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As filed with the Securities and Exchange Commission on July 26, 2007

Registration No. 333-142897

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

AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

THE ENSIGN GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)

Delaware (State or Other Jurisdiction of Incorporation or Organization)	8051 (Primary Standard Industrial Classification Code Number)	33-0861263 (I.R.S. Employer Identification No.)
27101 Puerta Real, Suite 450 Mission Viejo, CA 92691 (949) 487-9500 (Address, Including Zip Code and Telephone Number, Including Area Code, of Registrant's Principal Executive Offices)
Gregory K. Stapley, Esq. Vice President and General Counsel The Ensign Group, Inc. 27101 Puerta Real, Suite 450 Mission Viejo, CA 92691 (949) 487-9500 (Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)

Copies to:
Nolan S. Taylor, Esq. Ellen S. Bancroft, Esq. Parker A. Schweich, Esq. David F. Marx, Esq. Dorsey & Whitney LLP 38 Technology Drive Irvine, CA 92618 (949) 932-3600	Kirt W. Shuldberg, Esq. Shana C. Hood, Esq. Heller Ehrman LLP 4350 La Jolla Village Drive, 7th Floor San Diego, CA 92122-1246 (858) 450-8400

Approximate date of commencement of proposed sale to the public:
As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.    o

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o

CALCULATION OF REGISTRATION FEE

Title of Each Class of Securities to be Registered	Proposed Maximum Aggregate Offering Price(1)(2)	Amount of Registration Fee
Common Stock, $0.001 par value per share	$95,000,000	$2,917(3)

(1)

Includes the offering price attributable to shares that the underwriters have the option to purchase solely to cover over-allotments, if any.

(2)

Estimated solely for the purpose of computing the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.

(3)

Previously paid.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

The information in this prospectus is not complete and may be changed. We and the selling stockholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

Subject to completion, dated July 26, 2007

PROSPECTUS

                                     Shares

Common Stock

This is an initial public offering of shares of common stock of The Ensign Group, Inc. We are offering                        shares of our common stock in this offering.

Prior to this offering, there has been no public market for our common stock. We expect the public offering price to be between $                        and $                        per share. We have applied to list our common stock on the NASDAQ Global Market under the symbol "ENSG."

Investing in our common stock involves risks. See "Risk Factors" beginning on page 10.

	Per Share	Total
Public Offering Price	$	$
Underwriting Discounts and Commissions	$	$
Proceeds, before Expenses, to The Ensign Group, Inc.	$	$

The underwriters have a 30-day option to purchase up to                        additional shares of our common stock from the selling stockholders identified in this prospectus to cover over-allotments, if any. We will not receive any proceeds from the sale of common stock by the selling stockholders.

The underwriters expect to deliver the shares to purchasers on or about                        , 2007.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

D.A. DAVIDSON & CO. STIFEL NICOLAUS

The date of this Prospectus is                        , 2007

TABLE OF CONTENTS

	Page
PROSPECTUS SUMMARY	1
RISK FACTORS	10
FORWARD-LOOKING STATEMENTS	43
USE OF PROCEEDS	45
DIVIDEND POLICY	46
CAPITALIZATION	47
DILUTION	48
SELECTED CONSOLIDATED FINANCIAL DATA	49
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	53
INDUSTRY	82
BUSINESS	90
MANAGEMENT	102
COMPENSATION DISCUSSION AND ANALYSIS	107
TRANSACTIONS WITH RELATED PERSONS	126
PRINCIPAL AND SELLING STOCKHOLDERS	129
DESCRIPTION OF CERTAIN INDEBTEDNESS	132
DESCRIPTION OF CAPITAL STOCK	134
SHARES ELIGIBLE FOR FUTURE SALE	138
MATERIAL U.S. FEDERAL INCOME AND ESTATE TAX CONSIDERATIONS FOR NON-U.S. HOLDERS	140
UNDERWRITING	143
LEGAL MATTERS	147
EXPERTS	147
WHERE YOU CAN FIND MORE INFORMATION	147
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS	F-1

        You should rely only on the information contained in this prospectus. We have not authorized any other person to provide you with different or additional information. If anyone provides you different or inconsistent information, you should not rely on it. We and the selling stockholders (solely to the extent the over-allotment option is exercised) are offering to sell and seeking offers to buy shares of our common stock only in jurisdictions where offers or sales are permitted. The information in this prospectus is only accurate as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of our common stock.

        For investors outside the United States:    Neither we nor any of the selling stockholders, nor any of the underwriters for the offering of our common stock, have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about, and to observe any restrictions relating to, this offering and the distribution of this prospectus.

PROSPECTUS SUMMARY

This summary highlights selected information contained in greater detail elsewhere in this prospectus and does not contain all of the information that you should consider before investing in our common stock. You should read the entire prospectus carefully, especially the risks of investing in our common stock, which we discuss under "Risk Factors" and our consolidated financial statements and related notes. In this prospectus, the terms "Ensign," "we," "us" and "our" refer to The Ensign Group, Inc. and its separate, wholly-owned independent subsidiaries, unless otherwise stated.

The Ensign Group, Inc.

        We are a provider of skilled nursing and rehabilitative care services through the operation of facilities located in California, Arizona, Texas, Washington, Utah and Idaho. As of July 20, 2007, we owned or leased 61 facilities. All of our facilities are skilled nursing facilities, except for four facilities that offer both skilled nursing and assisted living arrangements in a campus setting, and three stand-alone assisted living facilities. At our facilities, each of which strives to be the facility of choice in the community it serves, we provide a broad spectrum of skilled nursing and assisted living services, physical, occupational and speech therapies, and other rehabilitative and healthcare services, for both long-term residents and short-stay rehabilitation patients. Our facilities have a collective capacity of over 7,400 skilled nursing, assisted living and independent living beds. As of July 20, 2007, we owned 23 of our facilities and operated an additional 38 facilities under long-term lease arrangements with options to purchase 12 of those 38 facilities. For the year ended December 31, 2006 and the three months ended March 31, 2007, our skilled nursing services, including our integrated rehabilitative therapy services, generated approximately 97% of our revenue.

        We have increased our revenue from $102.1 million in 2002 to $358.6 million in 2006. Over the same period, we have increased our net income from $3.6 million in 2002 to $22.5 million in 2006. We believe that much of our historical growth can be attributed to our expertise in acquiring underperforming facilities and transforming them into what we believe are market leaders in clinical quality, staff competency, employee loyalty and financial performance.

        We were formed with the goal of establishing a new standard of quality care within the skilled nursing industry. Our organizational structure is centered around local leadership, with most key decisions residing at the facility level. Facility leaders and staff are trained and incentivized to pursue superior clinical outcomes, operating efficiencies and financial performance at their individual facility. In addition, our facility leaders are incentivized and enabled to share real-time operating data and to assist other facility leaders on ways to improve clinical care, maximize patient satisfaction and augment operational efficiencies, resulting in a high level of interdependence and sharing of best practices.

Competitive Strengths

        We believe our success in acquiring, integrating and improving our facilities is a direct result of the following key competitive strengths:

•

experienced and dedicated employees;



•

reputation for quality care;



•

unique incentive programs;



•

staff and leadership development;



•

innovative "Service Center" approach, which provides centralized services for our facilities;



•

community focused approach;



•

attractive asset base; and



•

investment in information technology.

1

Growth Strategy

        Much of our historical growth can be attributed to our expertise in acquiring underperforming facilities and transforming them into successful standalone facilities with strengths in clinical quality, staff competency, employee loyalty and financial performance. We believe our competitive strengths position us well for future revenue and earnings growth. Key elements of our growth strategy include:

•

continue to grow our talent base and develop future leaders;



•

increase our mix of high acuity patients;



•

focus on organic growth and internal operating efficiencies;



•

continue to acquire additional facilities, in existing and new markets; and



•

expand and renovate our existing facilities, and potentially begin constructing new facilities.

Our Industry

        The senior living and long-term care industries consist of three primary living arrangement alternatives, with varying degrees of healthcare offerings depending upon the type of living arrangement and the health status of the patient or resident. The three primary living arrangement alternatives include independent living facilities, assisted living facilities and skilled nursing facilities. In addition, these alternatives are sometimes combined on a single campus, creating continuing care retirement communities. We predominantly focus on skilled nursing facilities, which provide both short-term post-acute rehabilitative care for patients and long-term custodial care for residents who require skilled nursing and therapy care on an inpatient basis. We estimate the skilled nursing market in the United States represented approximately $100 billion in revenue in 2005.

        Some of the major trends that have impacted the long-term care industry include:

•

shift of patient care to lower cost alternatives by federal and state governments as a result of increasing healthcare costs;



•

fragmentation in the senior living industry, and in particular in the skilled nursing market, providing significant acquisition and consolidation opportunities; and



•

increased demand for skilled nursing services resulting from increasing life expectancies and the aging population, as well as the modest decrease in the number of skilled nursing facilities in the United States over the past five years.

Acquisitions in 2006 and 2007

        Since January 1, 2006, we have added an aggregate of 15 facilities located in Texas, Washington, Utah, Idaho, Arizona and California that we had not operated previously, 11 of which we purchased and four of which we acquired under long-term lease arrangements. Three of the long-term lease arrangements include purchase options. Thirteen of these acquisitions were skilled nursing facilities, one was an assisted living facility and one was a campus that offers both skilled nursing and assisted living services. These facilities contribute 1,657 beds to our operations, increasing our total capacity by 29%. With these acquisitions, we entered two new markets, Utah and Idaho. In Texas, we increased our capacity by 684 beds, or approximately 146%, and more than doubled the number of our facilities in that state.

        In 2006, we purchased eight facilities for an aggregate purchase price of $31.1 million, of which $29.0 million was paid in cash, and $2.1 million was financed with the assumption of a loan on one of the facilities. In 2006, we also purchased the underlying assets of three facilities that we were operating under long-term lease arrangements for an aggregate purchase price of $11.1 million, which ultimately was financed pursuant to our Third Amended and Restated Loan Agreement with General Electric Capital Corporation.

2

        In 2007, we have acquired four additional long-term care facilities. Three of these facilities were acquired for an aggregate purchase price of $9.4 million in cash, which included two skilled nursing facilities in Texas and one skilled nursing facility in Utah. In July 2007, we acquired a long-term care facility in Utah that offers both skilled nursing and assisted living services, by assuming the operations of that facility under an operating lease agreement. No amounts were paid to the prior facility operators and we did not acquire any assets or assume any liabilities as part of this transaction. In addition, in July 2007, we exercised an option to purchase one of our leased facilities for $3.3 million in cash, bringing the total of our owned facilities to 23.

Risks Relating to our Company

        Investing in our common stock involves risks. As part of your evaluation of our company, you should consider the risks associated with our industry, our business, and this offering. See "Risk Factors" beginning on page 10 of this prospectus for a discussion of these risks, including, among others:

•

the impact of federal and state changes to reimbursement and other aspects of Medicaid and Medicare, from which we derive a significant portion of our revenue;



•

continuing cost containment pressures on Medicare and Medicaid spending;



•

the costs of complying with extensive and complex federal and state government laws and regulations;



•

preclusion from participating in federal or state healthcare programs, including Medicare and Medicaid;



•

changes in the acuity mix of patients in our facilities as well as payor mix and payment methodologies;



•

increased competition for, or a shortage of, nurses and other skilled personnel;



•

litigation that could result in significant legal costs and large settlement amounts or damage awards;



•

difficulties in completing future facility acquisitions and efficiently integrating our acquisitions;



•

our dependence upon receiving funds from multiple independent operating subsidiaries; and



•

the high ownership concentration of our common stock among affiliates of ours, which may prevent other stockholders from influencing significant corporate decisions.

Corporate Information

        The Ensign Group, Inc. is a holding company. All of our facilities are operated by separate, wholly-owned, independent subsidiaries that have their own management, employees and assets. The use of "we," "us" and "our" throughout this prospectus is not meant to imply that our facilities are operated by the same entity. In addition, one of our wholly-owned subsidiaries, which we call our Service Center, provides centralized accounting, payroll, human resources, information technology, legal, risk management and other centralized services to each operating subsidiary through contractual relationships between the Service Center and such subsidiaries. We were incorporated in 1999 in Delaware. Our executive offices are located at 27101 Puerta Real, Suite 450, Mission Viejo, CA 92691, and our telephone number is (949) 487-9500. Our corporate website is located at www.ensigngroup.net. The information contained in, or that can be accessed through, our website does not constitute a part of this prospectus.

        Ensign™ is our United States trademark. All other trademarks and trade names appearing in this prospectus are the property of their respective owners.

        Except as otherwise indicated, the market data and industry statistics in this prospectus are based upon independent industry publications and other publicly available information. While we believe these publications to be reliable and appropriate, we have not independently verified such data and statistics, and we do not make any representation as to the accuracy of such information.

3

The Offering

Common stock offered by Ensign	shares
Common stock to be outstanding after this offering	shares
Common stock offered by the selling stockholders pursuant to the over-allotment option	shares
Use of proceeds	We expect to use the net proceeds from the sale of the shares of common stock we are offering to acquire additional facilities, to upgrade existing facilities, and for working capital and other general corporate purposes. See "Use of Proceeds." We will not receive any proceeds from the sale of shares of common stock offered by the selling stockholders pursuant to the exercise by the underwriters of their over-allotment option.
Dividend policy	We have paid annual cash dividends since 2002, and quarterly cash dividends for each quarter since the first quarter of 2004. For the first and second quarters of 2007, we paid or will pay cash dividends to our stockholders of $0.04 per share, for an aggregate dividend of approximately $1,316,000. For 2006, we paid cash dividends to our stockholders of $0.03 per share for the first three quarters, and $0.04 per share for the fourth quarter, for an aggregate dividend of approximately $2,132,000. For 2005, we paid cash dividends to our stockholders of $0.02 per share for the first three quarters, and $0.03 per share for the fourth quarter, for an aggregate dividend of approximately $1,502,000. For 2004, we paid cash dividends to our stockholders of $0.01 per share for the first two quarters, and $0.015 per share for each of the third and fourth quarters, for an aggregate dividend of approximately $835,000. For 2002 and 2003, we paid annual cash dividends to our stockholders of an aggregate of approximately $240,000 and $408,000, respectively. We currently intend to continue to pay regular quarterly dividends to the holders of our common stock. The payment of dividends is subject to the discretion of our board of directors and will depend on many factors, including our results of operations, financial condition and capital requirements, earnings, general business conditions, restrictions imposed by financing arrangements, legal restrictions on the payment of dividends and other factors the board of directors deems relevant.
Risk factors	See "Risk Factors" and the other information included in this prospectus for a discussion of factors you should consider carefully before investing in shares of our common stock.
Proposed NASDAQ Global Market symbol	ENSG

4

        The number of shares of common stock to be outstanding after this offering is based on 16,446,380 shares outstanding as of March 31, 2007, which assumes the conversion of all of our outstanding preferred stock into 2,741,180 shares of common stock upon the completion of this offering, and does not include, as of such date:

•

1,164,400 shares of common stock issuable upon the exercise of outstanding options at a weighted average exercise price of $6.20 per share; and



•

shares of common stock reserved for future grant or issuance under our 2007 Omnibus Incentive Plan, which will become effective in connection with the completion of this offering.

        Unless otherwise indicated, all information in this prospectus assumes:

•

the underwriters will not exercise their over-allotment option to purchase up to                        additional shares of common stock from the selling stockholders;



•

no exercise of outstanding options;



•

the initial public offering price will be $                        per share; and



•

the effectiveness of our amended and restated certificate of incorporation and amended and restated bylaws upon completion of the offering.

5

Summary Consolidated Financial Data

        The following tables summarize our consolidated financial data for the periods presented and should be read together with "Selected Consolidated Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial data and related notes appearing elsewhere in this prospectus. The summary consolidated statement of income data for the years ended December 31, 2004, 2005 and 2006 and the consolidated balance sheet data as of December 31, 2005 and 2006 included in this prospectus have been derived from our audited consolidated financial statements included herein. Our summary consolidated balance sheet data as of December 31, 2004 has been derived from our audited consolidated financial statements that are not included in this prospectus. Our summary consolidated statement of income data for the three months ended March 31, 2006 and 2007 and the consolidated balance sheet data as of March 31, 2007 are derived from our unaudited consolidated financial statements included herein. Our historical results are not necessarily indicative of the results that may be expected in the future.

			Year Ended December 31,									Three Months Ended March 31,
			2004			2005			2006			2006			2007
			(in thousands, except share and per share data)
Consolidated Statement of Income Data:
Revenue			$	244,536		$	300,850		$	358,574		$	83,352		$	97,978
Expenses:
	Cost of services (exclusive of facility rent and depreciation and amortization shown separately below)			199,986			239,379			284,847			65,601			80,847
	Facility rent—cost of services			14,773			16,118			16,404			4,055			4,155
	General and administrative expense			8,537			10,909			14,210			3,260			3,746
	Depreciation and amortization			1,934			2,458			4,221			752			1,532
		Total expenses		225,230			268,864			319,682			73,668			90,280
Income from operations				19,306			31,986			38,892			9,684			7,698
Other income (expense):
	Interest expense			(1,565	)		(2,035	)		(2,990	)		(578	)		(1,169	)
	Interest income			85			491			772			162			392
		Other expense, net		(1,480	)		(1,544	)		(2,218	)		(416	)		(777	)
Income before provision for income taxes				17,826			30,442			36,674			9,268			6,921
Provision for income taxes				6,723			12,054			14,125			3,661			2,784
Net income			$	11,103		$	18,388		$	22,549		$	5,607		$	4,137
Net income per share(1):
	Basic		$	0.83		$	1.35		$	1.66		$	0.41		$	0.30
	Diluted		$	0.63		$	1.05		$	1.34		$	0.33		$	0.24
Weighted average common shares outstanding(1):
	Basic			13,284,902			13,468,060			13,365,682			13,529,822			13,419,764
	Diluted			17,519,032			17,505,040			16,823,242			16,929,017			16,904,196

(See footnotes on following pages)

6

	As of December 31,						As of March 31, 2007		As of March 31, 2007 Pro Forma As Adjusted(2)
	2004		2005		2006
	(in thousands, except per share data)
Consolidated Balance Sheet Data:
Cash and cash equivalents	$	14,755	$	11,635	$	25,491	$	16,409
Working capital		21,526		19,087		28,281		19,936
Total assets		80,255		119,390		190,531		194,319
Long-term debt, less current maturities		24,820		25,520		63,587		63,190
Redeemable, convertible preferred stock		2,725		2,725		2,725		2,725
Stockholders' equity		17,828		32,634		51,147		54,623
Cash dividends declared per common share	$	0.05	$	0.09	$	0.13	$	0.04

	Year Ended December 31,						Three Months Ended March 31,
	2004		2005		2006		2006		2007
Other Non-GAAP Financial Data:
EBITDA(3)	$	21,240	$	34,444	$	43,113	$	10,436	$	9,230
EBITDAR(3)		36,013		50,562		59,517		14,491		13,385

(footnotes to prior page)

(1)

See Note 2 of the Notes to the Consolidated Financial Statements.

(2)

Gives effect to the conversion of all of our outstanding preferred stock into 2,741,180 shares of our common stock upon the closing of this offering and the receipt of the estimated proceeds from the sale of the                                    shares offered by this prospectus at the assumed initial offering price of $                        per share (the midpoint of the range set forth on the cover of this prospectus), after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, as described in "Underwriting."

(3)

EBITDA and EBITDAR are supplemental non-GAAP financial measures. GAAP means generally accepted accounting principles in the United States. Regulation G, "Conditions for Use of Non-GAAP Financial Measures" and other provisions of the Securities Exchange Act of 1934, as amended, define and prescribe the conditions for use of certain non-GAAP financial information. We calculate EBITDA as net income before (a) interest expense, net, (b) provision for income taxes, and (c) depreciation and amortization. We calculate EBITDAR by adjusting EBITDA for facility rent—cost of services. These non-GAAP financial measures are used in addition to and in conjunction with results presented in accordance with GAAP. These non-GAAP financial measures should not be relied upon to the exclusion of GAAP financial measures. These non-GAAP financial measures reflect an additional way of viewing aspects of our operations that, when viewed with our GAAP results and the accompanying reconciliations to corresponding GAAP financial measures, provide a more complete understanding of factors and trends affecting our business.

We believe EBITDA and EBITDAR are useful to investors and other external users of our financial statements in evaluating our operating performance because:

•

they are widely used by investors and analysts in our industry as a supplemental measure to evaluate the overall operating performance of companies in our industry without regard to items such as interest expense, net and depreciation and amortization, which can vary substantially from company to company depending on the book value of assets, capital structure and the method by which assets were acquired; and

(See footnotes continued on the following page)

7

(footnotes to prior pages)

•

they help investors evaluate and compare the results of our operations from period to period by removing the impact of our capital structure and asset base from our operating results.

We use EBITDA and EBITDAR:

•

as measurements of our operating performance to assist us in comparing our operating performance on a consistent basis;



•

to design incentive compensation and goal setting;



•

to allocate resources to enhance the financial performance of our business;



•

to evaluate the effectiveness of our operational strategies; and



•

to compare our operating performance to that of our competitors.

We typically use EBITDA and EBITDAR to compare the operating performance of each skilled nursing and assisted living facility. EBITDA and EBITDAR are useful in this regard because they do not include such costs as net interest expense, income taxes, depreciation and amortization expense, and, with respect to EBITDAR, facility rent—cost of services which may vary from period to period depending upon various factors, including the method used to finance facilities, the amount of debt that we have incurred, whether a facility is owned or leased, the date of acquisition of a facility or business, or the tax law of the state in which a business unit operates. As a result, we believe that the use of EBITDA and EBITDAR provides a meaningful and consistent comparison of our business performance between periods and between facilities by eliminating certain items required by GAAP.

We also establish compensation programs and bonuses for our facility level employees that are based upon the achievement of EBITDA and EBITDAR targets.

Despite the importance of these measures in analyzing our underlying business, designing incentive compensation and for our goal setting, EBITDA and EBITDAR are non-GAAP financial measures that have no standardized meaning defined by GAAP. Therefore, our EBITDA and EBITDAR measures have limitations as analytical tools, and they should not be considered in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

•

they do not reflect our current or future cash requirements for capital expenditures or contractual commitments;



•

they do not reflect changes in, or cash requirements for, our working capital needs;



•

they do not reflect the net interest expense, or the cash requirements necessary to service interest or principal payments, on our debt;



•

they do not reflect any income tax payments we may be required to make;



•

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and EBITDAR do not reflect any cash requirements for such replacements; and



•

other companies in our industry may calculate these measures differently than we do, which may limit their usefulness as comparative measures.

(See footnotes continued on the following page)

8

(footnotes to prior pages)

We compensate for these limitations by using them only to supplement net income as calculated in accordance with GAAP in order to provide a more complete understanding of the factors and trends affecting our business.

Management strongly encourages investors to review our consolidated financial statements in their entirety and not to rely on any single financial measure. Because these non-GAAP financial measures are not standardized, it may not be possible to compare these financial measures with other companies' non-GAAP financial measures having the same or similar names. For information about our financial results as reported in accordance with GAAP, see our consolidated financial statements and related notes included elsewhere in this prospectus.

The table below reconciles net income to EBITDA and EBITDAR for the periods presented:

	Year Ended December 31,						Three Months Ended March 31,
	2004		2005		2006		2006		2007
	(in thousands)
Consolidated Statement of Income Data:
Net income	$	11,103	$	18,388	$	22,549	$	5,607	$	4,137
Interest expense, net		1,480		1,544		2,218		416		777
Provision for income taxes		6,723		12,054		14,125		3,661		2,784
Depreciation and amortization		1,934		2,458		4,221		752		1,532
EBITDA		21,240		34,444		43,113		10,436		9,230
Facility rent—cost of services		14,773		16,118		16,404		4,055		4,155
EBITDAR	$	36,013	$	50,562	$	59,517	$	14,491	$	13,385

9

RISK FACTORS

Investing in our common stock involves a high degree of risk. You should consider carefully the following risk factors, as well as the other information in this prospectus, including our consolidated financial statements and the related notes, before deciding whether to invest in shares of our common stock. The risks described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently believe are immaterial may also impair our business operations. If any of the following risks actually occurs, our business, financial condition and results of operations would be materially adversely affected. In this case, the trading price of our common stock would likely decline and you might lose all or part of your investment in our common stock.

Risks Related to Our Industry

Our revenue could be impacted by federal and state changes to reimbursement and other aspects of Medicaid and Medicare.

        For the years ended December 31, 2005 and 2006 and the three months ended March 31, 2006 and 2007, we derived approximately 44%, 42%, 41% and 44% of our revenue from the Medicaid program, respectively. For the years ended December 31, 2005 and 2006 and for the three months ended March 31, 2006 and 2007, we derived approximately 32%, 33%, 34% and 31% of our revenue from the Medicare program, respectively. If reimbursement rates under these programs are reduced or fail to increase as quickly as our costs, or if there are changes in the way these programs pay for services, our business and results of operations could be adversely affected. The services for which we are currently reimbursed by Medicaid and Medicare may not continue to be reimbursed at adequate levels or at all. Further limits on the scope of services being reimbursed, delays or reductions in reimbursement or changes in other aspects of reimbursement could impact our revenue. For example, in the past, the enactment of the Deficit Reduction Act of 2005 (or "DRA"), the Medicaid Voluntary Contribution and Provider-Specific Tax Amendments of 1991 and the Balanced Budget Act of 1997 (or "BBA") caused changes in government reimbursement systems, which, in some cases, made obtaining reimbursements more difficult and costly and lowered or restricted reimbursement rates for some of our residents.

        The Medicaid and Medicare programs are subject to statutory and regulatory changes affecting base rates or basis of payment, retroactive rate adjustments, administrative or executive orders and government funding restrictions, all of which may materially adversely affect the rates and frequency at which these programs reimburse us for our services. Implementation of these and other measures to reduce or delay reimbursement could result in substantial reductions in our revenue and profitability. Payors may disallow our requests for reimbursement based on determinations that certain costs are not reimbursable or reasonable because either adequate or additional documentation was not provided or because certain services were not covered or considered reasonably necessary. Additionally, revenue from these payors can be retroactively adjusted after a new examination during the claims settlement process or as a result of post-payment audits. New legislation and regulatory proposals could impose further limitations on government payments to healthcare providers. These and other changes to the reimbursement and other aspects of Medicaid could adversely affect our revenue.

Our future revenue, financial condition and results of operations could be impacted by continued cost containment pressures on Medicaid spending.

        Medicaid, which is largely administered by the states, is a significant payor for our skilled nursing services. Rapidly increasing Medicaid spending, combined with slow state revenue growth, has led many states to institute measures aimed at controlling spending growth. We expect continuing cost containment pressures on Medicaid outlays for skilled nursing facilities.

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        To generate funds to pay for the increasing costs of the Medicaid program, many states utilize financial arrangements such as provider taxes. Under provider tax arrangements, states collect taxes or fees from healthcare providers and then return the revenue to these providers as a Medicaid expenditure. Congress, however, has placed restrictions on states' use of provider tax and donation programs as a source of state matching funds. Under the Medicaid Voluntary Contribution and Provider-Specific Tax Amendments of 1991, the federal medical assistance percentage available to a state was reduced by the total amount of healthcare related taxes that the state imposed, unless certain requirements are met. The federal medical assistance percentage is not reduced if the state taxes are broad-based and not applied specifically to Medicaid reimbursed services. In addition, the healthcare providers receiving Medicaid reimbursement must be at risk for the amount of tax assessed and must not be guaranteed to receive reimbursement through the applicable state Medicaid program for the tax assessed. Lower Medicaid reimbursement rates would adversely affect our revenue, financial condition and results of operations.

If Medicare reimbursement rates decline, our revenue, financial condition and results of operations could be adversely affected.

        Over the past several years, the federal government has periodically changed various aspects of Medicare reimbursements for skilled nursing facilities. Medicare Part A covers inpatient hospital services, skilled nursing care and some home healthcare. Medicare Part B covers physician and other health practitioner services, some supplies and a variety of medical services not covered under Medicare Part A.

        Medicare coverage of skilled nursing services is available only if the patient is hospitalized for at least three consecutive days, the need for such services is related to the reason for the hospitalization, and the patient is admitted to the facility within 30 days following discharge from a Medicare participating hospital. Medicare coverage of skilled nursing services is limited to 100 days per benefit period after discharge from a Medicare participating hospital or critical access hospital. The patient must pay coinsurance amounts for the twenty-first day and each of the remaining days of covered care per benefit period.

        Medicare payments for skilled nursing services are paid on a case-mix adjusted per diem prospective payment system ("PPS") for all routine, ancillary and capital-related costs. The prospective payment for skilled nursing services is based solely on the adjusted federal per diem rate. Although Medicare payment rates under the skilled nursing facility PPS increased temporarily for federal fiscal years 2003 and 2004, new payment rates for federal fiscal year 2005 took effect for discharges beginning October 1, 2004. A proposed regulation by the Centers for Medicaid and Medicare Services ("CMS") sets forth a schedule of prospective payment rates applicable to Medicare Part A skilled nursing services which took effect October 1, 2006, including a full market basket increase of 3.1%. There can be no assurance that the skilled nursing facility PPS rates will be sufficient to cover our actual costs of providing skilled nursing facility services.

        Skilled nursing facilities are also required to perform consolidated billing for items and services furnished to patients and residents during a Part A covered stay and therapy services furnished during Part A and Part B covered stays. The consolidated billing requirement essentially confers on the skilled nursing facility itself the Medicare billing responsibility for the entire package of care that its residents receive in these situations. The BBA also affected skilled nursing facility payments by requiring that post-hospitalization skilled nursing services be "bundled" into the hospital's Diagnostic Related Group ("DRG") payment in certain circumstances. Where this rule applies, the hospital and the skilled nursing facility must, in effect, divide the payment which otherwise would have been paid to the hospital alone for the patient's treatment, and no additional funds are paid by Medicare for skilled nursing care of the patient. At present, this provision applies to a limited number of DRGs, but already is apparently having a negative effect on skilled nursing facility utilization and payments, either because

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hospitals are finding it difficult to place patients in skilled nursing facilities which will not be paid as before or because hospitals are reluctant to discharge the patients to skilled nursing facilities and lose part of their payment. This bundling requirement could be extended to more DRGs in the future, which would accentuate the negative impact on skilled nursing facility utilization and payments.

        Skilled nursing facility prospective payment rates, as they may change from time to time, may be insufficient to cover our actual costs of providing skilled nursing services to Medicare patients. In addition, we may not be fully reimbursed for all services for which each facility bills through consolidated billing. If Medicare reimbursement rates decline, it could adversely affect our revenue, financial condition and results of operations.

We are subject to various government reviews, audits and investigations that could adversely affect our business, including an obligation to refund amounts previously paid to us, potential criminal charges, the imposition of fines, and/or the loss of our right to participate in Medicare and Medicaid programs.

        As a result of our participation in the Medicaid and Medicare programs, we are subject to various governmental reviews, audits and investigations to verify our compliance with these programs and applicable laws and regulations. Private pay sources also reserve the right to conduct audits. An adverse review, audit or investigation could result in:

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an obligation to refund amounts previously paid to us pursuant to the Medicare or Medicaid programs or from private payors, in amounts that could be material to our business;



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state or federal agencies imposing fines, penalties and other sanctions on us;



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loss of our right to participate in the Medicare or Medicaid programs or one or more private payor networks;



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an increase in private litigation against us; and



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damage to our reputation in various markets.

        In 2004, our Medicare fiscal intermediary began to conduct selected reviews of claims previously submitted by and paid to certain of our facilities. While we have always been subject to post-payment audits and reviews, these new, more intensive "probe reviews" are relatively new and appear to be a permanent procedure with our intermediary.

        In some cases, probe reviews can also result in a facility being temporarily placed on prepayment review of reimbursement claims, requiring additional documentation and adding additional steps and time to the reimbursement process for the affected facility. Payment delays resulting from the prepayment review process could have an adverse effect on our cash flow, and such adverse effect could be material if multiple additional facilities were placed on prepayment review simultaneously.

        Failure to meet claim filing and documentation requirements during the initial review could subject a facility to an even more intensive "focus review," where a corrective action plan addressing perceived deficiencies must be prepared by the facility and approved by the fiscal intermediary. During a focus review, additional claims are reviewed post-payment to ensure that the prescribed corrective actions are being followed. Failure to make corrections or to otherwise meet the claim documentation and submission requirements could eventually result in Medicare decertification.

The reduction in overall Medicaid and Medicare spending pursuant to the Deficit Reduction Act of 2005 and the increased costs to comply with the Deficit Reduction Act of 2005 could adversely affect our revenue, financial condition or results of operations.

        The DRA provides for a reduction in overall Medicaid and Medicare spending by approximately $11.0 billion over five years. Under the DRA, individuals who transferred assets for less than fair

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market value during a five year look-back period will be ineligible for Medicaid for so long as they would have been able to fund their cost of care absent the transfer or until the transfer would no longer have been made during the look-back period. This period is referred to as the penalty period. The DRA also changes the calculation for determining when the penalty period begins, and prohibits states from ignoring small asset transfers and other asset transfer mechanisms. In addition, the legislation reduces Medicare skilled nursing facility bad debt payments by 30% for those individuals who are not dually eligible for Medicaid and Medicare. If any of our existing Medicaid patients become ineligible under the DRA during their stay, it would be difficult for us to collect from them or transfer them, and our revenue could decrease without a corresponding decrease in expenses related to the care of those patients. The loss of revenue associated with potential reductions in skilled nursing facility payments could adversely affect our revenue, financial condition or results of operations. The DRA also requires entities which receive at least $5.0 million in annual Medicaid dollars each year to provide education to their employees concerning false claims laws and protections for whistleblowers. The DRA also requires those entities to provide contractors and vendors with similar information. As a result, we have and will continue to expend resources to meet these requirements. Further, the requirement that we provide education to employees and contractors regarding false claims laws and other fraud and abuse laws may result in increased investigations into these matters.

        On February 5, 2007, the Bush Administration released its fiscal year 2008 budget proposal, which, if enacted, would reduce Medicare spending by approximately $5.3 billion in fiscal year 2008 and $75.9 billion over five years. In particular, the budget proposal is expected to freeze payments in fiscal year 2008 for skilled nursing facilities, and the payment update would be 0.65% less than the routine inflation update (or market basket increase) annually thereafter. The budget also would move toward site-neutral post-hospital payments to limit what the Administration characterizes as inappropriate incentives for five conditions commonly treated in both skilled nursing facilities and inpatient rehabilitation facilities. All bad debt reimbursement for unpaid beneficiary cost-sharing would be eliminated over four years. In addition, a budget mechanism would be established to automatically reduce Medicare spending if the portion of Medicare expenditures funded through general revenue is projected to exceed 45% within the next seven years. The budget also includes a series of proposals having an impact on Medicaid, including legislative and administrative changes that would reduce Medicaid payments by almost $26 billion over five years. Many of the proposed policy changes would require congressional approval to implement.

Annual caps that limit the amounts that can be paid for outpatient therapy services rendered to any Medicare beneficiary may reduce our future revenue and profitability or cause us to incur losses.

        Some of our rehabilitation therapy revenue is paid by the Medicare Part B program under a fee schedule. Congress has established annual caps that limit the amounts that can be paid (including deductible and coinsurance amounts) for rehabilitation therapy services rendered to any Medicare beneficiary under Medicare Part B. The BBA, requires a combined cap for physical therapy and speech-language pathology and a separate cap for occupational therapy. Due to a series of moratoria enacted subsequent to the BBA, the caps were only in effect in 1999 and for a few months in 2003. With the expiration of the most recent moratorium, the caps were reinstated on January 1, 2006 at $1,740 for physical therapy and speech therapy, and $1,740 for occupational therapy. Each of these caps increased to $1,780 on January 1, 2007.

        The DRA directs CMS to create a process to allow exceptions to therapy caps for certain medically necessary services provided on or after January 1, 2006 for patients with certain conditions or multiple complexities whose therapy services are reimbursed under Medicare Part B. The majority of the residents in our skilled nursing facilities and patients served by our rehabilitation therapy programs whose therapy is reimbursed under Medicare Part B have qualified for the exceptions to these

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reimbursement caps. The Tax Relief and Health Care Act of 2006 extended the exceptions through the end of 2007. Unless further extended, these exceptions will expire on December 31, 2007.

        The application of annual caps, or the discontinuation of exceptions to the annual caps, could have an adverse effect on our rehabilitation therapy revenue. Additionally, the exceptions to these caps may not be extended beyond December 31, 2007, which would have an even greater adverse effect on our revenue.

We are subject to extensive and complex federal and state government laws and regulations which could change at any time and increase our cost of doing business and subject us to enforcement actions.

        We, along with other companies in the healthcare industry, are required to comply with extensive and complex laws and regulations at the federal, state and local government levels relating to, among other things:

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facility and professional licensure, certificates of need, permits and other government approvals;



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adequacy and quality of healthcare services;



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qualifications of healthcare and support personnel;



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quality of medical equipment;



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confidentiality, maintenance and security issues associated with medical records and claims processing;



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relationships with physicians and other referral sources and recipients;



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constraints on protective contractual provisions with patients and third-party payors;



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operating policies and procedures;



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certification of additional facilities by the Medicare program; and



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payment for services.

        The laws and regulations governing our operations, along with the terms of participation in various government programs, regulate how we do business, the services we offer, and our interactions with patients and other healthcare providers. These laws and regulations are subject to frequent change. We believe that such regulations may increase in the future and we cannot predict the ultimate content, timing or impact on us of any healthcare reform legislation. Changes in existing laws or regulations, or the enactment of new laws or regulations, could negatively impact our business. If we fail to comply with these applicable laws and regulations, we could suffer civil or criminal penalties and other detrimental consequences, including denial of reimbursement, imposition of fines, temporary suspension of admission of new patients, suspension or decertification from the Medicaid and Medicare programs, restrictions on our ability to acquire new facilities or expand or operate existing facilities, the loss of our licenses to operate and the loss of our ability to participate in federal and state reimbursement programs.

        We are subject to federal and state laws, such as the Federal False Claims Act, state false claims acts, the illegal remuneration provisions of the Social Security Act, the federal anti-kickback laws, state anti-kickback laws, and the federal "Stark" laws, that govern financial and other arrangements among healthcare providers, their owners, vendors and referral sources, and that are intended to prevent healthcare fraud and abuse. Among other things, these laws prohibit kickbacks, bribes and rebates, as well as other direct and indirect payments or fee-splitting arrangements that are designed to induce the referral of patients to a particular provider for medical products or services payable by any federal healthcare program, and prohibit presenting a false or misleading claim for payment under a federal or state program. They also prohibit some physician self-referrals. Possible sanctions for violation of any of

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these restrictions or prohibitions include loss of eligibility to participate in federal and state reimbursement programs and civil and criminal penalties. Changes in these laws could increase our cost of doing business. If we fail to comply, even inadvertently, with any of these requirements, we could be required to alter our operations, refund payments to the government, enter into corporate integrity agreements with state or federal government agencies, and become subject to significant civil and criminal penalties.

        We are also required to comply with state and federal laws governing the transmission, privacy and security of health information. The Health Insurance Portability and Accountability Act of 1996 ("HIPAA") requires us to comply with certain standards for the use of individually identifiable health information within our company, and the disclosure and electronic transmission of such information to third parties, such as payors, business associates and patients. These include standards for common electronic healthcare transactions and information, such as claim submission, plan eligibility determination, payment information submission and the use of electronic signatures; unique identifiers for providers, employers and health plans; and the security and privacy of individually identifiable health information. In addition, some states have enacted comparable or, in some cases, more stringent privacy and security laws. If we fail to comply with these state and federal laws, we could be subject to criminal penalties and civil sanctions and be forced to modify our policies and procedures.

        We are unable to predict the future course of federal, state and local regulation or legislation, including Medicaid and Medicare statutes and regulations. Changes in the regulatory framework, our failure to obtain or renew required regulatory approvals or licenses or to comply with applicable regulatory requirements, the suspension or revocation of our licenses or our disqualification from participation in federal and state reimbursement programs, or the imposition of other harsh enforcement sanctions could increase our cost of doing business and expose us to potential sanctions. Furthermore, if we were to lose licenses or certifications for any of our facilities as a result of regulatory action or otherwise, we could be deemed to be in default under some of our agreements, including agreements governing outstanding indebtedness and lease obligations.

Any changes in the interpretation and enforcement of the laws or regulations governing our business could cause us to modify our operations, increase our cost of doing business and subject us to potential regulatory action.

        The interpretation and enforcement of federal and state laws and regulations governing our operations, including, but not limited to, laws and regulations relating to Medicaid and Medicare, the Federal False Claims Act, state false claims acts, the illegal remuneration provisions of the Social Security Act, the federal anti-kickback laws, state anti-kickback laws, the federal Stark laws, and HIPAA, are subject to frequent change. Governmental authorities may interpret these laws in a manner inconsistent with our interpretation and application. If we fail to comply, even inadvertently, with any of these requirements, we could be required to alter our operations and reduce, forego or refund reimbursements to the government, or incur other significant penalties. We could also be compelled to divert personnel and other resources to responding to an investigation or other enforcement action under these laws or regulations, or to ongoing compliance with a corporate integrity agreement, court order or similar agreement. The diversion of these resources, including our management team, clinical and compliance staff, and others, would take away from the time and energy these individuals devote to routine operations. Furthermore, federal, state and local officials are increasingly focusing their efforts on enforcement of these laws, particularly with respect to providers who share common ownership or control with other providers. The increased enforcement of these requirements could affect our ability to expand into new markets, to expand our services and facilities in existing markets and, if any of our presently licensed facilities were to operate outside of its licensing authority, may subject us to penalties, including closure of the facility. Changes in the interpretation and enforcement of existing laws or regulations could increase our cost of doing business.

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        We are unable to predict the intensity of federal and state enforcement actions or the areas in which regulators may choose to focus their investigations in any given year. Changes in government agency interpretation of applicable regulatory requirements, or changes in enforcement methodologies, including increases in the scope and severity of deficiencies determined by survey or inspection officials, could increase our cost of doing business. Furthermore, should we lose licenses or certifications for any of our facilities as a result of changing regulatory interpretations, enforcement actions or otherwise, we could be deemed to be in default under some of our agreements, including agreements governing outstanding indebtedness and lease obligations.

Increased civil and criminal enforcement efforts of government agencies against skilled nursing facilities could harm our business, and could preclude us from participating in federal healthcare programs.

        Both federal and state government agencies have heightened and coordinated civil and criminal enforcement efforts as part of numerous ongoing investigations of healthcare companies and, in particular, skilled nursing facilities. The investigations include, among other things:

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cost reporting and billing practices;



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quality of care;



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financial relationships with referral sources; and



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medical necessity of services provided.

        If any of our facilities is decertified or loses its licenses, our revenue, financial condition or results of operations would be adversely affected. In addition, the report of such issues at any of our facilities could harm our reputation for quality care and lead to a reduction in our patient referrals and ultimately a reduction in occupancy at these facilities.

        Federal law provides that practitioners, providers and related persons may not participate in most federal healthcare programs, including the Medicaid and Medicare programs, if the individual or entity has been convicted of a criminal offense related to the delivery of a product or service under these programs or if the individual or entity has been convicted under state or federal law of a criminal offense relating to neglect or abuse of patients in connection with the delivery of a healthcare product or service. Other individuals or entities may be, but are not required to be, excluded from such programs under certain circumstances, including, but not limited to, the following:

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conviction related to fraud;



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conviction relating to obstruction of an investigation;



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conviction relating to a controlled substance;



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licensure revocation or suspension;



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exclusion or suspension from state or other federal healthcare programs;



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filing claims for excessive charges or unnecessary services or failure to furnish medically necessary services;



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ownership or control of an entity by an individual who has been excluded from the Medicaid or Medicare programs, against whom a civil monetary penalty related to the Medicaid or Medicare programs has been assessed or who has been convicted of a criminal offense under federal healthcare programs; and



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the transfer of ownership or control interest in an entity to an immediate family or household member in anticipation of, or following, a conviction, assessment or exclusion from the Medicare or Medicaid programs.

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        The Office of Inspector General ("OIG") among other priorities, is responsible for identifying and eliminating fraud, abuse and waste in certain federal healthcare programs. The OIG has implemented a nationwide program of audits, inspections and investigations and from time to time issues "fraud alerts" to segments of the healthcare industry on particular practices that are vulnerable to abuse. The fraud alerts inform healthcare providers of potentially abusive practices or transactions that are subject to criminal activity and reportable to the OIG. An increasing level of resources has been devoted to the investigation of allegations of fraud and abuse in the Medicaid and Medicare programs, and federal and state regulatory authorities are taking an increasingly strict view of the requirements imposed on healthcare providers by the Social Security Act and Medicaid and Medicare programs. Although we have created a corporate compliance program that we believe is consistent with the OIG guidelines, the OIG may interpret its guidelines in a manner inconsistent with our interpretation or the OIG may ultimately determine that our corporate compliance program is insufficient.

        In some circumstances, if one facility is convicted of abusive or fraudulent behavior, then other facilities under common control or ownership may be decertified from participating in Medicaid or Medicare programs. Federal regulations prohibit any corporation or facility from participating in federal contracts if it or its principals have been barred, suspended or declared ineligible from participating in federal contracts. In addition, some state regulations provide that all facilities under common control or ownership licensed within a state may be de-licensed if one or more of the facilities are de-licensed. If any of our facilities were decertified or excluded from participating in Medicaid or Medicare programs, our revenue would be adversely affected.

Increased survey and enforcement efforts by governmental agencies on facilities could result in increased scrutiny by state and federal survey agencies.

        CMS has undertaken several initiatives to increase or intensify Medicaid and Medicare survey and enforcement activities, including federal oversight of state actions. CMS is taking steps to focus more survey and enforcement efforts on facilities with findings of substandard care or repeat violations of Medicaid and Medicare standards, and to identify multi-facility providers with patterns of noncompliance. In addition, the Department of Health and Human Services has proposed a rule that would allow CMS to charge user fees to healthcare facilities cited during regular certification, recertification or substantiated complaint surveys for deficiencies, which require a revisit to assure that corrections have been made. CMS is also increasing its oversight of state survey agencies and requiring state agencies to use enforcement sanctions and remedies more promptly when substandard care or repeat violations are identified, to investigate complaints more promptly, and to survey facilities more consistently. In addition, CMS has adopted, and is considering additional regulations expanding federal and state authority to impose civil money penalties in instances of noncompliance. When a facility is found to be deficient under state licensing and Medicaid and Medicare standards, sanctions may be threatened or imposed such as denial of payment for new Medicaid and Medicare admissions, civil monetary penalties, focused state and federal oversight and even loss of eligibility for Medicaid and Medicare participation or state licensure. Sanctions such as denial of payment for new admissions often are scheduled to go into effect before surveyors return to verify compliance. Generally, if the surveyors confirm that the facility is in compliance upon their return, the sanctions never take effect. However, if they determine that the facility is not in compliance, the denial of payment goes into effect retroactive to the date given in the original notice. This possibility sometimes leaves affected operators, including us, with the difficult task of deciding whether to continue accepting patients after the denial of payment date, thus risking the loss of revenue associated with those patients' care if they are later found to be out of compliance, or simply refusing admissions from the denial of payment date until the facility is actually found to be in compliance.

        Facilities with otherwise acceptable regulatory histories generally are given an opportunity to correct deficiencies and continue their participation in the Medicare and Medicaid programs by a

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certain date, usually within six months, although where denial of payment remedies are asserted, such interim remedies go into effect much sooner. Facilities with deficiencies that immediately jeopardize patient health and safety and those that are classified as poor performing facilities, however, are not generally given an opportunity to correct their deficiencies prior to the imposition of remedies and other enforcement actions. Moreover, facilities with poor regulatory histories continue to be classified by CMS as poor performing facilities notwithstanding any intervening change in ownership, unless the new owner obtains a new Medicare provider agreement instead of assuming the facility's existing agreement. However, new owners (including us, historically) nearly always assume the existing Medicare provider agreement due to the difficulty and time delays generally associated with obtaining new Medicare certifications, especially in previously-certified locations with sub-par operating histories. Accordingly, facilities that have poor regulatory histories before we acquire them and that develop new deficiencies after we acquire them are more likely to have sanctions imposed upon them by CMS or state regulators. In addition, in 2003, CMS established a program for identifying "special focus facilities," which are facilities identified in consultation with state health officials as needing special enforcement attention. These facilities are not immediately notified of their status as special focus facilities, but are placed under heightened scrutiny by federal and state officials. Such heightened scrutiny includes more frequent regulatory surveys and potentially heavier sanctions for noncompliance, among other things.

State efforts to regulate or deregulate the healthcare services or construction or expansion of healthcare facilities could impair our ability to expand our operations, or could result in increased competition.

        Some states require healthcare providers, including skilled nursing facilities, to obtain prior approval, known as a certificate of need, for:

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the purchase, construction or expansion of healthcare facilities;



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capital expenditures exceeding a prescribed amount; or



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changes in services or bed capacity.

        In addition, other states that do not require certificates of need have effectively barred the expansion of existing facilities or the development of new ones by placing partial or complete moratoria on the number of new Medicaid beds they will certify in certain areas or in the entire state. Other states have established such stringent development standards and approval procedures for constructing new healthcare facilities that the construction of new facilities, or the expansion or renovation of existing facilities, may become cost-prohibitive or extremely time-consuming. Our ability to acquire or construct new facilities or expand or provide new services at existing facilities would be adversely affected if we are unable to obtain the necessary approvals, if there are changes in the standards applicable to those approvals, or if we experience delays and increased expenses associated with obtaining those approvals. We may not be able to obtain licensure, certificate of need approval, Medicaid certification, or other necessary approvals for future expansion projects. Conversely, the elimination or reduction of state regulations that limit the construction, expansion or renovation of new or existing facilities could result in increased competition to us or result in overbuilding of facilities in some of our markets.

Overbuilding in certain markets, increased competition and increased operating costs may adversely affect our ability to generate and increase our revenue and profits and to pursue our growth strategy.

        The skilled nursing and long-term care industries are highly competitive and may become more competitive in the future. We compete with numerous other companies that provide long-term and rehabilitative care alternatives such as home healthcare agencies, life care at home, facility-based service programs, retirement communities, convalescent centers and other independent living, assisted living and skilled nursing providers, including not-for-profit entities. We have experienced and expect to

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continue to experience increased competition in our efforts to acquire and operate skilled nursing facilities. Consequently, we may encounter increased competition that could limit our ability to attract new patients, raise patient fees or expand our business.

        In addition, if overbuilding in the skilled nursing industry in the markets in which we operate were to occur, it could reduce the occupancy rates of existing facilities and, in some cases, might reduce the private rates that we charge for our services.

Changes in federal and state employment-related laws and regulations could increase our cost of doing business.

        Our operations are subject to a variety of federal and state employment-related laws and regulations, including, but not limited to, the U.S. Fair Labor Standards Act which governs such matters as minimum wages, overtime and other working conditions, the Americans with Disabilities Act ("ADA") and similar state laws that provide civil rights protections to individuals with disabilities in the context of employment, public accommodations and other areas, the National Labor Relations Act, regulations of the Equal Employment Opportunity Commission, regulations of the Office of Civil Rights, regulations of state Attorneys General, family leave mandates and a variety of similar laws enacted by the federal and state governments that govern these and other employment law matters. Because labor represents such a large portion of our operating costs, changes in federal and state employment-related laws and regulations could increase our cost of doing business.

        The compliance costs associated with these laws and evolving regulations could be substantial. For example, all of our facilities are required to comply with the ADA. The ADA has separate compliance requirements for "public accommodations" and "commercial properties," but generally requires that buildings be made accessible to people with disabilities. Compliance with ADA requirements could require removal of access barriers and non-compliance could result in imposition of government fines or an award of damages to private litigants. Further legislation may impose additional burdens or restrictions with respect to access by disabled persons. In addition, federal proposals to introduce a system of mandated health insurance and flexible work time and other similar initiatives could, if implemented, adversely affect our operations. We also may be subject to employee-related claims such as wrongful discharge, discrimination or violation of equal employment law. While we are insured for these types of claims, we could experience damages that are not covered by our insurance policies or that exceed our insurance limits, and we may be required to pay such damages directly.

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Compliance with federal and state fair housing, fire, safety and other regulations, may require us to make unanticipated expenditures, which could be costly to us.

        We must comply with the federal Fair Housing Act and similar state laws, which prohibit us from discriminating against individuals on certain bases in any of our practices if it would cause such individuals to face barriers in gaining residency in any of our facilities. Additionally, the Fair Housing Act and other similar state laws require that we advertise our services in such a way that we promote diversity and not limit it. We may be required, among other things, to change our marketing techniques to comply with these requirements.

        In addition, we are required to operate our facilities in compliance with applicable fire and safety regulations, building codes and other land use regulations and food licensing or certification requirements as they may be adopted by governmental agencies and bodies from time to time. Like other healthcare facilities, our skilled nursing facilities are subject to periodic survey or inspection by governmental authorities to assess and assure compliance with regulatory requirements. Surveys occur on a regular (often annual or biannual) schedule, and special surveys may result from a specific complaint filed by a patient, a family member or one of our competitors. We may be required to make substantial capital expenditures to comply with these requirements.

We are subject to environmental and occupational health and safety regulations, which may subject us to sanctions, penalties and increased costs.

        We are subject to a wide variety of federal, state and local environmental and occupational health and safety laws and regulations. The types of regulatory requirements to which we are subject include, but are not limited to:

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air and water quality control requirements;



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occupational health and safety requirements (such as standards regarding blood-borne pathogens and ergonomics) and waste management requirements;



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specific regulatory requirements applicable to asbestos, mold, lead-based paint and underground storage tanks; and



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requirements for providing notice to employees and members of the public about hazardous materials and wastes.

        If we fail to comply with these and other standards, we may be subject to sanctions and penalties. In addition, complying with these and other standards may increase our cost of doing business.

Risks Related to Our Business

We depend largely upon reimbursement from third-party payors, and our revenue, financial condition and results of operations could be negatively impacted by any changes in the acuity mix of patients in our facilities as well as payor mix and payment methodologies.

        Our revenue is affected by the percentage of our patients who require a high level of skilled nursing and rehabilitative care, whom we refer to as high acuity patients, and by our mix of payment sources. Changes in the acuity level of patients we attract, as well as our payor mix among Medicaid, Medicare, private payors and managed care companies, significantly affect our profitability because we generally receive higher reimbursement rates for high acuity patients and because the payors reimburse us at different rates. Governmental payment programs are subject to statutory and regulatory changes, retroactive rate adjustments, administrative or executive orders and government funding restrictions, all of which may materially increase or decrease the rate of program payments to us for our services. For the years ended December 31, 2004, 2005 and 2006 and the three months ended March 31, 2006 and 2007, 75.0%, 75.7%, 75.0%, 75.1%, and 74.3%, respectively, of our revenue was provided by

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government payors that reimburse us at predetermined rates. If our labor or other operating costs increase, we will be unable to recover such increased costs from government payors. Accordingly, if we fail to maintain our proportion of high acuity patients or if there is any significant increase in the percentage of our patients for whom we receive Medicaid reimbursement, our results of operations may be adversely affected.

        Initiatives undertaken by major insurers and managed care companies to contain healthcare costs may adversely affect our business. These payors attempt to control healthcare costs by contracting with healthcare providers to obtain services on a discounted basis. We believe that this trend will continue and may limit reimbursements for healthcare services. If insurers or managed care companies from whom we receive substantial payments were to reduce the amounts they pay for services, we may lose patients if we choose not to renew our contracts with these insurers at lower rates.

Increased competition for, or a shortage of, nurses and other skilled personnel could increase our staffing and labor costs and subject us to monetary fines.

        Our success depends upon our ability to retain and attract nurses, Certified Nurse Assistants ("CNAs") and therapists. Our success also depends upon our ability to retain and attract skilled management personnel who are responsible for the day-to-day operations of each of our facilities. Each facility has a facility leader responsible for the overall day-to-day operations of the facility, including quality of care, social services and financial performance. Depending upon the size of the facility, each facility leader is supported by facility staff who are directly responsible for day-to-day care of the patients and either facility staff or regional support to oversee the facility's marketing and community outreach programs. Other key positions supporting each facility may include individuals responsible for physical, occupational and speech therapy, food service and maintenance. We compete with various healthcare service providers, including other skilled nursing providers, in retaining and attracting qualified and skilled personnel.

        We operate one or more skilled nursing facilities in the states of California, Arizona, Texas, Washington, Utah and Idaho. With the exception of Utah, which follows federal regulations, each of these states has established minimum staffing requirements for facilities operating in that state. In California, the California Department of Health Services, (or "DHS"), enforces legislation that requires each skilled nursing facility to provide a minimum of 3.2 nursing hours per patient day. DHS enforces this requirement primarily through on-site reviews conducted during periodic licensing and certification surveys and in response to complaints. If a facility is determined to be out of compliance with this minimum staffing requirement, DHS may issue a notice of deficiency, or a citation, depending on the impact on patient care. A citation carries with it the imposition of monetary fines that can range from $100 to $100,000 per citation. The issuance of either a notice of deficiency or a citation requires the facility to prepare and implement an acceptable plan of correction. If we are unable to satisfy the minimum staffing requirements required by DHS, we could be subject to significant monetary fines. In addition, if DHS were to issue regulations which materially change the way compliance with the minimum staffing standard is calculated or enforced, our labor costs could increase and the current shortage of healthcare workers could impact us more significantly.

        The state of Washington requires that at least one registered nurse directly supervise resident care for a minimum of 16 hours per day, seven days per week, and that one registered nurse or licensed practical nurse directly supervise resident care during the remaining eight hours per day, seven days per week. State regulators may inspect skilled nursing facilities at any time to verify compliance with these requirements. If deficiencies are found, regulators may issue a citation and require the facility to prepare and execute a plan of correction. Failure to satisfactorily complete a plan of correction can result in civil fines of between $50 and $3,000 per day or between $1,000 and $3,000 per instance. Failure to correct deficiencies can also result in the suspension, revocation or nonrenewal of the skilled nursing facility's license. In addition, deficiencies can result in the suspension of resident admissions

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and/or the termination of Medicaid participation. If we are unable to satisfy the minimum staffing requirements in Washington, we could be subject to monetary fines and potential loss of license.

        In Idaho, skilled nursing facilities with 59 or fewer residents must provide an average of 2.4 nursing hours per resident per day, including the supervising nurse's hours. Skilled nursing facilities with 60 or more residents must provide an average of 2.4 nursing hours per resident per day, excluding the supervising nurse's hours. A facility complies with these requirements if the total nursing hours for the previous seven days equal or exceed the minimum staffing ratio for the period, averaged on a daily basis, if the facility has received prior approval to calculate nursing hours in this manner. State regulators may inspect at any time to verify compliance with these requirements. If any deficiencies are found and not timely or adequately corrected, regulators can revoke the facility's skilled nursing facility license. If we are unable to satisfy the minimum staffing requirements in Idaho, we could be subject to potential loss of our license.

        The state of Texas requires that a facility maintain a ratio of one licensed nursing staff person for each 20 residents for every 24 hour period, or a minimum of 0.4 licensed-care hours per resident day. State regulators may inspect a facility at any time to verify compliance with these requirements. Uncorrected deficiencies can result in the civil fines of between $100 and $10,000 per day per deficiency. Failure to correct deficiencies can further result in the revocation of the facility's skilled nursing facility license. In addition, deficiencies can result in the suspension of patient admissions and/or the termination of Medicaid participation. If we are unable to satisfy the minimum staffing requirements in Texas, we could be subject to monetary fines and potential loss of our license.

        The state of Arizona requires that at least one nurse must be present and responsible for providing direct care to not more than 64 residents. State regulators may impose civil fines for a facility's failure to comply with the laws and regulations governing skilled nursing facilities. Violations can result in civil fines in an amount not to exceed $500 per violation. Each day that a violation occurs constitutes a separate violation. In addition, such noncompliance can result in the suspension or revocation of the facility's license. If we are unable to satisfy the minimum staffing requirements in Arizona, we could be subject to fines and/or revocation of license.

        The state of Utah has no state-specific minimum staffing requirement in Utah beyond those required by federal regulations. Federal law requires that a facility have sufficient nursing staff to provide nursing and related services. Sufficient staff means, unless waived under certain circumstances, a licensed nurse to function as the charge nurse, and the services of a registered nurse for at least eight consecutive hours per day, seven days per week. Failure to comply with these requirements can, among other things, jeopardize a facility's compliance with the conditions of participation under relevant state and federal health care programs.

        We have hired personnel, including skilled nurses and therapists, from outside the United States. If immigration laws are changed, or if new and more restrictive government regulations proposed by the Department of Homeland Security are enacted, our access to qualified and skilled personnel may be limited. Increased competition for or a shortage of nurses or other trained personnel, or general inflationary pressures may require that we enhance our pay and benefits packages to compete effectively for such personnel. We may not be able to offset such added costs by increasing the rates we charge to our patients. Turnover rates and the magnitude of the shortage of nurses or other trained personnel vary substantially from facility to facility. An increase in costs associated with, or a shortage of, skilled nurses, could negatively impact our business. In addition, if we fail to attract and retain qualified and skilled personnel, our ability to conduct our business operations effectively would be harmed.

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We are subject to litigation that could result in significant legal costs and large settlement amounts or damage awards.

        The skilled nursing business involves a significant risk of liability given the age and health of our patients and residents and the services we provide. We and others in our industry are subject to a large and increasing number of claims and lawsuits, including professional liability claims, alleging that our services have resulted in personal injury, elder abuse, wrongful death or other related claims. The defense of these lawsuits may result in significant legal costs, regardless of the outcome, and can result in large settlement amounts or damage awards. Plaintiffs tend to sue every healthcare provider who may have been involved in the patient's care and, accordingly, we respond to multiple lawsuits and claims every year.

        Certain lawsuits filed on behalf of patients of long-term care facilities for alleged negligence and/or alleged abuses have resulted in large damage awards against other companies, both in and related to our industry. In addition, there has been an increase in the number of class action suits filed against long-term and rehabilitative care companies. A class action suit was previously filed against us alleging, among other things, violations of certain California Health and Safety Code provisions and a violation of the California Consumer Legal Remedies Act at certain of our facilities. We settled this class action suit and this settlement was approved by the affected class and the Court in April 2007. However, we could be subject to similar actions in the future.

        In addition to the class action, professional liability and other types of lawsuits and claims described above, we are also subject to potential lawsuits under the Federal False Claims Act and comparable state laws governing submission of fraudulent claims for services to any healthcare program (such as Medicare) or payor. These lawsuits, which may be initiated by the government or by a private party asserting direct knowledge of the claimed fraud or misconduct, can result in the imposition on a company of significant monetary damages, fines and attorney fees (a portion of which may be shared with the private parties who successfully identify the subject practices), as well as significant legal expenses and other costs to the company in connection with defending against such claims. Insurance is not available to cover such losses. Penalties for Federal False Claims Act violations include fines ranging from $5,500 to $11,000 for each false claim, plus up to three times the amount of damages sustained by the federal government. A violation may also provide the basis for exclusion from federally-funded healthcare programs. If one of our facilities or key employees were excluded from such participation, such exclusion could have a correlative negative impact on our financial performance. In addition, some states, including California, Arizona and Texas, have enacted similar whistleblower and false claims laws and regulations.

        In addition, the DRA created incentives for states to enact anti-fraud legislation modeled on the Federal False Claims Act. The DRA sets forth standards for state false claims acts to meet, including: (a) liability to the state for false or fraudulent claims with respect to any expenditure described in the Medicaid program; (b) provisions at least as effective as federal provisions in rewarding and facilitating whistleblower actions; (c) requirements for filing actions under seal for sixty days with review by the state's attorney general; and (d) civil penalties no less than authorized under the federal statutes. As such, we could face increased scrutiny, potential liability and legal expenses and costs based on claims under state false claims acts in existing and future markets in which we do business. Any of this potential litigation could result in significant legal costs and large settlement amounts or damage awards.

        Were litigation to be instituted against one or more of our subsidiaries, a successful plaintiff might attempt to hold us or another subsidiary liable for the alleged wrongdoing of the subsidiary principally targeted by the litigation. If a court in such litigation decided to disregard the corporate form, the resulting judgment could increase our liability and adversely affect our financial condition and results of operations.

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As Medicare and Medicaid certified providers, our operating subsidiaries undergo periodic audits and "probe reviews" by government agents, which can result in recoupments of prior revenue of the government, cause further reimbursements to be delayed or held and could result in civil or criminal sanctions.

        Our facilities undergo regular claims submission audits by government reimbursement programs in the normal course of their business, and such audits can result in adjustments to their past billings and reimbursements from such programs. In addition to such audits, several of our facilities have recently participated in more intensive "probe reviews" as described above, conducted by our Medicare fiscal intermediary. Some of these probe reviews identified patient miscoding, documentation deficiencies and other errors in recordkeeping and Medicare billing. If the government or court were to conclude that such errors and deficiencies constituted criminal violations, or were to conclude that such errors and deficiencies resulted in the submission of false claims to federal healthcare programs, or if it were to discover other problems in addition to the ones identified by the probe reviews that rose to actionable levels, we and certain of our officers might face potential criminal charges and/or civil claims, administrative sanctions and penalties for amounts that could be material to our business, results of operations and financial condition. Such amounts could include claims for treble damages and penalties of up to $11,000 per false claim submitted to a federal healthcare program.

        In addition, we and/or some of our key personnel could be temporarily or permanently excluded from future participation in state and federal healthcare reimbursement programs such as Medicaid and Medicare. In any event, it is likely that a governmental investigation alone, regardless of its outcome, would divert material time, resources and attention from our anagement team and our staff, and could have a materially detrimental impact on our results of operations during and after any such investigation or proceedings. While we believe that the assertion of criminal charges, civil claims, administrative sanctions or whistleblower actions would be unwarranted, the government is not sharing any information with us regarding its investigation, the subpoena or the matters that provoked its filing or withdrawal, and we cannot predict the outcome of any investigation or any possible related proceedings.

We believe that the U.S. Department of Justice is conducting an investigation into the reimbursement processes of some of our operating subsidiaries, which could adversely affect our operations and financial condition.

        In March 2007, we and certain of our officers received a series of notices from our bank indicating that the United States Attorney for the Central District of California had issued a subpoena to our bank requesting documents related to financial transactions involving us, ten of our operating subsidiaries, an outside investor group, and certain of our current and former officers. The U.S. Attorney voluntarily rescinded the subpoena before the bank delivered any documents. Subsequently, in June 2007, the U.S. Attorney sent a letter to one of our current employees requesting a meeting. The letter indicated that the U.S. Attorney and the U.S. Department of Health and Human Services Office of Inspector General were conducting an investigation of claims submitted to the Medicare program for rehabilitation services provided at our skilled nursing facilities. Although both we and the employee offered to cooperate, the U.S. Attorney later withdrew its meeting request. We have not been formally charged with any wrongdoing, served with any related subpoenas or requests, or directly notified of any concerns or investigations by the U.S. Attorney or any government agency. While we believe that the assertion of criminal charges, civil claims, administrative sanctions or whistleblower actions would be unwarranted, the U.S. Attorney's office has declined to discuss or provide us with any further information with respect to this matter and we cannot predict the outcome of any investigation or any possible related proceedings. To the extent the U.S. Attorney's office elects to pursue this matter, or if the investigation has been instigated by a qui tam relator who elects to pursue the matter, our operations and financial condition could be adversely affected and our stock price could decline.

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We are conducting an internal investigation into the billing and reimbursement processes of some of our operating subsidiaries, which could adversely affect our operations and financial condition.

        In November 2006, we became aware of an allegation of possible reimbursement irregularities at one or more of our facilities. That same month, we retained outside counsel and initiated an internal investigation into these matters. This investigation is currently ongoing, and no conclusion regarding the the allegation has yet been reached. We do not know what might be the ultimate outcome or findings of this investigation at this time. If our internal investigation results in negative findings, our business, financial condition and results of operations could be materially and adversely affected and our stock price could decline.

We may be unable to complete future facility acquisitions at attractive prices or at all, which may adversely affect our revenue.

        To date, our revenue growth has been significantly driven by our acquisition of new facilities. Subject to general market conditions and the availability of essential resources and leadership within our company, we continue to seek both single- and multi-facility acquisition opportunities that are consistent with our geographic, financial and operating objectives.

        We face competition for the acquisition of facilities and expect this competition to increase. Based upon factors such as our ability to identify suitable acquisition candidates, the purchase price of the facilities, prevailing market conditions, the availability of leadership to manage new facilities and our own willingness to take on new operations, the rate at which we have historically acquired facilities has fluctuated significantly. In the future, we anticipate the rate at which we may acquire facilities will continue to fluctuate, which may affect our revenue.

We may not be able to successfully integrate acquired facilities into our operations, and we may not achieve the benefits we expect from any of our facility acquisitions.

        We may not be able to successfully or efficiently integrate new acquisitions with our existing operations, culture and systems. The process of integrating acquired facilities into our existing operations may result in unforeseen operating difficulties, divert management's attention from existing operations, or require an unexpected committment of staff and financial resources, and may ultimately be unsuccessful. Existing facilities available for acquisition frequently serve or target different markets than those that we currently serve. We also may determine that renovations of acquired facilities and changes in staff and operating management personnel are necessary to successfully integrate those facilities into our existing operations. We may not be able to recover the costs incurred to reposition or renovate newly acquired facilities. The financial benefits we expect to realize from many of our acquisitions are largely dependent upon our ability to improve clinical performance, overcome regulatory deficiencies, rehabilitate or improve the reputation of the facilities in the community, increase and maintain occupancy, control costs, and in some cases change the patient acuity mix. If we are unable to accomplish any of these objectives at facilities we acquire, we will not realize the anticipated benefits and we may experience lower-than anticipated profits, or even losses.

        In 2006, we acquired ten skilled nursing facilities and one assisted living facility with a total of 1,160 beds. In 2007, we have acquired three skilled nursing facilities and one campus that offers both skilled nursing and assisted living services, with a total of 497 beds. This growth has placed and will continue to place significant demands on our current management resources. Our ability to manage our growth effectively and to successfully integrate new acquisitions into our existing business will require us to continue to expand our operational, financial and management information systems and to continue to retain, attract, train, motivate and manage key employees, including facility-level leaders and our local directors of nursing. We may not be successful in attracting qualified individuals necessary for any future acquisitions to be successful, and our management team may expend significant time and

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energy working to attract qualified personnel to manage facilities we may acquire in the future. Also, the newly acquired facilities may require us to spend significant time improving services that have historically been substandard, and if we are unable to improve such facilities quickly enough, we may be subject to litigation and/or loss of licensure or certification. If we are not able to successfully overcome these and other integration challenges, we may not achieve the benefits we expect from any of our facility acquisitions, and our business may suffer.

In undertaking acquisitions, we may be adversely impacted by costs, liabilities and regulatory issues that may adversely affect our operations.

        In undertaking acquisitions, we also may be adversely impacted by unforeseen liabilities attributable to the prior providers who operated those facilities, against whom we may have little or no recourse. Many facilities we have historically acquired were underperforming financially and had clinical and regulatory issues. Even though we believe we have improved operations and patient care at facilities that we have acquired, we still may face post-acquisition regulatory issues, including, without limitation, payment recoupment related to our predecessors' prior noncompliance and/or our own inability to quickly bring non-compliant facilities into full compliance. Diligence materials pertaining to acquisition targets, especially the underperforming facilities that often represent the greatest opportunity for return, are often inadequate, inaccurate or impossible to obtain, sometimes requiring us to make acquisition decisions with incomplete information. Despite our due diligence procedures, facilities that we may acquire in the future may generate unexpectedly low returns, may cause us to incur substantial losses, or may not meet a risk profile that our investors find acceptable. In addition, we might encounter unanticipated difficulties and expenditures relating to any of the acquired facilities, including contingent liabilities. For example, when we acquire a facility, we generally assume the facility's existing Medicare provider number for purposes of billing Medicare for services. If CMS later determined that the prior owner of the facility had received overpayments from Medicare for the period of time during which it operated the facility, or had incurred fees in connection with the operation of the facility, CMS could hold us liable for repayment of the overpayments or fines. If the prior operator is defunct or otherwise unable to reimburse us, we may be unable to recover these funds. We may be unable to improve every facility that we acquire. In addition, operation of these facilities may divert management time and attention from other operations and priorities, negatively impact cash flows, result in adverse or unanticipated accounting changes, or otherwise damage other areas of our company if they are not timely and adequately improved.

We are subject to reviews relating to Medicare overpayments, which could result in recoupment to the federal government of Medicare revenue.

        We are subject to reviews relating to Medicare services, billings and potential overpayments. Recent probe reviews, as described above, resulted in Medicare revenue recoupment, net of appeal recoveries, to the federal government of approximately $143,000 during the three months ended March 31, 2007, $203,000 in 2006 and $201,000 in 2005, a portion of which is currently under appeal. We anticipate that these probe reviews will increase in frequency in the future. In addition, three of our facilities are currently on prepayment review, and others may be placed on prepayment review in the future. We have one facility that is currently under focus review.

        Separately, the federal government has also introduced a pilot program that utilizes independent contractors (other than the fiscal intermediaries) to identify and recoup Medicare overpayments. These contractors are paid a contingent fee on recoupments. This pilot program could be extended or expanded based on the recommendation of CMS and the decision of Congress. Should this occur, we anticipate that the number of overpayment reviews will increase in the future, and that the reviewers could be more aggressive in making claims for recoupment. One of our facilities has been subjected to review under this pilot program, resulting in a recoupment to the federal government of approximately

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$12,000. If future Medicare reviews result in revenue recoupment to the federal government, it would have an adverse effect on our financial results.

Potential sanctions and remedies based upon alleged regulatory deficiencies could negatively affect our financial condition and results of operations.

        We have received notices of potential sanctions and remedies based upon alleged regulatory deficiencies from time to time, and such sanctions have been imposed on some of our facilities. We have also acquired at least one facility that we believe either already was or had been identified prior to the time of acquisition as a candidate for special focus facility status, as described above, and our current facilities and acquisitions may be identified as candidates for such status in the future. From time to time, we have opted to voluntarily stop accepting new patients pending completion of a new state survey, in order to avoid possible denial of payment for new admissions during the deficiency cure period, or simply to avoid straining staff and other resources while retraining staff, upgrading operating systems or making other operational improvements. In the past, some of our facilities have been in denial of payment status due to findings of continued regulatory deficiencies, resulting in an actual loss of the revenue associated with the Medicare and Medicaid patients admitted after the denial of payment date. Additional sanctions could ensue and, if imposed, these sanctions, entailing various remedies up to and including decertification, would further negatively affect our financial condition and results of operations.

        The intensified and evolving enforcement environment impacts providers like us because of the increase in the scope or number of inspections or surveys by governmental authorities and the severity of consequent citations for alleged failure to comply with regulatory requirements. We also divert personnel resources to respond to federal and state investigations and other enforcement actions. The diversion of these resources, including our management team, clinical and compliance staff, and others take away from the time and energy that these individuals could otherwise spend on routine operations. As noted, from time to time in the ordinary course of business, we receive deficiency reports from state and federal regulatory bodies resulting from such inspections or surveys. The focus of these deficiency reports tends to vary from year to year. Although most inspection deficiencies are resolved through an agreed-upon plan of corrective action, the reviewing agency typically has the authority to take further action against a licensed or certified facility, which could result in the imposition of fines, imposition of a provisional or conditional license, suspension or revocation of a license, suspension or denial of payment for new admissions, loss of certification as a provider under state or federal healthcare programs, or imposition of other sanctions, including criminal penalties. Furthermore, in some states citations in one facility impact other facilities in the state. Revocation of a license at a given facility could therefore impair our ability to obtain new licenses or to renew existing licenses at other facilities, which may also trigger defaults or cross-defaults under our leases and our credit arrangements, or adversely affect our ability to operate or obtain financing in the future. If state or federal regulators were to determine, formally or otherwise, that one facility's regulatory history ought to impact another of our existing or prospective facilities, this could also increase costs, result in increased scrutiny by state and federal survey agencies, and even impact our expansion plans. Therefore, our failure to comply with applicable legal and regulatory requirements in any single facility could negatively impact our financial condition and results of operations as a whole.

We may not be successful in generating internal growth at our facilities by expanding occupancy at these facilities. We also may be unable to improve patient mix at our facilities.

        Overall occupancy across all of our facilities was approximately 81% and 78% at December 31, 2006 and at March 31, 2007, respectively, leaving opportunities for internal growth without the acquisition or construction of new facilities. Because a large portion of our costs are fixed, a decline in our occupancy could adversely impact our financial performance. In addition, our profitability is

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impacted heavily by our patient mix. We generally generate greater profitability from non-Medicaid patients. If we are unable to maintain or increase the proportion of non-Medicaid patients in our facilities, our financial performance could be adversely affected.

Termination of our patient admission agreements and the resulting vacancies in our facilities could cause revenue at our facilities to decline.

        Most state regulations governing skilled nursing and assisted living facilities require written patient admission agreements with each patient. Several of these regulations also require that each patient have the right to terminate the patient agreement for any reason and without prior notice. Consistent with these regulations, all of our skilled nursing patient agreements allow patients to terminate their agreements without notice, and all of our assisted living resident agreements allow residents to terminate their agreements upon thirty days' notice. Patients and residents terminate their agreements from time to time for a variety of reasons, causing some fluctuations in our overall occupancy as patients and residents are admitted and discharged in normal course. If an unusual number of patients or residents elected to terminate their agreements within a short time, occupancy levels at our facilities could decline. As a result, beds may be unoccupied for a period of time, which would have a negative impact on our revenue, financial condition and results of operations.

We face significant competition from other healthcare providers and may not be successful in attracting patients and residents to our facilities.

        The skilled nursing and assisted living industries are highly competitive, and we expect that these industries may become increasingly competitive in the future. Our skilled nursing facilities compete primarily on a local and regional basis with many long-term care providers, from national and regional multi-facility providers that have substantially greater financial resources to small providers who operate a single nursing facility. We also compete with other skilled nursing and assisted living facilities, and with inpatient rehabilitation facilities, long-term acute care hospitals, home healthcare and other similar services and care alternatives. Increased competition could limit our ability to attract and retain patients, attract and retain skilled personnel, maintain or increase private pay and managed care rates or expand our business. Our ability to compete successfully varies from location to location depending upon a number of factors, including:

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our ability to attract and retain qualified facility leaders, nursing staff and other employees;



•

the number of competitors in the local market;



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the types of services available;



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our local reputation for quality care of patients;



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the commitment and expertise of our staff;



•

our local service offerings; and



•

the cost of care in each locality and the physical appearance, location, age and condition of our facilities.

