies for promoting the Company's properties and
monitors the success of the Company's marketing efforts. Each facility has a
Director of Marketing who oversees the facility's marketing and outreach
programs and supervises the on-site marketing staff and move-in coordinators.
Besides direct contacts with prospective referral sources, the Company also
relies on print advertising, yellow pages advertising, direct mail, signage
and special events, such as grand openings for new facilities, health fairs
and community receptions. In addition, resident referral programs have been
established and are promoted at each facility.

  HOSPITAL AND HEALTH CARE NETWORK AFFILIATIONS

   Another key element in the Company's operating strategy is to establish
affiliations between Brookdale's facilities and hospitals and health care
networks. As examples, The Hallmark (located in Chicago, Illinois) and The
Heritage (located in Des Plaines, Illinois) facilities are affiliated with Saint
Joseph Health Centers and Hospital and Holy Family Hospital, respectively,
pursuant to agreements with the respective hospitals. Both agreements grant the
hospitals the right to lease space from the Company at the respective facilities
and provide that the hospitals will maintain centers in the facilities to make
services available to facility residents. Each hospital pays rent for its leased
space, and the Company compensates the hospitals for making the services they
render available at the facilities. The annual amounts paid by the hospitals
pursuant to the rental arrangements at the Hallmark and the Heritage facilities
are approximately equal to the annual amounts paid by such facilities to such
respective hospitals pursuant to the applicable compensation arrangements. The
agreement regarding the Heritage facility terminates in February 1999 and the
agreement regarding the Hallmark facility terminates in December 1999, but will
be automatically extended unless either the hospital or the Company gives notice
of termination. Although not subject to a written agreement, The Devonshire
facility has an affiliation with Good Samaritan Hospital on terms similar to the
agreements regarding The Hallmark and The Heritage facilities. The Company
intends to attempt to arrange hospital and health care network affiliations for
its other facilities and those that it acquires, develops or leases in the
future. Hospital and health care network affiliations provide for on-site
physician and nursing services and facilitate the provision of health care
services and wellness programs to the Company's residents and provide the
Company with a referral source.

ACQUISITIONS, LEASES AND DEVELOPMENT

   The Company evaluates markets for acquisition, lease and development
opportunities based on demographics and market studies. The Company's
acquisition, lease and development strategy focuses on the urban and suburban
areas of major metropolitan markets.

  ACQUISITIONS AND LEASES

   The Company currently expects to acquire or lease 4 to 6 facilities
per year containing an aggregate of approximately 800 to 1,200 units. In some
cases, the purchase contract for a facility may be assigned to a third party
which would acquire the facility and in turn enter into an operating lease with
a wholly-owned subsidiary of the Company, with the subsidiary obtaining
substantially all of the benefits and risks of ownership. The Company utilizes
an operating lease structure for its acquisitions in order to minimize its
overall cost of capital.

   The Company may acquire facilities as a means of entry into new markets and
may also attempt to increase its market share in existing markets through
selected acquisitions based on its experience in and knowledge of existing
markets. Acquisitions are expected to consist primarily of large facilities that
are similar to the Company's current facilities, which average approximately 
216 units per facility. In reviewing acquisition opportunities, the Company
considers, among other things, underlying demographics, facility location within
its neighborhood or community, the current reputation of the facility in the
marketplace and the ability of the Company to improve or enhance a facility's
available services and amenities. Further, the Company evaluates the opportunity
to improve or enhance services and operating results through the implementation
of the Company's standard operating procedures.

   In March 1998, the Company entered into an operating lease transaction with
respect to The Harbor Village facility, a 272-unit senior independent and
assisted living facility located in Chicago, Illinois, pursuant to which the
Company leases and operates such facility. In February 1998, the Company entered
into an agreement to purchase The Atrium of San Jose, a 292-unit senior
independent and assisted living facility located in San Jose, California. The
Company expects to assign the purchase agreement for The Atrium of San Jose
facility to a third party which will acquire the facility and in turn enter into
an operating lease with the Company. The closing of a purchase and subsequent
operating lease transaction involving The Atrium of San Jose facility is
expected to occur prior to April 30, 1998. There can be no assurance that such
transaction will be consummated in a timely manner, if at all.

                                      5
<PAGE>
 
  DEVELOPMENT

   It is the Company's development strategy to commence the development of 2 to
3 facilities per year. The Company's flexible prototype facility contains
approximately 220 units, but can be constructed to accommodate between 150 to
250 units. The size of a particular facility will depend on site size, zoning
and underlying market characteristics. The Company's 220-unit prototype contains
approximately 220,000 square feet in a four-story building and contains a mix of
studio, one-bedroom and two-bedroom units. In addition to the living units, the
Company's prototype contains common areas for residents, including a living
room, library, lounges, billiards room, multi-purpose room, arts and crafts
room, exercise room, convenience store, beauty/barber shop, mail room, dining
room and private dining room. The Company anticipates that new developments will
require 8 to 10 months for pre-construction development, 12 to 14 months for
construction and approximately 12 months after opening to achieve stabilized
occupancy. The total construction costs for the 220-unit prototype, including
construction period financing costs and operating deficits during the lease-up
period, are estimated to be approximately $30.0 million, or approximately
$135,000 per unit.

   The Company evaluates markets in which to develop its prototype based on a
number of factors, including demographic profiles of both potential residents
and their adult children, existing competitors and the foreseeable level of
new entrants in the market, estimated market demand and zoning prospects. Site
selection is based on established criteria relating to land cost and
condition, visibility, accessibility, immediate adjacencies, community
perception and zoning prospects. Full market feasibility studies, which
include evaluations of all potential competitors, extensive interviews with key
community sources, including government officials of the local municipality and
members of the zoning board having jurisdiction over the site, and health care
providers, and demographic studies are conducted for each site.

   The Company is presented with potential sites by independent brokers,
developers, health care organizations and financial institutions and through
internal site identification. If a site meets the Company's general market
criteria, then the Company will order a preliminary market study by an
independent third party. If the market study indicates that the site meets its
selection criteria, the Company will then conduct a more in-depth analysis of
the market to ensure there is a demonstrated need for senior independent and
assisted living services and that the site is appropriate in terms of
location, size and zoning. If the market and site meet all of the Company's
selection criteria, the property will be purchased for development.

   The Company has acquired development sites located in Austin, Texas and
Southfield, Michigan for the construction of facilities with 209 and 219 units,
respectively, at each site and has commenced construction at these sites. In
addition, the Company has entered into agreements to acquire development sites
located in Raleigh, North Carolina and Glen Ellyn, Illinois for the construction
of facilities with 219 and 234 units, respectively, at each site, the closings
of which are contingent upon the receipt of all necessary approvals for the
development of the respective sites and are expected to occur by June 30, 1998.
The Company has also been selected by the Battery Park City Authority to be the
developer and operator of a senior independent and assisted living facility to
be located in Battery Park City in New York, New York. Construction on this
project is expected to commence by late 1998. The closings of the Company's
purchases or ground lease of the development sites is subject to certain
customary conditions, including zoning and other governmental approvals.
Although the Company expects the acquisitions or ground lease of the development
sites to be consummated, there can be no assurance that the conditions to
closing such acquisitions or ground lease will be satisfied in a timely manner,
if at all.

COMPETITION

   The senior independent and assisted living industry is highly competitive,
and the Company expects that it will become more competitive in the future.
The Company will continue to face competition from numerous local, regional
and national providers of senior independent and assisted living services. The
Company will compete with such providers primarily on the basis of cost,
quality of care and the array of services provided. The Company will also
compete with companies providing home based health care based on those factors
as well as the reputation, geographic location and physical appearance of
facilities and family preferences. Some of the Company's competitors operate
on a not-for-profit basis or as charitable organizations or have, or may
obtain, greater financial resources than those of the Company.

   Moreover, in the implementation of the Company's business and growth
strategy, the Company expects to face competition for the acquisition and
development of senior independent and assisted living facilities.
Consequently, there can be no assurance that the Company will not encounter
increased competition in the future which could limit its ability to attract
residents or expand its business and could have a material adverse effect on
the Company's financial condition, results of operations and prospects.

GOVERNMENTAL REGULATION

   Senior independent and assisted living facilities are subject to varying
degrees of federal, state and local regulation and licensing by local and
state health and social service agencies and other regulatory authorities.
While regulations and licensing requirements often vary significantly from
state to state, they typically address, among other things, personnel
education, training and records; facility services; physical plant
specifications; furnishing of resident units; food and housekeeping services;
emergency evacuation plans; and resident rights and responsibilities. In many
states, senior independent and assisted living facilities also are subject to
state or local building codes, fire codes and food service licensing or
certification requirements. Assisted living facilities may be subject to
periodic survey or inspection by governmental authorities. To date, state
regulation has not had a material adverse effect on the Company's ability to
offer services or conduct its business. In certain states where the Company
operates and where the Company may operate in the future, the Company may be
unable to provide certain higher levels of assisted living services without
obtaining the appropriate licenses. The Company's success will depend in part on
its ability to satisfy such regulations and requirements and to acquire and
maintain required licenses. The
                                      6
<PAGE>
 
Company's operations could also be adversely affected by, among other things,
regulatory developments such as revisions in licensing and certification
standards.

   Some states have adopted certificate of need or similar laws applicable to
assisted living and nursing facilities which generally require that the
appropriate state agency approve certain acquisitions or capital expenditures
and determine whether a need exists for certain new unit or bed additions or
new services. Certain states have placed a moratorium on granting certificates
of need or otherwise stated their intent not to grant approval for such
capital expenditures. To the extent certificates of need or other similar
approvals are required for expansion of Company operations, such expansion
could be adversely affected by the failure or inability to obtain the
necessary approvals or possible delays in obtaining such approvals.

   Although the Company currently does not participate in the Medicare or
Medicaid programs, the hospitals and other health care providers with which it
has affiliations do participate in those programs, and the Company may
participate in the Medicare program at the skilled nursing facility to be
constructed at the Devonshire facility. As of December 31, 1997, the Company
is paid for services it provides to 10 residents in the state of Washington by
the Department of Social and Health Services. Some portion of such funds are
derived by such agency from the federal Medicaid program. Also, all of the
Company's residents are eligible for Medicare benefits. Therefore, certain
aspects of the Company's business are and will be subject to federal and state
laws and regulations which govern financial and other arrangements between and
among health care providers, suppliers and vendors. These laws prohibit
certain direct and indirect payments and fee-splitting arrangements designed
to induce or encourage the referral of patients to, or the recommendation of,
a particular provider or other entity or person for medical products and
services. These laws include, but are not limited to, the federal
"anti-kickback law" which prohibits, among other things, the offer, payment,
solicitation or receipt of any form of remuneration in return for the referral
of Medicare and Medicaid patients. The Office of the Inspector General of the
Department of Health and Human Services, the Department of Justice and other
federal agencies interpret these statutes liberally and enforce them
aggressively. Congress and state legislatures have proposed legislation that
would significantly expand the government's involvement in curtailing fraud
and abuse and increase the monetary penalties for violation of these
provisions. Violation of these laws can result in, among other things, loss of
licensing, civil and criminal penalties for individuals and entities and
exclusion of health care providers or suppliers from participation in the
Medicare and/or Medicaid programs.

   In addition, although the Company is not a Medicare or Medicaid provider or
supplier, it is subject to these laws because (i) the state laws typically
apply regardless of whether Medicare or Medicaid payments are at issue, (ii)
the Company plans to build and operate a skilled nursing facility at its
Devonshire facility and may establish licensed home health agencies which are
intended to participate in the Medicare program and (iii) as required under
some state licensing laws, or for the convenience of its residents, some of
the Company's senior independent and assisted living facilities maintain
affiliations with hospitals and other health care providers, including
pharmacies, home health agencies and hospices, through which the health care
providers make their health care items or services (some of which may be
covered by Medicare or Medicaid) available to facility residents. There can be
no assurance that such laws will be interpreted in a manner consistent with
the practices of the Company.

   Under the Americans with Disabilities Act of 1990, all places of public
accommodation are required to meet certain federal requirements related to
access and use by disabled persons. A number of additional federal, state and
local laws exist which also may require modifications to existing and planned
properties to create access to the properties by disabled persons. While the
Company believes that its facilities are substantially in compliance with
present requirements or are exempt therefrom, if required changes involve a
greater expenditure than anticipated or must be made on a more accelerated
basis than anticipated, additional costs would be incurred by the Company.
Further legislation may impose additional burdens or restrictions with respect
to access by disabled persons, the costs of compliance with which could be
substantial.

   The Company and its activities are subject to zoning and other state and
local government regulations. Zoning variances or use permits are often
required for construction. Severely restrictive regulations could impair the
ability of the Company to open additional facilities at desired locations or
could result in delays, which could adversely affect the Company's business
and growth strategy and results of operations.

ENVIRONMENTAL MATTERS

   Under various federal, state and local laws and regulations, an owner of
real estate is liable for the costs of removal or remediation of certain
hazardous substances on its property.  Such laws often impose liability
without regard to whether the owner knew of, or was responsible for, the
presence of the hazardous substances.  The costs of remediation or removal may
be substantial, and the presence of the hazardous substances, or the failure
to promptly remediate them, may adversely affect the owner's ability to sell
the real estate or to borrow using the real estate as collateral.  In
connection with its ownership and operation of its facilities, the Company may
be potentially liable for the costs of removal or remediation of hazardous
substances.

   The Company has no knowledge, nor has the Company been notified by any
governmental authority, of any material noncompliance, liability or claim
relating to hazardous substances in connection with any properties in which
any of such entities now has or heretofore had an interest.  However, no
assurances can be given that (i) future laws, ordinances or regulations will
not impose any material environmental liability or (ii) the current
environmental condition of its facilities will not be affected by the
condition of the properties in the vicinity of its facilities (such as the
presence of underground storage tanks) or by third parties unrelated to the
Company.

                                      7
<PAGE>
 
EMPLOYEES

   As of December 31, 1997, the Company had approximately 1,060 employees, of
which 47 were employed at the Company's headquarters. The Company believes
employee relations are good.

INSURANCE

   The provision of personal and health care services entails an inherent risk
of liability. Compared to more institutional long-term care facilities, senior
independent and assisted living residences offer residents a greater degree of
independence in their daily lives. This increased level of independence,
however, may subject the resident and the Company to certain risks that would
be reduced in more institutionalized settings. The Company currently maintains
liability insurance intended to cover such claims, in addition to fire, flood,
and property insurance.  The Company believes its insurance coverage is
adequate based on the nature of the risks, its historical experience and
industry standards.

EXECUTIVE OFFICERS

   The following table sets forth certain information concerning each of the
Company's executive officers:

<TABLE> 
<CAPTION> 

Name                        Age     Position with the Company
----                        ---     -------------------------
<S>                         <C>     <C> 
Michael W. Reschke           42     Chairman of the Board, Director
Mark J. Schulte              44     President and Chief Executive Officer, Director
Darryl W. Copeland, Jr.      38     Executive Vice President, Director
Craig G. Walczyk             38     Vice President - Chief Financial Officer
Robert J. Rudnik             43     General Counsel and Secretary
Matthew F. Whitlock          33     Vice President - Acquisitions
Mark J. Iuppenlatz           38     Vice President - Development
Stephan T. Beck              42     Vice President - Operations
Margaret B. Shontz           38     Vice President - Human Resources
Sheryl A. Wolf               35     Controller
</TABLE>

   Michael W. Reschke has served as Chairman of the Board of Directors of the
Company since May 1997.  Mr. Reschke founded PGI in 1981 and, since that time,
has served as PGI's Chairman, Chief Executive Officer and President.  For the
last 16 years, Mr. Reschke has directed and managed the development, finance,
construction, leasing, marketing, acquisition, renovation and property
management activities of PGI.  Mr. Reschke is also Chairman of the Board of
Prime Retail, Inc. (NYSE:PRT), a publicly traded real estate investment trust
involved in the ownership, acquisition, development and management of upscale
factory outlet centers and the successor in interest to the former retail
division of PGI. In addition, Mr. Reschke is Chairman of the Board of Prime
Group Realty Trust (NYSE:PGE), a publicly traded real estate investment trust
involved in the ownership, acquisition, development and management of office
and industrial buildings and the successor in interest to the former office
and industrial divisions of PGI.  Mr. Reschke is also a member of the Board of
Directors of Ambassador Apartments, Inc. (NYSE:AAH), a publicly traded real
estate investment trust involved in the ownership, acquisition, redevelopment
and management of multi-family residential projects and the successor in
interest to the former multi-family division of PGI.  Mr. Reschke is licensed
to practice law in the State of Illinois and is a certified public accountant.
Mr. Reschke is a member of the Chairman's Roundtable and the Executive
Committee of the National Realty Committee, as well as a full member of the
Urban Land Institute.  Mr. Reschke also serves on the Board of Visitors of the
University of Illinois Law School.

   Mark J. Schulte has served as President and Chief Executive Officer and a
director of the Company since May 1997.  From January 1991 to May 1997, Mr.
Schulte was employed by PGI in its Senior Housing Division, most recently
serving as Executive Vice President, with primary responsibility for
overseeing all aspects of PGI's Senior Housing Division.  Prior to joining
PGI, Mr. Schulte had 13 years of experience in the development and operation
of multi-family housing, senior housing, senior independent and assisted
living and health care facilities.  Mr. Schulte is licensed to practice law in
the State of New York.  Mr. Schulte serves on the Executive Committee of the
American Seniors Housing Association.

   Darryl W. Copeland, Jr. has served as Executive Vice President and a
director of the Company since May 1997.  From March 1997 to May 1997, Mr.
Copeland was a consultant to PGI's Senior Housing Division.  From August 1989
to February 1997, Mr. Copeland was employed by Donaldson, Lufkin & Jenrette
Securities Corporation as an investment banker, most recently serving as
Senior Vice President in the Health Care and Leveraged Finance groups.

