BROOKDALE SENIOR LIVING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Activities, with the effective portion of the change in fair value of the derivative recorded in other comprehensive income and the ineffective portion included in the change in fair value of derivatives and amortization in the statement of operations.

On October 1, 2006, the Company elected to discontinue hedge accounting prospectively for the previously designated swap instruments. Consequently, the net gains and losses accumulated in other comprehensive income at that date of $1.3 million related to the previously designated swap instruments are being amortized to interest expense over the life of the underlying hedged debt payments. In the future, if the underlying hedged debt is extinguished or refinanced, the remaining unamortized gain or loss in accumulated other comprehensive income will be recognized in net income. Although hedge accounting was discontinued on October 1, 2006, the swap instruments remain outstanding and are carried at fair value in the consolidated balance sheet and the change in fair value beginning October 1, 2006 has been included in the statements of operations.

In April 2007, the Company entered into two separate treasury rate locks for notional amounts of $70 million and $50 million in anticipation of the Company’s planned future issuance of $120 million of fixed-rate debt. Both rate locks expired in May 2007 and resulted in a cash receipt to the Company of approximately $0.4 million which has been included in the results from operations.

8.	Legal Proceedings

In connection with the sale of certain facilities to Ventas Realty Limited Partnership (‘‘Ventas’’) in 2004, two legal actions have been filed. The first action was filed on September 15, 2005, by current and former limited partners in 36 investing partnerships in the United States District Court for the Eastern District of New York captioned David T. Atkins et al. v. Apollo Real Estate Advisors, L.P., et al. (the ‘‘Action’’). On March 17, 2006, a third amended complaint was filed in the Action. The third amended complaint is brought on behalf of current and former limited partners in 14 investing partnerships. It names as defendants, among others, the Company, Brookdale Living Communities, Inc. (‘‘BLC’’), a subsidiary of the Company, GFB-AS Investors, LLC (‘‘GFB-AS’’), a subsidiary of BLC, the general partners of the 14 investing partnerships, which are alleged to be subsidiaries of GFB-AS, Fortress Investment Group (‘‘Fortress’’), an affiliate of our largest stockholder, and R. Stanley Young, our former Chief Financial Officer. The nine count third amended complaint alleges, among other things, (i) that the defendants converted for their own use the property of the limited partners of 11 partnerships, including through the failure to obtain consents the plaintiffs contend were required for the sale of facilities indirectly owned by those partnerships to Ventas; (ii) that the defendants fraudulently persuaded the limited partners of three partnerships to give up a valuable property right based upon incomplete, false and misleading statements in connection with certain consent solicitations; (iii) that certain defendants, including GFB-AS, the general partners, and our former Chief Financial Officer, but not including the Company, BLC, or Fortress, committed mail fraud in connection with the sale of facilities indirectly owned by the 14 partnerships at issue in the Action to Ventas; (iv) that certain defendants, including GFB-AS and our former Chief Financial Officer, but not including the Company, BLC, the general partners, or Fortress, committed wire fraud in connection with certain communications with plaintiffs in the Action and another investor in a limited partnership; (v) that the defendants, with the exception of the Company, committed substantive violations of the Racketeer Influenced and Corrupt Organizations Act (‘‘RICO’’); (vi) that the defendants conspired to violate RICO; (vii) that GFB-AS and the general partners violated the partnership agreements of the 14 investing partnerships; (viii) that GFB-AS, the general partners, and our former Chief Financial Officer breached fiduciary duties to the plaintiffs; and (ix) that the defendants were unjustly enriched. The plaintiffs have asked for damages in excess of $100.0 million on each of the counts described above, including treble damages for the RICO claims. On April 18, 2006, we filed a motion to dismiss the claims with prejudice, which remains pending before the court, and plan to continue to vigorously defend this Action. A putative class action lawsuit was