        We may not be successful in attracting patients to our facilities, particularly Medicare, managed care, and private pay patients who generally come to us at higher reimbursement rates. Some of our competitors have greater financial and other resources than us, may have greater brand recognition and may be more established in their respective communities than we are. Competing skilled nursing companies may also offer newer facilities or different programs or services than we do and may thereby attract current or potential patients. Other competitors may accept a lower margin, and, therefore, present significant price competition for managed care and private pay patients. In addition, some of our competitors operate on a not-for-profit basis or as charitable organizations and have the ability to

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finance capital expenditures on a tax-exempt basis or through the receipt of charitable contributions, neither of which are available to us.

Competition for the acquisition of strategic assets from buyers with lower costs of capital than us or that have lower return expectations than we do could limit our ability to compete for strategic acquisitions and therefore to grow our business effectively.

        Several real estate investment trusts ("REITs"), other real estate investment companies, institutional lenders who have not traditionally taken ownership interests in operating businesses or real estate, as well as several skilled nursing and assisted living facility providers, have similar asset acquisition objectives as we do, along with greater financial resources and lower costs of capital than we are able to obtain. This may increase competition for acquisitions that would be suitable to us, making it more difficult for us to compete and successfully implement our growth strategy. Significant competition exists among potential acquirers in the skilled nursing and assisted living industries, including with REITs, and we may not be able to successfully implement our growth strategy or complete acquisitions, which could limit our ability to grow our business effectively.

If we do not achieve and maintain competitive quality of care ratings from CMS and private organizations engaged in similar monitoring activities, or if the frequency of CMS surveys and enforcement sanctions increases, our business may be negatively affected.

        CMS, as well as certain private organizations engaged in similar monitoring activities, provides comparative data available to the public on its web site, rating every skilled nursing facility operating in each state based upon quality-of-care indicators. These quality-of-care indicators include such measures as percentages of patients with infections, bedsores and unplanned weight loss. In addition, CMS has undertaken an initiative to increase Medicaid and Medicare survey and enforcement activities, to focus more survey and enforcement efforts on facilities with findings of substandard care or repeat violations of Medicaid and Medicare standards, and to require state agencies to use enforcement sanctions and remedies more promptly when substandard care or repeat violations are identified. For example, two of our facilities are now surveyed every six months instead of every 12 to 15 months as a result of historical survey results dating back to the prior operators. We have found a correlation between negative Medicaid and Medicare surveys and the incidence of professional liability litigation. In 2006, we experienced a higher than normal number of negative survey findings in some of our facilities. If we are unable to achieve quality-of-care ratings that are comparable or superior to those of our competitors, our ability to attract and retain patients could be adversely affected.

Significant legal actions and liability claims against us in excess of insurance limits or outside of our insurance coverage could subject us to increased insurance costs, litigation reserves, operating costs and substantial uninsured liabilities.

        We maintain liability insurance policies in amounts and with coverage limits and deductibles we believe are appropriate based on the nature and risks of our business, historical experience, industry standards and the price and availability of coverage in the insurance market. At any given time, we may have multiple current professional liability cases and/or other types of claims pending, which is common in our industry. In the past year, we have not paid or settled any claims in excess of the policy limits of our insurance coverages. We may face claims which exceed our insurance limits or are not covered by our policies.

        We also face potential exposure to other types of liability claims, including, without limitation, directors' and officers liability, employment practices and/or employment benefits liability, premises liability, and vehicle or other accident claims. Given the litigious environment in which all businesses operate, it is impossible to fully catalogue all of the potential types of liability claims that might be

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asserted against us. As a result of the litigation and potential litigation described above, as well as factors completely external to our company and endemic to the skilled nursing industry, during the past several years the overall cost of both general and professional liability insurance to the industry has dramatically increased, while the availability of affordable and favorable insurance coverage has dramatically decreased. If federal and state medical liability insurance reforms to limit future liability awards are not adopted and enforced, we expect that our insurance and liability costs may continue to increase.

        In some states, the law prohibits or limits insurance coverage for the risk of punitive damages arising from professional liability and general liability claims or litigation. Coverage for punitive damages is also excluded under some insurance policies. As a result, we may be liable for punitive damage awards in these states that either are not covered or are in excess of our insurance policy limits. Claims against us, regardless of their merit or eventual outcome, also could inhibit our ability to attract patients or expand our business, and could require our management to devote time to matters unrelated to the day-to-day operation of our business.

If we are unable to obtain insurance, or if insurance becomes more costly for us to obtain, our business may be adversely affected.

        It may become more difficult and costly for us to obtain coverage for resident care liabilities and other risks, including property and casualty insurance. For example, the following circumstances may adversely affect our ability to obtain insurance at favorable rates:

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we experience higher-than-expected professional liability, property and casualty, or other types of claims or losses;



•

we receive survey deficiencies or citations of higher-than-normal scope or severity;



•

we acquire especially troubled operations or facilities that present unattractive risks to current or prospective insurers;



•

insurers tighten underwriting standards applicable to us or our industry; or



•

insurers or reinsurers are unable or unwilling to insure us or the industry at historical premiums and coverage levels.

        If any of these potential circumstances were to occur, our insurance carriers may require us to significantly increase our self-insured retention levels or pay substantially higher premiums for the same or reduced coverage for insurance, including workers compensation, property and casualty, automobile, employment practices liability, directors and officers liability, employee healthcare and general and professional liability coverages.

        With few exceptions, workers' compensation and employee health insurance costs have also increased markedly in recent years. To partially offset these increases, we have increased the amounts of our self-insured retention ("SIR") and deductibles in connection with general and professional liability claims. We have also have implemented a self-insurance program for workers compensation in California, and elected non-subscriber status for workers compensation in Texas. If we are unable to obtain insurance, or if insurance becomes more costly for us to obtain, our business may be adversely affected.

Our self-insurance programs may expose us to significant and unexpected costs and losses.

        Since 2001, we have maintained insurance through a wholly-owned subsidiary insurance company, Standardbearer Insurance Company, Ltd., to insure our SIR and deductibles as part of a continually evolving overall risk management strategy. In addition, from 2001 to 2002, we used Standardbearer to reinsure a "fronted" professional liability policy, and we may elect to do so again in the future. We establish the premiums to be paid to Standardbearer, and the loss reserves set by that subsidiary based

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on an estimation process that uses information obtained from both company-specific and industry data. The estimation process requires us to continuously monitor and evaluate the life cycle of the claims. Using data obtained from this monitoring and our assumptions about emerging trends, we, along with an independent actuary, develop information about the size of ultimate claims based on our historical experience and other available industry information. The most significant assumptions used in the estimation process include determining the trend in costs, the expected cost of claims incurred but not reported and the expected costs to settle or pay damages with respect to unpaid claims. It is possible, however, that the actual liabilities may exceed our estimates of loss. We may also experience an unexpectedly large number of successful claims or claims that result in costs or liability significantly in excess of our projections. For these and other reasons, our self-insurance reserves could prove to be inadequate, resulting in liabilities in excess of our available insurance and self-insurance. If a successful claim is made against us and it is not covered by our insurance or exceeds the insurance policy limits, our business may be negatively and materially impacted. Further, because our SIR under our general and professional liability and workers compensation programs apply on a per claim basis, there is no limit to the maximum number of claims or the total amount for which we could incur liability in any policy period.

        Our self-insured liabilities are based upon estimates, and while our management believes that the estimates of loss are appropriate, the ultimate liability may be in excess of, or less than, recorded amounts. Due to the inherent volatility of actuarially determined loss estimates, it is reasonably possible that we could experience changes in estimated losses which could be material to net income. We believe that we have recorded reserves for general liability, professional liability, worker's compensation and healthcare benefits, at a level which has substantially mitigated the potential negative impact of adverse developments and/or volatility. In addition, if coverage becomes too difficult or costly to obtain from insurance carriers, we would have to self-insure a greater portion of our risks.

        In May 2006, we began self-insuring our employee health benefits. With respect to our health benefits self-insurance, we do not yet have a meaningful loss history by which to set reserves or premiums, and have consequently employed general industry data that is not specific to our own company to set reserves and premiums. Therefore, our reserves may prove to be insufficient and we may be exposed to significant and unexpected losses.

The geographic concentration of our facilities could leave us vulnerable to an economic downturn, regulatory changes or acts of nature in those areas.

        Our facilities located in California and Arizona account for the majority of our total revenue. As a result of this concentration, the conditions of local economies, changes in governmental rules, regulations and reimbursement rates or criteria, changes in demographics, acts of nature and other factors that may result in a decrease in demand and/or reimbursement for skilled nursing services in these states could have a disproportionately adverse effect on our revenue, costs and results of operations. Moreover, since approximately half of our facilities are located in California, we are particularly susceptible to revenue loss, cost increase or damage caused by natural disasters such as earthquakes or mudslides. In addition, to the extent we acquire additional facilities in Texas, we become more susceptible to revenue loss, cost increase or damage caused by hurricanes or flooding. Any significant loss due to a natural disaster may not be covered by insurance or may exceed our insurance limits and may also lead to an increase in the cost of insurance.

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The actions of a national labor union that has been pursuing a negative publicity campaign criticizing our business may adversely affect our revenue and our profitability.

        Unlike many other companies in our industry, we continue to assert our right to inform our employees about our views of the potential impact of unionization upon the workplace generally and upon individual employees. With one exception, to our knowledge the staffs at our facilities that have been approached to unionize have uniformly rejected union organizing efforts. Because approximately half of the workforce at one of our facilities voted to accept the union, we have recognized the union and been engaged in collective bargaining with that union since 2005. If employees of other facilities decide to unionize, our cost of doing business could increase, and we could experience contract delays, difficulty in adapting to a changing regulatory and economic environment, cultural conflicts between unionized and non-unionized employees, and strikes and work stoppages, and we may conclude that affected facilities or operations would be uneconomical to continue operating.

        The unwillingness on the part of both our management and staff to accede to union demands for "neutrality" and other concessions has resulted in a negative labor campaign by at least one labor union, the Service Employees International Union and its local chapter based in Oakland, California. Since 2002, this union has prosecuted a negative retaliatory publicity action, also known as a "corporate campaign," against us and has filed, promoted or participated in multiple legal actions against us. The union's campaign asserts, among other allegations, poor treatment of patients, inferior medical services provided by our employees, poor treatment of our employees, and health code violations by us. In addition, the union has publicly mischaracterized actions taken by the California Department of Health Services against us and our facilities. In numerous cases, the union's allegations have created the false impression that violations and other events that occurred at facilities prior to our acquisition of those facilities were caused by us. Since a large component of our business involves acquiring underperforming and distressed facilities, and improving the quality of operations at these facilities, we may therefore be associated with the past poor performance of these facilities.

        This union, along with other similar agencies and organizations, has demanded focused regulatory oversight and public boycotts of some of our facilities. It has also attempted to pressure hospitals, doctors, insurers and other healthcare providers and professionals to cease doing business with or referring patients to us. If this union or another union is successful in convincing our patients, their families or our referral sources to reduce or cease doing business with us, our revenue may be reduced and our profitability could be adversely affected. Additionally, if we are unable to attract and retain qualified staff due to negative public relations efforts by this or other union organizations, our quality of service and our revenue and profits could decline. Our strategy for responding to union allegations involves clear public disclosure of the union's identity, activities and agenda, and rebuttals to its negative campaign. Our ability to respond to unions, however, may be limited by some state laws, which purport to make it illegal for any recipient of state funds to promote or deter union organizing. For example, such a state law passed by the California Legislature was successfully challenged on the grounds that it was preempted by the National Labor Relations Act, only to have the challenge overturned by the Ninth Circuit in 2006. The case is now before the United States Supreme Court. If the Supreme Court upholds the Ninth Circuit's ruling, our ability to oppose unionization efforts could be hindered, and our business could be negatively affected.

A number of our facilities are operated under master lease arrangements or leases that contain cross-default provisions, and in some cases the breach of a single facility lease could subject multiple facilities to the same risk.

        We occupy approximately 15% of our facilities under agreements that are structured as master leases. Under a master lease, we may lease a large number of geographically dispersed properties through an indivisible lease. Failure to comply with Medicare or Medicaid provider requirements is a default under several of our master lease and debt financing instruments. In addition, other potential

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defaults related to an individual facility may cause a default of an entire master lease portfolio and could trigger cross-default provisions in our outstanding debt arrangements and other leases, which would have a negative impact on our capital structure and our ability to generate future revenue, and could interfere with our ability to pursue our growth strategy. With an indivisible lease, it is difficult to restructure the composition of the portfolio or economic terms of the lease without the consent of the landlord. In addition, we occupy approximately 25% of our facilities under individual facility leases that are held by the same or related landlords, the largest of which covers eight of our facilities and represented 0.8% and 6.6% of our net income for the year ended December 31, 2006 and the three months ended March 31, 2007, respectively. These leases typically contain cross-default provisions that could cause a default at one facility to trigger a technical default with respect to one or more other locations, potentially subjecting us to the various remedies available to the landlords under each of the related leases.

Failure to generate sufficient cash flow to cover required payments or meet operating covenants under our long-term debt, mortgages and long-term operating leases could result in defaults under such agreements and cross-defaults under other debt, mortgage or operating lease arrangements, which could harm our operations and cause us to lose facilities or experience foreclosures.

        At March 31, 2007, we had $64.3 million of outstanding indebtedness under our Third Amended and Restated Loan Agreement (the "Term Loan"), our Amended and Restated Loan and Security Agreement (the "Revolver"), mortgage notes and note payable and $169.5 million of operating lease obligations. We intend to continue financing our facilities through mortgage financing, long-term operating leases and other types of financing, including borrowings under our lines of credit and future credit facilities we may obtain.

        We may not generate sufficient cash flow from operations to cover required interest, principal and lease payments. In addition, from time to time the financial performance of one or more of our mortgaged facilities may not comply with the required operating covenants under the terms of the mortgage. Any non-payment, noncompliance or other default under our financing arrangements could, subject to cure provisions, cause the lender to foreclose upon the facility or facilities securing such indebtedness or, in the case of a lease, cause the lessor to terminate the lease, each with a consequent loss of revenue and asset value to us or a loss of property. Furthermore, in many cases, indebtedness is secured by both a mortgage on one or more facilities, and a guaranty by us. In the event of a default under one of these scenarios, the lender could avoid judicial procedures required to foreclose on real property by declaring all amounts outstanding under the guaranty immediately due and payable, and requiring us to fulfill our obligations to make such payments. If any of these scenarios were to occur, our financial condition would be adversely affected. For tax purposes, a foreclosure on any of our properties would be treated as a sale of the property for a price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income on foreclosure, but would not receive any cash proceeds, which would negatively impact our earnings and cash position. Further, because our mortgages and operating leases generally contain cross-default and cross-collateralization provisions, a default by us related to one facility could affect a significant number of other facilities and their corresponding financing arrangements and operating leases.

        Because our Term Loan, mortgage and lease obligations are fixed expenses and secured by specific assets, and because our revolving loan obligations are secured by virtually all of our assets, if reimbursement rates, patient acuity mix or occupancy levels decline, or if for any reason we are unable to meet our loan or lease obligations, we may not be able to cover our costs and some or all our assets may become at risk. Our ability to make payments of principal and interest on our indebtedness and to make lease payments on our operating leases depends upon our future performance, which will be subject to general economic conditions, industry cycles and financial, business and other factors affecting our operations, many of which are beyond our control. If we are unable to generate sufficient

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cash flow from operations in the future to service our debt or to make lease payments on our operating leases, we may be required, among other things, to seek additional financing in the debt or equity markets, refinance or restructure all or a portion of our indebtedness, sell selected assets, reduce or delay planned capital expenditures or delay or abandon desirable acquisitions. Such measures might not be sufficient to enable us to service our debt or to make lease payments on our operating leases. The failure to make required payments on our debt or operating leases or the delay or abandonment of our planned growth strategy could result in an adverse effect on our future ability to generate revenue and sustain profitability. In addition, any such financing, refinancing or sale of assets might not be available on terms that are economically favorable to us, or at all.

Our existing credit facilities and mortgage loans contain restrictive covenants and any default under such facilities or loans could result in a freeze on additional advances, the acceleration of indebtedness, the termination of leases, or cross-defaults, any of which would negatively impact our liquidity and inhibit our ability to grow our business and increase revenue.

        Our outstanding credit facilities and mortgage loans contain restrictive covenants and require us to maintain or satisfy specified coverage tests on a consolidated basis and on a facility or facilities basis. These restrictions and operating covenants include, among other things, requirements with respect to occupancy, debt service coverage and project yield. The debt service coverage ratios are generally calculated as revenue less operating costs, including an implied management fee and a reserve for capital expenditures, divided by the outstanding principal and accrued interest under the debt. These restrictions may interfere with our ability to obtain additional advances under existing credit facilities or to obtain new financing or to engage in other business activities, which may inhibit our ability to grow our business and increase revenue. At times in the past we have failed to timely deliver audited financial statements to our lender as required under our loan covenants. In each such case, we obtained waivers from our lender. In addition, in December 2000 we were unable to make balloon payments due under two mortgages on one of our facilities, but we were able to negotiate extensions with both lenders, and paid off both loans in January 2001 as required by the terms of the extensions. If we fail to comply with any of our loan requirements, or if we experience any defaults, then the related indebtedness could become immediately due and payable prior to its stated maturity date. We may not be able to pay this debt if it becomes immediately due and payable.

If we decide to expand our presence in the assisted living industry, we would become subject to risks in a market in which we have limited experience.

        The majority of our facilities have historically been skilled nursing facilities. If we decide to expand our presence in the assisted living industry, our existing overall business model would change and we would become subject to risks in a market in which we have limited experience. Although assisted living operations generally have lower costs and higher margins than skilled nursing, they typically generate lower overall revenue than skilled nursing operations. In addition, assisted living revenue is derived primarily from private payors as opposed to government reimbursement. In most states, skilled nursing and assisted living are regulated by different agencies, and we have less experience with the agencies that regulate assisted living. In general, we believe that assisted living is a more competitive industry than skilled nursing. If we decided to expand our presence in the assisted living industry, we would have to change our existing business model, which could have an adverse affect on our business.

If our referral sources fail to view us as an attractive skilled nursing provider, or if our referral sources otherwise refer fewer patients, our patient base may decrease.

        We rely significantly on appropriate referrals from physicians, hospitals and other healthcare providers in the communities in which we deliver our services to attract appropriate residents and patients to our facilities. Our referral sources are not obligated to refer business to us and may refer business to other healthcare providers. We believe many of our referral sources refer business to us as

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a result of the quality of our patient care and our efforts to establish and build a relationship with our referral sources. If we lose, or fail to maintain, existing relationships with our referral resources, fail to develop new relationships, or if we are perceived by our referral sources as not providing high quality patient care, our occupancy rate and the quality of our patient mix could suffer. In addition, if any of our referral sources have a reduction in patients whom they can refer due to a decrease in their business, our occupancy rate and the quality of our patient mix could suffer.

We may need additional capital to fund our operations and finance our growth, and we may not be able to obtain it on terms acceptable to us, or at all, which may limit our ability to grow.

        Continued expansion of our business through the acquisition of existing skilled nursing facilities, expansion of our existing facilities or construction of new facilities may require additional capital, particularly if we were to accelerate our acquisition and expansion plans. Financing may not be available to us or may be available to us only on terms that are not favorable. In addition, some of our outstanding indebtedness and long-term leases restrict, among other things, our ability to incur additional debt. If we are unable to raise additional funds or obtain additional funds on terms acceptable to us, we may have to delay or abandon some or all of our growth strategies. Further, if additional funds are raised through the issuance of additional equity securities, the percentage ownership of our stockholders would be diluted. Any newly issued equity securities may have rights, preferences or privileges senior to those of our common stock.

Delays in reimbursement may cause liquidity problems.

        If we experience problems with our information systems or if issues arise with Medicare, Medicaid or other payors, we may encounter delays in our payment cycle. From time to time, we have experienced such delays as a result of government payors instituting planned reimbursement delays for budget balancing purposes or as a result of prepayment reviews. Any future timing delay may cause working capital shortages. As a result, working capital management, including prompt and diligent billing and collection, is an important factor in our results of operations and liquidity. Our working capital management procedures may not successfully ameliorate the effects of any delays in our receipt of payments or reimbursements. Accordingly, such delays could have an adverse effect on our liquidity and financial condition.

Compliance with the regulations of the Department of Housing and Urban Development may require us to make unanticipated expenditures which could increase our costs.

        Four of our facilities are currently subject to regulatory agreements with the Department of Housing and Urban Development ("HUD") that give the Commissioner of HUD broad authority to require us to be replaced as the operator of those facilities in the event that the Commissioner determines there are operational deficiencies at such facilities under HUD regulations. Recently, one of our HUD-insured mortgaged facilities did not pass its HUD inspection. Following an unsuccessful appeal of the decision, we requested a re-inspection. If our facility fails the re-inspection, the HUD Commissioner could exercise its authority to replace us as the facility operator. In such event, we could be forced to repay the HUD mortgage on this facility to avoid being replaced as the facility operator, which would negatively impact our cash and financial condition. This alternative is not available to us if any of our other three HUD-insured facilities were determined by HUD to be operationally deficient because they are leased facilities. Compliance with HUD's requirements can often be difficult because these requirements are not always consistent with the requirements of other federal and state agencies. Appealing a failed inspection can be costly and time-consuming and, if we do not successfully remediate the failed inspection, we could be precluded from obtaining HUD financing in the future or we may encounter limitations or prohibitions on our operation of HUD-insured facilities.

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Upkeep of healthcare properties is capital intensive, requiring us to continually direct financial resources to the maintenance and enhancement of our facilities and equipment.

        Our ability to maintain and enhance our facilities and equipment in a suitable condition to meet regulatory standards, operate efficiently and remain competitive in our markets requires us to commit substantial resources to continued investment in our facilities and equipment. Some of our competitors may operate facilities that are not as old as ours, or may appear more modernized than our facilities, and therefore may be more attractive to prospective patients. We are sometimes more aggressive than our competitors in capital spending to address issues that arise in connection with aging facilities. If we are unable to direct the necessary financial and human resources to the maintenance, upgrade and modernization of our facilities and equipment, our business may suffer.

Failure to comply with existing environmental laws could result in increased expenditures, litigation and potential loss to our business and in our asset value.

        Our operations are subject to regulations under various federal, state and local environmental laws, primarily those relating to the handling, storage, transportation, treatment and disposal of medical waste; the identification and warning of the presence of asbestos-containing materials in buildings, as well as the encapsulation or removal of such materials; and the presence of other substances in the indoor environment.

        Our facilities generate infectious or other hazardous medical waste due to the illness or physical condition of the patients. Each of our facilities has an agreement with a waste management company for the proper disposal of all infectious medical waste, but the use of a waste management company does not immunize us from alleged violations of such laws for operations for which we are responsible even if carried out by a third party, nor does it immunize us from third-party claims for the cost to cleanup disposal sites at which such wastes have been disposed.

        Some of the facilities we lease, own or may acquire may have asbestos-containing materials. Federal regulations require building owners and those exercising control over a building's management to identify and warn their employees and other employers operating in the building of potential hazards posed by workplace exposure to installed asbestos-containing materials and potential asbestos-containing materials in their buildings. Significant fines can be assessed for violation of these regulations. Building owners and those exercising control over a building's management may be subject to an increased risk of personal injury lawsuits. Federal, state and local laws and regulations also govern the removal, encapsulation, disturbance, handling and disposal of asbestos-containing materials and potential asbestos-containing materials when such materials are in poor condition or in the event of construction, remodeling, renovation or demolition of a building. Such laws may impose liability for improper handling or a release into the environment of asbestos-containing materials and potential asbestos-containing materials and may provide for fines to, and for third parties to seek recovery from, owners or operators of real properties for personal injury or improper work exposure associated with asbestos-containing materials and potential asbestos-containing materials. The presence of asbestos-containing materials, or the failure to properly dispose of or remediate such materials, also may adversely affect our ability to attract and retain patients and staff, to borrow using such property as collateral or to make improvements to such property.

        The presence of mold, lead-based paint, underground storage tanks, contaminants in drinking water, radon and/or other substances at any of the facilities we lease, own or may acquire may lead to the incurrence of costs for remediation, mitigation or the implementation of an operations and maintenance plan and may result in third party litigation for personal injury or property damage. Furthermore, in some circumstances, areas affected by mold may be unusable for periods of time for repairs, and even after successful remediation, the known prior presence of extensive mold could adversely affect the ability of a facility to retain or attract patients and staff and could adversely affect a facility's market value and ultimately could lead to the temporary or permanent closure of the facility.

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        If we fail to comply with applicable environmental laws, we would face increased expenditures in terms of fines and remediation of the underlying problems, potential litigation relating to exposure to such materials, and a potential decrease in value to our business and in the value of our underlying assets.

        We are unable to predict the future course of federal, state and local environmental regulation and legislation. Changes in the environmental regulatory framework could result in increased costs. In addition, because environmental laws vary from state to state, expansion of our operations to states where we do not currently operate may subject us to additional restrictions in the manner in which we operate our facilities.

If we fail to safeguard the monies held in our patient trust funds, we will be required to reimburse such monies, and we may be subject to citations, fines and penalties

        Each of our facilities is required by federal law to maintain a patient trust fund to safeguard certain assets of their residents and patients. If any money held in a patient trust fund is misappropriated, we are required to reimburse the patient trust fund for the amount of money that was misappropriated. In 2005 we became aware of two separate and unrelated instances of employees misappropriating approximately $370,000 in patient trust funds, some of which was recovered from the employees and some of which we were required to reimburse from Company funds. If any monies held in our patient trust funds are misappropriated in the future and are unrecoverable, we will be required to reimburse such monies, and we may be subject to citations, fines and penalties pursuant to federal and state laws.

We are a holding company with no operations and rely upon our multiple independent operating subsidiaries to provide us with the funds necessary to meet our financial obligations. Liabilities of any one or more of our subsidiaries could be imposed upon us or our other subsidiaries.

        We are a holding company with no direct operating assets, employees or revenues. Each of our facilities is operated through a separate, wholly-owned, independent subsidiary, which has its own management, employees and assets. Our principal assets are the equity interests we directly or indirectly hold in our multiple operating and real estate holding subsidiaries. As a result, we are dependent upon distributions from our subsidiaries to generate the funds necessary to meet our financial obligations and pay dividends. Our subsidiaries are legally distinct from us and have no obligation to make funds available to us. The ability of our subsidiaries to make distributions to us will depend substantially on their respective operating results and will be subject to restrictions under, among other things, the laws of their jurisdiction of organization, which may limit the amount of funds available for distribution to investors or shareholders, agreements of those subsidiaries, the terms of our financing arrangements and the terms of any future financing arrangements of our subsidiaries.

Risks Related to This Offering and Ownership of our Common Stock

We may not be able to pay or maintain dividends and the failure to do so would adversely affect our stock price.

        Our ability to pay and maintain cash dividends is based on many factors, including our ability to make and finance acquisitions, our ability to negotiate favorable lease and other contractual terms, anticipated operating cost levels, the level of demand for our beds, the rates we charge and actual results that may vary substantially from estimates. Some of the factors are beyond our control and a change in any such factor could affect our ability to pay or maintain dividends. In addition, our Revolver with General Electric Capital Corporation (the "Lender") restricts our ability to pay dividends to stockholders if we are in default under this agreement.

        We may not be able to pay or maintain dividends, and we may at any time elect not to pay dividends but to retain cash for other purposes. We also cannot assure you that the level of dividends

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will be maintained or increase over time or that increases in demand for our beds and monthly patient fees will increase our actual cash available for dividends to stockholders. It is possible that we may pay dividends in a future period that may exceed our net income for such period. The failure to pay or maintain dividends would adversely affect our stock price.

An active market for our shares of common stock may never develop, which could make it difficult for you to sell your shares of common stock and could affect the value of your investment.

        There has not been a public market for our common stock. An active trading market for our common stock may not develop following this offering. You may not be able to sell your shares quickly or at the market price if trading in our common stock is not active. The initial public offering price for the shares will be determined by negotiations between us and representatives of the underwriters and may not be indicative of prices that will prevail in the trading market. Please see "Underwriting" for more information regarding our arrangements with the underwriters and the factors considered in setting the initial public offering price.

If the ownership of our common stock continues to be highly concentrated, it may prevent you and other stockholders from influencing significant corporate decisions and may result in conflicts of interest that could cause our stock price to decline.

        Following the completion of this offering, our executive officers, directors and their affiliates will beneficially own or control approximately            % of the outstanding shares of our common stock, of which Roy Christensen, our Chairman of the board of directors, Christopher Christensen, our President and Chief Executive Officer, and Gregory Stapley, our General Counsel, will beneficially own approximately            %,            % and            %, respectively, of the outstanding shares. Accordingly, our current executive officers, directors and their affiliates, if they act together, will have substantial control over the outcome of corporate actions requiring stockholder approval, including the election of directors, any merger, consolidation or sale of all or substantially all of our assets or any other significant corporate transactions. These stockholders may also delay or prevent a change of control of us, even if such a change of control would benefit our other stockholders. The significant concentration of stock ownership may adversely affect the trading price of our common stock due to investors' perception that conflicts of interest may exist or arise.

If securities or industry analysts do not publish research or reports about our business, if they change their recommendations regarding our stock adversely or if our operating results do not meet their expectations, our stock price and trading volume could decline.

        The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline. Moreover, if one or more of the analysts who cover us downgrade our stock or if our operating results do not meet their expectations, our stock price could decline.

The market price and trading volume of our common stock may be volatile, which could result in rapid and substantial losses for our stockholders.

        Even if an active trading market develops, the market price of our common stock may be highly volatile and could be subject to wide fluctuations. In addition, the trading volume in our common stock may fluctuate and cause significant price variations to occur. If the market price of our common stock declines, you may be unable to resell your shares at or above your purchase price. We cannot assure you that the market price of our common stock will not fluctuate or decline significantly in the future. In the past, when the market price of a stock has been volatile, holders of that stock have instituted securities class action litigation against the company that issued the stock. If any of our stockholders

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brought a lawsuit against us, we could incur substantial costs defending or settling the lawsuit. Such a lawsuit could also divert the time and attention of our management from our business.

Future offerings of debt or equity securities by us may adversely affect the market price of our common stock.

        In the future, we may attempt to increase our capital resources by offering debt or additional equity securities, including commercial paper, medium-term notes, senior or subordinated notes, series of preferred shares or shares of our common stock. Upon liquidation, holders of our debt securities and preferred shares, and lenders with respect to other borrowings, would receive a distribution of our available assets prior to any distribution to the holders of our common stock. Additional equity offerings may dilute the economic and voting rights of our existing stockholders or reduce the market price of our common stock, or both. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, holders of our common stock bear the risk of our future offerings reducing the market price of our common stock and diluting their share holdings in us.

        After this offering, we will have an aggregate of            shares of common stock authorized but unissued and not reserved for issuance under our option plans. We may issue all of these shares without any action or approval by our stockholders. We intend to continue to actively pursue acquisitions of skilled nursing facilities and may issue shares of common stock in connection with these acquisitions.

        Any shares issued in connection with our acquisitions, the exercise of outstanding stock options or otherwise would dilute the holdings of the investors who purchase our shares in this offering.

New investors in our common stock will experience immediate and substantial dilution.

        The offering price of our common stock will be substantially higher than the net tangible book value per share of our existing common stock. As a result, purchasers of our common stock in this offering will incur immediate and substantial dilution of $                        in pro forma as adjusted net tangible book value per share of common stock, based on an assumed public offering price of $                        per share (the midpoint of the price range set forth on the cover of this prospectus).

We have broad discretion with respect to the application of the net proceeds obtained from this offering and may not use these funds in a manner which you would approve.

        We will have broad discretion as to the application of the net proceeds from this offering. We intend to use the net proceeds of this offering to fund possible future acquisitions of skilled nursing facilities and businesses engaged in activities that are similar or complementary to our business, to fund expansions at our existing facilities and the development and construction of new skilled nursing facilities, and for general corporate purposes, including working capital. We may not use these funds in a manner which you would approve.

The number of shares eligible for sale following this offering may depress the market price of our common stock.

        Sales of a substantial number of shares of our common stock in the public market, or the perception that substantial sales may occur, could cause the market price of our common stock to decrease. Based on the shares of our common stock outstanding as of March 31, 2007, immediately after the completion of this offering, we will have            shares of common stock outstanding assuming no exercise of the underwriters' over-allotment option. In general, the shares sold in this offering will be freely transferable without restriction or additional registration under the Securities Act of 1933, as amended, or the Securities Act. In addition, all of the remaining            shares of common stock that will be outstanding after this offering will be available for sale in the public markets pursuant to

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Rule 144 or Rule 701 promulgated under the Securities Act, subject to lock-up agreements entered into by our directors, executive officers and certain stockholders. D.A. Davidson & Co. may, in its sole discretion, permit any director, executive officer, employee or stockholder who is subject to this lock-up to sell shares prior to the expiration of their respective lock-up agreements. Such lock-up agreements will expire 180 days after the execution of the underwriting agreement, unless extended an additional 18 days under certain circumstances. As such,            of the shares of common stock subject to such lock-up agreements will be immediately eligible for resale in the public markets and the remaining            shares subject to such lock-up agreements held by our directors, executive officers and other affiliates will be subject to the volume limitations under Rule 144 promulgated under the Securities Act.

        After the completion of this offering, we intend to register, under one or more registration statements on Form S-8, approximately            shares of our common stock that are issuable under our 2001 Stock Option Deferred Stock and Restricted Stock Plan and our 2005 Stock Incentive Plan, and            shares of our common stock that are issuable under our 2007 Omnibus Incentive Plan. Once we register these shares, all of such shares can be freely sold in the public markets upon issuance, subject to the lock-up agreements described above and any applicable vesting restrictions and, for our executive officers, directors and their affiliates, subject also to the limitations of Rule 144 other than the holding period.

Failure to achieve and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could result in a restatement of our financial statements, cause investors to lose confidence in our financial statements and our company and have a material adverse effect on our business and stock price.

        We produce our consolidated financial statements in accordance with the requirements of GAAP, but our internal accounting controls may not currently meet all standards applicable to companies with publicly traded securities. Effective internal controls are necessary for us to provide reliable financial reports to help mitigate the risk of fraud and to operate successfully as a publicly traded company. As a public company, we will be required to document and test our internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, which will require annual management assessments of the effectiveness of our internal controls over financial reporting and a report by our independent registered public accounting firm. This requirement will apply to us starting with our annual report for the year ended December 31, 2008.

        During fiscal year 2006 we identified certain accounting errors in our financial statements for the three years ended December 31, 2005. These errors primarily related to the appropriate classification of self-insurance liabilities between short-term and long-term. As a result of discovering these errors, we undertook a further review of our historical financial statements and identified similar reclassifications to deferred taxes and captive insurance subsidiary cash and cash equivalents. Following this review, our board of directors and independent registered public accounting firm concluded that an amendment of our consolidated financial statements, which included the restatement of our financial statements for the three years ended December 31, 2005, was necessary. It was not deemed that these errors were caused by a significant deficiency or material weakness in internal controls over financial reporting.

        As we prepare to comply with Section 404, we may identify significant deficiencies or errors that we may not be able to remediate in time to meet our deadline for compliance with Section 404. Testing and maintaining internal controls can divert our management's attention from other matters that are important to our business. We may not be able to conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 or our independent registered public accounting firm may not be able or willing to issue a favorable assessment if we conclude that our internal controls over financial reporting are not effective. If either we are unable to conclude that we have effective internal controls over financial reporting or our independent registered public accounting firm is unable to provide us with an unqualified report as required by Section 404, investors

40

could lose confidence in our reported financial information and our company, which could result in a decline in the market price of our common stock, and cause us to fail to meet our reporting obligations in the future, which in turn could impact our ability to raise additional financing if needed in the future.

        If we fail to implement the requirements of Section 404 in a timely manner, we may also be subject to sanctions or investigation by regulatory authorities such as the Securities and Exchange Commission or NASDAQ.

The requirements of being a public company, including compliance with the reporting requirements of the Exchange Act and the requirements of the Sarbanes-Oxley Act, may strain our resources, increase our costs and distract management, and we may be unable to comply with these requirements in a timely or cost-effective manner.

        As a public company, we will need to comply with laws, regulations and requirements, certain corporate governance provisions of the Sarbanes-Oxley Act of 2002, related regulations of the Securities and Exchange Commission, and requirements of NASDAQ, with which we are not required to comply as a private company. As a result, we will incur significant legal, accounting and other expenses that we did not incur as a private company. Complying with these statutes, regulations and requirements will occupy a significant amount of the time of our board of directors and management, will require us to have additional finance and accounting staff, may make it more difficult to attract and retain qualified officers and members of our board of directors, particularly to serve on our audit committee, and make some activities more difficult, time consuming and costly. Among other things, we will need to:

•

institute a more comprehensive compliance function;



•

establish new internal policies, such as those relating to disclosure controls and procedures and insider trading;



•

design, establish, evaluate and maintain a system of internal control over financial reporting in compliance with the requirements of Section 404 and the related rules and regulations of the Securities and Exchange Commission and the Public Company Accounting Oversight Board;



•

prepare and distribute periodic reports in compliance with our obligations under the federal securities laws;



•

involve and retain to a greater degree outside counsel and accountants in the above activities; and



•

establish an investor relations function.

        If we are unable to accomplish these objectives in a timely and effective fashion, our ability to comply with our financial reporting requirements and other rules that apply to reporting companies could be impaired. If our finance and accounting personnel insufficiently support us in fulfilling these public-company compliance obligations, or if we are unable to hire adequate finance and accounting personnel, we could face significant legal liability, which could have a material adverse effect on our financial condition and results of operations. Furthermore, if we identify any issues in complying with those requirements (for example, if we or our independent registered public accountants identified a material weakness or significant deficiency in our internal control over financial reporting), we could incur additional costs rectifying those issues, and the existence of those issues could adversely affect us, our reputation or investor perceptions of us.

        In addition, we also expect that being a public company subject to these rules and regulations will require us to modify our director and officer liability insurance, and we may be required to accept reduced policy limits or incur substantially higher costs to obtain the same or similar coverage. These

41

factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee, and qualified executive officers.

Our amended and restated certificate of incorporation, amended and restated bylaws and Delaware law will contain provisions that could discourage transactions resulting in a change in control, which may negatively affect the market price of our common stock.

        In addition to the effect that the concentration of ownership by our significant stockholders may have, our amended and restated certificate of incorporation and our amended and restated bylaws will contain provisions that may enable our management to resist a change in control. These provisions may discourage, delay or prevent a change in the ownership of our company or a change in our management, even if doing so might be beneficial to our stockholders. In addition, these provisions could limit the price that investors would be willing to pay in the future for shares of our common stock. Such provisions, to be set forth in our amended and restated certificate of incorporation or amended and restated bylaws, each of which will be effective upon the completion of this offering, include:

•

our board of directors will be authorized, without prior stockholder approval, to create and issue preferred stock, commonly referred to as "blank check" preferred stock, with rights senior to those of common stock;



•

advance notice requirements for stockholders to nominate individuals to serve on our board of directors or to submit proposals that can be acted upon at stockholder meetings;



•

our board of directors will be classified so not all members of our board are elected at one time, which may make it more difficult for a person who acquires control of a majority of our outstanding voting stock to replace our directors;



•

stockholder action by written consent will be limited;



•

special meetings of the stockholders will be permitted to be called only by the chairman of our board of directors, our chief executive officer or by a majority of our board of directors;



•

stockholders will not be permitted to cumulate their votes for the election of directors;



•

newly created directorships resulting from an increase in the authorized number of directors or vacancies on our board of directors will be filled only by majority vote of the remaining directors;



•

our board of directors will be expressly authorized to make, alter or repeal our bylaws; and



•

stockholders will be permitted to amend our bylaws only upon receiving at least a majority of the votes entitled to be cast by holders of all outstanding shares then entitled to vote generally in the election of directors, voting together as a single class.

        These and other provisions in our amended and restated certificate of incorporation, amended and restated bylaws and Delaware law could discourage acquisition proposals and make it more difficult or expensive for stockholders or potential acquirers to obtain control of our board of directors or initiate actions that are opposed by our then-current board of directors, including delaying or impeding a merger, tender offer or proxy contest involving us. Any delay or prevention of a change of control transaction or changes in our board of directors could cause the market price of our common stock to decline.

42

FORWARD-LOOKING STATEMENTS

        Some of the statements under "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Industry," "Business," "Compensation Discussion and Analysis" and elsewhere in this prospectus may contain forward-looking statements which reflect our current views with respect to, among other things, future events and financial performance. You can identify these forward-looking statements by the use of forward-looking words such as "outlook," "believes," "expects," "potential," "continues," "may," "should," "seeks," "approximately," "predicts," "intends," "plans," "estimates," "anticipates" or the negative version of those words or other comparable words. Any forward-looking statements contained in this prospectus are based upon the historical performance of our subsidiaries and on our current plans, estimates and expectations. The inclusion of this forward-looking information should not be regarded as a representation by us, the underwriters or any other person that the future plans, estimates or expectations contemplated by us will be achieved. Such forward-looking statements are subject to various risks and uncertainties. Accordingly, there are or will be important factors that could cause our actual results to differ materially from those indicated in these statements. We believe that these factors include, but are not limited to, the following risks:

•

federal and state changes to reimbursement and other aspects of Medicare and Medicaid;



•

the effect of federal and state government laws and regulations on our business;



•

preclusion from participating in federal or state healthcare programs, including, Medicare and Medicaid;



•

state efforts to regulate or deregulate healthcare services or the construction or expansion of healthcare facilities;



•

overbuilding in certain markets, increased competition and increased operating costs;



•

any changes in the acuity mix of patients in our facilities as well as payor mix and payment methodologies;



•

increased competition for or a shortage of nurses and other skilled personnel;



•

the inability to expand occupancy or to improve patient mix at our facilities;



•

diversion of material time, resources and attention from our management team and staff away from our business to respond to government probe reviews and/or investigations;



•

competition from other healthcare providers in attracting patients and residents to our facilities;



•

difficulties in completing future facility acquisitions and efficiently integrating acquired facilities;



•

the achievement and maintenance of competitive quality of care ratings from CMS and private organizations engaged in similar monitoring activities;



•

the geographic concentration of our facilities;



•

significant legal actions and liability claims;



•

increases in the expense or difficulty in obtaining insurance coverage;



•

exposure through our self-insurance programs to significant and unexpected losses;



•

the departure or other loss of our management team and facility leaders;



•

the effect of a breach of a single facility lease on a master-lease or other leases with the same landlord;

43

•

the failure to comply with the restrictive covenants and other provisions of our long-term debt, mortgages and long-term operating leases;



•

our dependence upon receiving funds from multiple, independent operating subsidiaries;



•

our referral sources referring fewer patients to our facilities; and



•

the termination of our patient admission agreements and the resulting vacancies in our facilities.

        A further description of these risks and other risks that may affect our business is described in the section entitled "Risk Factors" beginning on page 10 of this prospectus. These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this prospectus. We do not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.

        If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may vary materially from what we may have projected. Any forward-looking statements you read in this prospectus reflect our current views with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, financial condition, growth strategy and liquidity. You should specifically consider the factors identified in this prospectus that could cause actual results to differ before making an investment decision.

44

USE OF PROCEEDS

        The net proceeds from our sale of                shares of common stock in this offering are estimated to be approximately $                based on an assumed initial public offering price of $                per share (the midpoint of the price range set forth on the cover of this prospectus), after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. The shares of common stock that may be purchased by the underwriters upon exercise of their over-allotment option are shares outstanding before this offering and not additional shares issuable by us. If the underwriters' over-allotment option is exercised in full, it is estimated that the selling stockholders' net proceeds will be approximately $                  . We will not receive any of the proceeds from the sale of shares of our common stock offered by the selling stockholders pursuant to the exercise, if any, of the over-allotment option.

        We currently plan to use a portion of the net proceeds from this offering to acquire additional skilled nursing facilities, for improvements and upgrades to our existing facilities and to pay down debt. We currently have approximately $12.0 million budgeted for significant capital refurbishments at existing facilities in 2007. As of July 20, 2007, we held options to purchase 12 of our facilities, of which three become exercisable in the next two years. We will consider exercising some or all of such options as they become exercisable and may use a portion of the net proceeds to pay the purchase price for these facilities. We anticipate paying off our $2.1 million mortgage note in 2008, and we will also consider paying off all or a portion of our short-term debt, if any, that is incurred in connection with facility acquisitions.

        We expect to use the remainder of the net proceeds from this offering for working capital and for general corporate purposes.

        As of the date of this prospectus, we cannot specify with certainty all of the particular uses for the net proceeds from this offering. The amounts actually expended for the purposes indicated above will depend upon a number of factors, including the availability of suitable additional skilled nursing facilities, the related lease rates and acquisition costs, the status of the real estate market, construction and related materials costs, as well as other industry related factors. Accordingly, our management will retain broad discretion in the allocation of the net proceeds from this offering. Pending their use, we anticipate investing the net proceeds from this offering in short-term, interest-bearing, investment-grade securities.

45

DIVIDEND POLICY

        We paid annual cash dividends for 2002 and 2003, and commenced paying quarterly dividends for the first quarter of 2004. We have paid cash dividends to our stockholders in each quarter since then. The aggregate cash dividends we have paid to our stockholders are as follows:

Dividend Per Share	Date Paid	Aggregate Dividend Paid
		(in thousands)
$0.015	May 28, 2003	$	240
$0.025	February 18, 2004	$	408
$0.01	May 25, 2004	$	164
$0.01	July 28, 2004	$	167
$0.015	November 1, 2004	$	252
$0.015	February 4, 2005	$	252
$0.02	April 29, 2005	$	338
$0.02	July 29, 2005	$	331
$0.02	October 28, 2005	$	333
$0.03	January 31, 2006	$	500
$0.03	April 28, 2006	$	490
$0.03	July 28, 2006	$	492
$0.03	November 1, 2006	$	493
$0.04	January 30, 2007	$	657
$0.04	April 30, 2007	$	658
$0.04	July 31, 2007(1)	$	658

(1)

Dividend declared to stockholders of record as of June 30, 2007, which is expected to be paid by July 31, 2007.

        We do not have a formal dividend policy but we currently intend to continue to pay regular quarterly dividends to the holders of our common stock. Historically, we have paid aggregate dividends equal to 5% to 10% of our net income. However, future dividends will continue to be at the discretion of our board of directors and we may or may not continue to pay dividends at such rate. We expect that the payment of dividends will depend on many factors, including our results of operations, financial condition and capital requirements, earnings, general business conditions, legal restrictions on the payment of dividends and other factors the board of directors deems relevant. The loan and security agreement governing our revolving line of credit with General Electric Capital Corporation restricts our ability to pay dividends to stockholders if we are in default under this agreement. In addition, we are a holding company with no direct operating assets, employees or revenues. As a result, we are dependent upon distributions from our independent operating subsidiaries to generate the funds necessary to meet our financial obligations and pay dividends. It is possible that in certain quarters, we may pay dividends that exceed our net income for such period as calculated in accordance with GAAP.

46

CAPITALIZATION

        The following table summarizes our cash and cash equivalents and our capitalization at March 31, 2007:

•

on an actual basis;



•

on a pro forma basis to reflect the conversion of all of our outstanding preferred stock into an aggregate of 2,741,180 shares of common stock upon the closing of this offering; and



•

on a pro forma as adjusted basis to reflect (a) the conversion of all of our outstanding preferred stock into an aggregate of 2,741,180 shares of common stock upon the closing of this offering; and (b) our issuance of                                    shares of common stock at an assumed initial public offering price of $                        per share (the midpoint of the range set forth on the cover of this prospectus), after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

        The pro forma information below is illustrative only and our capitalization following the completion of this offering will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing. This table should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the related notes included elsewhere in this prospectus.

			March 31, 2007
			Actual			Pro Forma			Pro Forma As Adjusted
			(in thousands, except share and per share data)
Cash and cash equivalents			$	16,409		$	16,409
Long-term debt, including current maturities				64,270			64,270
Series A redeemable convertible preferred stock, $0.001 par value; 1,000,000 shares authorized; 685,295 shares issued and outstanding, actual; no shares issued and outstanding, pro forma or pro forma as adjusted				2,725			—
Stockholders' equity:
Common stock, $0.001 par value; 20,000,000 shares authorized; 13,705,200 shares issued and outstanding, actual; 16,446,380 shares issued and outstanding, pro forma;                        shares issued and outstanding, pro forma as adjusted				14			17
Additional paid-in capital				1,530			4,252
Retained earnings				57,863			57,863
Common stock in treasury, at cost, 745,000 shares				(4,784	)		(4,784	)
	Total stockholders' equity			54,623			57,348
		Total capitalization	$	121,618		$	121,618

The table above excludes, as of March 31, 2007:

•

1,164,400 shares of common stock issuable upon the exercise of outstanding options at a weighted average exercise price of $6.20 per share; and



•

shares of common stock reserved for future grant or issuance under our 2007 Omnibus Incentive Plan, which will become effective in connection with the completion of this offering.

        For additional information regarding our capital structure, see "Compensation Discussion and Analysis—Employee Benefit Plans," "Description of Capital Stock" and Notes 10, 11 and 12 of the Notes to the Consolidated Financial Statements.

47

DILUTION

        If you invest in our common stock in this offering, your interest will be diluted immediately to the extent of the difference between the initial public offering price per share of our common stock and the pro forma net tangible book value per share of our common stock after completion of this offering. Our pro forma net tangible book value as of March 31, 2007 was approximately $51.8 million, or $3.15 per share of common stock. Pro forma net tangible book value per share represents our total tangible assets less total liabilities divided by the number of shares of our common stock outstanding as of March 31, 2007 after giving effect to the conversion of all of our outstanding preferred stock into common stock upon the closing of this offering. After giving effect to the conversion of all of our outstanding preferred stock into common stock immediately prior to the closing of this offering, and our sale of                shares of common stock offered by this prospectus at the assumed public offering price of $            per share (the midpoint of the range on the front cover of this prospectus) and the receipt and application of those net proceeds, our pro forma net tangible book value as of March 31, 2007 would have been $            million, or $            per share of common stock. This represents an immediate increase in pro forma net tangible book value of $            per share to our existing stockholders and an immediate dilution in pro forma net tangible book value of $            per share to investors purchasing common stock in this offering.

        The following table illustrates this per share dilution:

Assumed initial public offering price per share			$
	Pro forma net tangible book value per share as of March 31, 2007	$
	Increase per share attributable to new investors	$
Pro forma net tangible book value per share after this offering			$
Dilution per share to new investors			$

        The following table summarizes on a pro forma as adjusted basis as of March 31, 2007, the difference between the number of shares of common stock purchased from us, the total consideration paid and the average price per share paid by existing stockholders and by new investors, assuming an initial public offering price of $                        per share (the midpoint of the range on the front cover of this prospectus) and before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us:

		Shares Purchased			Total Consideration
									Average Price Per Share
		Number	Percent		Amount		Percent
Existing stockholders		16,446,380		%	$	3,208,699		%	$	0.20
New investors
	Total		100.0	%			100.0	%

        If the underwriters exercise their over-allotment option in full, the number of shares held by new investors will increase to            , or      % of the total number of shares of common stock outstanding after this offering.

        The foregoing discussion and tables assume no exercise of any stock options outstanding as of March 31, 2007. To the extent that these options are exercised, new investors will experience further dilution. As of March 31, 2007, options to purchase 1,164,400 shares of our common stock were outstanding at a weighted average exercise price of $6.20 per share. Assuming all of our outstanding options are exercised, new investors will own approximately      % of the total number of shares of common stock outstanding after this offering while contributing approximately      % of the total consideration for such shares. Assuming all of our outstanding options are exercised, pro forma net tangible book value before this offering at March 31, 2007 would be $            per share, representing an immediate increase of $            per share to our existing stockholders, and, after giving effect to the sale of shares of common stock in this offering, there would be an immediate dilution of $            per share to new investors in this offering.

48

SELECTED CONSOLIDATED FINANCIAL DATA

        Our consolidated statement of income data for the years ended December 31, 2004, 2005 and 2006 and the consolidated balance sheet data as of December 31, 2005 and 2006 included in this prospectus have been derived from our audited consolidated financial statements included herein. The consolidated statement of income data for the years ended December 31, 2002 and 2003 and the consolidated balance sheet data as of December 31, 2002, 2003 and 2004 have been derived from our audited consolidated financial statements that are not included in this prospectus. The consolidated statement of income data for the three months ended March 31, 2006 and 2007 and the consolidated balance sheet data as of March 31, 2007 are derived from our unaudited consolidated financial statements included herein. Historical results are not necessarily indicative of future results. The following data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and related notes included elsewhere in this prospectus.

			Year Ended December 31,															Three Months Ended March 31,
			2002			2003			2004			2005			2006			2006			2007
			(in thousands, except share and per share data)
Consolidated Statement of Income Data:
Revenue			$	102,103		$	158,007		$	244,536		$	300,850		$	358,574		$	83,532		$	97,978
Expenses:
	Cost of services (exclusive of facility rent and depreciation and amortization shown separately below)			84,380			128,522			199,986			239,379			284,847			65,601			80,847
	Facility rent—cost of services			6,777			9,964			14,773			16,118			16,404			4,055			4,155
	General and administrative expense			4,115			6,246			8,537			10,909			14,210			3,260			3,746
	Depreciation and amortization			915			1,229			1,934			2,458			4,221			752			1,532
		Total expenses		96,187			145,961			225,230			268,864			319,682			73,668			90,280
Income from operations				5,916			12,046			19,306			31,986			38,892			9,684			7,698
Other income (expense):
	Interest expense			(1,104	)		(1,268	)		(1,565	)		(2,035	)		(2,990	)		(578	)		(1,169	)
	Interest income			8			4			85			491			772			162			392
		Other expense, net		(1,096	)		(1,264	)		(1,480	)		(1,544	)		(2,218	)		(416	)		(777	)
Income before provision for income taxes				4,820			10,782			17,826			30,442			36,674			9,268			6,921
Provision for income taxes				1,256			4,284			6,723			12,054			14,125			3,661			2,784
Net income			$	3,564		$	6,498		$	11,103		$	18,388		$	22,549		$	5,607		$	4,137
Net income per share(1):
	Basic		$	0.27		$	0.49		$	0.83		$	1.35		$	1.66		$	0.41		$	0.30
	Diluted		$	0.22		$	0.38		$	0.63		$	1.05		$	1.34		$	0.33		$	0.24
Weighted average common shares outstanding(1):
	Basic			12,701,574			12,905,250			13,284,902			13,468,060			13,365,682			13,529,822			13,419,764
	Diluted			16,571,686			16,985,350			17,519,032			17,505,040			16,823,242			16,929,017			16,904,196

(See footnotes on following pages)

49

(footnotes to prior page)

	As of December 31,										As of March 31, 2007
	2002		2003		2004		2005		2006
	(in thousands, except per share data)
Consolidated Balance Sheet Data:
Cash and cash equivalents	$	1,545	$	745	$	14,755	$	11,635	$	25,491	$	16,409
Working capital		1,402		10,191		21,526		19,087		28,281		19,936
Total assets		32,246		62,538		80,255		119,390		190,531		194,319
Long-term debt, less current maturities		12,019		16,239		24,820		25,520		63,587		63,190
Redeemable, convertible preferred stock		2,689		2,722		2,725		2,725		2,725		2,725
Stockholders' equity		1,393		7,343		17,828		32,634		51,147		54,623
Cash dividends declared per common share	$	0.015	$	0.025	$	0.05	$	0.09	$	0.13	$	0.04

	Year ended December 31,										Three Months Ended March 31,
	2002		2003		2004		2005		2006		2006	2007
Other Non-GAAP Financial Data:
EBITDA(2)	$	6,831	$	13,275	$	21,240	$	34,444	$	43,113	10,436	$	9,230
EBITDAR(2)		13,608		23,239		36,013		50,562		59,517	14,491		13,385

(1)

See Note 2 of the Notes to the Consolidated Financial Statements.

(2)

EBITDA and EBITDAR are supplemental non-GAAP financial measures. Regulation G, "Conditions for Use of Non-GAAP Financial Measures," and other provisions of the Securities Exchange Act of 1934, as amended, define and prescribe the conditions for use of certain non-GAAP financial information. We calculate EBITDA as net income before (a) interest expense, net, (b) provision for income taxes, and (c) depreciation and amortization. We calculate EBITDAR by adjusting EBITDA for facility rent—cost of services. These non-GAAP financial measures are used in addition to and in conjunction with results presented in accordance with GAAP. These non-GAAP financial measures should not be relied upon to the exclusion of GAAP financial measures. These non-GAAP financial measures reflect an additional way of viewing aspects of our operations that, when viewed with our GAAP results and the accompanying reconciliations to corresponding GAAP financial measures, provide a more complete understanding of factors and trends affecting our business.

We believe EBITDA and EBITDAR are useful to investors and other external users of our financial statements in evaluating our operating performance because:

•

they are widely used by investors and analysts in our industry as a supplemental measure to evaluate the overall operating performance of companies in our industry without regard to items such as interest expense, net and depreciation and amortization, which can vary substantially from company to company depending on the book value of assets, capital structure and the method by which assets were acquired; and



•

they help investors evaluate and compare the results of our operations from period to period by removing the impact of our capital structure and asset base from our operating results.

We use EBITDA and EBITDAR:

•

as measurements of our operating performance to assist us in comparing our operating performance on a consistent basis;



•

to design incentive compensation and goal setting;



•

to allocate resources to enhance the financial performance of our business;



•

to evaluate the effectiveness of our operational strategies; and



•

to compare our operating performance to that of our competitors.

(See footnotes continued on the following page)

50

(footnotes to prior page)

We typically use EBITDA and EBITDAR to compare the operating performance of each skilled nursing and assisted living facility. EBITDA and EBITDAR are useful in this regard because they do not include such costs as net interest expense, income taxes, depreciation and amortization expense, and, with respect to EBITDAR, facility rent—cost of services, which may vary from period-to-period depending upon various factors, including the method used to finance facilities, the amount of debt that we have incurred, whether a facility is owned or leased, the date of acquisition of a facility or business, or the tax law of the state in which a business unit operates. As a result, we believe that the use of EBITDA and EBITDAR provide a meaningful and consistent comparison of our business between periods by eliminating certain items required by GAAP.

We also establish compensation programs and bonuses for our facility level employees that are based upon the achievement of EBITDA and EBITDAR targets.

Despite the importance of these measures in analyzing our underlying business, designing incentive compensation and for our goal setting, EBITDA and EBITDAR are non-GAAP financial measures that have no standardized meaning defined by GAAP. Therefore, our EBITDA and EBITDAR measures have limitations as analytical tools, and they should not be considered in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

•

they do not reflect our current or future cash requirements for capital expenditures or contractual commitments;



•

they do not reflect changes in, or cash requirements for, our working capital needs;



•

they do not reflect the net interest expense, or the cash requirements necessary to service interest or principal payments, on our debt;



•

they do not reflect any income tax payments we may be required to make;



•

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and EBITDAR do not reflect any cash requirements for such replacements; and



•

other companies in our industry may calculate these measures differently than we do, which may limit their usefulness as comparative measures.

We compensate for these limitations by using them only to supplement net income on a basis prepared in accordance with GAAP in order to provide a more complete understanding of the factors and trends affecting our business.

Management strongly encourages investors to review our consolidated financial statements in their entirety and to not rely on any single financial measure. Because these non-GAAP financial measures are not standardized, it may not be possible to compare these financial measures with other companies' non-GAAP financial measures having the same or similar names. For information about our financial results as reported in accordance with GAAP, see our consolidated financial statements and related notes included elsewhere in this prospectus.

(See footnotes continued on the following page)

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(footnotes to prior pages)

The table below reconciles net income to EBITDA and EBITDAR for the periods presented:

	Year Ended December 31,										Three Months Ended March 31,
	2002		2003		2004		2005		2006		2006		2007
	(in thousands)
Consolidated Statement of Income Data:
Net income	$	3,564	$	6,498	$	11,103	$	18,388	$	22,549	$	5,607	$	4,137
Interest expense, net		1,096		1,264		1,480		1,544		2,218		416		777
Provision for income taxes		1,256		4,284		6,723		12,054		14,125		3,661		2,784
Depreciation and amortization		915		1,229		1,934		2,458		4,221		752		1,532
EBITDA		6,831		13,275		21,240		34,444		43,113		10,436		9,230
Facility rent—cost of services		6,777		9,964		14,773		16,118		16,404		4,055		4,155
EBITDAR	$	13,608	$	23,239	$	36,013	$	50,562	$	59,517	$	14,491	$	13,385

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion together with the consolidated financial statements and the notes thereto included elsewhere in this prospectus. This discussion contains forward-looking statements that are based upon management's current expectations, estimates and projections about our business and operations. The cautionary statements made in this prospectus should be read as applying to all related forward-looking statements wherever they appear in this prospectus. Forward-looking statements are not guarantees of future performance and involve significant risks and uncertainties. Our actual results may vary from those currently anticipated and expressed in such forward-looking statements as a result of a number of factors, including those we discuss under "Risk Factors" and elsewhere in this prospectus. You should read "Risk Factors" and "Forward-Looking Statements."

Overview

        We are a provider of skilled nursing and rehabilitative care services through the operation of 61 facilities located in California, Arizona, Texas, Washington, Utah and Idaho. All of these facilities are skilled nursing facilities, other than three stand-alone assisted living facilities in Arizona and Texas and four campuses that offer both skilled nursing and assisted living services in California, Arizona and Utah. Our facilities provide a broad spectrum of skilled nursing and assisted living services, physical, occupational and speech therapies, and other rehabilitative and healthcare services, for both long-term residents and short-stay rehabilitation patients. We encourage and empower our facility leaders and staff to make their facility the "facility of choice" in the community it serves. This means that our facility leaders and staff are generally free to discern and address the unique needs and priorities of healthcare professionals, customers and other stakeholders in the local community or market, and then work to create a superior service offering and reputation for that particular community or market to encourage prospective customers and referral sources to choose or recommend the facility. As of July 20, 2007, we owned 23 of our facilities and operated an additional 38 facilities under long-term lease arrangements, and had options to purchase 12 of those 38 facilities. The following table summarizes our facilities and licensed and independent living beds by ownership status as of July 20, 2007:

		Owned		Leased (with a purchase option)		Leased (without a purchase option)		Total
Number of facilities		23		12		26		61
	Percent of total	37.7	%	19.7	%	42.6	%	100	%
Skilled nursing, assisted living and independent living beds(1)(2)		2,954		1,339		3,144		7,437
	Percent of total	39.7	%	18.0	%	42.3	%	100	%

(1)

Includes 660 beds in our 454 assisted living units and 84 independent living units. All of the independent living units are located at one of our assisted living facilities.

(2)

All bed counts are licensed beds except for independent living beds, and may not reflect the number of beds actually available for patient use.

        In July 2007, we entered into an operating lease agreement whereby we assumed the operations of a long-term care facility in Utah that offers both skilled nursing and assisted living services. No amounts were paid to the prior facility operators and we did not acquire any assets or assume any liabilities as part of this transaction. This facility added approximately 95 beds to our operations. In addition, in July 2007, under the terms of the original lease agreement, we exercised an option to

53

purchase one of our leased facilities containing 98 beds for $3.3 million, bringing the total of our owned facilities to 23.

        The Ensign Group, Inc. is a holding company with no direct operating assets, employees or revenues. All of our facilities are operated by separate, wholly-owned, independent subsidiaries, which have their own management, employees and assets. In addition, one of our wholly-owned independent subsidiaries, which we call our Service Center, provides centralized accounting, payroll, human resources, information technology, legal, risk management and other services to each operating subsidiary through contractual relationships between such subsidiaries.

Facility Acquisition History

        In 2003, we increased our total bed capacity by approximately 76% through the acquisition of 17 facilities in California and Arizona. We purchased the assets of a long-term care facility located in Arizona for approximately $2.7 million, of which $0.3 million was paid in cash and the balance of approximately $2.4 million was financed through debt secured primarily by the underlying real property. We also entered into operating lease agreements whereby we assumed the operations of 16 facilities located in Southern California and Arizona. No amounts were paid to the prior facility operators and we did not acquire any assets or assume any liabilities as part of these transactions.

        In 2004, we increased our total bed capacity by approximately 5% through acquisition of two facilities in California and Arizona. We purchased the assets of a long-term care facility located in Arizona for approximately $6.5 million paid in cash. In addition, we entered into an operating lease agreement whereby we assumed the operations of a skilled nursing facility located in Southern California. No amount was paid to the prior facility operator and we did not acquire any assets or assume any liabilities as part of this transaction.

        In 2005, we increased our total bed capacity by approximately 7% from the prior year by acquiring three skilled nursing facilities in California. One of these facilities was acquired through an operating lease agreement with no additional cash consideration paid, and the other two facilities were purchased outright for aggregate cash consideration of approximately $14.9 million.

        Since January 1, 2006, we have added an aggregate of 15 facilities located in Texas, Washington, Utah, Idaho, Arizona and California that we had not operated previously, 11 of which we purchased and four of which we acquired under long-term lease arrangements. Three of the long-term lease arrangements include purchase options. Thirteen of these acquisitions were skilled nursing facilities, one was an assisted living facility and one was a campus that offers both skilled nursing and assisted living services. These facilities contributed 1,657 beds to our operations, increasing our total capacity by 29%. With these acquisitions, we entered two new markets, Utah and Idaho. In Texas, we increased our capacity by 684 beds, or approximately 146%, and more than doubled the number of our facilities in that state.

        In 2006, we purchased eight facilities at an aggregate purchase price of $31.1 million, of which $29.0 million was paid in cash, and $2.1 million was financed with the assumption of a loan on one of the facilities. In 2006, we also purchased the underlying assets of three facilities that we were operating under long-term lease arrangements for an aggregate purchase price of $11.1 million, which ultimately was financed using our Term Loan.

        In 2007, we have acquired four additional long-term care facilities. Three of these facilities were acquired for an aggregate purchase price of $9.4 million in cash, which included two skilled nursing facilities in Texas and one skilled nursing facility in Utah. In July 2007, we acquired a long-term care facility in Utah that offers both skilled nursing and assisted living services by assuming the operations of that facility under an operating lease agreement. No amounts were paid to the prior facility operators and we did not acquire any assets or assume any liabilities as part of this transaction. In

54

addition, in July 2007, we exercised an option to purchase one of our leased facilities for $3.3 million in cash, bringing the total of our owned facilities to 23.

        The following table sets forth the location and number of licensed and independent living beds located at our facilities as of July 20, 2007:

	CA	AZ	TX	UT	WA	ID	Total
Number of facilities	31	12	10	4	3	1	61
Skilled nursing, assisted living and independent living beds(1)(2)	3,529	1,952	1,154	431	283	88	7,437

(1)

Includes 660 beds in our 454 assisted living units and 84 independent living units.

(2)

All bed counts are licensed beds except for independent living beds, and may not reflect the number of beds actually available for patient use.

Key Performance Indicators

        We manage our skilled nursing business by monitoring key performance indicators that affect our financial performance. These indicators and their definitions include the following:

•

Routine revenue:  Routine revenue is generated by the contracted daily rate charged for all contractually inclusive services. The inclusion of therapy and other ancillary treatments varies by payor source and by contract. Services provided outside of the routine contractual agreement are recorded separately as ancillary revenue, including Medicare Part B therapy services, and are not included in the routine revenue definition.



•

Skilled revenue:  The amount of routine revenue generated from patients in our skilled nursing facilities who are receiving care under Medicare or managed care reimbursement, referred to as "Medicare and managed care patients." Skilled revenue excludes any revenue generated from our assisted living services.



•

Skilled mix:  The amount of our skilled revenue as a percentage of our total routine revenue. Skilled mix (in days) represents the number of days our Medicare and managed care patients are receiving services at our skilled nursing facilities divided by the total number of days patients from all payor sources are receiving services at our skilled nursing facilities for any given period.



•

Quality mix:  The amount of routine non-Medicaid revenue as a percentage of our total routine revenue. Quality mix (in days) represents the number of days our non-Medicaid patients are receiving services at our skilled nursing facilities divided by the total number of days patients from all payor sources are receiving services at our skilled nursing facilities for any given period. Our quality mix revenue excludes assisted living revenue, which represented 2.6%, 2.5% and 2.6% of our total revenue for the year ended December 31, 2006 and the three months ended March 31, 2006 and 2007, respectively.



•

Average daily rates:  The routine revenue by payor source for a period at our skilled nursing facilities divided by actual patient days for that revenue source for that given period.



•

Occupancy percentage:  The total number of residents occupying a bed in a skilled nursing, assisted living or independent living facility as a percentage of the number of licensed and independent living beds in the facility.



•

Number of facilities and licensed beds:  The total number of skilled nursing, assisted living and independent living facilities that we own or operate and the total number of licensed and independent living beds associated with these facilities. Independent living beds do not have a licensing requirement.

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        Skilled and Quality Mix.    Like most skilled nursing providers, we measure both patient days and revenue by payor. Medicare and managed care patients typically require a higher level of skilled nursing and rehabilitative care, whom we refer to as high acuity patients. Accordingly, Medicare and managed care reimbursement rates are typically higher than from other payors. In most states, Medicaid reimbursement rates are generally the lowest of all payor types. Changes in the payor mix can significantly affect our revenue and profitability.

        The following table summarizes our skilled mix and quality mix for the periods indicated as a percentage of our total routine revenue (less revenue from assisted living services) and as a percentage of total patient days:

	Year Ended December 31,						Three Months Ended March 31,
	2004		2005		2006		2006		2007
Skilled Mix:
Days	19.4	%	22.4	%	24.3	%	25.4	%	23.7	%
Revenue	39.6	%	42.9	%	45.6	%	47.1	%	44.2	%
Quality Mix:
Days	33.5	%	36.0	%	37.4	%	38.6	%	36.7	%
Revenue	51.5	%	53.5	%	55.5	%	56.7	%	54.3	%

        Occupancy.    We define occupancy as the actual patient days (one patient day equals one patient or resident occupying one bed for one day) during any measurement period as a percentage of the number of available patient days for that period. Available patient days are determined by multiplying the number of licensed and independent living beds in service during the measurement period by the number of calendar days in the measurement period. During any measurement period, the number of licensed and independent living beds in a skilled nursing, assisted living or independent living facility that are actually available to us may be less than the actual licensed and independent living bed capacity due to, among other things, temporary bed suspensions as a result of low occupancy levels, the voluntary or other imposition of quarantines or bed holds, or the dedication of bed space to other uses.

        The following table summarizes our occupancy statistics for the periods indicated:

	Year Ended December 31,			Three Months Ended March 31,
	2004	2005	2006	2006	2007
Occupancy:
Licensed and independent living beds at end of period(1)	5,417	5,796	6,940	5,900	7,342
Available patient days	1,918,678	2,034,270	2,281,735	523,020	639,522
Actual patient days	1,557,008	1,668,566	1,849,932	432,673	497,887
Occupancy percentage	81.2%	82.0%	81.1%	82.7%	77.9%

(1)

The number of licensed beds is calculated using the historical number of beds licensed at each facility. All bed counts are licensed beds except for independent living beds, and may not reflect the number of beds actually available for patient use.

Revenue Sources

        Our total revenue represents revenue derived primarily from providing services to patients and residents of skilled nursing facilities, and to a lesser extent from assisted living facilities and ancillary services. We receive service revenue from Medicaid, Medicare, private payors, other third-party payors

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and managed care sources. The sources and amounts of our revenue are determined by a number of factors, including licensed bed capacity and occupancy rates of our healthcare facilities, the mix of patients at our facilities and the rates of reimbursement among payors. Payment for ancillary services varies based upon the service provided and the type of payor. The following table sets forth our total revenue by payor source and as a percentage of total revenue for the periods indicated:

	Year Ended December 31,												Three Months Ended March 31,
	2004				2005				2006				2006				2007
	$		%		$		%		$		%		$		%		$		%
	(in thousands, except percentages)
Revenue:
Medicare	$	72,301	29.6	%	$	96,208	32.0	%	$	117,511	32.8	%	$	28,311	34.0	%	$	30,130	30.8	%
Managed care		25,172	10.3			33,484	11.1			44,487	12.4			10,436	12.5			12,705	13.0
Private and other payors(1)		35,942	14.7			39,831	13.2			45,312	12.6			10,330	12.4			12,502	12.7
Medicaid		111,121	45.4			131,327	43.7			151,264	42.2			34,275	41.1			42,641	43.5
Total revenue	$	244,536	100.0	%	$	300,850	100.0	%	$	358,574	100.0	%	$	83,352	100.0	%	$	97,978	100.0	%

(1)

Includes revenue from assisted living facilities.

Primary Components of Expense

        Cost of Services (exclusive of facility rent and depreciation and amortization shown seperately below).    Our cost of services represents the costs of operating our facilities and primarily consists of payroll and related benefits, supplies, purchased services, and ancillary expenses such as the cost of pharmacy and therapy services provided to residents. Cost of services also includes the cost of general and professional liability insurance and other general cost of services with respect to our facilities.

        Facility Rent—Cost of Services.    Facility rent—cost of services consists solely of lease amounts payable to third-party owners of the facilities that we operate but do not own.

        General and Administrative Expense.    General and administrative expense consists primarily of payroll and related benefits and travel expenses for our administrative Service Center personnel, including training and other operational support. General and administrative expense also includes professional fees (including accounting and legal fees), costs relating to our information systems, stock-based compensation and rent for our Service Center office.

        We expect our general and administrative expense to increase in the future as a result of becoming a public company. Our anticipated additional expenses include:

•

increased salaries, bonuses and benefits necessary to attract and retain qualified accounting professionals as we seek to expand the size and enhance the skills of our accounting and finance staff;



•

increased professional fees as we complete the process of complying with Section 404 of the Sarbanes-Oxley Act, including incurring additional audit fees in connection with our independent registered public accounting firm's audit of our assessment of our internal controls over financial reporting;



•

increased costs associated with creating and developing an internal audit function, which we have not had historically;



•

increased legal costs associated with complying with reporting requirements under the federal securities laws; and

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•

the incurrence of miscellaneous costs, such as stock exchange fees, investor relations fees, filing expenses, training expenses and increased directors' and officers' liability insurance.

        Depreciation and Amortization.    Property and equipment are recorded at their original historical cost. Depreciation is computed using the straight-line method over the estimated useful lives of the depreciable assets. The following is a summary of the depreciable lives of our depreciable assets:

Buildings and improvements	15 to 30 years
Leasehold improvements	Shorter of the lease term or estimated useful life, generally 5 to 15 years
Furniture and equipment	3 to 10 years

Critical Accounting Policies

        Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States ("GAAP"). The preparation of these financial statements and related disclosures requires us to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. On an ongoing basis we review our judgments and estimates, including those related to doubtful accounts, income taxes and loss contingencies. We base our estimates and judgments upon our historical experience, knowledge of current conditions and our belief of what could occur in the future considering available information, including assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty and actual results could differ materially from the amounts reported. The following summarizes our critical accounting policies, defined as those policies that we believe: (a) are the most important to the portrayal of our financial condition and results of operations; and (b) require management's most subjective or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain.

Revenue Recognition

        We follow the provisions of Staff Accounting Bulletin ("SAB") 104, "Revenue Recognition in Financial Statements" ("SAB 104"), for revenue recognition. Under SAB 104, four conditions must be met before revenue can be recognized: (i) there is persuasive evidence that an arrangement exists; (ii) delivery has occurred or service has been rendered; (iii) the price is fixed or determinable; and (iv) collection is reasonably assured.

        Our revenue is derived primarily from providing healthcare services to residents and is recognized on the date services are provided at amounts billable to individual residents. For residents under reimbursement arrangements with third-party payors, including Medicaid, Medicare and private insurers, revenue is recorded based on predetermined contractually agreed upon amounts on a per patient, daily basis.

        Revenue from reimbursements under the Medicare and Medicaid programs accounted for approximately 75%, 76%, 75%, 75% and 74% of our revenue for the years ended December 31, 2004, 2005 and 2006 and the three months ended March 31, 2006 and 2007, respectively. We record our revenue from these governmental and managed care programs as services are performed at their expected net realizable amounts under these programs. Our revenue from governmental and managed care programs is subject to audit and retroactive adjustment by governmental and third-party agencies. Consistent with healthcare industry accounting practices, any changes to these governmental revenue

58

estimates are recorded in the period the change or adjustment becomes known based on final settlements. Because of the complexity of the laws and regulations governing Medicare and state Medicaid assistance programs, our estimates may potentially change by a material amount. We record our revenue from private pay patients as services are performed. If, for the three months ended March 31, 2007, we were to experience a decrease of 1% in our revenue, our revenue would decline by approximately $1.0 million.

Allowance for Doubtful Accounts

        Accounts receivable are comprised of amounts due from patients and residents, Medicare and Medicaid payor programs, third-party insurance payors, and other nursing facilities and customers. We value our receivables based on the net amount we expect to receive from these payors. In evaluating the collectibility of our accounts receivable, management considers a number of factors including changes in collection patterns, accounts receivable aging trends by payor category and the status of ongoing disputes with third party payors. The percentages applied to our aged receivable balances are based on our historical experience and time limits, if any, for managed care, Medicare and Medicaid. We periodically refine our procedures for estimating the allowance for doubtful accounts based on experience with the estimation process and changes in circumstances. Our receivables from Medicare and Medicaid payor programs accounted for approximately 63%, 70%, 65% and 63% of our total accounts receivable as of December 31, 2004, 2005 and 2006 and March 31, 2007, respectively, and represent our only significant concentration of credit risk.

Self-Insurance

        We are partially self-insured for general and professional liability, up to a base amount per claim (self insurance retention) with an aggregate, one-time deductible above this limit. Losses beyond these amounts are insured through third-party coverage with coverage limits per occurrence, per location and on an aggregate basis for our company. For claims made in 2006, the self-insured retention was $0.4 million per claim with a $0.9 million deductible. The third party coverage above these limits for all years is $1.0 million per occurence, $3.0 million per facility with a $6.0 million company aggregate. The insurers' maximum aggregate loss limits are above our actuarially determined probable losses; therefore, we believe the likelihood of losses exceeding the insurers' maximum aggregate loss is remote.