   Craig G. Walczyk has served as Vice President - Chief Financial Officer of
the Company since May 1997.  From November 1992 to May 1997, Mr. Walczyk was
employed by PGI, most recently serving as Chief Financial Officer of its
Senior Housing Division.  Prior to joining PGI, Mr. Walczyk was employed by
the accounting firm of Ernst & Young LLP from September 1982 to October 1992.
Mr. Walczyk is a certified public accountant and a member of the American
Institute of Certified Public Accountants and the Illinois CPA Society.

                                      8
<PAGE>
 
   Robert J. Rudnik has served as General Counsel and Secretary of the Company
since July 1997.  Mr. Rudnik also serves as Executive Vice President, General
Counsel and Secretary of PGI.  Mr. Rudnik has served in such capacity for PGI
since 1984.  Mr. Rudnik is licensed to practice law in the State of Illinois
and is a member of the bar in the State of Florida.

   Matthew F. Whitlock has served as Vice President - Acquisitions of the
Company since May 1997.  From August 1996 to May 1997, Mr. Whitlock was
employed by PGI in its Senior Housing Division as Director of Acquisitions.
Prior to joining PGI, Mr. Whitlock was employed by the Forum Group, previously
one of the largest operators of senior and assisted living facilities, as an
acquisition specialist from August 1995 to July 1996.  Mr. Whitlock was a
principal with Concordia Group, a senior and assisted living consulting firm,
from June 1991 to July 1995.

   Mark J. Iuppenlatz has served as Vice President - Development of the
Company since May 1997.  From September 1996 to May 1997, Mr. Iuppenlatz was
employed by PGI in its Senior Housing Division as Director of Development.
Prior to joining PGI's Senior Housing Division, Mr. Iuppenlatz was employed by
Schlotzsky's, Inc. a publicly traded restaurant company, as Vice President -
Real Estate from January 1995 to August 1996.  Mr. Iuppenlatz was employed by
PGI as Director of Marketing and Leasing from October 1991 to 1994 and as
Director of Leasing from January 1989 to September 1991.

   Stephan T. Beck has served as Vice President - Operations of the Company
since May 1997.  From January 1993 to May 1997, Mr. Beck was employed by PGI,
most recently serving as Corporate Director of Operations of its Senior
Housing Division.  Prior to joining PGI, Mr. Beck was employed by Classic
Residence by Hyatt as Executive Director of the Hallmark facility which was
then managed by Classic Residence by Hyatt, from August 1990 to December 1992.

   Margaret B. Shontz has served as Vice President - Human Resources of the
Company since May 1997.  From February 1989 to May 1997, Ms. Shontz was
employed by PGI, most recently serving as Director of Human Resources of its
Senior Housing Division.

   Sheryl A. Wolf has served as Controller of the Company since May 1997.
From September 1991 to May 1997, Ms. Wolf was employed by PGI, most recently
serving as Corporate Director of Finance of its Senior Housing Division.

ITEM 2. PROPERTIES.

FACILITIES

   The following table sets forth certain information regarding the Company's
facilities:

<TABLE>
<CAPTION>
                                                                           YEAR     OCCUPANCY  RATE AT       OWNERSHIP
FACILITY                                LOCATION                 UNITS    OPENED    DECEMBER 31,1997(1)     STATUS(2)(3)
--------                                --------                 -----    ------    -------------------     ------------
<S>                                     <C>                     <C>        <C>             <C>                 <C>
The Hallmark..........................  Chicago, IL               341      1990            100%                Leased
The Devonshire (4)....................  Lisle, IL                 321      1990            100%                Owned
The Classic at West Palm Beach........  West Palm Beach, FL       309      1990             92%                Leased
The Heritage..........................  Des Plaines, IL           254      1993            100%                Owned
The Park Place........................  Spokane, WA               208      1992             88%                Leased
Edina Park Plaza......................  Edina, MN                 208      1987             96%                Owned
The Island on Lake Travis.............  Lago Vista, TX            207      1988             91%                Managed
Hawthorn Lakes (4)....................  Vernon Hills, IL          202      1987            100%                Owned
The Springs of East Mesa..............  Mesa, AZ                  185      1986            100%                Leased
The Gables at Farmington..............  Farmington, CT            172      1984             99%                Leased
The Kenwood...........................  Minneapolis, MN           153      1987            100%                Managed
The Brendenwood Retirement Community..  Voorhees, NJ              145      1987             88%                Leased
The Gables at Brighton................  Brighton, NY              103      1988             95%                Leased
                                                                --------
   Total Units as of December 31, 1997                          2,808(4)
                                                                ========

Harbor Village (5)                      Chicago, IL               272      1954(6)          78%                Leased

</TABLE>


(1)  Occupancy rate is calculated by dividing total occupied units by total
     units operated as of such date.

(2)  All facilities indicated as "Owned" are 100% owned by Brookdale.

(3)  The operating lease terms vary from one to five years, (with five to
     fourteen one-year extension options) to 23 years (with two 25-year
     extension options).

(4)  Total units exclude the planned 82-bed skilled nursing facility at The
     Devonshire facility and the planned 57-unit expansion at the Hawthorn
     Lakes facility.

(5)  The Company began leasing this facility on March 6, 1998.

(6)  This facility was operated as an apartment building until 1991, at which
     point the prior owner purchased, substantially renovated and began
     operating it as a senior independent and assisted living facility.

                                      9
<PAGE>
 
   The following table sets forth certain information regarding facilities
under development by the Company:

<TABLE>
<CAPTION>
                                     ESTIMATED
LOCATION                               UNITS            STATUS              EXPECTED OPENING
--------                             ---------          ------              ----------------
<S>                                   <C>         <C>                     <C>
Austin, TX..........................    209       Under Construction       First Quarter 1999
Southfield, MI......................    219       Under Construction      Second Quarter 1999
Glen Ellyn, IL......................    234         In Development         Third Quarter 1999
Raleigh, NC.........................    219         In Development         Third Quarter 1999
New York (Battery Park City), NY....    216         In Development                2000
                                      -----
   Total Estimated Units              1,097
                                      =====
</TABLE>

CORPORATE OFFICE LEASE

   On September 25, 1997, the Company entered into a five year lease (the
"Office Lease"), commencing October 1, 1997, for its corporate office with 77
West Wacker Limited Partnership (the "Landlord"), a partnership which is
currently owned by Prime Group Realty Trust, the publicly-traded real estate
investment trust which succeeded to the office and industrial properties owned
and operated by PGI.  The Company's corporate office is located at 77 West
Wacker Drive, Suite 4800, Chicago, Illinois 60601.  The office space is
approximately 13,500 square feet, with base rent of $18.50 per square foot,
escalating by $0.75 per square foot at each anniversary of the commencement
date.  On October 2, 1997, in consideration for the signing of the lease, the
Company received a $404,000 incentive from the Landlord.

   On March 17, 1998, the Company and the Landlord amended the Office Lease,
pursuant to which the Company and the Landlord agreed (i) to relocate the
Company's corporate office from the 48th floor to the 44th floor effective
April 24, 1998, (ii) to increase the space leased by the Company to
approximately 22,600 square feet and (iii) to extend the term of the Office
Lease until April 30, 2005. The base rent under the amended Office Lease
continues to be $18.50 per square foot, escalating $0.75 per square foot on each
May 1 of the term commencing May 1, 1999. In consideration for executing the
amendment of the Office Lease, which required the Company to relocate to another
floor and to lease additional space, the Company received a $452,000 cash
payment from the Landlord.

ITEM 3. LEGAL PROCEEDINGS.

   The Company is involved in various lawsuits and claims arising in the
normal course of business. In the opinion of management of the Company,
although the outcomes of these suits and claims are uncertain, in the
aggregate they should not have a material adverse effect on the Company's
business, financial condition and results of operations.

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

   No matters were submitted to a vote of the Company's security holders
during the quarter ended December 31, 1997.


                                   PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

PRICE RANGE OF COMMON STOCK

   The Company's common stock is listed and traded on the Nasdaq National
Market ("Nasdaq") under the symbol "BLCI." The following table sets forth the
high and low closing prices for the common stock, as reported by Nasdaq, for
the periods indicated:

<TABLE>
<CAPTION>
                                               CLOSING PRICE
                                                 PER SHARE
                                                 ---------
                                             HIGH        LOW
<S>                                         <C>         <C>
Fiscal year ending December 31, 1997:
     Second Quarter (1)...................  $12.13      $11.50
     Third Quarter........................   19.00       11.88
     Fourth Quarter.......................   20.63       16.50
</TABLE>

------------------------
(1)  The common stock commenced trading on May 2, 1997.

   On March 26, 1998, the closing price for the common stock, as reported by
Nasdaq was $22.125 per share. At such date, the Company had approximately 900
holders of record of common stock.

                                      10
<PAGE>
 
DIVIDEND POLICY

   The Company has never declared or paid any cash dividends on its common
stock and currently plans to retain future earnings, if any, to finance the
growth of the Company's business rather than to pay cash dividends. Payments
of any cash dividends in the future will depend on the financial condition,
results of operations and capital requirements of the Company as well as other
factors deemed to be relevant by the Board of Directors.

RECENT SALES OF UNREGISTERED SECURITIES

   On May 7, 1997, simultaneously with the completion of the IPO, the Company
issued 1,703,043 shares of common stock to PGI in exchange for all of the common
stock of BLC Property, Inc., PGI's interest in The Heritage and The Devonshire
facilities and the operations of its senior independent and assisted living
division and 296,957 shares of common stock to Mark J. Schulte, President and
Chief Executive Officer of the Company, in exchange for his interests in PGI's
senior independent and assisted living division.

ITEM 6. SELECTED FINANCIAL DATA.

   The following table presents selected financial and operating data for the
Company.  The selected financial data as of December 31, 1996 and 1997 and for
the years ended December 31, 1995, 1996 and 1997 have been derived from the
consolidated financial statements of the Company and the audited combined
financial statements of The Heritage, The Hallmark, The Devonshire, The Gables
at Brighton, and The Springs of East Mesa facilities (the "Predecessor
Properties") included elsewhere in this Annual Report on Form 10-K which should
be read in conjunction with those financial statements and notes thereto. The
selected financial data as of December 31, 1993, 1994 and 1995 and for the years
ended December 31, 1993 and 1994 have been derived from the combined financial
statements of the Predecessor Properties to the Company not included in this
Annual Report on Form 10-K which should be read in conjunction with those
financial statements and notes thereto. The Company initiated operations on May
7, 1997 in connection with the initial public offering of its common stock.

<TABLE>
<CAPTION>

                                                                     PREDECESSOR PROPERTIES
                                                ---------------------------------------------------------------
                                                             YEARS ENDED DECEMBER 31,                             BROOKDALE LIVING
                                                -----------------------------------------------                   COMMUNITIES, INC.
                                                                                                  JANUARY 1, TO      MAY 7, TO
                                                1993(1)       1994(1)       1995(1)     1996(1)    MAY 6, 1997    DECEMBER 31, 1997
                                                --------     ---------     ---------   ---------  -------------   -----------------
                                                                 (In Thousands, Except Per Share and Operating Data)
<S>                                             <C>          <C>           <C>         <C>           <C>               <C>
STATEMENTS OF OPERATIONS DATA:
  Revenue:
    Resident fees.............................. $ 6,629      $ 15,122      $ 21,848    $ 23,221      $ 10,473           $ 30,105
    Management fees............................      --            --            --          --            --                132
                                                --------     ---------     ---------   ---------     ---------          ---------

      Total revenue............................   6,629        15,122        21,848      23,221        10,473             30,237
  Facility operating expenses (3)..............  (5,279)      (11,270)      (13,253)    (12,805)       (6,102)           (15,892)
  Lease expense................................      --            --            --          --        (3,042)            (6,942)
  General and administrative expenses (3)......      --            --            --          --            --             (2,187)
  Depreciation and amortization................  (2,080)       (4,029)       (4,598)     (3,527)         (857)            (2,967)
                                                --------     ---------     ---------   ---------     ---------          ---------
  Operating (loss) income......................    (730)         (177)        3,997       6,889           472              2,249
  Interest expense, net........................  (1,329)       (3,227)       (5,421)     (4,524)         (762)            (2,326)
                                                --------     ---------     ---------   ---------     ---------          ---------
  (Loss) income before minority interest,
    tax (provision)/deferred tax benefit and
    extraordinary item.........................  (2,059)       (3,404)       (1,424)      2,365          (290)               (77)
  Loss (income) allocated to minority
    interest...................................   1,266         1,178           802        (756)         (138)                --
                                                --------     ---------     ---------   ---------     ---------          ---------
  (Loss) income before tax (provision)/
    deferred tax benefit and extraordinary
    item.......................................    (793)       (2,226)         (622)      1,609          (428)               (77)
  Tax (provision)/deferred tax benefit.........      --            --            --          --          (236)               558
  Extraordinary item (net of deferred tax
    benefit of $24 for 1997)...................      --            --         3,274          --            --                (36)
                                                --------     ---------     ---------   ---------     ---------          ---------
  Net (loss) income ........................... $  (793)     $ (2,226)     $  2,652    $  1,609      $   (664)          $    445
                                                ========     =========     =========   =========     =========          =========
  Basic earnings per common share..............      --            --            --          --            --           $   0.06
  Diluted earnings per common share............      --            --            --          --            --           $   0.06
  Basic weighted average shares
    outstanding................................      --            --            --          --            --              7,208
  Diluted weighted average shares
    outstanding................................      --            --            --          --            --              7,351
SELECTED OPERATING AND OTHER DATA(9):
  Number of facilities (at end of period)......       2             3             3           5            (9)                13
  Total units operated (4).....................     575           916           916       1,204            (9)             2,808
  Occupancy rate (4)(6)........................    79.9%         95.6%         98.1%       99.7%           (9)              96.4%
  Average monthly revenue per unit (5)(6)...... $ 1,454      $  1,732      $  2,015    $  2,050            (9)          $  1,965
</TABLE> 

                                      11
<PAGE>
 
<TABLE> 
<S>                                             <C>          <C>           <C>         <C>           <C>               <C>  
BALANCE SHEET DATA:
  Cash and cash equivalents.................... $   497      $  4,127      $  5,086    $  4,230      $ 1,915           $ 13,292
  Cash-restricted (7)..........................   8,457         2,047         1,733       1,089        2,269              5,920
  Letter of credit deposit (7).................      --            --            --          --           --             12,138
  Lease security deposits (8)..................      --            --            --          --           --             18,542
  Total assets.................................  65,149       102,579       100,325      57,836       55,982            183,169
  Total long-term debt.........................  71,510       101,242        99,627      65,000       65,000             96,167
  Total stockholders' equity and
    predecessor (deficit) capital..............  (2,780)        1,852         3,597     (25,427)     (28,685)            57,920
</TABLE>
(1)  The historical financial and operating data for the years ended December 
     31, 1993, December 31, 1994, December 31, 1995 and December 31, 1996
     represent combined historical financial data for the Predecessor
     Properties.

(2)  The financial and operating data for year ended December 31, 1997
     represent combined historical financial data for the Predecessor
     Properties until May 7, 1997 and, thereafter, the operations of the
     Company.

(3)  Prior to May 7, 1997, general and administrative expenses were allocated
     to the then existing facilities; however, following such date, the
     Company began reporting general and administrative expenses as a separate
     item.

(4)  Total units operated represents the total units operated as of the end of
     the period. Occupancy rate is calculated by dividing total occupied units
     by total units operated as of the end of the period.

(5)  Average monthly revenue per unit represents the average of the total
     monthly resident fees divided by occupied units at the end of the period
     averaged over the respective period presented and for the period of time
     in operation during the period.

(6)  For the year ended December 31, 1996, all the properties of the
     Predecessor Properties have been included in the occupancy rate. However,
     the average monthly revenue per unit excludes The Gables at Brighton and
     The Springs of East Mesa which were leased for less than a full month in
     1996.

(7)  Cash-restricted represents segregated amounts to be used for the payment
     of real estate taxes and other operating activities and deposits in
     accordance with governmental and debt agreement requirements. Letter of
     credit deposit represents cash collateral for the credit enhancement of
     $65.0 million of tax-exempt bonds that are secured by The Heritage and
     The Devonshire facilities. The Company earns interest income on both
     cash-restricted and letter of credit deposit amounts. See Note 3 to the
     Consolidated and Combined Financial Statements included elsewhere in this
     Annual Report on Form 10-K.

(8)  Lease security deposits represents investments collateralizing the
     Company's net lease obligations.

(9)  All Selected Operating and Other Data for 1997 is as of and for the year
     ended December 31, 1997.

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

OVERVIEW

   The Company operates 13 senior independent and assisted living facilities
containing a total of 2,808 units as of December 31, 1997. Four of such
facilities are owned by the Company, seven facilities are leased by the
Company and two facilities (one of which is owned by PGI) are managed by
Brookdale pursuant to management contracts. The Company's senior independent
and assisted living facilities offer residents a supportive, "home-like"
setting as well as assistance with certain activities of daily living. By
providing residents a range of service options as their needs change, the
Company seeks to achieve greater continuity of care, enabling senior
independents to age-in-place and thereby maintain their residency for a
longer time period. The ability to allow residents to age-in-place is
beneficial to the Company's residents as well as their families who are
burdened with care decisions for their elderly relatives.

   The Company derives its revenues from both resident fees and management fees.
In the future, the Company expects to derive additional revenue from development
fees associated with developing senior independent and assisted living
facilities for third parties. Resident fees typically are paid monthly by
residents, their families or other responsible parties. As of December 31, 1997,
99.6% of the Company's revenue was derived from private pay sources. Management
services income consists of management fees which typically range from 3.0% to
5.0% of a managed facility's total gross revenues. Resident fees and management
fees are recognized as revenues when services are provided. The Company does not
receive management fees from facilities that it owns or leases.

   The Company classifies its operating expenses into the following
categories: (i) facility operating expenses, which include labor, food,
marketing and other direct facility expenses and real estate taxes; (ii)
general and administrative expenses, which primarily include corporate
headquarters and other overhead costs; (iii) lease payments; and (iv)
depreciation and amortization.

