UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

[X]  Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
     Act of 1934, for the Quarterly Period ended September 30, 1998.

                                       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 Identification No.)
incorporation or organization)

77 W. Wacker Drive, Suite 4400                            60601
       Chicago, IL
--------------------------------             -----------------------------------
  (Address of principal                                 (Zip Code)
    executive offices)



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

                                 Not Applicable
--------------------------------------------------------------------------------
                    (Former name, former address, or former
                   fiscal year, if changed since last report)

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 the number of shares  outstanding  of each of the  issuer's  classes of
common stock, as of the latest practicable date.

As of November 13, 1998,  9,572,082  shares of the  registrant's  Common  Stock,
$0.01 par value per share, were outstanding.


<PAGE>

<TABLE>
<CAPTION>

                       BROOKDALE LIVING COMMUNITIES, INC.

                                    FORM 10-Q

                                      INDEX
                                      -----
<S>  <C>                                                                                                                 <C>

PART I:  FINANCIAL INFORMATION                                                                                        Page
                                                                                                                      ----

Item 1.  Financial Statements (Unaudited).                                                                               3

         Consolidated  Balance Sheets of Brookdale  Living  Communities,  Inc. as of September 30, 1998 and
         as of December 31, 1997                                                                                         4

         Consolidated  Statements of Operations of Brookdale Living Communities,  Inc. for the three months
         ended September 30, 1998 and 1997                                                                               5

         Consolidated  Statements of Operations of Brookdale Living  Communities,  Inc. for the nine months
         ended  September  30,  1998 and for the period  from May 7, 1997  through  September  30, 1997 and
         Combined  Statement of Operations of Predecessor  Properties (the  predecessor to Brookdale Living
         Communities, Inc.) for the period from January 1, 1997 through May 6, 1997                                      6

         Consolidated  Statements of Cash Flows of Brookdale Living  Communities,  Inc. for the nine months
         ended  September  30,  1998 and for the period  from May 7, 1997  through  September  30, 1997 and
         Combined  Statement of Cash Flows of Predecessor  Properties (the  predecessor to Brookdale Living
         Communities, Inc.) for the period from January 1, 1997 through May 6, 1997                                      7

         Notes to Consolidated  and Combined  Financial  Statements of Brookdale Living  Communities,  Inc.
         and Predecessor Properties (the predecessor to Brookdale Living Communities, Inc.)                              9

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations.                         12

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.                                                    16

PART II:  OTHER INFORMATION                                                                                             17

Item 1.  Legal Proceedings.                                                                                             17
Item 2.  Changes in Securities and Use of Proceeds.                                                                     17
Item 3.  Defaults Upon Senior Securities.                                                                               17
Item 4.  Submission of Matters to a Vote of Security Holders.                                                           17
Item 5.  Other Information.
Item 6.  Exhibits and Reports on Form 8-K.                                                                              17

Signatures                                                                                                              20


</TABLE>

                                      -2-
<PAGE>




                          PART I: FINANCIAL INFORMATION

Item 1.  Financial Statements (Unaudited).


     The information  furnished in the accompanying  unaudited  consolidated and
combined balance sheets, statements of operations,  and statements of cash flows
reflects all adjustments which are, in the opinion of management,  necessary for
a fair presentation of the aforementioned  financial  statements for the interim
period.

     Brookdale  Living  Communities,  Inc.  ("Brookdale")  was  incorporated  on
September 4, 1996 and commenced  operations  upon the  completion of its initial
public  offering  on May 7,  1997.  The  consolidated  financial  statements  of
Brookdale and Subsidiaries  (the "Company")  represent the results of operations
of 16 facilities the Company operated during the period presented.  The combined
financial  statements  of  Predecessor  Properties  (the  "Predecessor"  to  the
Company) are  presented  for  comparative  purposes due to common  ownership and
management  and  represent  the  results of  operations  of the  entities  (five
facilities)  which  comprised  the  Predecessor  Properties  for the period from
January 1, 1997 to May 6, 1997.

     The aforementioned  financial statements should be read in conjunction with
the notes to the consolidated and combined financial statements and Management's
Discussion and Analysis of Financial Condition and Results of Operations and the
financial  statements  for the period ended  December  31, 1997  included in the
Company's  Annual Report on Form 10-K as filed with the  Securities and Exchange
Commission on March 31, 1998.

                                      -3-

<PAGE>
<TABLE>
<CAPTION>

                        BROOKDALE LIVING COMMUNITIES, INC. AND SUBSIDIARIES (THE "COMPANY")

                                    CONSOLIDATED BALANCE SHEETS OF THE COMPANY
                                                  (In Thousands)
                                                    (Unaudited)


                                                                           September 30, 1998    December 31, 1997
                                                                           ------------------    -----------------

<S>                                                                                <C>                  <C>
Assets
Cash and cash equivalents..............................................      $         410        $      13,292
Accounts receivable....................................................                601                  214
Notes receivable.......................................................              6,028                    -
Prepaid expenses and other.............................................              9,947                3,077
                                                                             --------------       --------------
      Total current assets.............................................             16,986               16,583
                                                                             --------------       --------------

Property, plant and equipment..........................................            115,727              113,294
Accumulated depreciation...............................................             (4,787)              (2,164)
                                                                             --------------       --------------
Property, plant and equipment, net.....................................            110,940              111,130
                                                                             --------------       --------------

Property under development.............................................              9,083               11,427
Cash and investments - restricted......................................              7,470                5,920
Investment certificates - restricted ..................................             13,132                    -
Letter of credit deposits..............................................             13,471               12,138
Lease security deposits................................................             37,919               18,542
Other..................................................................              9,411                7,429
                                                                             --------------       --------------
      Total assets.....................................................      $     218,412        $     183,169
                                                                             ==============       ==============


Liabilities and Stockholders' Equity
Current portion of long-term debt......................................      $       3,304        $         286
Unsecured line of credit...............................................             20,650                    -
Current portion of deferred gain on sale of property...................                806                  806
Accrued interest payable...............................................                878                  566
Accounts payable and accrued expenses..................................              6,971                4,256
Other..................................................................                509                  344
                                                                             --------------       --------------
      Total current liabilities........................................             33,118                6,258
                                                                             --------------       --------------

Long-term debt, less current portion...................................             92,650               95,881
Tenant refundable entrance fees and security deposits..................              5,007                4,377
Deferred lease liability...............................................              2,637                1,811
Deferred gain on sale of property, less current portion................             16,318               16,922
                                                                             --------------       --------------
      Total liabilities................................................            149,730              125,249
                                                                             --------------       --------------

Stockholders' Equity
Common stock, $.01 par value,  75,000 shares authorized,  9,572 
    and 9,175 shares issued and outstanding at September 30, 1998
    and December 31, 1997, respectively................................                 96                   92
Additional paid-in-capital.............................................             63,696               57,383
Retained earnings......................................................              4,890                  445
                                                                             --------------       --------------
      Total stockholders' equity.......................................             68,682               57,920
                                                                             --------------       --------------
      Total liabilities and stockholders' equity.......................      $     218,412        $     183,169
                                                                             ==============       ==============

</TABLE>





See accompanying notes to consolidated and combined financial statements.