        The self-insured retention and deductible limits are self-insured through a wholly-owned insurance captive, the related assets and liability of which are included in the accompanying consolidated financial statements. We are subject to certain statutory requirements as we operate a captive insurance subsidiary. These requirements include, but are not limited to, maintaining minimum statutory capital. Our policy is to accrue amounts equal to the estimated costs to settle open claims as well as an estimate of the costs of claims that have been incurred but not reported. We have developed information about the size of the ultimate claims based on historical experience, current industry information and actuarial analysis, and have evaluated the estimate for claim loss exposure on an annual basis through 2006 and on a quarterly basis beginning with the first quarter in 2007. Accrued general liability and professional malpractice liabilities recorded on an undiscounted basis in the accompanying consolidated balance sheets were $12.0 million, $16.0 million, and $17.4 million as of December 31, 2005 and 2006 and March 31, 2007, respectively.

        We are self-insured for workers compensation liability in California, and in Texas, we have elected non-subscriber status for workers compensation claims. We have third-party guaranteed cost coverage in the other states in which we operate. In California and Texas, we accrue amounts equal to the estimated costs to settle open claims, as well as an estimate of the cost of claims that have been incurred but not reported. We use actuarial valuations to estimate the liability based on historical experience and industry information. Accrued workers compensation liabilities recorded on an

59

undiscounted basis in the accompanying consolidated balance sheets were $3.2 million, $4.5 million and $5.3 million as of December 31, 2005 and 2006 and March 31, 2007, respectively.

        During 2003 and 2004, we were insured for workers compensation in California and Arizona by a third party carrier under a policy where the retrospective premium is adjusted annually based on incurred developed losses and allocated expenses. Based on a comparison of the computed retrospective premium to the actual payments funded, amounts will be due to the insurer or insured. The funded accrual in excess of the estimated liabilities are included in prepaid expenses and other current assets in the accompanying consolidated balance sheets and totaled $1.7 million, $0.9 million and $0.9 million as of December 31, 2005 and 2006 and March 31, 2007, respectively.

        Effective May 1, 2006, we began to provide self-insured medical (including prescription drugs) and dental healthcare benefits to the majority of our employees. Prior to this, we had multiple third-party HMO and PPO plans, of which certain HMO plans are still active. We are not aware of any run-off claim liabilities from the prior plans. We are fully liable for all financial and legal aspects of these benefit plans. To protect ourselves against loss exposure with this policy, we have purchased individual stop-loss insurance coverage that insures individual claims that exceed $0.1 million to a per claim or a maximum of $6.0 million on our PPO plan and unlimited on our HMO plan. We have also purchased aggregate stop loss coverage that reimburses the plan up to $5.0 million once paid claims exceed approximately $7.2 million. The aforementioned coverage only applies to claims paid during the plan year. Our accrued liability under these plans recorded on an undiscounted basis in the accompanying consolidated balance sheets was $1.0 million and $1.0 million as of December 31, 2006 and March 31, 2007, respectively.

        We believe that adequate provision has been made in our financial statements for liabilities that may arise out of patient care, workers compensation, healthcare benefits and related services provided to date. The amount of our reserves is determined based on an estimation process that uses information obtained from both company-specific and industry data. This estimation process requires us to continuously monitor and evaluate the life cycle of the claims. Using data obtained from this process and our assumptions about emerging trends, we, with the assistance of an independent actuary, develop information about the potential size of ultimate claims based on our historical experience and other available industry information. The most significant assumptions used in the estimation process include determining the trend in costs, the expected cost of claims incurred but not reported and the expected costs to settle or pay damages with respect to unpaid claims. It is possible, however, that the actual liabilities may exceed our estimates of loss. In addition to the actuarial estimate of retained losses, our provision for insurance includes accruals for insurance premiums and the related costs for the coverage period and our estimate of any experience-based adjustments to premiums.

        Our self-insured liabilities are based upon estimates, and while our management believes that the estimates of loss are adequate, the ultimate liability may be in excess of, or less than, recorded amounts. Due to the inherent volatility of actuarially determined loss estimates, it is reasonably possible that we could experience changes in estimated losses that could be material to net income. If our actual liability exceeds our estimate of loss, our future earnings and financial condition would be adversely affected.

Impairment of Long-Lived Assets

        Our management reviews the carrying value of our long-lived assets that are held and used in our operations for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of these assets is determined based upon expected undiscounted future net cash flows from the operations to which the assets relate, utilizing management's best estimate, appropriate assumptions, and projections at the time. If the carrying value is determined to be unrecoverable from future operating cash flows, then the asset is deemed impaired

60

and an impairment loss would be recognized to the extent the carrying value exceeded the estimated fair value of the asset. We estimate the fair value of assets based on the estimated future discounted cash flows of the asset. Our management has evaluated our long-lived assets and has not identified any impairment as of December 31, 2004, 2005, 2006 or March 31, 2007.

Intangible Assets and Goodwill

        Intangible assets consist primarily of deferred financing costs, lease acquisition costs and trade names. Deferred financing costs are amortized over the term of the related debt, ranging from seven to 26 years. Lease acquisition costs are amortized over the life of the lease of the facility acquired, ranging from ten to 20 years. Trade names are amortized over 30 years.

        Goodwill is accounted for under Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" ("SFAS 141") and represents the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations. In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), goodwill is subject to periodic testing for impairment. In addition, goodwill is tested for impairment if events occur or circumstances change that would reduce the fair value of a reporting unit below its carrying amount. We perform our annual test for impairment during the fourth quarter of each year. We did not record any impairment charges in 2004, 2005, 2006 or the three months ended March 31, 2007.

Stock-Based Compensation

        As of January 1, 2006, we adopted SFAS No. 123(R), "Share-Based Payment" ("SFAS 123(R)"), which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including employee stock options based on estimated fair values, ratably over the requisite service period of the award. Prior to the adoption of SFAS 123(R), we accounted for stock-based awards to employees and directors using the intrinsic value method in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") as allowed under SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). Under that method, no compensation expense was recognized by us in our financial statements in connection with the awarding of stock option grants to employees provided that, as of the grant date, all terms associated with the award were fixed and the fair value of our stock, as of the grant date, was equal to or less than the amount an employee must pay to acquire the stock.

        We adopted SFAS 123(R) using the prospective transition method, which requires the application of the accounting standard as of January 1, 2006, the first day of our fiscal year ended December 31, 2006. Our consolidated financial statements as of and for the periods ended December 31, 2006, and March 31, 2006 and 2007 reflect the impact of SFAS 123(R). In accordance with the prospective transition method, our consolidated financial statements for periods prior to January 1, 2006 have not been restated to reflect, and do not include, the impact of SFAS 123(R).

        Stock-based compensation expense recognized under SFAS 123(R) consists of share-based payment awards made to employees and directors including employee stock options based on estimated fair values. Stock-based compensation expense recognized in our consolidated statement of income for the year ended December 31, 2006 and our unaudited consolidated statements of income for the three months ended March 31, 2006 and 2007 does not include compensation expense for share-based payment awards granted prior to, but not yet vested as of January 1, 2006, in accordance with the pro forma provisions of SFAS 123 but does include compensation expense for the share-based payment awards granted subsequent to January 1, 2006 based on the fair value on the grant date estimated in accordance with the provisions of SFAS 123(R). As stock-based compensation expense recognized in our consolidated statement of income for the year ended December 31, 2006 and our unaudited consolidated statements of income for the three months ended March 31, 2006 and 2007 is based on

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awards ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

        We use the Black-Scholes option-pricing model to recognize the value of stock-based compensation expense for all share-based payment awards. Determining the appropriate fair-value model and calculating the fair value of stock-based awards at the grant date requires considerable judgment, including estimating stock price volatility, expected option life and forfeiture rates. We develop estimates based on historical data and market information, which can change significantly over time. The Black-Scholes model required us to make several key judgments including:

•

The expected option term reflects the application of the simplified method set out in SAB No. 107 "Share-Based Payment", which was issued in March 2005. Accordingly, we have utilized the average of the contractual term of the options and the weighted average vesting period for all options to calculate the expected option term.



•

Estimated volatility also reflects the application of SAB No. 107 interpretive guidance and, accordingly, incorporates historical volatility of similar public entities until sufficient information regarding the volatility of our share price becomes available.



•

The dividend yield is based on our historical pattern of dividends as well as expected dividend patterns.



•

The risk-free rate is based on the implied yield of U.S. Treasury notes as of the grant date with a remaining term approximately equal to the expected term.



•

Estimated forfeiture rate of approximately 8% per year is based on our historical forfeiture activity of unvested stock options.

        For stock options granted during the year ended December 31, 2006 the assumptions for grants used in the Black-Scholes model were a weighted average risk free rate of 5.0%, an expected life of 6.5 years, a weighted average volatility of 45% and a weighted average dividend yield of 1.1%. No options were granted during the three month period ended March 31, 2007.

        As of December 31, 2004, 2005 and 2006, we valued our common stock using a combination of weighted income and market valuation approaches. The income approach was based on discounted cash flows. The market approach employed both a guideline company method and merger and acquisition method.

        The weighted income approach was given heavier consideration in determining final valuations, consistent with our opinion that this method produced the best indicator of the value of our stock. The assumptions and methodologies used in performing the income approach's discounted cash flow analysis included, among other things:

•

Debt-free cash flows were projected for five years, which was deemed to be the appropriate valuation period;



•

Earnings before interest, depreciation and amortization, less working capital investment, were used to estimate terminal value;



•

The appropriate discount rate to be applied to the net free cash flows and terminal value for purposes of these valuations was based upon our perception of the rate of return expected for a similar investment with similar risks; and



•

Discounts for lack of control and lack of marketability were also taken when appropriate.

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        Among other things, the market-approach valuations also took into account the following:

•

Trends and comparable valuations with respect to the guideline companies; and



•

Mergers and acquisitions within the guideline company group were reviewed, and values were derived based on observed market multiples, as adjusted for differences in size, profitability, facility age, geographic location and other factors.

        As noted above, in addition to the annual year-end weighted valuations, starting in 2004 we determined fair market value as outlined below contemporaneously with the granting of stock options. These valuations considered:

•

Our recent operating performance; and



•

A net income multiple derived from the annual weighted valuation analysis based on the factors outlined above.

        On July 27, 2006, in a manner generally consistent with historical valuation and grant practices, we granted options to purchase approximately 663,500 shares of common stock to employees. The exercise price was based on a contemporaneous fair value calculation performed as discussed above. Subsequently, a weighted valuation (also as discussed above) was performed, which produced a fair value less than the exercise price. Then, in March 2007, an additional retrospective weighted valuation was performed. Unlike the previous valuations, the March 2007 weighted valuation took into consideration the possibility of our entering the public marketplace in 2007. This re-measurement resulted in the adjusted fair value exceeding the exercise price. As a result of the finalized valuations and the adoption of SFAS 123(R), we recorded aggregate compensation expense of approximately $0.4 million and $0.2 million during the year ended December 31, 2006 and the three months ended March 31, 2007, respectively.

        During 2007, until the time of our initial public offering, we plan on obtaining weighted valuations that take into consideration the possibility of our entering into the public marketplace when we determine the value of our common stock.

        There are inherent uncertainties in performing such valuations and identifying comparable companies, transactions and other data that may be indicative of the fair value of our common stock. We believe that the estimates of the fair value of our common stock at each option grant date occurring prior to our initial public offering were reasonable under the circumstances.

        In future periods, we expect to recognize a total of approximately $4.4 million in stock-based compensation expense for unvested options ratably over the next 3.9 weighted average years. As of December 31, 2006 and March 31, 2007, there were 148,400 and 132,300 vested, exercisable options outstanding, respectively, under our stock option plans.

Income Taxes

        We account for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." Under this method, deferred tax assets and liabilities are established for temporary differences between the financial reporting basis and the tax basis of our assets and liabilities at tax rates expected to be in effect when such temporary differences are expected to reverse. Our temporary differences are primarily attributable to compensation accruals, straight line rent adjustments, reserves for doubtful accounts and insurance liabilities. We assess the likelihood that our deferred tax assets will be recovered from future taxable income and, if we believe that recovery is not more likely than not, we establish a valuation allowance to reduce the deferred tax assets to the amounts expected to be realized.

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        Our net deferred tax asset balances as of December 31, 2005 and 2006 and March 31, 2007 were approximately $8.1 million, $12.6 million and $13.3 million, respectively. We expect to fully utilize these deferred tax assets; however, their ultimate realization will depend upon the amount of future taxable income during the periods in which the temporary differences become deductible.

        We make our estimates and judgments regarding deferred tax assets and the associated valuation allowance, if any, based on, among other things, knowledge of operations, markets, historical trends and likely future changes and, when appropriate, the opinions of advisors with knowledge and expertise in certain fields. However, due to the nature of certain assets and liabilities, there are risks and uncertainties associated with some of our estimates and judgments. Actual results could differ from these estimates under different assumptions or conditions.

        FIN 48 requires us to maintain a liability for underpayment of income taxes and related interest and penalties, if any, for uncertain income tax positions. In considering the need for and magnitude of a liability for uncertain income tax positions, we must make certain estimates and assumptions regarding the amount of income tax benefit that will ultimately be realized. The ultimate resolution of an uncertain tax position may not be known for a number of years, during which time we may be required to adjust these reserves, in light of changing facts and circumstances.

        We used an estimate of our annual income tax rate to recognize a provision for income taxes in financial statments for interim periods. However, changes in facts and circumstances could result in adjustments to our effective tax rate in future quarterly or annual periods.

Acquisition Policy

        We periodically enter into agreements to acquire assets and/or businesses. The considerations involved in each of these agreements may include cash, financing, and/or long-term lease arrangements for real properties. We evaluate each transaction to determine whether the acquired interests are assets or businesses using the framework provided by Emerging Issue Task Force ("EITF") Issue No. 98-3, "Determining Whether a Nonmonetary Transaction Involves Receipt of Productive Assets or of a Business" ("EITF 98-3"). EITF 98-3 defines a business as a self sustaining integrated set of activities and assets conducted and managed for the purpose of providing a return to investors. A business consists of (a) input; (b) processes applied to those inputs; and (c) resulting outputs that are used to generate revenues. In order for an acquired set of activities and assets to be a business, it must contain all of the inputs and processes necessary for it to continue to conduct normal operations after the acquired entity is separated from the seller, including the ability to sustain a revenue stream by providing its outputs to customers. An acquired set of activities and assets fail the definition of a business if it excludes one or more of the above items such that it is not possible to continue normal operations and sustain a revenue stream by providing its products and/or services to customers.

Operating Leases

        We account for operating leases in accordance with SFAS No. 13, "Accounting for Leases," and Financial Accounting Standards Board ("FASB") Technical Bulletin 85-3, "Accounting for Operating Leases with Scheduled Rent Increases." Accordingly, we recognize rent expense under the operating leases for our facilities and administrative offices on a straight-line basis over the original term of such leases, inclusive of predetermined rent escalations or modifications.

Industry Trends

        Labor.    We are a labor-intensive business. For the three months ended March 31, 2007, approximately 66% of our total expenses represent payroll and related benefits, and we employ a large number of healthcare professionals who are in high demand and short supply in a number of our markets. At March 31, 2007, we had approximately 5,323 full-time equivalent employees, a number of whom are

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highly skilled, healthcare professionals, while others are non-exempt, hourly wage employees. Periodically, market forces, which vary by region, require that we increase wages in excess of general inflation or in excess of increases in the reimbursement rates we receive. A majority of our skilled nursing facilities are subject to state mandated minimum staffing ratios so our ability to reduce costs by decreasing staff is limited. We expect wages for healthcare professionals to continue to increase for the foreseeable future.

        In addition, health benefit costs continue to escalate well above the average wage rate increases that we have incurred and the increases in other goods and services we purchase. We have a limited ability to mitigate the increases in health benefit costs due to our need to offer competitive benefits to recruit and retain qualified personnel.

        Effects of Changing Prices.    Medicare reimbursement rates and procedures are subject to change from time to time, which could materially impact our revenue. Medicare reimburses our skilled nursing facilities under a prospective payment system ("PPS") for certain inpatient covered services. Under the PPS, facilities are paid a predetermined amount per patient, per day, based on the anticipated costs of treating patients. The amount to be paid is determined by classifying each patient into a resource utilization group ("RUG") category that is based upon each patient's acuity level. As of January 1, 2006, the RUG categories were expanded from 44 to 53, with increased reimbursement rates for treating higher acuity patients. The new rules also implemented a market basket increase that increased rates by 3.1% for fiscal year 2006. At the same time, Congress terminated certain temporary add-on payments that were added in 1999 and 2000 as the nursing home industry came under financial pressure from prior Medicare cuts. While the 2006 Medicare skilled nursing facility payment rates will not decrease payments to skilled nursing facilities, the loss of revenue associated with future changes in skilled nursing facility payments could, in the future, have an adverse impact on our financial condition or results of operation.

        The DRA is expected to significantly reduce net Medicare and Medicaid spending. Prior to the DRA, caps on annual reimbursements for rehabilitation therapy became effective on January 1, 2006. The DRA provides for exceptions to those caps for patients with certain conditions or multiple complexities whose therapy is reimbursed under Medicare Part B and provided in 2006. These exceptions have been extended to December 31, 2007.

        On February 5, 2007, the Bush Administration released its fiscal year 2008 budget proposal, which, if enacted, would reduce Medicare spending by approximately $5.3 billion in fiscal year 2008 and $75.9 billion over five years. In particular, the budget proposal is expected to freeze payments in fiscal year 2008 for skilled nursing facilities, and the payment update would be 0.65% less than the routine inflation update (or market basket increase) annually thereafter. The budget also would move toward site-neutral post-hospital payments to limit what the Administration characterizes as inappropriate incentives for five conditions commonly treated in both skilled nursing facilities and inpatient rehabilitation facilities. All bad debt reimbursement for unpaid beneficiary cost-sharing would be eliminated over four years. In addition, a budget mechanism would be established to automatically reduce Medicare spending if the portion of Medicare expenditures funded through general revenue is projected to exceed 45% within the next seven years. The budget also includes a series of proposals having an impact on Medicaid, including legislative and administrative changes that would reduce Medicaid payments by almost $26 billion over five years. Many of the proposed policy changes would require congressional approval to implement.

        Historically, adjustments to reimbursement under Medicare have had a significant effect on our revenue. For a discussion of historic adjustments and recent changes to the Medicare program and related reimbursement rates see Risk Factors—Risks Related to Our Industry—"Our revenue could be impacted by federal and state changes to reimbursement and other aspects of Medicaid and Medicare," "Our future revenue, financial condition and results of operations could be impacted by continued cost

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containment pressures on Medicaid spending," and "If Medicare reimbursement rates decline, our revenue, financial condition and results of operations could be adversely affected." The federal government and state governments continue to focus on efforts to curb spending on healthcare programs such as Medicare and Medicaid. We are not able to predict the outcome of the legislative process. We also cannot predict the extent to which proposals will be adopted or, if adopted and implemented, what effect, if any, such proposals and existing new legislation will have on us. Efforts to impose reduced allowances, greater discounts and more stringent cost controls by government and other payors are expected to continue and could adversely affect our business, financial condition and results of operations.

Results of Operations

        The following table sets forth details of our revenue, expenses and earnings as a percentage of total revenue for the periods indicated:

			Year Ended December 31,						Three Months Ended March 31,
			2004		2005		2006		2006		2007
Revenue			100.0	%	100.0	%	100.0	%	100.0	%	100.0	%
Expenses:
	Cost of services (exclusive of facility rent and depreciation and amortization shown separately below)		81.8		79.6		79.4		78.7		82.5
	Facility rent—cost of services		6.0		5.4		4.6		4.9		4.2
	General and administrative expense		3.5		3.6		4.0		3.9		3.8
	Depreciation and amortization		0.8		0.8		1.2		0.9		1.6
		Total expenses	92.1		89.4		89.2		88.4		92.1
Income from operations			7.9		10.6		10.8		11.6		7.9
Other income (expense):
	Interest expense		(0.6	)	(0.7	)	(0.8	)	(0.7	)	(1.2	)
	Interest income		—		0.2		0.2		0.2		0.4
		Other expense, net	(0.6	)	(0.5	)	(0.6	)	(0.5	)	(0.8	)
Income before provision for income taxes			7.3		10.1		10.2		11.1		7.1
Provision for income taxes			2.7		4.0		3.9		4.4		2.9
Net income			4.6	%	6.1	%	6.3	%	6.7	%	4.2	%

Three Months Ended March 31, 2007 Compared to Three Months Ended March 31, 2006

        Revenue.    Revenue increased $14.6 million, or 17.5%, to $98.0 million for the three months ended March 31, 2007 compared to $83.4 million for the three months ended March 31, 2006. Of the $14.6 million increase in the first quarter of 2007, skilled revenue (Medicare and managed care) increased $4.1 million, or 10.6%, Medicaid revenue increased $8.4 million, or 24.4%, and private and other revenue increased $2.2 million, or 21.0%. Approximately $13.2 million of the increase in the first quarter of 2007 was due to revenue generated by acquired facilities. We acquired three facilities in the first quarter of 2007, which contributed approximately $1.6 million of the increase in revenue for the first quarter of 2007. In addition, approximately $11.6 million of the increase in the revenue in the first quarter of 2007 was due to the effect of having the full three months of operations of the 11 facilities that were acquired during 2006. Historically, a majority of our acquisitions have been facilities that were underperforming financially and clinically, presenting us the opportunity to acquire operations at a favorable price and then improve clinical and operating performance. In evaluating the potential risks and rewards associated with these opportunities, we have typically anticipated some period of lower occupancy rates, skilled mix and quality mix, with corresponding losses or reduced profitability, in these

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operations. For the three months ended March 31, 2007 the occupancy rate, skilled mix and quality mix for facilities we acquired between January 1, 2006 and March 31, 2007 was 64.4%, 39.6% and 51.6%, respectively. These rates negatively impacted our overall company-wide occupancy rate, skilled mix and quality mix which were 77.9%, 44.2%, and 54.3%, respectively, during the three months ended March 31, 2007. Typically, our recently acquired facilities generate lower occupancy rates, skilled mix and quality mix than our stabilized facilities until operations have improved and the acquired facilities are fully integrated.

        The remaining $1.4 million increase in revenue for the three months ended March 31, 2007 was primarily due to higher reimbursement rates relative to the three months ended March 31, 2006, as described below, offset by a decline in skilled mix and occupancy. Same facility occupancy rates declined 1.7%, which was primarily attributable to two facilities, where revenues decreased by an aggregate of $1.7 million, of which $1.4 million was attributable to Medicare. These two facilities collectively experienced a patient day decline of 5,170 days as compared to the three months ended March 31, 2006. This occupancy decline was primarily the result of mandatory and voluntary admission holds. Subsequently, both of these admission holds were lifted and these two facilities are accepting new admissions. These revenue declines were more than offset by the increase in same facility revenues. For additional discussion on admission holds see our Risk Factors—Risks Related to Our Industry "Increased survey and enforcement efforts by governmental agencies on facilities could result in increased scrutiny by state and federal survey agencies".

        The following table reflects the change in the skilled nursing average daily revenue rates by payor source, excluding therapy and other ancillary services that are not covered by the daily rate:

	Three Months Ended March 31,
					Percent Change
	2006		2007
Skilled Nursing Average Daily Revenue Rates:
Medicare	$	434.89	$	444.04	2.1	%
Managed care		266.56		286.54	7.5
Total skilled revenue		371.23		381.22	2.7
Medicaid		141.36		147.68	4.5
Private and other payors		145.54		158.54	8.9
Total skilled nursing revenue	$	200.35	$	204.41	2.0	%

        The average Medicare daily rate increased by approximately 2.1% in the three months ended March 31, 2007 as compared to the three months ended March 31, 2006, primarily as a result of statutory inflationary increases. The average Medicaid rate increase of 4.5% in the three months ended March 31, 2007 relative to the same period in the prior year primarily resulted from increases in reimbursement rates in California. The change in the daily rate in the private and other category was primarily due to rate increases based on market dynamics.

        Payor Sources as a Percentage of Skilled Nursing Services.    We use both our skilled mix and quality mix as measures of the quality of reimbursements we receive at our skilled nursing facilities over

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various periods. The following table sets forth our percentage of skilled nursing patient days and revenue by payor source:

		Three Months Ended March 31,
		2006		2007		2006		2007
		Days				Revenue
Percentage of Skilled Nursing Days and Revenue:
Medicare		15.8	%	14.2	%	34.3	%	30.9	%
Managed care		9.6		9.5		12.8		13.3
	Skilled mix	25.4		23.7		47.1		44.2
Private and other payors		13.2		13.0		9.6		10.1
	Quality mix	38.6		36.7		56.7		54.3
Medicaid		61.4		63.3		43.3		45.7
Total skilled nursing		100.0	%	100.0	%	100.0	%	100.0	%

        The period to period decline in the quality mix is primarily attributable to the decline in Medicare days which is described above.

        Cost of Services (exclusive of facility rent and depreciation and amortization shown seperately below).    Cost of services increased $15.2 million, or 23.2%, to $80.8 million for the three months ended March 31, 2007 compared to $65.6 million for the three months ended March 31, 2006. Of the $15.2 million increase, $1.4 million was due to cost of services with respect to the three facilities acquired in the three months ended March 31, 2007 and $9.8 million reflected the impact in the three months ended March 31, 2007 relating to facilities acquired in 2006. The remaining $4.0 million increase was primarily due to a $1.6 million increase in wages and benefits, a $1.4 million increase in insurance costs and a $0.9 million increase in administrative benefits and other administrative expenses. The increase in wages and benefits was primarily due to increases in nursing labor and our increased use of contract nursing personnel, mainly in Arizona due to a state-wide nursing shortage. Insurance costs increased $1.4 million, of which $0.7 million was a result of favorable retrospective worker's compensation adjustments realized during the three month period ended March 31, 2006. A similar retrospective claims adjustment did not occur during the three month period ended March 31, 2007.

        Facility Rent—Cost of Services.    Facility rent—cost of services increased $0.1 million, or 2.5%, to $4.2 million for the three months ended March 31, 2007 compared to $4.1 million for the three months ended March 31, 2006. Of this increase, $0.3 million resulted from leased facilities that we acquired in 2006, which was offset in part by a decrease in rent expense of $0.2 million as a result of our purchase of three previously leased properties.

        General and Administrative Expense.    General and administrative expense increased $0.4 million, or 14.9%, to $3.7 million for the three months ended March 31, 2007 compared to $3.3 million for the three months ended March 31, 2006. The $0.4 million increase was primarily due to increases in professional fees of $0.3 million and stock-based compensation expense of $0.3 million. The increase in professional fees was primarily due to increases in accounting and tax services and professional staffing fees, all of which were increased in scope as compared to March 31, 2006 as we prepare to become a public reporting company. The increase in stock-based compensation expense incurred is due to the granting of additional options during 2006. These increases were offset in part by a reduction in incentive compensation due to reduced profitability.

        Depreciation and Amortization.    Depreciation and amortization expense increased $0.8 million, or 103.7%, to $1.5 million for the three months ended March 31, 2007 compared to $0.7 million for the three months ended March 31, 2006. This increase was related to the additional depreciation and amortization of facilities acquired in 2006 and 2007.

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        Other Income (Expense).    Other Income (expense) increased $0.4 million, or 86.8% to $0.8 million for the three months ended March 31, 2007 compared to $0.4 million for the three months ended March 31, 2006. This increase was primarily due to an increase in interest expense primarily related to an increase in overall borrowings that occurred throughout 2006 and thereby resulted in a larger balance outstanding under the Term Loan during the three months ended March 31, 2007. These funds were used to provide the capital to purchase 11 facilities during 2006. The increase in interest expense was partially offset by an increase in interest income of $0.2 million to $0.4 million for the three months ended March 31, 2007 compared to $0.2 million for the three months ended March 31, 2006. This increase primarily resulted from interest earned on our overall increase in the average cash balance during the three months ended March 31, 2007 within our insurance subsidiary's investment balances.

        Provision for Income Taxes.    Provision for income taxes decreased $0.9 million, or 24.0%, to $2.8 million for the three months ended March 31, 2007 compared to $3.7 million for the three months ended March 31, 2006. This decrease primarily resulted from lower income before income taxes, which was offset in part by an increase in the 2007 effective tax rate of 0.7% due to the adoption of FIN 48 and its impact on our permanent non-deductible items and accruals for tax related interest.

Year Ended December 31, 2006 Compared to Year Ended December 31, 2005

        Revenue.    Revenue increased $57.7 million, or 19.2%, to $358.6 million for the year ended December 31, 2006 compared to $300.8 million for the year ended December 31, 2005. Of the $57.7 million increase in 2006, skilled revenue (Medicare and managed care) increased $32.3 million, or 24.9%, Medicaid revenue increased $19.9 million, or 15.2%, and private and other revenue increased $5.5 million, or 13.8%. Approximately $37.5 million of the increase in 2006 was due to revenue generated by acquired facilities. We acquired 11 facilities in 2006, which contributed approximately $21.6 million of the 2006 increase in revenue. In addition, approximately $15.9 million of the increase in the revenue in 2006 was due to the effect of having the full 12 months of operations in 2006 of three facilities that were acquired during 2005.

        The remaining $20.2 million increase in revenue in 2006 was primarily due to additional revenues of approximately $4.1 million related to a net occupancy increase in the overall skilled nursing population and $18.2 million from the continuing shift to higher acuity/higher rate category residents combined with higher reimbursement rates relative to 2005, as described below. This increase in skilled revenues was partially offset by lower ancillary revenues of approximately $2.1 million for the year ended December 31, 2006, which was primarily due to the application of annual maximum limits per resident for Medicare therapy reimbursement.

        The following table reflects the change in the skilled nursing average daily revenue rates by payor source, excluding therapy and other ancillary services that are not covered by the daily rate:

	Year Ended December 31,
					Percent Change
	2005		2006
Skilled Nursing Average Daily Revenue Rates:
Medicare	$	411.51	$	441.78	7.4	%
Managed care		263.80		274.39	4.0
Total skilled revenue		357.84		377.54	5.5
Medicaid		135.22		143.17	5.9
Private and other payors		144.21		152.74	5.9
Total skilled nursing revenue	$	186.20	$	201.45	8.2	%

        The average Medicare daily rate increased by approximately 7.4% in 2006 as compared to 2005, primarily as a result of statutory inflationary increases, as well as a higher patient acuity mix. The

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average Medicaid rate increase of 5.9% in 2006 primarily resulted from increases in reimbursement rates in Texas and California. The increase in the California rate was partially offset by a daily enhancement fee charged for each occupied day recorded and discussed in cost of services below. The change in the daily rate in the private and other category was primarily due to rate increases based on market dynamics.

        Payor Sources as a Percentage of Skilled Nursing Services.    We use both our skilled mix and quality mix as measures of the quality of reimbursements we receive at our skilled nursing facilities over various periods. The following table sets forth our percentage of skilled nursing patient days and revenue by payor source:

		Year Ended December 31,
		Days				Revenue
		2005		2006		2005		2006
Percentage of Skilled Nursing Days and Revenue:
Medicare		14.3	%	15.0	%	31.4	%	32.9	%
Managed care		8.1		9.3		11.5		12.7
	Skilled mix	22.4		24.3		42.9		45.6
Private and other payors		13.6		13.1		10.5		9.9
	Quality mix	36.0		37.4		53.4		55.5
Medicaid		64.0		62.6		46.6		44.5
Total skilled nursing		100.0	%	100.0	%	100.0	%	100.0	%

        With our marketing focus on the skilled segment of the business, we experienced growth in the skilled categories and a corresponding decline in the revenue and occupancy percentage in the Medicaid, and private and other payors categories.

        Cost of Services (exclusive of facility rent and depreciation and amortization shown seperately below).    Cost of services increased $45.4 million, or 19.0%, to $284.8 million for the year ended December 31, 2006 compared to $239.4 million for the year ended December 31, 2005. Of the $45.4 million increase, $17.8 million was due to cost of services of facilities acquired in 2006 and $12.7 million reflected the impact in 2006 relating to facilities acquired in 2005. The remaining $14.9 million increase was primarily due to a $7.3 million increase in wages and benefits (mainly nursing labor), which was partially offset by a reduction of $0.9 million in California workers compensation cost, $1.7 million resulted from the increased use of contract nursing personnel (mainly in Arizona due to a state-wide acute nursing shortage), $4.7 million was due to higher ancillary costs related to increased therapy and other treatment needs associated with the higher skilled occupancy percentage, and $1.3 million was due to an increase in the California Enhancement Fee. The California Enhancement Fee is a per occupied daily charge imposed by the state that increased by $2.33 per resident occupied day from a weighted average rate of $5.18 in 2005 to $7.51 in 2006. This enhancement fee is directly related to, and partially offset, the reimbursement rate increase discussed above. The increase in our cost of services in 2006 was offset in part by a reduction of $0.5 million in professional liability insurance costs in 2006.

        Facility Rent—Cost of Services.    Facility rent—cost of services increased $0.3 million, or 1.8%, to $16.4 million for the year ended December 31, 2006 compared to $16.1 million for the year ended December 31, 2005. Of this increase, $0.2 million resulted from acquired leased facilities in 2006.

        General and Administrative Expense.    General and administrative expense increased $3.3 million, or 30.3%, to $14.2 million for the year ended December 31, 2006 compared to $10.9 million for the year ended December 31, 2005. Of the $3.3 million increase, $1.9 million was due to increased wages and benefits primarily due to a $1.1 million increase in incentive compensation, $0.5 million resulted from

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increased audit and professional fees primarily due to the increased scope of financial and tax audits in preparation for our initial public offering, and $1.0 million related to the settlement of a class action lawsuit, which is expected to be payable in the first six months of 2007. The remaining net change included $0.4 million in SFAS 123(R) stock compensation expense.

        Depreciation and Amortization.    Depreciation and amortization expense increased $1.8 million, or 71.7%, to $4.2 million for the year ended December 31, 2006 compared to $2.5 million for the year ended December 31, 2005. Of this increase, $1.4 million is related to the additional depreciation and amortization of facilities acquired in 2006.

        Other Income (Expense).    Interest expense increased $1.0 million, or 50.0% to $3.0 million for the year ended December 31, 2006 compared to $2.0 million for the year ended December 31, 2005. This increase in interest expense primarily related to increased borrowings in 2006 under our long-term loan to provide the capital to purchase a portion of the facilities acquired in 2006. The increase in interest expense was partially offset by an increase in interest income of $0.3 million to $0.8 million for the year ended December 31, 2006 compared to $0.5 million for the year ended December 31, 2005. This increase primarily resulted from interest earned on our insurance subsidiary's investment balances.

        Provision for Income Taxes.    Provision for income taxes increased $2.0 million, or 17.2%, to $14.1 million for the year ended December 31, 2006 compared to $12.1 million for the year ended December 31, 2005. This increase primarily resulted from higher income before income taxes, which was offset in part by a decrease in the 2006 effective tax rate of 1.1% due to an increased benefit in the application of employment tax credits in 2006.

Year Ended December 31, 2005 Compared to Year Ended December 31, 2004

        Revenue.    Revenue increased $56.3 million, or 23.0%, to $300.8 million for the year ended December 31, 2005 compared to $244.5 million for the year ended December 31, 2004. Of the $56.3 million increase over 2004, skilled revenue (Medicare and managed care) increased $32.2 million, or 33.1%, Medicaid increased $20.2 million, or 18.2%, and private and other revenue increased $3.9 million, or 10.8%.

        The 2005 increase in revenue included a retroactive adjustment to record a California state Medicaid rate increase that was effective August 1, 2004, which had been contingent upon Medicare approval. Medicare approved the retroactive adjustment in late 2005, at which time we recognized the additional revenue. This adjustment effectively resulted in an increase in 2005 revenue of $4.8 million compared to 2004. Approximately $10.2 million of the remaining 2005 increase in revenue was attributable to the acquisitions of three facilities in 2005. Skilled revenue, Medicaid and private and other accounted for $4.5 million, $3.8 million and $1.9 million, respectively, of the increase resulting from these acquisitions. The increase in 2005 revenue attributable to our two facilities acquired during 2004 was $16.4 million.

        The remaining increase of $24.9 million resulted from additional revenues of $6.7 million from a net increase in overall occupancy by skilled mix patients, and $16.6 million from the continuing shift to higher acuity/higher rate category residents combined with increased reimbursement rates relative to 2004, as described below. Higher ancillary revenues in 2005, primarily in Medicare Part B therapy, contributed approximately $1.8 million to the incremental skilled revenue increase.

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        The following table reflects the change in the skilled nursing average daily revenue rates by payor source, excluding therapy and other ancillary services not covered by the daily rate:

	Year Ended December 31,
					Percent Change
	2004		2005
Skilled Nursing Average Daily Revenue Rates:
Medicare	$	384.61	$	411.51	7.0	%
Managed care		242.39		263.80	8.8
Total skilled revenue		331.94		357.84	7.8
Medicaid(1)		118.35		135.22	14.3
Private and other payors		135.06		144.21	6.8
Total skilled nursing revenue	$	162.06	$	186.20	14.9	%

(1)

The foregoing table includes the retroactive impact of the 2004 California Medicaid revenue increase of $2.4 million realized in 2005, which related to services provided in 2004. Assuming such revenue was recognized in 2004, the average daily Medicaid rate for 2005 would have been $132.71, representing an increase of 9.7% over the 2004 adjusted rate of $120.94, and the overall skilled nursing rate for 2005 would have been $184.59, an increase of 12.7% over the 2004 adjusted rate of $163.79.

        The average Medicare daily rate increased by approximately 7.0% from 2004 to 2005 and resulted from statutory inflationary increases combined with a shift towards residents requiring higher levels of skilled care with higher rates of reimbursement. The average Medicaid rate increase of 14.3% in 2005 primarily resulted from increases in reimbursements in California and also included the impact of the $2.4 million retroactive revenue adjustment in 2005 related to 2004 as discussed above. The increase in the California rate was partially offset by a per patient day California Enhancement Fee, which increased $3.65 per occupied day. This Enhancement Fee was included in cost of services. The change in the daily rate in the private and other category primarily resulted from increases in the private rates to meet the requirement that private rates be at least equal to Medicaid rates.

        Payor Sources as a Percentage of Skilled Nursing Services.    The following table sets forth our percentage of skilled nursing patient days and revenue by payor source.

		Year Ended December 31,
		Days				Revenue
		2004		2005		2004		2005
Percentage of Skilled Nursing Days and Revenue:
Medicare		12.2	%	14.3	%	28.9	%	31.4	%
Managed care		7.2		8.1		10.7		11.5
	Skilled mix	19.4		22.4		39.6		42.9
Private and other payors		14.1		13.6		11.8		10.5
	Quality mix	33.5		36.0		51.4		53.4
Medicaid		66.5		64.0		48.6		46.6
Total		100.0	%	100.0	%	100.0	%	100.0	%

        Cost of Services (exclusive of facility rent and depreciation and amortization shown seperately below).    Cost of services increased $39.4 million, or 19.7%, to $239.4 million for the year ended December 31, 2005 compared to $200 million in 2004. Of the $39.4 million increase, $8.4 million was due to cost of services associated with facilities acquired in 2005 and $13.3 million reflected the impact in 2005 relating to facilities acquired in 2004. Of the remaining $17.7 million, $8.1 million was due to an

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increase in wages and benefits, of which approximately $2.5 million represented in nursing labor and $2.5 million was increased incentive compensation primarily related to our improved profitability. Additionally, $5.1 million of the increase was due to higher ancillary costs related to increased therapy and other treatment needs associated with an increased percentage of skilled mix patients, and $6.7 million was due to the increase in the California Enhancement Fee, of which $1.4 million related to 2004. These increases were partially offset by an improvement in workers compensation expense by approximately $2.0 million and a decrease of $0.6 million in the provision for uncollectible accounts.

        Facility Rent—Cost of Services.    Facility rent—cost of services increased $1.3 million, or 8.8%, to $16.1 million for the year ended December 31, 2005 compared to $14.8 million in 2004, which was primarily due to the acquisition of one additional leased facility and annual rent increases in most of our leased facilities.

        General and Administrative Expense.    General and administrative expense increased $2.4 million, or 28.2%, to $10.9 million for the year ended December 31, 2005 compared to $8.5 million for the prior year. Of the $2.4 million increase, $1.6 million was due to increased wages and benefits, of which $0.7 million resulted from increased incentive compensation due to our higher profitability, $0.2 related to increased travel and $0.6 million resulted from increases in other general and administrative expenses.

        Depreciation and Amortization.    Depreciation and amortization expense increased $0.6 million, or 27.1%, to $2.5 million for the year ended December 31, 2005 compared to $1.9 million for the prior year, of which $0.2 million related to additional depreciation resulting from our acquisitions and $0.4 million represented additional depreciation on higher investments in capital improvements and equipment.

        Other Income (Expense).    Interest expense increased $0.4 million, or 25.0% to $2.0 million for the year ended December 31, 2005 compared to $1.6 million for the year ended December 31, 2004. This increase in interest expense primarily related to increased borrowings under our real estate term loan in the latter portion of 2004 to provide the capital to purchase a portion of the facilities acquired in 2004 and 2005. The increase in interest expense was offset by a $0.4 million increase in interest income in 2005, resulting from higher average cash balances.

        Provision for Income Taxes.    Provision for income taxes increased $5.4 million, or 80.6%, to $12.1 million for the year ended December 31, 2005 compared to $6.7 million for the prior year. This increase was primarily due to higher income before provision for income taxes and an increase in the 2005 effective tax rate of 1.9% due to an effective reduction in employment tax credits for 2005.

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Quarterly Results of Operations

        The following tables present our unaudited quarterly results of operations for the periods indicated in dollars and as a percentage of revenue.

			Three Months Ended
			Mar. 31, 2005			June 30, 2005			Sept. 30, 2005			Dec. 31, 2005			Mar. 31, 2006			June 30, 2006			Sept. 30, 2006			Dec. 31, 2006			Mar. 31, 2007
			(in thousands, except share and per share data)
Consolidated Statement of Income Data:
Revenue			$	68,702		$	69,924		$	77,126		$	85,098		$	83,352		$	85,375		$	92,338		$	97,509		$	97,978
Expenses:
	Cost of services (exclusive of facility rent and depreciation and amortization shown separately below)			53,946			55,881			61,605			67,947			65,601			67,749			72,792			78,705			80,847
	Facility rent—cost of services			3,918			3,961			4,085			4,154			4,055			4,035			4,170			4,144			4,155
	General and administrative expense			2,389			2,523			2,817			3,180			3,260			3,330			3,881			3,739			3,746
	Depreciation and amortization			584			566			638			670			752			1,006			1,103			1,360			1,532
		Total expenses		60,837			62,931			69,145			75,951			73,668			76,120			81,946			87,948			90,280
Income from operations				7,865			6,993			7,981			9,147			9,684			9,255			10,392			9,561			7,698
Other income (expense):
	Interest expense			(473	)		(487	)		(520	)		(555	)		(578	)		(759	)		(734	)		(919	)		(1,169	)
	Interest income			77			107			142			165			162			135			203			272			392
		Other expense, net		(396	)		(380	)		(378	)		(390	)		(416	)		(624	)		(531	)		(647	)		(777	)
Income before provision for income taxes				7,469			6,613			7,603			8,757			9,268			8,631			9,861			8,914			6,921
Provision for income taxes				2,964			2,662			3,128			3,300			3,661			3,420			3,480			3,564			2,784
Net income				4,505			3,951			4,475			5,457		$	5,607		$	5,211		$	6,381		$	5,350		$	4,137
Net income per share:
	Basic		$	0.33		$	0.29		$	0.33		$	0.40		$	0.41		$	0.39		$	0.47		$	0.39		$	0.30
	Diluted		$	0.26		$	0.23		$	0.26		$	0.31		$	0.33		$	0.32		$	0.38		$	0.31		$	0.24
Weighted average common shares outstanding:
	Basic			13,600,951			13,409,288			13,380,861			13,483,391			13,529,822			13,229,954			13,311,639			13,393,404			13,419,764
	Diluted			17,632,209			17,540,919			17,428,627			17,421,543			16,929,017			16,514,032			16,864,932			16,983,926			16,904,196

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			Three Months Ended
			Mar. 31, 2005		June 30, 2005		Sept. 30, 2005		Dec. 31, 2005		Mar. 31, 2006		June 30, 2006		Sept. 30, 2006		Dec. 31, 2006		Mar. 31, 2007
As a Percent of Revenue:
Revenue			100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%
Expenses:
	Cost of services (exclusive of facility rent and depreciation and amortization shown separately below)		78.5		79.9		79.9		79.8		78.7		79.4		78.8		80.7		82.5
	Facility rent—cost of services		5.7		5.7		5.3		4.9		4.9		4.7		4.5		4.2		4.2
	General and administrative expense		3.5		3.6		3.7		3.7		3.9		3.9		4.2		3.8		3.8
	Depreciation and amortization		0.9		0.8		0.8		0.8		0.9		1.2		1.2		1.4		1.6
		Total expenses	88.6		90.0		89.7		89.2		88.4		89.2		88.7		90.1		92.1
Income from operations			11.4		10.0		10.3		10.8		11.6		10.8		11.3		9.9		7.9
Other income (expense):
	Interest expense		(0.6	)	(0.7	)	(0.6	)	(0.7	)	(0.7	)	(0.9	)	(0.8	)	(0.9	)	(1.2	)
	Interest income		0.1		0.2		0.2		0.2		0.2		0.2		0.2		0.2		0.4
		Other expense, net	(0.5	)	(0.5	)	(0.4	)	(0.5	)	(0.5	)	(0.7	)	(0.6	)	(0.7	)	(0.8	)
Income before provision for income taxes			10.9		9.5		9.9		10.3		11.1		10.1		10.7		9.2		7.1
Provision for income taxes			4.3		3.8		4.1		3.9		4.4		4.0		3.8		3.7		2.9
Net income			6.6	%	5.7	%	5.8	%	6.4	%	6.7	%	6.1	%	6.9	%	5.5	%	4.2	%

Liquidity and Capital Resources

        Our primary sources of liquidity have historically been derived from our cash flow from operations, long-term debt secured by our real property and our Amended and Restated Loan and Security Agreement (the "Revolver"). As of December 31, 2006 and March 31, 2007, the maximum available for borrowing under our Revolver was approximately $20.0 million, but approximately $8.4 million was pledged to secure outstanding letters of credit.

        Historically, we have financed the majority of our facility acquisitions primarily with cash. Cash paid for acquisitions was $6.0 million, $14.9 million, $29.0 million, $6.5 million and $9.4 million for the years ended December 31, 2004, 2005 and 2006 and the three months ended March 31, 2006 and 2007, respectively. Where we enter into facility operating lease agreements, we typically do not pay any amounts to the prior facility operator, nor do we acquire any assets or assume any liabilities as part of the transaction. Operating leases are included in the contractual obligations section below.

        Additionally in 2006, we purchased the underlying assets of three facilities that we were previously operating under long-term lease arrangements. These facilities were purchased for $11.1 million, which ultimately was financed using the Term Loan (described below) and is presented in the purchase of capital expenditures for the year ended 2006. Total capital expenditures for property and equipment were $5.1 million, $5.7 million, $14.1 million, $1.0 million and $2.8 million for the years ended December 31, 2004, 2005 and 2006 and the three months ended March 31, 2006 and 2007, respectively. We currently have approximately $12.0 million budgeted for capital refurbishments at existing facilities in 2007.

        In 2007, we have acquired four additional long-term care facilities. Three of these facilities were acquired for an aggregate purchase price of $9.4 million in cash, which included two skilled nursing facilities in Texas and one skilled nursing facility in Utah, increasing our total capacity by 402 beds. In July 2007, we acquired a long-term care facility in Utah that offers both skilled nursing and assisted living services, by assuming the operations of that facility under an operating lease agreement, increasing our total capacity by 95 beds. No amounts were paid to the prior facility operators and we did not acquire any assets or assume any liabilities as part of this transaction. In addition, in July 2007,

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we exercised an option to purchase one of our leased facilities for $3.3 million in cash, bringing the total of our owned facilities to 23.

        On December 29, 2006, a number of our independent real estate holding subsidiaries jointly entered into a Third Amended and Restated Loan Agreement (the "Term Loan") with General Electric Capital Corporation (the "Lender"), which consists of an approximately $64.7 million multiple-advance term loan, approximately $55.7 million of which had been drawn down at that time. The Term Loan expires on June 29, 2016, and is currently secured by the real and personal property comprising the ten facilities owned by these subsidiaries.

        The Term Loan has been funded in advances, with each advance bearing interest at a separate rate. The interest rates range from 7.50% per annum for the initial advance to 6.95% for the most recent advance. Subject to certain conditions, we may also receive additional advances that would bear interest at the rate of 2.25% plus the applicable U.S. Treasury rate at the time of advance. The proceeds of the advances made under the Term Loan have been used to refinance an existing loan from the Lender on four of the properties, and to purchase two other properties that we were previously leasing. We expect that the balance of the proceeds will be used to finance improvements to some of our existing properties and to acquire additional properties.

        In connection with the Term Loan, we have guaranteed the full and prompt payment and performance of all the obligations of our real estate holding subsidiaries under the loan documents for the Term Loan. In the event of our default under the Term Loan, all amounts owed by our subsidiaries, and guaranteed by us, under this loan agreement and any other loan with the Lender, including the Revolver discussed below, would become immediately due and payable. In addition, in the event of our default under the Term Loan, the Lender has the right to take control of our facilities encumbered by the loan to the extent necessary to make such payments and perform such acts required under the loan.

        Under the Term Loan, we are subject to standard reporting requirements and other typical covenants for a loan of this type. Effective October 1, 2006 and continuing each calendar quarter thereafter, we are subject to restrictive financial covenants, including average occupancy, Debt Service (as defined in the agreement) and Project Yield (as defined in the agreement). As of December 31, 2006 and March 31, 2007, we were in compliance with all loan covenants. As of March 31, 2007, our borrowing subsidiaries had $55.4 million outstanding on the Term Loan, with the right to draw an additional $9.0 million upon meeting certain covenants under the loan documents.

        On March 25, 2004, we entered into the Revolver, as amended on December 3, 2004, with the Lender, which consisted of a $20.0 million revolving credit facility. The Revolver expired in March 2007 but has been extended until August 1, 2007. We are in the process of negotiating with the Lender to replace the Revolver with a larger credit facility collateralized by a pledge of the outstanding equity of the participating operating subsidiaries of our portfolio company subsidiaries, as well as our service center.

        The Revolver bears interest at the prime rate of interest as designated by Citibank, N.A., or any successor thereto, as the same may fluctuate from time to time, plus a margin of 1%. In connection with the Revolver, we paid a commitment fee of $0.2 million, and, so long as the loan is available to us, we will pay a loan management fee to this lender equal to 0.08% of the average amount of the outstanding principal balance of the Revolver during the preceding month. The proceeds of the loans under the Revolver have been and continue to be used for working capital and other expenses arising in our ordinary course of business. As of March 31, 2007, we had $11,000 outstanding under the Revolver and approximately $8.4 million was pledged to secure outstanding letters of credit.

        We anticipate using proceeds from this offering to repay, in 2008, our $2.1 million mortgage note, which is not prepayable at this time.

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        We believe that the proceeds of this offering, together with our cash flow from operations and our Revolver, will be sufficient to cover our operating needs for at least the next 12 months. We may in the future elect to raise additional capital to fund acquisitions and capital renovations.

        The following table presents selected data from our consolidated statement of cash flows for the periods presented:

	Year Ended December 31,									Three Months Ended March 31,
	2004			2005			2006			2006			2007
	(in thousands)
Net cash provided by operating activities	$	17,802		$	20,446		$	30,945		$	4,362		$	4,220
Net cash used in investing activities		(11,233	)		(20,872	)		(43,709	)		(7,703	)		(12,474	)
Net cash provided by (used in) financing activities		7,441			(2,694	)		26,620			(3,417	)		(828	)
Net increase (decrease) in cash and cash equivalents		14,010			(3,120	)		13,856			(6,758	)		(9,082	)
Cash and cash equivalents at beginning of period		745			14,755			11,635			11,635			25,491
Cash and cash equivalents at end of period	$	14,755		$	11,635		$	25,491		$	4,877		$	16,409

Three Months Ended March 31, 2007 Compared to Three Months Ended March 31, 2006

        Net cash provided by operations for the three months ended March 31, 2007 was $4.2 million compared to $4.4 million for the three months ended March 31, 2006, a decrease of $0.2 million. The primary reason for the decrease in cash flow in the first quarter of 2007 was our decline in operating results, which contributed $4.1 million to cash flow or $7.0 million after adding back non-cash charges for depreciation and amortization, provision for doubtful accounts and stock compensation expense as compared to $5.6 million, or $7.6 million after adding back non-cash charges, in the first quarter of 2006. Other contributors to the decrease in cash flow included the payment of insurance subsidiary deposits and payment of accrued wages and related incentive pay due to improved operating results in 2006. These reductions in working capital were partially offset by the continued build-up of general, professional and workers compensation insurance accruals in excess of paid claims due to incurred but not yet reported claims and the increase in number of facilities.

        Net cash used in investing activities for the three months ended March 31, 2007 was $12.5 million compared to $7.7 million for the three months ended March 31, 2006, an increase of $4.8 million. The increase was primarily the result of cash we paid for our three facility acquisitions in the three months ended March 31, 2007 compared to one facility acquired in the three months ended March 31, 2006 and the increase in purchased property and equipment in the three months ended March 31, 2007 compared to the three months ended March 31, 2006.

        Net cash used in financing activities for the three months ended March 31, 2007 totaled $0.8 million compared to $3.4 million for the three months ended March 31, 2006, a decrease of $2.6 million. The decrease in cash used in financing activities in the three months ended March 31, 2007 compared to the three months ended March 31, 2006 primarily consisted of the repurchase of $2.8 million in treasury stock in the three months ended March 31, 2006 which did not recur in the the three months ended March 31, 2007.

Year Ended December 31, 2006 Compared to Year Ended December 31, 2005

        Net cash provided by operations for the year ended December 31, 2006 was $30.9 million compared to $20.4 million for the year ended December 31, 2005, an increase of $10.5 million. The primary reason for the increase in cash flow in 2006 was our improved operating results, which contributed $22.5 million to cash flow or $31.4 million after adding back non-cash charges for depreciation, amortization, allowance for doubtful accounts and stock compensation expense. Other contributors to the increase in working capital included the continued build-up of general, professional

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and workers compensation insurance accruals in excess of paid claims due to incurred but not yet reported claims and the increase in facilities. Accrued wages and related liabilities were a continued source of working capital due to our 2006 acquisitions, increased accruals for incentive pay due to improved operating results and general wage and salary increases. Deferred taxes represented a use of working capital primarily as a result of the increase in our self-insured liability. Other working capital fluctuations for 2006 primarily resulted from the increase in our facility acquisitions.

        Net cash used in investing activities for the year ended December 31, 2006 was $43.7 million compared to $20.9 million for the year ended December 31, 2005, an increase of $22.8 million. The increase was primarily the result of cash we paid for our 11 facility acquisitions in 2006 compared to three facilities acquired in 2005 and the increase in purchased property and equipment in 2006 and 2005.

        Net cash provided by financing activities for the year ended December 31, 2006 was $26.6 million compared to cash used for the year ended December 31, 2005 of $2.7 million, an increase of $29.3 million. The increase in cash provided by financing activities in 2006 compared to 2005 primarily consisted of the proceeds of $34.8 million in long-term notes, net, after refinancing $16.8 million in outstanding real estate loans and financing a $4.3 million facility acquisition. In addition, we repurchased $2.8 million in treasury stock in 2006, an increase of $0.5 million compared to the prior year period, and our dividend payments were $2.0 million in 2006, an increase of $0.7 million compared to 2005.

Year Ended December 31, 2005 Compared to Year Ended December 31, 2004

        Net cash provided by operations for the year ended December 31, 2005 was $20.4 million compared to $17.8 million for the year ended December 31, 2004, an increase of $2.6 million. The primary reason for the increase in cash flow in 2005 was our improved operating results, which contributed $18.4 million to cash flow or $23.9 million after adding back non-cash charges for depreciation, amortization and allowance for doubtful accounts. The remaining net decrease in working capital resulted primarily from a higher accounts receivable balance related to the retroactive California rate increases that were not received until 2006, new facility acquisition balances, an increase in receivable balances due to overall revenue rate increases and mix, and a decrease in our deferred tax liability due to our transition to self-insured status. Sources of working capital included an increase in accrued insurance liabilities due to general, professional and workers compensation insurance resulting from incurred but not yet reported claims, facility additions and the 2005 transition in California to self-insured status. Both other accrued liabilities and accounts payable included amounts related to the state of California per day enhancement fee of $3.5 million and $3.3 million, respectively. Accrued wages and related liabilities continued as a source of working capital due to acquisitions, increased incentive pay accruals and general wage and salary increases. The remaining fluctuations in working capital resulted primarily from the three facility acquisitions in 2005.

        Net cash used in investing activities for the year ended December 31, 2005 was $20.9 million compared to $11.2 million for the year ended December 31, 2004, an increase of $9.7 million. This increase was primarily the result of cash we paid for three facilities acquired in 2005 and two facilities acquired in 2004.

        Net cash used in financing activities for the year ended December 31, 2005 totaled $2.7 million compared to cash provided for the year ended December 31, 2004 of $7.4 million, a decrease of $10.1 million. The decrease in cash provided by financing activities in 2005 compared to 2004 was primarily due to the reduction in our long-term borrowings, the purchase of our treasury stock and higher dividend payments in 2005.

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Year Ended December 31, 2004

        Net cash provided by operations for the year ended December 31, 2004 was $17.8 million. This consisted of net income of $11.1 million or $16.5 million after adding back non-cash charges for depreciation, amortization and allowance for doubtful accounts. Accrued wages and related liabilities were a continued source of working capital due to increased accruals for incentive pay resulting from improved operating results, acquisitions and general wage and salary increases and the transition to self-insured status increased our deferred tax assets by $4.3 million, reducing our working capital.

        Net cash used in investing activities was $11.2 million for the year ended December 31, 2004. This consisted of cash we paid for our two facility acquisitions in 2004 and the purchase of property and equipment.

        Net cash provided by financing activities totaled $7.4 million for the year ended December 31, 2004. This consisted of proceeds in long-term notes partially offset by dividends paid in 2004.

Contractual Obligations and Commitments

        Our principal contractual obligations and commitments as of December 31, 2006 were as follows:

	2007		2008		2009		2010		2011		Thereafter		Total
	(in thousands)
Operating lease obligations	$	17,102	$	17,424	$	17,095	$	15,624	$	15,418	$	91,104	$	173,767
Long-term debt obligations (including interest at respective fixed rates)		5,665		7,631		5,495		5,495		5,494		68,408		98,188
Total	$	22,767	$	25,055	$	22,590	$	21,119	$	20,912	$	159,512	$	271,955

        We lease certain facilities and our service center offices under operating leases, most of which have initial lease terms ranging from five to 20 years and all of which include options to extend the lease term. Most of these leases contain renewal options, some of which involve rent increases. We also lease a majority of our equipment under operating leases with initial terms ranging from three to five years. Total rent expense, inclusive of straight-line rent adjustments, was approximately $15.1 million, $16.4 million, $16.7 million, $4.1 million and $4.2 million for the years ended December 31, 2004, 2005 and 2006 and the three months ended March 31, 2006 and 2007, respectively. In July 2007, we acquired a long-term care facility in Utah that offers both skilled nursing and assisted living services, by assuming the operations of that facility under an operating lease agreement. No amounts were paid to the prior facility operators and we did not acquire any assets or assume any liabilities as a part of this transaction. In addition, in July 2007, under the terms of the original lease agreement, we exercised an option to purchase one of our leased facilities for $3.3 million, bringing the total of our owned facilities to 23.

        Our long-term debt as of March 31, 2007 was primarily comprised of the following:

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Term Loan, multiple-advance term loan, principal and interest payable monthly, interest is fixed at time of each advance at the 10 year Treasury note rate plus 2.25%, rates in effect at March 31, 2007 range from 6.95% to 7.50%, balance due June 2016, collateralized by deeds of trust on real property, assignments of rents and security agreements. The balance outstanding was approximately $55.4 million at March 31, 2007.



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Mortgage note, principal and interest of $18,449 payable monthly and continuing through September 2008, interest at fixed rate of 7.49%, collateralized by a deed of trust on real property. The balance outstanding was approximately $2.1 million at March 31, 2007.



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HUD-insured mortgage note, principal and interest of $54,378 payable monthly and continuing through February 2027, interest at fixed rate of 7.5%, collateralized by a deed of trust on real

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property, assignment of rents, and security agreement. The balance outstanding was approximately $6.7 million at March 31, 2007.

        Under the Term Loan, we are subject to standard reporting requirements and other typical covenants for a loan of this type. Effective October 1, 2006 and continuing each calendar quarter thereafter, we are subject to certain restrictive financial covenants. These covenants are average occupancy, Debt Service coverage (as defined in the agreement) and Project Yield (as defined in the agreement). As of March 31, 2007, we believe we were in compliance with all loan covenants. Our non-compliance with these financial covenants could lead to acceleration of amounts under the Term Loan and a cross-default under the Revolver.

        In addition to the above long-term debt, we have a Revolver, from which we may borrow up to the lesser of $20.0 million or 85% of qualified accounts receivable, as defined. Revolver borrowings bear interest at an annual rate of prime plus 1%. As of March 31, 2007, there was $11,000 outstanding under the Revolver and $8.4 million was pledged to secure outstanding letters of credit maintained to secure lease obligations under some of our leases and statutory liabilities under our California self-insured worker's compensation program. The Revolver was set to expire in March 2007, but we negotiated short-term extensions until August 1, 2007. Our Revolver is with the same lender as our Term Loan. We are in the process of negotiating with the Lender to replace the Revolver with a larger credit facility secured by a pledge of the outstanding equity of the participating operating subsidiaries of our portfolio company subsidiaries, as well as our service center.

Inflation

        We have historically derived a substantial portion of our revenue from the Medicare program. We also derive revenue from state Medicaid and similar reimbursement programs. Payments under these programs generally provide for reimbursement levels that are adjusted for inflation annually based upon the state's fiscal year for the Medicaid programs and in each October for the Medicare program. These adjustments may not continue in the future, and even if received, such adjustments may not reflect the actual increase in our costs for providing healthcare services.

        Labor and supply expenses make up a substantial portion of our cost of services. Those expenses can be subject to increase in periods of rising inflation and when labor shortages occur in the marketplace. To date, we have generally been able to implement cost control measures or obtain increases in reimbursement sufficient to offset increases in these expenses. We may not be successful in offsetting future cost increases.

Off-Balance Sheet and Other Arrangements

        We have no off-balance sheet arrangements.

New Accounting Pronouncements

        In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS 157"), which defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements. SFAS 157 applies to other accounting pronouncements that require or permit fair value measurements. The new guidance is effective for financial statements issued for fiscal years beginning after November 15, 2007, and for interim periods within those fiscal years. We are currently evaluating the requirements of SFAS 157; however, we do not believe that our adoption of SFAS 157 will have a material effect on our consolidated financial statements.

        In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option For Financial Assets and Liabilities—including an amendment of FASB Statement No. 115" ("SFAS 159"). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We are currently evaluating the impact, if any, that SFAS No. 159 will have on our consolidated financial statements.

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Adoption of New Accounting Pronouncements

        In June 2006, the FASB issued FIN 48, which is effective for fiscal years beginning after December 15, 2006. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in financial statements in accordance with SFAS No. 109, "Accounting for Income Taxes," by prescribing a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company adopted FIN 48 at the beginning of fiscal year 2007. See Note 7 to our consolidated financial statements for a description of the impact of this adoption on our consolidated financial position and results of operations.

Quantitative and Qualitative Disclosures about Market Risk

        Interest Rate Risk.    We are exposed to interest rate changes as a result of our revolving credit facility, which is used to maintain liquidity and fund capital expenditures and operations. Our interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to provide more predictability to our overall borrowing costs. To achieve this objective, we borrow primarily at fixed rates, although we use our line of credit for short-term borrowing purposes. At March 31, 2007, we had $11,000 of outstanding floating rate debt. In addition, we are entitled, upon meeting certain covenants under the Term Loan, to take up to approximately $9 million in future advances under our Term Loan and each advance will bear interest based upon market rates in effect at the time of the advance.

        Our cash and cash equivalents and short-term investments as of March 31, 2007 consisted primarily of money market funds. Our market risk exposure is interest income sensitivity, which is affected by changes in the general level of U.S. interest rates, particularly because our investments are in short-term marketable securities. The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive from our investments without significantly increasing risk. Due to the short-term duration of our investment portfolio and the low risk profile of our investments, an immediate 10% change in interest rates would not have a material effect on the fair market value of our portfolio. Accordingly, we would not expect our operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest rates on our securities portfolio. In general, money market funds are not subject to market risk because the interest paid on such funds fluctuates with the prevailing interest rate.

        The above only incorporates those exposures that exist as of March 31, 2007, and does not consider those exposures or positions which could arise after that date. As we anticipate diversifying our investment portfolio into securities and other investment alternatives, we may face increased risk and exposures as a result of interest risk and the securities markets in general.

Internal Control Over Financial Reporting

        Management is responsible for establishing and maintaining adequate internal control over financial reporting and for the timeliness and reliability of the information disclosed. During 2006, we have been documenting and reviewing the design and effectiveness of our internal controls over financial reporting in anticipation of the requirement to comply with Section 404 of the Sarbanes-Oxley Act. Based on current regulations, we are required to comply with Section 404 for the year ending December 31, 2008. Continuous review and monitoring of our business processes will likely identify other possible changes to our internal control over financial reporting in the future. If we are unable to comply with Section 404 of the Sarbanes-Oxley Act, our stock price may decline. In addition, we expect our general and administrative expenses to increase substantially as we incur expenses associated with comprehensively analyzing, documenting and testing our system of internal control over financial reporting in anticipation of our compliance with Section 404 of the Sarbanes-Oxley Act.

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INDUSTRY

Overview of the Senior Living and Long-Term Care Industries

        The senior living and long-term care industries, which overlap and serve many of the same patients or residents, consist of three primary living arrangement alternatives with varying degrees of lifestyle and healthcare offerings, depending upon the type of living arrangement and the health of the patient or resident. These three alternatives include independent living facilities, assisted living facilities and skilled nursing facilities.

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Independent Living.  Independent living facilities are designed for active and relatively healthy seniors who desire living environments surrounded by a peer group for support and camaraderie. Independent living residents generally require few medical services and typically pay for services such as housekeeping, laundry and food service. The vast majority of independent living revenue is derived from residents' private pay sources.



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Assisted Living.  Assisted living facilities are designed for seniors who seek housing with supportive care and services. Assisted living residents are typically less active than independent living residents and require medical oversight and assistance with one or more activities of daily living, including bathing, dressing and medication management. Assisted living facilities generally offer all of the services of independent living, as well as medical assistance and daily care options. Assisted living residents tend to move into a facility both by choice and by necessity. The vast majority of assisted living revenue is derived from residents' private pay sources.



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Skilled Nursing.  Skilled nursing facilities provide both short-term post-acute rehabilitative care and long-term custodial care for patients who require skilled nursing or therapy care on an inpatient or residential basis. Unlike independent and assisted living, not all skilled nursing patients are seniors, as skilled nursing facilities serve patients of different ages and with differing needs. Post-acute patients are usually transferred directly from acute care hospitals to receive follow-up monitoring and rehabilitation and generally remain in skilled nursing facilities until they are able to return home. Long-term custodial patients require ongoing daily and medical assistance as their physical or mental ailments prevent them from living independently. The largest portion of custodial care revenue is derived from Medicaid, while skilled nursing revenue is generally derived from Medicare, managed care and private pay sources.

        In addition, these living arrangement alternatives are sometimes combined on a single campus, creating continuing care retirement communities ("CCRCs"). These communities provide a continuum of living arrangements and healthcare services that generally include independent living, assisted living and skilled nursing facilities in a single campus setting. The combination of these facilities and services located on a single campus allows patients and residents to age-in-place as their healthcare needs change.

        The facilities described above serve patients and residents with needs ranging from basic services, such as housekeeping or food service, to 24-hour medical support or highly specialized healthcare treatment. Each type of facility is specialized to more precisely meet the needs of a narrower demographic. In each setting, patients and residents may elect to receive additional specialized care and services as needed, such as rehabilitation, memory care and hospice care.

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Overview of the Skilled Nursing Industry

        While the skilled nursing market will continue to provide traditional long-term residential care to seniors, we believe that skilled nursing and rehabilitative services markets are becoming one of the fastest growing segments of the long-term care industry as doctors, insurers, managed care organizations (which are also known as Health Maintenance Organizations or "HMOs") and government healthcare programs seek to more quickly discharge high acuity patients from high-cost hospital environments to lower-cost skilled nursing facilities for care and recovery. We estimate that the skilled nursing market in the United States represented approximately $100 billion in revenue in 2005.

        Skilled nursing facilities provide both short-term post-acute rehabilitative care and long-term custodial care for patients who require skilled nursing and/or therapy care on an inpatient basis. Short-term post-acute patients are usually transferred directly from acute care hospitals and need short-term rehabilitation to recover from an acute episode. Short-term patients remain at the skilled nursing facility until they are well enough to return home. Medicare and managed care organizations, such as HMOs, cover most short-term, post-acute patient stays at higher reimbursement rates. Long-term custodial care residents, by contrast, tend to have chronic conditions that prevent them from living independently, and usually require ongoing daily medical attention for an extended period of time. Medicaid generally is a significant payor for residents requiring long-term custodial care.

        According to the American Health Care Association, as of December 2006, there were approximately 16,000 nursing facilities, which include skilled nursing facilities and other Medicaid or Medicare certified providers, in the United States with approximately 1.7 million beds and approximately 1.4 million patients, representing overall occupancy of approximately 85.4%. The industry is fragmented with the largest ten nursing home providers, sorted by bed count, representing approximately 12.4% of the total skilled nursing beds in 2005. The American Health Care Association estimates that in December 2006, the ownership distribution for nursing facilities in the United States was as follows:

United States Ownership Distribution for Nursing Facilities

For-profit organizations	66%
Non-profit organizations	28%
Government	6%
Source: American Health Care Association; Centers for Medicare and Medicaid Services (2006)

        Unlike acute healthcare services, private health insurance and Medicare do not constitute the majority of payor sources for nursing home care. Instead, Medicaid is a significant source of funding for nursing home care, which represented 44% of industry revenue in 2005. Private pay, or patient out-of-pocket payments, was the next largest payor category at 26%, followed by Medicare at 16%. Private health insurance, which generally represents post-acute coverage from traditional health insurance and specialized long-term care insurance policies, constitutes most of the remaining source of funding, along with other private and public sources.

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U.S. Nursing Home Care Revenue by Payor Source, 2005

Medicaid	44%
Private Pay	26%
Medicare	16%
Private Insurance	8%
Other Private	4%
Other Public	2%
Source: Centers for Medicare and Medicaid Services; Office of the Actuary, National Health Statistics Group

        According to the American Health Care Association, in the United States, the number of nursing facilities, which include skilled nursing facilities and other Medicaid or Medicare certified providers, declined from 16,715 in December 2000 to 15,861 in December 2006, representing an average decline of 0.9% annually. We believe that the modest decline in the number of nursing facilities was primarily due to several factors, including bankruptcies and other business exits caused by reductions in government reimbursement resulting from the Balanced Budget Act of 1997 (or "BBA"). In addition, regulatory requirements and other government regulations create substantial barriers to entry and limit the prospect of excess capacity. For example, Certificate of Need legislation places restrictions upon the maximum number of skilled nursing beds and/or facilities in 36 states.

        Skilled nursing facilities today are considerably different from the skilled nursing facilities of the past. As more assisted living and home health alternatives become available for those that require fewer medical services, average patient acuity levels at skilled nursing facilities have increased steadily. In addition, reimbursement changes are moving high acuity patients out of higher-cost settings, such as acute care and specialty hospitals, into skilled nursing and home health alternatives. These trends have led many skilled nursing facilities to focus on providing medically complex services to short-stay patients, who generally provide higher revenue and margins as compared to long-term custodial residents. Consistent with the changing role of skilled nursing facilities, the median length of stay in skilled nursing facilities has declined from 1.7 years in 1985 to 1.3 years in 2004, according to the 1985 and 2004 National Nursing Home Surveys conducted by the National Center for Health Statistics.

Payor Sources

        According to the CMS, approximately 62% of nursing home care revenue across the industry in 2005 was derived from government payment sources, including Medicaid and Medicare. Private pay, private health insurance and long-term care insurance constitute most of the remainder.

        Medicaid.    Medicaid is a state-administered program financed by state funds and matching federal funds. Medicaid programs are administered by the states and their political subdivisions, and often go by state-specific names, such as Medi-Cal in California and the Arizona Healthcare Cost Containment System in Arizona. Medicaid programs generally provide health benefits for qualifying individuals, and may supplement Medicare benefits for financially needy persons aged 65 and older. Medicaid reimbursement formulas are established by each state with the approval of the federal government in accordance with federal guidelines. Seniors who enter skilled nursing facilities as private pay clients can become eligible for Medicaid once they have substantially depleted their assets. Medicaid is the largest source of funding for nursing home facilities, and accounted for approximately 44% of industry revenue in 2005.

        Private and Other Payors.    Private and other payors consist primarily of individuals, family members or other third parties who directly pay for the services we provide. Private payors accounted for approximately 26% of industry revenue in 2005.

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        Medicare.    Medicare is a federal program that provides healthcare benefits to individuals who are 65 years of age or older or are disabled. To achieve and maintain Medicare certification, a skilled nursing facility must meet the CMS, "Conditions of Participation" on an ongoing basis, as determined in periodic facility inspections or "surveys" conducted primarily by the state licensing agency in the state where the facility is located. Medicare pays for inpatient skilled nursing facility services under the prospective payment system. The prospective payment for each beneficiary is based upon the medical condition of and care needed by, the beneficiary. Medicare skilled nursing facility coverage is limited to 100 days per episode of illness for those beneficiaries who require daily care following discharge from an acute care hospital. Medicare accounted for approximately 16% of industry revenue in 2005.

        Managed Care and Private Insurance.    Managed care patients consist of individuals who are insured by a third-party entity, typically a senior HMO plan, or who are Medicare beneficiaries who have assigned their Medicare benefits to a senior HMO plan. Private insurance accounted for approximately 8% of industry revenue in 2005. Another type of insurance, long-term care insurance, is also becoming more widely available to consumers, but is not expected to contribute significantly to industry revenues in the near term.

Industry Trends

        The skilled nursing industry has evolved to meet the growing demand for post-acute and custodial healthcare services generated by the shifting of patient care to lower cost settings, an aging population and increasing life expectancies. The skilled nursing industry has evolved in recent years, which we believe has led to a number of favorable improvements in the industry, as described below:

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Shift of Patient Care to Lower Cost Alternatives.  The growth of the senior population in the United States continues to increase healthcare costs, often faster than the available funding from government-sponsored healthcare programs. In response, federal and state governments have adopted cost-containment measures that encourage the treatment of patients in more cost-effective settings such as skilled nursing facilities, for which the staffing requirements and associated costs are often significantly lower than acute care hospitals, rehabilitation facilities or other post-acute care settings. As a result, skilled nursing facilities are serving a larger population of higher acuity patients than in the past.



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Significant Acquisition and Consolidation Opportunities. The skilled nursing industry is large and highly fragmented, characterized predominantly by numerous local and regional providers. According to the American Health Care Association, the nursing facility market, which includes skilled nursing facilities and other Medicaid or Medicare certified providers, was comprised of 15,861 facilities with approximately 1.7 million licensed beds as of December 2006. The ten largest skilled nursing providers by bed count control only 12.4% of these facilities in the aggregate. We believe this fragmentation provides significant acquisition and consolidation opportunities for us.



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Improving Supply and Demand Balance.  The number of skilled nursing facilities has declined modestly over the past several years. According to the American Health Care Association, the number of nursing facilities, which include skilled nursing facilities and other Medicaid or Medicare certified providers, has declined from 16,715 in December 2000 to 15,861 in December 2006. We expect that the supply and demand balance in the skilled nursing industry will continue to improve due to the shift of patient care to lower cost settings, an aging population and increasing life expectancies.



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Increased Demand Driven by Aging Populations and Increased Life Expectancy.  As life expectancy continues to increase in the United States and seniors account for a higher percentage of the total U.S. population, we believe the overall demand for skilled nursing services will increase. At present, the primary market demographic for skilled nursing services is individuals age 75 and

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older. According to U.S. Census Bureau Interim Projections, this group is one of the fastest growing segments of the United States population and is expected to more than double between 2000 and 2030.

        We believe the skilled nursing industry has been and will continue to be impacted by several other trends. The use of long-term care insurance is increasing among seniors as a means of planning for the costs of skilled nursing services. In addition, as a result of increased mobility in society, reduction of average family size, and the increased number of two-wage earner couples, more seniors are looking for alternatives outside the family for their care.

Competition

        The skilled nursing industry is highly competitive, and we expect that the industry will become increasingly competitive in the future. The industry is highly fragmented and characterized by numerous local and regional providers, in addition to large national providers that have achieved geographic diversity and economies of scale. We also compete with inpatient rehabilitation facilities and long-term acute care hospitals. Competitiveness may vary significantly from location to location, depending upon factors such as the number of competing facilities, availability of services, expertise of staff, and the physical appearance and amenities of each location. We believe that the primary competitive factors in the skilled nursing industry are:

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ability to attract and to retain qualified management and caregivers;



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reputation and commitment to quality;



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attractiveness and location of facilities;



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the expertise and commitment of the facility management team and employees;



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community value, including amenities and ancillary services; and



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for private pay and HMO patients, price of services.

        We seek to compete effectively in each market by establishing a reputation within the local community as the "facility of choice." This means that the facility leaders are generally free to discern and address the unique needs and priorities of healthcare professionals, customers and other stakeholders in the local community or market, and then create a superior service offering and reputation for that particular community or market that is calculated to encourage prospective customers and referral sources to choose or recommend the facility.