                                      12
<PAGE>
 
RESULTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                       YEARS ENDED       JANUARY 1-          MAY 7-
                                                                       DECEMBER 31,         MAY 6         DECEMBER 31
                                                                       ------------      ----------       -----------

                                                                     1995      1996         1997              1997
<S>                                                                 <C>       <C>          <C>              <C>
Total revenue......................................................  100.0%    100.0%      100.0%            100.0%
Facility operating expenses (1)....................................  (60.7)    (55.1)      (58.3)            (52.6)
Lease expense......................................................     --        --       (29.0)            (23.0)
General and administrative expenses (1)............................     --        --          --              (7.2)
Depreciation and amortization......................................  (21.0)    (15.2)       (8.2)             (9.8)
                                                                    -------   -------      -------          -------
Operating income...................................................   18.3      29.7         4.5               7.4
Interest expense, net..............................................  (24.8)    (19.5)       (7.3)             (7.7)
                                                                    -------   -------      -------          -------
(Loss) income before minority interest, tax (provision)/deferred
  tax benefit and extraordinary item...............................   (6.5)     10.2        (2.8)             (0.3)
Loss (income) allocated to minority interest.......................    3.7      (3.3)       (1.3)               --
                                                                    -------   -------      -------          -------
(Loss) income before tax (provision)/deferred tax benefit and
  extraordinary item...............................................   (2.8)      6.9        (4.1)             (0.3)
Tax (provision)/deferred tax benefit...............................     --        --        (2.2)              1.8
Extraordinary item (net of tax benefit of 0.1% for 1997)...........   14.9        --          --              (0.1)
                                                                    -------   -------      -------          -------
Net income (loss)..................................................   12.1%      6.9%       (6.3)%             1.4%
                                                                    =======   =======      =======          =======
Selected Operating and Other Data:
     Number of facilities (at end of period) (2)(6)................      3         5          --                13
     Total units operated (2)(3)(6)................................    916     1,204          --             2,808
     Occupancy rate (3)(6).........................................   98.1%     99.7%         --              96.4%
     Average monthly revenue per unit (4)(5)(6).................... $2,015    $2,050          --            $1,965
</TABLE>
------------------------
(1)  Prior to May 7, 1997, general and administrative expenses were allocated
     to the then existing facilities; however, following May 7, 1997, the
     Company, which commenced operations as of such date, began reporting
     general and administrative expenses as a separate item.

(2)  As of December 31, 1997, the Company operated 13 facilities with 2,808
     units.

(3)  Total units operated represents the total units operated as of the end of
     the period. Occupancy rate is calculated by dividing total occupied units
     by total units operated as of the end of the period.

(4)  Average monthly revenue per unit represents the average of the total
     monthly resident fees divided by occupied units at the end of the period
     averaged over the respective period presented and for the period of time
     in operation during the period.

(5)  For the year ended December 31, 1996, The Hallmark, The Heritage, The
     Devonshire, The Springs of East Mesa and The Gables at Brighton facilities
     (The Springs of East Mesa and Gables of Brighton beginning December 26,
     1996) (the "Predecessor Properties") have been included in the occupancy
     rate. However, the average monthly revenue per unit excludes The Gables at
     Brighton and The Springs of East Mesa which were leased for less than a
     full month in 1996.

(6)  All Selected Operating and Other Data is as of and for the year ended
     December 31, 1997.

COMPARISON OF YEAR ENDED DECEMBER 31, 1997 TO YEAR ENDED DECEMBER 31, 1996

   For the year ended December 31, 1996, results reflect operations of The
Hallmark, The Heritage and The Devonshire facilities. For the year ended
December 31, 1997, results reflect operations of the Predecessor Properties
facilities through May 7, 1997 and the Company's facilities thereafter.

   Revenue. Total revenue increased by $17.5 million, or 75.3%, to $40.7 million
for the year ended December 31, 1997 when compared to the year ended December
31, 1996. Of this increase, approximately $1.6 million (or an increase of 7.0%)
relates to increased resident fees at the properties that have been operated
during both periods. Approximately $14.9 million of such increase relates to
revenue from The Springs of East Mesa, The Gables at Brighton, Hawthorn Lakes,
Edina Park Plaza, and The Park Place facilities acquired or leased in December
1996 or during 1997, and approximately $1.0 million of such increase relates to
revenue from The Gables at Farmington, The Classic at West Palm Beach and The
Brendenwood Retirement Community facilities leased in November and December of
1997.

   Operating Expenses. Total operating expenses increased by $21.7 million, or
132.6%, to $38.0 million for the year ended December 31, 1997 when compared to
the year ended December 31, 1996. Facility operating expenses increased by $9.9
million, or 83.3%, to $21.8 million primarily due to the inclusion of the
acquired or leased facilities. From the commencement of operations on May 7,
1997 through December 31, 1997, the Company managed its facilities and,
accordingly, did not pay any property management fees, but incurred general and
administrative expenses of approximately $2.2 million. Lease expense increased
by $10.0 million due to the inclusion of The Springs of

                                      13
<PAGE>
 
East Mesa, The Gables at Brighton, The Hallmark, The Park Place, The Gables at
Farmington, The Classic at West Palm Beach and The Brendenwood Retirement
Community facilities.

   Depreciation and amortization increased by approximately $297,000, or 8.4%,
to $3.8 million for the year ended December 31, 1997. Of this increase,
approximately $182,000 relates to the depreciation of the step-up basis of The
Devonshire and The Heritage properties that resulted in connection with the IPO,
which totaled $130,000 and $52,000, respectively. The remainder of the increase,
or approximately $115,000, relates to the depreciation of the acquired or leased
facilities of $1.1 million offset by a decrease in depreciation on The Hallmark
facility of $1.2 million due to the sale and lease-back of this facility at the
end of 1996.

   Interest expense decreased by approximately $890,000, or 18.8%, to $3.9
million for the year ended December 31, 1997 primarily due to the sale and 
lease-back of The Hallmark facility. As a result of the sale and lease-back of
such facility on December 27, 1996, the facility was no longer encumbered by
debt. This decrease was slightly offset by the assumption of debt on the
Hawthorn Lakes and Edina Park Plaza facilities in connection with the purchase
of these properties during 1997. Interest income increased by approximately
$546,000, or 252.8%, to $762,000 due to an increase in average cash balances.
Property management fees decreased by approximately $700,000, or 75.3%, to
$230,000 due to the elimination of all management fee expense with respect to
facilities owned or leased by the Company once the Company commenced operations
on May 7, 1997.

   Net Income. For the year ended December 31, 1997, net income, when combining
the Predecessor Properties and the Company, decreased by approximately $1.8
million, or 113.6%, to a net loss of $219,000 when compared to the year ended
December 31, 1996. The net loss of $219,000 is composed of net income of the
Company of $445,000 for the period from May 7, 1997 to December 31, 1997 and a
net loss of the Predecessor Properties of $664,000 for the period from January
1, 1997 to May 6, 1997. Net income for the year ended December 31, 1997 (which
included the Predecessor Properties through May 7, 1997 and all of the Company's
facilities thereafter), versus net income for the year ended December 31, 1996,
which included the Predecessor Properties only, is not necessarily comparable,
in the opinion of management, due to the different ownership and capital
structures for the respective years.

COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO YEAR ENDED DECEMBER 31, 1995

   For these periods, results reflect operations of the Hallmark, Heritage and
Devonshire facilities.

   Revenue. Resident fees revenue increased by approximately $1.4 million, or
6.3%, to $23.2 million for the year ended December 31, 1996 primarily due to a
6.4% increase in average monthly revenue per unit and a 1.1% increase in
occupancy percentage from the year ended December 31, 1995 to the year ended
December 31, 1996. The occupancy rate for the Predecessor Properties during the
year ended December 31, 1996 was 99.7% as compared to 98.1% during the year
ended December 31, 1995. The average monthly revenue per unit increased by $35
per unit to $2,050 per unit for the year ended December 31, 1996 as compared to
$2,015 per occupied unit for the year ended December 31, 1995.

   Operating Expenses. Facility operating expenses decreased by approximately
$448,000, or 3.4%, to $12.8 million for the year ended December 31, 1996
primarily due to more efficient operations at the Predecessor Properties and
economies of scale created by the increase in occupancy and revenue. This was
evidenced by the decrease in these expenses as a percentage of revenue to 55.1%
for the year ended December 31, 1996 compared to 60.7% for the year ended
December 31, 1995. In addition, property management fees (such management fees,
which were paid to PGI, have not been paid since the IPO and will not be paid in
the future with respect to facilities owned or leased by the Company) decreased
approximately $141,000, or 13.2%, due primarily to a reduction of the Hallmark
facility's management fees, effective January 1, 1996, from 5.0% of operating
income to 3.0%.

   Depreciation and amortization expense decreased by approximately $1.1
million, or 23.3%, to $3.5 million for the year ended December 31, 1996
primarily due to amortization of deferred marketing fees of approximately
$591,000 in 1995 related to The Devonshire and The Heritage facilities that
became fully amortized in 1995 and certain furniture and equipment of The
Devonshire facility that was fully depreciated in 1995, representing a
depreciation expense of approximately $215,000 in 1995, and was partially offset
by an increase in depreciable assets at each of the Predecessor Properties.

   Interest expense, net decreased by approximately $897,000, or 16.5%, to $4.5
million for the year ended December 31, 1996 primarily due to the refinancing of
The Hallmark facility's mortgage payable at the end of 1995. This refinancing
resulted in savings of approximately $594,000 as interest accrued on the new
note bore a fixed rate of interest of 7.265% per annum whereas interest on the
old note accrued at a rate of LIBOR plus 2.5% per annum. For the year ended
December 31, 1995, the interest rate on the old note ranged from 8.75% to 9.0%.
In addition, The Devonshire and The Heritage facilities experienced lower
interest rates on their variable rate bonds during the year ended December 31,
1996 than during the year ended December 31, 1995, which resulted in additional
savings of approximately $292,000. Interest rates on these bonds (exclusive of
credit enhancement and other fees) averaged approximately 3.4% for the year
ended December 31, 1996 as compared to an average rate of approximately 3.9% for
the year ended December 31, 1995. These decreases in interest expense were
slightly offset by increased financing fees associated with The Devonshire and
The Heritage facilities' bonds for the year ended December 31, 1996.

   Income (Loss) Before Minority Interest and Extraordinary Item and Net Income.
Income (loss) before minority interest increased by approximately $3.8 million
and net income decreased by approximately $1.0 million to approximately $2.4
million and $1.6 million, respectively, for the year

                                      14
<PAGE>
 
ended December 31, 1996 compared to a loss before minority interest and
extraordinary item and net income of $1.4 million and $2.7 million,
respectively, for the year ended December 31, 1995 primarily due to an increase
in operating revenue and a decrease in operating expenses, offset as described
above, by an extraordinary gain on extinguishment of debt of $3.3 million on The
Hallmark facility in the year ended December 31, 1995.

LIQUIDITY AND CAPITAL RESOURCES

   On May 7, 1997, the Company completed the IPO of 4,500,000 shares of common
stock, $.01 par value per share, at $11.50 per share. The underwriters of the
IPO exercised their over-allotment option, and on June 3, 1997, the Company sold
an additional 675,000 shares of the Company's common stock at $11.50 per share.
The proceeds from the IPO (including the exercise of the underwriters' over-
allotment option), net of related underwriting discounts and commissions and
offering costs, totaled approximately $51.4 million. The Company used
approximately $40.1 million of the net proceeds from the IPO to fund (i) the
purchase prices for facilities purchased in connection with the IPO, (ii) cash
collateral deposits required with respect to financings assumed in connection
with the IPO and (iii) expenses incurred in connection with the IPO. The
remaining net proceeds were used to finance a portion of subsequent acquisitions
and developments of senior independent and assisted living facilities and
working capital and general corporate purposes.

   On December 24, 1997, the Company completed a follow-on public offering of
2,000,000 shares of common stock, $.01 par value per share, at $16.6875 per
share. The underwriters of the offering exercised their over-allotment option,
and on January 21, 1998, the

                                      15
<PAGE>
 
Company sold an additional 300,000 shares of the Company's common stock at
$16.6875 per share. The proceeds from such offering (including the exercise of
the underwriters' over-allotment option), net of related underwriting
discounts and commissions and offering costs, totaled approximately $35.6
million. The Company used approximately $20.0 million of such net proceeds to
repay outstanding indebtedness and $5.8 million to fund the deposit for the
Harbor Village facility and the balance of $9.8 million to fund lease security
deposits made in connection with the facility lease transactions consummated
subsequent to such offering. The remaining net proceeds will be used to finance
a portion of subsequent acquisitions and developments of senior independent and
assisted living facilities and working capital and general corporate purposes.

   Cash and cash equivalents (which excludes cash-restricted of $5.9 million,
the letter of credit deposit of $12.1 million and lease security deposits of
$18.5 million) increased by $9.1 million to $13.3 million at December 31, 1997
compared to $4.2 million at December 31, 1996 primarily due to cash remaining
after the use of the proceeds generated from the follow-on public stock
offering.

   Net cash provided by operating activities totaled approximately $4.4 million,
$6.5 million, and $1.5 million for the three years ended December 31, 1997, 1996
and 1995, respectively. The primary reasons for the net decrease in cash
provided by operating activities from 1996 to 1997 were the overall decrease in
net income and a decrease in prepaid rent liability. The primary reason for the
net increase in cash provided by operating activities from 1995 to 1996 is due
to improved operating results.

   Net cash (used in) provided by investing activities totaled approximately
($61.6) million, $25.3 million, and ($703,000) for each of the years ended 1997,
1996 and 1995. Investing activities during 1997 included cash used in the
acquisition of the Hawthorn Lakes and Edina Park Plaza facilities and cash used
to acquire a third party's interest in The Heritage and The Devonshire
facilities (collectively, $47.6 million) and $8.3 million in property under
development, during 1996 proceeds from the sale of The Hallmark facility of
$24.1 million, and during 1995 an increase in restricted cash of $571,000.

   Net cash provided by (used in) financing activities was approximately $66.2
million, ($31.8) million, and ($751,000) for the years ended December 31, 1997,
1996, and 1995. During 1997 the activity relates to proceeds received from the
IPO and follow-on offering and the exercise of the underwriters' over-allotment
option related to the IPO (collectively $82.2 million), partially offset
by cash deposits of $12.1 million required to secure the Company's obligations
related to the credit enhancement of the tax-exempt bonds for The Heritage and
The Devonshire facilities, during 1996 net distributions/advances to partners of
$30.7 million, and during 1995 proceeds from long term debt on The Hallmark
facility of $34.6 million partially offset by the repayment of long-term debt of
$33.0 million.

   The Company currently plans to acquire or lease 4 to 6 senior independent and
assisted living facilities per year containing an aggregate of approximately 800
to 1,200 units, and to commence development of 2 to 3 new facilities per year
containing approximately 220 units. The Company anticipates that new
developments will require 8 to 10 months for pre-construction development, 12 to
14 months for construction and approximately 12 months after opening to achieve
a stabilized occupancy rate of approximately 95%. The total construction costs,
including construction period financing costs and operating deficits during the
lease-up period, for the 220-unit prototype are estimated to be approximately
$30.0 million, or approximately $135,000 per unit. At March 26, 1998, the
Company had 5 sites under development for new senior independent and assisted
living facilities, 2 of which were under construction. Capital expenditures
related to the 2 sites under development have aggregate construction commitments
of $61.0 million, of which $51.0 million will be funded from the development
commitment described below. Capital expenditures related to the Company's
existing facilities are estimated to be approximately $3.0 million to $5.0
million in the aggregate in 1998. The Company anticipates that it will use a
combination of cash on hand, remaining net proceeds from the follow-on offering,
additional equity financing and debt financing, lease transactions and cash
generated from operations to fund its acquisition and development activities.
The Company currently estimates that the cash generated from operations,
remaining net proceeds from the follow-on offering, together with cash on hand,
existing debt facilities and commitments and anticipated financing, will be
sufficient to meet its liquidity needs for at least 12 months. Thereafter, in
order to achieve its growth plans, the Company will be required to obtain a
substantial amount of additional debt and equity financing and to generate
additional cash flow through the consummation of operating lease transactions.
The Company presently has no commitment, arrangement or understanding regarding
financing to fund the debt portion of the Company's acquisition and development
plans other than the $100.0 million commitment from The Capital Company of
America, Ltd. (formerly known as Nomura Asset Capital Corporation) for
development projects. There can be no assurance that the Company will be able to
obtain the financing necessary for its acquisition and development programs. A
lack of funds may require the Company to delay or eliminate all or some of its
development projects and acquisition plans and, therefore, could have a material
adverse effect on the Company's growth plans.

   As of December 31, 1997, the Company had $65.0 million of long-term
indebtedness in tax-exempt bonds with floating rates. The interest rates
(exclusive of credit enhancement and other fees) on such debt averaged 3.7%,
3.4% and 3.9% during the years ended, and were 3.78%, 4.07% and 5.16% as of,
December 31, 1997, 1996 and 1995, respectively. Such tax-exempt bonds contain
covenants requiring the facilities to maintain a minimum number of units for
income qualified residents. The Company may obtain similar bond financing for
future facilities.

   The Company is dependent on third-party financing for its acquisition and
development programs. Some financing obtained in the future is expected to
contain terms and conditions and representations and warranties that are
customary for such loans and may contain financing covenants and other
restrictions that (i) require the Company to meet certain financial tests and
maintain certain amounts of funds in escrow, (ii) limit, among other things, the
ability of the Company to borrow additional funds, dispose of assets and engage
in mergers or other business combinations and (iii) restrict the ability of the
Company to operate competing facilities within certain distances from mortgaged
facilities. There can be no assurance that financing for the Company's
acquisition and development program will be available to the Company on
acceptable terms or at all. A lack of funds may require the Company to delay or
eliminate all or some of its development projects and acquisition plans and
could therefore have a material adverse effect on the Company's growth plans and
on its business, financial condition and results of operations.