                                      -4-
<PAGE>

<TABLE>
<CAPTION>

                        BROOKDALE LIVING COMMUNITIES, INC. AND SUBSIDIARIES (THE "COMPANY")

                               CONSOLIDATED STATEMENTS OF OPERATIONS OF THE COMPANY
                                      (In Thousands, Except Per Share Amounts)
                                                    (Unaudited)


                                                                        Three months ended
                                                              September 30, 1998 September 30, 1997
                                                              ------------------ ------------------
<S>                                                                     <C>                <C>
Revenue
Resident fees...............................................    $       18,868      $      11,192
Development fees............................................             1,542                  -
Management fees.............................................                72                 50
                                                                ---------------     --------------
       Total revenue........................................            20,482             11,242
                                                                ---------------     --------------
Expenses
Facility operating..........................................            10,715              5,795
General and administrative..................................             1,280                659
Lease expense...............................................             4,790              2,566
Depreciation and amortization...............................             1,146              1,158
                                                                ---------------     --------------
       Total operating expenses.............................            17,931             10,178
                                                                ---------------     --------------
       Income from operations...............................             2,551              1,064
Interest income.............................................             1,277                274
Interest expense............................................            (1,033)            (1,158)
                                                                ---------------     --------------
       Income before income tax (expense) benefit...........             2,795                180
Income tax (expense) benefit................................              (982)                10
                                                                ---------------     --------------

       Net income...........................................    $        1,813      $         190
                                                                ===============     ==============

Basic earnings per common share.............................    $         0.19      $        0.03
                                                                ===============     ==============

Weighted average shares used for computing
    basic earnings per common share.........................             9,569              7,175
                                                                ===============     ==============

Diluted earnings per common share...........................    $         0.19      $        0.03
                                                                ===============     ==============

Weighted average shares used for computing
    diluted earnings per common share.......................             9,771              7,317
                                                                ===============     ==============
</TABLE>


See accompanying notes to consolidated and combined financial statements.


                                      -5-
<PAGE>
<TABLE>
<CAPTION>


                        BROOKDALE LIVING COMMUNITIES, INC. AND SUBSIDIARIES (THE "COMPANY")
                           AND PREDECESSOR PROPERTIES (THE "PREDECESSOR" TO THE COMPANY)

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


                                                                                  Brookdale Living     Predecessor
                                                               Brookdale Living   Communities, Inc.    Properties
                                                               Communities, Inc.     period from       period from
                                                                  nine months        May 7, 1997     January 1, 1997
                                                                     ended             through           through
                                                              September 30, 1998 September 30, 1997    May 6, 1997
                                                              ------------------ -------------------  ----------------

<S>                                                             <C>                 <C>              <C>
Revenue
Resident fees...............................................    $       51,723      $      17,731    $      10,473
Development fees............................................             4,120                  -                -
Management fees.............................................               188                 82                -
                                                                ---------------     -------------    --------------
       Total revenue........................................            56,031             17,813           10,473
                                                                ---------------     -------------    --------------

Expenses
Facility operating..........................................            28,993              9,278            5,872
General and administrative..................................             3,776              1,137                -
Lease expense...............................................            12,782              4,110            3,042
Depreciation and amortization...............................             3,577              1,849              857
Property management fees....................................                 -                  -              230
                                                                ---------------     -------------    --------------
       Total operating expenses.............................            49,128             16,374           10,001
                                                                ---------------     -------------    --------------
       Income from operations...............................             6,903              1,439              472
Interest income.............................................             2,918                400               68
Interest expense............................................            (2,891)            (1,873)            (830)
                                                                ---------------     -------------    --------------
       Income (loss) before minority interest and income
          tax (expense) benefit.............................             6,930                (34)            (290)
Minority interest...........................................                 -                  -             (138)
Income tax (expense) benefit................................            (2,485)               143             (236)
                                                                ---------------     -------------    --------------

       Net income (loss)....................................    $        4,445      $         109    $        (664)
                                                                ===============     ==============   ==============

Basic earnings per common share.............................    $         0.47      $        0.02
                                                                ===============     ==============

Weighted average shares used for computing
    basic earnings per common share.........................             9,489              7,051
                                                                ===============     ==============

Diluted earnings per common share...........................    $         0.46      $        0.02
                                                                ===============     ==============

Weighted average shares used for computing
    diluted earnings per common share.......................             9,738              7,144
                                                                ===============     ==============

</TABLE>

See accompanying notes to consolidated and combined financial statements.