        Increased competition could limit our ability to attract and retain patients, maintain or increase rates or to expand our business. Some of our competitors have greater financial and other resources than we have, may have greater brand recognition and may be more established in their respective communities than we are. Competing companies may also offer newer facilities or different programs or services than we offer, and may therefore attract individuals who are currently residents of our facilities, potential residents of our facilities, or who are otherwise receiving our healthcare services. Other competitors may have lower expenses or accept lower margins than us and, therefore, provide services at lower prices than we offer.

Reimbursement for Specific Services

        Reimbursement for Skilled Nursing Services.    Skilled nursing facility revenue is primarily derived from Medicaid, private pay, managed care and Medicare payors. Our skilled nursing facilities provide Medicaid-covered services to eligible individuals consisting of nursing care, room and board and social services. In addition, states may, at their option, cover other services such as physical, occupational and speech therapies.

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        Reimbursement for Rehabilitation Therapy Services.    Rehabilitation therapy revenue is primarily received from private pay and Medicare for services provided at skilled nursing facilities and assisted living facilities. The payments are based on negotiated patient per diem rates or a negotiated fee schedule based on the type of service rendered.

        Reimbursement for Assisted Living Services.    Assisted living facility revenue is primarily derived from private pay residents at rates we establish based upon the services we provide and market conditions in the area of operation. In addition, Medicaid or other state-specific programs in some states where we operate supplement payments for board and care services provided in assisted living facilities.

Government Regulation

        The regulatory environment within the skilled nursing industry continues to intensify in the amount and type of laws and regulations affecting it. In addition to this changing regulatory environment, federal, state and local officials are increasingly focusing their efforts on the enforcement of these laws. In order to operate our facilities we must comply with federal, state and local laws relating to licensure, delivery and adequacy of medical care, distribution of pharmaceuticals, equipment, personnel, operating policies, fire prevention, rate-setting, building codes and environmental protection. Additionally, we must also adhere to anti-kickback laws, physician referral laws, and safety and health standards set by the Occupational Safety and Health Administration ("OSHA"). Changes in the law or new interpretations of existing laws may have an adverse impact on our methods and costs of doing business.

        Skilled nursing facilities are also subject to various regulations and licensing requirements promulgated by state and local health and social service agencies and other regulatory authorities. Requirements vary from state to state and these requirements can affect, among other things, personnel education and training, patient and personnel records, facility services, staffing levels, monitoring of patient wellness, patient furnishings, housekeeping services, dietary requirements, emergency plans and procedures, certification and licensing of staff prior to beginning employment, and patient rights. These laws and regulations could limit our ability to expand into new markets and to expand our services and facilities in existing markets.

        Regulations Regarding Our Facilities.    Governmental and other authorities periodically inspect our facilities to assess our compliance with various standards. The intensified regulatory and enforcement environment continues to impact healthcare providers, as these providers respond to periodic surveys and other inspections by governmental authorities and act on any noncompliance identified in the inspection process. Unannounced surveys or inspections generally occur at least annually, and also following a government agency's receipt of a complaint about a facility. We must pass these inspections to maintain our licensure under state law, to obtain or maintain certification under the Medicare and Medicaid programs, to continue participation in the Veterans Administration program at some facilities, and to comply with our provider contracts with managed care clients at many facilities. From time to time, we, like others in the healthcare industry, may receive notices from federal and state regulatory agencies alleging that we failed to comply with applicable standards. These notices may require us to take corrective action, may impose civil monetary penalties for noncompliance, and may threaten or impose other operating restrictions on facilities that do not properly remedy any continuing noncompliance. If our facilities fail to comply with these directives or otherwise fail to comply substantially with licensure and certification laws, rules and regulations, we could lose our certification as a Medicare or Medicaid provider, or lose our state licenses to operate the facilities.

        Regulations Protecting Against Fraud.    Various complex federal and state laws exist which govern a wide array of referrals, relationships and arrangements, and prohibit fraud by healthcare providers. Governmental agencies are devoting increasing attention and resources to such anti-fraud efforts. The Health Insurance Portability and Accountability Act of 1996 ("HIPAA"), and the BBA expanded the

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penalties for healthcare fraud. Additionally, in connection with our involvement with federal healthcare reimbursement programs, the government or those acting on its behalf may bring an action under the False Claims Act, alleging that a healthcare provider has defrauded the government. These claimants may seek treble damages for false claims and payment of additional civil monetary penalties. The False Claims Act allows a private individual with knowledge of fraud to bring a claim on behalf of the federal government and earn a percentage of the federal government's recovery. Due to these "whistleblower" incentives, suits have become more frequent.

        Regulations Regarding Financial Arrangements.    We are also subject to federal and state laws that regulate financial arrangement by healthcare providers, such as the federal and state anti-kickback laws, the Stark laws, and various state referral laws.

        The federal anti-kickback laws and similar state laws make it unlawful for any person to pay, receive, offer, or solicit any benefit, directly or indirectly, for the referral or commendation for products or services which are eligible for payment under federal healthcare programs, including Medicare and Medicaid. For the purposes of the anti-kickback law, a "federal healthcare program" includes Medicare and Medicaid programs and any other plan or program that provides health benefits which are funded directly, in whole or in part, by the United States Government.

        The arrangements prohibited under these anti-kickback laws can involve nursing homes, hospitals, physicians and other healthcare providers, plans and suppliers. These laws have been interpreted very broadly to include a number of practices and relationships between healthcare providers and sources of patient referral. The scope of prohibited payments is very broad, including anything of value, whether offered directly or indirectly, in cash or in kind. Federal "safe harbor" regulations describe certain arrangements that will not be deemed to constitute violations of the anti-kickback law. Arrangements that do not comply with all of the strict requirements of a safe harbor are not necessarily illegal, but, due to the broad language of the statute, failure to comply with a safe harbor may increase the potential that a government agency or whistleblower will seek to investigate or challenge the arrangement. The safe harbors are narrow and do not cover a wide range of economic relationships.

        Violations of the federal anti-kickback laws can result in criminal penalties of up to $25,000 and five years imprisonment. Violations of the anti-kickback laws can also result in civil monetary penalties of up to $50,000 and an assessment of up to three times the total amount of remuneration offered, paid, solicited, or received. Violation of the anti-kickback laws may also result in an individual's or organization's exclusion from future participation in Medicare, Medicaid and other state and federal healthcare programs. Exclusion of us or any of our key employees from the Medicare or Medicaid program could have a material adverse impact on our operations and financial condition.

        In addition to these regulations, we may face adverse consequences if we violate the federal Stark laws related to certain Medicare physician referrals. The Stark laws prohibit a physician from referring Medicare patients for certain designated health services where the physician has an ownership interest in or compensation arrangement with the provider of the services, with limited exceptions. Also, any services furnished pursuant to a prohibited referral are not eligible for payment by the Medicare programs, and the provider is prohibited from billing any third party for such services. The Stark laws provide for the imposition of a civil monetary penalty of $15,000 per service and exclusion from Medicare for any person who presents or causes to be presented a bill or claim the person knows or should know is submitted in violation of the Stark laws. Such designated health services include physical therapy services; occupational therapy services; radiology services, including CT, MRI, and ultrasound; durable medical equipment and services; radiation therapy services and supplies; parenteral and enteral nutrients, equipment and supplies; prosthetics, orthotics and prosthetic devices and supplies; home health services; outpatient prescription drugs; inpatient and outpatient hospital services; clinical laboratory services; and, effective January 1, 2007, diagnostic and therapeutic nuclear medical services.

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        Regulations Regarding Patient Record Confidentiality.    We are also subject to laws and regulations enacted to protect the confidentiality of patient health information. For example, the U.S. Department of Health and Human Services has issued rules pursuant to HIPAA, which relate to the privacy of certain patient information. These rules govern our use and disclosure of protected health information. We have established policies and procedures to comply with HIPAA privacy requirements at these facilities. We believe that we are in compliance with all current HIPAA laws and regulations.

        Antitrust Laws.    We are also subject to federal and state antitrust laws. Enforcement of the antitrust laws against healthcare providers is common, and antitrust liability may arise in a wide variety of circumstances, including third party contracting, physician relations, joint venture, merger, affiliation and acquisition activities. In some respects, the application of federal and state antitrust laws to healthcare is still evolving, and enforcement activity by federal and state agencies appears to be increasing. At various times, healthcare providers and insurance and managed care organizations may be subject to an investigation by a governmental agency charged with the enforcement of antitrust laws, or may be subject to administrative or judicial action by a federal or state agency or a private party. Violators of the antitrust laws could be subject to criminal and civil enforcement by federal and state agencies, as well as by private litigants.

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BUSINESS

Overview

        We are a provider of skilled nursing and rehabilitative care services through the operation of facilities located in California, Arizona, Texas, Washington, Utah and Idaho. As of July 20, 2007, we owned or leased 61 facilities. All of our facilities are skilled nursing facilities, other than three stand-alone assisted living facilities in Arizona and Texas and four campuses that offer both skilled nursing and assisted living services in California, Arizona and Utah. Our facilities, each of which strives to be the facility of choice in the community it serves, provide a broad spectrum of skilled nursing, physical, occupational and speech therapies, and other rehabilitative and healthcare services and, in certain facilities, assisted living services, for both long-term residents and short-stay rehabilitation patients. Our facilities have a collective capacity of over 7,400 skilled nursing, assisted living and independent living beds. As of July 20, 2007 we owned 23 of our facilities and operated an additional 38 facilities under long-term lease arrangements, and had options to purchase 12 of those 38 facilities. For the year ended December 31, 2006 and the three months ended March 31, 2007, our skilled nursing services, including our integrated rehabilitative therapy services, generated approximately 97% of our revenue.

        We have increased our revenue from $102.1 million in 2002 to $358.6 million in 2006. Over the same period, we have increased net income from $3.6 million in 2002 to $22.5 million in 2006. Revenue was $358.6 million for the year ended December 31, 2006, an increase of $57.7 million, or 19%, compared to $300.9 million for the year ended December 31, 2005. Further, we have increased revenue by $14.6 million, or 17.5%, to $98.0 million for the three months ended March 31, 2007 compared to $83.4 million for the three months ended March 31, 2006.

        Our organizational structure is centered upon local leadership. We believe our organizational structure, which empowers leaders and staff at the facility level, is unique within the skilled nursing industry. Each of our facilities is led by highly dedicated individuals who are responsible for key decisions at their facilities. Facility leaders and staff are trained and incentivized to pursue superior clinical outcomes, operating efficiencies and financial performance at their facilities. In addition, our facility leaders are enabled and incentivized to share real-time operating data and otherwise assist their peers in other facilities in order to improve clinical care, maximize patient satisfaction and augment operational efficiencies, providing a level of interdependence and sharing of best practices.

        We believe our success is dependent upon our ability to provide superior care "one-facility-at-a time." We view skilled nursing primarily as a local business, influenced by personal relationships and community reputation. Accordingly, we promote each facility independently within its local community.

        Much of our historical growth can be attributed to our expertise in acquiring underperforming facilities and transforming them into market leaders in clinical quality, staff competency, employee loyalty and financial performance. We plan to continue to grow our revenue and earnings by:

•

continuing to grow our talent base and develop future leaders;



•

increase mix of high acuity patients;



•

focusing on organic growth and internal operating efficiencies;



•

continuing to acquire additional facilities in existing and new markets; and



•

expand and renovate our existing facilities, and potentially begin constructing new facilities.

Company History

        Our company was formed as a Delaware corporation in 1999, with the goal of establishing a new standard of quality care within the skilled nursing industry. The name "Ensign" is synonymous with a "flag" or a "standard," and alludes to our goal of setting the standard by which all others are

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measured. We believe that through our efforts and leadership, we can foster a new level of patient care and professional competence at our facilities, and set a new industry standard for quality skilled nursing and rehabilitative care services.

        We have an established track record of successful acquisitions. Many of our earliest acquisitions were completed at a time when the skilled nursing industry was undergoing a major restructuring. From 2001 to 2003, we acquired a number of underperforming facilities, as several long-term care providers disposed of troubled facilities from their portfolios. We then applied our core operating expertise to turn these facilities around, both clinically and financially. In 2004 and 2005, we focused on the integration and improvement of our existing operations while limiting our acquisitions to strategically situated properties, acquiring five facilities over that period.

        We organized our facilities into five distinct portfolio companies in 2006, which we believe has enabled us to attract additional qualified leadership talent, and to identify, acquire, and improve facilities at a faster rate. With the introduction of the new portfolio companies and our New Market CEO program in early 2006, our acquisition activity accelerated, allowing us to add 15 facilities since January 1, 2006. (See "—Recent Developments"). The following table summarizes our growth from our formation in 1999 through July 20, 2007:

Cumulative Facility Growth

	As of December 31,								As of July 20, 2007
	1999	2000	2001	2002	2003	2004	2005	2006
Cumulative number of facilities	5	13	19	24	41	43	46	57	61
Cumulative number of skilled nursing, assisted living and independent living beds(1)(2)	710	1,645	2,244	2,919	5,147	5,401	5,780	6,940	7,437

(1)

Includes 660 beds in our 454 assisted living units and 84 independent living units. The cumulative number of skilled nursing, assisted living and independent living beds is calculated using the current number of beds at each facility and may differ from the number of beds at the time of acquisition. We may also temporarily or permanently expand or reduce the number of beds in connection with renovations or expansions of specific facilities.

(2)

All bed counts are licensed beds except independent living beds, and may not reflect the number of beds actually available for patient use.

Our Competitive Strengths

        We believe that we are well positioned to benefit from the ongoing changes within our industry. We believe that our ability to acquire, integrate and improve our facilities is a direct result of the following key competitive strengths:

        Experienced and Dedicated Employees.    We believe that our employees are among the best in the skilled nursing industry. We believe each of our facilities is led by an experienced and caring leadership team, including a dedicated front-line care staff, who participates daily in the clinical and operational improvement of their individual facilities. We have been successful in attracting, training, incentivizing and retaining a core group of outstanding business and clinical leaders to lead our facilities. These leaders operate their facilities as separate local businesses. With broad local control, these talented leaders and their care staffs are able to quickly meet the needs of their patients and residents, employees and local communities, without waiting for permission to act or being bound to a "one-size-fits-all" corporate strategy.

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        Unique Incentive Programs.    We believe that our employee compensation programs are unique within the skilled nursing industry. Employee stock options and performance bonuses, based on achieving target clinical quality and financial benchmarks, represent a significant component of total compensation for our facility leaders. We believe that these compensation programs assist us in encouraging our facility leaders and key employees to act with a shared ownership mentality. Furthermore, our facility leaders are incentivized to help local facilities within a defined "cluster," which is a group of geographically-proximate facilities that share clinical best practices, real-time financial data and other resources and information.

        Staff and Leadership Development.    We have a company-wide commitment to ongoing education, training and professional development. Accordingly, our facility leaders participate in regular training. Most attend training sessions at Ensign University, our in-house educational system, generally four or five times each year. Other training opportunities are generally offered on a monthly basis. Training and educational topics include leadership development, our values, updates on Medicaid and Medicare billing requirements, updates on new regulations or legislation, emerging healthcare service alternatives and other relevant clinical, business and industry specific coursework. Additionally, we encourage and provide ongoing education classes for our clinical staff to maintain licensing and increase the breadth of their knowledge and expertise. We believe that our commitment to, and substantial investment in, ongoing education will further strengthen the quality of our facility leaders and staff, and the quality of the care they provide to our patients and residents.

        Innovative Service Center Approach. We do not maintain a corporate headquarters; rather, we operate a Service Center to support the efforts of each facility. Our Service Center is a dedicated service organization that provides centralized information technology, human resources, accounting, payroll, legal, risk management and other key services, so that local facility leaders can focus on delivering top-quality care and efficient business operations. Our Service Center approach allows individual facilities to function with the strength, synergies and economies of scale found in larger organizations, but without what we believe are the disadvantages of a top-down management structure or corporate hierarchy. We believe our Service Center approach is unique within the industry, and allows us to preserve the "one-facility-at-a-time" focus and culture that has contributed to our success.

        Proven Track Record of Successful Acquisitions.    We have established a disciplined acquisition strategy that is focused on selectively acquiring facilities within our target markets. Our acquisition strategy is highly operations driven. Prospective facility leaders are included in the decision making process, and thus compensated as these acquired facilities reach pre-established clinical quality and financial benchmarks, helping to ensure that we only undertake acquisitions that key leaders believe can become clinically sound and contribute to our financial performance.

        Since April 1999, we have acquired 61 facilities with over 7,400 skilled nursing, assisted living and independent living beds, including 660 beds in our 454 assisted living units and 84 independent living units, through both long-term leases and purchases. We believe our experience in acquiring these facilities and our demonstrated success in significantly improving their operations enables us to consider a broad range of acquisition targets. In addition, we believe we have developed expertise in transitioning newly-acquired facilities to our unique organizational culture and operating systems, which enables us to acquire facilities with limited disruption to patients, residents and facility operating staff, while significantly improving quality of care. We also intend to consider the construction of new facilities as we determine that market conditions justify the cost of new construction in some of our markets.

        Reputation for Quality Care.    We believe that we have achieved a reputation for high-quality and cost-effective care and services to our patients and residents within the communities we serve. We believe that our reputation for quality, coupled with the integrated skilled nursing and rehabilitation

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services that we offer, allows us to attract patients that require more intensive and medically complex care and generally result in higher reimbursement rates than lower acuity patients.

        Community Focused Approach.    We view skilled nursing care primarily as a local, community-based business. Our local leadership-centered management culture enables each facility's nursing and support staff and leaders to meet the unique needs of their residents and local communities. We believe that our commitment to this "one-facility-at-a-time" philosophy helps to ensure that each facility, its residents, their family members and the community will receive the individualized attention they need. By serving our residents, their families, the community and our fellow healthcare professionals, we strive to make each individual facility the facility of choice in its local community.

        We further believe that when choosing a healthcare provider, consumers usually choose a person or people they know and trust, rather than a corporation or business. Therefore, rather than pursuing a traditional organization-wide branding strategy, we actively seek to develop the facility brand at the local level, serving and marketing one-on-one to caregivers, our residents, their families, the community and our fellow healthcare professionals in the local market.

        Attractive Asset Base.    We believe that our facilities are among the best-operated in their respective markets. As of July 20, 2007 we owned 23 of the 61 facilities that we operated, and had options to purchase 12 of the 38 facilities that we operated under long-term lease arrangements. We will consider exercising some or all of these purchase options as they become exercisable, and we expect that we will own a higher percentage of our facilities in the future than we currently own. Assuming that all of our purchase options were currently exercisable and that we exercised all purchase options, we would own approximately 57% of the facilities we currently operate. By owning our facilities, we believe we will have better control over our occupancy costs over time, as well as increased financial and operational flexibility. We continually invest in our facilities, both owned and leased, to keep them physically attractive and clinically sound.

        Investment in Information Technology.    We have acquired and developed proprietary information technology that enables our facility leaders to access, and to share with their peers, both clinical and financial performance data in real time. Armed with relevant and current information, our facility leaders and their management teams are able to share best practices and latest information, adjust to challenges and opportunities on a timely basis, improve quality of care, mitigate risk and improve both clinical outcomes and financial performance. We have also invested in specialized healthcare technology systems to assist our nursing and support staff. We are in the process of installing automated software and touch-screen interface systems in each facility to enable our nursing staff to more efficiently monitor and deliver patient care and record patient information. These systems have improved the quality of our medical and billing records, while improving the productivity of our staff.

Our Growth Strategy

        We believe that the following strategies are primarily responsible for our growth to date, and will continue to drive the growth of our business:

        Grow Talent Base and Develop Future Leaders.    Our primary growth strategy is to expand our talent base and develop future leaders. A key component of our organizational culture is our belief that strong local leadership is a primary key to the success of each facility. While we believe that significant acquisition opportunities exist, we have generally followed a disciplined approach to growth that permits us to acquire a facility only when we believe, among other things, that we will have qualified leadership for that facility. To develop these leaders, we have a rigorous "Administrator-in-Training Program" that attracts proven business leaders from various industries and backgrounds, and provides them the knowledge and hands-on training they need to successfully lead one of our facilities. As of July 20, 2007, 13 prospective administrators were progressing through the various stages of this training

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program, which is generally much more rigorous, hands-on and intensive than the minimum 1,000 hours of training mandated by the licensing requirements of most states where we do business. Once administrators are licensed and assigned to a facility, they continue to learn and develop in our facility Chief Executive Officer Program, which facilitates the continued development of these talented business leaders into outstanding facility CEOs, through regular peer review, our Ensign University and on-the-job training.

        In addition, our facility Chief Operating Officer Program recruits and trains highly-qualified Directors of Nursing to lead the clinical programs in our facilities. Working together with their facility CEO and/or administrator, other key facility leaders and front-line staff, these experienced nurses manage delivery of care and other clinical personnel and programs to optimize both clinical outcomes and employee and patient satisfaction.

        Increase Mix of High Acuity Patients.    Many skilled nursing facilities are serving an increasingly larger population of patients who require a high level of skilled nursing and rehabilitative care, whom we refer to as high acuity patients, as a result of government and other payors seeking lower-cost alternatives to traditional acute-care hospitals. We generally receive higher reimbursement rates for providing care for these patients. In addition, many of these patients require therapy and other rehabilitative services, which we are able to provide as part of our integrated service offerings. Where therapy services are prescribed by a patient's physician or other healthcare professional, we generally receive additional revenue in connection with the provision of those services. By making these integrated services available to such patients, and maintaining established clinical standards in the delivery of those services, we are able to increase our overall revenues. We believe that we can continue to attract high acuity patients and therapy patients to our facilities by maintaining and enhancing our reputation for quality care, continuing our community focused approach, and strengthening our referral networks.

        Focus on Organic Growth and Internal Operating Efficiencies.    We are able to grow organically through our ability to increase patient occupancy within our existing facilities. Although some of the facilities we have acquired were in good physical and operating condition, the majority have been clinically and financially troubled, with some facilities having had occupancy rates as low as 30% at the time of acquisition. Additionally, we believe that incremental operating margins on the last 20% of our beds are significantly higher than on the first 80%, offering real opportunities to improve financial performance within our existing facilities, as we seek to improve overall occupancy beyond our rates for the three month periods ended March 31, 2006 and 2007 averages of 83% and 78%, respectively.

        We also believe we can generate organic growth by improving operating efficiencies and the quality of care at the patient level. By focusing on staff development, clinical systems and the efficient delivery of quality patient care, we believe we are able to deliver higher quality care at lower costs than many of our competitors.

        We also have achieved significant incremental occupancy and revenue growth by creating or expanding outpatient therapy programs in existing facilities. Physical, occupational and speech therapy services account for a significant portion of revenue in most of our skilled nursing facilities. By expanding therapy programs to provide outpatient services in many markets, we are able to increase revenue while spreading the fixed costs of maintaining these programs over a larger patient base. Outpatient therapy has also proven to be an effective marketing tool, raising the visibility of our facilities in their local communities and enhancing the reputation of our facilities with short-stay rehabilitation patients.

        Add New Facilities and Expand Existing Facilities.    A key element of our growth strategy includes the acquisition of existing facilities from third parties, the expansion of current facilities, and the potential construction of new facilities. In the near term, we plan to consider the construction of new

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facilities and may take advantage of the fragmented skilled nursing industry by acquiring facilities within select geographic markets. In addition, historically we have targeted facilities that we believed were underperforming, and where we believed we could improve service delivery, occupancy rates and cash flow. With experienced leaders in place at the community level, and demonstrated success in significantly improving operating conditions at acquired facilities, we believe that we are well positioned for continued growth. While the integration of underperforming facilities generally has a negative short-term effect on overall operating margins, these facilities are typically accretive to earnings within 12 to 18 months following acquisition. For the 22 facilities that we acquired from 2003 through 2005, the aggregate net monthly income from operations as a percentage of revenue improved from 4.1% during the first full month of operations to 10.3% during the twelfth month of operations.

Recent Developments

        Reorganization of Operations under Portfolio Companies.    To preserve our entrepreneurial culture and the scalability of our leadership-centered management model, we have recently created several distinct portfolio companies. We believe that this structure will better allow us to maintain organizational and individual development across a large and rapidly-growing organization, while continuing to maintain our "one-facility-at-a-time" focus and to implement the key principles that have produced our success to date. To facilitate this internal reorganization, we formed the following five separate portfolio companies in early 2006;

•

The Flagstone Group, Inc., with 15 facilities in Southern California;



•

Touchstone Care, Inc., with ten facilities in the Los Angeles area and in Southern California's Inland Empire and Palm Springs markets;



•

Northern Pioneer Healthcare, Inc., with nine facilities in Northern California and Washington;



•

Keystone Care, Inc., with ten facilities in Texas; and



•

Bandera Healthcare, Inc., with 12 facilities in Arizona.

        In addition, in late 2006 we formed a sixth future portfolio company, Milestone Healthcare, Inc., currently with five facilities in Utah and Idaho, as a direct result of the success of our New Market CEO Program, described below.

        Each of our portfolio companies has its own president. These presidents, who are experienced and proven leaders taken from the ranks of our executive officers and facility CEOs, serve as leadership resources within their own portfolio companies, and have the primary responsibility for recruiting qualified talent, finding potential acquisition targets, and identifying other internal and external growth opportunities. We believe this reorganization has already generated positive results, producing a strong recruiting year for us and facilitating 11 acquisitions in 2006 and three acquisitions in the first quarter of 2007. For example, during the first nine months following this reorganization, Keystone Care, Inc. doubled our annualized revenue and number of facilities in Texas, expanding from four facilities to eight. In addition, expansion into new markets through our New Market CEO program, as described below, has already led to the formation of one new future portfolio company and may lead to the formation of additional future portfolio companies in the future. Keystone Care, Inc. currently provides operational support to the New Market CEO facilities.

        New Market CEO Program.    In order to broaden our reach to new markets, and in an effort to provide existing leaders in our company with the entrepreneurial opportunity and challenge of entering a new market and starting a new business, we established the New Market CEO program in 2006. Supported by our Service Center and other resources, a New Market CEO evaluates a target market, develops a comprehensive business plan, and relocates to the target market to find talent and connect

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with other providers, regulators and the healthcare community in that market, with the goal of ultimately acquiring facilities and establishing an operating platform for future growth.

        Within several months, our first New Market CEO established our company as a provider of skilled nursing, rehabilitative and long-term care services in the Intermountain West. This led to the formation of a new future portfolio company, Milestone Healthcare, Inc., which has responsibility for three skilled nursing facilities and one campus that offers both skilled nursing and assisted living services in Utah and one skilled nursing facility in Idaho. We believe that this program will not only continue to drive growth, but will also provide a valuable training ground for our next generation of leaders, who will have experienced the challenges of growing and operating a new business. Keystone Care, Inc. currently provides operational support to Milestone Healthcare, Inc.

        Recent Acquisitions and Growth.    Since January 1, 2006, we added an aggregate of 15 facilities located in Texas, Washington, Utah, Idaho, Arizona and California that we had not operated previously, 11 of which we purchased and four of which we acquired under long-term lease arrangements. Three of the long-term lease arrangements include purchase options. Thirteen of these acquisitions were skilled nursing facilities, one was an assisted living facility and one was a campus that offers both skilled nursing and assisted living services. These facilities contributed 1,657 beds to our operations, increasing our total capacity by 29%. Our acquisitions in 2006 and 2007 enabled us to enter two new markets, Utah and Idaho. In Texas, we increased our capacity since January 1, 2006 by 684 beds, or approximately 146%, and more than doubled the number of our facilities in that state.

        In 2006, we purchased eight facilities for an aggregate purchase price of $31.1 million, of which $29.0 million was paid in cash, and $2.1 million was financed with the assumption of a loan on one of the facilities. In 2006, we also purchased the underlying assets of three facilities that we were operating under long-term lease arrangements. The aggregate purchase price for these facilities was $11.1 million, which was ultimately financed using our term loan. We also obtained a Certificate of Need from Washington to expand one of our existing facilities in that state by 30 beds, and have commenced construction activities at that facility.

        During the quarter ended March 31, 2007, we acquired three additional skilled nursing facilities for an aggregate purchase price of $9.4 million in cash, which includes two facilities in Texas and one facility in Utah, increasing our total capacity by 402 beds. In July 2007, we entered into an operating lease agreement whereby we assumed the operations of a long-term care facility in Utah that offers both skilled nursing and assisted living services, increasing our total capacity by 95 beds. No amounts were paid to the prior facility operators and we did not acquire any assets or assume any liabilities as part of this transaction. In addition, in July 2007, we purchased the underlying assets of one facility that we were operating under a long-term lease arrangement for $3.3 million.

Properties

        Service Center.    We currently lease 15,920 square feet of office space in Mission Viejo, California for our Service Center pursuant to a lease that expires in 2009. We have two options to extend our lease term at this location for an additional three-year term for each option.

        Facilities.    We currently operate 61 facilities in California, Arizona, Texas, Washington, Utah and Idaho, with the capacity to serve over 7,400 patients and residents. Of the facilities that we operate as of July 20, 2007, we own 23 facilities and lease 38 facilities pursuant to operating leases, 12 of which contain purchase options that provide us with the right to purchase the facility in the future, which we believe will enable us to better control our occupancy costs over time. We currently do not manage any facilities for third parties and do not actively seek to manage facilities for others, except on a short-term basis pending receipt of new operating licenses by our operating subsidiaries.

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        The following table provides summary information regarding the number of licensed and independent living beds at our facilities at July 20, 2007:

State	Leased without a purchase option	Leased with a purchase option	Owned	Total licensed and independent living beds(4)
California	1,654	1,026	849	3,529
Arizona	912	130	910	1,952
Texas	470	—	684	1,154
Utah	108	95	228	431
Washington(1)	—	—	283	283
Idaho	—	88	—	88
Total	3,144	1,339	2,954	7,437
Skilled nursing	2,829	1,253	2,695	6,777
Assisted living(2)	231	86	259	576
Independent living(3)	84	—	—	84

(1)

Our facility in Walla Walla recently obtained a Certificate of Need to add 30 more beds, and construction activities are currently underway.

(2)

Represents 454 assisted living units.

(3)

Represents 84 independent living units located within one of our assisted living facilities.

(4)

All bed counts are licensed beds except independent living beds, and may not reflect the number of beds actually available for patient use.

        Skilled Nursing Facilities.    As of July 20, 2007, we provided skilled nursing care at 58 of our facilities located in California, Arizona, Texas, Washington, Utah and Idaho. Each of these facilities is staffed by a team of experienced medical professionals that generally include registered nurses, licensed practical nurses, certified nursing assistants, occupational therapists, physical therapists, and support staff. Our residents are typically admitted to live at our facilities as they recover from strokes, other neurological conditions, cardiovascular and respiratory ailments, joint replacements and other medical conditions. We also provide standard services to each of our skilled nursing patients and residents, including room and board, special nutritional programs, social services, recreational activities and related healthcare and other services. For the year ended December 31, 2006 and the three months ended March 31, 2007, skilled nursing and rehabilitative care services accounted for approximately 97% of our total revenue.

        We currently provide rehabilitation therapy services in all of our skilled nursing facilities. Rehabilitation therapy consists of delivering prescribed physical, occupational and speech therapy services to our patients and residents. We generally staff these facilities with our own employees and believe that this integrated approach is critical to achieving successful patient outcomes. We believe our integrated approach enhances our ability to identify and provide better treatment options to our patients and residents and their physicians, and that hospitals and physicians recognize the value of this approach.

        Three of our other skilled nursing facilities are located on larger continuing care campuses, where other companies operate the assisted living and other campus services. We continue to actively seek quality assisted living providers with whom to associate in operating the skilled nursing component of their continuing care campuses.

        Assisted Living Facilities.    In addition to our core skilled nursing business, we offer assisted living services at seven facilities in California, Arizona, Texas and Utah. Our assisted living facilities provide

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residential accommodations, activities, meals, security, housekeeping and assistance in the activities of daily living to seniors and others who are independent or who require some support, but do not require the level of care provided in a skilled nursing facility. Three of these assisted living facilities are stand-alone facilities, while four others are located on campuses with our skilled nursing facilities. During the year ended December 31, 2006 and the three months ended March 31, 2007, assisted living services accounted for approximately 3% of our total revenue. As of July 20, 2007, we had 576 licensed assisted living beds in 454 assisted living units. In one of our assisted living facilities, we also have 84 independent living units.

Payor Sources

        Total Revenue by Payor Sources.    We derive revenue primarily from the Medicaid and Medicare programs, private pay patients and managed care payors. Medicaid typically covers patients that require standard room and board services, and provides reimbursement rates that are generally lower than rates earned from other sources. We monitor our quality mix, which is the percentage of non-Medicaid revenue from each of our facilities, to measure the level of more attractive reimbursements that we receive across each of our business units. We intend to continue to focus on enhancing our care offerings to accommodate more high acuity patients.

        The following table sets forth the payor sources of our total revenue for the periods indicated:

	Year Ended December 31,						Three Months Ended March 31,
	2004		2005		2006		2006		2007
	(in thousands)
Payor Sources for All Facilities:
Medicare	$	72,301	$	96,208	$	117,511	$	28,311	$	30,130
Managed care		25,172		33,484		44,487		10,436		12,705
Private and other payors(1)		35,942		39,831		45,312		10,330		12,502
Medicaid		111,121		131,327		151,264		34,275		42,641
Total revenue	$	244,536	$	300,850	$	358,574	$	83,352	$	97,978

(1)

Includes revenue from our assisted living facilities.

        Payor Sources as a Percentage of Skilled Nursing Services.    We use both our skilled mix and quality mix as measures of the quality of reimbursements we receive at our skilled nursing facilities over various periods. The following table sets forth our percentage of skilled nursing patient days by payor source:

								Three Months Ended March 31,
Percentage of Skilled Nursing Days:		Year Ended December 31,
		2004		2005		2006		2006		2007
Medicare		12.2	%	14.3	%	15.0	%	15.8	%	14.2	%
Managed care		7.2		8.1		9.3		9.6		9.5
	Skilled mix	19.4		22.4		24.3		25.4		23.7
Private and other payors		14.1		13.6		13.1		13.2		13.0
	Quality mix	33.5		36.0		37.4		38.6		36.7
Medicaid		66.5		64.0		62.6		61.4		63.3
Total skilled nursing		100.0	%	100.0	%	100.0	%	100.0	%	100.0	%

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Labor

        The operation of our skilled nursing and assisted living facilities requires a large number of highly skilled healthcare professionals and support staff. At March 31, 2007, we had approximately 5,323 full-time equivalent employees. For the three months ended March 31, 2007, approximately 66% of our total cost of services was payroll related. Periodically, market forces, which vary by region, require that we increase wages in excess of general inflation or in excess of increases in the reimbursement rates we receive. We believe that we staff appropriately, focusing primarily on the acuity level and day-to-day needs of our patients and residents. In most of the states where we operate, our skilled nursing facilities are subject to state mandated minimum staffing ratios, so our ability to reduce costs by decreasing staff, notwithstanding decreases in acuity or need, is limited. We seek to manage our labor costs by improving staff retention, improving operating efficiencies, maintaining competitive wage rates and benefits and reducing reliance on overtime compensation and temporary nursing agency services.

        The healthcare industry as a whole has been experiencing shortages of qualified professional clinical staff. We believe that our ability to attract and retain qualified professional clinical staff stems from our ability to offer attractive wage and benefits packages, a high level of employee training, an empowered culture that provides incentives for individual efforts and a quality work environment.

Customers

        No individual patient accounts for a significant portion of our revenue. We do not expect that the loss of a single patient would have a material adverse effect on our business, results of operations or financial condition. However, some managed care organizations serve as referral and payor sources for multiple patients in specific facilities, and the loss of our relationship with a significant managed care client could have a material adverse effect on the business of one or more of our facilities, and consequently on us.

Employees

        At March 31, 2007, we had approximately 5,323 full-time equivalent employees, of which approximately 59 were general and administrative personnel employed by our Service Center and the remaining employees were employed by our operating subsidiaries. In 2002, approximately 60 employees at one of our facilities voted to accept union representation. We are currently involved in collective bargaining with this union, but have not yet consummated a collective bargaining agreement. With the exception of this facility, to our knowledge the staff at our facilities that have been approached to unionize have rejected union organizing efforts. We consider our relationship with our employees to be good and have never experienced a work stoppage.

Risk Management

        We have developed a risk management program designed to stabilize our insurance and professional liability costs. As one element of this program, where state law permits, we have included an arbitration agreement in our standard admission packet at each of our facilities under which, upon admission, patients and residents are asked to execute an agreement that requires disputes to be arbitrated prior to filing a lawsuit. We believe that this has reduced our liability exposure to the extent that these agreements have been executed. We have also established an incident reporting process that involves monthly follow-up with our facility administrators to monitor the progress of claims and losses. We believe that our emphasis on providing high-quality care and our attention to monitoring quality of care indicators have also helped to reduce our liability exposure.

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Insurance

        We maintain insurance for general and professional liability, workers compensation, employment practices liability, employee benefits liability, property, casualty, directors and officers liability, patient trust surety bonds, crime, boiler and machinery, automobile, and commercial property and casualty insurance. In certain locations, we also maintain limited coverage for earthquakes, floods and other differences in condition.

        Our professional and general liability insurance policy has a self-insured retention ("SIR") per claim, plus a one-time corridor deductible. Our SIR is separately insured through our wholly-owned offshore captive insurer, Standardbearer. The reserves and funding of Standardbearer are established and reviewed annually, based upon an independent actuarial analysis of expected liabilities on an undiscounted basis, including incurred but not reported ("IBNR") losses, based upon the available information on the valuation date. The financial statements of Standardbearer are independently audited on an annual basis and have been included in our consolidated financial statements.

        We maintain workers compensation coverage as statutorily required. In Texas, we have elected non-subscriber status for workers compensation claims, and are directly liable for work-related injury claims asserted by our employees. In California, we self-insure the first $1.0 million for each workers compensation claim. Above this $1.0 million per claim self-insurance, we maintain excess coverage through a traditional insurer. Our $1.0 million per claim self-insured retention is insured through our offshore captive insurer, Standardbearer. The reserves and funding of Standardbearer are established annually, based upon independent actuarial analyses, including IBNR losses, based upon the available information on the valuation date. We also carry third-party workers compensation insurance coverage in Arizona, Utah and Idaho, with no deductible. In Washington, we participate in the state-operated workers compensation program.

Environmental Matters

        Our business is subject to a variety of federal, state and local environmental laws and regulations. As a healthcare provider, we face regulatory requirements in areas of air and water quality control, medical and low-level radioactive waste management and disposal, asbestos management, response to mold and lead-based paint in our facilities and employee safety.

        As an owner or operator of our facilities, we also may be required to investigate and remediate hazardous substances that are located on and/or under the property, including any such substances that may have migrated off, or may have been discharged or transported from the property. Part of our operations involves the handling, use, storage, transportation, disposal and discharge of medical, biological, infectious, toxic, flammable and other hazardous materials, wastes, pollutants or contaminants. In addition, we are sometimes unable to determine with certainty whether prior uses of our facilities and properties or surrounding properties may have produced continuing environmental contamination or noncompliance, particularly where the timing or cost of making such determinations is not deemed cost-effective. These activities, as well as the possible presence of such materials in, on and under our properties, may result in damage to individuals, property or the environment; may interrupt operations or increase costs; may result in legal liability, damages, injunctions or fines; may result in investigations, administrative proceedings, penalties or other governmental agency actions; and may not be covered by insurance.

        We believe that we are in material compliance with applicable environmental and occupational health and safety requirements. However, we cannot assure you that we will not encounter environmental liabilities in the future, and such liabilities may result in material adverse consequences to our operations or financial condition.

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Legal Proceedings

        We operate in a regulated and litigious industry. As a result, various lawsuits, claims and legal and regulatory proceedings have been instituted or asserted against us. In particular, on June 5, 2006, a complaint was filed against us in the Superior Court of the State of California for the County of Los Angeles, purportedly on behalf of the United States, claiming that we violated the Medicare Secondary Payer Act. In the complaint, the plaintiff alleged that we have inappropriately received and retained reimbursement from Medicare for treatment given to certain unidentified patients and residents of our facilities whose injuries were caused by us as a result of unidentified and unadjudicated incidents of medical malpractice. The plaintiff in this action is seeking damages of twice the amount that we were allegedly obligated to pay or reimburse to Medicare in connection with the treatment in question under the Medicare Secondary Payer Act, plus interest, together with plaintiff's costs and fees, including attorneys' fees. The plaintiff's case was dismissed in our favor by the trial court, and the dismissal is currently on appeal.

        We also have been, and continue to be, subject to claims and lawsuits in the ordinary course of business, including potential claims related to care and treatment provided at our facilities, as well as employment-related claims. Although the results of these claims and lawsuits cannot be predicted with certainty, we believe that the ultimate resolution of these ordinary course claims and lawsuits will not have a material adverse effect on our business, financial condition or results of operations.

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MANAGEMENT

Executive Officers and Directors

        The following table provides information with respect to our directors, executive officers and key employees as of June 30, 2007.

Name	Age	Position(s)
Christopher R. Christensen(4)	38	President, Chief Executive Officer and Director of The Ensign Group, Inc. and President, The Flagstone Group, Inc.
Alan J. Norman	56	Chief Financial Officer
Gregory K. Stapley	47	Vice President, General Counsel and Secretary
David M. Sedgwick	32	Vice President of Organizational Development
Cory R. Monette	38	President, Northern Pioneer Healthcare, Inc.
Barry R. Port	33	President, Keystone Care, Inc.
John P. Albrechtsen	30	President, Touchstone Care, Inc.
Michael C. Dalton	31	President, Bandera Healthcare, Inc.
Roy E. Christensen(4)	73	Chairman of the Board
Charles M. Blalack(2)(3)	80	Director
Antoinette T. Hubenette(1)(2)(3)(4)	58	Director
Thomas A. Maloof (1)(2)(3)	55	Director

(1)

Member of the Audit Committee

(2)

Member of the Compensation Committee

(3)

Member of the Nomination and Corporate Governance Committee

(4)

Member of the Quality Assurance and Compliance Committee

Christopher R. Christensen has served as our President since 1999, and he has served as our Chief Executive Officer since April 2006. He has been temporarily serving as the President of our subsidiary, The Flagstone Group, Inc., since May 2007, which oversees the operations of 15 facilities in Southern California. He has served as a member of our board of directors since 1999, and currently sits on the board of director's quality assurance and compliance committee. He previously served as our Chief Operating Officer from 1999 to April 2006. Prior to joining Ensign, Mr. Christensen served as Chief Operating Officer of Covenant Care, Inc., a California-based provider of long-term care. Mr. Christensen has presided over The Ensign Group's operations and growth since our inception in 1999.

Alan J. Norman has served as our Chief Financial Officer since May 2003, and previously served as our Vice President of Finance since joining Ensign in 2000. Prior to joining Ensign, he served as the Financial Director and Business Development Manager for Andial Corporation, an international wholesaler and retailer of specialty auto parts. Before that, he spent ten years in the healthcare field, where he was the Corporate Controller for Abbey Healthcare Group, a healthcare company providing equipment and services to the home. He has also served as Chief Financial Officer for a private commercial real estate development company.

        Gregory K. Stapley has served as our Vice President and General Counsel since joining Ensign shortly after our inception in 1999, and subsequently also became our Secretary in January 2006. Mr. Stapley previously served as General Counsel for the Sedgwick Companies, an Orange

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County-based manufacturer, wholesaler and retailer with 192 retail outlets across the United States, where he was responsible for all of that company's legal affairs, site acquisitions and developer relations. Prior to that, Mr. Stapley was partner with the Phoenix law firm of Jennings, Strouss & Salmon PLC, where his practice emphasized real estate and business transactions, and federal, state and local government relations.

David M. Sedgwick has served as our Vice President of Organizational Development since December 2006. Mr. Sedgwick joined Ensign in 2001, and from September 2002 to December 2006, he served as an administrator at several of our operating facilities. As Vice President of Organizational Development, Mr. Sedgwick is responsible for Ensign University, our training and professional growth program, and a key element of our talent-driven management approach. Mr. Sedgwick also oversees human resources and related functions, and is currently leading a number of employee and customer satisfaction and quality initiatives within our organization.

        Cory R. Monette has served as the President of our subsidiary, Northern Pioneer Healthcare, Inc., which oversees the operations of nine skilled nursing facilities in Northern California and Washington, since February 2006. He previously served as our Operations Resource from October 2004 to February 2006. From 2001 to October 2004, he served as an administrator for one of our facilities. Prior to joining Ensign, he served as administrator and senior administrator from 1992 to 2001 with Life Care Centers of America, a provider of skilled nursing services.

        Barry R. Port has served as the President of our subsidiary, Keystone Care, Inc., which oversees the operations of ten facilities in Texas, since March 2006. Mr. Port also currently provides oversight and guidance to our New Market CEO, who is responsible for four facilities in Utah and one facility in Idaho. He previously served as the Executive Director and in other capacities at our Desert Sky Health and Rehabilitation Center skilled nursing and assisted living campus in Glendale, Arizona, from March 2004 to March 2006. Before joining Ensign in March 2004, Mr. Port served as Manager of Corporate Agreements for Sprint Corporation from 2001 to March 2004.

John P. Albrechtsen has served as the President of our subsidiary, Touchstone Care, Inc., which oversees the operations of ten facilities in Southern California, since January 2006. He previously served as the administrator of one of our facilities from January 2004 to January 2006. Prior to serving as an administrator, he served as an administrator-in-training at one of our facilities from September 2003 to January 2004. He worked for Baldwin Park Unified School District from 2001 to September 2003.

Michael C. Dalton has served as the President of our subsidiary, Bandera Healthcare, Inc., which oversees the operations of 12 facilities in Arizona, since October 2006. Mr. Dalton joined Ensign in 2001, and served as Executive Director of two of our facilities in Southern California from July 2002 to December 2005. Mr. Dalton is a certified public accountant and worked as an associate and senior associate at KPMG LLP from 1999 to 2001. While at KPMG, his practice areas included providing auditing services for acute hospitals, long-term care facilities and physicians groups.

        Roy E. Christensen has served as our Chairman of the board of directors since 1999 and currently sits on the board of director's quality assurance and compliance committee. He served as our Chief Executive Officer from 1999 to April 2006. He is a 40-year veteran of the long-term care industry, and was founder and Chairman of both Beverly Enterprises, Inc., a healthcare company, and GranCare, Inc. (which was later merged into Mariner Post-Acute Network, Inc.), a healthcare company. In 1994, he founded Covenant Care, Inc., a successful long-term care company, and served as its Chairman and Chief Executive Officer from 1994 to 1997. He was Chairman of GranCare, Inc. from 1988 to 1993, and Chief Executive Officer of GranCare, Inc. from 1988 to 1991. He was a member of President Nixon's Healthcare Advisory Task Force on Medicare and Medicaid, and spent four years as a member of the Secretary of Health, Education and Welfare's Advisory Task Force during the Nixon Administration.

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        Charles M. Blalack has served as a Director since 2001. He is currently Chairman of the board of director's compensation committee, and is a member of the board of directors' nomination and corporate governance committee. Mr. Blalack has previously served on the board of directors of several public companies including Advanced Micro Devices, a semiconductor company. He founded and has been working at Blalack & Company, a registered investment advisor, since 1993. Mr. Blalack is a managing member of Ensign Group Investments, L.L.C., a limited liability company, which currently holds 100% of our issued and outstanding Series A preferred stock which, upon the closing of this offering, will be converted into 2,741,180 shares of our common stock. He serves on our board of directors pursuant to a Voting Agreement dated June 6, 2000 between Ensign Group Investments, L.L.C. and our founding stockholders, which will terminate automatically upon the closing of this offering.

        Antoinette T. Hubenette, M.D. has served as a Director since June 2003. She currently serves as Chairperson of the board of directors' quality assurance and compliance committee, and also serves on the board of directors' audit, compensation and nomination and corporate governance committees. Dr. Hubenette is a practicing physician and the former President of Cedars-Sinai Medical Group in Beverly Hills, California. She has been on the staff at Cedars-Sinai Medical Center since 1982, and is also on the staff of Midway Hospital Medical Center, both in the Los Angeles area. She has served as a director of Mercantile National Bank since 1998, and she has served on the board of directors of Cedars-Sinai Medical Care Foundation and GranCare, Inc. (which was later merged into Mariner Post-Acute Network, Inc.). She is a member of numerous medical associations and organizations.

        Thomas A. Maloof has served as a Director since 2000. He currently serves as Chairman of the board of directors' audit committee, and also serves on the board of directors' compensation and nomination and corporate governance committees. He served as Chief Financial Officer of Hospitality Marketing Concepts from 2000 to August 2005, and prior to that he served as President of Alfigen, Inc., a genetic services provider. He is currently serving as a director of PC Mall, Inc., a direct marketing company, and Farmer Brothers Co., a manufacturer and distributor of coffee and spices, both of which are listed on the NASDAQ Global Market.

        Christopher Christensen is the son of Roy Christensen, and the cousin of John Albrechtsen. David Sedgwick is the brother-in-law of Gregory Stapley. John Albrechtsen is the nephew of Roy Christensen and the cousin of Christopher Christensen. Roy Christensen is the father of Christopher Christensen and the uncle of John Albrechtsen.

Board of Directors

        Our board of directors currently consists of five members. We have determined that Messrs. Thomas A. Maloof and Charles M. Blalack and Dr. Antoinette T. Hubenette are independent directors as defined in the NASDAQ Stock Market LLC listing standards. All directors hold office until their successors have been elected and qualified or until their earlier death, resignation or removal. Effective upon the closing of this offering, we will divide the terms of office of the directors into three classes:

•

Class I, whose term will expire at the annual meeting of stockholders to be held in 2008;



•

Class II, whose term will expire at the annual meeting of stockholders to be held in 2009; and



•

Class III, whose term will expire at the annual meeting of stockholders to be held in 2010.

        Upon the closing of this offering, Class I shall consist of Messrs.                         and                         , Class II shall consist of Messrs.                         and                                     , and Class III shall consist of Messrs.                         and                         . At each annual meeting of stockholders after the initial classification, the successors to directors whose terms will then expire will serve from the time of election and qualification until the third annual meeting following election and until their successors

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are duly elected and qualified. A resolution of the board of directors may change the authorized number of directors, and the affirmative vote of at least 66²/3% of our outstanding voting stock may amend the provision of our amended and restated bylaws establishing the number of directors. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one third of the directors. This classification of the board of directors may have the effect of delaying or preventing changes in control or management of our company.

Board Committees

        Our board of directors has an audit committee, a compensation committee, a nomination and corporate governance committee and a quality assurance and compliance committee. Each committee has a written charter. Upon the effectiveness of the registration statement of which this prospectus forms a part, copies of each charter will be posted on our web site at http://www.ensigngroup.net under the Investor Relations section. The inclusion of our web site address does not include or incorporate by reference any of the information on our web site into this prospectus.

        Compensation Committee.    Our compensation committee currently consists of Messrs. Thomas A. Maloof and Charles M. Blalack and Dr. Antoinette T. Hubenette. Mr. Blalack serves as chairman of the compensation committee. All members of the compensation committee are independent directors, as defined in the NASDAQ Stock Market listing standards. The primary functions of this committee include:

•

developing and reviewing policies relating to compensation and benefits;



•

determining or recommending to the board of directors the cash and non-cash compensation of our executive officers;



•

evaluating the performance of our executive officers and overseeing management succession planning;



•

administering or making recommendations to the board of directors with respect to the administration of our equity-based and other incentive compensation plans; and



•

overseeing the preparation of the Compensation Disclosure and Analysis and the related Compensation Committee Report for inclusion in our annual proxy statement.

        Audit Committee.    Our audit committee consists of Mr. Thomas A. Maloof and Dr. Antoinette T. Hubenette. Mr. Maloof serves as chairman of the audit committee. Mr. Maloof and Dr. Hubenette are independent directors, as defined in the NASDAQ Stock Market listing standards and Rule 10A-3 of the Securities Exchange Act of 1934, as amended. The audit committee will consist of three independent directors within 12 months after the consummation of this offering. Each member of our audit committee can read and has an understanding of fundamental financial statements. Our board of directors has determined that Mr. Maloof qualifies as an "audit committee financial expert" as that term is defined in the rules and regulations established by the Securities and Exchange Commission. This designation is a disclosure requirement of the Securities and Exchange Commission related to Mr. Maloof's experience and understanding with respect to certain accounting and auditing matters. The designation does not impose on Mr. Maloof any duties, obligations or liability that are greater than those generally imposed on him as a member of our audit committee and our board of directors, and his designation as an audit committee financial expert pursuant to this Securities and Exchange Commission requirement does not affect the duties, obligations or liability of any other member of our audit committee or board of directors. The primary functions of this committee include overseeing:

•

the conduct of our financial reporting process and the integrity of our financial statements and other financial information provided by us to the public or any governmental or regulatory body;

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•

the functioning of our internal controls;



•

procedures for the receipt, retention and treatment of complaints regarding accounting, internal accounting controls or auditing matters, and for the confidential, anonymous submission by our employees of concerns regarding questionable accounting or auditing matters;



•

the approval of our transactions with related persons;



•

pre-approving permissible non-audit services to be performed by our independent accountants, if any, and the fees to be paid in connection therewith;



•

the engagement, replacement, compensation, qualifications, independence and performance of our independent auditors, and the conduct of the annual independent audit of our financial statements; and



•

the portions of our Code of Ethics and Business Conduct that relate to the integrity of our financial reports.

        Both representatives of our independent registered public accounting firm and internal financial personnel regularly meet privately with the audit committee and have unrestricted access to this committee.

        Nomination and Corporate Governance Committee.    Our nomination and corporate governance committee consists of Messrs. Thomas A. Maloof and Charles M. Blalack and Dr. Antoinette T. Hubenette.                        will serve as the chairman of the nomination and corporate governance committee. All members of the nomination and corporate governance committee are independent directors, as defined in the NASDAQ Stock Market listing standards. The primary functions of this committee include:

•

establishing the minimum qualifications for a director nominee, including the qualities and skills that members of the board of directors are expected to possess;



•

identifying and evaluating individuals qualified to become members of the board of directors, consistent with criteria approved by the board and the nomination and corporate governance committee;



•

selecting, or recommending that the board of directors select, the director nominees for election at the next annual meeting of stockholders, or to fill vacancies on the board of directors occurring between annual meetings of stockholders;



•

management succession planning; and



•

developing, recommending to the board of directors, and assessing corporate governance policies for us.

        Quality Assurance and Compliance Committee.    Our quality assurance and compliance committee is comprised of Messrs. Roy E. Christensen and Christopher R. Christensen and Dr. Antoinette T. Hubenette. Dr. Hubenette currently serves as the chairperson of this committee. The functions of this committee include:

•

promulgating, and updating from time to time as appropriate, a written corporate compliance program that substantially conforms to the Office of the Inspector General Program Guidance for Nursing Facilities, including written policies, procedures and standards of conduct, as well as disciplinary guidelines to assist officers and employees charged with direct enforcement responsibility;



•

designating a corporate compliance officer, and functioning as the compliance committee to which such compliance officer reports;

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•

ensuring that means exist for the delivery of appropriate compliance training and education to the officers and employees of our several subsidiaries;



•

establishing lines of communication for escalating compliance and quality control issues to the quality assurance and compliance committee and the board of directors;



•

establishing a system for internal monitoring and auditing of compliance and quality control issues; and



•

causing our officers to respond, as appropriate, to compliance and quality control issues and take effective corrective action.

Compensation Committee Interlocks and Insider Participation

        Our compensation committee currently consists of Messrs. Thomas A. Maloof and Charles M. Blalack and Dr. Antoinette T. Hubenette. None of the members of our compensation committee at any time has been one of our officers or employees. None of our executive officers currently serves, or during 2006 has served, as a member of the board of directors or compensation committee of any entity that has one or more executive officers on our board of directors or compensation committee. Mr. Blalack has a relationship with us that is disclosed in "Transactions with Related Persons", which is also described below.

        On June 6, 2000, we entered into an Investor Rights Agreement with the purchaser of our outstanding preferred stock, Ensign Group Investments, L.L.C., and our founders, including Roy E. Christensen, Christopher R. Christensen, Douglas M. Easton, Gregory K. Stapley, J. Richard Toolson, V. Jay Brady and Charles M. Blalack. The preferred stock held by Ensign Group Investments, L.L.C. will convert into 2,741,180 shares of common stock upon the consummation of this offering, whereupon Ensign Group Investments, L.L.C. will be entitled to rights with respect to the registration of its shares under the Securities Act. Ensign Group Investments, L.L.C. is provided certain rights to demand registration of the shares of common stock issuable upon conversion of its preferred stock, and to participate in certain registrations of our common stock that we may decide to do, from time to time. These rights terminate upon the earlier of three years after this offering or such time as all of the shares of registrable securities may be sold under Rule 144 under the Securities Act during any three-month period. One of our directors, Charles M. Blalack, is a manager of Ensign Group Investments, L.L.C. and may be deemed the beneficial owner of our capital stock held by Ensign Group Investments L.L.C. Mr. Blalack serves on our board of directors pursuant to a Voting Agreement, dated June 6, 2000, between Ensign Group Investments, L.L.C. and our founding stockholders, which will terminate automatically upon the closing of this offering. Ensign Group Investments, L.L.C. owns more than 5% of our capital stock.

COMPENSATION DISCUSSION AND ANALYSIS

        We believe that compensation paid to our executive officers should be closely aligned with our performance and the performance of each individual executive officer on both a short-term and a long-term basis, should be based upon the value each executive officer provides to our company, and designed to assist us in attracting and retaining the best possible executive talent, which we believe is critical to our long-term success. Because we believe that compensation should be structured to ensure that a significant portion of compensation earned by executives will be directly related to factors that directly and indirectly influence stockholder value, the "at risk" compensation of our executive officers generally constitutes a large portion of their total compensation potential. In addition, commensurate with our belief that those of our employees who act like owners should be owners, many of our executive officers have a significant level of stock ownership, which we believe aligns the incentives of the executive officers with the priorities of our stockholders. To that end, it is the view of our board of

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directors and compensation committee that the total compensation program for executive officers should consist of the following:

•

Base salary;



•

Annual and other short-term cash bonuses;



•

Long-term incentive compensation; and



•

Certain other benefits.

        In establishing our executive compensation packages, the compensation committee has historically reviewed compensation packages of executives of companies in the skilled nursing and assisted living industries based on publicly available information. For 2007 and beyond, our compensation committee may engage a compensation consultant to assist it in assessing industry comparability and competitiveness of our executive compensation packages through a more formal benchmarking process, but has not engaged consultants in the past.

Principal Elements of Executive Compensation

        Base Salary.    We believe it is important to pay our executives salaries within a competitive market range in order to attract and retain highly talented executives. Although historically we have not set executive salaries based upon any particular benchmarks, we may from time to time generally review relevant market data to assist us in our compensation decision process. We recently compared the compensation of some of the public companies in the skilled nursing and assisted living industries to the compensation of our executives. We believe that our executives' compensation is comparable to other executives' compensation in these industries. Each of our executive's base salary is generally determined based upon job responsibilities, individual experience and the value the executive provides to our company. The compensation committee considered each of these factors in determining the compensation each executive would be paid in 2006. The decision, if any, to materially increase or decrease an executive's base salary in subsequent years will likely be based upon these same factors. Our compensation committee makes decisions regarding base salary at the time the executive is hired and makes decisions regarding any changes to base salary on an annual basis.

        Annual Cash Bonuses.    We establish an executive incentive program each year, pursuant to which certain executives may earn annual bonuses based upon our performance. In the first quarter of each year, our compensation committee identifies the plan's participants for the year and establishes an objective formula by which the amount, if any, of the plan's bonus pool will be determined. This formula is based upon annual net income before taxes, and the bonus pool has not historically been subject to a cap. In the first quarter of the subsequent year, our compensation committee subjectively allocates the bonus pool among the individual executives based upon the recommendations of our Chief Executive Officer and the compensation committee's perceptions of each participating executive's contribution to both our clinical and financial performance during the preceding year, and value to the organization going forward. The financial measure that our compensation committee considers is our annual net income before taxes. The clinical measures that our compensation committee considers include our success in achieving positive survey results and the extent of positive patient and resident feedback. Our compensation committee also reviews and considers feedback from other employees regarding the executive's performance. Our compensation committee exercises discretion in the allocation of the bonus pool among the individual executives and has, at times, awarded bonuses that, collectively, were less than the bonus pool resulting from the predetermined formula. For example, for the fiscal year ended 2006, the compensation committee did not establish a cap on the bonus pool, and based upon the predetermined formula the bonus pool was $1.735 million, however, only $1.615 million was actually awarded to plan participants. Bonuses for 2006 performance were allocated to the named executive officers who participated in the executive incentive program as follows: Roy Christensen,

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$150,000; Christopher Christensen, $500,000; Alan Norman, $350,000; Gregory Stapley, $600,000; and David Sedgwick, $15,000. Rather than pay the balance of the 2006 bonus pool to plan participants, the compensation committee elected to pay a total of $120,000 from the pool to other employees who made significant contributions to our financial and clinical performance during 2006. Each year, our compensation committee reviews our financial performance goals and may adjust the bonus pool formula at its discretion to better align the amount available for annual executive bonuses with our objectives. Historically, the compensation committee has increased the level of annual net income before taxes that must be achieved in order to create the same bonus pool as the preceding year. In addition, for 2007, the compensation committee has capped the executive bonus pool at $2.2 million. The allocation of this bonus pool to the participating executives remains discretionary based upon the compensation committee's determination of each participating executive's contribution to our annual performance and value to the organization going forward.

        In addition to the annual bonus opportunity described above, in 2005 and 2006 our President and Chief Executive Officer were eligible to earn an additional annual cash bonus equal to one-half of one percent of our net income before taxes. Although our compensation committee had discretion to award these additional bonuses, it has historically awarded such bonuses if the executive's performance was satisfactory. For 2005, our compensation committee awarded such additional bonuses in the amount of $142,500 to each of Roy Christensen and Christopher Christensen, and, for 2006, awarded such additional bonuses in the amount of $183,368 to each of Roy Christensen and Christopher Christensen. We have eliminated this bonus for 2007.

        Long-Term Incentive Compensation.    We believe that long-term performance is achieved through an ownership culture. Accordingly, we encourage long-term performance by our executives and other key personnel throughout the organization through the use of stock-based awards and, to this end, our board of directors has in the past administered our option plans liberally in terms of frequency and number of stock option grants. We have adopted the 2001 Stock Option, Deferred Stock and Restricted Stock Plan, the 2005 Stock Incentive Plan and, effective upon effectiveness of the registration statement relating to this offering, the 2007 Omnibus Incentive Plan. These plans permit the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, performance awards, and other stock-based awards. Historically, we have generally issued stock options, which may be exercised for shares of restricted stock prior to the vesting of the stock option. Such shares of restricted stock are subject to repurchase by us in the event the employee's employment is terminated for any reason prior to the vesting of such shares.

        Although we do not have formal stock ownership guidelines, in order to preserve the linkage between the interests of executives and other key personnel and those of stockholders, we focus on granting stock options to those executives and others who do not already have a significant level of stock ownership. Although historically we have not granted stock options to Roy Christensen, Christopher Christensen or Gregory Stapley, because each of them already has a significant level of stock ownership, we may decide to do so in the future if we believe it is necessary for incentive and retention purposes. Our executives who have significant levels of stock ownership are not permitted to hedge the economic risk of such ownership. We intend to continue to provide long-term awards through the grant of stock options, which will vest based on continued employment, and we may decide to grant other awards such as stock appreciation rights, restricted stock, restricted stock units, performance awards, and other stock-based awards. Early in our history, we made a very limited number of restricted stock grants, but we have not done so since 2001 and we do not have any policies for allocating compensation to different forms of equity awards. We also do not have any policies for allocating compensation between long-term and currently paid out compensation or between cash and non-cash compensation or among different forms of non-cash compensation. In the future, our decision to allocate compensation to one form over another may be driven by considerations regarding accounting impact.

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        Except with respect to grants to our directors, the stock options that we grant generally vest as to 20% of the shares of common stock underlying the option on each anniversary of the grant date. In addition, these stock options generally have a maximum term of ten years. For a further description of the terms of these stock options, see "Compensation Discussion and Analysis—Employee Benefit Plans" below. The grant date of our stock options is generally the date our board of directors meets to approve such stock option grants. Our board of directors historically has approved stock option grants at regularly scheduled meetings. Our board of directors and compensation committee intend to continue this practice of approving the majority of stock-based awards at regularly scheduled meetings on a quarterly basis, unless earlier approval is required for a new-hire inducement grant, regardless of whether or not our board of directors or compensation committee knows material non-public information on such date. The exercise price of our stock options has been the fair market value of our common stock on the date of grant as determined by our board of directors, which historically was based initially upon formulas developed by management and more recently upon third-party valuations. After the closing of the offering described in this prospectus, the fair market value of our common stock will be the closing price of our common stock on the NASDAQ Global Market on the date of grant. Prior to the exercise of an option, the holder has no rights as a stockholder with respect to the shares of common stock underlying the option, including voting rights and the right to receive dividends or dividend equivalents.

        Because of his large equity stake, we have never granted stock options to our President and Chief Executive Officer, Christopher Christensen. Mr. Christensen historically has made recommendations to our board of directors regarding the amount of stock options and other compensation to grant to our other executives based upon his assessment of their performance, and may continue to do so in the future. Our executive officers, however, do not have any role in determining the timing of our stock option grants.

        Although we do not have any formal policy for determining the amount of stock options or the timing of our stock option grants, we have historically granted stock options or restricted stock to high-performing employees (i) in recognition of their individual achievements and contributions to our company, and (ii) in anticipation of their future service and achievements.

        Other Compensation.    Our executives are eligible to receive the same benefits that are available to all employees. In addition, we pay the premiums to provide life insurance equal to each executive's annual salary and the premiums to provide accidental death and dismemberment insurance. For 2006, Christopher Christensen received an automobile allowance of $15,900.

Principal Elements of Compensation for Presidents of Our Five Portfolio Companies

        Base Salary.    We believe that while it is important for us to compensate the presidents of our portfolio companies competitively, we can encourage faster and more meaningful personal growth in these key leaders and better performance in their separate companies by keeping base salaries relatively low, while offering these executives a more entrepreneurial and professionally motivating experience through significant cash and stock incentives. The level of each president's base salary is generally determined based upon our performance, the president's performance, the respective portfolio company's overall performance, and considerations such as the cost of living in the markets they serve, among other things. Our management exercises discretion in deciding how to reflect these items in setting base salary. Material increases or decreases in a president's base salary are based upon these same factors, with decisions regarding any changes to base salary generally made on an annual basis.

        Short-Term Cash Bonuses.    Presidents of our portfolio companies may earn cash bonuses by meeting target clinical and financial measurements for their respective portfolio companies. They are eligible to earn short-term cash bonuses, the amount of which is established pursuant to a formula

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based upon their company's net income before taxes. The level of these bonuses increases for each tier of the target milestones, and such bonuses are not subject to a cap. Each year the formula is based upon exceeding the most successful year to date, so it becomes increasingly more difficult for presidents to earn the same bonus each year. The bonuses are determined based upon management's perception of each president's contribution to the achievement of clinical and financial objectives during the preceding year at their portfolio company, and the value to the portfolio company going forward. The financial objective that we consider is the president's contribution to their portfolio company's annual net income before taxes. The clinical measures that management considers include factors such as the president's contribution to achieving positive survey results, and positive patient and resident feedback. Management also reviews and considers feedback from other employees regarding the president's performance. Although these bonuses historically have been earned on a quarterly basis, beginning in 2007 we transitioned to an annual bonus structure for these presidents. Management has also elected to recognize the efforts of outstanding performers in the group with supplemental cash bonuses where merited, and these bonuses are discretionary. For their performance during the 2006 fiscal year, we paid the five presidents of our five principal portfolio companies an aggregate of approximately $0.6 million in cash bonuses.

        Long-Term Incentive Compensation.    Two of the main objectives of placing presidents over separate portfolio companies were to enhance our ownership culture and to preserve and extend the entrepreneurial spirit that we believe has been crucial to our success to date. We encourage long-term performance by our presidents through the use of stock-based awards, and our board of directors has made significant stock option grants to these presidents. Each of these stock options may be exercised for shares of restricted stock prior to the vesting of the stock option. With some exceptions (such as in the event of death or disability), such shares of restricted stock are subject to repurchase by us in the event the president's employment is terminated for any reason prior to the vesting of such shares. Each of these stock options has a maximum term of ten years, and vests as to 20% of the shares of common stock underlying the option grant on each anniversary of the grant date, with an exercise price equal to the fair market value of our common stock as determined on the date of the grant.

        Other Compensation.    Our presidents are eligible to receive the same benefits that are available to all employees. With the exception of a small car allowance currently provided to three of our presidents and the payment of the car lease payments for two of our presidents, we do not have programs for providing perquisites or other personal benefits to presidents other than what is provided to a broad range of employees.

Principal Elements of Compensation for our Executive Directors

        We structure our executive director compensation program to reward our executive directors for our successful performance and each individual's contribution to that performance. Executive director compensation consists of a base salary, short-term cash bonuses and long-term equity incentive compensation. Generally, our executive directors are not considered executive officers. However, a portion of David Sedgwick's compensation for 2006 was earned by him while serving as an executive director. In addition to serving as the Vice President of Organization Development, he is serving as an executive director during portions of 2007.

        Base Salary.    Executive directors receive base salary for performing all of their leadership duties, which include managing one of our facilities and assisting other facilities in their geographic cluster. The amount of base salary is generally based upon individual experience and past performance as well as general market conditions. Base salary may be increased for executive directors who, among other things, achieve and continue to maintain certain clinical results, leadership performance or expertise.

        Short-Term Cash Bonuses.    Our executive team establishes the target bonus payments for executive directors based on the overall strategic goals of our organization as proposed by management and our

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board of directors. In addition, we have discretion to modify any bonuses earned as a result of not complying with applicable laws or regulations. Mr. Sedgwick earned his 2006 annual bonus pursuant to a formula based upon his facilities' and his cluster's EBITDAR (earnings before net interest expense, taxes, depreciation, amortization and facility rent—cost of services).

        Other Compensation.    In 2006, we granted Mr. Sedgwick options to purchase 32,500 shares of common stock in order to incentivize him. In addition, Mr. Sedgwick is eligible to receive the same benefits that are available to all employees. For 2006, Mr. Sedgwick also received an automobile allowance of $1,200.

Principal Elements of Director Compensation

        We do not compensate our directors other than for their service on our board of directors or its committees. Historically, including for fiscal year 2006, we have compensated our board members based upon what we considered to be fair compensation without considering compensation paid by other companies. Compensation for board and committee service is now partially based upon relevant market data that we obtain by reviewing director compensation by public companies in the skilled nursing and assisted living industries. Our board of directors considered this information in determining their compensation for 2007. Since our inception we have made only two stock option grants to our non-employee directors, which vested immediately upon the grant date. Our 2007 Omnibus Incentive Plan, however, contains an automatic option grant program for our directors. Pursuant to the automatic option grant program, non-employee directors will each receive options to purchase 12,000 shares of common stock at the beginning of their three-year terms, with a three-year vesting schedule. Directors elected to fill less than a three-year term will receive a pro rata grant that vests over their term. We do not intend to make any discretionary stock option grants to our directors.

Accounting and Tax Treatment of Compensation

        Internal Revenue Code Section 162(m) limits the amount that we may deduct for compensation paid to our chief executive officer and to each of our four most highly compensated officers to $1.0 million per person, unless certain exemption requirements are met. Exemptions to this deductibility limit may be made for various forms of performance-based compensation. In the past, annual cash compensation to our executive officers has not exceeded $1.0 million per person, so the compensation has been deductible. In addition to salary and bonus compensation, upon the exercise of stock options that are not treated as incentive stock options, the excess of the current market price over the option price, or option spread, is treated as compensation and accordingly, in any year, such exercise may cause an officer's total compensation to exceed $1.0 million. Under certain regulations, option spread compensation from options that meet certain requirements will not be subject to the $1.0 million cap on deductibility. While the compensation committee cannot predict how the deductibility limit may impact our compensation program in future years, the compensation committee intends to maintain an approach to executive compensation that strongly links pay to performance.

Executive Compensation

        The following table shows information regarding the compensation earned during the fiscal year ended December 31, 2006 by the individuals who served as our Chief Executive Officer during 2006, our Chief Financial Officer and our three other most highly compensated executive officers. The

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officers listed below will be collectively referred to as the "named executive officers" in this prospectus. We have not entered into any employment agreements with our named executive officers.

Summary Compensation Table

Name and Principal Position	Year	Salary($)	Bonus(1)($)	Option Awards(2)($)	Non-Equity Incentive Plan Compensation(3)($)	All Other Compensation($)		Total($)
Roy E. Christensen     Chairman of the Board(4)	2006	354,935	150,000	—	183,368	325	(5)	688,628
Christopher R. Christensen     Chief Executive Officer and President	2006	346,213	500,000	—	183,368	17,587	(6)	1,047,168
Alan J. Norman     Chief Financial Officer	2006	216,689	350,000	4,195		1,113	(7)	571,997
Gregory K. Stapley     Vice President and General Counsel	2006	296,631	600,000	—		1,525	(8)	898,156
David M. Sedgwick     Vice President of Organizational Development	2006	133,805	15,000	18,037	246,365	1,588	(9)	414,795
John P. Albrechtsen     President, Touchstone Care, Inc.	2006	164,687		42,785	176,755	11,629	(10)	395,856

(1)

The amounts shown in this column constitute the cash bonuses made to certain named executive officers. Roy Christensen, Christopher Christensen, Alan Norman, Gregory Stapley and David Sedgwick participated in our executive incentive program. These awards are discussed in further detail under the heading "Principal Elements of Executive Compensation" in the Compensation Discussion and Analysis section of this prospectus.

(2)

The amounts shown are the amounts of compensation cost recognized by us in fiscal year 2006 related to options to purchase common stock which were granted in fiscal year 2006, as a result of the adoption of SFAS 123R. These amounts disregard the estimated forfeiture rate which is considered when recognizing the SFAS 123R expense in the consolidated financial statements. For a discussion of valuation and forfeiture assumptions, see Note 12 to our consolidated financial statements.

(3)

John Albrechtsen participated in our bonus program for presidents of our portfolio companies. David Sedgwick participated in our executive director compensation program. In addition, Roy Christensen and Christopher Christensen each received a bonus of $183,368 awarded to our president and chief executive officer based on the attainment of certain pre-established performance criteria established by our compensation committee. These awards are all discussed in further detail under the headings "Principal Elements of Compensation for Presidents of Our Five Portfolio Companies", "Principal Elements of Executive Compensation" and "Principal Elements of Compensation for our Executive Directors" in the Compensation Discussion and Analysis section of this prospectus.

(4)

Roy Christensen was our Chief Executive Officer until April 2006.

(5)

Consists of term life insurance payments of $43, accidental death and dismemberment insurance payments of $7 and a matching contribution to The Ensign Group, Inc. 401(k) retirement plan of $275.

(6)

Consists of term life insurance payments of $42, accidental death and dismemberment insurance payments of $7, a matching contribution to The Ensign Group, Inc. 401(k) retirement plan of $1,638, and a car allowance of $15,900.

(7)

Consists of term life insurance payments of $26, accidental death and dismemberment insurance payments of $4 and a matching contribution to The Ensign Group, Inc. 401(k) retirement plan of $1,083.

(8)

Consists of term life insurance payments of $36, accidental death and dismemberment insurance payments of $6, and a matching contribution to The Ensign Group, Inc. 401(k) retirement program of $1,483.

(9)

Consists of term life insurance payments of $14, accidental death and dismemberment insurance payments of $2, a matching contribution to The Ensign Group, Inc. 401(k) retirement plan of $372 and a car allowance of $1,200.

(10)

Consists of term life insurance payments of $20, accidental death and dismemberment insurance payments of $3, a matching contribution to the Ensign Group, Inc. 401(k) retirement program of $1,523 and a car allowance of $10,083.

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Grants of Plan-Based Awards—2006

        The following table sets forth information regarding grants of plan-based awards made to our named executive officers during 2006.

						Estimated Future Payouts Under Equity Incentive Plan Awards
						All Other Option Awards: Number of Securities Underlying Options(#)
		Estimated Future Payouts Under Non-Equity Incentive Plan Awards
Name	Grant Date						Exercise or Base Price of Option Awards($/Sh)(7)	Grant Date Fair Value of Option Awards($)(1)	Closing Market Price on Grant Date ($/Sh)(8)
		Threshold($)	Target($)		Maximum($)
Roy E. Christensen Chairman of the Board			152,210	(2)
Christopher R. Christensen Chief Executive Officer and President			152,210	(2)
Alan J. Norman Chief Financial Officer	7/26/06					5,000(3)	7.50	48,450	15.09
Gregory K. Stapley Vice President and General Counsel
David M. Sedgwick Vice President of Organizational Development	7/26/06 7/26/06		0	(4)		11,000(5) 21,500(3)	7.50 7.50	106,590 208,335	15.09 15.09
John Albrechtsen President, Touchstone Care, Inc.	7/26/06 7/26/06		0	(6)		43,000(3) 8,000(5)	7.50 7.50	416,670 77,520	15.09 15.09

(1)

The amounts shown are the total fair value of the options awards related to options to purchase common stock which were granted in fiscal year 2006, as a result of the adoption of SFAS 123R. These amounts disregard the estimated forfeiture rate which is considered when recognizing the SFAS123R expense in the consolidated financial statements. For a discussion of valuation and forfeiture assumptions, see Note 12 to our consolidated financial statements.

(2)

For 2006 performance, our President and Chief Executive Officer could earn a bonus equal to one-half of one percent of our net income before taxes. Our compensation committee has discretion as to whether to award such bonus. This bonus plan does not provide for threshold or maximum payouts. The amount reported in the target performance column is derived by inputting our results from fiscal 2005 into the predetermined formula used in 2006 and computing what the payout would be in 2006 if we had the same results in 2006 that we had in 2005. This amount may or may not be indicative of the probable result for 2006. The actual bonus amount earned by our president and chief executive officer in 2006 is shown in the "Summary Compensation Table" above.

(3)

Stock options were granted pursuant to The Ensign Group, Inc. 2005 Stock Incentive Plan. All stock options may be early exercised. Stock options (or the restricted shares issued upon early exercise of the options) vest in equal annual increments (20% per year) on each anniversary of the date of grant. For a further description of this plan, see "Employee Benefit Plans."