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BROOKDALE SENIOR LIVING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

also filed on March 22, 2006, by certain limited partners in four of the same partnerships involved in the Action in the Court of Chancery for the State of Delaware captioned Edith Zimmerman et al. v. GFB-AS Investors, LLC and Brookdale Living Communities, Inc. (the ‘‘Second Action’’). On November 21, 2006, an amended complaint was filed in the Second Action. The putative class in the Second Action consists only of those limited partners in the four investing partnerships who are not plaintiffs in the Action. The Second Action names as defendants BLC and GFB-AS. The complaint alleges a claim for breach of fiduciary duty arising out of the sale of facilities indirectly owned by the investing partnerships to Ventas and the subsequent lease of those facilities by Ventas to subsidiaries of BLC. The plaintiffs seek, among other relief, an accounting, damages in an unspecified amount, and disgorgement of unspecified amounts by which the defendants were allegedly unjustly enriched. On December 12, 2006, we filed an answer denying the claim asserted in the amended complaint and providing affirmative defenses. On December 27, 2006, the plaintiffs moved to certify the Action as a class action. Both the plaintiffs and defendants have served document production requests and the Action is currently in the beginning stages of document discovery. We also intend to vigorously defend this Second Action. Because these actions are in an early stage we cannot estimate the possible range of loss, if any.

In addition, we have been and are currently involved in other litigation and claims incidental to the conduct of our business which are comparable to other companies in the senior living industry. Certain claims and lawsuits allege large damage amounts and may require significant legal costs to defend and resolve. Similarly, our industry is continuously subject to scrutiny by governmental regulators, which could result in litigation related to regulatory compliance matters. As a result, we maintain insurance policies in amounts and with coverage and deductibles we believe are adequate, based on the nature and risks of our business, historical experience and industry standards. Because our current policies provide for deductibles of $3.0 million for each claim, we are, in effect, self insured for most claims.

9.	Supplemental Disclosure of Cash Flow Information ($ in 000’s)

			Six Months Ended June 30,
			2007						2006
Supplemental Disclosure of Cash Flow Information:
Interest paid				$	67,564					$	35,362
Income taxes paid				$	501					$	335
Supplemental Schedule of Non-cash Operating, Investing and Financing Activities:
Consolidation of limited partnerships pursuant to EITF 04-5 on January 1, 2006:
Property, plant, equipment and leasehold intangibles, net				$	—					$	31,645
Accounts receivable and other					—						1,410
Cash and investments-restricted					—						1,204
Accrued expenses and other					—						(2,245	)
Tenant refundable fees and security deposits					—						(177	)
Debt					—						(19,723	)
Minority interest					—						(12,114	)
Net				$	—					$	—
De-consolidation of leased development property:
Property, plant, equipment and leasehold intangibles, net				$	(2,978	)				$	—

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BROOKDALE SENIOR LIVING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

			Six Months Ended June 30,
			2007						2006
Debt					2,978						—
Net				$	—					$	—
Acquisition of assets, net of related payables and cash received, net:
Cash and investments-restricted				$	387					$	1,719
Accounts receivable					64						—
Property, plant, equipment and leasehold intangibles, net					155,957						706,647
Investment in unconsolidated ventures					(1,342	)					—
Goodwill					3,101						—
Other intangible assets, net					(668	)					—
Trade accounts payable, accrued expenses and other					(1,336	)					—
Debt obligations					(5,273	)					—
Capital lease obligations assumed					—						(163,245	)
Deferred tax liability					—						(9,812	)
Minority interest					650						—
Other, net					(1,752	)					(3,414	)
Acquisition of assets, net of related payables and cash received				$	149,788					$	531,895

10.	Facility Leases

A summary of facility lease expense and the impact of straight-line adjustment and amortization of deferred gains are as follows ($ in 000’s):

			Three Months Ended June 30,												Six Months Ended June 30,
			2007						2006						2007						2006
Cash basis payment				$	62,233					$	42,470					$	125,463					$	84,032
Straight-line expense					6,028						5,239						12,364						10,498
Amortization of deferred gain					(1,085	)					(1,086	)					(2,170	)					(2,173	)
Facility lease expense				$	67,176					$	46,623					$	135,657					$	92,357