                                      16
<PAGE>
 
QUARTERLY RESULTS OF OPERATIONS

   The following is a summary of the quarterly results of operations for each
                      of the quarters since May 7, 1997:
               (Amounts in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                 1997 QUARTER ENDED:
                                                  -------------------------------------------------
                                                  JUNE 30 (1)        SEPTEMBER 30       DECEMBER 31
                                                  -----------        ------------       -----------
<S>                                                 <C>                <C>               <C>
Revenue                                             $ 6,572            $ 11,241          $ 12,424

Expenses                                              6,789              11,058            12,467
                                                    --------           ---------         ---------
    (Loss) income before deferred tax
        benefit and extraordinary item                 (217)                183               (43)
Deferred tax benefit                                    135                   7               416
                                                    --------           ---------         ---------
    (Loss) income from continuing operations
        before extraordinary item                       (82)                190               373

Extraordinary item (net of tax benefit of $24)            -                   -               (36)
                                                    --------           ---------         ---------
    Net (loss) income                               $   (82)           $    190          $    337
                                                    ========           =========         =========

Basic earnings per common share:
    (Loss) income from continuing operations
        before extraordinary item                   $ (0.01)           $   0.03          $   0.05
    Extraordinary item                                    -                   -                 -
                                                    --------           ---------         ---------
    Net (loss) income                               $ (0.01)           $   0.03          $   0.05
                                                    ========           =========         =========

Weighted average shares used for computing
    basic earnings per common share                   6,844               7,175             7,458
                                                    ========           =========         =========

Diluted earnings per common share:
    (Loss) income from continuing operations
        before extraordinary item                   $ (0.01)           $   0.03          $   0.05
    Extraordinary item                                    -                   -             (0.01)
                                                    --------           ---------         ---------
    Net (loss) income                               $ (0.01)           $   0.03          $   0.04
                                                    ========           =========         =========

Weighted average shares used for computing
    diluted earnings per common share                 6,844               7,318             7,671
                                                    ========           =========         =========
</TABLE>

(1)  The period includes operations from May 7, 1997 through June 30, 1997.

   To date, Brookdale's ability to increase cash flow to meet rising costs has 
not been adversely affected in any material way by existing, or proposed, rent 
control ordinances. Rent control ordinances may not be applicable to Brookdale's
facilities due to the services provided for the monthly fees charged to its 
residents. If Brookdale's facilities were subject to rent control ordinances, an
imposed limitation on the resident fees that Brookdale may charge at such a 
facility could impair Brookdale's ability to meet any rising costs of operating 
the facility.

IMPACT OF INFLATION

   Resident fees from senior independent and assisted living facilities owned
or leased by the Company and management fees from facilities managed by the
Company for third parties are its primary sources of revenue.  These revenues
are affected by monthly resident fee rates and facility occupancy rates.  The
rates charged for senior independent and assisted living services are highly
dependent upon local market conditions and the competitive environment in
which the facilities operate.  Substantially all of the Company's resident
agreements have terms of approximately one year and allow, at the time of
renewal, for adjustments in the monthly fees payable thereunder, thereby
enabling the Company to seek increases in monthly fees due to inflation or
other factors. Any such increase would be subject to market and competitive
conditions and could result in a decrease in occupancy at the Company's
facilities. The Company believes, however, that the short-term nature of its
resident agreements generally serves to reduce the risk to the Company of the
adverse effect of inflation. In addition, employee compensation expense is a
principal cost element of facility operations and is also dependent upon local
market conditions. There can be no assurance that resident fees will increase
or that costs will not increase due to inflation or other causes. In addition,
as of December 31, 1997, approximately $65.0 million in principal amount of
the Company's indebtedness bore interest at tax-exempt floating rates and
future indebtedness may bear floating rate interest. Inflation, and its impact
on floating interest rates, could affect the amount of interest payments due
on such indebtedness.

                                      17
<PAGE>
 
READINESS FOR YEAR 2000

   The Company is in the process of planning the nature and extent of the work
required to make its systems and infrastructure Year 2000 compliant. Based on
a recent assessment, the Company will have to modify or replace significant
portions of its hardware and software so that its systems will function
properly with respect to the Year 2000 and beyond. The Company believes that
with modifications to existing software and conversions to new software
applications, in addition to hardware upgrades on certain mechanical systems,
the Year 2000 issue will not pose significant operational problems. However,
if such modifications and conversions are not made, or are not completed in a
timely manner, the Year 2000 issue could have a material impact on the
operations of the Company.

   The Company continues to evaluate the Year 2000 issue and will utilize both
internal and external resources in order to reprogram, or replace, systems
that are not in compliance with the Year 2000. The Company anticipates
completing the project no later than March 31, 1999. The cost to complete the
project has not yet been determined.

   The project completion date is based on management's best estimates, which
were derived utilizing numerous assumptions of future events, including the
ability of third parties to modify the Company's systems on a timely basis.
There can be no guarantee that the project will be completed in a timely
manner. Specific factors that might delay completion of the project include,
but are not limited to, the availability of qualified personnel, the ability
to locate and correct all relevant computer codes, and similar uncertainties.


ITEM 7A. QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

   Not applicable.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

   The information required by this Item is set forth at the pages indicated
   in Item 14(a) below.

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

   Not applicable.


                                   PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

   The information required by Item 10 is incorporated herein by reference to
the information contained under the headings "Election of Directors" and "Other
Information-Compliance with Section 16(a) of the Securities Exchange Act of
1934" in the Company's definitive Proxy Statement filed April 20, 1998 under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). Certain
information regarding executive officers is contained in Part I hereof.

ITEM 11. EXECUTIVE COMPENSATION

   The information required by Item 11 is incorporated herein by reference to
the information contained under the headings "Compensation of Executive
Officers," "Compensation Committee Interlocks and Insider Participation" and
"Report of Compensation Committee" in the Company's definitive Proxy Statement
filed April 20, 1998 under the Exchange Act.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

   The information required by Item 12 is incorporated herein by reference to
the information contained under the heading "Principal Security Holders of the
Company" in the Company's definitive Proxy Statement filed April 20, 1998 under
the Exchange Act.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

   The information required by Item 13 is incorporated herein by reference to
the information contained under the heading "Other Information-Certain
Relationships and Related Transactions" in the Company's definitive Proxy
Statement filed April 20, 1998 under the Exchange Act.


                                   PART IV

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


(a) 1.  FINANCIAL STATEMENTS

                                      18
<PAGE>
 
Consolidated Balance Sheet of Brookdale Living Communities, Inc. as
of December 31, 1997 and Combined Balance Sheet of Predecessor
Properties (predecessor to Brookdale Living Communities, Inc.) as of
December 31, 1996

Consolidated Statement of Operations of Brookdale Living
Communities, Inc. for the period from May 7, 1997 through December
31, 1997 and Combined Statements of Operations of Predecessor
Properties (predecessor to Brookdale Living Communities, Inc.) for
the period from January 1, 1997 through May 6, 1997 and the years
ended December 31, 1996 and 1995

Consolidated Statement of Stockholders' Equity of Brookdale Living
Communities Inc. for the period from May 7, 1997 through December
31, 1997

Combined Statements of Changes in Partners' Capital (Deficit) of
Predecessor Properties (predecessor to Brookdale Living Communities,
Inc.) for the period January 1, 1997 through May 6, 1997 and the
years ended December 31, 1996 and 1995

Consolidated Statement of Cash Flows of Brookdale Living
Communities, Inc. for the period from May 7, 1997 through December
31, 1997 and Combined Statements of Cash Flows of Predecessor
Properties (predecessor to Brookdale Living Communities, Inc.) for
the period from January 1, 1997 through May 6, 1997 and the years
ended December 31, 1996 and 1995

Notes to Consolidated and Combined Financial Statements of Brookdale
Living Communities, Inc. and the Predecessor Properties (predecessor
to Brookdale Living Communities, Inc.)


(a) 2.  FINANCIAL STATEMENT SCHEDULES

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

                                      19
<PAGE>
 
(a) 3. EXHIBITS

EXHIBIT
NUMBER                           DESCRIPTION
-------                          -----------

  3.1       Restated Certificate of Incorporation of the Company, as filed
            with the Securities and Exchange Commission on June 16, 1997 as
            Exhibit 3.1 to the Company's Form 10-Q for the period ended March
            31, 1997 (File No. 0-22253) and incorporated herein by reference

  3.2       Amended and Restated By-laws of the Company, as filed with the
            Securities and Exchange Commission on June 16, 1997 as Exhibit 3.2
            to the Company's Form 10-Q for the period ended March 31, 1997
            (File No. 0-22253) and incorporated herein by reference

  4.1       Form of certificate representing Common Stock of the Company, as
            filed with the Securities and Exchange Commission on March 17,
            1997 as Exhibit 10.14 to the Company's Registration Statement on
            Form S-1 (Registration No. 333-12259) and incorporated herein by
            reference

 10.1       Formation Agreement dated as of May 7, 1997 by and among the
            Company, Brookdale Holdings, Inc., The Prime Group, Inc. ("PGI"),
            Prime Group Limited Partnership and Mark J. Schulte, as filed with
            the Securities and Exchange Commission on August 14, 1997 as
            Exhibit 10.1 to the Company's Form 10-Q for the period ended June
            30, 1997 (File No. 0-22253) and incorporated herein by reference

 10.2       Space Sharing Agreement dated as of May 7, 1997 by and between the
            Company and PGI, as filed with the Securities and Exchange
            Commission on August 14, 1997 as Exhibit 10.2 to the Company's
            Form 10-Q for the period ended June 30, 1997 (File No. 0-22253)
            and incorporated herein by reference

 10.3       Registration Rights Agreement dated as of May 7, 1997 by and
            between the Company, PGI, Prime Group Limited Partnership, and
            Prime Group VI, L.P, as filed with the Securities and Exchange
            Commission on August 14, 1997 as Exhibit 10.3 to the Company's
            Form 10-Q for the period ended June 30, 1997 (File No. 0-22253)
            and incorporated herein by reference

 10.4       Voting Agreement dated as of May 7, 1997 by and among the Company,
            PGI, Prime Group Limited Partnership, and Prime Group VI, L.P., as
            filed with the Securities and Exchange Commission on August 14,
            1997 as Exhibit 10.4 to the Company's Form 10-Q for the period
            ended June 30, 1997 (File No. 0-22253) and incorporated herein by
            reference

 10.5       Non-Compete Agreement dated as of May 7, 1997 by and among the
            Company, PGI, Prime Group Limited Partnership and Michael W.
            Reschke, as filed with the Securities and Exchange Commission on
            August 14, 1997 as Exhibit 10.5 to the Company's Form 10-Q for the
            period ended June 30, 1997 (File No. 0-22253) and incorporated
            herein by reference

 10.6       Subscription Agreement dated September 4, 1996 by and between the
            Company and Michael W. Reschke, as filed with the Securities and
            Exchange Commission on September 18, 1996 as Exhibit 10.6 to the
            Company's Registration Statement on Form S-1 (File No. 333-12259)
            and incorporated herein by reference

 10.7       Employment Agreement dated as of May 7, 1997 by and between the
            Company and Michael W. Reschke, as filed with the Securities and
            Exchange Commission on August 14, 1997 as Exhibit 10.6 to the
            Company's Form 10-Q for the period ended June 30, 1997 (File No.
            0-22253) and incorporated herein by reference

 10.8       Employment Agreement dated as of May 7, 1997 by and between the
            Company and Mark J. Schulte, as filed with the Securities and
            Exchange Commission on August 14, 1997 as Exhibit 10.7 to the
            Company's Form 10-Q for the period ended June 30, 1997 (File No.
            0-22253) and incorporated herein by reference

 10.9       Employment Agreement dated as of May 7, 1997 by and between the
            Company and Darryl W. Copeland. Jr., as filed with the Securities
            and Exchange Commission on August 14, 1997 as Exhibit 10.8 to the
            Company's Form 10-Q for the period ended June 30, 1997 (File No.
            0-22253) and incorporated herein by reference

 10.10      Employment Agreement dated as of May 7, 1997 by and between the
            Company and Matthew F. Whitlock, as filed with the Securities and
            Exchange Commission on August 14, 1997 as Exhibit 10.9 to the
            Company's Form 10-Q for the period ended June 30, 1997 (File No.
            0-22253) and incorporated herein by reference

                                      20
<PAGE>
 
EXHIBIT
NUMBER                           DESCRIPTION
-------                          -----------

 10.11      Employment Agreement dated as of May 7, 1997 by and between the
            Company and Mark J. Iuppenlatz, as filed with the Securities and
            Exchange Commission on August 14, 1997 as Exhibit 10.10 to the
            Company's Form 10-Q for the period ended June 30, 1997 (File No.
            0-22253) and incorporated herein by reference

 10.12      Management Agreement dated as of May 7, 1997 by and between
            Brookdale Living Communities of Texas, Inc. and The Island on Lake
            Travis, Ltd., as filed with the Securities and Exchange Commission
            on August 14, 1997 as Exhibit 10.11 to the Company's Form 10-Q for
            the period ended June 30, 1997 (File No. 0-22253) and incorporated
            herein by reference

 10.13      Submanagement Agreement dated as of July 1, 1997 by and between
            Brookdale Living Communities of Minnesota-II, Inc. and Kenwood
            Congregate Associates Limited Partnership and Active Life
            Management Corporation, as filed with the Securities and Exchange
            Commission on August 14, 1997 as Exhibit 10.12 to the Company's
            Form 10-Q for the period ended June 30, 1997 (File No. 0-22253)
            and incorporated herein by reference

 10.14      Brookdale Living Communities, Inc. Stock Incentive Plan, as filed
            with the Securities and Exchange Commission on December 15, 1997
            as Exhibit 10.14 to Amendment No. 4 to the Company's Registration
            Statement on Form S-1 (Registration No. 333-41191) and
            incorporated herein by reference

 10.15      Form of Indemnification Agreement, as filed with the Securities
            and Exchange Commission on March 17, 1997 as Exhibit 10.15 to
            Amendment No. 4 to the Company's Registration Statement on Form
            S-1 (Registration No. 333-12259) and incorporated herein by
            reference

 10.16      Amended and Restated Partnership Agreement of River Oaks Partners
            dated as of May 7, 1997 by and between Brookdale Holdings, Inc.
            and the Company, as filed with the Securities and Exchange
            Commission on August 14, 1997 as Exhibit 10.14 to the Company's
            Form 10-Q for the period ended June 30, 1997 (File No. 0-22253)
            and incorporated herein by reference

 10.17      Amended and Restated Agreement of Limited Partnership of The Ponds
            of Pembroke Limited Partnership dated as of May 7, 1997 by and
            between Brookdale Holdings, Inc. and the Company, as filed with
            the Securities and Exchange Commission on August 14, 1997 as
            Exhibit 10.15 to the Company's Form 10-Q for the period ended June
            30, 1997 (File No. 0-22253) and incorporated herein by reference

 10.18      Real Estate Purchase Agreement dated as of September 16, 1996 by
            and between PGI and Gables at Brighton Associates, as filed with
            the Securities and Exchange Commission on September 18, 1996 as
            Exhibit 10.21 to the Company's Registration Statement on Form S-1
            (Registration No. 333-12259) and incorporated herein by reference

 10.19      Real Estate Purchase Agreement dated as of September 16, 1996 by
            and between PGI and Edina Park Plaza Associates Limited
            Partnership, as filed with the Securities and Exchange Commission
            on September 18, 1996 as Exhibit 10.22 to the Company's
            Registration Statement on Form S-1 (Registration No. 333-12259)
            and incorporated herein by reference

 10.20      Real Estate Purchase Agreement dated as of September 16, 1996 by
            and between PGI and East Mesa Senior Living Limited Partnership,
            as filed with the Securities and Exchange Commission on September
            18, 1996 as Exhibit 10.23 to the Company's Registration Statement
            on Form S-1 (Registration No. 333-12259) and incorporated herein
            by reference

 10.21      Real Estate Purchase Agreement dated as of September 16, 1996 by
            and between PGI and Hawthorn Lakes Associates, as filed with the
            Securities and Exchange Commission on September 18, 1996 as
            Exhibit 10.24 to the Company's Registration Statement on Form S-1
            (Registration No. 333-12259) and incorporated herein by reference

 10.22      Letter Agreement dated September 17, 1996 by and among PGI, KILICO
            Realty Corporation and Kemper Investors Life Insurance Company, as
            filed with the Securities and Exchange Commission on September 18,
            1996 as Exhibit 10.25 to the Company's Registration Statement on
            Form S-1 (Registration No. 333-12259) and incorporated herein by
            reference

                                      21
<PAGE>
 
EXHIBIT
NUMBER                           DESCRIPTION
-------                          -----------

 10.23      First Amendment dated December 20, 1996 to Letter Agreement dated
            September 17, 1996 by and among PGI, KILICO Realty Corporation and
            Kemper Investors Life Insurance Company, as filed with the
            Securities and Exchange Commission on March 4, 1997 as Exhibit
            10.24 to Amendment No. 3 to the Company's Registration Statement
            on Form S-1 (Registration No. 333-12259) and incorporated herein
            by reference

 10.24      Second Amendment dated April 3, 1997 to Letter Agreement dated
            September 17, 1996 by and among PGI, KILICO Realty Corporation and
            Kemper Investors Life Insurance Company, as filed with the
            Securities and Exchange Commission on April 8, 1997 as Exhibit
            10.35 to Amendment No. 5 to the Company's Registration Statement
            on Form S-1 (Registration No. 333-12259) and incorporated herein
            by reference

 10.25      Third Amendment dated April 9, 1997 to Letter Agreement dated
            September 17, 1996 by and among PGI, KILICO Realty Corporation and
            Kemper Investors Life Insurance Company, as filed with the
            Securities and Exchange Commission on April 16, 1997 as Exhibit
            10.36 to Amendment No. 6 to the Company's Registration Statement
            on Form S-1 (Registration No. 333-12259) and incorporated herein
            by reference

 10.26      Purchase and Sale Agreement dated as of February 20, 1997 by and
            between the Company and Park Place General Partnership, as filed
            with the Securities and Exchange Commission on March 4, 1997 as
            Exhibit 10.25 to Amendment No. 3 to the Company's Registration
            Statement on Form S-1 (Registration No. 333-12259) and
            incorporated herein by reference