                                      -6-
<PAGE>
<TABLE>
<CAPTION>


                        BROOKDALE LIVING COMMUNITIES, INC. AND SUBSIDIARIES (THE "COMPANY")
                           AND PREDECESSOR PROPERTIES (THE "PREDECESSOR" TO THE COMPANY)

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



                                                                                  Brookdale Living     Predecessor
                                                               Brookdale Living   Communities, Inc.    Properties
                                                               Communities, Inc.     period from       period from
                                                                  nine months        May 7, 1997     January 1, 1997
                                                                     ended             through           through
                                                              September 30, 1998 September 30, 1997    May 6, 1997
                                                              ------------------ ------------------  --------------- 
<S>                                                             <C>                 <C>              <C>
Cash Flows from Operating Activities
Net income (loss)...........................................    $        4,445      $         109    $        (664)
    Adjustments to reconcile net income (loss) to net cash
    provided by (used in) operating activities:
       Depreciation and amortization........................             3,577              1,849              857
       Deferred income taxes................................             2,437               (143)               -
       Minority interest....................................                 -                  -              138
       Change in deferred lease liability...................               826                560              419
       Deferred gain on sale of property....................              (604)              (323)            (281)
       Changes in:
          Accounts receivable...............................              (387)              (253)             (61)
          Prepaid expenses and other........................            (6,034)            (2,587)            (110)
          Accrued interest payable..........................               312                170              111
          Accounts payable and accrued expenses.............             1,815                863              431
          Other current liabilities.........................            (1,333)            (1,275)           1,022
          Tenant refundable entrance fees 
              and security deposits.........................               (67)                (9)              35
                                                                ----------------    --------------   --------------
              Net cash provided by (used in)
                  operating activities......................             4,987             (1,039)           1,897
                                                                ----------------    --------------   --------------
Cash Flows from Investing Activities
    Lease security deposits and acquisitions................           (18,647)           (30,266)               -
    Increase in cash - restricted...........................              (280)              (579)          (1,180)
    Increase in investments - restricted....................           (13,132)                 -                -
    Property under development, net of related payables.....           (15,680)            (4,546)              (2)
    Proceeds from sale of property under development, net...             3,370                  -                -
    Payments received on notes receivable...................             7,446                  -                -
    Additions to property, plant and equipment
     and reimbursable leasehold improvements................            (4,940)              (575)            (149)
                                                                ----------------    --------------   --------------
              Net cash used in investing activities.........           (41,863)           (35,966)          (1,331)
                                                                ----------------    --------------   --------------
Cash Flows from Financing Activities
    Repayment of long-term debt.............................              (213)              (110)               -
    Proceeds from unsecured line of credit..................            28,150                  -                -
    Repayment of unsecured line of credit...................            (7,500)                 -                -
    Increase in letter of credit deposit....................            (1,333)           (11,702)               -
    Payment of deferred financing costs.....................              (957)               (50)            (287)
    Net distributions to partners...........................                 -                  -           (2,594)
    Proceeds from issuance of common stock, net.............             5,847             51,354                -
                                                                ----------------    --------------   --------------
              Net cash provided by (used in) financing 
                  activities................................            23,994             39,492           (2,881)
                                                                ----------------    --------------   --------------       
              Net (decrease) increase in cash and cash 
                  equivalents...............................           (12,882)             2,487           (2,315)
              Cash and cash equivalents at beginning 
                  of period.................................            13,292              1,915            4,230
                                                                ----------------    --------------   --------------       
              Cash and cash equivalents at end of period....    $          410      $       4,402    $       1,915
                                                                ================    ==============   ==============
</TABLE>


See accompanying notes to consolidated and combined financial statements.

                                      -7-
<PAGE>

<TABLE>
<CAPTION>

                        BROOKDALE LIVING COMMUNITIES, INC. AND SUBSIDIARIES (THE "COMPANY")
                           AND PREDECESSOR PROPERTIES (THE "PREDECESSOR" TO THE COMPANY)

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


                                                                                  Brookdale Living     Predecessor
                                                               Brookdale Living   Communities, Inc.    Properties
                                                               Communities, Inc.     period from       period from
                                                                  nine months        May 7, 1997     January 1, 1997
                                                                     ended             through           through
                                                              September 30, 1998 September 30, 1997    May 6, 1997
                                                              ------------------ ------------------  ---------------       
<S>                                                             <C>                 <C>               <C>
Supplemental Disclosure of Cash Flow Information:
Interest paid, net of amounts capitalized...................    $        3,056      $       1,988    $         723
                                                              ================== ==================  ===============
Income taxes paid...........................................    $          651      $           -    $           -
                                                              ================== ==================  ===============
Supplemental  Schedule  of Noncash  Investing
and Financing Activities:

In connection  with property  acquisitions  and net lease 
transactions,  assets acquired and liabilities 
assumed were as follows:
     Fair value of assets acquired..........................    $       19,516      $      68,545    $           -
     Less: Cash consideration paid..........................            17,319             30,266                -
                                                              ------------------ ------------------  ---------------
     Liabilities assumed....................................    $        2,197      $      38,279    $           -
                                                              ================== ==================  ===============
</TABLE>



See accompanying notes to consolidated and combined financial statements.

                                      -8-
<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)
                                   (Unaudited)

1.   Organization

     Brookdale  Living  Communities,  Inc.  ("Brookdale")  was  incorporated  in
Delaware on September 4, 1996 and commenced  operations  upon the  completion of
its initial public offering (the "IPO"), which closed on May 7, 1997.

     The consolidated financial statements of the Company include the properties
owned or  leased  by the  Company.  The  combined  financial  statements  of the
Predecessor Properties (defined below) include the facilities owned or leased by
the senior independent and assisted living division of The Prime Group, Inc. and
certain of its affiliates  (collectively,  "PGI"),  which  consisted of the five
facilities  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  as  of  September  30,  1998  (collectively,  the
"Properties").

Property Name                                    Date Owned or Leased
-------------                                    --------------------

Owned Facilities:
-----------------
The Heritage (1)                                 May 7, 1997
The Devonshire (1)                               May 7, 1997
Hawthorn Lakes                                   May 7, 1997
Edina Park Plaza                                 May 7, 1997

Leased Facilities:
------------------
The Hallmark (1)                                 May 7, 1997
The Springs of East Mesa (1)                     May 7, 1997
The Gables at Brighton (1)                       May 7, 1997
The Park Place                                   May 7, 1997
The Gables at Farmington                         November 24, 1997
The Classic at West Palm Beach                   December 18, 1997
The Brendenwood Retirement Community             December 22, 1997
Harbor Village                                   March 6, 1998
The Atrium of San Jose                           May 12, 1998
The Chatfield                                    July 2, 1998

Managed Facilities:
-------------------
The Island on Lake Travis (2)
The Kenwood (3)

Development Projects Under Construction(4):
-------------------------------------------
Austin, Texas
Southfield, Michigan
Raleigh, North Carolina
Glen Ellyn, Illinois
New York (Battery Park City), New York

(1)  Collectively  referred to as the  "Predecessor  Properties"
(2)  Management services  commenced May 7, 1997
(3)  Management  services  commenced July 1, 1997
(4)  The Company is developing these projects for third party owners.