(4)

David Sedgwick participated in our executive director compensation program. Our executive directors may earn cash bonuses pursuant to a formula based upon their respective facilities' and clusters' EBITDAR (earnings before net interest expense, taxes, depreciation, amortization and facility rent-cost of services). The bonus program does not provide for threshold or maximum payout amounts. The amount reported in the target performance column is derived by inputting the results of the applicable facility and cluster from fiscal 2005 into the formula used in 2006 and computing what the payment would be in 2006 if such facility and cluster had the same results in 2006 that it had in 2005. This amount may or may not be indicative of the probable result for 2006. The actual bonus amount earned by David Sedgwick in 2006 is shown in the "Summary Compensation Table" above.

(5)

Stock options were granted pursuant to The Ensign Group, Inc. 2001 Stock Option, Deferred Stock and Restricted Stock Plan. All stock options may be early exercised. Stock options (or the restricted shares issued upon early exercise of the options) vest in equal annual increments (20% per year) on each anniversary of the date of grant. For a further description of this plan, see "Employee Benefit Plans."

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(6)

John Albrechtsen participates in our bonus program for the presidents of our portfolio companies. Presidents of our portfolio companies may earn cash bonuses for their respective subsidiaries meeting target clinical standards and financial milestones pursuant to a predetermined formula based upon their respective subsidiaries' net income before taxes. This bonus program does not provide for threshold or maximum payout amounts. The amount reported in the target performance column is derived by inputting the results of the applicable subsidiary from fiscal 2005 into the formula used in 2006 and computing what the payout would be in 2006 if such subsidiary had the same results in 2006 that it had in 2005. This amount may or may not be indicative of the probable result for 2006. The actual bonus amount earned by John Albrechtsen in 2006 is shown in the "Summary Compensation Table" above.

(7)

The exercise price for these options to purchase common stock was determined as disclosed under "Management's Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies—Stock-Based Compensation."

(8)

The closing market price on the grant date was determined as disclosed under "Management's Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies—Stock-Based Compensation."

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Outstanding Equity Awards at Fiscal Year-End—2006

        The following table lists the outstanding equity incentive awards held by our named executive officers as of December 31, 2006.

	Option Awards						Stock Awards
Name	Number of Securities Underlying Unexercised Options Exercisable(#)(1)(2)		Number of Securities Underlying Unexercised Options Unexercisable(#)	Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options(#)	Option Exercise Price($)	Option Expiration Date	Number of Shares or Units of Stock That Have Not Vested (#)(3)		Market Value of Shares or Units of Stock That Have Not Vested ($)(4)	Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested(#)	Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested($)
Roy E. Christensen Chairman of the Board
Christopher R. Christensen Chief Executive Officer and President
Alan J. Norman Chief Financial Officer	15,000 5,000	(8) (9)			5.75 7.50	10/31/15 07/25/16	8,000 8,000 9,600 9,000	(5) (6) (7) (8)
Gregory K. Stapley Vice President and General Counsel
David M. Sedgwick Vice President of Organizational Development	20,000 11,000 2,500 19,000	(13) (14) (15) (16)			5.75 7.50 7.50 7.50	10/31/15 07/25/16 07/25/16 07/25/16	3,200 6,400 4,800	(10) (11) (12)
John Albrechtsen President, Touchstone Care, Inc.	20,000 43,000 8,000	(19) (20) (21)			5.75 7.50 7.50	10/31/15 07/25/16 07/25/16	2,400 4,800	(17) (18)

(1)

All options held by our named executive officers may be early exercised.

(2)

Options vest in equal annual installments (20% each year) on the anniversary of the date of grant.

(3)

The shares listed below were issued pursuant to the early exercise of stock options to purchase shares of our common stock. These shares are subject to a right of repurchase held by us that lapses over time based upon the vesting schedule of the originally issued stock options.

(4)

The market value of these shares at December 31, 2006 is calculated based on an assumed value per share of our common stock equal to the midpoint of the range set forth on the cover page of this prospectus.

(5)

On September 4, 2002, Mr. Norman was granted a stock option to purchase up to 40,000 shares of common stock. On December 23, 2003, Mr. Norman early exercised this option and purchased all 40,000 shares. To the extent that the stock option had not full vested, such shares became restricted stock, subject to the same vesting schedule as the previously granted stock option, of which 8,000 shares were unvested at fiscal year-end and 32,000 shares were vested at fiscal year end.

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(6)

On November 26, 2002, Mr. Norman was granted a stock option to purchase up to 40,000 shares of common stock. On December 23, 2003, Mr. Norman early exercised this option and purchased all 40,000 shares. To the extent that the stock option had not full vested, such shares became restricted stock, subject to the same vesting schedule as the previously granted stock option, of which 8,000 shares were unvested at fiscal year-end and 32,000 shares were vested at fiscal year end.

(7)

On August 20, 2003, Mr. Norman was granted a stock option to purchase up to 24,000 shares of common stock. On March 18, 2004, Mr. Norman early exercised this option and purchased all 24,000 shares. To the extent that the stock option had not full vested, such shares became restricted stock, subject to the same vesting schedule as the previously granted stock option, of which 9,600 shares were unvested at fiscal year-end and 14,400 shares were vested at fiscal year end.

(8)

Represents stock options granted on November 1, 2005 to purchase up to 30,000 shares. On March 30, 2006, Mr. Norman early exercised stock options to purchase 15,000 shares. Such shares became restricted stock, subject to the same vesting schedule as the stock options, of which 9,000 shares were unvested at fiscal year-end and 6,000 shares were vested at fiscal year-end.

(9)

Represents stock options granted on July 26, 2006 to purchase up to 5,000 shares.

(10)

On February 10, 2002, Mr. Sedgwick was granted a stock option to purchase up to 16,000 shares of common stock. On December 31, 2003, Mr. Sedgwick early exercised this option and purchased 8,000 shares, and on June 28, 2004, Mr. Sedgwick early exercised this option and purchased the remaining 8,000 shares. To the extent that the stock option had not fully vested, such shares became restricted stock, subject to the same vesting schedule as the previously granted stock option, of which 3,200 shares were unvested at fiscal year-end and 12,800 shares were vested at fiscal year end.

(11)

On November 19, 2003, Mr. Sedgwick was granted a stock option to purchase up to 16,000 shares of common stock. On June 28, 2004, Mr. Sedgwick early exercised this option and purchased 8,000 shares, and on June 30, 2005, Mr. Sedgwick early exercised this option and purchased the remaining 8,000 shares. To the extent that the stock option had not full vested, such shares became restricted stock, subject to the same vesting schedule as the previously granted stock option, of which 6,400 shares were unvested at fiscal year-end and 9,600 shares were vested at fiscal year end.

(12)

On December 22, 2004, Mr. Sedgwick was granted a stock option to purchase up to 8,000 shares of common stock. On April 25, 2006, Mr. Sedgwick early exercised this option and purchased all 8,000 shares. To the extent that the stock option had not full vested, such shares became restricted stock, subject to the same vesting schedule as the previously granted stock option, of which 4,800 shares were unvested at fiscal year-end and 3,200 shares were vested at fiscal year end.

(13)

Represents stock options granted on November 1, 2005 to purchase up to 20,000 shares.

(14)

Represents stock options granted on July 26, 2006 to purchase up to 11,000 shares.

(15)

Represents stock options granted on July 26, 2006 to purchase up to 2,500 shares.

(16)

Represents stock options granted on July 26, 2006 to purchase up to 19,000 shares.

(17)

On April 30, 2004, Mr. Albrechtsen was granted a stock option to purchase up to 4,000 shares of common stock. On August 15, 2006, Mr. Albrechtsen early exercised this option and purchased all 4,000 shares. To the extent that the stock option had not full vested, such shares became restricted stock, subject to the same vesting schedule as the previously granted stock option, of which 2,400 shares were unvested at fiscal year-end and 1,600 shares were vested at fiscal year end.

(18)

On June 8, 2004, Mr. Albrechtsen was granted a stock option to purchase up to 8,000 shares of common stock. On June 22, 2006, Mr. Albrechtsen early exercised this option and purchased all 8,000 shares. To the extent that the stock option had not full vested, such shares became restricted stock, subject to the same vesting schedule as the previously granted stock option, of which 4,800 shares were unvested at fiscal year-end and 3,200 shares were vested at fiscal year end.

(19)

Represents stock options granted on November 1, 2005 to purchase up to 20,000 shares.

(20)

Represents stock options granted on July 26, 2006 to purchase up to 43,000 shares.

(21)

Represents stock options granted on July 26, 2006 to purchase up to 8,000 shares.

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Option Exercises and Stock Vested — 2006

        The following table provides information for our named executive officers about options that were exercised and restricted stock that vested during 2006.

	Option Awards			Stock Awards
Name	Number of Shares Acquired on Exercise(#)		Value Realized on Exercise($)(1)	Number of Shares Acquired on Vesting(#)		Value Realized on Vesting($)(2)
Roy E. Christensen Chairman of the Board	—
Christopher R. Christensen Chief Executive Officer and President	—
Alan J. Norman Chief Financial Officer	15,000	(3)		26,800	(3)
Gregory K. Stapley Vice President and General Counsel	—
David M. Sedgwick Vice President of Organizational Development	8,000	(4)		8,000	(4)
John Albrechtsen President, Touchstone Care, Inc.	12,000	(5)		2,400	(5)

(1)

The aggregate dollar amount realized upon the exercise of an option represents the difference between the aggregate market value of the shares of our common stock underlying that option on the date of exercise and the aggregate exercise price of the option. We have assumed the per share market value to be the midpoint of price range set forth on the cover of this prospectus.

(2)

The aggregate value realized upon the vesting of the stock award is based upon the aggregate market value of the vested shares of our common stock on the vesting date. We have assumed the per share market value to be the midpoint of the price range set forth on the cover of this prospectus.

(3)

On March 30, 2006, March 18, 2004 and December 23, 2003, Mr. Norman early exercised stock options to purchase 15,000, 24,000 and 80,000 shares, respectively. To the extent that the stock options had not fully vested, such shares became restricted stock, subject to the same vesting schedule as the previously granted stock options, of which 26,800 shares vested during 2006.

(4)

On April 25, 2006, June 30, 2005, June 28, 2004 and December 31, 2003, Mr. Sedgwick early exercised stock options to purchase 8,000, 8,000, 16,000 and 8,000 shares, respectively. To the extent that the stock options had not fully vested, such shares became restricted stock, subject to the same vesting schedule as the previously granted stock options, of which 8,000 shares vested during 2006.

(5)

On August 15, 2006 and June 22, 2006, Mr. Albrechtsen early exercised stock options to purchase 4,000 and 8,000 shares, respectively. To the extent that the stock options had not fully vested, such shares became restricted stock, subject to the same vesting schedule as the previously granted stock options, of which 2,400 shares vested during 2006.

Change-in-Control and Severance Disclosure

        We have not entered into any arrangements providing for payments or benefits in connection with the resignation, severance, retirement or other termination of any of our named executive officers, changes in their compensation or a change in control.

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Director Compensation

        The compensation and benefits for service as a member of the board of directors are determined by the compensation committee. Prior to 2007, each non-employee director received $3,000 for each board meeting physically attended and $1,000 for each committee meeting physically attended. Additionally, the chairperson of each of the compensation committee and the quality assurance and compliance committee received an additional $3,000 per year and the chairperson of the audit committee received an additional $4,000 per year.

        Our Chairman of the Board currently receives an annual retainer of $100,000, and each of our non-employee directors currently receives an annual retainer of $30,000, $1,500 for each board meeting and each committee meeting the director physically attends, and $500 for each meeting in which the director participates telephonically. Additionally, the chairperson of each of the compensation committee and the nomination and corporate governance committee receives an additional $5,000 per year and the chairperson of each of the audit committee and the quality assurance and compliance committee receives an additional $12,500 per year.

        In addition, after our 2007 Omnibus Incentive Plan becomes effective, each non-employee director who is elected to a three-year term, will receive an automatic option grant for 12,000 shares of common stock, with a three-year vesting schedule, on the date he or she is appointed, elected or re-elected. Directors elected to fill less than a three-year term will receive a pro rata grant that vests over their term.

        The following table sets forth a summary of the compensation we paid to our non-employee directors in 2006. Directors who are our employees do not receive any additional compensation for their service as directors.

Name	Fees Earned or Paid in Cash($)		Stock Awards(1)($)	Option Awards(1)($)	Non-Equity Incentive Plan Compensation($)	Change in Pension Value and Nonqualified Deferred Compensation Earnings($)	All Other Compensation($)	Total($)
Antoinette T. Hubenette	$	19,000						$	19,000
Thomas A. Maloof		14,000							14,000
Charles M. Blalack		15,000							15,000

(1)

On November 1, 2005, each of Antoinette T. Hubenette, Thomas A. Maloof and Charles M. Blalack received a stock option to purchase up to 10,000 shares of common stock, which was fully vested upon the grant. Each of these directors subsequently exercised the stock option and each received 10,000 shares of common stock, which they still hold. In addition, on May 20, 2003, each of Antoinette T. Hubenette, Thomas A. Maloof and Charles M. Blalack received a stock option to purchase up to 20,000 shares of common stock which was fully vested upon the grant. Each of the directors exercised this stock option and received 20,000 shares of common stock, which they each still hold.

Employee Benefit Plans

The Ensign Group, Inc. 2001 Stock Option, Deferred Stock and Restricted Stock Plan

        Under The Ensign Group, Inc. 2001 Stock Option, Deferred Stock and Restricted Stock Plan (the "2001 Plan"), our officers, employees, directors and consultants may be granted stock options, restricted stock awards and deferred stock awards. Our board of directors has determined not to grant any additional awards under the 2001 Plan after the completion of this offering. However, the 2001 Plan will continue to govern the terms and conditions of the outstanding awards granted under the 2001 Plan. The 2001 Plan is administered by our board of directors.

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        A total of 1,980,000 shares of our common stock are authorized for issuance under the 2001 Plan pursuant to the terms of the 2001 Plan. As of December 31, 2006 and March 31, 2007, options to purchase a total of 495,000 and 463,900 shares of our common stock were issued and outstanding at a weighted average exercise price of $5.38 and $5.48 per share, respectively.

        In the event of any merger, reorganization, consolidation, recapitalization, stock dividend, or other change in corporate structure affecting our common stock, an appropriate substitution or adjustment will be made in (i) the aggregate number of shares reserved for issuance under the 2001 Plan, and (ii) the kind, number and option price of shares subject to outstanding stock options or awards granted under the 2001 Plan as may be determined by our compensation committee or our board of directors.

        The 2001 Plan will terminate in 2011 unless terminated earlier by our board of directors. To the extent permitted by law, our board of directors may amend or modify the 2001 Plan at any time. However, no amendment or modification shall adversely affect the rights and obligations with respect to outstanding options unless the holder or holders so affected consent to that amendment or modification. To the extent necessary to comply with applicable law, we will obtain stockholder approval of any amendment to the 2001 Plan.

        Historically, we have granted stock option awards under the 2001 Plan. Option recipients may exercise their options before the options have vested and receive shares of restricted stock, subject to the same vesting schedule as the stock options exercised by the recipient. Subject to the provisions of the 2001 Plan, the restricted stock agreements that govern the terms of restricted stock issued upon exercise of stock options granted pursuant to the 2001 Plan generally provide us with the right to repurchase restricted stock if an employee's employment is terminated. Some of the restricted stock agreements provide for accelerated vesting in full of the restricted stock and termination of our repurchase right upon the consummation of this offering. As a result, upon completion of this offering, approximately                                    shares otherwise subject to our repurchase right will vest in full and no longer be subject to repurchase.

        The stock options granted under the 2001 Plan generally have the following material terms:

•

for non-employee directors, options vest and become exercisable immediately, and for all other participants, options vest and become exercisable in five equal annual installments (20% each year) on each anniversary of the date of grant;



•

options are nonqualified stock options;



•

the exercise price per share of common stock underlying the options is equal to the fair market value of our common stock on the date of grant, as determined by our board of directors;



•

options expire ten years after the date of grant; and



•

to the extent vested on the date of termination, options are exercisable for three months after termination, except when termination is as a result of death or disability in which case options are exercisable for six months.

The Ensign Group, Inc. 2005 Stock Incentive Plan

        Under The Ensign Group, Inc. 2005 Stock Incentive Plan (the "2005 Plan"), our officers, employees, directors and consultants may be granted stock options, stock awards (including restricted stock), stock appreciation rights, performance-contingent awards and other equity-based awards. Our board of directors has determined not to grant any additional awards under the 2005 Plan after the completion of this offering. However, the 2005 Plan will continue to govern the terms and conditions of the outstanding awards granted under the 2005 Plan. The 2005 Plan is administered by our board of directors.

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        A total of 1,000,000 shares of our treasury stock are authorized for issuance under the 2005 Plan pursuant to the terms of the 2005 Plan. As of December 31, 2006 only 800,000 shares were repurchased and therefore eligible for reissuance to officers, key employees, directors, and consultants of the Company under the 2005 Plan. As of December 31, 2006 and March 31, 2007, options to purchase a total of 749,000 and 700,500 shares of our common stock were issued and outstanding at a weighted average exercise price of $6.68 and $6.69 per share, respectively.

        In the event of a stock split, reverse stock split, stock dividend, recapitalization, combination, reclassification or other distribution of common stock without the receipt of consideration by us, the number of shares of common stock reserved for the grant of stock options, dividend equivalent rights, performance unit awards, phantom shares, stock appreciation rights and stock awards, the number of shares of common stock reserved for issuance upon the exercise or payment, as applicable, of each outstanding stock option, dividend equivalent right, phantom share and stock appreciation right and upon vesting or grant, as applicable, of each stock award; the exercise price of each outstanding stock option and the specified number of shares of common stock to which each outstanding dividend equivalent right, phantom share and stock appreciation right pertains will be proportionately adjusted.

        In the event of a merger, consolidation, reorganization, extraordinary dividend, spin-off, sale of substantially all of our assets, other change in capital structure, tender offer for shares of our common stock, or a change in control, the compensation committee or the board of directors may make such adjustments with respect to awards and take such other actions as it deems necessary or appropriate, including, without limitation, the substitution of new awards, or the adjustment of outstanding awards, the acceleration of awards, the removal of restrictions on outstanding awards, or the termination of outstanding awards in exchange for the cash value determined in good faith by the compensation committee or the board of directors.

        The 2005 Plan will terminate in 2015 unless terminated earlier by our board of directors. To the extent permitted by law, our board of directors may amend or modify the 2005 Plan at any time. However, no amendment or modification shall adversely affect the rights and obligations with respect to outstanding options unless the holder or holders so affected consent to that amendment or modification. To the extent necessary to comply with applicable law, we will obtain stockholder approval of any amendment to the 2005 Plan.

        Historically, we have granted only stock option awards under the 2005 Plan. However, option recipients may exercise their options before the options have vested and receive shares of restricted stock, subject to the same vesting schedule as the stock option exercised by the recipient.

        The stock options granted under the 2005 Plan generally have the following material terms:

•

for non-employee directors, options vest and become exercisable immediately, and for all other participants, options vest and become exercisable in five equal annual installments (20% each year) on each anniversary of the date of grant;



•

options are nonqualified stock options;



•

the exercise price per share of common stock underlying the options is equal to the fair market value of our common stock on the date of grant, as determined by our board of directors;



•

options expire ten years after the date of grant; and



•

to the extent vested on the date of termination, options are exercisable for three months after termination, except when termination is as a result of death or disability in which case option are exercisable for six months.

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The Ensign Group, Inc. 2007 Omnibus Incentive Plan

        Our 2007 Omnibus Incentive Plan (the "Omnibus Plan") was adopted by our board of directors and approved by our stockholders in                  2007 and will become effective upon effectiveness of the registration statement relating to this offering. The compensation committee of our board of directors (also referred to herein as the "committee") has the authority to administer the Omnibus Plan and, except for option grants made to non-employee directors under the Director Automatic Option Grant Program discussed below, will have full power and authority to determine when and to whom awards will be granted, and the type, amount, form of payment and other terms and conditions of each award, consistent with the provisions of the Omnibus Plan. Subject to the provisions of the Omnibus Plan, the committee may amend or waive the terms and conditions, or accelerate the exercisability, of an outstanding award. The committee has authority to interpret the Omnibus Plan and establish rules and regulations for the administration of the Omnibus Plan. In addition, our board of directors may generally exercise the powers of the committee at any time. Any employee, officer, consultant, independent contractor or director providing services to us or any of our affiliates, who is selected by the committee, is eligible to receive awards under the Omnibus Plan.

        The aggregate number of shares of common stock that may be issued under all stock-based awards made under the Omnibus Plan will be                                    shares. In addition, the number of shares of common stock reserved under the Omnibus Plan will automatically be increased on the first day of each fiscal year, beginning on January 1, 2008, in an amount equal to the lesser of (i)                                     shares of common stock or (ii)                         % of the number of shares outstanding as of the last day of the immediately preceding fiscal year or (iii) such lesser number as determined by our board of directors. Any shares of common stock that are used by a participant as full or partial payment to us of the purchase price relating to an award, or in connection with the satisfaction of tax obligations relating to an award, shall again be available for granting awards (other than incentive stock options) under the Omnibus Plan. Additionally, any shares of our common stock subject to any award that is terminated or forfeited without delivery of any shares will be available for future awards under the Omnibus Plan. The shares of common stock issuable under the Omnibus Plan may be drawn from shares of authorized but unissued common stock or from shares of common stock that we acquire. No eligible person may be granted any award or awards under the Omnibus Plan, the value of which award or awards is based solely on an increase in the value of shares of common stock after the date of grant of such award or awards, and which is intended to represent "qualified performance based compensation" with the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended, for more than                                    shares of our common stock (subject to adjustment in the event of a stock split or similar corporate event), in the aggregate in any taxable year.

        In the event that the committee shall determine that any dividend or other distribution (whether in the form of cash, shares of our common stock, other securities or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase or exchange of shares of our common stock or other securities, issuance of warrants or other rights to purchase shares of our common stock or other securities or other event identified by the committee as affecting shares of our common stock such that an adjustment is necessary or appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Omnibus Plan, then the committee shall, in such manner as it may deem equitable, adjust any or all of (i) the number and type of shares of common stock (or other securities or other property) that thereafter may be made the subject of awards, (ii) the number and type of shares of common stock (or other securities or other property) subject to outstanding awards, (iii) the purchase price or exercise price with respect to any award and (iv) the share limitations contained in the Omnibus Plan.

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        Under our Omnibus Plan, the committee is permitted and authorized to make the following grants to all eligible persons:

•

Stock Options.  The committee may grant stock options to officers and other employees intended to qualify as incentive stock options, as defined in Section 422 of the Internal Revenue Code of 1986, as amended, and may also grant options to employees, consultants, independent contractors and directors that do not qualify as incentive stock options. The holder of an option will be entitled to purchase a number of shares of our common stock at a specified exercise price during a specified time period, all as determined by the committee. The exercise price of an option may not be less than 100% of the fair market value of our common stock on the date of grant, or in the case of incentive stock options, 110% of the fair market value of our common stock with respect to holders of more than 10% of our common stock. The fair market value of our common stock will be the closing sale price as quoted on the NASDAQ Global Market on the date of grant. The Omnibus Plan permits payment of the exercise price to be made by cash, shares of our common stock, other securities, other awards or other property. The shares subject to each option will generally vest in one or more installments over a specified period of service measured from the grant date.



•

Stock Appreciation Rights.  The holder of a SAR is entitled to receive the excess of the fair market value (calculated as of the exercise date or, at the committee's discretion, as of any time during a specified period before or after the exercise date) of a specified number of shares of our common stock over the grant price of the SAR, as determined by the committee, paid solely in shares of common stock. SARs vest and become exercisable in accordance with a vesting schedule established by the committee.



•

Restricted Stock and Restricted Stock Units.  The holder of restricted stock will own shares of our common stock subject to restrictions imposed by the committee (including, for example, restrictions on transferability or on the right to vote the restricted shares or to receive any dividends with respect to the shares) for a specified time period determined by the committee. The restrictions, if any, may lapse or be waived separately or collectively, in installments or otherwise, as the committee may determine. The holder of restricted stock units will have the right, subject to any restrictions imposed by the committee, to receive shares of our common stock at some future date determined by the committee.



•

Performance Awards.  Performance awards give participants the right to receive payments in cash, stock or property based solely upon the achievement of certain performance goals during a specified performance period. Subject to the terms of the Omnibus Plan, the performance goals to be achieved during any performance period, the length of any performance period, the amount of any performance award granted, the amount of any payment or transfer to be made pursuant to any performance award and any other terms and conditions of any performance award is determined by the committee. No eligible person may be granted performance awards in excess of                                    shares of our common stock (subject to adjustment in the event of a stock split or similar event) in the aggregate in any taxable year.



•

Dividend Equivalents.  The committee may grant dividend equivalents under which the participant is entitled to receive payments (in cash, shares of common stock, other securities, other awards or other property as determined in the discretion of the committee) equivalent to the amount of cash dividends paid by us to holders of shares of common stock with respect to a number of shares of common stock determined by the committee.



•

Other Stock Awards.  The committee may grant unrestricted shares of our common stock, subject to terms and conditions determined by the committee and the Omnibus Plan limitations.

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        The term of awards will not be longer than ten years, or in the case of incentive stock options, longer than five years with respect to holders of more than 10% of our common stock. The committee may permit accelerated vesting of an award upon the occurrence of certain events, including a change in control, regardless of whether the award is assumed, substituted or otherwise continued in effect by the successor corporation. The acceleration of vesting in the event of a change in the ownership or control may be seen as an anti-takeover provision and may have the effect of discouraging a merger proposal, a takeover attempt or other efforts to gain control of us.

        Awards under the Omnibus Plan may be subject to performance goals, including revenue, cash flow, gross profit, earnings before interest and taxes, earnings before interest, taxes, depreciation and amortization and net earnings, earnings per share, margins (including one or more of gross, operating and net income margins), returns (including one or more of return on assets, equity, investment, capital and revenue and total stockholder return), stock price, economic value added, working capital, market share, cost reductions, workforce satisfaction and diversity goals, employee retention, customer satisfaction, completion of key projects and strategic plan development and implementation. The goals may reflect absolute entity or business unit performance or a relative comparison to the performance of a peer group of entities or other external measure of the selected performance criteria.

        Under the Automatic Option Grant Program of the Omnibus Plan, each non-employee director who is elected to a three-year term, whether through election by our stockholders or appointment by the board of directors, will receive an automatic option grant for 12,000 shares of common stock on the date he or she is appointed, elected or re-elected. Each non-employee director who is initially elected to less than a three-year term upon the implementation of our staggered board, will receive a pro-rata option grant depending upon the length of the term for which they are elected on the date he or she is appointed, elected or re-elected. The Automatic Option Grant Program is expressly governed by the provisions of the Omnibus Plan, and neither the board of directors nor the committee has any discretionary authority to administer the Automatic Option Grant Program. Each option granted under the Automatic Option Grant Program will have an exercise price per share equal to 100% of the fair market value of the option shares on the automatic grant date, be immediately exercisable subject to vesting and have a maximum term of ten years measured from the grant date. Each automatic grant will become vested in three equal annual installments on the completion of each year of service measured from the grant date. In the event of a change in control of us, the vesting of all options granted under the Automatic Option Grant Program will accelerate and then terminate.

        Unless earlier discontinued or terminated by the board, the Omnibus Plan will expire in                   2017. No awards may be made after that date. However, unless otherwise expressly provided in an applicable award agreement, any award granted under the Omnibus Plan prior to expiration may extend beyond the end of such period through the award's normal expiration date. Our board of directors may amend, suspend or terminate the Omnibus Plan at any time, provided that our board of directors will get stockholder approval when necessary to not violate the rules of the NASDAQ Global Market, to allow the grant of incentive stock options, to increase the number of shares of common stock authorized under the Omnibus Plan, to grant or reprice options or SARs with an exercise price less than the fair market value of the common stock, or to prevent the grant of options or SARs that would qualify under Section 162(m) of the Internal Revenue Code of 1986, as amended. The committee may not amend an outstanding award in a manner that adversely affects the holder of the award without the holder's consent.

401(k) Plan

        We maintain a tax-qualified retirement plan that provides eligible employees an opportunity to save for retirement on a tax-advantaged basis. Eligible employees, upon meeting certain length-of-service requirements, are able to defer up to 90% of their eligible compensation, subject to applicable annual Internal Revenue Code limits. The 401(k) plan permits us to make matching

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contributions and profit sharing contributions to eligible participants, although such contributions are not required. Currently, we match up to $0.25 per dollar contributed by the applicable employee up to the first two percent of such employee's compensation. Pre-tax contributions are allocated to each participant's individual account and are then invested in selected investment alternatives according to the participants' directions. Employee contributions are 100% vested at all times; and employer contributions are subject to a four-year pro rata vesting schedule. The 401(k) plan is intended to qualify under Sections 401(a) and 501(a) of the Internal Revenue Code. As a tax-qualified retirement plan, contributions to the 401(k) plan and earnings on these contributions are not taxable to the employees until distributed from the 401(k) plan and all contributions are deductible by us when made.

Limitation of Liability and Indemnification of Officers and Directors

        Under our amended and restated certificate of incorporation and amended and restated bylaws, we must indemnify, and may advance expenses to, any and all persons whom we have the power to indemnify under section 145 of the Delaware General Corporation Law, including our directors, officers, employees and agents, to the fullest extent permitted by the General Corporation Law of the State of Delaware. In addition, our amended and restated certificate of incorporation provides that our directors will not be personally liable for monetary damages to us for breaches of their fiduciary duty as directors, unless they violated their duty of loyalty to us or our stockholders, acted in bad faith, knowingly or intentionally violated the law, authorized illegal dividends or redemptions or derived an improper personal benefit from their actions as directors.

        Under our amended and restated bylaws, we are also permitted to enter into indemnification agreements and purchase insurance to the extent permitted by section 145 of the Delaware General Corporation Law. We have procured and intend to maintain a directors and officers liability insurance policy that insures such persons against the costs of defense, settlement or payment of a judgment under certain circumstances. In addition, we intend to enter into indemnification agreements with each of our directors and officers. These agreements, among other things, require us to indemnify each director and officer to the fullest extent permitted by Delaware law, including indemnification of expenses such as attorneys' fees, judgments, fines and settlement amounts incurred by the director or officer in any action or proceeding, including any action or proceeding by or in right of us, arising out of the person's services as a director or officer. At present, we are not aware of any material pending or threatened litigation or proceeding involving any of our directors, officers, employees or agents in which indemnification would be required or permitted. We believe the provisions in our amended and restated certificate of incorporation, our amended and restated bylaws and indemnification agreements are necessary to attract and retain qualified persons as directors and officers.

        There is no material pending litigation or proceeding naming any of our directors or officers as to which indemnification is being sought, nor are we aware of any material pending or threatened litigation that may result in claims for indemnification by any director or officer.

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TRANSACTIONS WITH RELATED PERSONS

        Since January 1, 2004, there has not been, nor is there any proposed transaction in which we were or will be a party or in which we were or will be a participant, involving an amount that exceeded or will exceed $120,000 and in which any director, executive officer, beneficial owner of more than 5% of any class of our voting securities, or any member of the immediate family of any of the foregoing persons had or will have a direct or indirect material interest, other than the compensation arrangements and other agreements and transactions which are described in "Executive Officer and Director Compensation" and the transactions described below.

Investor Rights Agreement and Voting Agreement

        On June 6, 2000, we entered into an Investor Rights Agreement with the purchaser of our outstanding preferred stock, Ensign Group Investments, L.L.C., and our founders, including Roy E. Christensen, Christopher R. Christensen, Douglas M. Easton, Gregory K. Stapley, J. Richard Toolson, V. Jay Brady and Charles M. Blalack. The preferred stock held by Ensign Group Investments, L.L.C. will convert into 2,741,180 shares of common stock upon the consummation of this offering, whereupon Ensign Group Investments, L.L.C. will be entitled to rights with respect to the registration of its shares under the Securities Act. Ensign Group Investments, L.L.C. is provided certain rights to demand registration of the shares of common stock issuable upon conversion of its preferred stock, and to participate in certain registrations of our common stock that we may decide to do, from time to time. These rights terminate upon the earlier of three years after this offering or such time as all of the shares of registrable securities may be sold under Rule 144 under the Securities Act during any three-month period. One of our directors, Charles M. Blalack, is a manager of Ensign Group Investments, L.L.C. and may be deemed the beneficial owner of our capital stock held by Ensign Group Investments L.L.C. Mr. Blalack serves on our board of directors pursuant to a Voting Agreement, dated June 6, 2000, between Ensign Group Investments, L.L.C. and our founding stockholders, which will terminate automatically upon the closing of this offering. Ensign Group Investments, L.L.C. owns more than 5% of our capital stock.

Family Relationships

        V. Jay Brady is the son-in-law of Roy Christensen and the brother-in-law of Christopher Christensen. Mr. Brady served as President of The Flagstone Group, Inc. from January 2006 to May 2007. He previously served as our Vice President of Executive Development from March 2004 to January 2006, and as Chief Executive Officer and administrator of one of our facilities from 1999 to March 2004. In 2006, we paid Mr. Brady total cash compensation of $383,423, and we granted him options to purchase up to 42,500 shares of our common stock at an exercise price of $7.50 per share under our 2005 Plan. These options expire on July 25, 2016. In 2005, we paid Mr. Brady total cash compensation of $356,531. In 2004, we paid Mr. Brady total cash compensation of $320,528.

        Covey Christensen is the son of Roy Christensen and the brother of Christopher Christensen. Covey Christensen has served as the executive director of one of our facilities since April 2004. He previously served as executive director at another of our facilities from 2002 to 2004. In 2006, we paid Covey Christensen total cash compensation of $287,491, and we granted him options to purchase up to 4,000 shares of our common stock at an exercise price of $7.50 per share under our 2001 Plan. These options expire on July 25, 2016. In 2005, we paid Covey Christensen total cash compensation of $267,201, and we granted him options to purchase up to 8,000 shares of our common stock at an exercise price of $5.75 per share under our 2005 Plan. These options expire on October 31, 2015. In 2004, we paid Covey Christensen total cash compensation of $164,133.

        Tyler Albrechtsen is the brother of John Albrechtsen. Tyler Albrechtsen has served as the executive director of one of our facilities since August 2006. He previously served as administrator-in-training of

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the same facility from January 2006 to August 2006. In 2006, we paid Tyler Albrechtsen total cash compensation of $100,753, and we granted him options to purchase up to 10,000 shares of our common stock at an exercise price of $7.50 per share, 8,000 of which were under our 2001 Plan, and 2,000 of which were under our 2005 Plan. These options expire on July 25, 2016.

Repurchase of Our Common Stock

        On April 11, 2005, Douglas M. Easton, our former Chief Financial Officer, entered into a letter agreement with Dudley A. Rauch, a former director of our Company and trustee of the Rauch Family Living Trust u/t/d 3/1/99, whereby Mr. Easton agreed to sell the Rauch Family Living Trust 300,000 shares of our common stock held by Mr. Easton for an aggregate purchase price of $1,725,000 and grant a call option on an additional 300,000 shares of our common stock held by Mr. Easton for an option purchase price of $0.50 per share, with an exercise price of $7.00 per share and expiration date of May 1, 2006.

        On April 26, 2005, we purchased a call option on 300,000 shares of our common stock held by Mr. Easton for an option purchase price of $0.50 per share, with an exercise price of $7.00 per share and expiration date of May 1, 2006. We exercised this option and purchased all 300,000 shares pursuant to this option on March 30, 2006, for an aggregate purchase price of $2,100,000.

        Also on April 26, 2005, we repurchased 300,000 shares of our common stock from Mr. Easton under a stock purchase agreement of the same date for an aggregate purchase price of $1,725,000.

        Additionally, on April 29, 2005, we entered into a partial assignment of purchase rights under letter agreement with Mr. Easton and the Rauch Family Living Trust, pursuant to which the Rauch Family Living Trust assigned to us its right to purchase 100,000 shares of our common stock held by Mr. Easton for an aggregate price of $575,000. We purchased all 100,000 of these shares pursuant to this assignment immediately thereafter.

        Also on April 29, 2005, we entered into a partial assignment of option rights under letter agreement with Mr. Easton and the Rauch Family Living Trust, pursuant to which the Rauch Family Living Trust assigned to us its option to purchase 100,000 shares of our common stock held by Mr. Easton for an option purchase price of $0.50 per share, with an exercise price of $7.00 per share and expiration date of May 1, 2006. We exercised this option and purchased all 100,000 shares pursuant to this option on March 30, 2006, for an aggregate purchase price of $700,000.

        All of the stock repurchased by us from Mr. Easton in the foregoing transactions was made available for issuance under the 2005 Plan.

Indemnification Provisions

        We intend to enter into indemnification agreements with each of our directors and officers. These indemnification agreements, and our certificate of incorporation and bylaws, require us to indemnify our directors and officers to the fullest extent permitted by Delaware law.

Policies and Procedures for Transactions with Related Persons

        The audit committee has approved or ratified all of the transactions described in "Transactions with Related Persons".

        After the effectiveness of the registration statement of which this prospectus forms a part, we expect that our audit committee will review for potential conflict of interest situations, on an ongoing basis, any future proposed transaction, or series of transactions, with related persons, and either approve or disapprove each reviewed transaction or series of related transactions with related persons.

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        On                                     , 2007, we adopted a written policy and procedures with respect to related person transactions, which includes specific provisions for the approval of related person transactions. Pursuant to this policy, related person transactions include a transaction, arrangement or relationship or series of similar transactions, arrangements or relationships, in which we and certain enumerated related persons participate, the amount involved exceeds $120,000 and the related person has a direct or indirect material interest.

        In the event that a related party transaction is identified, such transaction must be reviewed and approved or ratified by our audit committee. If it is impracticable for our audit committee to review such transaction, the transaction will be reviewed by the chair of our audit committee, whereupon the chair of our audit committee will report to the audit committee the approval or disapproval of such transaction.

        In reviewing and approving related person transactions, the audit committee, or its chair, shall consider all information that the audit committee, or its chair, believes to be relevant and important to a review of the transaction. The audit committee or its chair, as the case may be, shall approve only those related person transactions that are determined to be in, or not inconsistent with, our best interests and that of our stockholders, taking into account all available relevant facts and circumstances available to the audit committee or the chair. These facts and circumstances will typically include, but not be limited to, the benefits of the transaction to us; the impact on a director's independence in the event the related person is a director, an immediate family member of a director or an entity in which a director is a partner, stockholder or executive officer; the availability of other sources for comparable products or services; the terms of the transaction; and the terms of comparable transactions that would be available to unrelated third parties or to employees generally. No member of the audit committee shall participate in any review, consideration or approval of any related person transaction with respect to which the member or any of his or her immediate family members is the related person.

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PRINCIPAL AND SELLING STOCKHOLDERS

        The following table indicates information as of March 31, 2007 regarding the ownership of our common stock by:

•

each person who is known by us to beneficially own more than 5% of our shares of common stock;



•

each named executive officer;



•

each of our directors;



•

each of the selling stockholders; and



•

all of our directors and executive officers as a group.

        The number of shares beneficially owned and the percentage of shares beneficially owned are based on 16,446,380 shares of common stock outstanding as of March 31, 2007, which assumes the conversion of all of our outstanding preferred stock into 2,741,180 shares of common stock upon the completion of this offering. The percentage of shares beneficially owned after this offering includes shares of common stock being offered but does not include the shares that are subject to the underwriters' over-allotment option. Beneficial ownership is determined in accordance with the rules and regulations of the Securities and Exchange Commission. Except for outstanding options issued under our equity incentive plans, there are no outstanding rights to purchase shares of our common stock that are exercisable by the persons included in this table. Shares subject to options that are exercisable within 60 days following March 31, 2007 are deemed to be outstanding and beneficially owned by the optionee for the purpose of computing share and percentage ownership of that optionee, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. Except as indicated in the footnotes to this table, and as affected by applicable community property laws, all persons listed have sole voting and investment power for all shares shown as beneficially owned by them. Except as indicated in the footnotes to this table, the business address

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of each person listed below who is known by us to beneficially own more than 5% of our shares of common stock is 27101 Puerta Real, Suite 450, Mission Viejo, California 92691.

		Beneficially Owned Before the Offering			Beneficially Owned After the Offering
Name and Address of Beneficial Owners		Number of Shares(1)	Percent(1)	Number of Shares Being Offered By Selling Stockholders in this Offering	Number of Shares	Percent
Named Executive Officers and Directors:
	Christopher R. Christensen(3)	3,893,000	23.7
	Alan J. Norman(4)	329,000	2.0
	Gregory K. Stapley(5)	1,189,000	7.2
	John P. Albrechtsen(6)	95,500	*
	David M. Sedgwick(7)	98,000	*
	Roy E. Christensen(8)	3,910,000	23.8
	Antoinette T. Hubenette	30,000	*
	Thomas A. Maloof	130,000	*
	Charles M. Blalack(9)	3,033,180	18.4
All Executive Officers and Directors as a Group (12 persons)(10)		13,050,680	77.7
Other Five Percent Stockholders:
	Ensign Group Investments, L.L.C.(11)	2,741,180	16.7

*

Represents less than 1% of the outstanding shares of common stock.

(1)

Includes shares of restricted stock. Restricted stock may not be disposed of until vested and is subject to repurchase by us upon termination of service to us.

(2)

In the event the underwriters exercise their over-allotment option, Messrs.             and                        have agreed to sell to the underwriters up to             shares and            shares, respectively, of our common stock at the initial public offering price per share, less underwriting discounts and commissions.

(3)

Represents 3,889,000 shares held by the Christensen Family Trust dated October 24, 2005, and 4,000 shares held by Mr. Christensen's spouse as custodian for their minor children under the California Uniform Transfers to Minors Act. Mr. Christensen and his spouse share voting and investment power over the Christensen Family Trust, and Mr. Christensen's spouse holds voting and investment power over the shares held for their children.

(4)

Includes stock options to purchase 20,000 shares of common stock that are currently exercisable or exercisable within 60 days after March 31, 2007.

(5)

Represents 1,173,000 shares held by the Stapley Family Trust; and 16,000 shares held by Mr. Stapley's spouse as custodian for their minor children under the California Uniform Transfers to Minors Act. Mr. Stapley and his spouse share voting and investment power over the shares held by the Stapley Family Trust, and Mr. Stapley's spouse holds voting and investment power over the shares held for their children.

(6)

Includes stock options to purchase 71,000 shares of common stock that are currently exercisable or exercisable within 60 days after March 31, 2007.

(7)

Includes stock options to purchase 52,500 shares of common stock that are currently exercisable or exercisable within 60 days after March 31, 2007.

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(8)

Represents 3,910,000 shares held by the Christensen Family Trust dated August 17, 1992. Mr. Christensen and his spouse share voting and investment power over the Christensen Family Trust.

(9)

Represents 292,000 shares held by the Blalack Family Trust dated December 1, 1994 and 2,741,180 shares held by Ensign Group Investments, L.L.C. Mr. Blalack and his spouse share voting power and investment power over the Blalack Family Trust. Mr. Blalack is a managing member of Ensign Group Investments, L.L.C., and therefore may be deemed the beneficial owner of the common stock held by Ensign Group Investments, L.L.C. The business address for Mr. Blalack is 130 South San Rafael, Pasadena, CA 91105.

(10)

Includes stock options to purchase 355,500 shares of common stock that are currently exercisable or exercisable within 60 days after March 31, 2007.

(11)

Charles M. Blalack, T. Brook Townsend III and Travis Spitzer are managers of Ensign Group Investments, L.L.C, and therefore may be deemed the beneficial owners of the common stock held by Ensign Group Investments, L.L.C. Mr. Blalack shares voting and investment power with Mr. Townsend and Mr. Spitzer. Mr. Blalack, Mr. Townsend and Mr. Spitzer disclaim beneficial ownership of the common stock held by Ensign Group Investments, L.L.C. except to the extent of their individual pecuniary interest therein and their rights to compensation therefrom as managers. Mr. Townsend is also deemed the beneficial owner of 48,000 shares held by the T. Brook Townsend III 1991 Revocable Intervivos Separate Property Trust and may be deemed the beneficial owner of 8,000 shares held by the Barbara L. Townsend 1991 Revocable Intervivos Separate Property Trust. Mr. Townsend is not a trustee of the Barbara L. Townsend 1991 Revocable Intervivos Separate Property Trust, but is the president of the registered investment advisor that may have discretionary authority to dispose of or to vote the shares held by the Barbara L. Townsend 1991 Revocable Intervivos Separate Property Trust. Mr. Townsend has sole voting and investment power over the shares held by the T. Brook Townsend III 1991 Revocable Intervivos Separate Property Trust. Mr. Blalack is deemed to be the beneficial owner of 292,000 shares held by the Blalack Family Trust dated December 1, 1994. Ensign Group Investments, L.L.C. does not have an interest in the shares beneficially owned by Mr. Townsend and Mr. Blalack. The address for Ensign Group Investments, L.L.C. is 22601 Pacific Coast Highway, Suite 200, Malibu, CA 90265.

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DESCRIPTION OF CERTAIN INDEBTEDNESS

Term Loan with General Electric Capital Corporation

        On December 29, 2006, a number of our independent real estate holding subsidiaries jointly entered into the Term Loan, which consists of an approximately $64.7 million multiple-advance term loan, approximately $55.7 million of which had been drawn down at that time. This term loan expires on June 29, 2016, and is currently secured by the real and personal property comprising the ten facilities owned by these subsidiaries.

        The Term Loan has been funded in advances, with each advance bearing interest at a separate rate. The interest rates range from 7.50% per annum for the initial advance to 6.95% for the most recent advance. Subject to certain conditions, we may also receive additional advances that would bear interest at the rate of 2.25% plus the applicable U.S. Treasury rate at the time of advance.

        The proceeds of the advances made under the Term Loan have been used to refinance an existing loan from the Lender on four of the properties, and to acquire the fee interests in two other properties that we were previously leasing with options to purchase. We expect that the balance of the proceeds will be used to finance improvements to some of our existing properties and to acquire additional properties.

        In connection with the Term Loan, we have guaranteed the full and prompt payment and performance of all the obligations of our real estate holding subsidiaries under the loan documents for the Term Loan.

        In the event of our default under the Term Loan, all amounts owed by our subsidiaries, and guaranteed by us, under this loan agreement and any other loan with the Lender, including the Revolver discussed below, would become immediately due and payable. In addition, in the event of our default under the Term Loan, the Lender has the right to take control of our facilities encumbered by the loan to the extent necessary to make such payments and perform such acts required under the loan.

        As of March 31, 2007, our borrowing subsidiaries had $55.4 million outstanding on the Term Loan, with the right to draw an additional $9.0 million upon meeting certain covenants under the loan documents.

Revolving Credit Facility with General Electric Capital Corporation

        On March 25, 2004, we entered into the Revolver, as amended on December 3, 2004, with the Lender, which consisted of a $20.0 million revolving credit facility. The Revolver expired in March 2007 but was extended until August 1, 2007. We are in the process of negotiating with the Lender to replace the Revolver with a larger credit facility collateralized by a pledge of the outstanding equity of the participating operating subsidiaries of our portfolio company subsidiaries, as well as our service center.

        In connection with the Revolver, we and the majority of our subsidiaries granted a first priority security interest to the Lender in, among other things: (1) all accounts, accounts receivable and rights to payment of every kind, contract rights, chattel paper, documents and instruments with respect thereto, and all of our rights, remedies, securities and liens in, to, and in respect of our accounts, (2) all moneys, securities, and other property and the proceeds thereof under the control of the Lender and its affiliates, (3) all right, title and interest in, to and in respect of all goods relating to or resulting in accounts, (4) all deposit accounts into which our accounts are deposited, (5) general intangibles and other property of every kind relating to our accounts, (6) all other general intangibles, including, without limitation, proceeds from insurance policies, intellectual property rights, and goodwill, (7) inventory, machinery, equipment, tools, fixtures, goods, supplies, and all related attachments, accessions and replacements, and (8) proceeds, including insurance proceeds, of all of the foregoing. In

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the event of our default, the Lender has the right to take possession of the foregoing with or without judicial process.

        The Revolver bears interest at the prime rate of interest as designated as such by Citibank, N.A., or any successor thereto, as the same may fluctuate from time to time, plus a margin of 1%. In connection with the Revolver, we paid a commitment fee of $0.2 million, and, so long as the loan is available to us, we will pay a loan management fee to the Lender equal to 0.08% of the average amount of the outstanding principal balance of the Revolver during the preceding month.

        The proceeds of the loans under the Revolver have been and continue to be used for working capital and other expenses arising in our ordinary course of business.

        As of March 31, 2007, we had $11,000 outstanding under the Revolver and approximately $8.4 million was pledged to secure outstanding letters of credit.

Mortgage Loan with Wells Fargo Bank, N.A.

        Cherry Health Holdings, Inc., one of our real estate holding subsidiaries, is the borrower under a mortgage loan that it assumed in October 2006. The Loan Assumption Agreement was entered into with Wells Fargo Bank, N.A. as Trustee for GMAC Commercial Mortgage Securities, Inc., the original lender. At the time of the Loan Assumption Agreement, the principal balance outstanding under the corresponding promissory note was approximately $2.1 million. The unpaid balance of principal and accrued interest from the mortgage loan is due on September 1, 2008, and is not prepayable until March 2008. The mortgage loan bears interest at the rate of 7.49% per annum.

        The mortgage loan is secured by Cherry Health Holdings Inc.'s interest in the Pacific Care Center facility and the rents, issues and profits thereof, as well as all personal property used in the operation of the facility.

        In connection with the mortgage loan, we have guaranteed the full and prompt payment and performance of all the obligations of Cherry Health Holdings, Inc. under the loan and assumption documents.

Continental Wingate Associates, Inc. Mortgage Loan

        Ensign Southland LLC, a subsidiary of The Ensign Group, Inc., entered into a mortgage loan on January 30, 2001 with Continental Wingate Associates, Inc. The mortgage loan is insured with the U.S. Department of Housing and Development, or HUD, which subjects our Southland facility to HUD oversight and periodic inspections. As of March 31, 2007, the balance outstanding on this mortgage loan was approximately $6.7 million. The unpaid balance of principal and accrued interest from this mortgage loan is due on February 1, 2027. The mortgage loan bears interest at the rate of 7.5% per annum.

        This mortgage loan is secured by the real property comprising the Southland Care Center facility and the rents, issues and profits thereof, as well as all personal property used in the operation of the facility.

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DESCRIPTION OF CAPITAL STOCK

        The following description of our securities and provisions of our amended and restated certificate of incorporation and amended and restated bylaws is only a summary. For a more complete understanding of these documents, you should refer to the copies of our amended and restated certificate and amended and restated bylaws which have been filed with the Securities and Exchange Commission as exhibits to our registration statement, of which this prospectus forms a part. The description of common stock and preferred stock reflect changes to our capital structure that will occur upon the closing of this offering in accordance with the terms of the amended and restated certificate of incorporation that will be adopted by us immediately prior to the closing of this offering.

        Upon the closing of this offering, our authorized capital stock will consist of                                shares of common stock, par value $0.001 per share, and                                shares of preferred stock, par value $0.001 per share.

Common Stock

        At March 31, 2007, 13,705,200 shares of common stock were outstanding and held of record by 182 holders. The holders of our common stock are entitled to one vote for each share held of record on all matters submitted to a vote of the stockholders, including the election of directors, and do not have cumulative voting rights. Accordingly, the holders of a majority of the shares of common stock entitled to vote in any election of directors can elect all of the directors standing for election, if they so choose. The shares of common stock offered by this prospectus, when issued, will be fully paid and non-assessable and will not be subject to any redemption or sinking fund provisions. The holders of our common stock do not have any preemptive, subscription or conversion rights.

        The holders of our common stock are entitled to receive dividends declared by the board of directors out of legally available funds, subject to the rights of preferred stockholders, if any, and the terms of any existing or future agreements between us and our lenders. In the event of our liquidation, dissolution or winding up, common stockholders are entitled to share ratably in all assets legally available for distribution after payment of all debts and other liabilities, and subject to the prior rights of any holders of outstanding shares of preferred stock, if any.

Preferred Stock

        As of March 31, 2007, there were 685,295 shares of Series A preferred stock held by one stockholder of record. Upon consummation of this offering, each share of Series A preferred stock will convert into four shares of our common stock such that all of the outstanding preferred stock will convert into an aggregate of 2,741,180 shares of our common stock.

        Upon the closing of this offering, the board of directors will be authorized to issue from time to time up to an aggregate of                    shares of preferred stock in one or more series and to fix or alter the designations, preferences, rights and any qualifications, limitations or restrictions of the shares of each of these series, including the dividend rights, dividend rates, conversion rights, voting rights, term of redemption, including sinking fund provisions, redemption price or prices, liquidation preferences and the number of shares constituting any series or designations of a series without further vote or action by the stockholders. The issuance of preferred stock may have the effect of delaying, deferring or preventing a change in control of us without further action by the stockholders, could decrease the amount of earnings and assets available for distribution to the holders of our common stock, and may adversely affect the voting and other rights of the holders of common stock. The issuance of preferred stock with voting and conversion rights may adversely affect the voting power of the holders of common stock, including the loss of voting control. We currently have no plans to issue any shares of preferred stock.

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        We believe that the ability to issue preferred stock without the expense and delay of a special stockholders' meeting will provide us with increased flexibility in structuring possible future financings and acquisitions, and in meeting other corporate needs that might arise. This also permits the board of directors to issue preferred stock containing terms which could impede the completion of a takeover attempt, subject to limitations imposed by the securities laws. The board of directors will make any determination to issue these shares based on its judgment as to the best interests of us and our stockholders at the time of issuance. This could discourage an acquisition attempt or other transaction which stockholders might believe to be in their best interests or in which they might receive a premium for their stock over the then market price of the stock.

Anti-Takeover Provisions

        We are subject to the provisions of Section 203 of the Delaware General Corporation Law. Subject to exceptions, Section 203 prohibits a publicly-held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years from the date of the transaction in which the person became an interested stockholder, unless the interested stockholder attained this status with the approval of the board of directors or unless the business combination is approved in a prescribed manner. A "business combination" includes mergers, asset sales and other transactions resulting in a financial benefit to the interested stockholder. Subject to exceptions, an "interested stockholder" is a person who, together with affiliates and associates, owns, or within three years did own, 15% or more of the corporation's outstanding voting stock. This statute could prohibit or delay the accomplishment of mergers or other takeover or change in control attempts with respect to us and, accordingly, may discourage attempts to acquire us. In addition, provisions of the certificate of incorporation and bylaws that will become effective on or before the closing of this offering may make it more difficult to acquire control of us. These provisions could deprive stockholders of the opportunity to realize a premium on the shares of common stock owned by them and may adversely affect the prevailing market price of our common stock. These provisions are intended to:

•

enhance the likelihood of continuity and stability in the composition of the board and in the policies formulated by the board;



•

discourage transactions that may involve an actual or threatened change in control of us;



•

discourage tactics that may be used in proxy fights;



•

encourage persons seeking to acquire control of us to consult first with our board of directors to negotiate the terms of any proposed business combination or offer; and



•

reduce our vulnerability to an unsolicited proposal for a takeover that does not contemplate the acquisition of all of our outstanding shares or that is otherwise unfair to our stockholders.

        Classified Board of Directors; Removal and Filling Vacancies.    Upon the closing of this offering, our certificate of incorporation and bylaws will provide for our board of directors to be divided into three classes of directors serving staggered, three-year terms. The classification of our board of directors has the effect of requiring at least two annual stockholder meetings, instead of one, to replace a majority of members of the board. Subject to the rights of the holders of any outstanding series of preferred stock, the certificate of incorporation will authorize only the board of directors to fill vacancies, including newly created directorships. Accordingly, this provision could prevent a stockholder from obtaining majority representation on our board of directors by enlarging the board of directors and filling the new directorships with its own nominees. The certificate of incorporation will also provide that directors may be removed by stockholders only for cause and only by the affirmative vote of holders of a majority of the outstanding shares of voting stock.

        Special Stockholder Meetings.    The certificate of incorporation that will become effective on or before the closing of this offering will provide that special meetings of the stockholders for any purpose

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or purposes, unless required by law, shall be called by the chairman of the board of directors, the chief executive officer or a majority of the board of directors. This limitation on the right of stockholders to call a special meeting could make it more difficult for stockholders to initiate actions that are opposed by the board of directors. These actions could include the removal of an incumbent director or the election of a stockholder nominee as a director. They could also include the implementation of a rule requiring stockholder ratification of specific defensive strategies that have been adopted by the board of directors with respect to unsolicited takeover bids. In addition, the limited ability of the stockholders to call a special meeting of stockholders may make it more difficult to change the existing board and management.

        Amendment of Provisions in the Certificate of Incorporation.    The certificate of incorporation that will become effective on or before the closing of this offering will generally require the affirmative vote of the holders of at least two-thirds of the outstanding voting stock in order to amend any provisions of the certificate of incorporation concerning:

•

the removal or appointment of directors;



•

the authority of stockholders to act by written consent;



•

the required vote to amend the certificate of incorporation;



•

calling a special meeting of stockholders;



•

procedure and content of stockholder proposals concerning business to be conducted at a meeting of stockholders;



•

director nominations by stockholders; and



•

the issuance of preferred stock without shareholder approval.

        These voting requirements will make it more difficult for minority stockholders to make changes in the certificate of incorporation that could be designed to facilitate the exercise of control over us.

Options

        As of March 31, 2007, options to purchase a total of 1,164,400 shares of common stock were outstanding, and there were up to 250,400 unissued shares of common stock under our 2001 Stock Option, Deferred Stock and Restricted Stock Plan and our 2005 Stock Incentive Plan that were authorized for issuance. For a more complete discussion of our stock option plans, please see "Compensation Discussion and Analysis—Executive Compensation" and "—Employee Benefit Plans."

Registration Rights

        Upon consummation of this offering, the holders of 2,741,180 shares of our common stock, or their transferees, will be entitled to certain rights with respect to the registration of such shares, or registrable securities, under the Securities Act, as follows:

        Demand Registration Rights.    Commencing after six months after the closing of this offering, the holders of shares representing at least a majority of the registrable securities may request that we register all or at least 30% of their shares of registrable securities, or a lesser percentage with an aggregate offering price greater than $5.0 million, net of underwriter discounts and sales commissions. Upon their request, we must, subject to some restrictions and limitations, use commercially reasonable efforts to cause a registration statement covering the number of shares of registrable securities that are subject to the request to become effective. The holders of registrable securities may only require us to file a maximum of one registration statement in response to their demand registration rights, and we may delay such registration under certain circumstances for up to 120 days no more than once in any 12-month period.

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        Piggyback Registration Rights.    Except with respect to this offering, in the event that we propose to register any of our securities under the Securities Act, the holders of registrable securities are entitled to notice of such registration and are entitled to include their registrable securities in such registration, subject to certain marketing and other limitations and exceptions. These registration opportunities are unlimited, but the number of shares that may be registered may be cut back in limited situations by the underwriters.

        Form S-3 Registration Rights.    The holders of shares representing at least 30% of the registrable securities may request that we register their shares if we are eligible to file a registration statement on Form S-3 and if the aggregate price of the shares sought to be offered to the public by the holders of registrable securities is at least $1.0 million, net of any underwriter discounts and sales commissions. The holders of registrable securities may only require us to file three registration statements on Form S-3, and we may delay such registration under certain circumstances for up to 120 days no more than once in any 12-month period.

        We are generally obligated to bear the expenses, other than underwriting discounts and sales commissions, of these registrations. These registration rights terminate upon the earlier of three years after this offering or such time as all of the shares of registrable securities may be sold under Rule 144 under the Securities Act, during any three-month period.

Transfer Agent and Registrar

        The transfer agent and registrar for our common stock is                                .

NASDAQ Global Market Listing

        We have applied to list our common stock on the NASDAQ Global Market under the symbol "ENSG."

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SHARES ELIGIBLE FOR FUTURE SALE

        Prior to this offering, there has been no public market for our common stock. Future sales of our common stock in the public market, or the availability of such shares for sale in the public market, could adversely affect market prices prevailing from time to time. As described below, only a limited number of shares will be available for sale shortly after this offering due to contractual and legal restrictions on resale. Nevertheless, sales of shares of our common stock in the public market after such restrictions lapse, or the perception that those sales may occur, could adversely affect the prevailing market price at such time and our ability to raise equity capital in the future.

        Upon completion of this offering, we will have                                shares of common stock outstanding, assuming no exercise of any options after March 31, 2007. Of this amount, the                                 shares offered by this prospectus will be available for immediate sale in the public market as of the date of this prospectus. Following the expiration of lock-up agreements with the representatives of the underwriters, which extend for a period of not less than 180 days from the date of execution of the underwriting agreement,                                 additional shares will be available for sale in the public market, subject in some cases to compliance with the volume and other limitations of Rule 144 and Rule 701 of the Securities Act.

Days after the Date of this Prospectus	Approximate Number of Shares Eligible for Future Sale	Comment
Upon effectiveness		Freely tradable shares sold in this offering
90 days		Shares eligible for sale under Rule 144, 144(k) or 701
180 days		Lock-up released; shares eligible for sale under Rules 144, 144(k) or 701
Over 180 days		Restricted securities held for less than one year

        In general, under Rule 144 as currently in effect, a person who has beneficially owned shares for at least one year is entitled to sell, within any three-month period commencing 90 days after the date of this prospectus, a number of shares that does not exceed the greater of:

•

1% of the then outstanding shares of common stock, which will equal approximately                     shares immediately after this offering; or



•

the average weekly trading volume during the four calendar weeks preceding the sale, subject to the filing of a Form 144 with respect to the sale.

        A person who is not deemed to have been an affiliate of ours at any time during the 90 days immediately preceding a sale and who has beneficially owned the shares proposed to be sold for at least two years is entitled to sell such shares under Rule 144(k) without regard to the manner of sale, public information, volume limitation or notice provisions of Rule 144. Persons deemed to be affiliates of ours must always sell under the limitations imposed by Rule 144, even after the applicable holding periods have been satisfied.

        Unless they rely upon a different exemption, any employee, director, officer, consultant or advisor who purchased shares of our common stock under a written compensatory plan or contract is entitled to rely on the resale provisions of Rule 701 of the Securities Act, which permits nonaffiliates to sell these shares without having to comply with the public information, holding period, volume limitation or notice provisions of Rule 144 and permits affiliates to sell these shares without having to comply with the Rule 144 holding period restrictions, in each case commencing 90 days after the date of this prospectus, subject to the 180-day restrictive period under the lock-up agreements.

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        As a result of the lock-up agreements described below and the provisions of Rule 144, 144(k) and 701, assuming such shares have been released from any repurchase right we may hold, these shares of restricted securities will be available for sale in the public market as follows:

•

beginning 181 days after the date of this prospectus                    shares held by persons who are not our affiliates will have been held long enough to be sold under Rule 701, Rule 144(k) or Rule 144, subject to the limitations described above;



•

beginning 181 days after the date of this prospectus                    shares held by our affiliates will have been held long enough to be sold under Rule 701 or Rule 144, subject to volume and other limitations described above; and



•

the remaining shares may be sold under Rule 144 or 144(k) once they have been held for the required statutory period.

        We are unable to estimate the number of shares that will be sold under Rules 144, 144(k) and 701, since this will depend on the market price for our common stock, the personal circumstances of the sellers and other factors.

        We, our directors and executive officers, the holders of a majority of our outstanding stock and a majority of our option holders have agreed that, subject to certain exceptions, including those described in "Underwriting", we and they will not sell any common stock without the prior written consent of D.A. Davidson & Co. for a period of 180 days from the date of the execution of the underwriting agreement.

        The 180-day restricted period described in the preceding paragraph will be extended, as described in "Underwriting", if:

•

during the last 17 days of the 180-day restricted period we issue an earnings release or we disclose material news or a material event relating to us occurs; or



•

prior to the expiration of the 180-day restricted period, we announce that we will release earnings results during the 16-day period beginning on the last day of the 180-day restricted period,

in which case the restrictions described in the preceding paragraph will continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the occurrence of the material news or material event.

        We intend to file a registration statement on Form S-8 under the Securities Act as soon as practicable after the completion of the offering to register shares of common stock subject to outstanding stock options or reserved for issuance under our stock plans. This registration will permit the resale of these shares by nonaffiliates in the public market without restriction under the Securities Act, upon completion of the lock-up period described above. Shares registered under the Form S-8 registration statement held by affiliates of ours will be subject to Rule 144 volume limitations. As of March 31, 2007, there were outstanding options under our stock option plans to purchase 1,164,400 shares of common stock issuable upon the exercise of outstanding options at a weighted average exercise price of $6.20 per share. See "Compensation Discussion and Analysis—Executive Compensation" and "Compensation Discussion and Analysis—Employee Benefit Plans."

        Holders of 2,741,180 shares of common stock have registration rights with respect to their shares. Registration of these securities would enable these shares to be freely tradable without restriction under the Securities Act.

        See also "Risk Factors—The number of shares eligible for sale following this offering may depress the market price of our common stock."

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MATERIAL U.S. FEDERAL INCOME AND ESTATE TAX
CONSIDERATIONS FOR NON-U.S. HOLDERS

        The following discussion is a summary of the material U.S. federal income tax considerations generally applicable to the purchase, ownership and disposition of our common stock by Non-U.S. Holders. For purposes of this summary, a "non-U.S. holder" is any holder other than a citizen or resident of the United States; a corporation (or other entity treated as a corporation for United States income tax purposes) organized under the laws of the United States, any state or the District of Columbia; an estate, the income of which is subject to U.S. federal income taxation regardless of its source; a trust if it (i) is subject to the primary supervision of a court within the United States and one or more U.S. persons have the authority to control all substantial decisions of the trust, or (ii) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person.

        This summary deals only with our common stock held as capital assets by holders who purchase common stock in this offering. This discussion does not cover all aspects of U.S. federal income taxation that may be relevant to the purchase, ownership or disposition of our common stock by prospective investors in light of their particular circumstances. In particular, this discussion does not address all of the tax considerations that may be relevant to certain types of investors subject to special treatment under U.S. federal income tax laws, such as:

•

dealers in securities or currencies;



•

financial institutions;



•

regulated investment companies;



•

real estate investment trusts;



•

tax-exempt entities;



•

insurance companies;



•

persons holding common stock as part of a hedging, integrated, conversion or constructive sale transaction or a straddle;



•

traders in securities that elect to use a mark-to-market method of accounting for their securities holdings;



•

persons liable for alternative minimum tax;



•

U.S. expatriates or former long-term residents of the U.S.;



•

entities treated as partnerships for U.S. federal income tax purposes and the beneficial owners of any entity treated as a partnership for U.S. federal income tax purposes; or



•

persons that own, or are deemed to own, more than five percent of our company.

        If a partnership or other flow-through entity is a beneficial owner of common stock, the tax treatment of a partner in the partnership or an owner of the entity will depend upon the status of the partner or other owner and the activities of the partnership or other entity. Accordingly, partnerships and flow-through entities that hold our common stock and partners or owners of such partnerships or entities, as applicable, should consult their own tax advisors. Special rules may also apply to you if you are a "controlled foreign corporation" or a "passive foreign investment company," or are otherwise subject to special treatment under the Code. Any such holders should consult their own tax advisors to determine the U.S. federal, state, local and non-U.S. income and other tax consequences that may be relevant to them.

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        Furthermore, this summary is based upon the provisions of the Internal Revenue Code of 1986, as amended, or the Code, the Treasury regulations promulgated thereunder and administrative and judicial interpretations thereof, all as of the date hereof. Such authorities may be repealed, revoked, modified or subject to differing interpretations, possibly on a retroactive basis, so as to result in U.S. federal income tax consequences materially different from those discussed below. We have not received a ruling from the Internal Revenue Service, or the IRS, with respect to any of the matters discussed herein, and therefore there can be no assurance that the IRS would agree with the conclusions stated herein. This discussion does not address any state, local or non-U.S. tax considerations.

        If you are considering the purchase of our common stock, we urge you to consult your own tax advisors concerning the particular U.S. federal income tax consequences to you of the purchase, ownership and disposition of our common stock, as well as any consequences to you arising under state, local and non-U.S. tax laws.

Dividends

        Dividends paid to you (to the extent paid out of our current or accumulated earnings and profits, as determined for U.S. federal income tax purposes) generally will be subject to U.S. federal withholding tax at a 30% rate, or such lower rate as may be specified by an applicable tax treaty. However, dividends that are effectively connected with a trade or business you conduct within the United States, or, if certain tax treaties apply to you, are attributable to a permanent establishment you maintain in the United States, are not subject to the U.S. federal withholding tax, but instead are subject to U.S. federal income tax on a net income basis at the applicable graduated individual or corporate rates. Special certification and disclosure requirements must be satisfied for effectively connected income to be exempt from withholding. If you are a corporation, any such effectively connected dividends that you receive may be subject to an additional branch profits tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty.

        If you wish to claim the benefit of an applicable treaty rate for dividends paid on our common stock, you must provide the withholding agent with a properly executed IRS Form W-8BEN, claiming an exemption from or reduction in withholding under the applicable income tax treaty. In the case of common stock held by a foreign intermediary (other than a "qualified intermediary"), the intermediary generally must provide an IRS Form W-8IMY and attach thereto an appropriate certification by each beneficial owner for which it is receiving the dividends.

        If you are eligible for a reduced rate of U.S. federal withholding tax pursuant to an applicable income tax treaty, you may obtain a refund of any excess amounts withheld by filing an appropriate claim for refund with the IRS.

Sale, Exchange or Other Taxable Disposition of Common Stock

        You generally will not be subject to U.S. federal income tax with respect to gain recognized on a sale, exchange or other taxable disposition of shares of our common stock except in the following situations:

•

If the gain is effectively connected with your conduct of a trade or business in the United States, or, if certain tax treaties apply, is attributable to a permanent establishment you maintain in the United States you will be subject to tax on any gain derived from the sale, exchange or other taxable disposition at applicable graduated U.S. federal income tax rates. In addition, if you are a corporation, you may be subject to the branch profits tax on your effectively connected earnings and profits for the taxable year, which would include such gain, at a rate of 30% or at such lower rate as may be specified by an applicable income tax treaty, subject to adjustments.

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•

If you are an individual and hold shares of our common stock as a capital asset, you are present in the United States for 183 or more days in the taxable year of the sale, exchange or other taxable disposition and certain other conditions are met, you will generally be subject to a flat 30% withholding tax on any gain derived from the sale, exchange or other taxable disposition that may be offset by U.S. source capital losses (even though you are not considered a resident of the United States); or



•

If the rules of the Foreign Investment in Real Property Tax Act, or FIRPTA (described below) treat the gain as effectively connected with a U.S. trade or business.

        The FIRPTA rules may apply to a sale, exchange or other disposition of common stock if we are or have been a "United States real property holding corporation" for U.S. federal income tax purposes at any time during the shorter of the five-year period preceding such disposition and your holding period in the common stock, and (i) you beneficially own, or have owned, more than 5% of the total fair market value of our common stock at any time during the five-year period preceding such disposition, or (ii) our common stock has ceased to be traded on an established securities market prior to the beginning of the calendar year in which the sale or disposition occurs.

U.S. Federal Estate Tax

        Shares of our common stock held by an individual Non-U.S. Holder at the time of his or her death will be included in such Non-U.S. Holder's gross estate for U.S. federal estate tax purposes, unless an applicable estate tax treaty provides otherwise.

Information Reporting and Backup Withholding

        You may be subject to information reporting and backup withholding with respect to any dividends on, and the proceeds from dispositions of, our common stock paid to you, unless you comply with certain reporting procedures (usually satisfied by providing an IRS Form W-8BEN) or otherwise establish an exemption. Additional rules relating to information reporting requirements and backup withholding with respect to the payment of proceeds from the disposition of shares of our common stock will apply as follows:

•

If the proceeds are paid to or through the U.S. office of a broker (U.S. or foreign), they generally will be subject to backup withholding and information reporting, unless you certify that you are not a U.S. person under penalties of perjury (usually on an IRS Form W-8BEN) or otherwise establish an exemption;



•

If the proceeds are paid to or through a non-U.S. office of a broker that is not a U.S. person and is not a foreign person with certain specified U.S. connections, or a U.S. Related Person, they will not be subject to backup withholding or information reporting; and



•

If the proceeds are paid to or through a non-U.S. office of a broker that is a U.S. person or a U.S. Related Person, they generally will be subject to information reporting (but not backup withholding), unless you certify that you are not a U.S. person under penalties of perjury (usually on an IRS Form W-8BEN) or otherwise establish an exemption.

        In addition, the amount of any dividends paid to you and the amount of tax, if any, withheld from such payment generally must be reported annually to you and the IRS. The IRS may make such information available under the provisions of an applicable income tax treaty to the tax authorities in the country in which you reside.

        Any amounts withheld under the backup withholding rules will be allowed as a refund or a credit against your U.S. federal income tax liability provided the required information is timely furnished by you to the IRS. Non-U.S. Holders should consult their own tax advisors regarding the filing of a U.S. tax return for claiming a refund of such backup withholding.

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UNDERWRITING

        Subject to the terms and conditions set forth in an underwriting agreement among us and the underwriters, the underwriters named below, for whom D.A. Davidson & Co. and Stifel, Nicolaus & Company, Incorporated are acting as representatives, have severally agreed to purchase from us the respective number of shares of common stock appearing opposite their names below:

Underwriters		Number of Shares
D.A. Davidson & Co.
Stifel, Nicolaus & Company, Incorporated
	Total

        The underwriters have agreed, severally and not jointly, to purchase all of the shares shown in the above table if any of those shares are sold in this offering. If an underwriter defaults in an amount in excess of that described in the underwriting agreement, the underwriting agreement provides that the purchase commitments of the non-defaulting underwriters may be increased or the underwriting agreement may be terminated under certain circumstances.

        The shares of common stock are offered by the underwriters, subject to prior sale, when, as and if issued to and accepted by them, subject to approval of legal matters by counsel for the underwriters, including confirming the validity of the shares of common stock being offered, and other conditions contained in the underwriting agreement including, among other items, the receipt of legal opinions, officers' certificates and other customary closing documents, the absence of any material adverse changes affecting us or our business and the absence of any objections from the National Association of Securities Dealers, Inc. with respect to the fairness and reasonableness of the underwriting terms.

        The underwriters reserve the right to withdraw, cancel or modify offers to the public and to reject orders in whole or in part. The underwriters have advised us that they do not intend to confirm sales to any account over which they exercise discretionary authority in excess of 5% of the total number of shares offered by them.

Commissions and Discounts

        The underwriters have advised us that they propose to offer the shares of our common stock to the public at the public offering price appearing on the cover page of this prospectus and to certain dealers at that price less a concession of not more than $          per share, of which up to $          may be reallowed to other dealers. After the initial offering, the public offering price, concession and reallowance to dealers may be changed.

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        The following table shows the public offering price, underwriting discount and commissions, and proceeds, before expenses, to us and to the selling stockholders, both on a per share basis and in total, assuming either no exercise or full exercise by the underwriters of their over-allotment option and assuming, upon exercise in full of the over-allotment option, that the selling stockholders deliver all of the shares needed to satisfy the over-allotment option.

	Per Share		Total
	Without Option	With Option	Without Option	With Option
Public offering price
Underwriting discount and commissions payable by us
Proceeds, before expenses, to us
Underwriting discount and commissions payable by the selling stockholders	—		—
Proceeds, before expenses, to selling stockholders	—		—

        We estimate that the expenses of this offering payable by us, not including underwriting discounts and commissions, will be approximately $                        , which includes legal, accounting and printing costs and various other fees associated with registering and listing our common stock. We have agreed to pay the expenses of the selling stockholders incurred in connection with this offering, other than underwriting discounts and commissions payable in respect of the shares sold by the selling stockholders.

Over-Allotment Option

        The selling stockholders have granted to the underwriters an option, exercisable during the 30-day period after the date of this prospectus, to purchase up to a total of                        additional shares of our common stock at the public offering price per share less the underwriting discounts and commissions per share shown on the cover page of this prospectus. To the extent that the underwriters exercise this option, each underwriter will have a firm commitment, subject to conditions, to purchase approximately the same percentage of the additional shares that the number of shares of common stock to be purchased by that underwriter as shown in the above table represents as a percentage of the total number of shares shown in that table.

Indemnification

        We and the selling stockholders have agreed to indemnify the underwriters against specified liabilities, including liabilities under the Securities Act, and to contribute to payments the underwriters may be required to make in respect of those liabilities.

Lock-Up Agreements

        We, all of our directors and officers, certain of our employees, all of the selling stockholders and certain of our other stockholders, all of whom collectively hold approximately      .      % of the shares of our common stock outstanding as of                        , 2007 have agreed that, without the prior written consent of D.A. Davidson & Co., we and they will not, during the period beginning on and including the date of the execution of the underwriting agreement through and including the date which is 180 days after the date of the execution of the underwriting agreement, directly or indirectly, offer, sell, contract to sell, pledge or otherwise dispose of, or enter into any transaction which is designed to, or might reasonably be expected to, result in the disposition of (whether by actual disposition or effective economic disposition due to cash settlement or otherwise by us or our affiliates or any person in privity with us or our affiliates), or file (or participate in filing) any registration statement with the Securities

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and Exchange Commission (other than registration statements or Form S-8) in respect of, or establish or increase a put equivalent position or liquidate or decrease a call equivalent position with respect to, any shares of our common stock, or any securities convertible into, or exercisable or exchangeable for, shares of our common stock.

        The lock-up provisions are subject to certain exceptions, including transfers of the stockholder's securities as bona fide gifts, by will or applicable laws of descent or to a trust for the benefit of the stockholder or the stockholder's immediate family or by a trust to its beneficiaries, to the stockholder's affiliates or to any investment fund or other entity controlled or managed by the stockholder, as a distribution to members, partners or stockholders of the stockholder, or to any corporation, partnership, limited liability company or other entity all of the beneficial ownership interests of which are held by the stockholder or the stockholder's immediate family, provided, among other requirements, that the transferee of such securities agrees to be locked-up to the same extent as the stockholder from whom the transferee received the securities. In addition, the lock-up provisions do not apply to shares of common stock proposed to be sold pursuant to the underwriting agreement; transactions relating to shares of common stock acquired in open market transactions after the completion of the offering so long as such transactions that are dispositions for value are not required to be reported or are voluntarily reported under Section 16(a) of the Securities Exchange Act of 1934 during the lock-up period; the establishment of a securities trading plan pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934 provided that no transfers occur under such plan during the lock-up period; the issuance by us of common stock, options or other awards under our equity incentive plans (provided the recipient agrees to the lock-up); and the issuance by us of common stock upon the exercise of options or other awards under our equity incentive plans or the conversion of securities outstanding as of the date of this prospectus.