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BROOKDALE SENIOR LIVING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

11.	Other Comprehensive Loss, Net

The following table presents the after-tax components of the Company’s other comprehensive loss for the periods presented ($ in 000’s):

			Three Months Ended June 30,												Six Months Ended June 30,
			2007						2006						2007						2006
Net loss				$	(18,675	)				$	(20,259	)				$	(53,815	)				$	(39,585	)
Unrealized gain on derivatives					—						1,279						—						9,191
Reclassification of net gains on derivatives into earnings					(393	)					—						(786	)					—
Amortization of payments from settlement of forward interest swaps					94						94						188						188
Other					116						—						232						—
Total comprehensive loss				$	(18,858	)				$	(18,886	)				$	(54,181	)				$	(30,206	)

12.	Income Taxes

The Company’s effective tax rate for the three months ending June 30, 2007 and 2006 are 39.7% and 1.4%, respectively, and for the six months ending June 30, 2007 and 2006 are 38.0% and 1.7%, respectively. The difference between the periods is primarily due to the ability to benefit book losses in the first two quarters of 2007 compared to the same period in 2006 as a result of the deferred tax liabilities generated in connection with the acquisitions of American Retirement Corporation (‘‘ARC’’) and Southern Assisted Living, Inc. (‘‘SALI’’).

The Company adopted the provisions of FIN 48 on January 1, 2007. The adoption of FIN 48 resulted in a transition adjustment to goodwill of $1.6 million, comprised of $1.4 million in taxes and $0.2 million in interest and penalties. The adoption impacted goodwill versus retained earnings as the original benefit recorded on these positions was not recorded through earnings as the Company previously reserved for all deferred tax assets. Due to the recognition of deferred tax liabilities in connection with the ARC and SALI acquisitions, the previously recorded valuation allowance was reversed through purchase accounting and thus the benefit was reflected as a component of goodwill. Interest and penalties related to these tax positions are classified as tax expense in the Company’s financial statements. Tax returns for all wholly owned subsidiaries for the years 2002 through 2006 are subject to future examination by tax authorities. In addition, for one wholly owned subsidiary, Alterra Healthcare Corporation, tax returns are open from 1999 through 2001 to the extent of the net operating losses generated during those periods. The Company has reviewed its FIN 48 position as of June 30, 2007, and has determined that, with the exception of updating the interest computation for the period, no additional reserve is required.

13.	Segment Results

Under SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, the Company determined that it has four reportable segments based on the way that our chief operating decision makers organize the Company’s business activities for making operating decisions and assessing performance. The four segments are independent living; assisted living; retirement centers/CCRCs; and management services.

	•	Independent Living.    Our independent living facilities are primarily designed for middle to upper income senior citizens age 70 and older who desire an upscale residential environment providing the highest quality of service. The majority of our independent living facilities consist of both independent living and assisted living units in a single facility, which allows residents to ‘‘age-in-place’’ by providing them with a continuum of senior independent and assisted living services.

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BROOKDALE SENIOR LIVING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

	•	Assisted Living.    Our assisted living facilities offer housing and 24-hour assistance with activities of daily life to mid-acuity frail and elderly residents. Our assisted living facilities include both freestanding, multi-story facilities and freestanding, single-story facilities. We also operate memory care facilities, which are freestanding assisted living facilities specially designed for residents with Alzheimer’s disease and other dementias.

	•	Retirement Centers/CCRCs.    Our retirement centers/CCRCs are large communities that offer a variety of living arrangements and services to accommodate all levels of physical ability and health. Most of our retirement centers/CCRCs have independent living, assisted living and skilled nursing available on one campus, and some also include memory care and Alzheimer’s units.