                                      -9-
<PAGE>


2.    Summary of Significant Accounting Policies

Basis of Presentation

    The  accompanying  unaudited  financial  statements  have been  prepared  in
accordance with generally accepted  accounting  principles for interim financial
information and with the  instructions to Form 10-Q and Article 10 of Regulation
S-X.  Accordingly,  they do not include  all of the  information  and  footnotes
required by generally  accepted  accounting  principles  for complete  financial
statements.  In the opinion of management,  all adjustments considered necessary
for a fair presentation  have been included.  Operating results for such interim
periods are not necessarily indicative of the results that may be expected for a
full fiscal  year.  For further  information  regarding  significant  accounting
policies please refer to the financial  statements and footnotes thereto for the
period ended  December 31, 1997 included in the Company's  Annual Report on Form
10-K as filed with the  Securities  and Exchange  Commission  on March 31, 1998.
Significant  intercompany  accounts 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 these estimates.

    Development Fees

    Development fees are recognized in the period earned.

    Reclassifications

     Certain  prior period  amounts have been  reclassified  to conform with the
current financial statement presentation.

3.  Recent Developments

     On April 15, 1998, the Company  purchased  land in Raleigh,  North Carolina
(the  "Raleigh  Project")  for the purpose of  developing a Brookdale  prototype
senior  independent and assisted living facility.  The Company acquired the land
for a total consideration of approximately $2,100 in cash. On June 30, 1998, the
Company  sold the  Raleigh  Project  to an  unaffiliated  third  party,  at cost
including additional costs of development incurred prior to such sale. The sales
price for the Raleigh  Project was $2,903,  of which $1,000 was received in cash
and $1,903 was received by the delivery of a promissory note bearing interest at
9.0% per annum. The Company continues to develop the Raleigh Project pursuant to
a development agreement with the owner.

     On July 2,  1998,  the  Company  entered  into an  agreement  to lease  The
Chatfield,  a  125-unit  senior  independent  living  facility  located  in West
Hartford,  Connecticut.  The lease is an operating  lease with an initial  five-
year term and five one-year  renewal terms,  and annual lease payment amounts of
approximately  $1,025  through the initial lease term.  In  connection  with the
lease, the Company funded a security deposit of approximately $5,300.

     On July 16, 1998,  the Company  increased its unsecured  revolving  line of
credit with LaSalle National Bank to $25,000.  The maturity date for the amended
line of credit was  revised  so that the loan must be paid down to $10,000  upon
the earlier of the  completion of an offering of securities or November 30, 1998
(see Note 7).  The  remaining  $10,000  line of  credit  will  continue  to bear
interest  according  to the original  terms of the loan  agreement at prime plus
1/2% per annum.

     On July 23,  1998,  the Company  sold a  development  site  located in Glen
Ellyn,  Illinois (the "Glen Ellyn Project") to an  unaffiliated  third party, at
cost including  additional costs of development incurred prior to such sale. The
sales price for the Glen Ellyn Project was $4,125,  of which $1,400 was received
in cash and $2,725 was  received by the  delivery of a  promissory  note bearing
interest at 9.0% per annum.  The  Company  will  develop the Glen Ellyn  Project
pursuant  to a  development  agreement  with the  owner.  On October  26,  1998,
construction financing of $31,125 was put into place for the Glen Ellyn Project.

     On September 28, 1998,  the Company  transferred to an  unafilliated  third
party certain  benefits  associated  with the Company's  right to develop a site
located in Battery Park City, New York,  New York (the "Battery Park  Project").
The price received by the Company was $2,150, of which $750 was received in cash
and $1,400 was received by the delivery of a promissory note bearing interest at
9.0% per annum.  The Company will develop the Battery Park Project pursuant to a
development agreement with the transferee.


                                      -10-
<PAGE>


4.  Income Taxes

     Income tax expense  differs from the amounts  computed by applying the U.S.
federal  income tax rate of 34% to income before income tax expense  principally
as a  result  of  non-taxable  amortization  of the  deferred  gain on sale of a
property and state income taxes.

5.  Earnings Per Share

     The  following  table  sets  forth the  computation  of basic  and  diluted
earnings per share for the three months ended  September  30, 1998 and September
30, 1997,  the nine months ended  September  30, 1998 and the period from May 7,
1997 through September 30, 1997.


<TABLE>
<CAPTION>

                                                                                                                   Period from
                                                 Three Months          Three Months          Nine Months           May 7, 1997
                                                     Ended                 Ended                Ended                Through
                                              September 30, 1998    September 30, 1997    September 30, 1998    September 30, 1997
                                              ------------------    ------------------    ------------------    ------------------

<S>                                               <C>                   <C>                   <C>                   <C>
Numerator for basic and diluted
earnings per common share                         $  1,813              $    190              $  4,445              $    109
                                                  --------              --------              --------              --------

Denominator:
   Denominator for basic earnings per
     share - weighted-average shares                 9,569                 7,175                 9,489                 7,051
   Effect of dilutive securities:
      Employee stock options                           202                   142                   249                    93
      Warrants                                           -                     -                     -                     -
                                                  --------              --------              --------              --------
   Denominator for diluted earnings per
     share-adjusted weighted-average shares
     and assumed conversions                         9,771                 7,317                 9,738                 7,144
                                                  ========              ========              ========              ========

Basic earnings per share                          $   0.19              $   0.03              $   0.47              $   0.02
                                                  ========              ========              ========              ========

Diluted earnings per share                        $   0.19              $   0.03              $   0.46              $   0.02
                                                  ========              ========              ========              ========
</TABLE>

     During  the  nine  months  ended  September  30,  1998,  certain  employees
exercised stock options.  The Company received a tax benefit with respect to the
exercise of  non-qualified  stock options and the  disqualifying  disposition of
incentive stock options of  approximately  $470 which was credited to additional
paid-in capital.

6.  Pro Forma Information

     On October 21,  1998,  the Company  entered  into an agreement to lease the
Ponce de Leon facility, a 145-unit facility located in Santa Fe, New Mexico. The
lease is an operating  lease with an initial  five-year  term and five  one-year
renewal terms, and annual lease payment amounts of approximately  $1,200 through
the initial  lease  term.  In  connection  with the lease,  the  Company  funded
approximately a lease security deposit of $4,750.