        Moreover, if:

•

during the last 17 days of the 180-day restricted period, we issue an earnings release or disclose material news or a material event relating to us occurs; or



•

prior to the expiration of the 180-day restricted period, we announce that we will release earnings results during the 16-day period beginning on the last day of the 180-day restricted period,

then the restrictions imposed by the preceding paragraph shall continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release, the disclosure of material news or the occurrence of the material event, as applicable.

        D.A. Davidson & Co., may, in its sole discretion and at any time or from time to time, without notice, release all or any portion of the shares or other securities subject to the lock-up agreements described above. Any determination to release any shares or other securities subject to the lock-up agreements would be based on a number of factors at the time of determination, which may include the market price of the common stock, the liquidity of the trading market for the common stock, general market conditions, the number of shares or other securities proposed to be sold or otherwise transferred and the timing, purpose and terms of the proposed sale or other transfer.

Stabilization

        In order to facilitate this offering of our common stock, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the market price of our common stock. Specifically, the underwriters may sell more shares of common stock than they are obligated to purchase under the underwriting agreement, creating a short position. A short sale is covered if the short position is no greater than the number of shares of common stock available for purchase by the underwriters under the over-allotment option. The underwriters may close out a covered short sale by

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exercising the over-allotment option or purchasing common stock in the open market. In determining the source of common stock to close out a covered short sale, the underwriters may consider, among other things, the market price of common stock compared to the price payable under the over-allotment option. The underwriters may also sell shares of common stock in excess of the over-allotment option, creating a naked short position. The underwriters must close out any naked short position by purchasing shares of common stock in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the common stock in the open market after the date of pricing of this offering that could adversely affect investors who purchase in this offering.

        As an additional means of facilitating this offering, the underwriters may bid for, and purchase, common stock in the open market to stabilize the price of our common stock. The underwriting syndicate may also reclaim selling concessions allowed to an underwriter or a dealer for distributing common stock in this offering if the syndicate repurchases previously distributed common stock to cover syndicate short positions or to stabilize the price of the common stock.

        The foregoing transactions, if commenced, may raise or maintain the market price of our common stock above independent market levels or prevent or slow down a decline in the market price of our common stock.

        The underwriters have advised us that these transactions, if commenced, may be effected on the NASDAQ Global Market or otherwise. Neither we nor any of the underwriters make any representation that the underwriters will engage in any of the transactions described above and these transactions, if commenced, may be discontinued without notice. Neither we nor any of the underwriters make any representation or prediction as to the direction or magnitude of the effect that the transactions described above, if commenced, may have on the market price of our common stock.

Offering Price Determination

        Prior to this offering, there has been no public market for our common stock. Consequently, the initial public offering price for the shares of our common stock will be determined by negotiations among us and the underwriters. The factors to be considered in determining the initial public offering price include:

•

prevailing market conditions;



•

our historical performance and capital structure;



•

financial and operating information and market valuations with respect to other companies that we and the representatives of the underwriters believe to be comparable to us;



•

an overall assessment of our management;



•

the present state of our business; and



•

our future prospects.

        An active trading market for our common stock may not develop. It is possible that the market price of our common stock after this offering may be less than the initial public offering price. In addition, the estimated initial public offering price range appearing on the cover of this prospectus is subject to change as a result of market conditions or other factors.

Electronic Offer, Sale and Distribution of Shares

        This prospectus in electronic format may be made available online through online services maintained by one or more of the underwriters and/or selling group members participating in this offering, or by their affiliates. In those cases, prospective investors may view offering terms online and,

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depending upon the particular underwriter or selling group member, prospective investors may be allowed to place orders online. Other than the electronic prospectus, the information on the websites of the underwriters, other selling group members and their affiliates is not part of this prospectus. The underwriters may agree to allocate a specific number of shares for sale to online brokerage account holders. Any such allocation for online distributions will be made by the representatives on the same basis as other allocations.

NASDAQ Global Market Listing

        We have applied to list our common stock on the NASDAQ Global Market under the symbol "ENSG."

LEGAL MATTERS

        The validity of the issuance of the shares of common stock offered by this prospectus will be passed upon for us by Dorsey & Whitney LLP, Irvine, California. Certain legal matters relating to the sale of common stock in this offering will be passed upon for the underwriters by Heller Ehrman LLP, San Diego, California.

EXPERTS

        The consolidated financial statements as of December 31, 2005 and 2006, and for each of the three years in the period ended December 31, 2006, included in this prospectus and the related financial statement schedule included elsewhere in the registration statement have been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report appearing herein and elsewhere in the registration statement (which report expresses an unqualified opinion on the consolidated financial statements and financial statement schedule and includes explanatory paragraphs (i) referring to adoption of the provisions of Statement of Financial Accounting Standards No. 123 (revised 2004) Share-Based Payment effective January 1, 2006 and (ii) referring to the restatement of the consolidated balance sheet as of December 31, 2005 and the related consolidated statement of cash flows for the two years then ended as discussed in Note 17), and have been so included in reliance upon the reports of such firm given upon their authority as experts in accounting and auditing.

WHERE YOU CAN FIND MORE INFORMATION

        We have filed a registration statement on Form S-1 with the Securities and Exchange Commission under the Securities Act of 1933, as amended, with respect to the shares of common stock offered by this prospectus. This prospectus, which constitutes a part of the registration statement, does not contain all of the information set forth in the registration statement or the exhibits and schedules filed therewith. For further information with respect to us and our common stock, please see the registration statement and the exhibits and schedules filed with the registration statement. Statements contained in this prospectus regarding the contents of any contract or any other document that is filed as an exhibit to the registration statement are not necessarily complete, and each such statement is qualified in all respects by reference to the full text of such contract or other document filed as an exhibit to the registration statement. The registration statement, including its exhibits and schedules, may be inspected without charge at the Public Reference Room maintained by the Securities and Exchange Commission, located at 100 F Street, N.E., Washington, D.C. 20549, and copies of all or any part of the registration statement may be obtained from such offices upon the payment of the fees prescribed by the Securities and Exchange Commission. Please call the Securities and Exchange Commission at 1-800-SEC-0330 for further information about the public reference room. The Securities and Exchange Commission also maintains an Internet website that contains reports, proxy and information statements

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and other information regarding registrants that file electronically with the Securities and Exchange Commission. The address of the website is www.sec.gov.

        Upon completion of this offering, we will become subject to the information and periodic reporting requirements of the Securities Exchange Act of 1934, as amended, and, in accordance therewith, will file periodic and current reports, proxy statements and other information with the Securities and Exchange Commission. Such periodic and current reports, proxy statements and other information will be available for inspection and copying at the public reference room and on the Securities and Exchange Commission website referred to above, as well as free of charge on our web site at http://www.ensigngroup.net under the Investor Relations section. The inclusion of our web site address in this prospectus does not include or incorporate by reference any information on our web site into this prospectus.

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THE ENSIGN GROUP, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page
Report of Independent Registered Public Accounting Firm	F-2
Consolidated Balance Sheets as of December 31, 2005 (Restated) and 2006 and March 31, 2007 (Unaudited)	F-3
Consolidated Statements of Income for the Years Ended December 31, 2004, 2005 and 2006 and the Three Months Ended March 31, 2006 and 2007 (Unaudited)	F-4
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2004, 2005 and 2006 and for the Three Months Ended March 31, 2007 (Unaudited)	F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 2004 (Restated), 2005 (Restated) and 2006 and the Three Months Ended March 31, 2006 and 2007 (Unaudited)	F-6
Notes to Consolidated Financial Statements	F-8

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
The Ensign Group, Inc.
Mission Viejo, California

        We have audited the accompanying consolidated balance sheets of The Ensign Group, Inc. and subsidiaries (the "Company") as of December 31, 2006 and 2005, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2006. Our audits also included the financial statement schedule listed in the Index at Item 16. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

        We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of The Ensign Group, Inc. and subsidiaries as of December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

        As discussed in Note 2 to the consolidated financial statements, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment in 2006.

        As discussed in Note 17, the accompanying consolidated balance sheet as of December 31, 2005 and the related consolidated statements of cash flows for the two years then ended have been restated.

/s/ DELOITTE & TOUCHE LLP

Costa Mesa, California
April 26, 2007

F-2

THE ENSIGN GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

										March 31,
				December 31, 2005			December 31, 2006			2007			2007 Pro Forma Stockholders' Equity
				(As Restated— See Note 17)						(unaudited)			(unaudited)
Assets
Current assets:
	Cash and cash equivalents			$	11,635		$	25,491		$	16,409		$	16,409
	Accounts receivable—less allowance for doubtful accounts of $4,959, $7,543 and $8,126 at December 31, 2005 and 2006 and March 31, 2007, respectively				43,363			45,285			44,447			44,447
	Prepaid expenses and other current assets				4,274			4,185			4,938			4,938
	Deferred tax asset—current				4,459			8,844			8,174			8,174
		Total current assets			63,731			83,805			73,968			73,968
Property and equipment, net					43,644			87,133			97,169			97,169
Insurance subsidiary deposits					4,547			8,530			9,770			9,770
Deferred tax asset					3,673			3,714			5,125			5,125
Restricted and other assets					2,004			2,618			2,780			2,780
Intangible assets, net					1,791			2,659			2,624			2,624
Goodwill					—			2,072			2,883			2,883
			Total assets	$	119,390		$	190,531		$	194,319		$	194,319
Liabilities and stockholders' equity
Current liabilities:
	Accounts payable			$	11,029		$	12,329		$	13,105		$	13,105
	Accrued wages and related liabilities				18,238			24,026			20,952			20,952
	Accrued self-insurance liabilities—current				3,729			6,122			6,567			6,567
	Other accrued liabilities				11,114			12,106			12,328			12,328
	Current maturities of long-term debt				534			941			1,080			1,080
		Total current liabilities			44,644			55,524			54,032			54,032
Long-term debt—less current maturities					25,520			63,587			63,190			63,190
Accrued self-insurance liability					11,542			15,384			17,079			17,079
Deferred rent and other long-term liabilities					2,325			2,164			2,670			2,670
Commitments and contingencies (Note 13)
Series A redeemable convertible preferred stock; $0.001 par value; 1,000,000 shares authorized; 685,295 shares issued and outstanding at December 31, 2005 and 2006 and March 31, 2007 respectively; liquidation preference of $2,618, $2,401 and $2,330 at December 31, 2005 and 2006 and March 31, 2007, respectively					2,725			2,725			2,725			—
Stockholders' equity:
	Common stock; $0.001 par value; 20,000,000 shares authorized; 13,914,400, 13,693,600 and 13,705,200 shares issued and outstanding at December 31, 2005 and 2006 and March 31, 2007, respectively; 16,434,780 and 16,446,380 pro forma shares issued and outstanding at December 31, 2006 and March 31, 2007 (unaudited)				14			14			14			17
	Additional paid-in capital				613			1,250			1,530			4,252
	Retained earnings				34,307			54,724			57,863			57,863
	Common stock in treasury, at cost, 400,000, 755,000 and 745,000 shares at December 31, 2005 and 2006 and March 31, 2007, respectively				(2,300	)		(4,841	)		(4,784	)		(4,784	)
		Total stockholders' equity			32,634			51,147			54,623			57,348
			Total liabilities and stockholders' equity	$	119,390		$	190,531		$	194,319		$	194,319

See notes to consolidated financial statements.

F-3

THE ENSIGN GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

			Year Ended December 31,									Three Months Ended March 31,
			2004			2005			2006			2006			2007
												(unaudited)
Revenue			$	244,536		$	300,850		$	358,574		$	83,352		$	97,978
Expense:
	Cost of services (exclusive of facility rent and depreciation and amortization shown separately below)			199,986			239,379			284,847			65,601			80,847
	Facility rent—cost of services			14,773			16,118			16,404			4,055			4,155
	General and administrative expense			8,537			10,909			14,210			3,260			3,746
	Depreciation and amortization			1,934			2,458			4,221			752			1,532
		Total expenses		225,230			268,864			319,682			73,668			90,280
Income from operations				19,306			31,986			38,892			9,684			7,698
Other income (expense):
	Interest expense			(1,565	)		(2,035	)		(2,990	)		(578	)		(1,169	)
	Interest income			85			491			772			162			392
		Other expense, net		(1,480	)		(1,544	)		(2,218	)		(416	)		(777	)
Income before provision for income taxes				17,826			30,442			36,674			9,268			6,921
Provision for income taxes				6,723			12,054			14,125			3,661			2,784
Net income			$	11,103		$	18,388		$	22,549		$	5,607		$	4,137
Net income per share:
	Basic		$	0.83		$	1.35		$	1.66		$	0.41		$	0.30
	Diluted		$	0.63		$	1.05		$	1.34		$	0.33		$	0.24
Weighted average common shares outstanding:
	Basic			13,284,902			13,468,060			13,365,682			13,529,822			13,419,764
	Diluted			17,519,032			17,505,040			16,823,242			16,929,017			16,904,196

See notes to consolidated financial statements.

F-4

THE ENSIGN GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(IN THOUSANDS EXCEPT SHARE DATA)

	Common Stock										Treasury Stock
					Additional Paid-In Capital			Retained Earnings
	Shares		Amount								Shares		Amount			Total
Balance—December 31, 2003	13,594,000		$	14	$	173		$	7,156				$	—		$	7,343
Issuance of common stock to employees and directors resulting from the exercise of stock options	470,000					220											220
Dividends declared and paid									(835	)							(835	)
Accretion on Series A preferred stock									(3	)							(3	)
Net income									11,103								11,103
Balance—December 31, 2004	14,064,000			14		393			17,421					—			17,828
Issuance of common stock to employees and directors resulting from the exercise of stock options	253,400					221											221
Repurchase of common stock	(3,000	)				(1	)										(1	)
Dividends declared and paid									(1,502	)							(1,502	)
Purchase of treasury stock	(400,000	)									400,000			(2,300	)		(2,300	)
Net income									18,388								18,388
Balance—December 31, 2005	13,914,400			14		613			34,307		400,000			(2,300	)		32,634
Issuance of common stock to employees and directors resulting from the exercise of stock options	183,400					195					(45,000	)		259			454
Repurchase of common stock	(4,200	)				(1	)										(1	)
Dividends declared									(2,132	)							(2,132	)
Employee stock award compensation						443											443
Purchase of treasury stock	(400,000	)									400,000			(2,800	)		(2,800	)
Net income									22,549								22,549
Balance—December 31, 2006	13,693,600			14		1,250			54,724		755,000			(4,841	)		51,147
Issuance of common stock to employees and directors resulting from the exercise of stock options (unaudited)	14,800					32					(10,000	)		57			89
Repurchase of common stock (unaudited)	(3,200	)				(1	)										(1	)
Dividends declared (unaudited)									(658	)							(658	)
Employee stock award compensation (unaudited)						249											249
Net income (unaudited)									4,137								4,137
FIN 48 transition amount (unaudited)									(340	)							(340	)
Balance—March 31, 2007 (unaudited)	13,705,200		$	14	$	1,530		$	57,863		745,000		$	(4,784	)	$	54,623

See notes to consolidated financial statements

F-5

THE ENSIGN GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

					Year Ended December 31,									Three Months Ended March 31,
					2004			2005			2006			2006			2007
					(As Restated— See Note 17)			(As Restated— See Note 17)						(unaudited)
Cash flows from operating activities:
	Net income				$	11,103		$	18,388		$	22,549		$	5,607		$	4,137
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation and amortization				1,934			2,458			4,221			752			1,532
		Deferred income taxes				(4,259	)		(3,913	)		(4,426	)		625			(760	)
		Provision for doubtful accounts				3,415			3,092			4,191			1,267			1,127
		Stock compensation				—			—			443			2			249
		Loss on disposition of property and equipment				10			6			30			—			14
		Change in operating assets and liabilities
			Accounts receivable			391			(19,189	)		(6,113	)		(4,216	)		(289	)
			Prepaid expenses and other current assets			6,047			(970	)		89			(768	)		(753	)
			Insurance subsidiary deposits			(354	)		(2,865	)		(3,983	)		(996	)		(1,240	)
			Accounts payable			(8,510	)		5,718			1,300			576			776
			Accrued wages and related liabilities			3,917			4,402			5,788			(2,389	)		(3,074	)
			Other accrued liabilities			949			6,314			782			3,594			250
			Accrued self-insurance			1,751			6,820			6,235			277			2,140
			Deferred rent liability			1,408			185			(161	)		31			111
				Net cash provided by operating activities		17,802			20,446			30,945			4,362			4,220
Cash flows from investing activities
	Purchase of property and equipment					(5,085	)		(5,685	)		(14,086	)		(969	)		(2,796	)
	Restricted and other assets					(134	)		(303	)		(656	)		(187	)		(242	)
	Cash payment for acquisitions					(6,014	)		(14,884	)		(28,967	)		(6,547	)		(9,436	)
				Net cash used in investing activities		(11,233	)		(20,872	)		(43,709	)		(7,703	)		(12,474	)
Cash flows from financing activities
	Net payments on revolver loan					(2,250	)		—			—			—			—
	Proceeds from long-term debt					15,896			1,500			34,782			—			11
	Payments on long term debt					(4,906	)		(859	)		(2,689	)		(142	)		(270	)
	Issuance of treasury stock upon exercise of options					—			—			259			—			—
	Issuance of common stock upon exercise of options					220			221			195			25			89
	Repurchase of common stock					—			(1	)		(1	)		(2,800	)		(1	)
	Dividends paid					(983	)		(1,254	)		(1,975	)		(500	)		(657	)
	Payments of deferred financing costs					(536	)		(1	)		(1,151	)		—			—
	Purchase of treasury stock					—			(2,300	)		(2,800	)		—			—
				Net cash provided by (used in) financing activities		7,441			(2,694	)		26,620			(3,417	)		(828	)
Net increase (decrease) in cash and cash equivalents						14,010			(3,120	)		13,856			(6,758	)		(9,082	)
Cash and cash equivalents beginning of year						745			14,755			11,635			11,635			25,491
Cash and cash equivalents end of year					$	14,755		$	11,635		$	25,491		$	4,877		$	16,409

F-6

			Year Ended December 31,							Three Months Ended March 31,
			2004		2005		2006			2006		2007
										(unaudited)
Supplemental disclosures of cash flow information
	Cash paid during the period for:
		Interest	$	1,654	$	2,037	$	2,978		$	621	$	1,169
		Income taxes	$	10,395	$	14,000	$	18,105		$	1,650	$	2,500
Non-cash investing and financing activities:
	Accretion on Series A preferred stock		$	3	$	—	$	—		$	—	$	—
	Transfer of capital reserves from other assets to property and equipment		$	137	$	35	$	43		$	—	$	—
	Conditional asset retirement obligations under FIN 47		$	—	$	—	$	50		$	—	$	48
	Purchase of property and equipment under long-term obligations		$	—	$	—	$	4,278		$	—	$	—
	In conjunction with acquisitions:
		Fair value of assets acquired	$	6,014	$	14,884	$	31,065		$	6,547	$	9,436
		Plus: lease acquisition costs		—		—		6			—		—
		Less: debt assumed		—		—		(2,104	)		—		—
		Cash paid	$	6,014	$	14,884	$	28,967		$	6,547	$	9,436

See notes to consolidated financial statements.

F-7

THE ENSIGN GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006

AND THE THREE MONTHS ENDED MARCH 31, 2006 AND 2007 (UNAUDITED)

(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

1. THE COMPANY

        The Ensign Group, Inc., through its subsidiaries (collectively the "Company"), provides skilled nursing and rehabilitative care services through the operation of 60 facilities as of March 31, 2007, located in California, Arizona, Texas, Washington, Utah and Idaho. All of these facilities are skilled nursing facilities, other than three stand-alone assisted living facilities in Arizona and Texas and three campuses that offer both skilled nursing and assisted living services located in California and Arizona. The Company's facilities provide a broad spectrum of skilled nursing and assisted living services, physical, occupational and speech therapies, and other rehabilitative and healthcare services, for both long-term residents and short-stay rehabilitation patients. As of March 31, 2007, the Company owned 22 of its 60 facilities and operated an additional 38 facilities through long-term lease arrangements, and had options to purchase 12 of those 38 facilities. In July 2007, the Company acquired a long-term care facility in Utah that offers both skilled nursing and assisted living services, by assuming the operations of that facility under an operating lease agreement. No amounts were paid to the prior facility operators and the Company did not acquire any assets or assume any liabilities as part of this transaction. This facility added approximately 95 beds to the Company's operations. In addition, in July 2007, under the terms of the original lease agreement, the Company exercised an option to purchase one of its leased facilities for $3.3 million, bringing the total of the Company's owned facilities to 23.

        The Company operates as a holding company. All of the Company's facilities are operated by separate, wholly-owned independent subsidiaries, each of which has its own management, employees and assets. One of the Company's wholly-owned subsidiaries provides centralized accounting, payroll, human resources, information technology, legal, risk management and other centralized services to the other operating subsidiaries through contractual relationships between such subsidiaries.

        The Company also has a wholly-owned captive insurance subsidiary that provides claims-made coverage to the Company for healthcare, professional and general liability as well as certain workers' compensation insurance.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation—The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The Company is the sole member or shareholder of various consolidated limited liability companies and corporations, each established to operate various acquired skilled nursing and assisted living facilities. All intercompany transactions and balances have been eliminated in consolidation.

Estimates and Assumptions—The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. The most significant estimates in the Company's consolidated financial statements relate to revenue, allowance for doubtful accounts, intangible assets and goodwill, impairment of long-lived assets, patient liability claims included in accrued self-insurance liabilities, stock-based compensation and income taxes. Actual results could differ from those estimates.

F-8

        Unaudited Interim Financial Information—The accompanying unaudited interim consolidated balance sheet as of March 31, 2007, the consolidated statements of income and cash flows for the three months ended March 31, 2006 and 2007, and the consolidated statements of stockholders' equity for the three months ended March 31, 2007 are unaudited. These unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. In the opinion of the Company's management, the unaudited interim consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments necessary for the fair presentation of the Company's statement of financial position as of March 31, 2007 and its results of operations and their cash flows for the three months ended March 31, 2006 and 2007. The results for the three months ended March 31, 2007 are not necessarily indicative of the results to be expected for the year ending December 31, 2007.

        Unaudited Pro Forma Information—The unaudited pro forma consolidated balance sheet information at March 31, 2007 reflects the conversion of all of the Company's outstanding preferred stock into an aggregate of 2,741,180 shares of common stock upon the closing of the Company's initial public offering.

Revenue and Accounts Receivable—The Company follows the provisions of Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition in Financial Statements" ("SAB 104"), for revenue recognition. Under SAB 104, four conditions must be met before revenue can be recognized: (i) there is persuasive evidence that an arrangement exists; (ii) delivery has occurred or service has been rendered; (iii) the price is fixed or determinable; and (iv) collection is reasonably assured.

        The Company's revenue is derived primarily from providing long-term health care services to residents and is recognized on the date services are provided at amounts billable to individual residents. For residents under reimbursement arrangements with third-party payors, including Medicaid, Medicare and private insurers, revenue is recorded based on contractually agreed-upon amounts on a per patient, daily basis.

        Revenue from the Medicare and Medicaid programs accounted for approximately 75%, 76%, 75%, 75% and 74% of the Company's revenue for the years ended December 31, 2004, 2005 and 2006 and the three months ended March 31, 2006 and 2007 (unaudited), respectively. The Company records revenue from these governmental and managed care programs as services are performed at their expected net realizable amounts under these programs. The Company's revenue from governmental and managed care programs is subject to audit and retroactive adjustment by governmental and third-party agencies. Consistent with healthcare industry accounting practices, any changes to these governmental revenue estimates are recorded in the period the change or adjustment becomes known based on final settlements. The Company records revenue from private pay patients as services are performed.

F-9

        Revenue for the years ended December 31, 2004, 2005 and 2006 and the three months ended March 31, 2006 and 2007 (unaudited), respectively, is summarized in the following tables:

		Year Ended December 31,
		2004				2005				2006
		Revenue		% of Revenue		Revenue		% of Revenue		Revenue		% of Revenue
Medicaid		$	111,121	45.4	%	$	131,327	43.7	%	$	151,264	42.2	%
Medicare			72,301	29.6			96,208	32.0			117,511	32.8
	Total Medicaid and Medicare		183,422	75.0			227,535	75.7			268,775	75.0
Managed care			25,172	10.3			33,484	11.1			44,487	12.4
Private and other payors			35,942	14.7			39,831	13.2			45,312	12.6
	Revenue	$	244,536	100.0	%	$	300,850	100.0	%	$	358,574	100.0	%

		Three Months Ended March 31,
		2006				2007
		(unaudited)
		Revenue		% of Revenue		Revenue		% of Revenue
Medicaid		$	34,275	41.1	%	$	42,641	43.5	%
Medicare			28,311	34.0			30,130	30.8
	Total Medicaid and Medicare		62,586	75.1			72,771	74.3
Managed care			10,436	12.5			12,705	13.0
Private and other payors			10,330	12.4			12,502	12.7
	Revenue	$	83,352	100.0	%	$	97,978	100.0	%

        Accounts receivable consist primarily of amounts due from Medicare and Medicaid programs, other government programs, managed care health plans and private payor sources. Estimated provisions for doubtful accounts are recorded to the extent it is probable that a portion or all of a particular account will not be collected.

        In evaluating the collectibility of accounts receivable, the Company considers a number of factors, including the age of the accounts, changes in collection patterns, the composition of patient accounts by payor type and the status of ongoing disputes with third-party payors. The percentages applied to the aged receivable balances are based on the Company's historical experience and time limits, if any, for managed care, Medicare and Medicaid. The Company periodically refines its procedures for estimating the allowance for doubtful accounts based on experience with the estimation process and changes in circumstances.

F-10

        Accounts receivable consist of the following:

		December 31,						March 31, 2007
		2005			2006
								(unaudited)
Medicaid		$	23,686		$	22,534		$	20,388
Managed care			10,288			12,972			13,452
Medicare			9,953			11,974			12,759
Private and other payors			4,395			5,348			5,974
			48,322			52,828			52,573
Less allowance for doubtful accounts			(4,959	)		(7,543	)		(8,126	)
	Accounts receivable	$	43,363		$	45,285		$	44,447

        Cash and Cash Equivalents—Cash and cash equivalents consist of cash and short-term investments with original maturities of three months or less at time of purchase and therefore approximate fair value. The Company places its cash and short-term investments with high credit quality financial institutions. In addition, the Company's insurance captive maintains cash and cash equivalents and insurance subsidiary deposits. See discussion below.

Property and Equipment, Net—Property and equipment are initially recorded at their original historical cost. Repairs and maintenance are expensed as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the depreciable assets (ranging from 3 to 30 years). Leasehold improvements are amortized on a straight-line basis over the shorter of their estimated useful lives or the remaining lease term.

        Property and equipment consist of the following:

		December 31,						March 31, 2007
		2005			2006
								(unaudited)
Land		$	9,019		$	17,265		$	19,655
Buildings and improvements			24,438			57,062			63,578
Equipment			7,599			11,818			13,252
Furniture and fixtures			2,827			3,761			4,126
Leasehold improvements			6,255			7,363			8,092
			50,138			97,269			108,703
Less accumulated depreciation			(6,494	)		(10,136	)		(11,534	)
	Property and equipment, net	$	43,644		$	87,133		$	97,169

        Insurance Subsidiary Deposits—In order to reflect the nature of the Company's captive insurance subsidiary cash and cash equivalents, insurance subsidiary cash balances that are designated to support

F-11

long-term insurance subsidiary liabilities have been presented in a long-term classification to reflect its purpose and the liabilities that the cash supports. Insurance subsidiary deposits classified as long-term were $4,547, $8,530 and $9,770 as of December 31, 2005 and 2006 and March 31, 2007 (unaudited), respectively.

        Impairment of Long-Lived Assets—The Company's management reviews the carrying value of long-lived assets that are held and used in the Company's operations for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of these assets is determined based upon expected undiscounted future net cash flows from the operations to which the assets relate, utilizing management's best estimate, appropriate assumptions, and projections at the time. If the carrying value is determined to be unrecoverable from future operating cash flows, the asset is deemed impaired and an impairment loss would be recognized to the extent the carrying value exceeded the estimated fair value of the asset. The Company estimates the fair value of assets based on the estimated future discounted cash flows of the asset. The Company's management has evaluated its long-lived assets and has not identified any impairment as of December 31, 2004, 2005, 2006 or March 31, 2007 (unaudited).

        Intangible Assets and Goodwill—Intangible assets consist primarily of deferred financing costs, lease acquisition costs and trade names. Deferred financing costs are amortized over the term of the related debt, ranging from seven to 26 years. Lease acquisition costs are amortized over the life of the lease of the facility acquired, ranging from ten to 20 years. Trade names are amortized over 30 years.

        Goodwill is accounted for under Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" ("SFAS 141") and represents the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations. In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), goodwill is subject to periodic testing for impairment. In addition, goodwill is tested for impairment if events occur or circumstances change that would reduce the fair value of a reporting unit below its carrying amount. The Company performs its annual test for impairment during the fourth quarter of each year. The Company did not record any impairment charges in 2004, 2005, 2006 or during the three months ended March 31, 2007.

Restricted and Other Assets—Other assets consist primarily of capital reserves and deposits. Capital reserves are maintained as part of the mortgage agreements of the Company and certain of its landlords with the U.S. Department of Housing and Urban Development. These capital reserves are restricted for capital improvements and repairs to the related facilities.

F-12

        Restricted and other assets consist of the following:

	December 31,				March 31, 2007
	2005		2006
					(unaudited)
Deposits with landlords	$	829	$	1,001	$	1,001
Capital improvement reserves with landlords and lenders		1,144		1,562		1,740
Other		31		55		39
	$	2,004	$	2,618	$	2,780

Deferred Rent—Deferred rent represents rental expense in excess of actual rent payments and is amortized on a straight-line basis over the life of the related lease.

        Self-Insurance—The Company is partially self-insured for general and professional liability up to a base amount per claim (self-insured retention) with an aggregate, one time deductible above this limit. Losses beyond these amounts are insured through third-party policies with coverage limits per occurrence, per location and on an aggregate basis for the Company. For claims made in 2006, the self-insured retention was $350 per claim with a $900 deductible. The third-party coverage above these limits for all years is $1,000 per occurrence, $3,000 per facility with a $6,000 company aggregate. The insurers' maximum aggregate loss limits are above the Company's actuarially determined probable losses; therefore, the Company estimates the likelihood of losses exceeding the insurers' maximum aggregate loss is remote.

        The self-insured retention and deductible limits are self-insured through a wholly-owned insurance captive, the related assets and liability of which are included in the accompanying consolidated financial statements. The Company is subject to certain statutory requirements as it operates a captive insurance subsidiary. These requirements include, but are not limited to, maintaining statutory capital. The Company's policy is to accrue amounts equal to the estimated costs to settle open claims as well as an estimate of the cost of claims that have been incurred but not reported. The Company develops information about the size of the ultimate claims based on historical experience, current industry information and actuarial analysis, and evaluates the estimates for claim loss exposure on an annual basis through 2006 and on a quarterly basis beginning with the first quarter of 2007. Accrued general liability and professional malpractice liabilities recorded on an undiscounted basis in the accompanying consolidated balance sheets were $12,023, $16,013 and $17,367 as of December 31, 2005 and 2006 and March 31, 2007 (unaudited), respectively.

        The Company is self-insured for workers' compensation liability in California, and in Texas, we have elected non-subscriber status for workers' compensation claims. The Company has third party guaranteed cost coverage in the other states in which the Company operates. In California and Texas, the Company accrues amounts equal to the estimated costs to settle open claims, as well as an estimate of the cost of claims that have been incurred but not reported. The Company uses actuarial valuations to estimate the liability based on historical experience and industry information. Accrued workers'

F-13

compensation liabilities are recorded on an undiscounted basis in the accompanying consolidated balance sheets and were $3,248, $4,504 and $5,312 as of December 31, 2005 and 2006 and March 31, 2007 (unaudited), respectively.

        During 2003 and 2004, the Company was insured for workers' compensation liability in California and Arizona by a third-party carrier under a policy where the retrospective premium is adjusted annually based on incurred developed losses and allocated expenses. Based on a comparison of the computed retrospective premium to the actual payments funded, amounts will be due to the insurer or insured. The funded accrual in excess of the estimated liabilities are included in prepaid expenses and other current assets in the accompanying consolidated balance sheets and were $1,699, $930 and $930 as of December 31, 2005 and 2006 and March 31, 2007 (unaudited), respectively.

        Effective May 1, 2006, the Company began to provide self-insured medical (including prescription drugs) and dental healthcare benefits to the majority of its employees. Prior to this, the Company had multiple third-party HMO and PPO plans, of which certain HMO plans are still active. The Company is not aware of any run-off claim liabilities from the prior plans. The Company is fully liable for all financial and legal aspects of these benefit plans. To protect itself against loss exposure with this policy, the Company has purchased individual stop-loss insurance coverage that insures individual claims that exceed $100 on a per claim basis or a maximum of $6,000 on the PPO plan and unlimited on the HMO plan. The Company has also purchased aggregate stop-loss coverage that reimburses the plan up to $5,000 once paid claims exceed $7,225. The aforementioned coverage only applies to claims paid during the plan year. The Company's accrued liability under these plans recorded on an undiscounted basis in the accompanying consolidated balance sheet is $989 and $967 at December 31, 2006 and March 31, 2007 (unaudited), respectively.

        The Company believes that adequate provision has been made in the consolidated financial statements for liabilities that may arise out of patient care, workers' compensation, healthcare benefits and related services provided to date. The amount of the Company's reserves is determined based on an estimation process that uses information obtained from both company-specific and industry data. This estimation process requires the Company to continuously monitor and evaluate the life cycle of the claims. Using data obtained from this monitoring and the Company's assumptions about emerging trends, the Company, with the assistance of an independent actuary, develops information about the size of ultimate claims based on the Company's historical experience and other available industry information. The most significant assumptions used in the estimation process include determining the trend in costs, the expected cost of claims incurred but not reported and the expected costs to settle or pay damage awards with respect to unpaid claims. It is possible, however, that the actual liabilities may exceed the Company's estimate of loss. In addition to the actuarial estimate of retained losses, the provision for insurance includes accruals for insurance premium and related costs for the coverage period and the estimate of any experience-based adjustments to premiums.

        The self-insured liabilities are based upon estimates, and while management believes that the estimates of loss are adequate, the ultimate liability may be in excess of or less than the recorded amounts. Due to the inherent volatility of actuarially determined loss estimates, it is reasonably possible that the Company could experience changes in estimated losses that could be material to net income. If

F-14

the Company's actual liability did exceed its estimate of loss, its future earnings and financial condition would be adversely affected.

Long-Term Debt—The carrying value of the Company's long-term debt is considered to approximate the fair value of such debt for all periods presented based upon the interest rates that the Company believes it can currently obtain for similar debt.

Income Taxes—Income taxes are accounted for in accordance with SFAS No. 109 "Accounting for Income Taxes" ("SFAS 109"). Under this method, deferred tax assets and liabilities are established for temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities at tax rates expected to be in effect when such temporary differences are expected to reverse. The temporary differences are primarily attributable to compensation accruals, straight line rent adjustments and reserves for doubtful accounts and insurance liabilities. The Company assesses the likelihood that the deferred tax assets will be recovered from future taxable income and, if recovery is not more likely than not, the Company establishes a valuation allowance to reduce the deferred tax assets to the amounts expected to be realized.

        The net deferred tax assets as of December 31, 2005 and 2006 and March 31, 2007 (unaudited) were $8,132, $12,558 and $13,299, respectively. The Company expects to fully utilize these deferred tax assets; however, their ultimate realization is dependent upon the amount of future taxable income during the periods in which the temporary differences become deductible.

        Comprehensive Income—For the years ended December 31, 2004, 2005 and 2006 and the three months ended March 31, 2006 and 2007 (unaudited), there were no differences between comprehensive income and net income. Therefore, statements of comprehensive income have not been presented.

        Stock-Based Compensation—As of January 1, 2006, the Company adopted SFAS No. 123(R), "Share-Based Payment" ("SFAS 123(R)"), which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including employee stock options based on estimated fair values, ratably over the requisite service period of the award. Net income will be reduced as a result of the recognition of the fair value of all stock options issued on and subsequent to January 1, 2006, the amount of which is contingent upon the number of future options granted and other variables. Prior to the adoption of SFAS 123(R), the Company accounted for stock-based awards to employees and directors using the intrinsic value method in accordance with Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") as allowed under SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123").

        The Company adopted SFAS 123(R) using the prospective transition method. The Company's consolidated financial statements as of and for the periods ended December 31, 2006 and March 31, 2006 and 2007 (unaudited) reflect the impact of SFAS 123(R). In accordance with the prospective transition method, the Company's consolidated financial statements for periods prior to January 1, 2006 have not been restated to reflect, and do not include, the impact of SFAS 123(R).

F-15

        Generally, no compensation expense was recognized by the Company in its financial statements in connection with the awarding of stock option grants to employees provided that, as of the grant date, all terms associated with the award were fixed and the fair value of its stock, as of the grant date, was equal to or less than the amount an employee must pay to acquire the stock. The Company would have recognized compensation expense in situations where the fair value of its common stock on the grant date was greater than the amount an employee must pay to acquire the stock. Existing options at January 1, 2006 will continue to be accounted for in accordance with APB 25 unless such options are modified, repurchased or canceled after the effective date.

Acquisition Policy—The Company periodically enters into agreements to acquire assets and/or businesses. The considerations involved in each of these agreements may include cash, financing and/or long-term lease arrangements for real properties. The Company evaluates each transaction to determine whether the acquired interests are assets or businesses using the framework provided by Emerging Issues Task Force ("EITF") Issue No. 98-3, "Determining Whether a Nonmonetary Transaction Involves Receipt of Productive Assets or of a Business" ("EITF 98-3"). EITF 98-3 defines a business as a self-sustaining integrated set of activities and assets conducted and managed for the purpose of providing a return to investors. A business consists of (a) input, (b) processes applied to those inputs, and (c) resulting outputs that are used to generate revenues. In order for an acquired set of activities and assets to be a business, it must contain all of the inputs and processes necessary for it to continue to conduct normal operations after the acquired entity is separated from the seller, including the ability to sustain a revenue stream by providing its outputs to customers. An acquired set of activities and assets fail the definition of a business if it excludes one or more of the above items such that it is not possible to continue normal operations and sustain a revenue stream by providing its products and/or services to customers.

Operating Leases—The Company accounts for operating leases in accordance with SFAS No. 13, "Accounting for Leases", and Financial Accounting Standards Board ("FASB") Technical Bulletin 85-3, "Accounting for Operating Leases with Scheduled Rent Increases". Accordingly, rent expense under operating leases for the Company's facilities and administrative office is recognized on a straight-line basis over the original term of each lease, inclusive of predetermined rent escalations or modifications.

        Net Income Per Common Share—Basic net income per share is computed by dividing net income attributable to common shares by the weighted average number of outstanding common shares for the period. The computation of diluted earnings per share ("EPS") is similar to the computation of basic EPS except that the denominator is increased to include contingently returnable shares and the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued. In addition, in computing the dilutive effect of convertible securities, the numerator is adjusted to add back (a) any convertible preferred dividends and (b) the after-tax amount of interest, if any, recognized in the period associated with any convertible debt.

F-16

        A reconciliation of the numerator and denominator used in the calculation of basic net income per common share follows:

		Year Ended December 31,									Three Months Ended March 31,
		2004			2005			2006			2006			2007
											(unaudited)
Numerator:
	Net income	$	11,103		$	18,388		$	22,549		$	5,607		$	4,137
	Preferred stock accretion		(3	)		—			—			—			—
	Preferred stock dividends		(137	)		(247	)		(356	)		(82	)		(110	)
	Net income available to common stockholders for basic net income per share	$	10,963		$	18,141		$	22,193		$	5,525		$	4,027
Denominator:
	Weighted average shares outstanding for basic net income per share(1)		13,284,902			13,468,060			13,365,682			13,529,822			13,419,764
	Basic net income per common share	$	0.83		$	1.35		$	1.66		$	0.41		$	0.30

(1)

Basic share amounts are shown net of contingently returnable shares, which total 677,600, 432,000, and 302,200 and 465,800 and 284,800 shares at December 31, 2004, 2005 and 2006 and March 31, 2006 and 2007 (unaudited), respectively.

F-17

        A reconciliation of the numerator and denominator used in the calculation of diluted net income per common share follows:

		Year Ended December 31,						Three Months Ended March 31,
		2004		2005		2006		2006		2007
								(unaudited)
Numerator:
	Net income	$	11,103	$	18,388	$	22,549	$	5,607	$	4,137
Denominator:
	Weighted average common shares outstanding		13,284,902		13,468,060		13,365,682		13,529,822		13,419,764
	Plus: incremental shares from assumed conversions(1)		4,234,130		4,036,980		3,457,560		3,399,195		3,484,432
	Adjusted weighted average common shares outstanding		17,519,032		17,505,040		16,823,242		16,929,017		16,904,196
	Diluted net income per common share	$	0.63	$	1.05	$	1.34	$	0.33	$	0.24

(1)

Fully diluted share amounts include contingently returnable shares, which total 677,600, 432,000, 302,200 and 465,800 and 284,800 shares at December 31, 2004, 2005 and 2006 and March 31, 2006 and 2007 (unaudited), respectively.

        Pro Forma Net Income Per Common Share—Pro forma basic and diluted net income per common share give effect to the conversion of the Company's preferred stock into common stock upon the closing of the Company's initial public offering, as if the conversion occurred on January 1, 2006.

F-18

        A reconciliation of the numerator and denominator used in the calculation of pro forma basic and diluted net income per common share follows:

		Year Ended December 31,		Three Months Ended March 31,
		2006		2007
				(unaudited)
Pro forma basic net income per common share
Numerator:
	Net income	$	22,549	$	4,137
Denominator:
	Weighted average common shares outstanding used in pro forma basic net income per common share		13,365,682		13,419,764
	Effect of preferred stock		2,741,180		2,741,180
	Adjusted weighted average common shares		16,106,862		16,160,944
	Pro forma basic net income per common share	$	1.40	$	0.26
Pro forma diluted net income per common share
Numerator:
	Net income	$	22,549	$	4,137
Denominator:
	Weighted average common shares outstanding used in pro forma basic net income per common share		16,106,862		16,160,944
	Plus: incremental shares from assumed conversions		716,380		743,252
	Adjusted weighted average common shares outstanding used in pro forma diluted net income per common share		16,823,242		16,904,196
	Pro forma diluted net income per common share	$	1.34	$	0.24

        Recent Accounting Pronouncements—In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS 157"), which defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements. SFAS 157 applies to other accounting pronouncements that require or permit fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007, and for interim periods within those fiscal years. The Company is currently evaluating the requirements of SFAS 157 and does not believe that the adoption of SFAS 157 will have a material effect on the consolidated financial statements.

        In February 2007, the FASB issued SFAS No. 159 "The Fair Value Option For Financial Assets and Financial Liabilities—including an amendment of FASB Statement No. 115" ("SFAS 159"). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact, if any, that SFAS 159 will have on its consolidated financial statements.

F-19

        Adoption of New Accounting Pronouncement—In June 2006, the FASB issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109" ("FIN 48"), and is effective for fiscal years beginning after December 15, 2006. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in financial statements in accordance with SFAS 109 by prescribing a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosures, and transition. The Company adopted FIN 48 at the beginning of fiscal year 2007. See Note 7 for a description of the impact of this adoption on the Company's consolidated financial position and results of operations.

3. ACQUISITIONS

        The Company's acquisition policy is to purchase and lease facilities to complement the Company's existing portfolio of long-term care facilities. The operations of all the Company's facilities are included in the accompanying consolidated financial statements subsequent to the date of acquisition. Acquisitions are typically paid in cash and are accounted for using the purchase method of accounting in accordance with SFAS 141. Where the Company enters into facility operating lease agreements, the Company typically does not pay any amounts to the prior facility operator nor does the Company acquire any assets or assume any liabilities as part of the transaction. Some operating leases include options to purchase the facilities. As a result, from time to time, the Company will acquire facilities that the Company has been operating on a lease basis.

        During the three months ended March 31, 2007 (unaudited), the Company acquired three facilities. The aggregate purchase price for the three acquisitions was approximately $9,431 which was paid entirely in cash. The facilities acquired during the three months ended March 31, 2007 are as follows:

•

In February 2007, the Company purchased a skilled nursing facility in Salt Lake City, Utah, adding an additional 120 licensed beds(1).

(1)

All bed counts are licensed beds except independent living beds, and may not reflect the number of beds actually available for patient use.

•

In March 2007, the Company purchased a skilled nursing facility in Lewisville, Texas adding an additional 120 licensed beds.(1)

•

In March 2007, the Company purchased a skilled nursing facility in Mesquite, Texas adding an additional 162 licensed beds.(1)

        Goodwill recognized in these transactions amounted to $806, which is expected to be fully deductible for tax purposes. The Company recognized $17 in other intangible assets.

        During the year ended December 31, 2006, the Company acquired eleven facilities. The aggregate purchase price for eight of the eleven acquisitions was approximately $31,065, of which $28,961 was paid in cash, and $2,104 was an assumption of a loan for one of the facilities. The other three facilities

F-20

were acquired pursuant to long-term lease arrangements between the Company and the real property owners of the facilities at prevailing fair market lease rates. In these lease transactions, the Company assumed ownership of the skilled nursing and assisted living operating businesses at these facilities for no monetary consideration. Ten of the acquisitions were skilled nursing facilities and one was an assisted living facility. The facilities acquired in 2006 are as follows:

•

In March 2006, the Company purchased a skilled nursing facility in San Diego, California, adding an additional 120 beds.(1)



•

In May 2006, the Company purchased a skilled nursing facility in Livingston, Texas, adding an additional 120 beds.(1)



•

In June 2006, the Company purchased a skilled nursing facility in Lynnwood, Washington adding an additional 95 beds.(1)



•

In July 2006, the Company entered into an operating lease and assumed the operations of a skilled nursing facility in Ogden, Utah, adding an additional 108 beds.(1) No additional consideration was paid to the property owner and the Company did not purchase any assets or assume any liabilities as part of this transaction. The Company paid $212 for assets owned by the previous operator, which included costs associated with the transaction.



•

In August 2006, the Company purchased a skilled nursing facility in Hoquiam, Washington adding an additional 109 beds.(1)



•

In September 2006, the Company purchased an assisted living facility in Rosenburg, Texas, adding an additional 44 beds.(1)



•

In September 2006, the Company purchased a skilled nursing facility in Richmond, Texas, adding an additional 118 beds.(1)



•

In September 2006, the Company purchased a skilled nursing facility in Salt Lake City, Utah, adding an additional 108 beds.(1)



•

In October 2006, the Company entered into an operating lease and assumed the operations of a skilled nursing facility in Pocatello, Idaho adding an additional 88 beds.(1) No additional consideration was paid, and the Company did not purchase any assets or assume any liabilities as part of this transaction.



•

In November 2006, the Company entered into an operating lease and assumed the operations of a skilled nursing facility in Scottsdale, Arizona, adding an additional 130 beds.(1) No additional consideration was paid and the Company did not purchase any assets or assume any liabilities as part of this transaction.



•

In December 2006, the Company purchased a skilled nursing facility in Carrollton, Texas, adding an additional 120 beds.(1)

(1)

All bed counts are licensed beds except independent living beds, and may not reflect the number of beds actually available for patient use.

F-21

        Goodwill recognized in these transactions amounted to $2,072, which is expected to be fully deductible for tax purposes. The Company recognized $180 in other intangible assets. During the three months ended March 31, 2007, the Company recognized an additional $5 of goodwill related to fiscal year 2006 acquisitions due to the finalization of the purchase price allocations.

        During the year ended December 31, 2005 the Company acquired three skilled nursing facilities. The aggregate purchase price for two of these facilities was approximately $14,884. The third facility was acquired pursuant to a long-term lease arrangement between the Company and the real property owners of the facility at prevailing fair market lease rates. The facilities acquired in 2005 are as follows:

•

In May 2005, the Company entered into an operating lease agreement whereby it assumed the operations of a skilled nursing facility in Rosemead, California, adding an additional 59 beds.(1) No additional consideration was paid and the Company did not purchase any assets or assume any liabilities as part of this transaction.



•

In August 2005, the Company purchased a skilled nursing facility in Upland, California, adding an additional 206 beds.(1)



•

In August 2005, the Company purchased a skilled nursing facility in Camarillo, California adding an additional 114 beds.(1)

        No goodwill was recognized in relation to these transactions. The Company recognized $733 in other intangible assets.

        The purchase prices in the above transactions were allocated to real property, equipment, intangible assets and goodwill based on the following valuation techniques:

•

The fair value of land, buildings and improvements and equipment, furniture and fixtures (or tangible assets) was determined utilizing a cost approach. In the cost approach, the subject property is valued based upon the fair value of the land, as if vacant, by comparing recent sales or asking prices for similar land, to which the depreciated replacement cost of the building and improvements and equipment is added. The replacement cost of the building and improvements and equipment is adjusted for accrued depreciation resulting from physical deterioration, functional obsolescence and external or economic obsolescence.



•

The customer base was valued under an income capitalization approach using an excess earnings method. Excess earnings are the earnings remaining after deducting the market rates of return on the estimated values of contributory assets including debt-free net working capital, tangible and intangible assets. The excess earnings are thereby calculated and discounted to a present value. The primary components of this method consist of the determination of excess earnings and an appropriate rate of return. To arrive at the excess earnings attributable to an intangible asset, earnings after taxes derived from that asset are projected. Thereafter, the returns on contributory debt-free net working capital, tangible and intangible assets are deducted from the earnings projections. After deducting returns on these contributory assets, the remaining earnings are attributable to the customer base. These remaining, or excess, earnings are then discounted to a present value utilizing an appropriate discount rate for the asset.

F-22

•

Goodwill is calculated as the value that remains after subtracting the net asset value and the value of identifiable tangible and intangible assets and liabilities for the respective purchase.

        The table below presents the allocation of the purchase price for the facilities acquired as noted above:

	December 31,				March 31, 2007
	2005		2006
					(unaudited)
Land	$	6,295	$	5,782	$	2,390
Building and improvements		7,039		21,863		5,675
Equipment, furniture, and fixtures		817		1,168		543
Goodwill		—		2,072		811
Tradename and customer base intangible		733		180		17
	$	14,884	$	31,065	$	9,436

        Additionally, in 2006, the Company purchased the underlying assets of three facilities that it was operating under long-term lease arrangements. These facilities were purchased for $11,107, which ultimately was financed using the Company's term loan. Cash outflows of approximately $6,800 related to these purchases are included in the purchase of property and equipment under cash flows from investing activities in the consolidated statements of cash flows.

        The March 31, 2007 valuations are subject to revision as the allocation of the value of property, equipment and identifiable intangible assets, were based on initial information and final allocations were not complete.

4. ACQUISITIONS—UNAUDITED PRO FORMA FINANCIAL INFORMATION

        The Company has established an acquisition strategy that is focused on identifying acquisitions within its target markets that offer the greatest opportunity for investment return at attractive prices. The facilities acquired by the Company are frequently underperforming financially and can have regulatory and clinical challenges to overcome. Financial information, especially with underperforming facilities, is often inadequate, inaccurate or unavailable. As a result, the Company has developed an acquisition assessment program that is based on existing and potential resident mix, the local available market, referral sources and operating expectations based on the Company's experience with its existing facilities. Following an acquisition, the Company implements a well-developed integration program to provide a plan for transition and generation of profits from facilities that have a history of significant operating losses. Consequently, the Company believes that prior operating results are not meaningful and may be misleading as the information is not representative of the Company's current operating results or indicative of the integration potential of its newly acquired facilities.

F-23

4. ACQUISITIONS—UNAUDITED PRO FORMA FINANCIAL INFORMATION (continued)

        The following table represents pro forma results of consolidated operations as if the acquisitions discussed above in Note 3 had occurred at the beginning of each fiscal year, after giving effect to certain adjustments. The 2005 financial results in the table below include the impact of both 2005 and 2006 acquisitions.

	December 31,
	2005		2006
	(unaudited)		(unaudited)
Revenue	$	355,321	$	381,806
Net income before extraordinary items	$	18,314	$	21,865
Net income	$	18,314	$	21,865
Basic net income per common share	$	1.34	$	1.61
Diluted net income per common share	$	1.05	$	1.30

        The foregoing pro forma information is not indicative of what the results of operations would have been if the acquisitions had actually occurred at the beginning of the periods presented, and is not intended as a projection of future results or trends. Our pro forma assumptions are as follows:

•

Revenue was based on actual revenue from the prior operator or from regulatory filings where available (two of the three 2005 acquisitions and seven of the eleven 2006 acquisitions). If actual revenue was not available, revenue was estimated based on available partial operating results of the prior operator of the facility, or if no information was available, estimates were derived from the Company's revenue for that particular facility. Prior year revenue for the 2006 acquisitions was estimated based upon the Company's 2006 same facility growth rate of 7% and projecting back to 2005.



•

Operating costs are based upon the application of the Company's specific operating statistics for the period in which the Company operated that facility, interest expense is based upon the purchase price and average cost of debt borrowed during each respective year and depreciation is calculated using the actual allocated purchase price.

The three facilities acquired during the three months ended March 31, 2007 were not material acquisitions to the Company, individually, or in the aggregate. These acquisitions have been included in the March 31, 2007 consolidated balance sheet of the Company and the operating results have been included in the consolidated statement of income of the Company since the date the Company gained effective control.

F-24

5. INTANGIBLE ASSETS—Net

		December 31,
		2005							2006
Intangible Assets	Weighted Average Life (Years)	Gross Carrying Amount		Accumulated Amortization			Net		Gross Carrying Amount		Accumulated Amortization			Net
Debt issuance costs	9.3	$	772	$	(496	)	$	276	$	1,744	$	(504	)	$	1,240
Lease acquisition costs	15.5		1,141		(359	)		782		1,063		(398	)		665
Customer base	0.3		—		—			—		180		(136	)		44
Tradename	30.0		733		—			733		733		(23	)		710
Total		$	2,646	$	(855	)	$	1,791	$	3,720	$	(1,061	)	$	2,659

	March 31, 2007 (unaudited)
Intangible Assets	Weighted Average Life (Years)	Gross Carrying Amount		Accumulated Amortization			Net
Debt issuance costs	9.3	$	1,802	$	(551	)	$	1,251
Lease acquisition costs	15.5		1,071		(415	)		656
Customer base	0.3		197		(182	)		15
Tradename	30.0		733		(31	)		702
Total		$	3,803	$	(1,179	)	$	2,624

        Amortization expense was $292, $359, and $470, $63 and $130 for the years ended December 31, 2004, 2005 and 2006 and the three months ended March 31, 2006 and 2007 (unaudited), respectively. Amortization expense for each of the periods ending December 31 is as follows:

Year	Amount
2007	$	290
2008		233
2009		210
2010		210
2011		210
Thereafter		1,506
	$	2,659

F-25

6. OTHER ACCRUED LIABILITIES

        Other accrued liabilities consist of the following:

		December 31,				March 31, 2007
		2005		2006
						(unaudited)
Quality assurance fee		$	3,532	$	1,863	$	1,901
Resident refunds payable			1,576		1,736		1,450
Deferred resident revenue			1,424		1,370		1,708
Cash held in trust for residents			813		1,070		1,087
Claim settlement			—		1,000		—
Dividends payable			500		657		658
Income taxes payable			1,455		1,885		2,845
Property taxes			395		638		367
Other			1,419		1,887		2,312
	Other accrued liabilities	$	11,114	$	12,106	$	12,328

        Quality assurance fee represents amounts payable to the State of California in respect of a mandated fee based on resident days. Resident refunds payable includes amounts due to residents for overpayments and duplicate payments. Deferred resident revenue occurs when the Company receives payments in advance of services provided. Cash held in trust for residents reflects monies received from, or on behalf of, residents. Maintaining a trust account for residents is a regulatory requirement and, while the trust assets offset the liability, the Company assumes a fiduciary responsibility for these funds. The cash balance related to this liability is included in other current assets in the accompanying consolidated balance sheets.

F-26

7. INCOME TAXES

        The provision for income taxes for the years ended December 31, 2004, 2005 and 2006 and the three months ended March 31, 2006 and 2007 (unaudited) is summarized as follows:

		December 31,									March 31,
		2004			2005			2006			2006		2007
											(unaudited)
Current:
	Federal	$	9,210		$	13,328		$	15,960		$	2,447	$	2,814
	State		1,772			2,639			2,592			589		706
			10,982			15,967			18,552			3,036		3,520
Deferred:
	Federal		(3,287	)		(3,395	)		(3,565	)		580		(515	)
	State		(972	)		(518	)		(862	)		45		(260	)
			(4,259	)		(3,913	)		(4,427	)		625		(775	)
Interest income, gross of related tax effects			—			—			—			—		(18	)
Interest expense, gross of related tax effects			—			—			—			—		57
Total		$	6,723		$	12,054		$	14,125		$	3,661	$	2,784

        A reconciliation of the federal statutory rate to the effective tax rate for the years ended December 31, 2004, 2005 and 2006 and for the three months ended March 31, 2006 and 2007, respectively, is comprised as follows:

	December 31,						March 31,
	2004		2005		2006		2006		2007
							(unaudited)
Income tax expense at statutory rate	35.0	%	35.0	%	35.0	%	35.0	%	35.0	%
State income taxes—net of federal benefit	3.0	%	4.5	%	3.1	%	4.4	%	4.2	%
Non-deductible expenses	0.1	%	0.1	%	0.1	%	0.1	%	0.5	%
Net interest	—	%	—	%	—	%	—	%	0.3	%
Other adjustments	(0.4	%)	—		0.3	%	—		0.2	%
Total income tax provision	37.7	%	39.6	%	38.5	%	39.5	%	40.2	%

F-27

        The Company's deferred tax assets and liabilities as of December 31, 2005 and 2006 and March 31, 2007 (unaudited) are summarized as follows:

		December 31,						March 31, 2007
		2005			2006
								(unaudited)
Deferred tax assets (liabilities):
	Accrued expenses	$	7,259		$	9,563		$	10,890
	Allowance for doubtful accounts		2,122			3,228			3,477
	State taxes		371			235			(655	)
	Tax credits		281			622			637
	Total deferred tax assets		10,033			13,648			14,349
	Depreciation and amortization		(294	)		(413	)		(413	)
	Prepaid expenses		(1,607	)		(677	)		(637	)
	Total deferred tax liabilities		(1,901	)		(1,090	)		(1,050	)
Net deferred tax assets		$	8,132		$	12,558		$	13,299

        The Company adopted FIN 48 effective January 1, 2007 and, as of the date of adoption, had a total amount of unrecognized tax benefits of $217. This total consists of $487 of accrued interest and unrecognized tax benefits for permanent differences (as defined by SFAS No. 109) net of $270 of unrecognized tax detriments from temporary differences (as defined by SFAS No. 109) which resulted in additional deferred tax liability. As of January 1, 2007, the Company recorded $340 as an adjustment, net of the associated tax impact, to opening retained earnings as a result of the adoption of FIN 48. This amount if recognized would affect the Company's effective tax rate. The Company's net FIN 48 tax liability as of January 1, 2007 was $87.

        The Company has historically classified interest and/or penalties on income tax liabilities or refunds as additional income tax expense or income and will continue to do so after the adoption of FIN 48. As of January 1, 2007, the total amount of accrued interest and penalties, net of associated tax benefit, in the Company's statement of financial position was $152. The Company accrued an additional amount of interest and penalties equal to $23 in the first quarter of 2007.

        The Company had state enterprise zone credit carryforwards as of December 31, 2005 and 2006 and March 31, 2007 (unaudited), of $281, $622, and $637, respectively, which relate to state limitations on the application of employment related tax credits. These state enterprise zone credits are expected to carryforward indefinitely and may be used to offset future state income tax.

        As of January 1, 2007, the Company was under examination by the Internal Revenue Service ("IRS") for the 2004 and 2005 income tax years and by a major state tax jurisdiction for the 2003 and 2004 income tax years. The Company settled with the IRS on all outstanding requests during the first quarter 2007 and communicated the outcome of the IRS examination to the examining state

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jurisdiction. The settlement of these items reduced unrecognized tax detriments (increasing total unrecognized tax benefits by approximately $200).

        The Federal statute of limitations on the Company's 2003 income tax year will close in the third quarter of 2007. The Company does not believe this closure will significantly impact unrecognized tax benefits or detriments of any uncertain tax position.

8. CREDIT FACILITY

        The Company has an Amended and Restated Loan and Security Agreement (the "Revolver") with General Electric Capital Corporation (the "Lender") under which the Company may borrow up to the lesser of $20,000 or 85% of qualified accounts receivable, as defined. Revolver borrowings bear interest at an annual rate of prime plus 1%. The Revolver contains typical representations and covenants for a loan of this type. A violation of any of these covenants could result in a default under the Revolver, which would result in all amounts owed by the Company, including possibly amounts due under the Third Amended and Restated Loan Agreement (the "Term Loan") with the Lender discussed in Note 9, to become immediately due and payable upon receipt of notice. The Company was in compliance with all covenants as of March 31, 2007. At December 31, 2005 and 2006 and March 31, 2007 (unaudited), there was $0, $0, and $11 outstanding, respectively, under the Revolver and $8,449 was pledged to secure outstanding letters of credit in the same periods. The Revolver expired in March 2007 but has been extended until August 1, 2007. The Company is in the process of negotiating with the Lender to replace the Revolver with a larger credit facility collateralized by a pledge of the outstanding equity of the participating operating subsidiaries of the Company's portfolio company subsidiaries, as well as its service center.

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9. LONG-TERM DEBT

        Long-term debt consists of the following:

	December 31,						March 31, 2007
	2005			2006
							(unaudited)
Term Loan with the Lender, multiple-advance term loan, principal and interest payable monthly; interest is fixed at time of draw at 10-year Treasury Note rate plus 2.25% (rates in effect at December 31, 2006 range from 6.95% to 7.50%), balance due June 2016, collateralized by a deed of trust on real property and assignment of rents.	$	—		$	55,653		$	55,448
Term loan with financial institution, principal and interest payable monthly at 30-day LIBOR plus 4.5% (8.89% at December 31, 2005), balance due March 2007, collateralized by a deed of trust on real property and assignment of rents.		16,968			—			—
Mortgage note, principal, and interest of $54,378 payable monthly and continuing through February 2027, interest at fixed rate of 7.5%, collateralized by deed of trust on real property, assignment of rents, and security agreement		6,913			6,774			6,726
Mortgage note, principal, and interest of $18,449 payable monthly and continuing through September 2008, interest at fixed rate of 7.49%, collateralized by deed of trust on real property		—			2,094			2,078
Mortgage note, principal, and interest of $22,049 payable monthly and continuing through February 2010, interest at fixed rate of 10%, collateralized by deed of trust on real properties		1,871			—			—
Promissory note due to seller, principal, and interest of $3,125 payable monthly, interest at fixed rate of 7%, balance due March 2010, collateralized by deed of trust on real property		291			—			—
Notes payable, principal and interest payable monthly at fixed rate of 11.475%, balance due January 2008, collateralized by equipment		11			—			—
Notes payable, principal and interest payable monthly at fixed rate of 6.9%, balance due November 2008, collateralized by equipment		—			7			7
Revolver with the Lender; revolving credit facility, interest is variable at an annual rate of prime plus 1%, expires on August 1, 2007		—			—			11
		26,054			64,528			64,270
Less current maturities		(534	)		(941	)		(1,080	)
	$	25,520		$	63,587		$	63,190

        Under the Term Loan, the Company is subject to standard reporting requirements and other typical covenants for a loan of this type. Effective October 1, 2006 and continuing each calendar quarter thereafter, the Company is subject to restrictive financial covenants, including average occupancy, Debt Service (as defined in the agreement) and Project Yield (as defined in the

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agreement). As of December 31, 2006 and March 31, 2007 (unaudited), the Company was in compliance with all loan covenants.

        The carrying value of the Company's long-term debt is considered to approximate the fair value of such debt for all periods presented based upon the interest rates that the Company believes it can currently obtain for similar debt.

        Future principal payments on long-term debt as of December 31, 2006 are as follows:

Year Ending December 31	Amount
2007	$	941
2008		3,022
2009		1,076
2010		1,157
2011		1,246
Thereafter		57,086
	$	64,528

10. PREFERRED STOCK

Series A Preferred Stock—The Company issued shares of Series A preferred stock in 2000 in conjunction with the cancellation of $2,330 of debt at a purchase price of $3.40 per share.

        Dividend Rights—The holders of Series A preferred stock are entitled to receive dividends in preference to the common stockholders at a per-share amount for each share of Series A preferred stock (on an "as-if-converted" basis) at least equal to the aggregate amount of cash dividends declared and accumulated (or paid) for each share of common stock into which each such share of Series A preferred stock could then be converted, when and if declared by the Board of Directors. No dividends may be paid on the common stock until accumulated dividends, if any, have been paid as to each outstanding share of Series A preferred stock. See Note 11 for a description of dividends declared and paid.

        Liquidation/Winding Up Rights—In the event of any liquidation, dissolution, or winding up of the Company, each holder of the Series A preferred stock shall be entitled to receive, in preference to the common stockholders, $3.40 per share, plus declared, but unpaid dividends. Such per-share amount shall be appropriately adjusted to reflect certain events, including any stock dividends, stock splits, or recapitalizations effected after the date of issuance of any shares of Series A preferred stock. Additionally, upon any liquidation, dissolution or winding up of the Company or redemption of the Series A preferred stock, the holders of Series A preferred stock shall be entitled to receive, in addition to any previously declared and accumulated dividends, an amount (the "Premium") equal to (i) the greater of (a) cash in the amount of $0.204 per annum per share of Series A preferred stock (adjusted to reflect stock dividends, stock splits, recapitalizations, or similar transactions) or (b) a per-share amount for each share of Series A preferred stock (on an as-if-converted basis) equal to the aggregate amount of cash dividends declared for each share of common stock into which each such

F-31

share could then be converted, less (ii) the actual amount of any dividends paid (or declared and accumulated) on the Series A preferred stock prior to the liquidation, dissolution, or winding up, if any. After such preferential distribution has taken place, the Series A preferred stockholders shall participate in the distribution of the remaining assets of the Company with the common stockholders, on an as-if-converted, pro rata basis.

Participating Voting Rights—The holder of Series A preferred stock has voting rights similar to common stockholders on an as-if-converted basis.

        Conversion Rights—Series A preferred stock shares are convertible on a four-for-one basis, at the holder's option, into shares of common stock, with the conversion rate determined by dividing $3.40 by the then current Series A conversion price ($0.85 per share as of December 31, 2006 and March 31, 2007 (unaudited)), which is subject to adjustment in certain circumstances at conversion. Conversion is automatic in certain circumstances, including a public offering of the Company's common stock meeting certain specified criteria.

        Redemption Rights—The holder of the Series A preferred stock did not exercise its redemption option, which expired 90 days after the Company delivered its audited financial statements for fiscal 2003. The redemption option required the Company to redeem all (but not less than all) of such holder's Series A preferred stock for the conversion price then in effect of the redeeming holder's shares of Series A preferred stock, plus accumulated but unpaid declared dividends, plus any Premium due thereon, if exercised. Additionally, if, by December 31, 2010, the Company has not completed a public offering, as defined, the holder of Series A preferred stock shall have the option, for a 90-day period (beginning on the date that the Company delivers its audited financial statements for fiscal 2010), to require the Company to redeem all (but not less than all) of such holder's Series A preferred stock for the conversion price then in effect of the redeeming holder's shares of Series A preferred stock, plus (i) accumulated but unpaid declared dividends, plus (ii) an amount equal to the greater of (a) cash in the amount of $1.43 per share for each of such redeeming holder's shares of Series A preferred stock (adjusted to reflect stock dividends, stock splits, recapitalizations, or similar transactions) or (b) a per-share amount for each of such redeeming holder's shares of Series A preferred stock (on an as-if-converted basis) equal to the aggregate amount of cash dividends declared for each share of common stock into which each share of Series A preferred stock being redeemed could then be converted, less (iii) the actual amount of any dividends paid prior to the redemption.

        Accretion of the preferred stock discount for issuance costs and premiums is shown as an increase in Series A preferred stock and a reduction in retained earnings in the consolidated financial statements.

11. STOCKHOLDERS' EQUITY

        The Company effected a stock split on September 30, 2005, pursuant to which each share of common stock then outstanding was converted into two shares of common stock. All common shares and per-share amounts have been restated for all periods presented to reflect the stock split.

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        The Company's policy is to pay declared dividends in the month following the month of declaration. The Company does not have a formal policy with respect to if or when to declare dividends or the amounts of dividends, but it currently intends to continue to pay regular quarterly dividends to the holders of its common stock. The payment of dividends is subject to the discretion of the board of directors and will depend on many factors, including results of operations, financial condition and capital requirements, earnings, general business conditions, legal restrictions on the payment of dividends and other factors the board of directors deems relevant. The Revolver restricts the Company's ability to pay dividends to stockholders if it is in default under this agreement. At December 31, 2005 and 2006 and March 31, 2006 and 2007 (unaudited), declared but unpaid preferred and common stock dividends totaled approximately $500, $657, $490 and $658, respectively, which were included in other accrued liabilities.

        Dividends declared for the years ended December 31, 2004, 2005 and 2006 and the three months ended March 31, 2006 and 2007 (unaudited), respectively, were as follows:

	Year Ended December 31,						Three Months Ended March 31,
	2004		2005		2006		2006		2007
							(unaudited)
Preferred stock	$	137	$	247	$	356	$	82	$	110
Common stock		698		1,255		1,776		408		548
	$	835	$	1,502	$	2,132	$	490	$	658

12. OPTIONS AND WARRANTS

        As of January 1, 2006, the Company adopted SFAS 123(R), which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including employee stock options based on estimated fair values, ratably over the requisite service period of the award. SFAS 123(R) supersedes the Company's previous accounting under APB 25. Prior to the adoption of SFAS 123(R), the Company accounted for stock-based awards to employees and directors using the intrinsic value method in accordance with APB 25 as allowed under SFAS 123. Generally, no compensation expense was recognized by the Company in its financial statements in connection with the awarding of stock option grants to employees provided that, as of the grant date, all terms associated with the award were fixed and the fair value of its stock, as of the grant date, was equal to or less than the amount an employee must pay to acquire the stock. The Company had recognized compensation expense in situations where the fair value of the common stock on the grant date was greater than the amount an employee must pay to acquire the stock.

        The Company adopted SFAS 123(R) using the prospective transition method, which requires the application of the accounting standard as of January 1, 2006, the first day of the Company's fiscal year ended December 31, 2006. The Company's consolidated financial statements as of and for the periods ended December 31, 2006 and March 31, 2006 and 2007 (unaudited) reflect the impact of SFAS 123(R). In accordance with the prospective transition method, the Company's consolidated

F-33

financial statements for periods prior to January 1, 2006 have not been restated to reflect, and do not include, the impact of SFAS 123(R).

        Stock-based compensation expense recognized under SFAS 123(R) consists of share-based payment awards made to employees and directors including employee stock options based on estimated fair values. Stock-based compensation expense recognized in the Company's consolidated statement of income for the year ended December 31, 2006 and the three months ended March 31, 2006 and 2007 (unaudited) does not include compensation expense for share-based payment awards granted prior to, but not yet vested as of January 1, 2006, in accordance with the provisions of SFAS 123 but does include compensation expense for the share-based payment awards granted on or subsequent to January 1, 2006 based on the grant date fair value estimated in accordance with the adoption provisions of SFAS 123(R). As stock-based compensation expense recognized in the Company's consolidated statement of income for the year ended December 31, 2006 and the three months ended March 31, 2006 and 2007 (unaudited) is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

        The Company has two option plans, both of which have been approved by the stockholders. Options may be exercised for unvested shares of common stock, which have full stockholder rights including voting, dividend and liquidation rights. The Company retains the right to repurchase any or all unvested shares at the exercise price paid per share any or all unvested shares should the optionee cease to remain in service while holding such unvested shares.

        2001 Stock Option Plan—The 2001 Stock Option, Deferred Stock, and Restricted Stock Plan authorizes the sale of up to 1,980,000 shares of common stock to officers, employees, directors, and consultants of the Company. Granted non-employee director options vest and become exercisable immediately. All other granted options and restricted stock vest over five years at 20% per year on the anniversary of the grant date. Options expire ten years from the date of grant. The exercise price of the stock is determined by the Board of Directors, but shall not be less than 100% of the fair value on the date of grant. Options granted and shares issued upon early exercise of such options prior to 2006 will vest in full upon the consummation of the Company's initial public offering. At December 31, 2006 and March 31, 2007 (unaudited), there were 256,800 and 205,900, respectively, un-issued shares of common stock available for issuance under this plan, including shares that have been forfeited and are available for reissue.

        2005 Option Incentive Plan—The 2005 Option Incentive Plan, Deferred Stock, and Restricted Stock Plan authorizes the sale of up to 1,000,000 shares of treasury stock of which only 800,000 shares were repurchased and therefore eligible for reissuance as of December 31, 2006 and March 31, 2007 (unaudited), to officers, key employees, directors, and consultants of the Company. Granted non-employee director options vest and become exercisable immediately. All other granted options vest over five years at 20% per year on the anniversary of the grant date. Options expire ten years from the date of grant. At December 31, 2006 and March 31, 2007 (unaudited), there were 6,000 and 44,500, respectively, un-issued shares of common stock available for issuance under this plan, including shares that have been forfeited and are available for reissue.

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        The Company uses the Black-Scholes option-pricing model to recognize the value of stock-based compensation expense for all share-based payment awards. Determining the appropriate fair-value model and calculating the fair value of stock-based awards at the grant date requires considerable judgment, including estimating stock price volatility, expected option life and forfeiture rates. The Company develops estimates based on historical data and market information, which can change significantly over time. The Black-Scholes model required the Company to make several key judgments including:

•

The expected option term reflects the application of the simplified method set out in SAB No. 107 "Share-Based Payment", which was issued in March 2005. Accordingly, the Company has utilized the average of the contractual term of the options and the weighted average vesting period for all options to calculate the expected option term.



•

Estimated volatility also reflects the application of SAB No. 107 interpretive guidance and, accordingly, incorporates historical volatility of similar public entities until sufficient information regarding the volatility of the Company's share price becomes available.



•

The dividend yield is based on the Company's historical pattern of dividends as well as expected dividend patterns.



•

The risk-free rate is based on the implied yield of U.S. Treasury notes as of the grant date with a remaining term approximately equal to the expected term.



•

Estimated forfeiture rate of approximately 8% per year is based on its historical forfeiture activity of unvested stock options.

        The Company used the following assumptions for stock options granted during the year ended December 31, 2006:

Plan	Options Granted	Weighted Average Risk-Free Rate	Expected Life	Weighted Average Volatility	Weighted Average Dividend Yield
2001	286,000	4.9%	6.5 years	46%	1.19%
2005	400,000	5.0%	6.5 years	45%	1.06%
Total	686,000

        For the year ended December 31, 2006, the following represent the Company's weighted average exercise price, grant date intrinsic value and fair value displayed by grant date:

Plan	Grant Date	Options Granted	Weighted Average Exercise Price		Weighted Average Grant Date Intrinsic Value		Weighted Average Fair Value of Options		Weighted Average Fair Value of Common Stock
2001	1/17/2006 7/26/2006	22,500 263,500	$ $	7.05 7.50	$ $	0.00 7.59	$ $	2.51 9.69	$ $	7.05 15.09
2005	7/26/2006	400,000	$	7.50	$	7.59	$	9.69	$	15.09

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12. OPTIONS AND WARRANTS (continued)

        No options were granted during the three month period ended March 31, 2007.

        As of December 31, 2004, 2005 and 2006, the Company valued its common stock using a combination of weighted income and market valuation approaches. The income approach was based on discounted cash flows. The market approach employed both a guideline company method and merger and acquisition method.

        The weighted income approach was given heavier consideration in determining final valuations, consistent with the Company's opinion that this method produced the best indicator of the value of its stock. The assumptions and methodologies used in performing the income approach's discounted cash flow analysis included, among other things:

•

Debt-free cash flows were projected for five years, which was deemed to be the appropriate valuation period;



•

Earnings before interest, depreciation and amortization, less working capital investment, were used to estimate terminal value;



•

The appropriate discount rate to be applied to the net free cash flows and terminal value for purposes of these valuations was based upon the Company's perception of the rate of return expected for a similar investment with similar risks; and



•

Discounts for lack of control and lack of marketability were also taken when appropriate.

        Among other things, the market approach valuations also took into account the following:

•

Trends and comparable valuations with respect to the guideline companies; and



•

Mergers and acquisitions within the guideline company group were reviewed, and values were derived based on observed market multiples, as adjusted for differences in size, profitability, facility age, geographic location and other factors.

        As noted above, in addition to the annual year-end weighted valuations, starting in 2004 the Company determined fair market value as outlined below contemporaneously with the granting of stock options. These valuations considered:

•

The Company's recent operating performance; and



•

A net income multiple derived from the annual weighted valuation analysis based on the factors outlined above.

        On July 27, 2006, in a manner generally consistent with historical valuation and grant practices, the Company granted options to purchase approximately 663,500 shares of common stock to employees. The exercise price was based on a contemporaneous fair value calculation performed as discussed above. Subsequently, a weighted valuation (also as discussed above) was performed, which produced a fair value less than the exercise price. Then, in March 2007, an additional retrospective weighted valuation was performed. Unlike the previous valuations, the March 2007 weighted valuation took into consideration the possibility of the Company entering the public marketplace in 2007. This

F-36

re-measurement resulted in the adjusted fair value exceeding the exercise price. As a result of the finalized valuations and the adoption of SFAS 123(R), the Company recorded aggregate compensation expense of approximately $443 and $249 during the year ended December 31, 2006 and the three-months ended March 31, 2007 (unaudited), respectively.