	•	Management Services.    Our management services segment includes facilities owned by others and operated by us pursuant to management agreements. Under our management agreements for these facilities, we receive management fees as well as reimbursed expenses, which represent the reimbursement of certain expenses we incur on behalf of the owners.

The following table sets forth certain segment financial and operating data ($ in 000’s)

			Three Months Ended June 30,												Six Months Ended June 30,
			2007						2006						2007						2006
Revenue(1)
Independent Living				$	112,197					$	95,697					$	219,307					$	186,404
Assisted Living					196,847						146,234						390,314						258,097
Retirement Centers/CCRCs					147,578						25,911						292,339						44,377
Management Services					1,788						585						3,284						1,732
				$	458,410					$	268,427					$	905,244					$	490,610
Segment operating income(2)
Independent Living				$	50,217						43,048					$	96,999						82,829
Assisted Living					72,006						58,997						143,860						99,263
Retirement Centers/CCRCs					48,533						4,516						94,426						8,560
Management Services					1,252						410						2,299						1,212
				$	172,008					$	106,971					$	337,584					$	191,864
General and administrative (including non-cash stock-based compensation expense)(3)				$	35,222					$	22,950					$	75,426					$	43,690
Facility lease expense					67,176						46,623						135,657						92,357
Deprecation and amortization					82,471						30,947						155,455						53,246
(Loss) income from operations				$	(12,861	)				$	6,451					$	(28,954	)				$	2,571
Total Assets
Independent living																$	1,156,772					$	1,080,744
Assisted living																	1,296,941						852,156
Retirement Centers/CCRCs																	2,069,645						334,494
Corporate and Management Services																	331,126						113,792
																$	4,854,484					$	2,381,186

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BROOKDALE SENIOR LIVING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

(1)	All revenue is earned from external third parties in the United States.

(2)	Segment operating income is defined as segment revenues less segment operating expenses (excluding depreciation and amortization).

(3)	Net of general and administrative costs allocated to management services reporting segment.

14.	Subsequent Events

In July 2007, the Company entered into a series of forward starting interest rate swaps in the aggregate notional amount of $553.1 million in anticipation of planned future financing transactions as well as the replacement of certain existing hedges that will be expiring.

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

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

Certain statements in this Quarterly Report on Form 10-Q and other information we provide from time to time may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Those forward-looking statements include all statements that are not historical statements of fact and those regarding our intent, belief or expectations, including, but not limited to, statements relating to our ability to deploy capital, close accretive transactions, anticipate, manage and address industry trends and their effect on our business, grow dividends, generate growth organically or through acquisitions, achieve operating efficiencies and cost savings, expand our offering of ancillary services (therapy and home health) to additional facilities, expand existing facilities, develop new facilities, secure financing and increase revenues, earnings, Adjusted EBITDA, Cash From Facility Operations, and/or Facility Operating Income (as such terms are defined herein) and add residents and statements relating to our expectations for the performance of our entrance fee communities and our expected levels of expenditures. Words such as ‘‘anticipate(s)’’, ‘‘expect(s)’’, ‘‘intend(s)’’, ‘‘plan(s)’’, ‘‘target(s)’’, ‘‘project(s)’’, ‘‘believe(s)’’, ‘‘will’’, ‘‘would’’, ‘‘seek(s)’’, ‘‘estimate(s)’’ and similar expressions are intended to identify such forward-looking statements. These statements are based on management’s current expectations and beliefs and are subject to a number of risks and uncertainties that could lead to actual results differing materially from those projected, forecasted or expected. Although we believe that the assumptions underlying the forward-looking statements are reasonable, we can give no assurance that our expectations will be attained. Factors that could cause actual results to differ materially from our expectations include, but are not limited to, our ability to integrate the facilities of American Retirement Corporation (‘‘ARC’’) or other acquisitions into our operations; our continued ability to acquire facilities at attractive prices which will generate returns consistent with expectations; the possibility that the facilities that we have recently acquired and will acquire may not generate sufficient additional income to justify their acquisition; possibilities that conditions to closing of certain transactions will not be satisfied; the possibilities that changes in the capital markets, including changes in interest rates and/or credit spreads, or other factors could make financing more expensive or unavailable to us; a decrease in the overall demand for senior housing; general economic conditions and economic conditions in the markets in which we operate; downturns in the real estate markets in the regions where our facilities are located; competitive pressures within the industry and/or markets in which we operate; the creditworthiness of our residents; interest rate fluctuations; licensing risks; our failure to comply with federal, state and local laws and regulations; our failure to comply with environmental laws; the effect of future legislation or regulatory changes on our operations; and other risks detailed from time to time in our filings with the Securities and Exchange Commission, press releases and other communications, including those set forth under ‘‘Risk Factors’’ included in our Annual Report on Form 10-K for the year ended December 31, 2006. Such forward-looking statements speak only as of the date of this Quarterly Report. We expressly disclaim any obligation to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or change in events, conditions or circumstances on which any statement is based.