 10.27      Purchase and Sale Agreement dated as of February 20, 1997 by and
            between the Company and Park Place II, L.L.C., as filed with the
            Securities and Exchange Commission on March 4, 1997 as Exhibit
            10.26 to Amendment No. 3 to the Company's Registration Statement
            on Form S-1 (Registration No. 333-12259) and incorporated herein
            by reference

 10.28      Master Lease Agreement dated as of December 27, 1996 by and
            between Health and Retirement Properties Trust, as landlord, and
            BLC Property, Inc., as tenant, as filed with the Securities and
            Exchange Commission on March 4, 1997 as Exhibit 10.27 to Amendment
            No. 3 to the Company's Registration Statement on Form S-1
            (Registration No. 333-12259) and incorporated herein by reference

 10.29      Sublease Agreement dated as of December 27, 1996 by and between
            BLC Property, Inc., as sublandlord, and Brookdale Living
            Communities of Arizona, Inc., as subtenant, as filed with the
            Securities and Exchange Commission on March 4, 1997 as Exhibit
            10.28 to Amendment No. 3 to the Company's Registration Statement
            on Form S-1 (Registration No. 333-12259) and incorporated herein
            by reference

 10.30      Sublease Agreement dated as of December 27, 1996 by and between
            BLC Property, Inc., as sublandlord,  and Brookdale Living
            Communities of New York, Inc., as subtenant, as filed with the
            Securities and Exchange Commission on March 4, 1997 as Exhibit
            10.29 to Amendment No. 3 to the Company's Registration Statement
            on Form S-1 (Registration No. 333-12259) and incorporated herein
            by reference

 10.31      Sublease Agreement dated as of December 27, 1996 by and between
            BLC Property, Inc., as sublandlord, and Brookdale Living
            Communities of Illinois, Inc., as subtenant, as filed with the
            Securities and Exchange Commission on March 4, 1997 as Exhibit
            10.31 to Amendment No. 3 to the Company's Registration Statement
            on Form S-1 (Registration No. 333-12259) and incorporated herein
            by reference

 10.32      Real Estate Purchase Agreement dated as of February 24, 1997 by
            and between PGI and Firstar DuPage Bank Trust No. 3612 dated
            December 4, 1989, Firstar DuPage Bank Trust No. 3625 dated
            February 22, 1990, West Suburban Bank Trust No. 1975 dated
            December 13, 1978 and the direct and indirect beneficiaries
            thereof, as filed with the Securities and Exchange Commission on
            March 4, 1997 as Exhibit 10.32 to Amendment No. 3 to the Company's
            Registration Statement on Form S-1 (Registration No. 333-12259)
            and incorporated herein by reference

 10.33      Real Estate Purchase Agreement dated as of February 14, 1997 by
            and between PGI and AC Properties, L.L.C., as filed with the
            Securities and Exchange Commission on March 4, 1997 as Exhibit
            10.33 to Amendment No. 3 to the Company's Registration Statement
            on Form S-1 (Registration No. 333-12259) and incorporated herein
            by reference.

                                      22
<PAGE>
 
EXHIBIT
NUMBER                           DESCRIPTION
-------                          -----------

 10.34      Contract for Sale dated as of February 21, 1997 by and between PGI
            and VG Office Partnership '95, Ltd., as filed with the Securities
            and Exchange Commission on March 4, 1997 as Exhibit 10.34 to
            Amendment No. 3 to the Company's Registration Statement on Form
            S-1 (Registration No. 333-12259) and incorporated herein by
            reference

 10.35      First Amendment dated as of February 21, 1997 to Contract for Sale
            dated February 21, 1997 by and between PGI and VG Office
            Partnership '95, Ltd., as filed with the Securities and Exchange
            Commission on March 4, 1997 as Exhibit 10.35 to Amendment No. 3 to
            the Company's Registration Statement on Form S-1 (Registration No.
            333-12259) and incorporated herein by reference

 10.36      Purchase and Sale Agreement dated as of June 11, 1997 by and
            between Gables at Farmington Associates and the Company, as filed
            with the Securities and Exchange Commission on August 14, 1997 as
            Exhibit 10.34 to the Company's Form 10-Q for the period ended June
            30, 1997 (File No. 0-22253) and incorporated herein by reference

 10.37      First Amendment to Purchase and Sale Agreement dated as of July 3,
            1997 by and between Gables at Farmington Associates and the
            Company, as filed with the Securities and Exchange Commission on
            August 14, 1997 as Exhibit 10.35 to the Company's Form 10-Q for
            the period ended June 30, 1997 (File No. 0-22253) and incorporated
            herein by reference

 10.38      Second Amendment to Purchase and Sale Agreement dated as of July
            16, 1997 by and between Gables at Farmington Associates and the
            Company, as filed with the Securities and Exchange Commission on
            August 14, 1997 as Exhibit 10.36 to the Company's Form 10-Q for
            the period ended June 30, 1997 (File No. 0-22253) and incorporated
            herein by reference

 10.39      Third Amendment to Purchase and Sale Agreement dated as of July
            23, 1997 by and between Gables at Farmington Associates and the
            Company, as filed with the Securities and Exchange Commission on
            August 14, 1997 as Exhibit 10.37 to the Company's Form 10-Q for
            the period ended June 30, 1997 (File No.  0-22253) and
            incorporated herein by reference

 10.40      Fourth Amendment to Purchase and Sale Agreement dated as of July
            30, 1997 by and between Gables at Farmington Associates and the
            Company, as filed with the Securities and Exchange Commission on
            August 14, 1997 as Exhibit 10.38 to the Company's Form 10-Q for
            the period ended June 30, 1997 (File No. 0-22253) and incorporated
            herein by reference

 10.41      Fifth Amendment to Purchase and Sale Agreement dated as of August
            5, 1997 by and between Gables at Farmington Associates and the
            Company, as filed with the Securities and Exchange Commission on
            August 14, 1997 as Exhibit 10.39 to the Company's Form 10-Q for
            the period ended June 30, 1997 (File No. 0-22253) and incorporated
            herein by reference

 10.42      Sixth Amendment to Purchase and Sale Agreement dated as of August
            8, 1997 by and between Gables at Farmington Associates and the
            Company, as filed with the Securities and Exchange Commission on
            August 14, 1997 as Exhibit 10.40 to the Company's Form 10-Q for
            the period ended June 30, 1997 (File No. 0-22253) and incorporated
            herein by reference

 10.43      First Amendment to Master Lease Agreement and Incidental Documents
            dated as of May 7, 1997 by and among Health and Retirement
            Properties Trust, BLC Property, Inc., Brookdale Living Communities
            of Washington, Inc., Brookdale Living Communities of Arizona,
            Inc., Brookdale Living Communities of Illinois, Inc., Brookdale
            Living Communities of New York, Inc., the Company, The Prime
            Group, Inc., Prime International, Inc., PGLP, Inc., Prime Group
            Limited Partnership and Prime Group II, as filed with the
            Securities and Exchange Commission on August 14, 1997 as Exhibit
            10.41 to the Company's Form 10-Q for the period ended June 30,
            1997 (File No. 0-22253) and incorporated herein by reference

 10.44      Stock Option and Deposit Agreement dated as of May 7, 1997 by and
            between Darryl W. Copeland, Jr. and PGI, as filed with the
            Securities and Exchange Commission on August 14, 1997 as Exhibit
            10.42 to the Company's Form 10-Q for the period ended June 30,
            1997 (File No. 0-22253) and incorporated herein by reference

                                      23
<PAGE>
 
EXHIBIT
NUMBER                           DESCRIPTION
-------                          -----------

 10.45      Stock Purchase Agreement and Agreement Concerning Option Shares
            dated as of May 7, 1997 by and among PGI, Prime Group VI, L.P. and
            Darryl W. Copeland, Jr., as filed with the Securities and Exchange
            Commission on August 14, 1997 as Exhibit 10.43 to the Company's
            Form 10-Q for the period ended June 30, 1997 (File No. 0-22253)
            and incorporated herein by reference

 10.46      Real Estate Purchase and Sale Agreement dated as of July 29, 1997
            by and between the Company and The Classic of West Palm Beach
            Limited Partnership, as filed with the Securities and Exchange
            Commission on November 14, 1997 as Exhibit 10.1 to the Company's
            Form 10-Q for the period ended September 30, 1997 (File No.
            0-22253) and incorporated herein by reference

 10.47      First Amendment to Real Estate Purchase and Sale Agreement dated
            as of November 18, 1997 by and between The Classic at West Palm
            Beach Limited Partnership and the Company, as filed with the
            Securities and Exchange Commission on December 15, 1997 as Exhibit
            10.54 to Amendment No. 4 to the Company's Registration Statement
            on Form S-1 (Registration No. 333-41191) and incorporated herein
            by reference

 10.48      Lease Agreement dated as of September 25, 1997 by and between the
            Company and 77 West Wacker Limited Partnership, as filed with the
            Securities and Exchange Commission on November 14, 1997 as Exhibit
            10.2 to the Company's Form 10-Q for the period ended September 30,
            1997 (File No. 0-22253) and incorporated herein by reference

 10.49      Agreement for Purchase and Sale dated as of December 4, 1997 by
            and between Lincoln Harbor Village, L.P. and the Company, as filed
            with the Securities and Exchange Commission on December 15, 1997
            as Exhibit 10.48 to Amendment No. 4 to the Company's Registration
            Statement on Form S-1 (Registration No. 333-41191) and
            incorporated herein by reference

 10.50      Assignment and Assumption of Contract for Sale dated as of October
            1, 1997 by and between the Company and Brookdale Living
            Communities of Michigan, Inc., as filed with the Securities and
            Exchange Commission on December 15, 1997 as Exhibit 10.49 to
            Amendment No. 4 to the Company's Registration Statement on Form
            S-1 (Registration No. 333-41191) and incorporated herein by
            reference

 10.51      Assignment and Assumption of Contract for Sale dated as of
            September 3, 1997 by and between the Company and BLC of Texas-II,
            L.P., as filed with the Securities and Exchange Commission on
            December 15, 1997 as Exhibit 10.50 to Amendment No. 4 to the
            Company's Registration Statement on Form S-1 (Registration No.
            333-41191) and incorporated herein by reference

 10.52      Real Estate Purchase Agreement dated as of October 10, 1997 by and
            between Anvil Investments, LLC and the Company, as filed with the
            Securities and Exchange Commission on December 15, 1997 as Exhibit
            10.51 to Amendment No. 4 to the Company's Registration Statement
            on Form S-1 (Registration No. 333-41191) and incorporated herein
            by reference

 10.53      Real Estate Purchase and Sale Agreement dated as of October 1,
            1997 between Brendenwood MRC Limited Partnership and the Company,
            as filed with the Securities and Exchange Commission on December
            15, 1997 as Exhibit 10.52 to Amendment No. 4 to the Company's
            Registration Statement on Form S-1 (Registration No. 333-41191)
            and incorporated herein by reference

 10.54      First Amendment to Real Estate Purchase and Sale Agreement dated
            as of November 22, 1997 by and between Brendenwood MRC Limited
            Partnership and the Company, as filed with the Securities and
            Exchange Commission on December 15, 1997 as Exhibit 10.53 to
            Amendment No. 4 to the Company's Registration Statement on Form
            S-1 (Registration No. 333-41191) and incorporated herein by
            reference

 10.55      Loan Agreement dated as of October 22, 1997 by and between the
            Company and LaSalle National Bank, as filed with the Securities
            and Exchange Commission on December 15, 1997 as Exhibit 10.55 to
            Amendment No. 4 to the Company's Registration Statement on Form
            S-1 (Registration No. 333-41191) and incorporated herein by
            reference

 10.56      First Amendment to Loan Agreement and Documents dated as of
            December 1, 1997 by and between the Company and LaSalle National
            Bank, as filed with the Securities and Exchange Commission on
            December 15, 1997 as Exhibit 10.56 to Amendment No. 4 to the
            Company's Registration Statement on Form S-1 (Registration No.
            333-41191) and incorporated herein by reference

                                      24
<PAGE>
 
EXHIBIT
NUMBER                           DESCRIPTION
-------                          -----------

 10.57      Second Amendment to Loan Agreement and Documents dated as of
            December 11, 1997 by and between the Company and LaSalle National
            Bank, as filed with the Securities and Exchange Commission on
            December 15, 1997 as Exhibit 10.58 to Amendment No. 4 to the
            Company's Registration Statement on Form S-1 (Registration No.
            333-41191) and incorporated herein by reference

 10.58      Lease dated as of November 21, 1997 by and between Brookdale
            Living Communities of Connecticut, Inc., as lessee, and The Gables
            Business Trust, as lessor

 10.59      Lease dated as of December 17, 1997 by and between Brookdale
            Living Communities of Florida, Inc., as lessee, and The Classic
            Business Trust, as lessor, as filed with the Securities and
            Exchange Commission on February 17, 1998 as Exhibit 10.1 to the
            Company's Form 8-K dated December 17, 1997 (File No. 0-22253) and
            incorporated herein by reference

 10.60      Loan Agreement dated as of December 18, 1997 by and among The
            Classic Business Trust, Brookdale Living Communities of Florida,
            Inc. and Nomura Asset Capital Corporation, as filed with the
            Securities and Exchange Commission on February 17, 1998 as Exhibit
            10.2 to the Company's Form 8-K dated December 17, 1997 (File No.
            0-22253) and incorporated herein by reference

 10.61      Certificate Pledge Agreement dated as of December 17, 1997 by
            Brookdale Living Communities of Florida, Inc. in favor of The
            Classic Business Trust, as filed with the Securities and Exchange
            Commission on February 17, 1998 as Exhibit 10.3 to the Company's
            Form 8-K dated December 17, 1997 (File No. 0-22253) and
            incorporated herein by reference

 10.62      Securities Pledge Agreement dated as of December 17, 1997 by
            Brookdale Living Communities of Florida, Inc. in favor of The
            Classic Business Trust and Wilmington Trust Company, as filed with
            the Securities and Exchange Commission on February 17, 1998 as
            Exhibit 10.4 to the Company's Form 8-K dated December 17, 1997
            (File No. 0-22253) and incorporated herein by reference

 10.63      Indemnity Agreement dated as of December 17, 1997 from Brookdale
            Living Communities, Inc. in favor of Wilmington Trust Company and
            FBTC Leasing Corp., as filed with the Securities and Exchange
            Commission on February 17, 1998 as Exhibit 10.5 to the Company's
            Form 8-K dated December 17, 1997 (File No. 0-22253) and
            incorporated herein by reference

 10.64      Guaranty and Suretyship Agreement dated as of December 18, 1997
            from Brookdale Living Communities of Florida, Inc. in favor of
            Nomura Asset Capital Corporation, as filed with the Securities and
            Exchange Commission on February 17, 1998 as Exhibit 10.6 to the
            Company's Form 8-K dated December 17, 1997 (File No. 0-22253) and
            incorporated herein by reference

 10.65      Environmental Indemnity Agreement dated as of December 18, 1997
            from Brookdale Living Communities, Inc. in favor of Nomura Asset
            Capital Corporation, as filed with the Securities and Exchange
            Commission on February 17, 1998 as Exhibit 10.7 to the Company's
            Form 8-K dated December 17, 1997 (File No. 0-22253) and
            incorporated herein by reference

 10.66      Lease dated as of December 17, 1997 by and between Brookdale
            Living Communities of New  Jersey, Inc., as lessee, and The
            Brendenwood Business Trust, as lessor, as filed with the
            Securities and Exchange Commission on February 17, 1998 as Exhibit
            10.8 to the Company's Form 8-K dated December 17, 1997 (File No.
            0-22253) and incorporated herein by reference

 10.67      Loan Agreement dated as of December 22, 1997 by and among The
            Brendenwood Business Trust, Brookdale Living Communities of New
            Jersey, Inc. and Nomura Asset Capital Corporation, as filed with
            the Securities and Exchange Commission on February 17, 1998 as
            Exhibit 10.9 to the Company's Form 8-K dated December 17, 1997
            (File No. 0- 22253) and incorporated herein by reference

 10.68      Certificate Pledge Agreement dated as of December 17, 1997 by
            Brookdale Living Communities of New  Jersey, Inc. in favor of The
            Brendenwood Business Trust, as filed with the Securities and
            Exchange Commission on February 17, 1998 as Exhibit 10.10 to the
            Company's Form 8-K dated December 17, 1997 (File No. 0-22253) and
            incorporated herein by reference

                                      25
<PAGE>
 
EXHIBIT
NUMBER                           DESCRIPTION
-------                          -----------

 10.69      Securities Pledge Agreement dated as of December 17, 1997 by
            Brookdale Living Communities of New  Jersey, Inc. in favor of The
            Brendenwood Business Trust and Wilmington Trust Company, as filed
            with the Securities and Exchange Commission on February 17, 1998
            as Exhibit 10.11 to the Company's Form 8-K dated December 17, 1997
            (File No. 0-22253) and incorporated herein by reference

 10.70      Indemnity Agreement dated as of December 17, 1997 from Brookdale
            Living Communities, Inc. in favor of Wilmington Trust Company and
            FBTC Leasing Corp., as filed with the Securities and Exchange
            Commission on February 17, 1998 as Exhibit 10.12 to the Company's
            Form 8-K dated December 17, 1997 (File No. 0-22253) and
            incorporated herein by reference

 10.71      Guaranty and Suretyship Agreement dated as of December 22, 1997
            from Brookdale Living Communities of New Jersey, Inc. in favor of
            Nomura Asset Capital Corporation, as filed with the Securities and
            Exchange Commission on February 17, 1998 as Exhibit 10.13 to the
            Company's Form 8-K dated December 17, 1997 (File No. 0-22253) and
            incorporated herein by reference

 10.72      Environmental Indemnity Agreement dated as of December 22, 1997
            from Brookdale Living Communities, Inc. in favor of Nomura Asset
            Capital Corporation, as filed with the Securities and Exchange
            Commission on February 17, 1998 as Exhibit 10.14 to the Company's
            Form 8-K dated December 17, 1997 (File No. 0-22253) and
            incorporated herein by reference

 10.73*     Loan Agreement dated as of November 21, 1997 by and among The
            Gables of Business Trust, Brookdale Living Communities of
            Connecticut, Inc. and Nomura Asset Capital Corporation

 10.74*     Certificate Pledge Agreement dated as of November 21, 1997 by
            Brookdale Living Communities of Connecticut, Inc. in favor of The
            Gables Business Trust

 10.75*     Securities Pledge Agreement dated as of November 21, 1997 by
            Brookdale Living Communities of Connecticut, Inc. in favor of The
            Gables Business Trust and Wilmington Trust Company

 10.76*     Indemnity Agreement dated as of November 21, 1997 from the Company
            in favor of Wilmington Trust Company and FBTC Leasing Corp.