        The following table represents the employee stock option activity during the years ended December 31, 2004, 2005 and 2006 and the three months ended March 31, 2007 (unaudited):

	Number of Shares Outstanding		Weighted Average Exercise Price		Number of Shares Vested	Weighted Average Exercise Price
December 31, 2003	976,000		$	0.47	136,400	$	0.25
Granted	270,000		$	2.20
Forfeitures	(128,000	)	$	0.50
Exercised	(470,000	)	$	0.47
December 31, 2004	648,000		$	1.19	98,000	$	0.47
Granted	465,000		$	5.67
Forfeitures	(71,400	)	$	1.20
Exercised	(253,800	)	$	0.87
December 31, 2005	787,800		$	3.94	131,760	$	2.21
Granted	686,000		$	7.48
Forfeitures	(46,400	)	$	2.41
Exercised	(183,400	)	$	2.48
December 31, 2006	1,244,000		$	6.17	148,400	$	3.82
Granted	—			—
Forfeitures	(64,800	)	$	5.53
Exercised	(14,800	)	$	6.05
March 31, 2007 (unaudited)	1,164,400		$	6.20	132,300	$	3.85

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        The following summary information reflects stock options outstanding, vesting and related details as of March 31, 2007 (unaudited):

	Stock Outstanding					Stock Vested
Year of Grant	Number Outstanding	Exercise Price	Black- Scholes Fair Value		Remaining Contractual Life (Years)	Number Vested and Exercisable	Exercise Price
2003	50,000	$0.67-0.81	$	38,095	7	26,800	$0.67-0.81
2004	92,400	$1.96-2.46		213,002	7	34,000	$1.96-2.46
2005	375,800	$4.99-5.75		2,132,210	8	67,600	$4.99-5.75
2006	646,200	$7.05-7.50		6,132,438	9	3,900	$7.05
Total	1,164,400	$6.20	$	8,515,745	8	132,300	$3.85

        During the year ended December 31, 2006 and the three months ended March 31, 2006 and 2007 (unaudited), the Company recognized $443, $2 and $249, respectively, in compensation expense, all of which was classified as general and administrative expense. The Company expects to recognize $169, $1 and $98, respectively, in tax benefits when the options vest and are exercised. As of December 31, 2006 and March 31, 2006 and 2007 (unaudited), the total fair value of shares vested was approximately $567, $269 and $492, respectively.

        In future periods, the Company expects to recognize approximately $4,356 in stock-based compensation expense over the next 3.9 weighted average years for unvested options that were outstanding as of March 31, 2007.

        There were 1,032,100 unvested and outstanding options at March 31, 2007, of which 820,478 are expected to vest. The weighted average contractual life for options vested at March 31, 2007 was 7 years.

        The aggregate intrinsic value of options outstanding, expected to vest, vested and exercised as of December 31, 2006 was approximately $13,659, $9,107, $1,978 and $2,691, respectively. The aggregate intrinsic value of options outstanding, expected to vest, vested and exercised as of March 31, 2007 (unaudited) was approximately $14,227, $9,808, $1,927 and $3,187. The intrinsic value is calculated as the difference between the market value and the exercise price of the options.

        Stock Warrants—At December 31, 2004, the Company had warrants to purchase 512,000 shares of common stock outstanding and exercisable at an exercise price of $0.0025 per share, relating to an extension of the term loan during 1999. The aggregate estimated fair value of such warrants of $1 was recorded as interest expense on the date of grant. The fair value of such warrants was estimated at the grant date using the Black-Scholes option-pricing model, assuming a risk-free interest rate of 5.40%, volatility of 80%, dividend yield of zero and contractual life of 72 months. The Company had no warrants outstanding and exercisable at December 31, 2005 and 2006 and March 31, 2006 and 2007 (unaudited).

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13. COMMITMENTS AND CONTINGENCIES

Leases—The Company leases certain facilities and its administrative offices under non-cancelable operating leases, most of which have initial lease terms ranging from 5 to 20 years. The Company also leases certain of its equipment under non-cancelable operating leases with initial terms ranging from three to five years. Most of these leases contain renewal options, certain of which involve rent increases. Total rent expense, inclusive of straight-line rent adjustments, was $15,056, $16,406, $16,701, and $4,129 and $4,229 for the years ended December 31, 2004, 2005 and 2006 and the three months ended March 31, 2006 and 2007 (unaudited), respectively.

        Future minimum annual lease payments under noncancelable leases in effect as December 31, 2006, are as follows:

Year Ending December 31,		Amounts
	2007	$	17,102
	2008		17,424
	2009		17,095
	2010		15,624
	2011		15,418
Thereafter			91,104
		$	173,767

        Nine of the Company's facilities are operated under master lease arrangements with cross-default provisions and the breach of a single facility lease would subject multiple facilities to the same risk. Under a master lease, the Company may lease a large number of geographically dispersed properties through an indivisible lease. Failure to comply with Medicare or Medicaid provider requirements is a default under several of the Company's master lease and debt financing instruments. In addition, other potential defaults related to an individual facility may cause a default of an entire master lease portfolio and could trigger cross-default provisions in the Company's outstanding debt arrangements and other leases. With an indivisible lease, it is difficult to restructure the composition of the portfolio or economic terms of the lease without the consent of the landlord. In addition, a number of the Company's individual facility leases are held by the same or related landlords, and these leases typically also involve cross-default provisions that could cause a default at one facility to trigger a technical default with respect to others, potentially subjecting the Company to the various remedies available to the landlords under each of the leases. In addition, our equity interests in three of our operating companies, which operate three facilities held under a master lease arrangement with one of our landlords, have been pledged to the landlord as additional security for our obligations under the master lease arrangement.

Regulatory Matters—Laws and regulations governing Medicare and Medicaid programs are complex and subject to interpretation. Compliance with such laws and regulations can be subject to future governmental review and interpretation, as well as significant regulatory action including fines,

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penalties, and exclusion from certain governmental programs. The Company believes that it is in compliance with all applicable laws and regulations.

        A portion of the Company's revenue is derived from Medicaid and Medicare, for which reimbursement rates are subject to regulatory changes and government funding restrictions. Although the Company is not aware of any significant future rate changes, significant changes to the reimbursement rates could have a material effect on the Company's operations.

Cost-Containment Measures—Both government and private pay sources have instituted cost-containment measures designed to limit payments made to providers of health care services, and there can be no assurance that future measures designed to limit payments made to providers will not adversely affect the Company.

        Indemnities—From time to time, the Company enters into certain types of contracts that contingently require the Company to indemnify parties against third-party claims. These contracts primarily include (i) certain real estate leases, under which the Company may be required to indemnify property owners or prior facility operators for post-transfer environmental or other liabilities and other claims arising from the Company's use of the applicable premises, (ii) operations transfer agreements, in which the Company agrees to indemnify past operators of facilities the Company acquires against certain liabilities arising from the transfer of the operation and/or the operation thereof after the transfer, (iii) certain lending agreements, under which the Company may be required to indemnify the lender against various claims and liabilities, (iv) agreements with certain lenders under which the Company may be required to indemnify such lenders against various claims and liabilities, and (v) certain agreements with the Company's officers, directors, and employees, under which the Company may be required to indemnify such persons for liabilities arising out of their employment relationships. The terms of such obligations vary by contract and, in most instances, a specific or maximum dollar amount is not explicitly stated therein. Generally, amounts under these contracts cannot be reasonably estimated until a specific claim is asserted. Consequently, because no claims have been asserted, no liabilities have been recorded for these obligations on the Company's balance sheets for any of the periods presented.

        Litigation—The skilled nursing business involves a significant risk of liability given the age and health of the Company's patients and residents and the services the Company provides. The Company and others in the industry are subject to an increasing number of claims and lawsuits, including professional liability claims, alleging that services have resulted in personal injury, elder abuse, wrongful death or other related claims. The defense of these lawsuits may result in significant legal costs, regardless of the outcome, and can result in large settlement amounts or damage awards.

        The Company maintains liability insurance policies in amounts and with the coverage and deductibles it believes are adequate based on the nature and risks of its business, historical experience, industry standards and the availability of coverage in the insurance market.

        In recent years, there has been an increase in the number of class action suits filed against long-term and rehabilitative care companies. A class action suit was previously filed against the

F-40

Company alleging, among other things, violations of applicable California Health and Safety Code provisions and a violation of the California Consumer Legal Remedies Act at certain of its facilities. The Company has received court approval for its settlement and the obligation to pay has been capped, not to exceed $3,000. As of December 31, 2006 the Company's best estimate of the ultimate liability it believes it will likely be subject to after all payments to class claimants and related estimated legal expenses was approximately $1,000. This amount was recorded in accrued other liabilities in the accompanying consolidated financial statements as of December 31, 2006. In April 2007, the Company settled this class action suit. The ultimate amount of legal expenses and claims was approximately $1,100 which was paid or accrued as of March 31, 2007.

        In addition to the class action, professional liability and other types of lawsuits and claims described above, the Company is also subject to potential lawsuits under the Federal False Claims Act and comparable state laws alleging submission of fraudulent claims for services to any healthcare program (such as Medicare) or payor. A violation may provide the basis for exclusion from federally-funded healthcare programs. Such exclusions could have a correlative negative impact the Company's financial performance. Some states, including California, Arizona and Texas, have enacted similar whistleblower and false claims laws and regulations. In addition, the Deficit Reduction Act of 2005 created incentives for states to enact anti-fraud legislation modeled on the Federal False Claims Act. As such, the Company could face increased scrutiny, potential liability and legal expenses and costs based on claims under state false claims acts in markets in which it does business.

        On June 5, 2006, a complaint was filed against the Company in the Superior Court of the State of California for the County of Los Angeles, purportedly on behalf of the United States, claiming that the Company violated the Medicare Secondary Payer Act. In the complaint, the plaintiff alleged that the Company has inappropriately received and retained reimbursement from Medicare for treatment given to certain unidentified patients and residents of its facilities whose injuries were caused by the Company as a result of unidentified and unadjudicated incidents of medical malpractice. The plaintiff in this action is seeking damages of twice the amount that the Company was allegedly obligated to pay or reimburse to Medicare in connection with the treatment in question under the Medicare Secondary Payer Act, plus interest, together with plaintiff's costs and fees, including attorneys' fees. The plaintiff's case was dismissed in the Company's favor by the trial court, and the dismissal is currently on appeal.

        The Company has been, and continues to be, subject to claims and legal actions that arise in the ordinary course of business including potential claims related to care and treatment provided at its facilities, as well as employment related claims. The Company does not believe that the ultimate resolution of these actions will have a material adverse effect on the Company's financial business, financial condition or, results of operations. A significant increase in the number of these claims or an increase in amounts owing under successful claims could materially adversely affect the Company's business, financial condition, results of operations and cash flows.

        Other Matters—In March 2007, the Company and certain of its officers received a series of notices from the Company's bank indicating that the United States Attorney for the Central District of California issued a subpoena to our bank and then rescinded that subpoena. This rescinded subpoena

F-41

originally requested documents from the Company's bank related to financial transactions involving the Company, ten of its operating subsidiaries, an outside investor group, and certain of its current and former officers. Subsequently, in June 2007, the U.S. Attorney sent a letter to one of the Company's current employees requesting a meeting. The letter indicated that the U.S. Attorney and the U.S. Department of Health and Human Services Office of Inspector General were conducting an investigation of claims submitted to the Medicare program for rehabilitation services provided at the Company's facilities. Although both the Company and the employee offered to cooperate, the U.S. Attorney later withdrew its meeting request. The Company has not been formally charged with any wrongdoing, served with any related subpoenas or requests, or been directly notified of any concerns or related investigations by the U.S. Attorney or any government agency. While the Company believes that the assertion of criminal charges, civil claims, administrative sanctions or whistleblower actions would be unwarranted, the U.S. Attorney's office has declined to discuss or provide the Company with any further information with respect to this matter and the Company cannot predict the outcome of any investigation or any possible related proceedings. To the extent the U.S. Attorney's office elects to pursue this matter, or if the investigation has been instigated by a qui tam relator who elects to pursue the matter, the Company's operations and financial condition could be adversely affected and the Company's stock price could decline.

        In November 2006, the Company became aware of an allegation of possible reimbursement irregularities at one or more of its facilities. That same month, the Company retained outside counsel and initiated an internal investigation into these matters. This investigation is currently ongoing and no conclusion regarding the allegation has yet been reached. The Company does not know what might be the ultimate outcome or findings of this investigation at this time. If the Company's internal investigation results in negative findings, the Company's business, financial condition and results of operations could be materially and adversely affected and our stock price could decline.

        Based on the uncertainty of these matters, coupled with the lack of sufficient data to appropriately estimate a reasonable contingent financial impact, no loss accrual was established for these matters as of December 31, 2006 or March 31, 2007. The Company plans to continue to monitor these matters and account for any subsequent changes in the loss contingency.

Concentrations—

Credit Risk—The Company has significant accounts receivable balances, the collectibility of which is dependent on the availability of funds from certain governmental programs, primarily Medicare and Medicaid. These receivables represent the only significant concentration of credit risk for the Company. The Company does not believe there are significant credit risks associated with these governmental programs. The Company believes that an adequate allowance has been recorded for the possibility of these receivables proving uncollectible, and continually monitors and adjusts these allowances as necessary. The Company's receivables from Medicare and Medicaid payor programs accounted for approximately 63%, 70%, 65% and 63% of its total accounts receivable as of December 31, 2004, 2005 and 2006 and March 31, 2007 (unaudited), respectively. Revenue from reimbursements under the Medicare and Medicaid programs accounted for approximately 75%, 76%, 75% and 75%, and 74% of

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the Company's total revenue for the years ended December 31, 2004, 2005, and 2006 and the three months ended March 31, 2006 and 2007 (unaudited), respectively.

        Cash in Excess of FDIC Limits—The Company currently has bank deposits with a financial institution that exceed FDIC insurance limits. FDIC insurance provides protection for bank deposits up to $100.

14. DEFINED CONTRIBUTION PLAN

        The Company has a 401(k) defined contribution plan (the "401(k) Plan"), whereby eligible employees may contribute up to 15% of their annual basic earnings. Additionally, the 401(k) Plan provides for discretionary matching contributions (as defined) by the Company. The Company contributed, $148, $196, $231 and $57 and $63 to the 401(k) Plan during the years ended December 31, 2004, 2005 and 2006 and the three months ended March 31, 2006 and 2007 (unaudited), respectively. Beginning in 2007, the Company's plan allowed eligible employees to contribute up to 90% of their eligible compensation, subject to applicable annual Internal Revenue Code limits.

15. BUSINESS SEGMENTS

        The Company has a single reporting segment—long-term care services, which includes the operation of skilled nursing and assisted living facilities, and related ancillary services at the facilities. The Company's single reporting segment is made up of several individual operating segments grouped together principally based on their geographical locations within the United States. Each of the geographically grouped operating segments represents a division of the Company and is managed by a segment manager who reports to the chief operating decision maker. Each of the operating segments provide long-term care services and possess economic characteristics that are similar resulting in similar long-term financial performance. Based on the similar economic characteristics of each of the operating segments, management believes the Company meets the criteria for aggregating its operations into a single reporting segment.

16. SUBSEQUENT EVENTS

        On July 3, 2007, under the terms of the original lease agreement, the Company exercised an option to purchase one of its leased skilled nursing facilities in Glendora, California for an aggregate purchase price of $3,300, which was paid in cash. Changing this leased facility into an owned facility resulted in no net change in the number of beds.

        On July 16, 2007, the Company entered into an operating lease agreement whereby it assumed the operations of a long-term care facility in Draper, Utah that offers both skilled nursing and assisted living services. No amounts were paid to the prior facility operators and the Company did not acquire any assets or assume any liabilities as part of this transaction. This facility adds approximately 95 beds to the Company's operations.

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17. RESTATED 2005 CONSOLIDATED FINANCIAL STATEMENTS

        Subsequent to December 31, 2005, the Company determined that its previously issued consolidated balance sheet as of December 31, 2005 should be restated to appropriately classify the Company's self-insurance accrual between short-term and long-term liabilities. Previously the Company had classified the entire liability as current. The Company also adjusted the corresponding components of its deferred taxes between the short and long-term asset and liability classifications accordingly. Additionally, in order to reflect the nature of the related captive insurance subsidiary cash and cash equivalents, the Company restated its insurance subsidiary cash between the short-term and long-term classifications to more appropriately reflect the cash as restricted for payment of such obligations from a regulatory standpoint. As a result, the Company has restated the accompanying consolidated balance sheet as of December 31, 2005 and related amounts in the consolidated statements of cash flows for the years ended December 31, 2004 and 2005 from amounts previously reported. The impact to the balance sheet is to decrease the current portion of accrued self-insurance liabilities with a corresponding increase in the long-term portion of accrued self-insurance liabilities of $11,542 and reduce cash and cash equivalents with a corresponding increase to a long-term insurance subsidiary deposit account of $4,547, as of December 31, 2005. As a result of the liability reclassification, the current deferred tax asset was reduced by $3,686, with a corresponding increase to the long-term deferred tax assets as of December 31, 2005. There was no impact on the consolidated statements of income.

        The following table shows the effect of the restatement to the consolidated balance sheet as of December 31, 2005:

Consolidated Balance Sheet

			December 31, 2005
			As Previously Reported		As Restated
Assets:
Cash and cash equivalents			$	16,182	$	11,635
Deferred tax asset—current				8,145		4,459
	Total current assets			71,964		63,731
Insurance subsidiary deposits				—		4,547
Deferred tax asset				—		3,673
		Total assets	$	119,403	$	119,390
Liabilities and stockholders' equity:
Accrued self-insurance liabilities—current			$	15,271	$	3,729
	Total current liabilities			56,186		44,644
Accrued self-insurance liabilities				—		11,542
Deferred tax liability				13		—
		Total liabilities and stockholders' equity	$	119,403	$	119,390

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        The following table shows the effect of the restatement to the consolidated statements of cash flow for the years ended December 31, 2004 and 2005:

Consolidated Statements of Cash Flows

			December 31, 2004					December 31, 2005
			As Previously Reported		As Restated			As Previously Reported			As Restated
Cash flows from operating activities:
	Change in operating assets and liabilities:
		Insurance subsidiary deposits	$	—	$	(354	)	$	—		$	(2,865	)
		Other accrued liabilities		2,700		949			13,134			6,314
		Accrued self-insurance liabilities—current		—		1,751			—			6,820
	Net cash provided by operating activities			18,156		17,802			23,311			20,446
Net increase (decrease) in cash and cash equivalents				14,364		14,010			(255	)		(3,120	)
Cash and cash equivalents beginning of year				2,073		745			16,437			14,755
Cash and cash equivalents end of year			$	16,437	$	14,755		$	16,182		$	11,635

F-45

        Until                                     , 2007, all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

Shares

Common Stock

PRICE $                    PER SHARE

D.A. DAVIDSON & CO. STIFEL NICOLAUS

PROSPECTUS

                                     , 2007

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution

        The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable by us in connection with the sale and distribution of the securities being registered. All amounts are estimated except the SEC registration fee, the NASD filing fee and the NASDAQ Global Market listing fee.

Item	Amount to be Paid
SEC registration fee	$2,917
NASD filing fee	$10,000
NASDAQ Global Market listing fee	*
Blue sky fees and expenses	*
Printing and engraving expenses	*
Legal fees and expenses	*
Accounting fees and expenses	*
Transfer Agent and Registrar fees	*
Miscellaneous	*
Total	$ *

*

To be provided by amendment

Item 14. Indemnification of Directors and Officers

        Under Section 145 of the Delaware General Corporation Law, we can indemnify our directors and officers against liabilities they may incur in such capacities, including liabilities under the Securities Act of 1933, as amended (the "Securities Act"). Our bylaws (Exhibit 3.4 to this registration statement), which will be adopted by us immediately prior to the closing of this offering, provide that we will indemnify our directors and officers to the fullest extent permitted by law and require us to advance litigation expenses upon our receipt of an undertaking by the director or officer to repay such advances if it is ultimately determined that the director or officer is not entitled to indemnification. Our bylaws, which will be adopted by us immediately prior to the closing of this offering, further provide that rights conferred under such bylaws do not exclude any other right such persons may have or acquire under any bylaw, agreement, vote of stockholders or disinterested directors, insurance policy or otherwise.

        Our certificate of incorporation (Exhibit 3.2 to this registration statement), which will be adopted by us immediately prior to the closing of this offering, provides that we shall indemnify our directors and officers if such persons acted (i) in good faith, (ii) in a manner reasonably believed to be in or not opposed to our best interests, and (iii) with respect to any criminal action or proceeding, with reasonable cause to believe such conduct was lawful. Our certificate of incorporation will also provide that, pursuant to Delaware law, our directors shall not be liable for monetary damages for breach of the directors' fiduciary duty of care to us and our stockholders. This provision in our certificate of incorporation does not eliminate the duty of care, and in appropriate circumstances equitable remedies such as injunctive or other forms of non-monetary relief will remain available under Delaware law. In addition, each director will continue to be subject to liability for breach of the director's duty of loyalty to us for acts or omissions not in good faith or involving intentional misconduct, for knowing violations of law, for actions leading to improper personal benefit to the director, and for payment of dividends or approval of stock repurchases or redemptions that are unlawful under Delaware law. The provision

II-1

also does not affect a director's responsibilities under any other law, such as the federal securities laws or state or federal environmental laws. The certificate of incorporation further provides that we are authorized to indemnify our directors and officers to the fullest extent permitted by law through the bylaws, agreement, vote of stockholders or disinterested directors, or otherwise. We intend to obtain a separate directors and officers liability insurance in connection with this offering.

        We have entered into agreements to indemnify our directors and certain of our officers in addition to the indemnification provided for in the certificate of incorporation and bylaws. These agreements will, among other things, indemnify our directors and some of our officers for certain expenses (including attorneys fees), judgments, fines and settlement amounts incurred by such person in any action or proceeding, including any action by or in our right, on account of services by that person as a director or officer or as a director or officer of any of our subsidiaries, or as a director or officer of any other company or enterprise that the person provides services to at our request.

        The underwriting agreement (Exhibit 1.1 to this registration statement) provides for indemnification by the underwriters of us and our officers and directors, and by us of the underwriters, for certain liabilities arising under the Securities Act or otherwise in connection with this offering.

Item 15. Recent Sales of Unregistered Securities

        Since January 1, 2004, we have issued the following securities that were not registered under the Securities Act of 1933, as amended:

        From January 1, 2004 to March 31, 2007, we granted options to purchase an aggregate of 1,421,000 shares (as adjusted for stock splits) of common stock to our employees and directors under our 2001 Stock Option, Deferred Stock and Restricted Stock Plan and 2005 Stock Incentive Plan at exercise prices ranging from $1.96 to $7.50 per share (as adjusted for stock splits). From January 1, 2004 to March 31, 2007, 922,000 shares (as adjusted for stock splits) of common stock have been purchased pursuant to exercises of stock options for an aggregate purchase price of $984,887, and 313,300 shares have been cancelled and returned to the stock option plan pool. As of March 31, 2007, options to purchase 1,164,400 shares (as adjusted for stock splits) were outstanding.

        The stock option grants and common stock issuances under our equity incentive plans were made in reliance upon the exemption provided by Rule 701 promulgated under the Securities Act or Section 4(2) of the Securities Act. Appropriate legends are affixed to the stock certificates issued in such transactions.

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Item 16. Exhibits and Financial Statement Schedules

(a)

Exhibits

        The following Exhibits are attached hereto and incorporated herein by reference.

Exhibit No.	Description
1.1*	Form of Underwriting Agreement
3.1**	Fourth Amended and Restated Certificate of Incorporation of The Ensign Group, Inc.
3.1(a)*	Certificate of Amendment to Certificate of Incorporation, as amended, to be filed prior to completion of the offering to effect a              -for-              stock split
3.2*	Form of Fifth Amended and Restated Certificate of Incorporation of The Ensign Group, Inc., to be in effect upon completion of the offering to which this registration statement relates
3.3**	Bylaws of The Ensign Group, Inc.
3.4*	Form of Amended and Restated Bylaws of The Ensign Group, Inc. to be in effect upon completion of the offering to which this registration statement relates
4.1*	Specimen common stock certificate
4.2**	Investor Rights Agreement, dated June 6, 2000, by and among The Ensign Group, Inc. and certain stockholders of The Ensign Group, Inc.
5.1*	Opinion of Dorsey & Whitney LLP
10.1+	The Ensign Group, Inc. 2001 Stock Option, Deferred Stock and Restricted Stock Plan, form of Stock Option Grant Notice for Executive Officers and Directors, stock option agreement and form of restricted stock agreement for Executive Officers and Directors
10.2+	The Ensign Group, Inc. 2005 Stock Incentive Plan, form of Nonqualified Stock Option Award for Executive Officers and Directors, and form of restricted stock agreement for Executive Officers and Directors
10.3+*	The Ensign Group, Inc. 2007 Omnibus Incentive Plan
10.4+*	Form of 2007 Omnibus Incentive Plan Stock Option Agreement
10.5+*	Form of 2007 Omnibus Incentive Plan Restricted Stock Agreement
10.6+*	Form of Indemnification Agreement entered into between The Ensign Group, Inc. and its directors and officers
10.7**	Third Amended and Restated Loan Agreement, dated as of December 29, 2006, by and among certain subsidiaries of The Ensign Group, Inc. as Borrowers, and General Electric Capital Corporation as Agent and Lender
10.8	Consolidated, Amended and Restated Promissory Note, dated as of December 29, 2006, in the original principal amount of $64,692,111.67, by and among certain subsidiaries of The Ensign Group, Inc. in favor of General Electric Capital Corporation, Inc.

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10.9	Third Amended and Restated Guaranty of Payment and Performance, dated as of December 29, 2006, by The Ensign Group, Inc. as Guarantor and General Electric Capital Corporation as Agent and Lender, under which Guarantor guarantees the payment and performance of the obligations of certain of Guarantor's subsidiaries under the Third Amended and Restated Loan Agreement
10.10	Form of Amended and Restated Deed of Trust, Assignment of Rents, Security Agreement and Fixture Financing Statement, dated as of June 30, 2006 (filed against Desert Terrace Nursing Center, Desert Sky Nursing Home, Highland Manor Health and Rehabilitation Center and North Mountain Medical and Rehabilitation Center), by and among Terrace Holdings AZ LLC, Sky Holdings AZ LLC, Ensign Highland LLC and Valley Health Holdings LLC as Grantors, Chicago Title Insurance Company as Trustee, and General Electric Capital Corporation as Beneficiary and Schedule of Material Differences therein
10.11	Deed of Trust, Assignment of Rents, Security Agreement and Fixture Financing Statement, dated as of June 30, 2006 (filed against Park Manor), by and among Plaza Health Holdings LLC as Grantor, Chicago Title Insurance Company as Trustee, and General Electric Capital Corporation as Beneficiary
10.12	Deed of Trust, Assignment of Rents, Security Agreement and Fixture Financing Statement, dated as of June 30, 2006 (filed against Catalina Care and Rehabilitation Center), by and among Rillito Holdings LLC as Grantor, Chicago Title Insurance Company as Trustee, and General Electric Capital Corporation as Beneficiary
10.13	Deed of Trust, Assignment of Rents, Security Agreement and Fixture Financing Statement, dated as of October 16, 2006 (filed against Park View Gardens at Montgomery), by and among Mountainview Communitycare LLC as Grantor, Chicago Title Insurance Company as Trustee, and General Electric Capital Corporation as Beneficiary
10.14	Deed of Trust, Assignment of Rents, Security Agreement and Fixture Financing Statement, dated as of October 16, 2006 (filed against Sabino Canyon Rehabilitation and Care Center), by and among Meadowbrook Health Associates LLC as Grantor, Chicago Title Insurance Company as Trustee and General Electric Capital Corporation as Beneficiary
10.15	Form of Deed of Trust, Assignment of Rents, Security Agreement and Fixture Financing Statement, dated as of December 29, 2006 (filed against Upland Care and Rehabilitation Center and Camarillo Care Center), by and among Cedar Avenue Holdings LLC and Granada Investments LLC as Grantors, Chicago Title Insurance Company as Trustee and General Electric Capital Corporation as Beneficiary and Schedule of Material Differences therein

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10.16	Form of First Amendment to (Amended and Restated) Deed of Trust, Assignment of Rents, Security Agreement and Fixture Financing Statement, dated as of December 29, 2006 (filed against Desert Terrace Nursing Center, Desert Sky Nursing Home, Highland Manor Health and Rehabilitation Center, North Mountain Medical and Rehabilitation Center, Catalina Care and Rehabilitation Center, Park Manor, Park View Gardens at Montgomery, Sabino Canyon Rehabilitation and Care Center), by and among Terrace Holdings AZ LLC, Sky Holdings AZ LLC, Ensign Highland LLC, Valley Health Holdings LLC, Rillito Holdings LLC, Plaza Health Holdings LLC, Mountainview Communitycare LLC and Meadowbrook Health Associates LLC as Grantors, Chicago Title Insurance Company as Trustee, and General Electric Capital Corporation as Beneficiary and Schedule of Material Differences therein
10.17**	Amended and Restated Loan and Security Agreement, dated as of March 25, 2004, by and among The Ensign Group, Inc. and certain of its subsidiaries as Borrower, and General Electric Capital Corporation as Agent and Lender, previously filed as Exhibit 10.19 to our Form S-1 on May 14, 2007
10.18**	Amendment No. 1, dated as of December 3, 2004, to the Amended and Restated Loan and Security Agreement, by and among The Ensign Group, Inc. and certain of its subsidiaries as Borrower, and General Electric Capital Corporation as Lender, previously filed as Exhibit 10.20 to our Form S-1 on May 14, 2007
10.19	Second Amended and Restated Revolving Credit Note, dated as of December 3, 2004, in the original principal amount of $20,000,000, by The Ensign Group, Inc. and certain of its subsidiaries in favor of General Electric Capital Corporation
10.20**	Amendment No. 2, dated as of March 25, 2007, to the Amended and Restated Loan and Security Agreement, by and among The Ensign Group, Inc. and certain of its subsidiaries as Borrower, and General Electric Capital Corporation as Lender, previously filed as Exhibit 10.22 to our Form S-1 on May 14, 2007
10.21	Amendment No. 3, dated as of June 22, 2007, to the Amended and Restated Loan and Security Agreement, by and among The Ensign Group, Inc. and certain of its subsidiaries as Borrower and General Electric Capital Corporation as Lender
10.22	Exceptions to Nonrecourse Guaranty, dated as of October 2006, by The Ensign Group, Inc. as Guarantor and Wells Fargo Bank, N.A. as Trustee for GMAC Commercial Mortgage Securities, Inc., under which Guarantor guarantees full and prompt payment of all amounts due and owing by Cherry Health Holdings, Inc. under the Promissory Note
10.23**	Pacific Care Center Loan Agreement, dated as of August 6, 1998, by and between G&L Hoquiam, LLC as Borrower and GMAC Commercial Mortgage Corporation as Lender (later assumed by Cherry Health Holdings, Inc. as Borrower and Wells Fargo Bank, N.A. as Lender)

II-5

10.24	Deed of Trust and Security Agreement, dated as of August 6, 1998, by and among G&L Hoquiam, LLC as Grantor, Ticor Title Insurance Company as Trustee and GMAC Commercial Mortgage Corporation as Beneficiary
10.25	Promissory Note, dated as of August 6, 1998, in the original principal amount of $2,475,000, by G&L Hoquiam, LLC in favor of GMAC Commercial Mortgage Corporation
10.26**	Loan Assumption Agreement, by and among G&L Hoquiam, LLC as Prior Owner; G&L Realty Partnership, L.P. as Prior Guarantor; Cherry Health Holdings, Inc. as Borrower; and Wells Fargo Bank, N.A., the Trustee for GMAC Commercial Mortgage Securities, Inc., as Lender
10.27	Deed of Trust with Assignment of Rents, dated as of January 30, 2001, by and among Ensign Southland LLC as Trustor, Brian E. Callahan as Trustee and Continental Wingate Associates, Inc. as Beneficiary
10.28**	Deed of Trust Note, dated as of January 30, 2001, in the original principal amount of $7,455,100, by Ensign Southland, LLC in favor of Continental Wingate Associates, Inc.
10.29**	Security Agreement, dated as of January 30, 2001, by and between Ensign Southland, LLC and Continental Wingate Associates, Inc.
10.30**	Master Lease Agreement, dated July 3, 2003, between Adipiscor LLC as Lessee and LTC Partners VI, L.P., Coronado Corporation and Park Villa Corporation collectively as Lessor
10.31**	Lease Guaranty, dated July 3, 2003, between The Ensign Group, Inc. as Guarantor and LTC Partners VI, L.P., Coronado Corporation and Park Villa Corporation collectively as Lessor, under which Guarantor guarantees the payment and performance of Adipiscor LLC's obligations under the Master Lease Agreement
10.32**	Master Lease Agreement, dated September 30, 2003, between Permunitum LLC as Lessee, Vista Woods Health Associates LLC, City Heights Health Associates LLC, and Claremont Foothills Health Associates LLC as Sublessees, and OHI Asset (CA), LLC as Lessor
10.33**	Lease Guaranty, dated September 30, 2003, between The Ensign Group, Inc. as Guarantor and OHI Asset (CA), LLC as Lessor, under which Guarantor guarantees the payment and performance of Permunitum LLC's obligations under the Master Lease Agreement
10.34**	Lease Guaranty, dated September 30, 2003, between Vista Woods Health Associates LLC, City Heights Health Associates LLC and Claremont Foothills Health Associates LLC as Guarantors and OHI Asset (CA), LLC as Lessor, under which Guarantors guarantee the payment and performance of Permunitum LLC's obligations under the Master Lease Agreement
10.35**	Master Lease Agreement, dated January 31, 2003, between Moenium Holdings LLC as Lessee and Healthcare Property Investors, Inc., d/b/a in the State of Arizona as HC Properties, Inc., and Healthcare Investors III collectively as Lessor

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10.36**	Lease Guaranty, between The Ensign Group, Inc. as Guarantor and Healthcare Property Investors, Inc. as Owner, under which Guarantor guarantees the payment and performance of Moenium Holdings LLC's obligations under the Master Lease Agreement
10.37**	First Amendment to Master Lease Agreement, dated May 27, 2003, between Moenium Holdings LLC as Lessee and Healthcare Property Investors, Inc., d/b/a in the State of Arizona as HC Properties, Inc., and Healthcare Investors III collectively as Lessor
10.38**	Second Amendment to Master Lease Agreement, dated October 31. 2004, between Moenium Holdings LLC as Lessee and Healthcare Property Investors, Inc., d/b/a in the State of Arizona as HC Properties, Inc., and Healthcare Investors III collectively as Lessor
10.39**	Lease Agreement, by and between Mission Ridge Associates, LLC and Ensign Facility Services, Inc.
10.40**	First Amendment to Lease Agreement, dated as of January 15, 2004, by and between Mission Ridge Associates, LLC and Ensign Facility Services, Inc.
10.41**	Form of Independent Consulting and Centralized Services Agreement between Ensign Facility Services, Inc. and certain of its subsidiaries
21.1	Subsidiaries of The Ensign Group, Inc., as amended
23.1	Consent of Deloitte & Touche LLP
23.2*	Consent of Dorsey & Whitney LLP (included in Exhibit 5.1)
24.1**	Power of Attorney (included on signature pages hereto)

*

To be filed by amendment.

**

Previously filed.

+

Indicates management contract or compensatory plan.

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(b)

Financial Statement Schedules

The Ensign Group, Inc. and Subsidiaries
Schedule II
Valuation and Qualifying Accounts
(In thousands)

		Balance at Beginning of Year			Additions Charged to Costs and Expenses			Deductions		Balance at End of Year
Year Ended December 31, 2004
	Allowance for doubtful accounts	$	(1,737	)	$	(3,415	)	$	939	$	(4,213	)
Year Ended December 31, 2005
	Allowance for doubtful accounts	$	(4,213	)	$	(3,092	)	$	2,346	$	(4,959	)
Year Ended December 31, 2006
	Allowance for doubtful accounts	$	(4,959	)	$	(4,191	)	$	1,607	$	(7,543	)
Three Months Ended March 31, 2007 (unaudited)
	Allowance for doubtful accounts	$	(7,543	)	$	(1,127	)	$	544	$	(8,126	)

        All other schedules have been omitted because the information required to be set forth therein is not applicable or is shown in the consolidated financial statements or notes thereto.

II-8

Item 17. Undertakings

        The undersigned hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreement, certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.

        Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

        The undersigned registrant hereby undertakes that:

        (1)    For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.

        (2)    For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

II-9

SIGNATURES

        Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Mission Viejo, State of California, on July 25, 2007.

THE ENSIGN GROUP, INC.
By:	/s/  CHRISTOPHER R. CHRISTENSEN
	Christopher R. Christensen Chief Executive Officer and President

        Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 1 to the Registration Statement has been signed by the following persons in the capacities and on the dates indicated:

Signature	Title	Date
/s/  CHRISTOPHER R. CHRISTENSEN Christopher R. Christensen	Chief Executive Officer and President (principal executive officer)	July 25, 2007
/s/  ALAN J. NORMAN Alan J. Norman	Chief Financial Officer (principal financial and accounting officer)	July 25, 2007
* Roy E. Christensen	Chairman of the Board	July 25, 2007
* Antoinette T. Hubenette	Director	July 25, 2007
* Thomas A. Maloof	Director	July 25, 2007
* Charles M. Blalack	Director	July 25, 2007

*By:
/s/  CHRISTOPHER R. CHRISTENSEN Christopher R. Christensen
Attorney-in-fact

II-10

EXHIBIT INDEX

Exhibit No.	Description
1.1*	Form of Underwriting Agreement
3.1**	Fourth Amended and Restated Certificate of Incorporation of The Ensign Group, Inc.
3.1(a)*	Certificate of Amendment to Certificate of Incorporation, as amended, to be filed prior to completion of the offering to effect a              -for-              stock split
3.2*	Form of Fifth Amended and Restated Certificate of Incorporation of The Ensign Group, Inc., to be in effect upon completion of the offering to which this registration statement relates
3.3**	Bylaws of The Ensign Group, Inc.
3.4*	Form of Amended and Restated Bylaws of The Ensign Group, Inc. to be in effect upon completion of the offering to which this registration statement relates
4.1*	Specimen common stock certificate
4.2**	Investor Rights Agreement, dated June 6, 2000, by and among The Ensign Group, Inc. and certain stockholders of The Ensign Group, Inc.
5.1*	Opinion of Dorsey & Whitney LLP
10.1+	The Ensign Group, Inc. 2001 Stock Option, Deferred Stock and Restricted Stock Plan, form of Stock Option Grant Notice for Executive Officers and Directors, stock option agreement and form of restricted stock agreement for Executive Officers and Directors
10.2+	The Ensign Group, Inc. 2005 Stock Incentive Plan, form of Nonqualified Stock Option Award for Executive Officers and Directors, and form of restricted stock agreement for Executive Officers and Directors
10.3+*	The Ensign Group, Inc. 2007 Omnibus Incentive Plan
10.4+*	Form of 2007 Omnibus Incentive Plan Stock Option Agreement
10.5+*	Form of 2007 Omnibus Incentive Plan Restricted Stock Agreement
10.6+*	Form of Indemnification Agreement entered into between The Ensign Group, Inc. and its directors and officers
10.7**	Third Amended and Restated Loan Agreement, dated as of December 29, 2006, by and among certain subsidiaries of The Ensign Group, Inc. as Borrowers, and General Electric Capital Corporation as Agent and Lender
10.8	Consolidated, Amended and Restated Promissory Note, dated as of December 29, 2006, in the original principal amount of $64,692,111.67, by and among certain subsidiaries of The Ensign Group, Inc. in favor of General Electric Capital Corporation, Inc.
10.9	Third Amended and Restated Guaranty of Payment and Performance, dated as of December 29, 2006, by The Ensign Group, Inc. as Guarantor and General Electric Capital Corporation as Agent and Lender, under which Guarantor guarantees the payment and performance of the obligations of certain of Guarantor's subsidiaries under the Third Amended and Restated Loan Agreement

10.10	Form of Amended and Restated Deed of Trust, Assignment of Rents, Security Agreement and Fixture Financing Statement, dated as of June 30, 2006 (filed against Desert Terrace Nursing Center, Desert Sky Nursing Home, Highland Manor Health and Rehabilitation Center and North Mountain Medical and Rehabilitation Center), by and among Terrace Holdings AZ LLC, Sky Holdings AZ LLC, Ensign Highland LLC and Valley Health Holdings LLC as Grantors, Chicago Title Insurance Company as Trustee, and General Electric Capital Corporation as Beneficiary and Schedule of Material Differences therein
10.11	Deed of Trust, Assignment of Rents, Security Agreement and Fixture Financing Statement, dated as of June 30, 2006 (filed against Park Manor), by and among Plaza Health Holdings LLC as Grantor, Chicago Title Insurance Company as Trustee, and General Electric Capital Corporation as Beneficiary
10.12	Deed of Trust, Assignment of Rents, Security Agreement and Fixture Financing Statement, dated as of June 30, 2006 (filed against Catalina Care and Rehabilitation Center), by and among Rillito Holdings LLC as Grantor, Chicago Title Insurance Company as Trustee, and General Electric Capital Corporation as Beneficiary
10.13	Deed of Trust, Assignment of Rents, Security Agreement and Fixture Financing Statement, dated as of October 16, 2006 (filed against Park View Gardens at Montgomery), by and among Mountainview Communitycare LLC as Grantor, Chicago Title Insurance Company as Trustee, and General Electric Capital Corporation as Beneficiary
10.14	Deed of Trust, Assignment of Rents, Security Agreement and Fixture Financing Statement, dated as of October 16, 2006 (filed against Sabino Canyon Rehabilitation and Care Center), by and among Meadowbrook Health Associates LLC as Grantor, Chicago Title Insurance Company as Trustee and General Electric Capital Corporation as Beneficiary
10.15	Form of Deed of Trust, Assignment of Rents, Security Agreement and Fixture Financing Statement, dated as of December 29, 2006 (filed against Upland Care and Rehabilitation Center and Camarillo Care Center), by and among Cedar Avenue Holdings LLC and Granada Investments LLC as Grantors, Chicago Title Insurance Company as Trustee and General Electric Capital Corporation as Beneficiary and Schedule of Material Differences therein
10.16	Form of First Amendment to (Amended and Restated) Deed of Trust, Assignment of Rents, Security Agreement and Fixture Financing Statement, dated as of December 29, 2006 (filed against Desert Terrace Nursing Center, Desert Sky Nursing Home, Highland Manor Health and Rehabilitation Center, North Mountain Medical and Rehabilitation Center, Catalina Care and Rehabilitation Center, Park Manor, Park View Gardens at Montgomery, Sabino Canyon Rehabilitation and Care Center), by and among Terrace Holdings AZ LLC, Sky Holdings AZ LLC, Ensign Highland LLC, Valley Health Holdings LLC, Rillito Holdings LLC, Plaza Health Holdings LLC, Mountainview Communitycare LLC and Meadowbrook Health Associates LLC as Grantors, Chicago Title Insurance Company as Trustee, and General Electric Capital Corporation as Beneficiary and Schedule of Material Differences therein

10.17**	Amended and Restated Loan and Security Agreement, dated as of March 25, 2004, by and among The Ensign Group, Inc. and certain of its subsidiaries as Borrower, and General Electric Capital Corporation as Agent and Lender, previously filed as Exhibit 10.19 to our Form S-1 on May 14, 2007
10.18**	Amendment No. 1, dated as of December 3, 2004, to the Amended and Restated Loan and Security Agreement, by and among The Ensign Group, Inc. and certain of its subsidiaries as Borrower, and General Electric Capital Corporation as Lender, previously filed as Exhibit 10.20 to our Form S-1 on May 14, 2007
10.19	Second Amended and Restated Revolving Credit Note, dated as of December 3, 2004, in the original principal amount of $20,000,000, by The Ensign Group, Inc. and certain of its subsidiaries in favor of General Electric Capital Corporation
10.20**	Amendment No. 2, dated as of March 25, 2007, to the Amended and Restated Loan and Security Agreement, by and among The Ensign Group, Inc. and certain of its subsidiaries as Borrower, and General Electric Capital Corporation as Lender, previously filed as Exhibit 10.22 to our Form S-1 on May 14, 2007
10.21	Amendment No. 3, dated as of June 22, 2007, to the Amended and Restated Loan and Security Agreement, by and among The Ensign Group, Inc. and certain of its subsidiaries as Borrower and General Electric Capital Corporation as Lender
10.22	Exceptions to Nonrecourse Guaranty, dated as of October 2006, by The Ensign Group, Inc. as Guarantor and Wells Fargo Bank, N.A. as Trustee for GMAC Commercial Mortgage Securities, Inc., under which Guarantor guarantees full and prompt payment of all amounts due and owing by Cherry Health Holdings, Inc. under the Promissory Note
10.23**	Pacific Care Center Loan Agreement, dated as of August 6, 1998, by and between G&L Hoquiam, LLC as Borrower and GMAC Commercial Mortgage Corporation as Lender (later assumed by Cherry Health Holdings,  Inc. as Borrower and Wells Fargo Bank, N.A. as Lender)
10.24	Deed of Trust and Security Agreement, dated as of August 6, 1998, by and among G&L Hoquiam, LLC as Grantor, Ticor Title Insurance Company as Trustee and GMAC Commercial Mortgage Corporation as Beneficiary
10.25	Promissory Note, dated as of August 6, 1998, in the original principal amount of $2,475,000, by G&L Hoquiam, LLC in favor of GMAC Commercial Mortgage Corporation
10.26**	Loan Assumption Agreement, by and among G&L Hoquiam, LLC as Prior Owner; G&L Realty Partnership, L.P. as Prior Guarantor; Cherry Health Holdings, Inc. as Borrower; and Wells Fargo Bank, N.A., the Trustee for GMAC Commercial Mortgage Securities, Inc., as Lender
10.27	Deed of Trust with Assignment of Rents, dated as of January 30, 2001, by and among Ensign Southland LLC as Trustor, Brian E. Callahan as Trustee and Continental Wingate Associates, Inc. as Beneficiary
10.28**	Deed of Trust Note, dated as of January 30, 2001, in the original principal amount of $7,455,100, by Ensign Southland, LLC in favor of Continental Wingate Associates, Inc.
10.29**	Security Agreement, dated as of January 30, 2001, by and between Ensign Southland, LLC and Continental Wingate Associates, Inc.

10.30**	Master Lease Agreement, dated July 3, 2003, between Adipiscor LLC as Lessee and LTC Partners VI, L.P., Coronado Corporation and Park Villa Corporation collectively as Lessor
10.31**	Lease Guaranty, dated July 3, 2003, between The Ensign Group, Inc. as Guarantor and LTC Partners VI, L.P., Coronado Corporation and Park Villa Corporation collectively as Lessor, under which Guarantor guarantees the payment and performance of Adipiscor LLC's obligations under the Master Lease Agreement
10.32**	Master Lease Agreement, dated September 30, 2003, between Permunitum LLC as Lessee, Vista Woods Health Associates LLC, City Heights Health Associates LLC, and Claremont Foothills Health Associates LLC as Sublessees, and OHI Asset (CA), LLC as Lessor
10.33**	Lease Guaranty, dated September 30, 2003, between The Ensign Group, Inc. as Guarantor and OHI Asset (CA), LLC as Lessor, under which Guarantor guarantees the payment and performance of Permunitum LLC's obligations under the Master Lease Agreement
10.34**	Lease Guaranty, dated September 30, 2003, between Vista Woods Health Associates LLC, City Heights Health Associates LLC and Claremont Foothills Health Associates LLC as Guarantors and OHI Asset (CA),  LLC as Lessor, under which Guarantors guarantee the payment and performance of Permunitum LLC's obligations under the Master Lease Agreement
10.35**	Master Lease Agreement, dated January 31, 2003, between Moenium Holdings LLC as Lessee and Healthcare Property Investors, Inc., d/b/a in the State of Arizona as HC Properties, Inc., and Healthcare Investors III collectively as Lessor
10.36**	Lease Guaranty, between The Ensign Group, Inc. as Guarantor and Healthcare Property Investors, Inc. as Owner, under which Guarantor guarantees the payment and performance of Moenium Holdings LLC's obligations under the Master Lease Agreement
10.37**	First Amendment to Master Lease Agreement, dated May 27, 2003, between Moenium Holdings LLC as Lessee and Healthcare Property Investors, Inc., d/b/a in the State of Arizona as HC Properties, Inc., and Healthcare Investors III collectively as Lessor
10.38**	Second Amendment to Master Lease Agreement, dated October 31. 2004, between Moenium Holdings LLC as Lessee and Healthcare Property Investors, Inc., d/b/a in the State of Arizona as HC Properties, Inc., and Healthcare Investors III collectively as Lessor
10.39**	Lease Agreement, by and between Mission Ridge Associates, LLC and Ensign Facility Services, Inc.
10.40**	First Amendment to Lease Agreement, dated as of January 15, 2004, by and between Mission Ridge Associates, LLC and Ensign Facility Services, Inc.
10.41**	Form of Independent Consulting and Centralized Services Agreement between Ensign Facility Services, Inc. and certain of its subsidiaries
21.1	Subsidiaries of The Ensign Group, Inc., as amended
23.1	Consent of Deloitte & Touche LLP
23.2*	Consent of Dorsey & Whitney LLP (included in Exhibit 5.1)

24.1** Power of Attorney (included on signature pages hereto)

*

To be filed by amendment.

**

Previously filed.

+

Indicates management contract or compensatory plan.

QuickLinks

Subject to completion, dated July 26, 2007
Shares
Common Stock
TABLE OF CONTENTS
PROSPECTUS SUMMARY
The Ensign Group, Inc.
The Offering
Summary Consolidated Financial Data
RISK FACTORS
Risks Related to Our Industry
Risks Related to Our Business
Risks Related to This Offering and Ownership of our Common Stock
FORWARD-LOOKING STATEMENTS
USE OF PROCEEDS
DIVIDEND POLICY
CAPITALIZATION
DILUTION
SELECTED CONSOLIDATED FINANCIAL DATA
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INDUSTRY
United States Ownership Distribution for Nursing Facilities
U.S. Nursing Home Care Revenue by Payor Source, 2005
BUSINESS
Cumulative Facility Growth
MANAGEMENT
COMPENSATION DISCUSSION AND ANALYSIS
Summary Compensation Table
Grants of Plan-Based Awards—2006
Outstanding Equity Awards at Fiscal Year-End—2006
Option Exercises and Stock Vested — 2006
TRANSACTIONS WITH RELATED PERSONS
PRINCIPAL AND SELLING STOCKHOLDERS
DESCRIPTION OF CERTAIN INDEBTEDNESS
DESCRIPTION OF CAPITAL STOCK
SHARES ELIGIBLE FOR FUTURE SALE
MATERIAL U.S. FEDERAL INCOME AND ESTATE TAX CONSIDERATIONS FOR NON-U.S. HOLDERS
UNDERWRITING
LEGAL MATTERS
EXPERTS
WHERE YOU CAN FIND MORE INFORMATION
THE ENSIGN GROUP, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
THE ENSIGN GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
THE ENSIGN GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
THE ENSIGN GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS EXCEPT SHARE DATA)
THE ENSIGN GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
THE ENSIGN GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006 AND THE THREE MONTHS ENDED MARCH 31, 2006 AND 2007 (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
PART II INFORMATION NOT REQUIRED IN PROSPECTUS
SIGNATURES
EXHIBIT INDEX

EX-10.1

Exhibit 10.1

THE ENSIGN GROUP, INC.
2001 STOCK OPTION, DEFERRED STOCK
AND
RESTRICTED STOCK PLAN

Section 1.    General Purpose of Plan; Definitions.

        (a)   This plan is intended to implement and govern the 2001 Stock Option, Deferred Stock and Restricted Stock Plan (the "Plan") of The Ensign Group, Inc., a Delaware corporation (the "Company"). The Plan was adopted September 12, 2001, by the Board of Directors and on November 28, 2001 by the shareholders. The purpose of the Plan is to enable the Company to obtain and retain competent personnel who will contribute to the Company's success by their ability, ingenuity and industry, and to provide incentives to such personnel and members that are linked directly to increases in shareholder value, and will therefore, inure to the benefit of all shareholders of the Company.

        (b)   For purposes of the Plan, the following terms shall be defined as set forth below:

        (1)   "Administrator" means the Board, or if the Board does not administer the Plan, the Committee, in accordance with Section 2.

        (2)   "Award" means any award of Deferred Stock, Restricted Stock or Stock Option.

        (3)   "Board" means the Board of Directors of the Company.

        (4)   "Code" means the Internal Revenue Code of 1986, as amended from time to time, or any successor thereto.

        (5)   "Commission" means the Securities and Exchange Commission.

        (6)   "Committee" means the Compensation Committee of the Board, or any other Committee the Board may subsequently appoint to administer the Plan. If at any time the Board shall administer the Plan, then the functions of the Committee specified in the Plan shall be exercised by the Board.

        (7)   "Company" means The Ensign Group, Inc., a corporation organized under the laws of Delaware (or any successor corporation).

        (8)   "Deferred Stock" means an award made granted pursuant to Section 6 below of the right to receive Stock at the end of a specified deferral period.

        (9)   "Disability" means permanent and total disability as determined under the Company's disability program or policy, or if such disability program or policy does not exist, then any disability that renders an Eligible Employee unable to serve the Company or any future Subsidiary or Parent Corporation in the capacity for which such Eligible Employee served immediately prior to such disability.

        (10) "Effective Date" shall mean the date provided pursuant to Section 15.

        (11) "Eligible Participant" means an employee, consultant, advisor, director (including non-employee director), or Officer of the Company, any future Subsidiary, any future Parent Corporation or any majority-owned subsidiaries of any Parent Corporation eligible to participate in the Plan pursuant to Section 4.

        (12) "Exchange Act" means the Securities Exchange Act of 1934, as amended.

        (13) "Fair Market Value" means, as of any given date, with respect to any Awards granted hereunder, at the discretion of the Administrator and subject to such limitations as the Administrator may impose, (A) the closing sales price of the Stock on such date, or (B) the

average of the closing sales price of the Stock on each day on which the Stock was traded over a period of up to twenty trading days immediately prior to such date, or (C) if the Stock is not publicly traded, the fair market value of the Stock as otherwise determined by the Administrator in the good faith exercise of its discretion.

        (14) "Incentive Stock Option" means any Stock option intended to be designated as an "incentive stock option" within the meaning of Section 422 of the Code.

        (15) "Non-Qualified Stock Option" means any Stock Option that is not an Incentive Stock Option, including any Stock Option that provides (as of the time such option is granted) that it will not be treated as an Incentive Stock Option.

        (16) "Officer" means the Chief Executive Officer, Chairman of the Board, president, Chief Financial Officer, Chief Accounting Officer, Chief Accounting Officer, any vice president in charge of a principal business function (such as sales, administration or finance) and any other person who performs similar policy-making functions for the Company.

        (17) "Parent Corporation" means any corporation (other than the Company) in an unbroken chain of corporations ending with the Company, if each of the corporations other than the Company owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in the chain.

        (18) "Participant" means any Eligible Participant selected by the Administrator pursuant to the Administrator's authority in Section 2 below to receive grants of Stock Options or Awards or any combination of the foregoing.

        (19) "Restricted Period" means the period set by the Administrator as it pertains to Deferred Stock or Restricted Stock awards pursuant to Section 6.

        (20) "Restricted Stock" means an award of shares of Stock granted pursuant to Section 6 subject to restrictions that will lapse with the passage of time or upon the attainment of performance objectives.

        (21) "Securities Act" means the Securities Act of 1933, as amended.

        (22) "Stock" means the common stock, no par value, of the Company.

        (23) "Stock Option" means an option to purchase shares of Stock granted pursuant to Section 5.

        (24) "Subsidiary" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company, if each of the corporations (other than the last corporation) in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in the chain.

Section 2.    Administration.

        (a)   The Plan shall be administered by the Board or by a Committee appointed by the Board, which shall serve at the pleasure of the Board; provided, however, that if the Stock is registered under Section 12 of the Securities Act and if the Committee does not consist solely of "Non-Employee Directors," as defined in Rule 16b-3 as promulgated by the Commission under the Exchange Act, and as such Rule may be amended from time to time, or any successor definition adopted by the Commission, then the Plan shall be administered, and each grant shall be approved, by the Board.

        (b)   The Administrator shall have the power and authority to grant to Eligible Participants, pursuant to the terms of the Plan: (i) Stock Options, (ii) Deferred Stock, (iii) Restricted Stock, or (iv) any combination of the foregoing.

        In particular, the Administrator shall have the authority:

        (1)   to select those employees of the Company or any future Subsidiary or any future Parent Corporation who are Eligible Participants;

        (2)   to determine whether and to what extent Stock Options, Deferred Stock, Restricted Stock or a combination of the foregoing, are to be granted to Eligible Participants of the Company or any future Subsidiary hereunder;

        (3)   to determine the number of shares of Stock to be covered by each such Award;

        (4)   to determine the terms and conditions, not inconsistent with the terms of the Plan, of any such Award including, but not limited to, (i) the restricted period applicable to Deferred Stock or Restricted Stock awards, (ii) the date or dates on which restrictions applicable to such Deferred Stock or Restricted Stock shall lapse during such period, and (iii) when and in what increments shares covered by Stock Options may be purchased; and

        (5)   to determine the terms and conditions, not inconsistent with the terms of the Plan, which shall govern all written instruments evidencing the Stock Options, Deferred Stock, Restricted Stock or any combination of the foregoing.

        (c)   The Administrator shall have the authority, in its discretion, to adopt, alter and repeal such administrative rules, guidelines and practices governing the Plan as it shall from time to time deem advisable; to interpret the terms and provisions of the Plan and any Award issued under the Plan (and any agreements relating thereto); and to otherwise supervise the administration of the Plan.

        (d)   All decisions made by the Administrator pursuant to the provisions of the Plan shall be final and binding on all persons, including the Company, any future Subsidiaries or Parent Corporation and the Participants.

Section 3.    Stock Subject to Plan.

        (a)   The total number of shares of Stock reserved and available for issuance under the Plan shall be Five Hundred Thousand (500,000) shares. Such shares shall consist of authorized but unissued shares.

        (b)   To the extent that (i) a Stock Option expires or is otherwise terminated without being exercised or (ii) any shares of Stock subject to any Deferred Stock or Restricted Stock award granted hereunder are forfeited, such shares shall again be available for issuance in connection with future Awards under the Plan. If any shares of Stock have been pledged as collateral for indebtedness incurred by a Participant in connection with the exercise of a Stock Option and such shares are returned to the Company in satisfaction of such indebtedness, such shares shall again be available for issuance in connection with future Awards under the Plan.

        (c)   In the event of any merger, reorganization, consolidation, recapitalization, stock dividend, or other change in corporate structure affecting the Stock, an appropriate substitution or adjustment shall be made in (i) the aggregate number of shares reserved for issuance under the Plan, and (ii) the kind, number and option price of shares subject to outstanding Stock Options or Awards granted under the Plan as may be determined by the Administrator, in its sole discretion, provided that the number of shares subject to any Award shall always be a whole number. Such other substitutions or adjustments shall be made as may be determined by the Administrator, in its sole discretion; provided, however, that with respect to Incentive Stock Options, such adjustment shall be made in accordance with Section 424 of the Code.

Section 4.    Eligibility.

        Officers and other key employees, directors and consultants and advisors of the Company, any future Subsidiary or any future Parent Corporation who are responsible for or contribute to the management, growth and/or profitability of the business of the Company, shall be eligible to be granted

Non-Qualified Stock Options, Deferred Stock or Restricted Stock awards hereunder. Officers and other key employees of the Company, any future Subsidiary or any future Parent Corporation shall also be eligible to be granted Incentive Stock Options hereunder. The Participants under the Plan shall be selected from time to time by the Administrator, in its sole discretion, from among the persons recommended by the senior management of the Company, and the Administrator shall determine, in its sole discretion, the number of shares covered by each Award.

Section 5.    Stock Options for Eligible Employees.

        (a)   Stock Options may be granted to Eligible Employees alone or in addition to other Awards granted under the Plan. Any Stock Option granted under the Plan shall be in such form as the Administrator may from time to time approve, and the provisions of Stock Option awards need not be the same with respect to each Optionee. Recipients of Stock Options shall enter into a stock option agreement with the Company, in such form as the Administrator shall determine, which agreement shall set forth, among other things, the exercise price of the option, the term of the option and provisions regarding exercisability of the option granted thereunder.

        (b)   The Stock Options granted under the Plan to Eligible Employees may be of two types: (x) Incentive Stock Options and (y) Non-Qualified Stock Options.

        The Administrator shall have the authority under this Section 5 to grant any Optionee Incentive Stock Options, Non-Qualified Stock Options, or both types of Stock Options; provided, however, that Incentive Stock Options may not be granted to any individual who is not an employee of the Company, any future Subsidiaries or any future Parent Corporation. To the extent that any Stock Option does not qualify as an Incentive Stock Option, it shall constitute a separate Non-Qualified Stock Option. More than one option may be granted to the same Optionee and be outstanding concurrently hereunder.

        (c)   Stock Options granted under the Plan shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms of the Plan, as the Administrator shall, in its sole discretion, deem desirable:

          (i)  Option Price. The option price per share of Stock purchasable under an Incentive Stock Option shall be determined by the Administrator, in its sole discretion, at the time of grant but shall be not less than 100% of the Fair Market Value of the Stock on such date, and shall not, in any event, be less than the par value of the Stock, if any. The option price per share of Stock purchasable under a Non-Qualified Stock Option may be less than 100% of such Fair Market Value, but in no event less than 85% of such Fair Market Value. If an employee owns or is deemed to own (by reason of the attribution rules applicable under Section 424(d) of the Code) more than 10% of the combined voting power of all classes of stock of the Company or any future Parent Corporation or any future Subsidiary and an Incentive Stock Option is granted to such employee, the option price of such Incentive Stock Option (to the extent required by the Code at the time of grant) shall be no less than 110% of the Fair Market Value of the Stock on the date such Incentive Stock Option is granted.

         (ii)  Option Term. The term of each Stock Option shall be fixed by the Administrator, but no Stock Option shall be exercisable more than ten years after the date such Stock Option is granted; provided, however, that if an employee owns or is deemed to own (by reason of the attribution rules of Section 424(d) of the Code) more than 10% of the combined voting power of all classes of stock of the Company or any future Parent Corporation or any future Subsidiary and an Incentive Stock Option is granted to such employee, the term of such Incentive Stock Option (to the extent required by the Code at the time of grant) shall be no more than five years from the date of grant.

        (iii)  Exercisability. Stock Options shall be exercisable in accordance with the vesting requirements imposed by the Administrator at the time of grant or in the discretion of the Administrator immediately for shares of Restricted Stock, which shall be subject to the provisions of Section 6 below, and subject to such terms and conditions as shall be determined by the Administrator at or after grant; provided, however, that such Stock Options shall in any case vest at

least 20% per year for each year of continuous employment over the five-year period commencing from the date of grant. To the extent not exercised, installments shall accumulate and be exercisable in whole or in part at any time after becoming exercisable but not later than the date the Stock Option expires. The Administrator may provide, in its discretion, that any Stock Option shall be exercisable only in installments, and the Administrator may waive such installment exercise provisions at any time in whole or in part based on such factors as the Administrator may determine in its sole discretion.

        (iv)  Method of Exercise. Subject to Subsection 5(c)(iii), Stock Options may be exercised in whole or in part at any time during the option period by giving written notice of exercise to the Company specifying the number of shares to be purchased, accompanied by payment in full of the purchase price in cash or its cash equivalent, as determined by the Administrator. The Administrator may, in its sole discretion, accept payment in whole or in part on behalf of the Company (i) in the form of unrestricted Stock already owned by the optionee, or, in the case of the exercise of a Non-Qualified Stock Option, Restricted Stock subject to an Award hereunder (based, in each case, on the Fair Market Value of the Stock on the date the option is exercised), (ii) by cancellation of any indebtedness owed by the Company to the optionee, (iii) by a full recourse promissory note executed by the optionee, (iv) by requesting that the Company withhold whole shares of Common Stock then issuable upon exercise of the Stock Option (based on the Fair Market Value of the Stock on the date the option is exercised), (v) by arrangement with a broker which is acceptable to the Administrator where payment of the option price is made pursuant to an irrevocable direction to the broker to deliver all or part of the proceeds from the sale of the shares underlying the option to the Company, or (vi) by any combination of the foregoing; provided, however, that in the case of an Incentive Stock Option, the right to make payment in the form of already owned shares may be authorized only at the time of grant. Any payment in the form of stock already owned by the optionee may be effected by use of an attestation form approved by the Administrator. If payment of the option exercise price of a Non-Qualified Stock Option is made in whole or in part in the form of Restricted Stock, the shares received upon the exercise of such Stock Option (to the extent of the number of shares of Restricted Stock surrendered upon exercise of such Stock Option) shall be restricted in accordance with the original terms of the Restricted Stock award in question, except that the Administrator may direct that such restrictions shall apply only to that number of shares equal to the number of shares surrendered upon the exercise of such option. An optionee shall generally have the rights to dividends and other rights of a shareholder with respect to shares subject to the option only after the optionee has given written notice of exercise, has paid in full for such shares, and, if requested, has given the representation described in paragraph (a) of Section 10.

        (d)   The Administrator may require the voluntary surrender of all or a portion of any Stock Option granted under the Plan as a condition precedent to a grant of a new Stock Option. Subject to the provisions of the Plan, such new Stock Option shall be exercisable at the price, during such period and on such other terms and conditions as are specified by the Administrator at the time the new Stock Option is granted; provided, however, that should the Administrator so require, the number of shares subject to such new Stock Option shall not be greater than the number of shares subject to the surrendered Stock Option. Upon their surrender, the Stock Options shall be canceled and the shares previously subject to such canceled Stock Options shall again be available for grants of Stock Options and other Awards hereunder.

        (e)   The Company may make loans available to Stock Option holders in connection with the exercise of outstanding options granted under the Plan, as the Administrator, in its discretion, may determine. Such loans shall (i) be evidenced by promissory notes entered into by the Stock Option holders in favor of the Company, (ii) be subject to the terms and conditions set forth in this paragraph and such other terms and conditions, not inconsistent with the Plan, as the Administrator shall determine, (iii) bear interest, if any, at such rate as the Administrator shall determine and (iv) be subject to Board approval. In no event may the principal amount of any such loan exceed the sum of (x) the exercise price less the par value of the shares of Stock covered by the option, or portion

thereof, exercised by the holder and (y) any Federal, state, and local income tax attributable to such exercise. The initial term of the loan, the schedule of payments of principal and interest under the loan, the extent to which the loan is to be with or without recourse against the holder with respect to principal or interest and the conditions upon which the loan will become payable in the event of the holder's termination of employment shall be determined by the Administrator; provided, however, that the term of the loan, including extensions, shall not exceed seven (7) years. Unless the Administrator determines otherwise, when a loan is made, shares of Common Stock having a Fair Market Value at least equal to the principal amount of the loan shall be pledged by the holder to the Company as security for payment of the unpaid balance of the loan, and such pledge shall be evidenced by a pledge agreement, the terms of which shall be determined by the Administrator, in its discretion; provided, however, that each loan shall comply with all applicable laws, regulations and rules of the Board of Governors of the Federal Reserve System and any other governmental agency having jurisdiction.

        (f)    No Stock Option shall be transferable by the optionee otherwise than by will or by the laws of descent and distribution. Incentive Stock Options shall be exercisable, during the optionee's lifetime, only by the optionee.

        (g)   If an optionee's employment with the Company, any future Subsidiary or Parent Corporation terminates by reason of death or Disability, the Stock Option may thereafter be immediately exercised, to the extent then exercisable (or on such accelerated basis as the Administrator shall determine at or after grant), by the legal representative of the optionee, by the legal representative of the estate of the optionee, or by the legatee of the optionee under the will of the optionee, for a period of at least six (6) months from the date of such death or disability. In the event of a termination of employment by reason of Disability, if an Incentive Stock Option is exercised after the expiration of the exercise periods that apply for purposes of Section 422 of the Code, such Stock Option shall thereafter be treated as a Non-Qualified Stock Option.

        (h)   Except as otherwise provided in this paragraph or otherwise determined by the Administrator, if an optionee's employment with the Company, any future Subsidiary or any future Parent Corporation terminates for any reason other than death or Disability, the optionee must exercise his or her Stock Options within ninety (90) days from the date of such termination. If the optionee does not exercise his or her Stock Options within this ninety (90) day period, the Stock Options automatically terminate, and such Stock Options become null and void.

        (i)    To the extent that the aggregate Fair Market Value (determined as of the date the Incentive Stock Option is granted) of the shares of Stock with respect to which Incentive Stock Options granted to an optionee under this Plan and all other option plans of the Company, any future Parent Corporation and any future Subsidiary become exercisable for the first time by the optionee during any calendar year exceeds $100,000, such Stock Options shall be treated as Non-Qualified Stock Options.

Section 6.    Deferred Stock and Restricted Stock.

        (a)   Deferred Stock and Restricted Stock awards may be issued to Eligible Employees either alone or in addition to other Awards granted under the Plan. The Administrator shall determine the Eligible Employees, and the time or times at which grants of Deferred Stock or Restricted Stock awards shall be made; the number of shares to be awarded; the price, if any, to be paid by the recipient of Deferred Stock or Restricted Stock awards; the Restricted Period (as defined in paragraph 6(c) hereof) applicable to Deferred Stock or Restricted Stock awards; the performance objectives applicable to Deferred Stock or Restricted Stock awards; the date or dates on which restrictions applicable to such Deferred Stock or Restricted Stock awards shall lapse during such Restricted Period; and all other conditions of the Deferred Stock or Restricted Stock awards. The Administrator may also condition the grant of Deferred Stock or Restricted Stock awards upon the exercise of Stock Options, or upon such other criteria as the Administrator may determine, in its sole discretion. The provisions of Deferred Stock or Restricted Stock awards need not be the same with respect to each recipient. The Administrator may also make loans available to purchase Deferred Stock or Restricted Stock, upon terms similar to those set forth above in Section 5(e).

        (b)   The prospective recipient of a Deferred Stock or Restricted Stock award shall not have any rights with respect to such Award, unless and until such recipient has executed an agreement evidencing the Award (a "Deferred Stock Award Agreement" or Restricted Stock Award Agreement" as appropriate) and has delivered a fully executed copy thereof to the Company, within a period of sixty days (or such other period as the Administrator may specify) after the Award date.

        Except as provided below in this paragraph (b) of Section 6, (i) each Participant who is awarded Restricted Stock shall be issued a stock certificate in respect of such shares of Restricted Stock; and (ii) such certificate shall be registered in the name of the Participant, and shall bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such Award, substantially in the following form:

"The transferability of this certificate and the shares of stock represented hereby are subject to the terms and conditions (including forfeiture) of The Ensign Group, Inc. 2001 Stock Option, Deferred Stock and Restricted Stock Plan and a Restricted Stock Award Agreement entered into between the registered owner and The Ensign Group, Inc. Copies of such Plan and Agreement are on file in the offices of The Ensign Group, Inc."

        The Company shall require that the stock certificates evidencing such shares be held in the custody of the Company until the restrictions thereon shall have lapsed, and, as a condition of any Restricted Stock award, the Participant shall have delivered a stock power, endorsed in blank, relating to the Stock covered by such Award.

        With respect to Deferred Stock awards, at the expiration of the Restricted Period, stock certificates in respect of such shares of Deferred Stock shall be delivered to the Participant, or his legal representative, in a number equal to the shares of Stock covered by the Deferred Stock award.

        (c)   The Deferred Stock or Restricted Stock awards granted pursuant to this Section 6 shall be subject to the following restrictions and conditions:

          (i)  Subject to the provisions of the Plan and the Deferred Stock or Restricted Stock Award Agreements, during such period as may be set by the Administrator commencing on the grant date (the "Restricted Period"), the Participant shall not be permitted to sell, transfer, pledge or assign shares of Deferred Stock or Restricted Stock awarded under the Plan, except by gift for estate and tax planning purposes to family members and in conformity with the restrictions applicable to such shares under this Plan. Within these limits, the Administrator may, in its sole discretion, provide for the lapse of such restrictions in installments and may accelerate or waive such restrictions in whole or in part based on such factors and such circumstances as the Administrator may determine, in its sole discretion, including, but not limited to, the attainment of certain performance related goals, the Participant's termination, death or Disability.

         (ii)  Except as provided in paragraph (c)(i) of this Section 6, the Participant shall have, with respect to the shares of Restricted Stock, all of the rights of a shareholder of the Company, including the right to vote the shares, and the right to receive any dividends thereon during the Restricted Period. With respect to Deferred Stock awards, the Participant shall generally not have the rights of a shareholder of the Company, including the right to vote the shares during the Restricted Period; provided, however, that dividends declared during the Restricted Period with respect to the number of shares covered by a Deferred Stock award shall be paid to the Participant. Certificates for shares of unrestricted Stock shall be delivered to the Participant promptly after, and only after, the Restricted Period shall expire without forfeiture in respect of such shares of Deferred Stock or Restricted Stock, except as the Administrator, in its sole discretion, shall otherwise determine.

        (iii)  Subject to the provisions of the Deferred Stock or Restricted Stock Award Agreement and this Section 6, upon termination of employment for any reason during the Restricted Period, all shares subject to any restriction as of the date of such termination shall be forfeited by the Participant, and the Participant shall only receive the amount, payable within 90 days, if any, paid by the Participant for such Deferred Stock or Restricted Stock.

Section 7.    Amendment and Termination.

        (a)   The Board may amend, alter or discontinue the Plan, but no amendment, alteration, or discontinuation shall be made that would impair the rights of the Participant under any Award theretofore granted without such Participant's consent, or that without the approval of the shareholders (as described below) would:

(i)

except as provided in Section 3, increase the total number of shares of Stock reserved for the purpose of the Plan;



(ii)

change the employees or class of employees eligible to participate in the Plan;



(iii)

extend the maximum option period under Section 5 of the Plan.

        (b)   Notwithstanding the foregoing, shareholder approval under this Section 7 shall only be required at such time and under such circumstances as shareholder approval would be required under applicable federal and state laws, regulations and exchange requirements.

        (c)   The Administrator may amend the terms of any Award theretofore granted, prospectively or retroactively, but, subject to Section 3, no such amendment shall impair the rights of any holder without his or her consent.

Section 8.    Unfunded Status of Plan.

        The Plan is intended to constitute an "unfunded" plan for incentive compensation. With respect to any payments not yet made to a Participant or optionee by the Company, nothing contained herein shall give any such Participant or optionee any rights that are greater than those of a general creditor of the Company.

Section 9.

        This Section has been intentionally deleted.

Section 10.    General Provisions.

        (a)   Each person purchasing shares pursuant to a Stock Option represents and agrees with the Company that such person is acquiring the shares for his own account without a view to distribution thereof. The certificates for such shares may include any legend that the Administrator deems appropriate to reflect any restrictions on transfer.

        All certificates for shares of Stock delivered under the Plan shall be subject to such stock-transfer orders and other restrictions as the Administrator may deem advisable under the rules, regulations, and other requirements of the Commission, any stock exchange upon which the Stock is then listed, and any applicable Federal or state securities law, and the Administrator may cause a legend or legends to be placed on any such certificates to make appropriate reference to such restrictions.

        (b)   Nothing contained in the Plan shall prevent the Board from adopting other or additional compensation arrangements, subject to shareholder approval if such approval is required; and such arrangements may be either generally applicable or applicable only in specific cases.

        (c)   Each Participant shall, no later than the date as of which the value of an Award first becomes includable in the gross income of the Participant for Federal income tax purposes, pay to the Company, or make arrangements satisfactory to the Administrator regarding payment of, any Federal, state, or local taxes of any kind required by law to be withheld with respect to the Award. The obligations of the Company under the Plan shall be conditional on the making of such payments or arrangements, and the Company (and, where applicable, its Subsidiaries) shall, to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind otherwise due to the Participant.

        (d)   No member of the Board or the Administrator, nor any officer or employee of the Company acting on behalf of the Board or the Administrator, shall be personally liable for any action, determination, or interpretation taken or made in good faith with respect to the Plan, and all members of the Board or the Administrator and each and any officer or employee of the Company acting on their behalf shall, to the extent permitted by law, be fully indemnified and protected by the Company in respect of any such action, determination or interpretation.

        (e)   This Plan is purely voluntary on the part of the Company, and while the Company hopes to continue it indefinitely, the continuance of the Plan shall not be deemed to constitute a contract between the Company and any employee, or to be consideration for or a condition of the employment of any employee. Nothing contained in the Plan shall be deemed to give any employee the right to be retained in the employ of the Company, any future Subsidiaries, or any future Parent Corporation to interfere with the right of the Company to discharge or retire any employee thereof at any time. No employee shall have any right to or interest in Stock Options, Restricted Stock, or Deferred Stock, authorized hereunder prior to the grant of such a Stock Option or other award described herein to such employee, and upon such grant he or she shall have only such rights and interests as are expressly provided herein, subject, however, to all applicable provisions of the Company's Articles of Incorporation, as the same may be amended from time to time.

Section 11.    Specific Performance.

        The Stock Options granted under this Plan and the Shares issued pursuant to the exercise of such Stock Options cannot be readily purchased or sold in the open market, and, for that reason among others, the Company and its shareholders will be irreparably damaged in the event that this Plan is not specifically enforced. In the event of any controversy concerning the right or obligation to purchase or sell any such Option or Optioned Stock, such right or obligation shall be enforceable in a court of equity by a decree of a specific performance. Such remedy shall, however, be cumulative and not exclusive, and shall be in addition to any other remedy which the parties may have.

Section 12.    Invalid Provision.

        In the event that any provision of this Plan is found to be invalid or otherwise unenforceable under any applicable law, such invalidity or unenforceability shall not be construed as rendering any other provisions contained herein invalid or unenforceable, and all such other provisions shall be given full force and effect to the same extent as though the invalid unenforceable provision was not contained herein.

Section 13.    Applicable Law.

        This Plan shall be governed by and construed in accordance with the laws of the State of California.

Section 14.    Successors and Assigns.