     Without  including  the impact of the leasing of the Ponce de Leon facility
described above the pro forma operations,  revenue,  net income,  basic earnings
per share and diluted  earnings  per share would be $20,491,  $1,813,  $0.19 and
$0.19, respectively,  for the three months ended September 30, 1998 and $18,311,
$845,  $0.12 and $0.12,  respectively,  for the three months ended September 30,
1997 and $60,660,  $4,807,  $0.51 and $0.49,  respectively,  for the nine months
ended September 30, 1998 and $54,016, $1,277, $0.18 and $0.18, respectively, for
the nine months ended September 30, 1997.

     The 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 Company had leased the
Ponce de Leon facility and completed the December,  1997  follow-on  offering of
2,300 shares of common stock at the beginning of each period  presented,  nor do
they purport to represent  the results of  operations  of the Company for future
periods.

                                      -11-
<PAGE>



                                     Three Months                Nine Months
                                  Ended September 30,        Ended September 30,
                                  -------------------        -------------------
                                   1998       1997            1998        1997
                                   ----       ----            ----        ----
   Revenue                        $21,340    $19,159        $63,206     $56,561
   Net income                       1,930        962          5,157       1,628
   Basic earnings per share          0.20       0.13           0.54        0.23
   Diluted earnings per share        0.20       0.13           0.53        0.23

7.  Subsequent Events

     On October 19, 1998,  the Company  entered into  definitive  agreements  to
purchase both a 274-unit senior and assisted living facility  located in Redwood
City, California and an approximate 300-unit senior and assisted living facility
in the  northeastern  United  States.  The  closing  of the  purchases  of these
facilities  is subject to customary  closing  contingencies, and there can be no
assurance that such closing  contingencies will be satisfied in a timely manner,
if at all.

     On November  13,  1998,  the Company  sold 2,000  shares of common stock at
$16.50 which is scheduled to close on November 18, 1998. The Company granted the
underwriters an option to purchase up to 300 additional shares at $16.50.


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

     The following discussion is based on the Consolidated  Financial Statements
of the Company as of September 30, 1998 and December 31, 1997,  and for the nine
months  ended  September  30,  1998  and the  period  from May 7,  1997  through
September  30, 1997 and the Combined  Statement  of  Operations  of  Predecessor
Properties  for the period from  January 1, 1997 to May 6, 1997.  The  financial
statements of the  Predecessor  Properties  combine the results of operations of
five properties which were contributed by PGI to the Company simultaneously with
the  consummation  of  its  IPO  and  are  now  consolidated  in  the  Company's
Consolidated   Financial   Statements.   Historical  results  and  any  apparent
percentage  relationships with respect thereto are not necessarily indicative of
future operations.

Cautionary Statements

     This quarterly  report on Form 10-Q 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  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 successful  completion of the acquisition of the facilities  which the
Company has under contract, the successful completion of development activities,
the successful  integration of newly  acquired,  leased or developed  facilities
with the  operations  of the  Company's  existing  facilities,  fluctuations  in
operating  results,  occupancy  levels  in the  markets  in  which  the  Company
competes, and/or unanticipated changes in expenses or capital expenditures, (iv)
the  effect  of  future  legislation  or  regulatory  changes  on the  Company's
operations  and (v) 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.  The
Company  undertakes no obligation to update such  forward-looking  statements to
reflect subsequent events or circumstances.

Overview

     As of September 30, 1998, the Company  operated 16 senior  independent  and
assisted living  facilities  containing a total of 3,470 units.  Four facilities
are owned by the  Company,  ten  facilities  are leased by the  Company  and two
facilities (one of which is owned by PGI) are managed by the Company 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  residents to  "age-in-place"  and
thereby  maintain  their stay 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 resident fees,  development  fees and
management fees.  Resident fees consist of charges for leasing units,  providing
basic care services,  and, in certain  instances,  providing  supplemental  care
services to residents. Basic care services include meal service, housekeeping

                                      -12-
<PAGE>
services  within  the  resident  units,  social  and  recreational   activities,
scheduled transportation,  security,  emergency call response, access to on-site
medical  services and medical  education and wellness  programs.  In addition to
basic care  services,  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,  and
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,  bathing,  eating and  medication  administration  or
reminders.  The Company plans to expand its supplemental  service offerings,  as
permitted by applicable  licensing,  in order to capture incremental revenue and
enable its residents to remain in its facilities longer. Resident fees typically
are paid monthly by residents,  their families or other responsible  parties. As
of  September  30,  1998,  over 99% of the  Company's  revenue was derived  from
private pay sources.

     The Company derives  additional  revenue from  development  fees associated
with developing senior  independent and assisted living facilities for PGI and a
third party and management  fees from managing  senior  independent and assisted
living  facilities  for  unaffiliated   third  parties  pursuant  to  management
contracts.  Management  services  income  consists  of  management  fees,  which
typically range from 3.0% to 5.0% of a managed  facility's total gross revenues.
All such fees are recognized as revenues when management services are rendered.

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

Comparison  of nine  months  ended  September  30,  1998 to  nine  months  ended
September 30, 1997

     For  the  nine  months  ended  September  30,  1998,  results  reflect  the
operations of the Company's 16 facilities.  For the nine months ended  September
30, 1997,  results reflect the operations of the Predecessor's  five facilities,
the  operations of the Company's  three  properties  acquired at the IPO and the
management by the Company of two facilities after the IPO.

     Revenue.  Total  revenue  increased by $27.7  million,  or 98.1%,  to $56.0
million for the nine months ended  September  30, 1998 when compared to the nine
months ended  September 30, 1997.  Resident fees increased by $23.5 million,  or
83.4%,  to $51.7  million.  Of this increase,  approximately  $1.1 million (or a
"same  store"  increase of 4.7%)  reflects  an increase in resident  fees at the
properties that have been operated during both periods, which resulted primarily
from  increases in monthly  charges under  residency  agreements.  Approximately
$22.4 million of such increase reflects revenue from facilities acquired, leased
or  managed  subsequent  to the IPO.  The  remaining  $4.2  million of the total
revenue   increase   reflects  revenue  from  development  and  management  fees
associated  with  projects  being  developed  and  managed  by the  Company  for
unaffiliated third parties.