 10.77*     Guaranty and Suretyship Agreement dated as of November 21, 1997
            from Brookdale Living Communities of Connecticut, Inc. in favor of
            Nomura Asset Capital Corporation

 10.78*     Environmental Indemnity Agreement dated as of November 21, 1997
            from the Company in favor of Nomura Asset Capital Corporation

 10.79*     Amended and Restated Employment Agreement dated as of November 3,
            1997 by and between the Company and Matthew F. Whitlock

 21.1       Subsidiaries of the Company, as filed with the Securities and
            Exchange Commission on December 15, 1997 as Exhibit 21.1 to
            Amendment No. 4 to the Company's Registration Statement on Form
            S-1 (Registration No. 333-41191) and incorporated herein by
            reference

 23.1       Consent of Ernst & Young LLP

 27.1*      Financial Data Schedule
-----------------------------------

* Previously filed.


(b)  REPORTS ON FORM 8-K

     The Registrant filed no reports on Form 8-K during the quarter ended
     December 31, 1997.

(c)  EXHIBITS

     The list of exhibits filed with this report is set forth in response to
     Item 14(a)(3). The required exhibits have been filed as indicated in the
     Exhibit Index.

(d)  FINANCIAL STATEMENTS AND SCHEDULES

     Not applicable.

                                      26
<PAGE>
 

                                  SIGNATURES

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

                                      BROOKDALE LIVING COMMUNITIES, INC.
                                      ----------------------------------------
                                      Registrant


Dated:  March 31, 1999                /s/ Mark J. Schulte
                                      ----------------------------------------
                                      Mark J. Schulte
                                      President and Chief Executive Officer

Dated:  March 31, 1999                /s/ Darryl W. Copeland, Jr.
                                      ----------------------------------------
                                      Darryl W. Copeland, Jr.
                                      Executive Vice President and  
                                      Chief Financial Officer

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

/s/ Michael W. Reschke                                March 31, 1999
----------------------------------
Michael W. Reschke
Chairman of the Board, Director


/s/ Mark J. Schulte                                   March 31, 1999
----------------------------------
Mark J. Schulte
President and Chief Executive Officer, Director
(Principal Executive Officer)


/s/ Darryl W. Copeland, Jr.                           March 31, 1999
----------------------------------
Darryl W. Copeland, Jr.
Executive Vice President and
Chief Financial Officer, Director
(Principal Financial Officer)


/s/ R. Stanley Young                                  March 31, 1999
----------------------------------
R. Stanley Young
Senior Vice President-Finance
and Treasurer
(Principal Accounting Officer)


/s/ Wayne D. Boberg                                   March 31, 1999
----------------------------------
Wayne D. Boberg, Director


----------------------------------
Bruce L. Gewertz, Director


----------------------------------
Darryl W. Hartley-Leonard, Director


----------------------------------
Daniel J. Hennessy, Director

                                      27
<PAGE>
 
INDEX TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS OF BROOKDALE LIVING
      COMMUNITIES, INC. AND SUBSIDIARIES AND PREDECESSOR PROPERTIES
           (PREDECESSOR TO BROOKDALE LIVING COMMUNITIES, INC.)

<TABLE>
<S>                                                              <C>
Report of Independent Auditors..............................     F-1

Consolidated Balance Sheet of Brookdale Living
Communities, Inc. as of December 31, 1997 and Combined
Balance Sheet of Predecessor Properties (predecessor to
Brookdale Living Communities, Inc.) as of December 31,
1996........................................................     F-2

Consolidated Statement of Operations of Brookdale Living
Communities, Inc. for the period from May 7, 1997 through
December 31, 1997 and Combined Statements of Operations of
Predecessor Properties (predecessor to Brookdale Living
Communities, Inc.) for the period from January 1, 1997
through May 6, 1997 and the years ended December 31, 1996
and 1995....................................................     F-3
 
Consolidated Statement of Stockholders' Equity of
Brookdale Living Communities, Inc. for the period from May
7, 1997 through December 31, 1997...........................     F-4
 
Combined Statements of Changes in Partners' Capital
(Deficit) of Predecessor Properties (predecessor to
Brookdale Living Communities, Inc.) for the period January
1, 1997 through May 6, 1997 and the years ended December
31, 1996 and 1995...........................................     F-5
 
Consolidated Statement of Cash Flows of Brookdale Living
Communities, Inc. for the period from May 7, 1997 through
December 31, 1997 and Combined Statements of Cash Flows of
Predecessor Properties (predecessor to Brookdale Living
Communities, Inc.) for the period from January 1, 1997
through May 6, 1997 and the years ended December 31, 1996
and 1995....................................................     F-6
 
Notes to Consolidated and Combined Financial Statements of
Brookdale Living Communities, Inc. and the Predecessor
Properties (predecessor to Brookdale Living Communities,
Inc.).......................................................     F-8
</TABLE>
<PAGE>
 
                        REPORT OF INDEPENDENT AUDITORS


To the Board of Directors of
Brookdale Living Communities, Inc.


   We have audited the accompanying consolidated balance sheet of Brookdale
Living Communities, Inc., a Delaware corporation, and subsidiaries (the
"Company") as of December 31, 1997 and the related consolidated statements of
operations, stockholders' equity and cash flows for the period from May 7,
1997 (date of formation) through December 31, 1997.  We have also audited the
combined balance sheet of the Predecessor Properties (predecessor to Brookdale
Living Communities, Inc.) (the "Predecessor") as of December 31, 1996 and the
related combined statements of operations, changes in partners' capital
(deficit) and cash flows for the period from January 1, 1997 through May 6,
1997 and for each of the two years in the period ended December 31, 1996.
These financial statements are the responsibility of the Company's and the
Predecessor's management.  Our responsibility is to express an opinion on
these financial statements based on our audits.

   We conducted our audits in accordance with generally accepted auditing
standards.  Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement.  An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation.  We believe that our audits provide a
reasonable basis for our opinion.

   In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Brookdale
Living Communities, Inc. and subsidiaries as of December 31, 1997 and the
consolidated results of their operations and their cash flows for the period
from May 7, 1997 through December 31, 1997 and the combined financial position
of the Predecessor Properties (predecessor to Brookdale Living Communities,
Inc.) as of December 31, 1996 and the combined results of their operations and
their cash flows for the period from January 1, 1997 through May 6, 1997 and
for each of the two years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.



                                       /s/ ERNST & YOUNG LLP


Chicago, Illinois
March 26, 1998







                                      F-1
<PAGE>
 
   BROOKDALE LIVING COMMUNITIES, INC. AND SUBSIDIARIES (THE "COMPANY") AND
          PREDECESSOR PROPERTIES (THE "PREDECESSOR" TO THE COMPANY)

            CONSOLIDATED BALANCE SHEET OF THE COMPANY AND COMBINED
                       BALANCE SHEET OF THE PREDECESSOR
                   (In Thousands, Except Par Value Amount)

<TABLE>
<CAPTION>
                                                                  Brookdale Living       Predecessor
                                                                  Communities, Inc.       Properties
                                                                  December 31, 1997    December 31, 1996
ASSETS                                                            -----------------    -----------------
<S>                                                               <C>                  <C>
CURRENT ASSETS:
Cash and cash equivalents                                             $ 13,292             $  4,230
Accounts receivable                                                      1,053                  165
Prepaid rent                                                                 -                1,251
Deferred tax asset                                                         385                    -
Other                                                                    2,103                   84
                                                                      --------             --------
  Total current assets                                                  16,833                5,730
Property, plant and equipment                                          113,294               58,387
Accumulated depreciation                                                (2,164)              (9,159)
                                                                      --------             --------
Property, plant and equipment, net                                     111,130               49,228
Property under development                                              11,427                   75
Cash-restricted                                                          5,920                1,089
Letter of credit deposit                                                12,138                    -
Lease security deposits                                                 18,542                    -
Deferred costs, net                                                      2,980                1,714
Deferred tax asset                                                       4,199                    -
                                                                      --------             --------
  Total assets                                                        $183,169             $ 57,836
                                                                      ========             ========

LIABILITIES AND STOCKHOLDERS' EQUITY/PREDECESSOR DEFICIT


CURRENT LIABILITIES:
Current portion of long-term debt                                     $    286             $      -
Current portion of deferred gain on sale of property                       806                  806
Prepaid rent                                                               108                  616
Accrued interest payable                                                   566                  182
Accrued real estate taxes                                                1,284                1,031
Accounts payable and accrued expenses                                    2,972                  813
Income taxes payable                                                       236                    -
Tenant entrance and security deposits                                    4,377                2,614
Due to affiliates, net                                                       -                  710
                                                                      --------             --------
  Total current liabilities                                             10,635                6,772
Deferred lease liability                                                 1,811                   13
Long-term debt, less current portion                                    95,881               65,000
Deferred gain on sale of property,
 less current portion                                                   16,922               17,728
                                                                      --------             --------
  Total liabilities                                                    125,249               89,513
Minority interest                                                            -               (6,250)
Predecessor deficit                                                          -              (25,427)
Common stock, $.01 par value, 75,000
 shares authorized; 9,175 issued
 and outstanding at December 31, 1997                                       92                    -
Additional paid-in-capital                                              57,383                    -
Accumulated earnings                                                       445                    -
                                                                      --------             --------
  Total stockholders'equity                                             57,920                    -
                                                                      --------             --------
  Total liabilities and stockholders'equity/predecessor deficit       $183,169             $ 57,836
                                                                      ========             ========
</TABLE>


See accompanying notes to consolidated and combined financial statements.

                                      F-2
<PAGE>
 
   BROOKDALE LIVING COMMUNITIES, INC., AND SUBSIDIARIES (THE "COMPANY") AND
          PREDECESSOR PROPERTIES (THE "PREDECESSOR" TO THE COMPANY)

       CONSOLIDATED STATEMENT OF OPERATIONS OF THE COMPANY AND COMBINED
                 STATEMENTS OF OPERATIONS OF THE PREDECESSOR
                   (In Thousands, Except Per Share Amounts)

<TABLE>
<CAPTION>
                                       Brookdale Living      Predecessor
                                       Communities, Inc.     Properties
                                         period from         period from      Predecessor Properties
                                          May 7,1997       January 1, 1997       Ended December 31,
                                            through          through Year     ----------------------
                                       December 31, 1997      May 6,1997         1996       1995
                                       -----------------   ---------------    ----------------------
<S>                                    <C>                  <C>               <C>        <C>
REVENUE
Resident fees                                $30,105            $10,473         $23,221    $21,948
Management fees                                  132                  -               -          -
                                             -------            -------         -------    -------
        Total revenue                         30,237             10,473          23,221     21,848

EXPENSES
Facility operating                            15,892              5,872          11,875     12,182
General and administrative                     2,187                  -               -          -
Lease expense                                  6,942              3,042               -          -
Depreciation and amortization                  2,967                857           3,527      4,598
Property management fees                           -                230             930      1,071
                                             -------            -------         -------    -------
        Total operating expenses              27,988             10,001          16,332     17,851
                                             -------            -------         -------    -------
        Income from operations                 2,249                472           6,889      3,997
Interest income                                 (694)               (68)           (216)      (205)
Interest expense                               3,020                830           4,740      5,626
                                             -------            -------         -------    -------
        (Loss) income before minority
          interest, deferred tax benefit/
          tax (provision) and extraordinary
          item                                   (77)              (290)          2,365     (1,424)
Minority interest                                  -               (138)           (756)       802
Deferred tax benefit/tax (provision)             558               (236)              -          -
                                             -------            -------         -------    -------
        Income (loss) from continuing
          operations before extraordinary
          item                                   481               (664)          1,609       (622)
Extraordinary item (net of deferred tax
  benefit of $24 for 1997)                       (36)                 -               -      3,274
                                             -------            -------         -------    -------
        Net income (loss)                    $   445            $  (664)        $ 1,609    $ 2,652
                                             =======            =======         =======    =======

Basic and diluted earnings per common share:
        Income from continuing operations
          before extraordinary item          $  0.07
        Extraordinary item                     (0.01)
                                             -------
        Net income                           $  0.06
                                             =======

        Weighted average shares used for
        computing basic earnings per share     7,208
                                             =======

        Weighted average shares used for
        computing diluted earnings per
        share                                  7,351
                                             =======
</TABLE>

See accompanying notes to consolidated and combined financial statements.

                                      F-3
<PAGE>
 
   BROOKDALE LIVING COMMUNITIES, INC., AND SUBSIDIARIES (THE "COMPANY") AND
          PREDECESSOR PROPERTIES (THE "PREDECESSOR" TO THE COMPANY)

        CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY OF THE COMPANY

             FOR THE PERIOD MAY 7, 1997 THROUGH DECEMBER 31, 1997
                                (In Thousands)

<TABLE>
<CAPTION>
                                                                                      
                                                                                        Brookdale Living 
                                                    Common Stock                        Communities Inc. 
                                                --------------------      Additional      Accumulated        
                                                Shares        Amount   Paid-in Capital      Earnings
                                                --------------------   ---------------  ----------------
<S>                                             <C>         <C>         <C>             <C>
Balances at May 7, 1997                               -       $    -      $      -           $   -
Reclassification of net deficit of predecessor        -            -       (28,685)              -
Deferred tax asset                                    -            -         4,002               -
Common stock offerings                            9,175           92        82,066               -
Net income                                            -            -            -               445
                                                  -------------------------------------------------
Balances at December 31, 1997                     9,175       $   92      $ 57,383           $  445
                                                  =================================================
</TABLE>







See accompanying notes to consolidated and combined financial statements.






                                      F-4
<PAGE>
 
   BROOKDALE LIVING COMMUNITIES, INC. AND SUBSIDIARIES (THE "COMPANY") AND
          PREDECESSOR PROPERTIES (THE "PREDECESSOR" TO THE COMPANY)

COMBINED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT) OF THE PREDECESSOR

             PERIOD FROM JANUARY 1, 1997 THROUGH MAY 6, 1997 AND
                FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
                                (In Thousands)

<TABLE>

<S>                                                   <C>
Balances at January 1, 1995                           $   1,852
Contributions                                                55
Distributions                                              (962)
Net income                                                2,652
                                                      ----------
Balances at December 31, 1995                             3,597
Contributions                                                51
Distributions                                           (26,152)
Advances made to general partners                        (4,532)
Net income                                                1,609
                                                      ----------
Balances at December 31, 1996                           (25,427)
Contributions                                               813
Distributions                                            (3,407)
Net loss                                                   (664)
                                                      ----------
Balances at May 6, 1997                               $ (28,685)
                                                      ==========
</TABLE>







See accompanying notes to consolidated and combined financial statements.




                                      F-5
<PAGE>
 
   BROOKDALE LIVING COMMUNITIES, INC.  AND SUBSIDIARIES (THE "COMPANY") AND
          PREDECESSOR PROPERTIES (THE "PREDECESSOR" TO THE COMPANY)

    CONSOLIDATED STATEMENT OF CASH FLOWS OF THE COMPANY OF THE COMPANY AND
             COMBINED STATEMENTS OF CASH FLOWS OF THE PREDECESSOR
                                (In Thousands)

<TABLE>
<CAPTION>
                                                                     Brookdale Living      Predecessor
                                                                     Communities, Inc.     Properties
                                                                        period from        period from     Predecessor Properties
                                                                        May 7, 1997      January 1, 1997   Year Ended December 31,
                                                                          through            through       -----------------------
                                                                     December 31, 1997     May 6, 1997       1996           1995
                                                                     -----------------   ---------------   -----------------------
<S>                                                                  <C>                  <C>               <C>          <C>
CASH FLOW FROM OPERATING ACTIVITIES                                      
Net income (loss)                                                        $    445           $   (664)      $  1,609      $  2,652
    Adjustments to reconcile net income (loss) to net cash
    provided by operating activities
       Depreciation and amortization                                        2,967                857          3,527         4,598
       Miniority interest                                                       -                138            756          (802)
       Extraordinary item                                                      36                  -              -        (3,274)
       Increase in deferred lease liability                                 1,379                419             13             -
       Deferred gain on sale of property                                     (525)              (281)             -             -
       Increase in accounts receivable                                       (827)               (61)            (4)          (40)
       Decrease (increase) in prepaid rent asset                              396                855         (1,251)            -
       Change in due from/to affiliates, net                                   53               (763)           531            (1)
       Increase in deferred tax assets                                       (582)                 -              -             -
       (Increase) decrease in other assets                                 (1,367)              (202)            75            43
       (Decrease) increase in prepaid rent liability                       (2,101)               786            616             -
       Increase (decrease) in accrued interest payable                        273                111            (22)         (680)
       Increase (decrease) in accrued real estate taxes                       199                 54             38          (135)
       Increase (decrease) in accounts payable and accrued expenses         1,786                377            223          (945)
       Increase in entrance and tenant security deposits                      374                 35            354           112
       Increase in income taxes payable                                         -                236              -             -
                                                                         ---------          ---------      ---------     ---------
           Net cash provided by operating activities                        2,506              1,897          6,465         1,528

CASH FLOWS FROM INVESTING ACTIVITIES
    Cash paid for lease security deposits and acquisitions                (47,643)                 -              -             -
    Cash paid for property under development                               (8,350)                (2)            (6)          (33)
    Proceeds from sale of property                                              -                  -         24,152             -
    Additions to property, plant and equipment                             (1,559)              (149)          (358)          (99)
    Increase in lease security deposits                                       (62)                 -              -             -
    (Increase) decrease in cash-restricted                                 (2,614)            (1,180)         1,529          (571)
                                                                         ---------          ---------      ---------     ---------
           Net cash (used in) provided by investing activities            (60,228)            (1,331)        25,317          (703)

CASH FLOWS FROM FINANCING ACTIVITIES
    Repayment of long-term debt                                              (178)                 -           (306)      (32,968)
    Proceeds from long-term debt                                                -                  -              -        34,627
    Increase in letter of credit deposit                                  (12,138)                 -              -             -
    Increase in deferred costs                                               (743)              (287)          (814)       (1,503)
    Net proceeds from equity offerings                                     82,158                  -              -             -
    Net advances/distributions to partners                                      -             (2,594)       (30,633)         (907)
                                                                         ---------          ---------      ---------     ---------
           Net cash provided by (used in) financing activities             69,099             (2,881)       (31,753)         (751)
                                                                         ---------          ---------      ---------     ---------
           Net increase (decrease) in cash and cash equivalents            11,377             (2,315)            29            74
           Cash and cash equivalents at beginning of period                 1,915              4,230          4,201         4,127
                                                                         ---------          ---------      ---------     ---------
           Cash and cash equivalent at end of period                     $ 13,292           $  1,915       $  4,230      $  4,201
                                                                         =========          =========      =========     =========
</TABLE>

See accompanying notes to consolidated and combined financial statements.