Executive Overview

During the second quarter of 2007, we continued to make significant progress in implementing the growth strategy outlined in our most recent Annual Report on Form 10-K. We are focusing on increasing our revenues, cash flows and dividends per share through a combination of: (i) organic growth in our existing operations; (ii) expansion of our ancillary service programs (including therapy and home health services); (iii) selected acquisitions of additional operating companies and facilities; and (iv) expansion of our existing facilities.

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As a result of these efforts, and as more fully described below, our revenues for the second quarter of 2007 increased to $458.4 million, an increase of $190.0 million, or 70.8%, over the second quarter of 2006. Including the effect of the historical results of the ARC facilities not included in our results of operations in the second quarter of 2006, same store revenues grew 7.8% over the second quarter of 2006.

In addition, we declared a dividend of $0.50 per share for the second quarter, an increase of 11.1% over the $0.45 per share dividend declared for the first quarter of 2007 and an increase of 42.9% over the $0.35 per share dividend declared for the second quarter of 2006.

We continued to make progress in expanding our ancillary services programs to additional facilities during the second quarter. For the six months ended June 30, 2007, we have completed the roll-out of our ancillary services program to over 10,000 units.

Our focus on growth through selective acquisition of new properties, as well as previously leased or managed properties, also continued during the second quarter. During the quarter, we closed four acquisitions, with an aggregate purchase price of $179.2 million. As a result of these acquisitions, we acquired ownership of three facilities that were previously leased or managed by us, and acquired leasehold interests in three other facilities. We also acquired ownership of a facility in which we held partnership interests.

In addition, we continued to invest in our facility expansion program during the quarter. For the six months ended June 30, 2007, we have completed expansions at five facilities. As of the end of the quarter, we had another four expansion projects under construction.

As a result of our acquisition and expansion activity, the number of units we operated as of the end of the second quarter increased to 51,616, an increase of 17,270, or 50.3%, over the same prior year quarter.

Although we continued to experience volatility in the entrance fee portion of our business during the second quarter, our net entrance fee sales increased from the previous quarter. The timing of entrance fee sales is subject to a number of different factors and is also inherently subject to variability (positively or negatively) when measured over the short-term. We believe that our entrance fee sales during the quarter continued to be negatively impacted by softness in the housing markets in certain of the markets in which we operate (primarily certain areas of Florida and Arizona). In response, we have increased our sales and marketing efforts in those markets and expect entrance fee sales to normalize over the longer term.

Consolidated Results of Operations

Three Months Ended June 30, 2007 and 2006

The following table sets forth, for the periods indicated, statement of operations items and the amount and percentage of increase or decrease of these items. The results of operations for any particular period are not necessarily indicative of results for any future period. The following data should be read in conjunction with our condensed consolidated financial statements and the notes thereto, which are included herein. Our results reflect the inclusion of acquisitions that occurred during the respective reporting periods. Refer to our most recent Annual Report on Form 10