     Operating Expenses. Total operating expenses increased by $22.8 million, or
86.3%,  to $49.1  million  for the nine  months  ended  September  30, 1998 when
compared  to the nine  months  ended  September  30,  1997.  Facility  operating
expenses increased by $13.8 million, or 91.4%, to $29.0 million primarily due to
the addition of the expenses of the facilities  acquired or leased subsequent to
the IPO. From the commencement of its operations on May 7, 1997, the Company has
managed  all  of  its  facilities  and,   accordingly,   incurred   general  and
administrative  expenses of approximately $3.8 million for the nine months ended
September  30,  1998  compared  to $1.1  million for the period from May 7, 1997
through  September 30, 1997. For the period January 1, 1997 through May 6, 1997,
two  of  the  Predecessor   Properties  incurred  property  management  fees  of
approximately $230,000.

     Lease expense increased by approximately  $5.6 million,  or 78.7%, to $12.8
million for the nine months ended  September  30, 1998 when compared to the nine
months ended  September  30, 1997 due primarily to the addition of lease expense
for the facilities leased  subsequent to the IPO.  Depreciation and amortization
increased  by  approximately  $871,000,  or 32.2%,  to $3.6 million for the nine
months ended September 30, 1998 when compared to the nine months ended September
30, 1997. This increase  primarily  reflects the  depreciation of the step-up in
basis of two of the Predecessor  Properties that resulted in connection with the
IPO and the depreciation of two of the IPO Properties acquired on May 7, 1997.

    Interest income increased by approximately  $2.5 million to $2.9 million for
the nine months ended  September 30, 1998 when compared to the nine months ended
September  30,  1997 due to an  increase in average  cash  balances  and various
deposits and restricted investments.

     Net Income.  For the nine months  ended  September  30,  1998,  the Company
generated net income of approximately $4.4 million, as compared to a net loss of
$555,000  for the nine months  ended  September  30, 1997, primarily  due to the
changes in revenue and expenses described above.


                                      -13-
<PAGE>


Comparison  of three  months  ended  September  30, 1998 to three  months  ended
September 30, 1997

     For the  three  months  ended  September  30,  1998,  results  reflect  the
operations of the Company's 16 facilities.  For the three months ended September
30, 1997, results reflect the operations of the Company's ten facilities.

     Revenue.  Total  revenue  increased  by $9.2  million,  or 82.2%,  to $20.5
million for the three months ended September 30, 1998 when compared to the three
months ended  September 30, 1997.  Resident fees  increased by $7.7 million,  or
68.6%, to $18.9 million.  Of this increase,  approximately  $496,000 (or a "same
store" increase of 4.5%) reflects an increase in resident fees at the properties
that have been  operated  during both periods,  which  resulted  primarily  from
increases in monthly  charges under  residency  agreements.  Approximately  $7.2
million of such increase  reflects revenue from facilities  acquired,  leased or
managed  subsequent to June 30, 1997.  The  remaining  $1.5 million of the total
revenue   increase   reflects  revenue  from  development  and  management  fees
associated  with  projects  being  developed  and  managed  by the  Company  for
unaffiliated third parties.

     Operating Expenses.  Total operating expenses increased by $7.8 million, or
76.2%,  to $17.9  million for the three  months  ended  September  30, 1998 when
compared to the three  months  ended  September  30,  1997.  Facility  operating
expenses increased by $4.9 million,  or 84.9%, to $10.7 million primarily due to
the addition of the expenses of the facilities  acquired or leased subsequent to
June 30, 1997.  From the  commencement of operations on May 7, 1997, the Company
has  managed  all of its  facilities  and,  accordingly,  incurred  general  and
administrative expenses of approximately $1.3 million for the three months ended
September 30, 1998 compared to $659,000 for the three months ended September 30,
1997.

     Lease expense  increased by approximately  $2.2 million,  or 86.7%, to $4.8
million for the three months ended September 30, 1998 when compared to the three
months ended  September  30, 1997 due to the  addition of lease  expense for the
facilities leased subsequent to June 30, 1997.

     Interest income increased by approximately $1.0 million to $1.3 million for
the three  months  ended  September  30, 1998 when  compared to the three months
ended  September  30,  1997,  due to an increase in average  cash  balances  and
various deposits and restricted investments.

     Net Income.  For the three months  ended  September  30, 1998,  the Company
generated net income of approximately $1.8 million, as compared to net income of
$190,000 for the three  months ended  September  30, 1997, primarily  due to the
changes in revenue and expenses described above.

Liquidity and Capital Resources

     Cash   and   cash   equivalents   (which   does   not   include   cash  and
investments-restricted  of $20.6 million,  the letter of credit deposit of $13.5
million and lease security deposits of $37.9 million) decreased by $12.9 million
to $410,000 at September 30, 1998 as compared to December 31, 1997 primarily due
to cash  utilized for the  acquisition,  leasing and  development  of facilities
offset in part by the proceeds from equity  offerings and  borrowings  under the
unsecured line of credit.

     Net  cash  provided  by  operating  activities  for the nine  months  ended
September 30, 1998 totaled  approximately  $5.0 million as a result of increased
property operations before depreciation and amortization and properties acquired
and leased subsequent to December 31, 1997.

     Net cash used in investing  activities totaled  approximately $41.9 million
for the nine months ended September 30, 1998. Investing activities included cash
paid for lease security deposits in connection with the lease of four facilities
of $18.6 million, cash paid for property under development of $15.7 million, net
of sale  proceeds,  payments  received on notes  receivable of $7.4 million,  an
increase in cash and  investments-restricted  of $13.4 million and other uses of
$1.6 million.

     Net cash provided by financing  activities was approximately  $24.0 million
for the nine months ended  September  30, 1998.  Financing  activities  included
proceeds from equity  offerings of $4.7 million,  $1.1 million from the exercise
of employee  stock options and net proceeds from an unsecured  line of credit of
$20.7 million offset by other net uses of approximately $2.5 million.