                                      F-6
<PAGE>
 
   BROOKDALE LIVING COMMUNITIES, INC. AND SUBSIDIARIES (THE "COMPANY") AND
          PREDECESSOR PROPERTIES (THE "PREDECESSOR" TO THE COMPANY)

       CONSOLIDATED STATEMENT OF CASH FLOWS OF THE COMPANY AND COMBINED
            STATEMENT OF CASH FLOWS OF THE PREDECESSOR (CONTINUED)
                                (In Thousands)

<TABLE>
<CAPTION>
                                         Brookdale Living        Predecessor
                                         Communities, Inc.       Properties
                                            period from          period from
                                            May 7, 1997        January 1, 1997     Predecessor Properties
                                              through              through         Year Ended December 31,
                                         December 31, 1997       May 6, 1997         1996           1995
                                         -----------------     ---------------     -----------------------
<S>                                      <C>                   <C>                  <C>            <C>
Supplemental Disclosure of Cash
 Flow Information:
Interest paid                                 $ 3,338                 $723          $4,762         $6,306
                                              =======                 ====          ======         ======
Supplemental Schedule of Noncash
 Investing and Financing Activities:
In connection with net lease transactions
 and acquisitions, assets acquired and
 liabilities assumed were as follows:
        Fair value of assets acquired and
         minority interest assumed            $87,260                 $  -          $    -         $    -
        Less: Consideration given
                Cash paid                      47,643                    -               -              -
                                              -------                 ----          ------         ------
        Liabilities and minority
         interest assumed                     $39,617                 $  -          $    -         $    -
                                              =======                 ====          ======         ======
</TABLE>
The following assets and liabilities were contributed by the Predecessor to
the Company on May 7, 1997:

<TABLE>
<CAPTION>
<S>                                           <C>
Cash                                          $  1,915
Cash-restricted                                  2,269
Accounts receivable                                226
Prepaid rent                                       396
Due from affiliates, net                            53
Property, plant and equipment, net              48,808
Property under development                          77
Deferred costs, net                              1,710
Other assets                                       290
                                              --------
  Total assets                                  55,744
Deferred gain on sale of property, current         806
Prepaid rent                                     1,402
Accrued interest payable                           293
Accrued real estate taxes                        1,085
Accounts payable and accrued expenses            1,190
Income taxes payable                               236
Tenant entrance and security deposits            2,649
Deferred lease liability                           432
Bonds payable                                   65,000
Deferred gain on sale of property, noncurrent   17,447
                                              --------
  Total liabilities                             90,540
Minority interests                              (6,111)
                                              --------
  Predecessor owners' deficit contributed     $(28,685)
                                              ========
</TABLE>

See accompanying notes to consolidated and combined financial statements.







                                      F-7
<PAGE>
 
     BROOKDALE LIVING COMMUNITIES, INC. AND SUBSIDIARIES (THE "COMPANY")
        AND PREDECESSOR PROPERTIES (THE "PREDECESSOR" TO THE COMPANY)

           NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
           (In Thousands, Except Per Share Amounts and Square Feet)

1.  ORGANIZATION

   Brookdale Living Communities, Inc. was incorporated in Delaware on September
4, 1996. Brookdale Living Communities, Inc. and its subsidiaries (collectively,
"the Company") were formed in order to create a company focused on senior
independent and assisted living, which would succeed to such property ownership
interests and operations of the senior independent and assisted living division
of The Prime Group, Inc. and certain of its affiliates (collectively, "PGI"). In
connection with an initial public offering (the "IPO"), which closed on May 7,
1997, the Company sold 4,500 shares of its common stock at $11.50 per share and
received net proceeds of $44,097. PGI contributed its senior independent and
assisted living property ownership interests and operations of the Predecessor
Properties as described below, in exchange for 1,703 shares of common stock of
the Company. Mark J. Schulte (President and Chief Executive Officer of the
Company) contributed his interests in PGI's senior independent and assisted
living division to the Company in exchange for 297 shares of common stock of the
Company. PGI also purchased 2,500 of the 4,500 shares of common stock sold in
the IPO. In connection with the IPO, the Company granted the underwriters an
option to purchase up to 675 additional shares of common stock for the purpose
of covering over-allotments. On June 3, 1997, the underwriters exercised their
over-allotment option, and the Company sold an additional 675 shares at $11.50
per share. The Company received net proceeds of approximately $7,210 from the
sale of these additional shares. On December 24, 1997, the Company completed a
follow-on public offering of 2,000 shares of its common stock at $16.6875 per
share. The Company received net proceeds of $30,851 from the sale of these
shares.

   In connection with the IPO, the Company acquired a third party's interest
in two of the Predecessor Properties, acquired two facilities from an
unaffiliated third party and entered into an agreement to lease another
facility from an unaffiliated third party.

   The consolidated financial statements of the Company include the properties
owned or leased by the Company.  The combined financial statements of the
Predecessor Properties include the properties owned or leased by the senior
independent and assisted living division of PGI, which consisted of five
properties as indicated in the table below (PGI owned or leased The Heritage,
The Devonshire and The Hallmark facilities during the period from January 1,
1995 through May 6, 1997 and leased The Springs of East Mesa and The Gables at
Brighton facilities for the period from December 27, 1996 through May 6,
1997).  The following table sets forth the properties owned, leased, managed
or under development by the Company (collectively, the "Properties").

<TABLE>
<CAPTION>
Entity                                                 Property Name                              Date Owned or Leased
------                                                 -------------                              --------------------
<S>                                                    <C>                                        <C>
Owned Facilities:
----------------
River Oaks Partners                                    The Heritage (1)                           May 7, 1997
The Ponds of Pembroke Limited Partnership              The Devonshire (1)                         May 7, 1997
Brookdale Living Communities of Illinois-II, Inc.      Hawthorn Lakes                             May 7, 1997
Brookdale Living Communities of Minnesota, Inc.        Edina Park Plaza                           May 7, 1997

Leased Facilities:
-----------------
Brookdale Living Communities of Illinois, Inc.         The Hallmark (1)                           May 7, 1997
Brookdale Living Communities of Arizona, Inc.          The Springs of East Mesa (1)               May 7, 1997
Brookdale Living Communities of New York, Inc.         The Gables at Brighton (1)                 May 7, 1997
Brookdale Living Communities of Washington, Inc.       The Park Place                             May 7, 1997
Brookdale Living Communities of Connecticut, Inc.      The Gables at Farmington                   November 24, 1997
Brookdale Living Communities of Florida, Inc.          The Classic at West Palm Beach             December 18, 1997
Brookdale Living Communities of New Jersey, Inc.       The Brendenwood Retirement Community       December 22, 1997

Managed Facilities:
------------------
Brookdale Living Communities of Texas, Inc.            The Island on Lake Travis (2)
Brookdale Living Communities of Minnesota-II, Inc.     The Kenwood (3)

Development Projects Under Construction:
---------------------------------------
BLC of Texas II, L.P.                                  Austin, Texas
Brookdale Living Communities of Michigan, Inc.         Southfield, Michigan

Projects In Development:
-----------------------
Glen Ellyn, Illinois
Raleigh, North Carolina
New York (Battery Park City), New York
</TABLE>
(1)  Collectively referred to as "the Predecessor Properties"
(2)  Management services commenced May 7, 1997
(3)  Management services commenced July 1, 1997

                                      F-8
<PAGE>
 
2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

   The consolidated and combined financial statements include the accounts of
the Company and the Predecessor Properties.

   The consolidated financial statements include the financial statements of
Brookdale Living Communities, Inc. and its wholly-owned subsidiaries. All
significant intercompany balances and transactions have been eliminated in
consolidation.

USE OF ESTIMATES

   The preparation of the consolidated and combined financial statements in
accordance with generally accepted accounting principles requires management to
make estimates and assumptions that affect amounts reported in the consolidated
and combined financial statements and accompanying notes. Actual results could
differ from those estimates.

RESIDENT FEE REVENUE

   Resident fee revenue is recorded when services are rendered and consists of
fees for basic housing, support services and fees associated with additional
services such as personalized health and assisted living care.

PROPERTY, PLANT AND EQUIPMENT

   Property, plant and equipment are carried at depreciated cost.
Expenditures for ordinary maintenance and repairs are expensed to operations as
incurred. Renovations and improvements which improve and/or extend the useful
life of the asset are capitalized and depreciated over their estimated useful
life.

   Depreciation is calculated on a straight-line basis over the estimated
useful lives of assets, which are as follows:

<TABLE>
         <S>                                             <C>
         Buildings and improvements                      40-45 years
         Leasehold improvements                           5-23 years
         Furniture and equipment                          3-12 years
</TABLE>

PROPERTY UNDER DEVELOPMENT

   Development costs, including interest, fees and costs incurred in developing
new properties, are capitalized to property under development as incurred. Upon
completion of construction, development costs are amortized over the useful
lives of the respective properties on a straight-line basis.

DEFERRED COSTS

   Bond credit enhancement costs are amortized on a straight-line basis over the
term of the letters of credit. Deferred financing costs are amortized on a
straight-line basis over the term of the long-term debt. Deferred lease costs
are amortized on a straight-line basis over the term of the lease.

INCOME TAXES

   Certain PGI entities were partnerships and, as such, were not taxable
entities. The income or loss from the partnerships was includable on the
respective federal income tax returns of the partners.

EARNINGS PER SHARE

   In 1997, Financial Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share" which specifies the
method of computation, presentation, and disclosure for earnings per share
("EPS"). SFAS No. 128 requires the presentation of basic EPS and diluted EPS.
Basic EPS is calculated by dividing net income available to common shareholders
by the weighted average number of shares outstanding during the period. Diluted
EPS includes the potentially dilutive effect, if any, which would occur if
outstanding common stock options were exercised.

                                      F-9
<PAGE>
 
STOCK BASED COMPENSATION

   The Company accounts for stock option grants in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25"). Under APB 25, no compensation expense is recognized for the stock
option grants because the exercise price of the options equals the market price
of the underlying stock at the date of grant.

RECLASSIFICATIONS

   Certain 1996 and 1995 amounts have been reclassified to conform with the
current financial statement presentation.

3.  CASH-RESTRICTED

    Cash-restricted consists of:

<TABLE>
<CAPTION>
                                                          December 31,
                                                          ------------
                                                        1997         1996
                                                        ----         ----
         <S>                                          <C>          <C>
         Life Care escrow deposits                    $  2,899     $  1,089
         Tenant security deposits                        2,121            -
         Real estate tax and insurance reserve             900            -
                                                      --------     --------

         Total cash-restricted                        $  5,920     $  1,089
                                                      ========     ========
</TABLE>

   The Heritage and The Hallmark are required to make Life Care escrow
deposits under the Illinois Life Care Facility Act, Section 7(b) which have
been and will be funded from time to time in accordance with a schedule
provided by the Illinois Department of Public Health. 

   Pursuant to the Internal Revenue Code, Section 148(f), The Heritage was
required to rebate to the United States government any interest earnings in
excess of the interest cost of the proceeds generated from the sale of bonds
which were not yet used for project costs. During 1995, the partnership paid
$806 from unused restricted bond proceeds to the United States government as a
final settlement of its arbitrage rebate payable.  No amounts were due or paid
in 1997 or 1996.

4.  PROPERTY, PLANT AND EQUIPMENT

    Property, plant and equipment consists of:

<TABLE>
<CAPTION>
                                                         December 31,
                                                         ------------
                                                      1997          1996
                                                      ----          ----
         <S>                                       <C>           <C>
         Land                                      $   9,988     $   3,685
         Buildings and improvements                   98,849        52,418
         Leasehold improvements                          349            --
         Furniture and equipment                       4,108         2,284
                                                   ---------     ---------
         Property, plant and equipment               113,294        58,387
         Less:  Accumulated depreciation              (2,164)       (9,159)
                                                   ---------     ---------

         Net property, plant and equipment         $ 111,130     $  49,228
                                                   =========     =========
</TABLE>

   Effective May 7, 1997, the Company changed the estimated useful lives used
to compute depreciation for The Devonshire and The Heritage buildings and
improvements from 40 to 45 years.  This change was made to better reflect the
estimated periods during which such assets will remain in service.  The change
had the effect of reducing depreciation expense by approximately $94 and
increasing net income subsequent to May 7, 1997 by approximately $56 for the
period from May 7, 1997 to December 31, 1997.  The change had the effect of
increasing net income per common share by $0.01 for the period from May 7,
1997 to December 31, 1997.

                                     F-10
<PAGE>
 

5.  DEFERRED COSTS

    Deferred costs consist of the following:

<TABLE>
<CAPTION>
                                                                    December 31,
                                                                    ------------
                                                                   1997      1996
                                                                   ----      ----
         <S>                                                     <C>       <C>
         Bond credit enhancement and deferred financing costs    $ 2,392   $ 3,876
         Lease costs                                                 787       444
                                                                 -------   -------
         Deferred costs                                            3,179     4,320
         Less:  Accumulated amortization                            (199)   (2,606)
                                                                 -------   -------

         Net deferred costs                                      $ 2,980   $ 1,714
                                                                 =======   =======
</TABLE>

6.  LONG-TERM DEBT

    Long-term debt consists of the following:

<TABLE>
<CAPTION>
                                                                 December 31,
                                                                 ------------
                                                               1997        1996
                                                               ----        ----
         <S>                                                 <C>         <C>
         Fixed rate mortgage notes payable, issued by
           local municipalities (a)                          $ 28,167    $     --
         Note payable (b)                                       3,000          --
         Variable rate tax-exempt bonds issued by state
           and local governmental authorities (c)              65,000      65,000
                                                             --------    --------
         Total debt                                            96,167      65,000
         Less:  Current portion                                   286          --
                                                             --------    --------

         Total long-term debt                                $ 95,881    $ 65,000
                                                             ========    ========
</TABLE>

(a)  As part of the purchase of the Edina Park Plaza and Hawthorn Lakes
     facilities, the Company assumed the notes ($31,345 as of May 7, 1997). The
     notes bear interest at 8% ($14,934 at December 31, 1997) and 8.525%
     ($13,233 at December 31, 1997) with monthly principal and interest payments
     through maturity in 2027. The notes are collateralized by the Edina Park
     Plaza and Hawthorn Lakes facilities, respectively.

(b)  The principal and accrued interest balance on the note is due on May 1,
     1999.  Interest accrues at 8%.  The note requires interest to be paid on
     delinquent payments at 12%.  The principal balance and accrued interest
     may be pre-paid without penalty.

(c)  Permanent financing for The Devonshire and The Heritage has been provided
     by $65,000 (The Devonshire - $33,000, The Heritage - $32,000) of
     tax-exempt Qualified Residential Rental Bonds (the "Bonds").  The Bonds
     mature on December 15, 2025 and December 15, 2019, respectively.

     Under the terms of the bond loan agreement, The Devonshire and The
     Heritage (the "Partnerships") are required to make interest-only payments
     monthly, calculated using a floating rate determined by the remarketing
     agent of the Bonds.  The rates ranged from 3.00% to 4.70% during 1997;
     from 2.30% to 4.40% during 1996; and from 2.55% to 5.20% during 1995.
     The rates at December 31, 1997 were 3.75% and 3.80%, respectively, and at
     December 31, 1996 were 4.00% and 4.10%, respectively.  The annual
     interest rate on the Bonds cannot exceed 15%.  Under certain conditions,
     the interest rate on the Bonds may be converted to a fixed rate at the
     request of the respective Partnership.

     Beginning May 7, 1997, the Bonds became collateralized by letters of
     credit in the stated amount of $66,715 which were issued by two financial
     institutions with a stated termination date of May 18, 2000.  The letters
     of credit are collateralized, in part, by the $12,138 letter of credit
     deposit with the financial institutions.  The Company amortized letter of
     credit and other credit enhancement fees of $549 during the period from
     May 7, 1997 through December 31, 1997.  Prior to May 7, 1997, the Bonds
     were collateralized by irrevocable letters of credit issued by various
     financial institutions.  The Predecessor Properties amortized letter of
     credit and the credit enhancement fees of $250, $581 and $877 during the
     period from January 1, 1997 through May 6, 1997 and for the years ended
     December 31, 1996 and 1995, respectively.

     Each bondholder may tender Bonds on any business day upon seven days'
     notice and receive a price equal to the principal amount thereof, plus
     accrued interest through the tender date.  Upon tender, the remarketing
     agent has agreed to immediately remarket the Bonds on a best-efforts
     basis.  In the event the remarketing agent fails to remarket any Bonds,
     the bond trustee is required to draw on the letters of credit to pay the
     purchase price of the Bonds, in which event, the Partnerships are
     required to reimburse the issuers of the letters of credit.

     The Company obtained an unsecured $20 million interim credit facility
     from a financial institution for working capital and acquisition needs.
     Interest accrued on the outstanding principal amount of the loan at the
     prime rate of interest plus one percent per annum and was payable
     monthly. The credit facility was repaid and terminated on December 24,
     1997, which

                                     F-11
<PAGE>
 
     resulted in an extraordinary loss on extinguishment of debt, net of a $24
     tax benefit, of $36.  Otherwise, the maturity date was April 1998.

   On December 27, 1996, The Hallmark was sold by PGI in a sale-leaseback
transaction and a portion of the sale proceeds was used to repay a mortgage
note secured by The Hallmark.  In addition, The Hallmark was required to pay a
prepayment fee of $2,723, which was netted against the deferred gain on sale
of property.  The deferred gain on sale of property is being recognized over
the life of the lease as a reduction of the related lease expense. The Hallmark
repaid a previous note secured by the assets of the partnership on December 18,
1995 from proceeds of the above-mentioned mortgage note, which resulted in an
extraordinary gain of $3,274.

   The annual aggregate scheduled maturities of debt obligations for the five
years subsequent to December 31, 1997 are as follows:

         Year ended December 31,
         1998                          $    286
         1999                             3,310
         2000                               336
         2001                               365
         2002                               396
         Thereafter                      91,474
                                       --------

                                       $ 96,167
                                       ========

   Total interest incurred by the Company and the Predecessor Properties was
$3,211, $830, $4,740, and $5,626 for the period from May 7, 1997 to December
31, 1997, the period from January 1, 1997 to May 7, 1997 and for the years
ended December 31, 1996 and 1995, respectively.  During the period from May 7,
1997 to December 31, 1997, the Company capitalized $191 of interest expense.

7.  COMMON STOCK

   In May 1997, the Company completed the IPO of 4,500 shares of common stock
at $11.50 per share.  The proceeds from the IPO, net of related underwriting
discounts and commissions and offering costs, totaled approximately $44,097.
The underwriters of the IPO exercised their over-allotment option, and in June
1997, the Company sold an additional 675 shares of common stock at $11.50 per
share. The Company received net proceeds of approximately $7,210 from the sale
of these additional shares.

   In December 1997, the Company completed a follow-on public offering of
2,000 shares of common stock at $16.6875 per share.  The proceeds from the
offering, net of related underwriting discounts and commissions and offering
costs, totaled approximately $30,851.

8.  STOCK BASED COMPENSATION PLAN

   The Company has granted stock options to various employees and directors
under its 1997 Stock Incentive Plan.  The Company accounts for this plan under
APB Opinion No. 25, under which no compensation cost has been recognized.

   In November 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123 recommends changes in accounting for
employee stock-based compensation plans and requires certain disclosures with
respect to stock option plans.  The statement's disclosures have been adopted
by the Company effective December 31, 1997.

   Had compensation cost for these plans been determined consistent with SFAS
123, the Company's net income and earnings per share would have been reduced
to the following unaudited pro forma amounts:

<TABLE>
<CAPTION>
                                              Period from
                                              May 7, 1997
                                                through
                                           December 31, 1997
                                           -----------------
<S>                                        <C>
         Net income:
             As reported                        $   445
             Pro forma                          $    92
         EPS:
             As reported                        $  0.06
             Pro forma                          $  0.01
</TABLE>

   The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1997: risk free interest rate of 6.6 percent,
expected volatility of 43.5 percent; weighted average fair value of options of
$4.89; expected life of 4 years and no expected dividend yield.

   The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.

   Under the provisions of the Company's non-qualified and incentive stock
option plan for officers and key employees, 830 shares of common stock were
reserved for issuance at May 7, 1997.  The options become exercisable over a
three to four year period, commencing at the date of grant.  All options
expire 10 years from the date of grant.  The prices of all options granted
were less than or equal to the fair market value at the date of the grant.

                                     F-12
<PAGE>
 

   The table below summarizes the transactions in the Company's stock
incentive plan during 1997:

<TABLE>
<CAPTION>
                                                                        1997
                                                                        ----
   <S>                                                                  <C>
   Options outstanding at beginning of year                                -
   Granted                                                               762
   Exercised                                                               -
   Canceled                                                                -
                                                                         ---
   Options outstanding at end of year $11.50 to $16.66 per share         762
                                                                         ---

   Exercisable at end of year                                              -
                                                                         ===
</TABLE>

   The following table summarizes information about certain options in the
Company's stock incentive plan outstanding as of December 31, 1997 in
accordance with SFAS 123:

<TABLE>
<CAPTION>
                                                 Weighted Avg.
                               Number              Remaining         Weighted Avg.
         Exercise Price      Outstanding       Contractual Life      Exercise Price
         --------------      -----------       ----------------      --------------
         <S>                 <C>               <C>                   <C>
            $11.50               695              9.35 years            $11.500
            $11.875               56              9.50 years            $11.875
            $16.6625              11              9.99 years            $16.663
                                 ---

                                 762
                                 ===
</TABLE>

9.  INCOME TAXES

   Deferred income taxes reflect the net effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amount used for income tax purposes.  Prior to formation of
the Company on May 7, 1997 (see Note 1), the Predecessor Properties were held
in either partnerships which passed through tax liabilities and benefits to
the owners or in a C-Corporation (operations began December 12, 1997) which
was subject to income taxes.  The transfer of assets at the formation of the
Company was taxable, in part to the owners, which resulted in a $4,002
deferred tax asset at the contribution date.  In addition, the Predecessor had
$236 of current income taxes payable for the period from January 1, 1997 through
May 6, 1997, which were not paid in 1997. Accordingly, the tax basis of a
majority of the property and equipment of the Company exceeds its respective
book basis for financial reporting purposes. The tax effects of temporary
differences that give rise to significant portions of the deferred tax assets
recognized as of the date of formation of the Company and at December 31, 1997
are presented below (no deferred tax liabilities at May 7, 1997 or December 31,
1997).

<TABLE>
<CAPTION>
                                                December 31, 1997    May 7, 1997
                                                -----------------    -----------
         <S>                                         <C>                <C>
         Property, plant and equipment               $3,676             $4,002
         Deferred lease costs                           523                  -
         Operating loss carryforward                    343                  -
         Deferred revenue                                42                  -
                                                     ------             ------

         Total deferred tax assets                   $4,584             $4,002
                                                     ======             ======
</TABLE>
   At December 31, 1997, the Company had net operating loss carryforwards for 
income tax purposes of approximately $857 which expire in 2012.

   The benefit (provision) for income taxes (including income taxes on
extraordinary item) is composed of the following:
<TABLE>
<CAPTION>
                                                       Period from        Period from
                                                       May 7, 1997      January 1, 1997
                                                         through            through
                                                    December 31, 1997     May 6, 1997
                                                    -----------------     -----------
         <S>                                        <C>                 <C>
         Federal:
           Current                                        $    -            $ (195)
           Deferred                                          509                 -
                                                          ------            -------
                                                             509              (195)
                                                          ------            -------

         State:
           Current                                        $    -            $  (41)
           Deferred                                           73                 -
                                                          ------            -------
                                                              73               (41)
                                                          ------            -------

                                                          $  582            $ (236)
                                                          ======            =======
</TABLE>

                                     F-13
<PAGE>
 
   A reconciliation of the benefit (provision) for income taxes to the amount
computed at the federal statutory rate is as follows:

<TABLE>
<CAPTION>
                                                       Period from        Period from
                                                       May 7, 1997      January 1, 1997
                                                         through            through
                                                    December 31, 1997     May 6, 1997
                                                    -----------------     -----------
         <S>                                        <C>                  <C>
         Federal income tax at statutory rate             $   27            $  150
         State taxes, net of federal benefit                  73               (41)
         Income of non-taxable Predecessor Properties          -               (71)
         Rental income taxable to the Predecessor            286              (242)
         Deferred lease costs                                  -               (43)
         Non-taxable amortization of deferred gain           184                 -
         Extraordinary item                                   21                 -
         Other                                                (9)               11 
                                                          ------            -------

                                                          $  582            $ (236)
                                                          ======            =======
</TABLE>

10.  TAX INCREMENTAL FINANCING

   The Heritage is located in a redevelopment area designated by a local
municipality as a tax incremental financing district ("TIF"). Under the terms
of the redevelopment agreement, The Heritage was eligible to receive payments,
in accordance with the terms of the Tax Incremental Financing Bond ("Bond")
issued to it.  The Bond was scheduled to mature on December 1, 2007 and had
interest at 10% per annum, with principal and interest payable annually on
each December 1.  The Bond was subject to optional redemption, in whole or in
part, at any time, at a redemption price equal to the principal outstanding at
the date redeemed.  The Bond was subject to mandatory redemption, in part, by
the application of annual sinking fund installments by the municipality on
each December 1, at a redemption price equal to the principal outstanding at
the date redeemed.  The Bond was payable solely from real estate tax
incremental revenues and certain sales tax receipts generated in the TIF.
Payments were to be made to the extent of available TIF revenues.  The
insufficiency of TIF revenues generated in the redevelopment area for any
given year would not be considered a default in payment, but all past due
amounts would be a continuing obligation payable from future TIF revenues. Any
unpaid amounts including interest, at maturity, would be forgiven.  As the
collectibility of the Bond principal and interest was dependent upon
sufficient TIF revenues being generated in the redevelopment area, revenue was
recognized by The Heritage when principal and interest were received.  For the
period from May 7, 1997 through December 31, 1997 (final payment) and for the
years ended December 31, 1996 and 1995, the Heritage received payments
totaling $576, $610 and $144, respectively.  No payments were received during
the period from January 1, 1997 to May 6, 1997.

11.  EMPLOYEE BENEFIT PLAN

   In August 1994, PGI established a 401(k) plan for all employees of the PGI
Entities who meet minimum employment criteria.  The plan provides that the
participants may defer up to 15% of their eligible compensation on a pre-tax
basis subject to certain maximum amounts.  PGI contributes an additional 25%
of the employee's contribution to the plan, up to $500 per employee per annum.
On September 1, 1997, the Company established a 401(k) plan for all employees
of the Company's entities that meet minimum employment criteria.  The plan
provides that the participants may defer up to 15% of their eligible
compensation on a pre-tax basis subject to certain maximum amounts.  The
Company contributes an additional 25% of the employee's contribution to the
plan.  Employees are always 100% vested in their own contributions and vested
in PGI's and the Company's contributions over five years.  The Company and the
PGI entities made contributions to such plans in the amount of $55, $15, $30
and $26 for the period from May 7, 1997 through December 31, 1997, the period
from January 1, 1997 through May 6, 1997 and for the years ended December 31,
1996 and 1995, respectively.  Such amounts are included in facility operating
expense in the consolidated and combined statements of  operations.

12.  LEASES

   The Company entered into lease agreements ("Lease Agreements") with various
financial institutions for the Leased Facilities.  The Lease Agreement for the
Hallmark, Springs of East Mesa, Gables at Brighton and Park Place facilities
has an initial term of 23 years, with two options to extend for 25 years each,
and requires annual base rent payments ranging from $10,185 to $11,204.  The
Lease Agreements for these four facilities also require additional rent each
year beginning in 1999 based on 10% of the excess of each year's revenue
compared to 1998 revenue.  The Lease Agreements for the Classic at West Palm
Beach and Brendenwood Retirement Community facilities have initial terms of
five years with five options to extend for one year each, and Lease Agreement
for the Gables at Farmington facility has an initial lease term of one year
with fourteen options to extend for one year each.  The Lease Agreements for
the Gables at Farmington, Classic at West Palm Beach and Brendenwood
Retirement Community facilities require annual payments ranging from $4,312 to
$4,722.  The Company has the option to acquire the Leased Facilities at fair
market value prior to or at the end of such lease term.  The Company
guarantees the lease payments on the Hallmark, Springs of East Mesa, Gables at
Brighton and Park Place facilities.

   On September 25, 1997, the Company entered into a five year lease (the
"Office Lease"), commencing October 1, 1997, for its corporate office with an
affiliate of PGI (the "Landlord"), with base rents that escalate at each
anniversary of the commencement date by $0.75 per square foot per year.  In
conjunction with the signing of the lease, the Company received a $404
incentive from the Landlord,

                                     F-14
<PAGE>
 
which has been deferred and is being amortized using the straight-line method
over the life of the Office Lease.  Office Lease expense is included in
General and Administrative expense.

   The aggregate amount of all future minimum lease payments (includes $1,284
of payments to be made to the landlord for the Lease Agreements and the Office
Lease as of December 31, 1997 are as follows:

         Year ended December 31,
         1998                         $  14,877
         1999                            15,639
         2000                            16,184
         2001                            16,200
         2002                            16,142
         Thereafter                     224,409
                                      ---------

                                      $ 303,451
                                      =========

13.  EARNINGS PER SHARE

   The following table sets forth the computation of basic and diluted
earnings per share for the period from May 7, 1997 through December 31, 1997.

<TABLE>
         <S>                                                                           <C>
         Numerator:
           Income from continuing operations before extraordinary item                 $    481
           Extraordinary item (net of tax benefit of $24)                                   (36)
                                                                                       --------
               Numerator for basic and diluted earnings per common share                    445

         Denominator:
           Denominator for basic earnings per share - weighted-average shares             7,208
           Effect of dilutive securities:
             Employee stock options                                                         143
                                                                                       --------
               Dilutive potential common shares                                             143

               Denominator for diluted earnings per share-adjusted weighted
                 average shares and assumed conversions                                   7,351
                                                                                       ========

         Basic and diluted earnings per share                                          $   0.06
                                                                                       ========
</TABLE>

   Options to purchase 10,600 shares of common stock at $16.66 per share were
outstanding during the period from May 7, 1997 through December 31, 1997 but
were not included in the computation of diluted earnings per share because the
options' exercise price was greater than the average market price of the
common shares and, therefore, the effect would be anti-dilutive.

   For additional disclosures regarding the employee stock options, see Note 8.

14.  RELATED PARTY TRANSACTIONS

   In connection with the management and administration of The Heritage, The
Devonshire and the Hallmark facilities, PGI was entitled to fees for services
provided.  Such amounts incurred for the period from January 1, 1997 through
May 6, 1997 and for the years ended December 31, 1996 and 1995 are summarized
as follows:

<TABLE>
<CAPTION>
                                                      Period from            Year Ended
                                                    January 1, 1997         December 31,
                                                        through             ------------
                                                      May 6, 1997         1996        1995
                                                      -----------         ----        ----
         <S>                                              <C>             <C>       <C>
         Property management fee (a)                      $230            $930      $1,071
         Administration fee (b)                            130             372         372
</TABLE>

         (a)  PGI was entitled to a property management fee equal to 5% of
              total operating income (3% management fee for The Hallmark
              facility effective January 1, 1996 through December 26, 1996,
              with no fee thereafter).  The fee is included in property
              management fees in the combined statements of operations of the
              Predecessor.

         (b)  PGI was entitled to an annual administration fee of $186 per
              facility for providing administrative services to The Devonshire
              and The Heritage facilities.  The fee is included in facility
              operating expenses in the combined statements of operations of
              the Predecessor.

                                     F-15
<PAGE>
 
   On May 7, 1997, the Company began providing management services for The
Island on Lake Travis facility, which is owned by PGI. The Company is entitled
to a fee based on 5% of revenue.  The Company recognized $132 in management
fee revenue during the period from May 7, 1997 through December 31, 1997.

15.  FAIR VALUE OF FINANCIAL INSTRUMENTS

  Cash and cash equivalents, cash-restricted and variable rate and fixed rate
debt are reflected in the accompanying consolidated and combined balance
sheets at amounts considered by management to reasonably approximate fair
value.  Management estimates the fair value of its long-term fixed rate debt
using a discounted cash flow analysis based upon the Company's current
borrowing rate for debt with similar maturities.

16.  LITIGATION

   The Company is involved in various lawsuits and claims arising in the
normal course of business. In the opinion of management of the Company,
although the outcomes of these suits and claims are uncertain, in the
aggregate they should not have a material adverse effect on the Company's
business, financial condition and results of operations.

17. Pro Forma (Unaudited)

   The following unaudited pro forma condensed, consolidated and combined
statements of operations of the Company for the years ended December 31, 1997
and December 31, 1996 are presented as if, at January 1, 1997 and January 1,
1996, (i) the Company had sold and issued 9,175 shares of its common stock,
purchased the Owned Facilities and leased the Leased Facilities and the Harbor
Village facility (see note 19) which was leased beginning March 6, 1998.  If
the Harbor Village facility was not included in the pro forma operations,
revenue, net income and income per share would be $60,035, $1,234, and $0.13,
respectively, for 1997 and $55,641, $276, and $0.03, respectively, for 1996.

   These unaudited pro forma condensed consolidated and combined statements of
operations are not necessarily indicative of what the actual results of
operations of the Company would have been assuming the IPO and follow-on
public offering had been consummated at the beginning of each period
presented, nor do they purport to represent the results of operations of the
Company for future periods.

<TABLE>
<CAPTION>
                                                                                 Year ended December 31,
                                                                                 -----------------------
                                                                                   1997           1996
                                                                                   ----           ----
         <S>                                                                     <C>            <C>
         Revenue                                                                 $ 63,743       $ 59,462
         Net income                                                                 1,474            479
         Earnings per share                                                          0.16           0.05
</TABLE>

18.  SUBSEQUENT EVENTS

   On January 21, 1998, the underwriters of the follow-on public offering
completed in December 1997 exercised their over-allotment option for an
additional 300 shares of common stock at $16.6875 per share.  The Company
received net proceeds of approximately $4.7 million from the sale of these
additional shares.

   On March 6, 1998, the Company entered into a lease agreement to lease the
Harbor Village facility, a 272 unit facility located in Chicago, Illinois. The
lease is an operating lease with an initial five-year term with seven one-year
option periods with annual payment amounts ranging from $1,256 to $1,481
through the initial lease term.  The Company has an option to acquire this
facility at its fair market value at the end of the lease term.

   On March 17, 1998, the Company and the Landlord amended the Office Lease,
pursuant to which the Company and Landlord agreed to increase the space
leased, to extend the term of the Office Lease until April 30, 2005 with base
rent under similar per square foot terms. In consideration for executing the
amendment of the Office Lease, the Company received an additional $452
incentive from the Landlord.


                                     F-16