     The  Company  currently  plans  to  acquire  or  lease  four to six  senior
independent and assisted  living  facilities per year containing an aggregate of
approximately  800 to 1,200 units and to commence  development of at least three
new  facilities  per  year  containing   approximately   220  units.  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 September
30, 1998, the Company had five facilities  under  construction and several sites
under  consideration  for  development  for new senior  independent and assisted
living  facilities.  Capital  expenditures  related  to the  Company's  existing
facilities  are estimated to be  approximately  $5.0 million to $10.0 million in
the aggregate in 1998. The Company anticipates that it will use a combination of
cash on hand, additional equity financing and debt financing, lease transactions
and cash  generated  from  operations to fund its  acquisition  and  development
activities.  In order to achieve its growth plans,  the Company will be required
to obtain a substantial  amount of additional  financing.  The Company presently
has no




                                      -14-
<PAGE>

commitment,  arrangement or understanding  regarding  financing to fund the debt
portion  of the  Company's  acquisition  and  development  plans  other than the
follow-on  offering of common stock scheduled to be completed November 18, 1998,
and the $100.0 million commitment from The Capital Company of America (successor
to  Nomura  Asset  Capital   Corporation)  for  development  projects  of  which
approximately  $51 million is  committed  to the Austin,  Texas and  Southfield,
Michigan development  projects.  There can be no assurance that the Company will
be able to obtain the financing  necessary for its  acquisition  and development
programs.

     As of  September  30,  1998,  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  3.6%
during the nine months ended September 30, 1998.  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.

     As of September 30, 1998,  the Company also had $20.7  million  outstanding
under its unsecured  line of credit at a floating  rate of prime plus 1/2%.  The
interest rate on the line was at 9% during the three months ended  September 30,
1998.

     The Company is  dependent on  third-party  financing  for its  acquisition,
leasing and development programs.  Financing obtained in the future is generally
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 and leasing
plans and could therefore have a material adverse effect on the Company's growth
plans and on its future results of operations.

Impact of Recently Issued Accounting Standards

     In  April  1998,  the  Accounting   Standards  Executive  Committee  issued
Statement of Position 98-5,  "Reporting on the Cost of Start-Up Activities" (SOP
98-5) which is effective for fiscal years beginning after December 15, 1998. SOP
98-5 provides guidance on financial reporting of start-up costs and organization
costs.  Adoption of SOP 98-5 is not anticipated to affect the financial position
or results of operations of the Company.

     In June 1998, the Financial  Accounting Standards Board (the "FASB") issued
FASB 133,  "Accounting for Derivative  Investments and Hedging Activities" which
is effective for fiscal years  beginning  after June 15, 1999. FASB 133 provides
guidance  for  the  recognition  and  measurement  of  derivatives  and  hedging
activities.  Adoption  of FASB 133 is not  anticipated  to affect the  financial
position or results of operations of the Company.

Impact of Inflation

     Resident fees from senior  independent and assisted living facilities owned
or leased by the Company, management fees from facilities managed by the Company
for third parties and development fees from facilities  developed by the Company
for third parties are the Company's  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
allow  for  adjustments  in  the  monthly  fees  payable  thereunder  upon  each
anniversary of the commencement of the residency agreement, thereby enabling the
Company to seek  increases  in monthly  fees due to  inflation,  demand or other
factors.   Any  such  increase  would  be  subject  to  market  and  competitive
conditions.  The  Company  believes,  however,  that the  ability  to adjust the
monthly fees payable under the residency agreements on an annual basis 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 September 30, 1998,  approximately
$85.7 million in principal amount of the Company's indebtedness bore interest at
floating rates  (including $65.0 million at the tax-exempt bond floating rate of
approximately  3.6% for nine  months  ending  September  30,  1998)  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.

Readiness for Year 2000

     The Company has implemented a program to assess, remediate and mitigate the
potential  impact of the Year 2000 Issue  throughout the Company.  The Company's
program  has been  structured  to address  its  internal  computer  systems  and
applications, network services operations, facilities operations and third-party
vendors and  suppliers.  The Company  believes  that it is taking the  necessary
steps within its control to mitigate the potential impact of the Year 2000 Issue
on the Company.


                                      -15-
<PAGE>

Information Systems

     The  Company  intended  to  replace  its  accounting  system  prior  to the
assessment of its Year 2000 Issue.  The Company  expects that the replacement of
its  current  system  will  mitigate  the  impact of the Year 2000  Issue on its
accounting operations. The corporate software selection has been completed and a
contract  has been signed in the third  quarter of 1998 to commence  development
and  implementation in the fourth quarter 1998. The Company is in the process of
identifying  replacement  software at the  facilities it owns or operates and is
expected  to  select a  replacement  in the  first  quarter  1999.  The  Company
anticipates  completing  the corporate  project no later than the second quarter
1999 and the facilities' project no later than the second quarter 1999.

Facilities

     The Company has  commenced an  assessment  of each  facility,  including an
assessment of  infrastructure  equipment  such as  elevators,  HVAC and security
systems,  and other critical  service  provider  readiness  issues.  The Company
anticipates  completing its preliminary  assessment by December 31, 1998. During
the first half of 1999, the Company will undertake  contingency planning for its
facilities as necessary.

Third-Party Vendors and Suppliers

         The Company's approach to third-party suppliers involves the process of
identification and prioritization critical suppliers and communicating with them
about  their  plans  and  progress  in  addressing  the Year  2000  Issue.  This
evaluation and the subsequent contingency planning will be undertaken during the
first half of calendar 1999.

Costs

     The  final  cost to  complete  the  project  has not yet  been  determined.
However,  the  estimated  total  cost  is not  expected  to be  material  to the
Company's financial position.

     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.  Although the
Company  intends to continue  preparations  for Year 2000, it is not possible to
quantify  potential indirect effects resulting from the lack of readiness of any
third party with whom the Company conducts its business.

     Readers are cautioned that forward-looking statements contained in the Year
2000  disclosure  should be read in  conjunction  with the Company's  disclosure
under the heading "Cautionary Statements" on page 12.

Item 3.       Quantitative and Qualitative Disclosures About Market Risk.

         Not Applicable.

                                      -16-
<PAGE>


PART II:  OTHER INFORMATION


         Item 1.     Legal Proceedings.

                     No material  developments with respect to legal proceedings
                     occurred  during  the  period  covered  by  this  quarterly
                     report.

         Item 2.     Changes in Securities and Use of Proceeds.

                     None

         Item 3.     Defaults Upon Senior Securities.

                     None

         Item 4.     Submission of Matters to a Vote of Security Holders.

                     None

         Item 5.     Other Information.

                     None

         Item 6.     Exhibits and Reports on Form 8-K.

(a)    Exhibits:

                                  EXHIBIT INDEX

      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

                                      -17-
<PAGE>


      Exhibit
      Number                                Description
      -------                               -----------

       10.1      Lease,  dated  as of July 1,  1998,  by and  between  Brookdale
                 Living Communities of Connecticut-WH,  Inc., as lessee, and The
                 Chatfield  Business Trust, S.T., as lessor-owner, as filed with
                 the  Securities  and  Exchange  Commission  on July 16, 1998 as
                 Exhibit 10.1 to the Company's Form 8-K dated July 2, 1998 (File
                 No. 0-22253) and incorporated herein by reference

       10.2      Fixed Rate Program  Promissory Note Secured by Mortgage,  dated
                 July 1, 1998,  from The  Chatfield  Business  Trust,  S.T.,  as
                 maker, payable to the order of Heller Financial, Inc., as filed
                 with the Securities and Exchange Commission on July 16, 1998 as
                 Exhibit 10.2 to the Company's Form 8-K dated July 2, 1998 (File
                 No. 0-22253) and incorporated herein by reference

       10.3      Guaranty,  dated as of July 1, 1998, issued by Brookdale Living
                 Communities  of   Connecticut-WH,   Inc.  in  favor  of  Heller
                 Financial,  Inc., as filed  with the  Securities  and  Exchange
                 Commission  on July 16, 1998 as Exhibit  10.3 to the  Company's
                 Form 8-K dated July 2, 1998 (File No. 0-22253) and incorporated
                 herein by reference

       10.4      Certificate  A Pledge  Agreement,  dated as of July 1, 1998, by
                 Brookdale Living Communities of  Connecticut-WH,  Inc. in favor
                 of The Chatfield Business Trust, S.T., Wilmington Trust Company
                 and  LaSalle  National  Bank, as filed with the Securities  and
                 Exchange  Commission  on July 16,  1998 as Exhibit  10.4 to the
                 Company's  Form 8-K dated July 2, 1998 (File No.  0-22253)  and
                 incorporated herein by reference

       10.5      Certificate  B Pledge  Agreement,  dated as of July 1, 1998, by
                 Brookdale Living Communities of  Connecticut-WH,  Inc. in favor
                 of The Chatfield Business Trust, S.T., Wilmington Trust Company
                 and  LaSalle  National  Bank, as filed with the Securities  and
                 Exchange  Commission  on July 16,  1998 as Exhibit  10.5 to the
                 Company's  Form 8-K dated July 2, 1998 (File No.  0-22253)  and
                 incorporated herein by reference

       10.6      Hazardous Substance Indemnification Agreement, dated as of July
                 1, 1998, from Brookdale Living  Communities of  Connecticut-WH,
                 Inc. and Brookdale Living Communities,  Inc. in favor of Heller
                 Financial,  Inc., as filed  with the  Securities  and  Exchange
                 Commission  on July 16, 1998 as Exhibit  10.6 to the  Company's
                 Form 8-K dated July 2, 1998 (File No. 0-22253) and incorporated
                 herein by reference

       10.7      Indemnity  Agreement,  dated as of July 1, 1998, from Brookdale
                 Living  Communities,  Inc. in favor of Wilmington Trust Company
                 and Bank  Hapoalim,  B.M., as filed  with  the  Securities  and
                 Exchange  Commission  on July 16,  1998 as Exhibit  10.7 to the
                 Company's  Form 8-K dated July 2, 1998 (File No.  0-22253)  and
                 incorporated herein by reference

       10.8      Letter   Agreement   regarding   liability  for  carve-outs  to
                 non-recourse   provisions,   dated  July  1,  1998,  issued  by
                 Brookdale   Living   Communities,   Inc.  in  favor  of  Heller
                 Financial,  Inc., as filed  with the  Securities  and  Exchange
                 Commission  on July 16, 1998 as Exhibit  10.8 to the  Company's
                 Form 8-K dated July 2, 1998 (File No. 0-22253) and incorporated
                 herein by reference

       10.9      First  Amendment to Loan  Agreement and  Documents, dated as of
                 July 16, 1998, by and between the Company and LaSalle  National
                 Bank         

       10.10     Amended  and  Restated  Note dated July 16,  1998 issued by the
                 Company payable to the order of LaSalle National Bank

       12        Computation  of Ratio of Earnings to Combined Fixed Charges

       27        Financial Data Schedule


                                      -18-
<PAGE>



(b)      Reports on Form 8-K:

         On July 14,  1998,  the  Company  filed a Current  Report on Form 8-K/A
dated  May 12,  1998  with the  Securities  and  Exchange  Commission  including
pursuant  to Item 7 of Form 8-K/A the  audited  statements  of The Atrium of San
Jose which was leased by the Company on May 12, 1998 and the unaudited pro forma
statements of the Company  reflecting  all  acquisitions  and leases through The
Atrium of San Jose.

         On July 16, 1998,  the Company filed a Current Report on Form 8-K dated
June 25, 1998 with the Securities and Exchange Commission announcing pursuant to
Item 5 of Form 8-K the Company's  $100,000,000  financing  agreement with Nomura
Asset  Management  Corporation,  providing  financing  for the  development  and
construction of senior living facilities to be owned or developed and managed by
the Company or an affiliate of the Company.

         On July 16, 1998,  the Company filed a Current Report on Form 8-K dated
July 2, 1998 with the Securities and Exchange Commission  announcing pursuant to
Item 2 of Form 8-K the lease of The Chatfield which commenced on July 2, 1998.

         On July 17, 1998,  the Company filed a Current Report on Form 8-K dated
June 30, 1998 with the Securities and Exchange Commission announcing pursuant to
Item 5 of Form 8-K the Development Agreement for a construction site in Raleigh,
North Carolina.


                                      -19-
<PAGE>


                                                    SIGNATURES


Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.


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


Date:  November 16, 1998           /s/ Mark J. Schulte
       -----------------           ----------------------------------
                                   Mark J. Schulte
                                   President and
                                   Chief Executive Officer


Date:  November 16, 1998           /s/ Darryl W. Copeland, Jr.
       -----------------           ----------------------------------
                                   Darryl W. Copeland, Jr.
                                   Executive Vice President and
                                   Chief Financial Officer



                                      -20-