        This Plan shall be binding on and inure to the benefit of the Company and the employees to whom an Option is granted hereunder, and such employees' heirs, executors, administrators, legatees, personal representatives, assignees and transferees.

Section 15.    Effective Date of Plan.

        The Plan became effective (the "Effective Date") on September 12, 2001. If shareholder approval of the plan is not obtained within 12 months from the Effective Date, all Awards granted hereunder shall be rescinded and declared void ab initio.

Section 16.    Term of Plan.

        No Stock Option, Deferred Stock or Restricted Stock award shall be granted pursuant to the Plan on or after the tenth anniversary of the Effective Date, but Awards theretofore granted may extend beyond that date.

Section 17.    Annual Financial Statements.

        The Company shall deliver annual financial statements to each employee granted a Stock Option, Deferred Stock or Restricted Stock hereunder until such Award expires or is otherwise canceled.

Section 18.    Limitation on Amount of Securities Offered.

        Until such time as the Company becomes subject to the reporting requirements of Sections 13 or 15(d) of the Exchange Act, the aggregate offering price of securities subject to a current offer and sold, or amount of securities sold, as the case may be, within the preceding twelve (12) months under this Plan and any other agreement granting options under Rule 701 of the Securities Act shall not exceed the greater of: (i) $1,000,000, (ii) 15% of the total assets of the Company, measured as of the end of its most recently completed fiscal year or (iii) 15% of the outstanding Stock, including securities (other than securities issued pursuant to this Plan or any agreement granted under Rule 701) convertible or exchangeable for Stock.

Section 19.    Disclosure Requirements

        In the event the aggregate offering price of securities subject to outstanding offers plus the offering price of securities sold in the preceding twelve (12) months, as a result of Awards issued under this Plan, exceeds $5,000,000, the Company shall deliver the following disclosure documents to the Participant or optionee within a reasonable period of time before the applicable date of exercise, conversion or sale:

        (a)   A summary of the material terms of this Plan;

        (b)   Information about the risks associated with purchasing the shares of stock in the Company; and

        (c)   Financial statements as of a date no more than 180 days before the sale of securities pursuant to this Section 19.

        IN WITNESS WHEREOF, pursuant to the due authorization and adoption of this Plan by the Board on the day and year first above written, the Company has caused this Plan to be duly executed by its duly authorized officers.

THE ENSIGN GROUP, INC., a Delaware corporation
By:	/s/  ROY E. CHRISTENSEN Roy E. Christensen Chief Executive Officer

Notice No. [NOTICE NO.]

FORM OF STOCK OPTION GRANT NOTICE FOR EXECUTIVE OFFICERS
AND DIRECTORS

THE ENSIGN GROUP, INC.
2001 STOCK OPTION, DEFERRED STOCK
AND RESTRICTED STOCK PLAN

        The Ensign Group, Inc. (the "Company"), pursuant to its 2001 Stock Option, Deferred Stock and Restricted Stock Plan (the "Plan"), hereby grants to the Optionholder named below an option to purchase the number of shares of the Company's Common Stock set forth below. This option is subject to all of the terms and conditions as set forth in this Stock Option Grant Notice ("Grant Notice"), the Stock Option Agreement, the Plan (as amended from time to time) and the Notice of Exercise, all of which are attached hereto, incorporated herein in their entirety, and approved and accepted by the undersigned.

Optionholder:	[NAME OF OPTION HOLDER]
Date of Notice:	[DATE OF NOTICE]
Date of Grant:	[DATE OF GRANT]
Number of Shares Subject to Option:	[NUMBER OF SHARES]
Exercise Price per Share:	$[EXERCISE PRICE]
Expiration Date:	[EXPIRATION DATE]

Type of Grant: [    ] Incentive Stock Option ("ISO")     [x] Non-Qualified Stock Option ("NQSO")

Exercise Schedule: [    ] Same as Vesting Schedule    [x] Early Exercise Permitted [For Directors Hubenette, Maloof and Blalack this line is deleted and Exercise Schedule is combined with Vesting Schedule]

Vesting Schedule: [VESTING SCHEDULE]

Payment Terms: As described in the Stock Option Agreement.

Additional Terms/Acknowledgements: The undersigned Optionholder acknowledges receipt of, and understands and agrees to, this Grant Notice, the Stock Option Agreement, the Plan and the Notice of Exercise form. Optionholder further acknowledges that as of the Date of Grant, this Grant Notice, the Stock Option Agreement, the Plan and the Notice of Exercise form set forth the entire understanding between Optionholder and the Company regarding the acquisition of stock in the Company and supersede all prior oral and written agreements on that subject with the exception of (i) Stock Options previously granted and delivered to Optionholder under the Plan, and (ii) the following agreements only:

        OTHER AGREEMENTS: None

NOTICE: Federal tax laws have specific requirements that must be met in order for a stock option to qualify as an "Incentive Stock Option" or "ISO." If all of these requirements are not met, the option, or the applicable portion, will automatically be treated as a "non-qualified stock option." Notwithstanding any reference to the characterization of this option as a non-qualified stock option or ISO in the Notice of Grant, it is solely your responsibility to determine the characterization of this option with your tax advisers. The tax treatment for incentive stock options and non-qualified stock options varies considerably, so you should consult with your tax adviser regarding the tax treatment of your stock option.

1

        By signing below, the Company grants, and the Optionholder accepts, the Stock Option described herein upon the terms and conditions set forth herein and in the Stock Option Agreement, the Plan and the Notice of Exercise form, effective as of the Date of Grant.

THE ENSIGN GROUP, INC.		OPTIONHOLDER:
By:	/s/  CHRISTOPHER R. CHRISTENSEN CHRISTOPHER R. CHRISTENSEN PRESIDENT [CHIEF OPERATING OFFICER]	By:	/s/  [NAME OF OPTION HOLDER] [NAME OF OPTION HOLDER]

SPOUSAL ACKNOWLEDGEMENT:

        By his or her signature below, the spouse of the Optionholder, if such Optionholder is legally married as of the date of his execution of this Agreement, acknowledges that he or she has read this Agreement and the Plan and is familiar with the terms and provisions thereof, and agrees to be bound by all the terms and conditions of said Agreement and said Plan document.

[REDACTED] Spouse

ALTERNATIVE:

        By his or her signature below the Optionee represents that he or she is not legally married as of the date of execution of this Agreement.

Optionholder

2

STOCK OPTION AGREEMENT

THE ENSIGN GROUP, INC.
2001 STOCK OPTION, DEFERRED STOCK
AND RESTRICTED STOCK PLAN

        Pursuant to the Stock Option Grant Notice ("Grant Notice") and this Stock Option Agreement (this "Agreement"), which is a part of the Grant Notice and incorporated therein by this reference, The Ensign Group, Inc. (the "Company") has granted you a Stock Option ("Option(s)") under its 2001 Stock Option, Deferred Stock and Restricted Stock Plan (the "Plan") to purchase the number of shares of the Company's Common Stock indicated in the Grant Notice at the exercise price indicated in the Grant Notice.

        As used herein, the terms "you" and "your" and similar pronouns shall refer to you, the Optionholder designated in the Grant Notice. Defined terms not explicitly defined in this Stock Option Agreement but defined in the Grant Notice or the Plan shall have the same definitions as in Grant Notice and the Plan respectively.

        The following terms and conditions, plus (i) the terms and conditions of the Plan and any amendment previously or hereafter made thereto, (ii) the terms set forth in the accompanying Notice of Exercise form, and (iii) all applicable laws and regulations, shall govern your Option(s) and the exercise thereof, and by accepting the Option(s), you agree as follows:

        1.     The Option(s). You may, at your option, purchase all or any part of the aggregate number of shares of Common Stock as set forth in the Grant Notice (the "Optioned Shares") from the Plan, at the Exercise Price per Share set forth in the Grant Notice (the "Option Price"), on the terms and conditions set forth herein.

        2.     Option Type. Options intended to qualify as Incentive Stock Options are designated by an "ISO" in the Grant Notice and this Agreement. Options intended as separate Non-Qualified Stock Options are designated by a "NQSO" in the Grant Notice and this Agreement.

        3.     Method of Exercise.

        a.     Early Exercise. If permitted in the Grant Notice, the Option(s) shall be exercisable immediately for Restricted Stock. You affirm that you further understand and agree that (i) in the event you exercise the Option(s) prior to full vesting of such Option(s), you will receive Restricted Shares as to the non-vested Option(s) and shall be required, as a condition of exercise, to execute and deliver an Restricted Stock Agreement in the form attached hereto as Exhibit Aas to all shares issued pursuant to such non-vested Options, (ii) such Restricted Stock shall be subject to forfeiture in the event you are no longer employed by the Company for any reason, as provided in the Restricted Stock Agreement, and (iii) the Option(s) granted hereunder shall expire and become un-exercisable as provided in Section 4(c) below.

        b.     Exercise Following Vesting. If early exercise is not permitted in the Grant Notice, then the Option(s) shall become exercisable as they vest according to the vesting schedule set forth in the Grant Notice.

        c.     Notice of Exercise. Options may be exercised only as to whole shares; no exercise of fractional shares is permitted. You may exercise all or part of the vested portion of your Option(s) (and the non-vested portion if your Grant Notice permits) by giving written notice of such exercise on the accompanying Notice of Exercise form, together with full payment of the Option Price for the shares covered by the Notice and any other or additional documents the Company may then require, to the Secretary of the Company at the Company's principal business office during regular business hours.

        d.     Payment. Payment of the Option Price shall be made only in cash or cash equivalents, except as otherwise determined and permitted in writing by the Administrator. As determined by the Administrator, in its sole discretion, payment in whole or part may also be made (i) by

cancellation of any indebtedness owed by the Company to you, (ii) by a full recourse promissory note executed by you, (iii) in the form of unrestricted Stock owned by you, or, in the case of the exercise of an NQSO, Restricted Stock subject to an award under the Plan (based, in each case, on the Fair Market Value of the Stock on the date the option is exercised); provided, however, that in the case of an ISO, the right to make payment in the form of already owned shares may be authorized only at the time of grant, or (iv) by any combination of the foregoing or as set forth in the Plan. Any payment in the form of Stock already owned by you may be effected by use of an attestation form approved by the Administrator. If payment of the option exercise price of a NQSO is made in whole or in part in the form of Restricted Stock, the shares received upon the exercise of such Option (to the extent of the number of shares of Restricted Stock surrendered upon exercise of such Option) shall be restricted in accordance with the original terms of the Restricted Stock award in question, except that the Administrator may direct that such restrictions shall apply only to that number of shares surrendered upon the exercise of such Option.

        4.     Governing Plan. This Agreement is subject to and hereby incorporates the Plan and all of the terms and conditions of the Plan, as the same may be amended from time to time hereafter, but no such subsequent amendment shall adversely affect your rights under this Agreement and the Plan except as may be required by applicable law. You expressly acknowledge and agree that the provisions of this Agreement are subject to the Plan; that the terms of this Agreement shall in no manner limit or modify the controlling provisions of the Plan, and that in case of any conflict between the provisions of the Plan and this Agreement, the provisions of the Plan shall be controlling and binding upon the parties hereto. You also hereby expressly:

        (a)   Acknowledge receipt of a copy of the Plan, represent that you are familiar with the terms and provisions of the Plan, and accept this Agreement subject to all the terms and provisions of the Plan;

        (b)   Agree to accept as binding, conclusive and final all decisions or interpretations of the Administrator upon any questions arising under the Plan;

        (c)   Acknowledge that you are familiar with Sections of the Plan regarding the exercise of the Option(s), and represent that you understand that said Option(s) must be exercised on or before the earliest of the following dates, whichever is applicable:

          (i)  the day prior to the tenth (10^th) anniversary of the Date of Grant;

         (ii)  the date which is three (3) months from the date of termination of your full-time employment for any reason other than death or disability as provided under Subsection 5(h) of the Plan;

        (iii)  the date that is six (6) months following termination of your full-time employment by reason of your death, or the date that is six (6) months following termination of your full-time employment by reason of disability, whichever is applicable, as provided in Subsection 5(g) of the Plan; or

        (iv)  the Expiration Date set forth in the Grant Notice; and

notwithstanding the foregoing, if your full-time employment with the Company is terminated for any reason, only those Option installments which are vested and exercisable as of such termination date may be exercised (although if the Options have vested as of the termination date or been accelerated by the Administrator as set forth in Subsections 5(g) and (h) of the Plan they may be exercised thereafter in accordance with such Subsections 5(g) and (h)). Any remaining Options which are as of such date not yet vested and exercisable shall automatically terminate and be cancelled;

        (d)   Acknowledge, understand and agree that the existence of the Plan and the execution of this Agreement are not sufficient by themselves to cause any exercise of any Option(s) granted as an Incentive Stock Option to qualify for favorable tax treatment through the application of Section 422 of the Internal Revenue Code; that you must, in order to so qualify, individually meet by your own action all applicable requirements of Section 422, including without limitation the following holding period and employment requirements as to Incentive Stock Options:

        (1)   holding period requirement: you may not make any disposition of an Optioned Share within two (2) years from the Date of Grant nor within one (1) year after acquiring the Optioned Shares through exercise of the Option(s), and

        (2)   employment requirement: at all times during the period beginning on the date of the granting of the Option(s) and ending on the day three (3) months before the date of exercise, you must have been a full-time employee of the Company, its Parent, or a Subsidiary of the Company, or a corporation or a parent or subsidiary of such corporation issuing or assuming the Option(s) in a transaction to which Section 425(a) of the Internal Revenue Code applies, except where the termination of employment is by means of your disability, in which case said three (3) month period may be extended to six (6) months; and

        (e)   Notwithstanding anything to the contrary contained herein, your Option(s) may not be exercised unless the shares issuable upon exercise are then registered under the Securities Act or, if such shares are not then so registered, the Company has determined that such exercise and issuance would be exempt from the registration requirements of the Securities Act. The exercise of your option must also comply with other applicable laws and regulations governing the Option(s), and the Option(s) may not be exercised if the Company determines that the exercise would not be in material compliance with such laws and regulations.

        5.     Representations and Warranties. As a condition to the exercise of any portion of an Option, the Company may require the person exercising such Option to make any representation and/or warranty to the Company as may, in the judgment of counsel to the Company, be required under the Securities Act of 1933 or any other applicable law or regulation. You hereby represent to the Company that each of the Options evidenced hereby and the shares purchasable upon exercise thereof are will be acquired only for investment and without any present intention to sell or distribute such securities, and that you will sign a lock-up agreement similar to that signed by the principal shareholders at the initial public offering ("IPO") of the Company's stock as may be required by the underwriters in such IPO.

        6.     Options Not Transferable. You shall not have the right to transfer any Option(s) other than by will or by the laws of descent and distribution. Without expanding the preceding limitation, the terms of this Agreement shall be binding upon you and your executors, administrators, heirs, successors, transferees and assignees.

        7.     No Enlargement of Employee Rights. Nothing in this Agreement shall be construed to confer upon you any right to continued employment with the Company or any present or future Parent or Subsidiary of the Company, or to restrict in any way the right of the Company or any present or future Parent or Subsidiary of the Company, to terminate your employment. You

acknowledge that you are and, in the absence of an express written employment agreement to the contrary remain, an "employee-at-will" and your employment with the Company may be terminated by the Company at any time, with or without cause.

        8.     Withholding of Taxes. You hereby authorize the Company to withhold, in accordance with any applicable law, from any compensation payable to you, any taxes required to be withheld by federal, state or local law as a result of the grant of the Option(s) or the issuance of stock pursuant to the exercise of such Option(s).

        9.     Acknowledgement; Waiver of Certain Shareholder Rights. You acknowledge and agree that all Optioned Shares issuable upon exercise of the Options are and shall be issued only subject to the condition, and upon your waiver and agreement, which shall be evidenced by your acceptance of the Grant Notice, that you and your successors and assigns will not at any time sue, or participate in or promote any suit or shareholder or regulatory action, or claim any other or similar right as a shareholder, against the Company or its present or future parents or subsidiaries, and their respective shareholders, officers, directors, partners, members, employees and contractors, on account of any transactions made or entered into, or not made and entered into, by the Company to date or hereafter and prior to the registration of the Optioned Shares, including without limitation any claim related to the Company's divestiture of certain real estate and other assets or holdings, and opportunities heretofore or hereafter presented to the Company involving real estate or other business assets, and you hereby expressly warrant that by accepting the Options, and by exercising them and paying the purchase price for the Optioned Shares, and by any other action or forbearance you may now or hereafter take, you nevertheless claim no right, title or interest in or to any real estate or other business asset heretofore, currently or hereafter owned by or offered to the Company or its several subsidiaries, and you agree for yourself and for your heirs, successors and assigns to hold the Company and its subsidiaries, and their respective shareholders, officers, directors, partners, members, employees and contractors, harmless for, from and against any suit, claim, liability or action by you and your successors in interest to the Optioned Shares relative thereto.

        10.   Laws Applicable to Construction; Venue. This Agreement shall be construed and enforced in accordance with the laws of the State of California. Venue for all disputes and proceedings relating hereto shall lie solely in Orange County, California.

        11.   Notices. Any notices or other communication permitted or required pursuant to this Agreement shall be made in writing and shall be either delivered personally, sent by an overnight delivery or courier service, or delivered via certified or registered mail (postage prepaid). Notices shall be deemed given when personally served, or if sent by overnight delivery or courier service, the day after sent from within the United States, or if mailed, three (3) days after date of deposit in the United States mail.

        12.   Costs of Litigation. In any action at law or in equity to enforce any of the provisions or rights under this Agreement or the Plan, the unsuccessful party to such litigation, as determined by the court in a final judgment or decree, shall pay the successful party or parties all costs, expenses and reasonable attorneys' fees incurred by the successful party or parties (including without limitation costs, expenses end fees on any appeals), and if the successful party recovers judgment in any such action or proceeding such costs, expenses and attorneys' fees shall be included as part of the judgment.

        13.   Necessary Acts. You agree to perform all acts and execute and deliver any documents that may be reasonably necessary to carry out the provisions of this Agreement, including but not limited to all acts and documents related to compliance with federal and/or state securities laws. You further agree to be responsible for conferring with your own tax accountant regarding the tax matters pertaining to the Option(s) and the exercise of the Option(s) and you shall be solely responsible as to all tax filings pertaining to you as the Optionee, including without limitation the filing of an IRC §83(b) election as described in the Restricted Stock Agreement.

        14.   Counterparts. For convenience this Agreement may be executed in any number of identical counterparts, each of which shall be deemed a complete original in itself and may be introduced in evidence or used for any other purpose without the production of any other counterparts.

        15.   Invalid Provisions. In the event that any provision of this Agreement is found to be invalid or otherwise unenforceable under any applicable law, such invalidity or unenforceability shall not be construed as rendering any other provisions contained herein invalid or unenforceable, and all such other provisions shall be given full force and effect to the same extent as though the invalid and unenforceable provision was not contained herein.

        16.   Limitation on Value of Optioned Shares. You hereby acknowledge that the Plan provides that the aggregate fair market value (determined as of the date hereof) of the shares of Common Stock to which Option(s) granted as Incentive Stock Options are exercisable for the first time by you as an Optionee during any calendar year under all incentive stock option plans of the Company and any future Subsidiary shall not exceed $100,000. It is understood and agreed that should it be determined that an Option if granted as an Incentive Stock Option hereunder would exceed such maximum, such Option shall be considered granted as a Non-Qualified Stock Option to the extent, but only to the extent of such excess. This limitation shall not apply to any option granted as a Non-Qualified Stock Option.

        [END—REMAINDER OF PAGE INTENTIONALLY LEFT BLANK—EXHIBITS FOLLOW]

EXHIBIT A

Form of Restricted Stock Agreement

FORM OF RESTRICTED STOCK AGREEMENT FOR EXECUTIVE
OFFICERS AND DIRECTORS
(FOR NON-VESTED OPTION EXERCISE) [Form used for Non-Director grants]
(VESTED ON ISSUANCE) [Form used for Director grants]
THE ENSIGN GROUP, INC.
2001 STOCK OPTION, DEFERRED STOCK
AND RESTRICTED STOCK PLAN

Date of Restricted Stock Agreement:

Optionholder:

Date of Grant:

Number of Shares Subject to Option:

Number of Options Exercised hereby:

Exercise Price per Share:

Exercise Date:

[The following three lines are the form used for Non-Director grants]

Shares Exercised or Owned Previously:	Vested:	Non-vested:
Shares Covered Hereby:	Vested:	Non-vested:
Total Owned Shares (incl this exercise):	Vested:	Non-vested:

[The following two lines are the form used for Director grants]
Vested Shares Exercised to Date:
Non-Vested Shares Covered Hereby:

        THIS RESTRICTED STOCK AGREEMENT, dated as set forth above, is made by and between THE ENSIGN GROUP, INC., a Delaware corporation (the "Company") and the above-named Optionholder ("Employee").

R E C I T A L S

        A.    The Board of Directors of the Company has established the Company's 2001 Stock Option, Deferred Stock and Restricted Stock Plan (the "Plan") effective as of November 28, 2001; and

        B.    The Company's Board of Directors, as Administrator of the Plan and by action duly taken on the Date of Grant, granted to Employee an option or options (the "Option(s)") to purchase a specific number of shares of the Company's Common Stock from the Plan on the terms and conditions set forth the Stock Option Grant Notice (the "Grant Notice"), the Notice of Exercise form referenced therein, and the Plan, all of which are incorporated herein by this reference; and

        C.    Employee has exercised its Option(s) as to the Number of Shares Exercised as set forth above at the Exercise Price per Share as set forth above (the "Purchase Price") as of the Exercise Date, and, without superceding any term or restriction of the Plan, the Stock Option Agreement or the Notice of Exercise, now desires to entire into this Stock Restriction Agreement in furtherance of such exercise. All of such shares of Common Stock which are being acquired pursuant to non-vested Options are likewise non-vested restricted stock and are interchangeably referred to herein as "Shares" or as "Restricted Stock".

A G R E E M E N T

        NOW THEREFORE, in consideration of the covenants contained herein, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged:

        1.     Employment. Nothing in this Agreement shall be construed to confer upon Employee any right to employment or continued employment with the Company or any present or future Parent or Subsidiary of Company, or to restrict in any way the right of the Company or any present or future Parent or Subsidiary of the Company, to terminate Employee's employment. Employee acknowledges that Employee is, and in the absence of an express written employment agreement to the contrary shall remain, an "employee-at-will," and Employee's employment with the Company may be terminated by the Company at any time, with or without cause.

        2.     Vesting Schedule. Employee agrees that Employee's rights to the Restricted Stock shall become vested only (i) in accordance with the vesting schedule for the corresponding Options as contained in the Grant Notice, and (ii) if, as of each such vesting date, Employee is employed [full-time] by the Company or any of its Parent or Subsidiaries.

        3.     Repurchase Option.

        a.     In the event Employee's [full-time] employment is terminated for any reason, then subject to provisions of Subsections 5(g) and (h) of the Plan the Company may exercise its Repurchase Option described below. A leave of absence (regardless of the reason therefor) shall be deemed to constitute a resignation by Employee unless such leave is authorized by the Company in writing and Employee returns to full-time work within the time specified in such authorization or in any amendment thereto. The date when the full-time Employment Period is terminated is hereinafter referred to as the "Termination Date."

        b.     The Company may at any time within ninety (90) days after the later of the Termination Date or the date any approved leave terminates (if Employee fails to return within the time specified) purchase all or any of the non-vested Restricted Stock from the holder thereof (the "Repurchase Option") at the Exercise Price per Share set forth above (the "Repurchase Price"). The Repurchase Option, if exercised by the Company, shall be exercised by written notice signed by an officer of the Company and delivered to Employee. The Company may pay for the shares of Restricted Stock it has elected to repurchase (i) by delivery of a check in the amount of the Repurchase Price for the non-vested Restricted Stock being repurchased, (ii) by cancellation by the Company of an amount of Employee's indebtedness to the Company, or (iii) by a combination of (i) and (ii) so that the combined payment and cancellation of indebtedness equals the Repurchase Price.

        c.     In the event the Company for any reason elects not to exercise its Repurchase Option, the Company may assign its Repurchase Option, provided that the Repurchase Option shall not extend beyond the ninety (90) days described herein. If exercised by an assignee or assignees, the Repurchase Option shall be exercised by written notice signed by the exercising assignee(s) and delivered or mailed to Employee. Such assignees shall pay for the shares of non-vested Restricted Stock they have elected to purchase by delivery of a check in the amount of the Repurchase Price to the holder thereof.

        d.     In the event that the Company or an assignee does not elect to exercise the Repurchase Option as to any of the shares of Restricted Stock subject to it within the time allotted therefor, the Repurchase Option shall expire as to such shares as the Company and/or its assignees have not elected to purchase.

        e.     The Company's Repurchase Option shall terminate upon any offering by the Company of its equity securities to the public (a "Qualified IPO") pursuant to an effective registration statement under the Securities Act of 1933, as then in effect (the "Securities Act"), or any comparable statement under any similar federal statute then in force in which the equity securities are sold, provided that a Qualified IPO shall not include an offering made in connection with a business acquisition or combination or an employee benefit plan. [This provision is not included in Mr. Sedgwick's grant number 134 and Mr. Dalton's grant number 166]

        4.     "Market Stand-Off" Agreement. Employee hereby agrees that, during the period specified by the Company and the underwriter or underwriters of the initial public offering of common stock (or other securities) of the Company, following the effective date of a registration statement of the Company filed under the Securities Act of 1933, as amended (the "1933 Act"), Employee shall not, to the extent requested by the Company and such underwriter, directly or indirectly, sell, offer or contract to sell (including, without limitation, any short sale), grant any option to purchase or otherwise transfer or dispose of (other than to donees, who agree to be similarly bound) any securities of the Company at any time during such period except Common Stock included in such registration. In order to enforce the foregoing covenant, Employee hereby agrees to be bound by any stop-transfer instructions imposed by the Company with respect to Restricted Stock until the end of such period.

        5.     Limitations on Disposition.

        a.     Employee agrees that in no event will he or she make a disposition of any of the Restricted Stock, unless and until (a) he or she shall have notified the Company of the proposed disposition and shall have furnished the Company with a statement of the circumstances surrounding the proposed disposition, and (b) he or she shall have furnished the Company with an opinion of counsel satisfactory to the Company to the effect that (i) such disposition will not require registration of such Restricted Stock under the Act, or (ii) that appropriate action necessary for compliance with the Act has been taken, or (c) the Company shall have waived, expressly and in writing, its rights under clauses (a) and (b) of this subparagraph. In addition, prior to any disposition of any of the Restricted Stock, the Company may require the transferee or assignee to provide in writing investment representations and its agreement to the market stand-off provisions hereof in a form acceptable to the Company.

        b.     The Company shall not be required (i) to transfer on its books any shares of Restricted Stock of the Company which shall have been sold or transferred in violation of any of the provisions set forth in this Agreement, or (ii) to treat as owner of such shares or to accord the right to vote as such owner or to pay dividends to any transferee to whom such shares shall have been so transferred. Employee shall, during the term of this Agreement, exercise all rights and privileges of a shareholder of the Company with respect to the Restricted Stock after the issuance, and prior to the repurchase, thereof.

        c.     The restrictions contained in this Section 5 will not apply with respect to transfers of shares of Restricted Stock (i) pursuant to applicable laws of descent and distribution or (ii) among Employee's family group; provided that such restrictions will continue to be applicable to the Restricted Stock after any such transfer and the transferees of such Restricted Stock have agreed in writing to be bound by the provisions of this Agreement. Employee's "family group" means Employee's spouse and descendants (whether natural or adopted) and any trust or limited partnership solely for the benefit of Employee and/or Employee's spouse and/or descendants.

        6.     Representations and Warranties of Employee. In connection with the purchase and sale of the Restricted Stock, Employee represents and warrants to the Company that:

        a.     As of the date hereof, including this purchase, Employee has good and marketable title to, and owns free and clear of all liens (but not free of the restrictions set forth herein or in any similar prior agreement relating to some or all of such shares), [the number of shares of Common Stock listed under "Total of All Owned Shares" above [Form used for Non-Director grants]] [a total of            (-            -) shares of Common Stock [Form used for Director grants]];

        b.     The Restricted Stock acquired by Employee was acquired for Employee's own account and not with a view to, or intention of, the distribution thereof in violation of the 1933 Act, or any applicable state securities laws, and the Restricted Stock shall not be disposed of in contravention of the 1933 Act or any applicable state securities law;

        c.     Employee is sophisticated in financial matters and is able to evaluate the risks and benefits of the investment in the Restricted Stock;

        d.     Employee is able to bear the economic risk of his or her investment in the Restricted Stock for an indefinite period of time because the Restricted Stock has not been registered under the Securities Act and, therefore, cannot be sold unless subsequently registered under the Securities Act or an exemption from such registration is available;

        e.     Employee has reviewed, or has had an opportunity to review, the following documents: (A) the Company's Certificate of Incorporation and Bylaws; (B) the loan agreements, notes and related documents with the Company's senior lenders; and (C) the Company's pro forma balance sheet dated as of the date hereof;

        f.      This Agreement constitutes the legal, valid and binding obligation of Employee, enforceable in accordance with its terms, and the execution, delivery and performance of this Agreement by Employee does not and shall not conflict with, violate or cause a breach of any agreement, contract or instrument to which Employee is a party or any judgment, order or decree to which Employee is subject. Employee acknowledges, affirms and intends that this Agreement constitutes a material inducement for the Company to grant the Restricted Stock to Employee. Employee also acknowledges and affirms that the Company has relied upon the representations and warranties of Employee contained herein and the valid, binding and enforceable nature of this Agreement in entering into this Agreement;

        g.     As an inducement to the Company to issue the Restricted Stock to Employee, as a condition thereto, Employee acknowledges and agrees that:

            i.  no provision contained herein shall entitle Employee to remain in the employment of the Company and its present or future Parent or Subsidiaries or affect the right of the Company to terminate Employee's employment with or without cause; and

           ii.  the Company shall have no duty or obligation to disclose to Employee, and Employee shall have no right to be advised of, any material information regarding the Company and its present or future Parent or Subsidiaries at any time prior to, upon or in connection with the repurchase of Restricted Stock upon the termination of Employee's employment with the Company and its Subsidiaries or as otherwise provided hereunder;

        h.     The Company and Employee acknowledge and agree that this Agreement has been executed and delivered in connection with and as a part of the compensation and incentive arrangements between the Company and Employee.

        i.      Employee acknowledges and agrees that all Shares issued to Employee from the Plan, whether Restricted Stock or otherwise, are and shall be issued only subject to the express condition, and upon Employee's waiver and agreement, which shall be evidenced by Employee's acceptance of the Grant Notice and again by Employee's purchase and acceptance of the Shares, that Employee and its successors and assigns will not at any time sue, or participate in or promote any suit or shareholder or regulatory action, or claim any other or similar right as a shareholder, against the Company or its present or future parents or subsidiaries, and their respective shareholders, officers, directors, partners, members, employees and contractors, on account of any transactions made or entered into, or not made and entered into, by the Company to date or hereafter and prior to the registration of the Shares, including without limitation any claim related to the Company's divestiture of certain real estate and other assets or holdings, and opportunities heretofore or hereafter presented to the Company involving real estate or other business assets, and Employee hereby expressly warrants that by accepting the Options and/or Shares, and by paying the purchase price for the Shares, and by any other action or forbearance Employee may now or hereafter undertake, Employee nevertheless claims no right, title or interest in or to any real estate or other business asset heretofore, currently or hereafter owned by or offered to the Company or its several subsidiaries, and Employee agrees for itself and for its heirs, successors and assigns to hold the Company and its subsidiaries, and their respective shareholders, officers, directors, partners, members, employees and contractors, harmless for, from and against any suit, claim, liability or action by Employee and its successors in interest to the Shares relative thereto.

        7.     Deliveries at Closing. Upon execution of this Agreement, Employee shall deliver to the Company four (4) duly executed blank Assignments Separate from Certificate in the form attached hereto as Exhibit A to be held by the Company until the expiration of the Company's Repurchase Option. Each Assignment Separate from Certificate shall represent shares of Restricted Stock. Upon the vesting of all or any part of Employee's Restricted Stock, Company shall upon request release the corresponding Assignment(s) Separate from Certificate to Employee.

        8.     Section 83(b) filing. Within thirty (30) days after Employee purchases any Restricted Stock from the Company, Employee shall make an effective election with the Internal Revenue Service under Section 83(b) of the Internal Revenue Code and the regulations promulgated thereunder in the form of Exhibit B attached hereto.

        9.     Legends. All certificates representing any shares of Restricted Stock of the Company subject to the provisions of this Agreement shall have endorsed thereon the following legends:

"THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE TERMS AND CONDITIONS OF A CERTAIN RESTRICTION AGREEMENT WHICH INCLUDES A REPURCHASE RIGHT AND A MARKET STAND-OFF AGREEMENT. COPIES OF THE AGREEMENT MAY BE OBTAINED UPON WRITTEN REQUEST TO THE SECRETARY OF THE COMPANY.

"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO DISTRIBUTION OR RESALE, AND MAY NOT BE TRANSFERRED UNLESS AN EFFECTIVE REGISTRATION STATEMENT FOR SUCH SHARES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, IS THEN IN EFFECT; OR PURSUANT TO RULE 144; OR A WRITTEN OPINION TO THE ISSUER FROM LEGAL COUNSEL SATISFACTORY TO THE ISSUER IS OBTAINED TO THE EFFECT THAT AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND ANY APPLICABLE STATE SECURITIES LAWS IS AVAILABLE WITH RESPECT TO THE PROPOSED SALE OR TRANSFER AND THAT NO SUCH REGISTRATION IS REQUIRED."

        10.   Survival. This Agreement shall survive and continue in full force in accordance with its terms notwithstanding any termination of Employee's employment.

        11.   Miscellaneous.

        a.     Further Instruments and Actions. The parties agree to execute such further instruments and to take such further action as may reasonably be necessary to carry out the intent of this Agreement.

        b.     Notices. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit in the United States Post Office, by registered or certified mail with postage and fees prepaid, addressed to the other party hereto at his or her address hereinafter shown below his or her signature or at such other address as such party may designate by ten (10) days advance written notice to the other party hereto.

        c.     Governing Law, Assignment and Enforcement. This Agreement is governed by the internal law of California and shall inure to the benefit of the successors and assigns of the Company and, subject to the restrictions on transfer herein set forth, be binding upon Employee, his or her heirs, executors, administrators, guardians, successors and assigns. The prevailing party in any action to enforce this Agreement shall be entitled to attorneys' fees and costs. The parties agree that damages are not an adequate remedy for Employee's breach hereof and the Company shall accordingly be entitled to specific performance of this Agreement. Venue for any action or proceeding related to this Agreement shall lie solely in Orange County, California.

        d.     Amendments and Waivers. This Agreement represents the entire understanding of the parties with respect to the subject matter hereof and supersedes all previous understandings, written or oral. This Agreement may only be amended with the written consent of the parties hereto (and assignee(s) of the Repurchase Option, if any), or the successors or assigns of the foregoing, and no oral waiver or amendment shall be effective under any circumstances whatsoever.

        e.     Cooperation. Employee agrees to cooperate affirmatively with the Company, to the extent reasonably requested by the Company, to enforce rights and obligations pursuant to this Agreement.

        IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written.

THE ENSIGN GROUP, INC., a Delaware corporation		EMPLOYEE:
By:		By:
	Name: Title: Address:		Name: Address:
			SSN:

EMPLOYEE'S IRC §83(b) CERTIFICATION

        By signing below I signify that I have received, completed, executed and retained the I.R.C. Section 83(b) election that was attached hereto as Exhibit B. I understand that I, and not the Company, will be responsible for completing the form and filing the election with the appropriate office of the federal and state tax authorities and that if such filing is not completed within thirty (30) days after the date of this Agreement, I may forfeit the tax benefits of Section 83(b). I understand further that such filing should be made by registered or certified mail, return receipt requested, and that I must retain two (2) copies of the completed form for filing with my state and federal tax returns for the current tax year and an additional copy for my records.

EMPLOYEE:

SPOUSAL ACKNOWLEDGEMENT & CONSENT

        The undersigned spouse of Employee hereby acknowledges that I have read the foregoing Restricted Stock Agreement and that I understand its contents. I am aware that the Agreement provides for the repurchase of my spouse's shares of Common Stock under certain circumstances and imposes other restrictions on the transfer of such Common Stock. I agree that my spouse's interest in the Common Stock is subject to this Agreement and any interest I may have in such Common Stock shall be irrevocably bound by this Agreement and further that my community property interest, if any, shall be similarly bound by this Agreement.

        I am aware that the legal, financial and other matters contained in this Agreement are complex and I am free to seek advice with respect thereto from independent counsel. I have either sought such advice or determined after carefully reviewing this Agreement that I will waive such right.

Dated:
, 20

ALTERNATIVE:

By his or her signature below, Employee represents that he or she is not legally married as of the date of execution of this Agreement.

EMPLOYEE
Dated:	, 20

EXHIBIT A

FORM OF
ASSIGNMENT SEPARATE FROM CERTIFICATE

        FOR VALUE RECEIVED, I, ________________, hereby sell, assign and transfer unto ________________ the quantity of ________________ (______) of the ________________ (______) shares of the Common Stock of The Ensign Group, Inc. standing in my name on the books of said corporation represented by Certificate No. ______ herewith and do hereby irrevocably constitute and appoint the Secretary of the within-named corporation as attorney to transfer said stock on the books of the within-named corporation with full power of substitution in the premises.

        This Assignment Separate from Certificate was executed in conjunction with the terms of a Restricted Stock Agreement between the above assignor and The Ensign Group, Inc. dated as of ________________, 20__.

EMPLOYEE:
Dated:	, 20

EXHIBIT B
FORM OF ELECTION TO INCLUDE STOCK IN GROSS
INCOME PURSUANT TO SECTION 83(b) OF THE
INTERNAL REVENUE CODE

        The undersigned purchased restricted shares of Common Stock, $.001 par value per share (the "Shares"), of The Ensign Group, Inc. (the "Company") on the Exercise Date (as defined below). The Shares are nontransferable and, under certain circumstances, the Company has the right to repurchase the Shares at cost should the undersigned cease to be employed by the Company and its subsidiaries. The Shares are accordingly subject to substantial risk of forfeiture.

        Although the undersigned does not believe that Code §83 applies to the Shares, in the event Code §83 is determined to apply, then the undersigned hereby makes an election pursuant to Code §83(b) and Treasury Regulation §1.83-2 promulgated thereunder, with respect to the Shares, to report as taxable income for calendar year 20____ the excess (if any) of the Shares' fair market value on the acquisition date over the purchase price thereof. The following information is supplied in accordance with Treasury Regulation §1.83-2(e):

        1.     The name, address and social security number of the undersigned:

Name:

Address:

SSN:

        2.     A description of the property with respect to which the election is being made: ________________ (______) shares of Common Stock, $.001 par value per share.

        3.     The date on which the options for these shares were exercised: ________________, 20___ (the "Exercise Date"). The original Grant Date to which the restrictions are tied and on which the vesting periods are calculated: ________________, 20___ (the "Restriction Date"). The taxable year for which such election is made: Calendar 20___.

        4.     The restrictions to which the property is subject: If prior to the fifth (5^th) anniversary of the Restriction Date the undersigned ceases to be employed by the Company or any of its subsidiaries, the non-vested portion of the Shares shall be subject to repurchase by the Company at cost. None of the Shares are vested as of the date hereof, twenty percent (20%) shall become vested on each of the first (1^st), second (2^nd), third (3^rd), fourth (4^th) and fifth (5^th) anniversaries of the Restriction Date.

        5.     The fair market value on the Restriction Date of the property with respect to which the election is being made, determined without regard to any lapse restrictions: ________________ Dollars ($______)

        6.     The amount paid for such property: ________________ Dollars ($______)

        A copy of this election has been furnished to the Secretary of the Company pursuant to Treasury Regulations §1.83-2(e)(7).

		EMPLOYEE:
Dated:	, 20

SCHEDULE OF MATERIAL DIFFERENCES TO THE FORM OF STOCK OPTION GRANT NOTICE FOR EXECUTIVE OFFICERS

NOTICE NO.	NAME OF OPTION HOLDER	DATE OF NOTICE	DATE OF GRANT	NUMBER OF SHARES	EXERCISE PRICE		EXPIRATION DATE	VESTING SCHEDULE
13	Alan John Norman	09/04/02	09/04/02	10,000	$	1.01	09/04/12	*
18	Alan John Norman	01/07/03	11/26/02	10,000	$	1.34	11/26/12	*
66	Alan John Norman	09/19/03	08/20/03	6,000	$	2.66	08/20/13	*
39	Antoinette T. Hubenette	06/19/03	05/20/03	5,000	$	2.15	05/20/13	**
129	Barry Port	02/15/05	12/22/04	4,000	$	4.91	12/22/14	*
37	Charles M. Blalack	06/19/03	05/20/03	5,000	$	2.15	05/20/13	**
5	Cory R. Monette	03/01/02	02/10/02	7,500	$	0.75	02/10/12	*
14	Cory R. Monette	01/07/03	11/26/02	2,500	$	1.34	11/26/12	*
49	Cory R. Monette	09/19/03	08/20/03	6,000	$	2.66	08/20/13	*
75	David M. Sedgwick	12/15/03	11/19/03	4,000	$	3.23	11/19/13	*
134	David M. Sedgwick	02/15/05	12/22/04	4,000	$	4.91	12/22/14	*
216	David M. Sedgwick	10/16/06	07/26/06	11,000	$	7.50	07/25/16	*
8	David Sedgwick	03/01/02	02/10/02	4,000	$	0.75	02/10/12	*
79	John Albrechtsen	05/17/04	04/30/04	2,000	$	3.91	04/30/14	*
97	John Albrechtsen	11/29/04	06/08/04	4,000	$	4.06	06/08/14	*
178	John Albrechtsen	10/16/06	07/26/06	8,000	$	7.50	07/25/16	*
42	Michael C. Dalton	06/19/03	05/20/03	5,000	$	2.15	05/20/13	*
76	Michael C. Dalton	12/15/03	11/19/03	4,000	$	3.23	11/19/13	*
135	Michael C. Dalton	02/15/05	12/22/04	4,000	$	4.91	12/22/14	*
166	Michael C. Dalton	10/16/06	07/26/06	5,000	$	7.50	07/25/16	*
38	Thomas A. Maloof	06/19/03	05/20/03	5,000	$	2.15	05/20/13	**

*

Subject to the limitations contained in the Stock Option Agreement, the Options shall vest annually over the next five (5) years, beginning on the first (1^st) anniversary of the Date of Grant, in accordance with the following vesting schedule. If the Options are exercised early (where permitted above), the shares received on exercise will also be subject to vesting on the same schedule, based on the Date of Grant, not the date of exercise:

First (1st) Anniversary:	20%
Second (2nd) Anniversary:	20%
Third (3rd) Anniversary:	20%
Fourth (4th) Anniversary:	20%
Fifth (5th) Anniversary:	20%

**

The Stock Option granted hereby shall be fully vested, and shall be exercisable as vested shares under 3(b) of the Option Agreement, upon issuance to the Optionholder, subject to the terms and conditions of this Grant Notice, the Stock Option Agreement, the Plan and the Notice of Exercise form.

EX-10.2

Exhibit 10.2

THE ENSIGN GROUP, INC.
2005 STOCK INCENTIVE PLAN

THE ENSIGN GROUP, INC.
2005 STOCK INCENTIVE PLAN

TABLE OF CONTENTS

			Page
SECTION 1.    DEFINITIONS			1
	1.1	DEFINITIONS	1
SECTION 2    THE STOCK INCENTIVE PLAN			4
	2.1	PURPOSE OF THE PLAN	4
	2.2	STOCK SUBJECT TO THE PLAN	4
	2.3	STOCK SUBJECT TO THE PLAN	4
	2.4	ADMINISTRATION OF THE PLAN	4
	2.5	ELIGIBILITY AND LIMITS	4
SECTION 3    TERMS OF STOCK INCENTIVES			5
	3.1	TERMS AND CONDITIONS OF ALL STOCK INCENTIVES	5
	3.2	TERMS AND CONDITIONS OF OPTIONS.	6
		(a) Option Price	6
		(b) Option Term	6
		(c) Payment	7
		(d) Conditions to the Exercise of an Option	7
		(e) Termination of Incentive Stock Option	7
		(f) Special Provisions for Certain Substitute Options	7
	3.3	TERMS AND CONDITIONS OF STOCK APPRECIATION RIGHTS.	8
		(a) Settlement	8
		(b) Conditions to Exercise	8
	3.4	TERMS AND CONDITIONS OF STOCK AWARDS.	8
	3.5	TERMS AND CONDITIONS OF DIVIDEND EQUIVALENT RIGHTS.	8
		(a) Payment	8
		(b) Conditions to Payment	8
	3.6	TERMS AND CONDITIONS OF PERFORMANCE UNIT AWARDS.	9
		(a) Payment	9
		(b) Conditions to Payment	9
	3.7	TERMS AND CONDITIONS OF PHANTOM SHARES.	9
		(a) Payment	9
		(b) Conditions to Payment	9
	3.8	TREATMENT OF AWARDS UPON TERMINATION OF EMPLOYMENT	9
SECTION 4    RESTRICTIONS ON STOCK			10
	4.1	ESCROW OF SHARES.	10
	4.2	RESTRICTIONS ON TRANSFER.	10
SECTION 5    TERMS APPLICABLE TO CALIFORNIA STOCK INCENTIVES			10
	5.1	APPLICATION	10
	5.2	EXERCISE PRICE OF OPTIONS	10
	5.3	PURCHASE PRICE OF STOCK INCENTIVES OTHER THAN STOCK OPTIONS	11
	5.4	EXERCISE PERIOD OF OPTIONS	11
	5.5	NONTRANSFERABILITY OF STOCK INCENTIVES	11
	5.6	EXERCISABILITY OF OPTIONS	11
	5.7	EXERCISE OF OPTIONS FOLLOWING TERMINATION OF EMPLOYMENT	11
	5.8	REPURCHASE UPON TERMINATION OF EMPLOYMENT	11

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	5.9	VOTING RIGHTS	12
SECTION 6    GENERAL PROVISIONS			12
	6.1	WITHHOLDING	12
	6.2	CHANGES IN CAPITALIZATION; MERGER; LIQUIDATION	12
	6.3	CASH AWARDS	13
	6.4	COMPLIANCE WITH CODE	13
	6.5	RIGHT TO TERMINATE EMPLOYMENT	13
	6.6	NON-ALIENATION OF BENEFITS	13
	6.7	RESTRICTIONS ON DELIVERY AND SALE OF SHARES; LEGENDS	13
	6.8	LISTING AND LEGAL COMPLIANCE	14
	6.9	TERMINATION AND AMENDMENT OF THE PLAN	14
	6.10	STOCKHOLDER APPROVAL	14
	6.11	ANNUAL FINANCIAL STATEMENTS	14
	6.12	CHOICE OF LAW	14
	6.13	EFFECTIVE DATE OF PLAN	14

ii

THE ENSIGN GROUP
2005 STOCK INCENTIVE PLAN

SECTION 1.    DEFINITIONS

        1.1    Definitions.    Whenever used herein, the masculine pronoun will be deemed to include the feminine, and the singular to include the plural, unless the context clearly indicates otherwise, and the following capitalized words and phrases are used herein with the meaning thereafter ascribed:

        (a)   "Affiliate" means:

        (1)   Any Subsidiary or Parent,

        (2)   An entity that directly or through one or more intermediaries controls, is controlled by, or is under common control with the Company, as determined by the Company, or

        (3)   Any entity in which the Company has such a significant interest that the Company determines it should be deemed an "Affiliate", as determined in the sole discretion of the Company.

        (b)   "Board of Directors" means the board of directors of the Company.

        (c)   "Code" means the Internal Revenue Code of 1986, as amended.

        (d)   "Committee" means the committee appointed by the Board of Directors to administer the Plan. The Board of Directors shall consider the advisability of whether the members of the Committee shall consist solely of at least two members of the Board of Directors who are both "outside directors" as defined in Treas. Reg. § 1.162-27(e) as promulgated by the Internal Revenue Service and "non-employee directors" as defined in Rule 16b-3(b)(3) as promulgated under the Exchange Act. If the Committee has not been appointed, the Board of Directors in their entirety shall constitute the Committee.

        (e)   "Company" means The Ensign Group, Inc., a Delaware corporation.

        (f)    "Disability" has the same meaning as provided in the long-term disability plan or policy maintained or, if applicable, most recently maintained, by the Company or, if applicable, any Affiliate of the Company for the Participant. If no long-term disability plan or policy was ever maintained on behalf of the Participant or, if the determination of Disability relates to an Incentive Stock Option, Disability means that condition described in Code Section 22(e)(3), as amended from time to time. In the event of a dispute, the determination of Disability will be made by the Committee and will be supported by advice of a physician competent in the area to which such Disability relates.

        (g)   "Dividend Equivalent Rights" means certain rights to receive cash payments as described in Section 3.5.

        (h)   "Effective Date" means September 15, 2005, the date the Plan was approved by the Board of Directors.

        (i)    "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time.

        (j)    "Fair Market Value" with regard to a date means:

        (1)   the price at which Stock shall have been sold on that date or the last trading date prior to that date as reported by the national securities exchange selected by the Committee on which the shares of Stock are then actively traded or, if applicable, as reported by the NASDAQ Stock Market or the OTC Bulletin Board.

        (2)   if such market information is not published on a regular basis, the price of Stock in the over-the-counter market on that date or the last business day prior to that date as

reported by the NASDAQ Stock Market or the OTC Bulletin Board or, if not so reported, by a generally accepted reporting service.

        (3)   if Stock is not publicly traded, as determined in good faith by the Committee.

For purposes of Paragraphs (1), (2), or (3) above, the Committee may use the closing price as of the applicable date, the average of the high and low prices as of the applicable date or for a period certain ending on such date, the price determined at the time the transaction is processed, the tender offer price for shares of Stock, or any other method which the Committee determines is reasonably indicative of the fair market value.

        (k)   "Incentive Stock Option" means an incentive stock option within the meaning of Section 422 of the Internal Revenue Code.

        (l)    "Option" means a Nonqualified Stock Option or an Incentive Stock Option.

        (m)  "Over 10% Owner" means an individual who at the time an Incentive Stock Option is granted owns Stock possessing more than 10% of the total combined voting power of the Company or one of its Subsidiaries, determined by applying the attribution rules of Code Section 424(d).

        (n)   "Nonqualified Stock Option" means a stock option that is not an Incentive Stock Option.

        (o)   "Parent" means any corporation (other than the Company) in an unbroken chain of corporations ending with the Company if, with respect to Incentive Stock Options, at the time of the granting of the Option, each of the corporations other than the Company owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. A Parent shall include any entity other than a corporation to the extent permissible under Section 424(f) or regulations and rulings thereunder.

        (p)   "Participant" means an individual who receives a Stock Incentive hereunder.

        (q)   "Performance Goals" means the measurable performance objectives, if any, established by the Committee for a Performance Period that are to be achieved with respect to a Stock Incentive granted to a Participant under the Plan. Performance Goals may be described in terms of Company-wide objectives or in terms of objectives that are related to performance of the division, Affiliate, department or function within the Company or an Affiliate in which the Participant receiving the Stock Incentive is employed or on which the Participant's efforts have the most influence. The achievement of the Performance Goals established by the Committee for any Performance Period will be determined without regard to the effect on such Performance Goals of any acquisition or disposition by the Company of a trade or business, or of substantially all of the assets of a trade or business, during the Performance Period and without regard to any change in accounting standards by the Financial Accounting Standards Board or any successor entity. The Performance Goals established by the Committee for any Performance Period under the Plan will consist of one or more of the following:

(i)

earnings per share and/or growth in earnings per share in relation to target objectives, excluding the effect of extraordinary or nonrecurring items;



(ii)

operating cash flow and/or growth in operating cash flow in relation to target objectives;



(iii)

cash available in relation to target objectives;



(iv)

net income and/or growth in net income in relation to target objectives, excluding the effect of extraordinary or nonrecurring items;



(v)

revenue and/or growth in revenue in relation to target objectives;

2

(vi)

total shareholder return (measured as the total of the appreciation of and dividends declared on the Common Stock) in relation to target objectives;



(vii)

return on invested capital in relation to target objectives;



(viii)

return on shareholder equity in relation to target objectives;



(ix)

return on assets in relation to target objectives; and



(x)

return on common book equity in relation to target objectives

If the Committee determines that, as a result of a change in the business, operations, corporate structure or capital structure of the Company, or the manner in which the Company conducts its business, or any other events or circumstances, the Performance Goals are no longer suitable, the Committee may in its discretion modify such Performance Goals or the related minimum acceptable level of achievement, in whole or in part, with respect to a period as the Committee deems appropriate and equitable, except where such action would result in the loss of the otherwise available exemption of the Stock Incentive under Section 162(m) of the Code. In such case, the Committee will not make any modification of the Performance Goals or minimum acceptable level of achievement.

        (r)   "Performance Period" means, with respect to a Stock Incentive, a period of time within which the Performance Goals relating to such Stock Incentive are to be measured. The Performance Period will be established by the Committee at the time the Stock Incentive is granted.

        (s)   "Performance Unit Award" refers to a performance unit award as described in Section 3.6.

        (t)    "Phantom Shares" refers to the rights described in Section 3.7.

        (u)   "Plan" means The Ensign Group, Inc. 2005 Stock Incentive Plan.

        (v)   "Stock" means Company's common stock.

        (w)  "Stock Appreciation Right" means a stock appreciation right described in Section 3.3.

        (x)   "Stock Award" means a stock award described in Section 3.4.

        (y)   "Stock Incentive Agreement" means an agreement between the Company and a Participant or other documentation evidencing an award of a Stock Incentive.

        (z)   "Stock Incentive Program" means a written program established by the Committee, pursuant to which Stock Incentives are awarded under the Plan under uniform terms, conditions and restrictions set forth in such written program.

        (aa) "Stock Incentives" means, collectively, Dividend Equivalent Rights, Incentive Stock Options, Nonqualified Stock Options, Phantom Shares, Stock Appreciation Rights and Stock Awards and Performance Unit Awards.

        (bb) "Subsidiary" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if, at the time of the granting of the Option, each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in the chain. A "Subsidiary" shall include any entity other than a corporation to the extent permissible under Section 424(f) or regulations or rulings thereunder.

        (cc) "Termination of Employment" means the termination of the employee-employer relationship between a Participant and the Company and its Affiliates, regardless of whether severance or similar payments are made to the Participant for any reason, including, but not by

3

way of limitation, a termination by resignation, discharge, death, Disability or retirement. The Committee will, in its absolute discretion, determine the effect of all matters and questions relating to a Termination of Employment, including, but not by way of limitation, the question of whether a leave of absence constitutes a Termination of Employment.

SECTION 2    THE STOCK INCENTIVE PLAN

        2.1    Purpose of the Plan.    The Plan is intended to (a) provide incentive to officers, employees, directors and consultants of the Company and its Affiliates to stimulate their efforts toward the continued success of the Company and to operate and manage the business in a manner that will provide for the long-term growth and profitability of the Company; (b) encourage stock ownership by officers, key employees, directors and consultants by providing them with a means to acquire a proprietary interest in the Company, acquire shares of Stock, or to receive compensation which is based upon appreciation in the value of Stock; and (c) provide a means of obtaining, rewarding and retaining officers, employees, directors, and consultants.

        2.2    Stock Subject to the Plan.    Subject to adjustment in accordance with Section 5.2, one million (1,000,000) shares of Stock, which shall consist solely of treasury shares that are acquired by the Company from stockholders of the Company (the "Maximum Plan Shares") are hereby reserved exclusively for issuance upon exercise or payment pursuant to Stock Incentives. The shares of Stock attributable to the nonvested, unpaid, unexercised, unconverted or otherwise unsettled portion of any Stock Incentive that is forfeited or cancelled or expires or terminates for any reason without becoming vested, paid, exercised, converted or otherwise settled in full will again be available for purposes of the Plan.

        2.3    Term of the Plan.    The Plan shall terminate on the tenth anniversary of the earlier of the Effective Date or the date the Plan is approved by the Company's stockholders, and no Stock Incentive shall be granted pursuant to the Plan on or after the Plan termination date but Awards theretofore granted may extend beyond that date.

        2.4    Administration of the Plan.    The Plan is administered by the Committee. The Committee has full authority in its discretion to determine the officers, employees, directors and consultants of the Company or its Affiliates to whom Stock Incentives will be granted and the terms and provisions of Stock Incentives, subject to the Plan. Subject to the provisions of the Plan, the Committee has full and conclusive authority to interpret the Plan; to prescribe, amend and rescind rules and regulations relating to the Plan; to determine the terms and provisions of the respective Stock Incentive Agreements and to make all other determinations necessary or advisable for the proper administration of the Plan. The Committee's determinations under the Plan need not be uniform and may be made by it selectively among persons who receive, or are eligible to receive, awards under the Plan (whether or not such persons are similarly situated). The Committee's decisions are final and binding on all Participants.

        2.5    Eligibility and Limits.    Stock Incentives may be granted only to officers, employees, directors, and consultants of the Company or an Affiliate of the Company; provided, however, that an Incentive Stock Option may only be granted to an employee of the Company or any Parent or Subsidiary. In the case of Incentive Stock Options, the aggregate Fair Market Value (determined as at the date an Incentive Stock Option is granted) of stock with respect to which stock options intended to meet the requirements of Code Section 422 become exercisable for the first time by an individual during any calendar year under all plans of the Company and its Parents and Subsidiaries may not exceed $100,000; provided further, that if the limitation is exceeded, the Incentive Stock Option(s) which cause the limitation to be exceeded will be treated as Nonqualified Stock Option(s).

4

SECTION 3    TERMS OF STOCK INCENTIVES

        3.1    Terms and Conditions of All Stock Incentives.

        (a)   The number of shares of Stock as to which a Stock Incentive may be granted will be determined by the Committee in its sole discretion, subject to the provisions of Section 2.2 as to the total number of shares available for grants under the Plan and subject to the limits on Options and Stock Appreciation Rights in the following sentence. On such date as required by Section 162(m) of the Code and the regulations thereunder for compensation to be treated as qualified performance based compensation, the maximum number of shares of Stock with respect to which Options or Stock Appreciation Rights may be granted during any calendar year to any employee may not exceed 1,000,000. If, after grant, an Option is cancelled, the cancelled Option shall continue to be counted against the maximum number of shares for which options may be granted to an employee as described in this Section 3.1. If, after grant, the exercise price of an Option is reduced or the base amount on which a Stock Appreciation Right is calculated is reduced, the transaction shall be treated as the cancellation of the Option or the Stock Appreciation Right, as applicable, and the grant of a new Option or Stock Appreciation Right, as applicable. If an Option or Stock Appreciation Right is deemed to be cancelled as described in the preceding sentence, the Option or Stock Appreciation Right that is deemed to be canceled and the Option or Stock Appreciation Right that is deemed to be granted shall both be counted against the maximum number of shares for which Options or Stock Appreciation Rights may be granted to an employee as described in this Section 3.1.

5

        (b)   Each Stock Incentive will either be evidenced by a Stock Incentive Agreement in such form and containing such terms, conditions and restrictions as the Committee may determine to be appropriate, including without limitation, Performance Goals that must be achieved as a condition to vesting or payment of the Stock Incentive, or be made subject to the terms of a Stock Incentive Program, containing such terms, conditions and restrictions as the Committee may determine to be appropriate, including without limitation, Performance Goals that must be achieved as a condition to vesting or payment of the Stock Incentive. Each Stock Incentive Agreement or Stock Incentive Program is subject to the terms of the Plan and any provisions contained in the Stock Incentive Agreement or Stock Incentive Program that are inconsistent with the Plan are null and void.

        (c)   The date a Stock Incentive is granted will be the date on which the Committee has approved the terms and conditions of the Stock Incentive and has determined the recipient of the Stock Incentive and the number of shares covered by the Stock Incentive, and has taken all such other actions necessary to complete the grant of the Stock Incentive.

        (d)   Any Stock Incentive may be granted in connection with all or any portion of a previously or contemporaneously granted Stock Incentive. Exercise or vesting of a Stock Incentive granted in connection with another Stock Incentive may result in a pro rata surrender or cancellation of any related Stock Incentive, as specified in the applicable Stock Incentive Agreement or Stock Incentive Program.

        (e)   Stock Incentives are not transferable or assignable except by will or by the laws of descent and distribution and are exercisable, during the Participant's lifetime, only by the Participant; or in the event of the Disability of the Participant, by the legal representative of the Participant; or in the event of death of the Participant, by the legal representative of the Participant's estate or if no legal representative has been appointed, by the successor in interest determined under the Participant's will; provided, however, that the Committee may waive any of the provisions of this Section or provide otherwise as to any Stock Incentives other than Incentive Stock Options.

        3.2    Terms and Conditions of Options.    Each Option granted under the Plan must be evidenced by a Stock Incentive Agreement. At the time any Option is granted, the Committee will determine whether the Option is to be an Incentive Stock Option described in Code Section 422 or a Nonqualified Stock Option, and the Option must be clearly identified as to its status as an Incentive Stock Option or a Nonqualified Stock Option. Incentive Stock Options may only be granted to employees of the Company or any Subsidiary or Parent. At the time any Incentive Stock Option granted under the Plan is exercised, the Company will be entitled to legend the certificates representing the shares of Stock purchased pursuant to the Option to clearly identify them as representing the shares purchased upon the exercise of an Incentive Stock Option.

        (a)    Option Price.    Subject to adjustment in accordance with Section 6.2 and the other provisions of this Section 3.2, the exercise price (the "Exercise Price") per share of Stock purchasable under any Option must be as set forth in the applicable Stock Incentive Agreement, but in no event may it be less than the Fair Market Value on the date the Option is granted with respect to an Incentive Stock Option. With respect to each grant of an Incentive Stock Option to a Participant who is an Over 10% Owner, the Exercise Price may not be less than 110% of the Fair Market Value on the date the Option is granted.

        (b)    Option Term.    Any Incentive Stock Option granted to a Participant who is not an Over 10% Owner is not exercisable after the expiration of ten (10) years after the date the Option is granted. Any Incentive Stock Option granted to an Over 10% Owner is not exercisable after the expiration of five (5) years after the date the Option is granted. The term of any Nonqualified Stock Option must be as specified in the applicable Stock Incentive Agreement.

6

        (c)    Payment.    Payment for all shares of Stock purchased pursuant to exercise of an Option will be made in any form or manner authorized by the Committee in the Stock Incentive Agreement or by amendment thereto, including, but not limited to, cash or, if the Stock Incentive Agreement provides:

          (i)  by delivery to the Company of a number of shares of Stock which have been owned by the holder for at least six (6) months prior to the date of exercise having an aggregate Fair Market Value of not less than the product of the Exercise Price multiplied by the number of shares the Participant intends to purchase upon exercise of the Option on the date of delivery;

         (ii)  in a cashless exercise through a broker; or

        (iii)  by having a number of shares of Stock withheld, the Fair Market Value of which as of the date of exercise is sufficient to satisfy the Exercise Price.

In its discretion, the Committee also may authorize (at the time an Option is granted or thereafter) Company financing to assist the Participant as to payment of the Exercise Price on such terms as may be offered by the Committee in its discretion, except to the extent prohibited by law as to officers and directors, including without limitation, the Sarbanes-Oxley Act of 2002, as amended. Payment must be made at the time that the Option or any part thereof is exercised, and no shares may be issued or delivered upon exercise of an option until full payment has been made by the Participant. The holder of an Option, as such, has none of the rights of a stockholder.

        (d)    Conditions to the Exercise of an Option.    Each Option granted under the Plan is exercisable by the Participant or any other designated person, at such time or times, or upon the occurrence of such event or events, and in such amounts, as the Committee specifies in the Stock Incentive Agreement; provided, however, that subsequent to the grant of an Option, the Committee, at any time before complete termination of such Option, may modify the terms of an Option to the extent not prohibited by the terms of the Plan, including without limitation, accelerating the time or times at which such Option may be exercised in whole or in part, and may permit the Participant or any other designated person to exercise the Option, or any portion thereof, for all or part of the remaining Option term, notwithstanding any provision of the Stock Incentive Agreement to the contrary.

        (e)    Termination of Incentive Stock Option.    With respect to an Incentive Stock Option, in the event of Termination of Employment of a Participant, the Option or portion thereof held by the Participant which is unexercised will expire, terminate, and become unexercisable no later than the expiration of three (3) months after the date of Termination of Employment; provided, however, that in the case of a holder whose Termination of Employment is due to death or Disability, one (1) year will be substituted for such three (3) month period; provided, further that such time limits may be exceeded by the Committee under the terms of the grant, in which case, the Incentive Stock Option will be a Nonqualified Option if it is exercised after the time limits that would otherwise apply. For purposes of this Subsection (e), Termination of Employment of the Participant will not be deemed to have occurred if the Participant is employed by another corporation (or a parent or subsidiary corporation of such other corporation) which has assumed the Incentive Stock Option of the Participant in a transaction to which Code Section 424(a) is applicable.

        (f)    Special Provisions for Certain Substitute Options.    Notwithstanding anything to the contrary in this Section 3.2, any Option issued in substitution for an option previously issued by another entity, which substitution occurs in connection with a transaction to which Code Section 424(a) is applicable, may provide for an exercise price computed in accordance with such Code Section and the regulations thereunder and may contain such other terms and conditions as the Committee may prescribe to cause such substitute Option to contain as nearly as possible the

7

same terms and conditions (including the applicable vesting and termination provisions) as those contained in the previously issued option being replaced thereby.

        3.3    Terms and Conditions of Stock Appreciation Rights.    Each Stock Appreciation Right granted under the Plan must be evidenced by a Stock Incentive Agreement. A Stock Appreciation Right entitles the Participant to receive the excess of (1) the Fair Market Value of a specified or determinable number of shares of the Stock at the time of payment or exercise over (2) a specified or determinable price which, in the case of a Stock Appreciation Right granted in connection with an Option, may not be less than the Exercise Price for that number of shares subject to that Option. A Stock Appreciation Right granted in connection with a Stock Incentive may only be exercised to the extent that the related Stock Incentive has not been exercised, paid or otherwise settled.

        (a)    Settlement.    Upon settlement of a Stock Appreciation Right, the Company must pay to the Participant the appreciation in cash or shares of Stock (valued at the aggregate Fair Market Value on the date of payment or exercise) as provided in the Stock Incentive Agreement or, in the absence of such provision, as the Committee may determine.

        (b)    Conditions to Exercise.    Each Stock Appreciation Right granted under the Plan is exercisable or payable at such time or times, or upon the occurrence of such event or events, and in such amounts, as the Committee specifies in the Stock Incentive Agreement; provided, however, that subsequent to the grant of a Stock Appreciation Right, the Committee, at any time before complete termination of such Stock Appreciation Right, may accelerate the time or times at which such Stock Appreciation Right may be exercised or paid in whole or in part.

        3.4    Terms and Conditions of Stock Awards.    The number of shares of Stock subject to a Stock Award and restrictions or conditions on such shares, if any, will be as the Committee determines, and the certificate for such shares will bear evidence of any restrictions or conditions. Subsequent to the date of the grant of the Stock Award, the Committee has the power to permit, in its discretion, an acceleration of the expiration of an applicable restriction period with respect to any part or all of the shares awarded to a Participant. The Committee may require a cash payment from the Participant in an amount no greater than the aggregate Fair Market Value of the shares of Stock awarded determined at the date of grant in exchange for the grant of a Stock Award or may grant a Stock Award without the requirement of a cash payment.

        3.5    Terms and Conditions of Dividend Equivalent Rights.    A Dividend Equivalent Right entitles the Participant to receive payments from the Company in an amount determined by reference to any cash dividends paid on a specified number of shares of Stock to Company stockholders of record during the period such rights are effective. The Committee may impose such restrictions and conditions on any Dividend Equivalent Right as the Committee in its discretion shall determine, including the date any such right shall terminate and may reserve the right to terminate, amend or suspend any such right at any time.

        (a)    Payment.    Payment in respect of a Dividend Equivalent Right may be made by the Company in cash or shares of Stock (valued at Fair Market Value as of the date payment is owed) as provided in the Stock Incentive Agreement or Stock Incentive Program, or, in the absence of such provision, as the Committee may determine.

        (b)    Conditions to Payment.    Each Dividend Equivalent Right granted under the Plan is payable at such time or times, or upon the occurrence of such event or events, and in such amounts, as the Committee specifies in the applicable Stock Incentive Agreement or Stock Incentive Program; provided, however, that subsequent to the grant of a Dividend Equivalent Right, the Committee, at any time before complete termination of such Dividend Equivalent Right, may accelerate the time or times at which such Dividend Equivalent Right may be paid in whole or in part.

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        3.6    Terms and Conditions of Performance Unit Awards.    A Performance Unit Award shall entitle the Participant to receive, at a specified future date, payment of an amount equal to all or a portion of the value of a specified or determinable number of units (stated in terms of a designated or determinable dollar amount per unit) granted by the Committee. At the time of the grant, the Committee must determine the base value of each unit, the number of units subject to a Performance Unit Award, and the Performance Goals applicable to the determination of the ultimate payment value of the Performance Unit Award. The Committee may provide for an alternate base value for each unit under certain specified conditions.

        (a)    Payment.    Payment in respect of Performance Unit Awards may be made by the Company in cash or shares of Stock (valued at Fair Market Value as of the date payment is owed) as provided in the applicable Stock Incentive Agreement or Stock Incentive Program or, in the absence of such provision, as the Committee may determine.

        (b)    Conditions to Payment.    Each Performance Unit Award granted under the Plan shall be payable at such time or times, or upon the occurrence of such event or events, and in such amounts, as the Committee shall specify in the applicable Stock Incentive Agreement or Stock Incentive Program; provided, however, that subsequent to the grant of a Performance Unit Award, the Committee, at any time before complete termination of such Performance Unit Award, may accelerate the time or times at which such Performance Unit Award may be paid in whole or in part.

        3.7    Terms and Conditions of Phantom Shares.    Phantom Shares shall entitle the Participant to receive, at a specified future date, payment of an amount equal to all or a portion of the Fair Market Value of a specified number of shares of Stock at the end of a specified period. At the time of the grant, the Committee will determine the factors which will govern the portion of the phantom shares so payable, including, at the discretion of the Committee, any performance criteria that must be satisfied as a condition to payment. Phantom Share awards containing performance criteria may be designated as performance share awards.

        (a)    Payment.    Payment in respect of Phantom Shares may be made by the Company in cash or shares of Stock (valued at Fair Market Value as of the date payment is owed) as provided in the applicable Stock Incentive Agreement or Stock Incentive Program, or, in the absence of such provision, as the Committee may determine.

        (b)    Conditions to Payment.    Each Phantom Share granted under the Plan is payable at such time or times, or upon the occurrence of such event or events, and in such amounts, as the Committee specify in the applicable Stock Incentive Agreement or Stock Incentive Program; provided, however, that subsequent to the grant of a Phantom Share, the Committee, at any time before complete termination of such Phantom Share, may accelerate the time or times at which such Phantom Share may be paid in whole or in part.

        3.8    Treatment of Awards Upon Termination of Employment.    Except as otherwise provided by Plan Section 3.2(e), any award under this Plan to a Participant who has experienced a Termination of Employment may be cancelled, accelerated, paid or continued, as provided in the applicable Stock Incentive Agreement or Stock Incentive Program, or, as the Committee may otherwise determine to the extent not prohibited by the Plan. The portion of any award exercisable in the event of continuation or the amount of any payment due under a continued award may be adjusted by the Committee to reflect the Participant's period of service from the date of grant through the date of the Participant's Termination of Employment or such other factors as the Committee determines are relevant to its decision to continue the award.

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SECTION 4    RESTRICTIONS ON STOCK

        4.1    Escrow of Shares.    Any certificates representing the shares of Stock issued under the Plan will be issued in the Participant's name, but, if the applicable Stock Incentive Agreement or Stock Incentive Program so provides, the shares of Stock will be held by a custodian designated by the Committee (the "Custodian"). Each applicable Stock Incentive Agreement or Stock Incentive Program providing for transfer of shares of Stock to the Custodian must appoint the Custodian as the attorney-in-fact for the Participant for the term specified in the applicable Stock Incentive Agreement or Stock Incentive Program, with full power and authority in the Participant's name, place and stead to transfer, assign and convey to the Company any shares of Stock held by the Custodian for such Participant, if the Participant forfeits the shares under the terms of the applicable Stock Incentive Agreement or Stock Incentive Program. During the period that the Custodian holds the shares subject to this Section, the Participant is entitled to all rights, except as provided in the applicable Stock Incentive Agreement or Stock Incentive Program, applicable to shares of Stock not so held. Any dividends declared on shares of Stock held by the Custodian must provide in the applicable Stock Incentive Agreement or Stock Incentive Program, to be paid directly to the Participant or, in the alternative, be retained by the Custodian or by the Company until the expiration of the term specified in the applicable Stock Incentive Agreement or Stock Incentive Program and shall then be delivered, together with any proceeds, with the shares of Stock to the Participant or to the Company, as applicable.

        4.2    Restrictions on Transfer.    The Participant does not have the right to make or permit to exist any disposition of the shares of Stock issued pursuant to the Plan except as provided in the Plan or the applicable Stock Incentive Agreement or Stock Incentive Program. Any disposition of the shares of Stock issued under the Plan by the Participant not made in accordance with the Plan or the applicable Stock Incentive Agreement or Stock Incentive Program will be void. The Company will not recognize, or have the duty to recognize, any disposition not made in accordance with the Plan and the applicable Stock Incentive Agreement or Stock Incentive Program, and the shares so transferred will continue to be bound by the Plan and the applicable Stock Incentive Agreement or Stock Incentive Program.

SECTION 5    TERMS APPLICABLE TO CALIFORNIA STOCK INCENTIVES

        5.1    Application.    The provisions of this Section 5 shall apply, and be reflected in any Stock Incentive Agreement pertaining to, any Stock Incentives granted hereunder to the extent required to comply with the Corporate Securities Law of 1968 of the State of California and the regulations promulgated thereunder. To the extent there is a conflict between any other terms of the Plan and the terms contained in this Section of the Plan, the terms of this Section shall be controlling, and any provision of the Plan that would be contrary to such California law shall not apply to the Stock Incentives described in this Section 5.1. This Section 5 shall be construed in a manner consistent with the applicable provisions of the California Code of Regulations.

        5.2    Exercise Price of Options.    Any Option grant shall have an exercise price which is not less than 85% of the Fair Value (as defined hereafter) of the underlying Stock at the time the Option is granted. In the event the recipient of the Option owns securities possessing more than 10% of the total combined voting power of all classes of securities of the Company or its Parents or Subsidiaries, the exercise price shall not be less than 110% of the Fair Value of the Stock underlying the Option grant at the time the Option is granted. As used in herein the term "Fair Value" shall mean fair value as determined under Section 260.140.50 of the California Code of Regulations, specifically a price which is fair to the Company and the purchaser, giving predominate weight to the following: (i) with respect to Stock that is actively traded on a public market of substantial depth, the recent market price of such Stock; (ii) with respect to Stock not traded on a public market, the price at which the securities of reasonably comparable corporations (if any) in the same industry are being traded, subject to appropriate adjustments for dissimilarities between the corporations being compared; and (iii) in the

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absence of (i) or (ii) above, the earnings history, book value and prospects of the Company at the time the calculation is made with respect to Stock.

        5.3    Purchase Price of Stock Incentives other than Stock Options.    Except as set forth below, all Stock sold pursuant to Stock Incentives other than Options shall have a purchase price of at least 85% of the Fair Value, determined at the date of grant of the Stock Incentive or at the time the purchase is consummated, of the Stock underlying the Stock Incentive. In the event the recipient of the Stock Incentive (other than an Option) owns securities possessing more than 10% of the total combined voting power of all classes of securities of the Company or its Parents or Subsidiaries, the purchase price shall not be less than 100% of the Fair Value, determined at the date of grant of the Stock Incentive or at the time the purchase is consummated, of the Stock underlying the Stock Incentive.

        5.4    Exercise Period of Options.    Each Option will have an exercise period of not more than 120 months from the date of grant.

        5.5    Nontransferability of Stock Incentives.    The right to purchase Stock pursuant to Stock Incentives shall be nontransferable other than by will or the laws of descent and distribution or as permitted by Rule 701 promulgated under the Securities Act of 1933, as amended.

        5.6    Exercisability of Options.    Each Optionee shall have the right to exercise the Option at the rate of at least 20% per year over five years from the date the Option is granted, subject to reasonable conditions such as continued employment. Notwithstanding the foregoing, in the case of Options granted to officers, directors, managers or consultants, the Option may become fully exercisable, subject to reasonable conditions such as continued employment, at any time or during any period established by the Company.

        5.7    Exercise of Options Following Termination of Employment.    Unless the Optionee's employment is terminated for "cause" as defined in the Stock Incentive Agreement, the Optionee shall have the right to exercise the vested portion of the Option, subject to Section 5.4, for:

        (a)   at least six months from the date of Termination of Employment, if termination was caused by death or Disability; or

        (b)   at least thirty days from the date of Termination of Employment, if termination was caused by other than death or Disability.

        5.8    Repurchase Upon Termination of Employment.    If a Stock Incentive Agreement gives the Company the right to repurchase Stock awarded pursuant to the Plan upon Termination of Employment, such Stock may only be repurchased in accordance with the following terms:

        (a)   The Stock may be repurchased for Fair Value as determined on the date of Termination of Employment for cash or cancellation of purchase money indebtedness, except as provided in Subsection (b) below, but the repurchase right shall lapse when the Company's Stock becomes publicly traded;

        (b)   The Stock may be repurchased at the original purchase price, provided that the Stock Incentive Agreement pertaining to such Stock provides that the right to repurchase at such price lapses at the rate of 20% per year over five (5) years from the time the Option is granted (without respect to the date the Option was exercised or became exercisable) for cash or cancellation of purchase money indebtedness;

        (c)   All repurchases must be completed within ninety (90) days of the date of Termination of Employment, except with respect to Stock obtained upon the exercise of an Option following Termination of Employment, which must be repurchased within ninety (90) days of the date of such exercise;

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        (d)   Notwithstanding the provisions of Subsections (a), (b) and (c) above, the Stock held by an officer, director, manager, or consultant may be subject to additional or greater restrictions.

        5.9    Voting Rights.    Stock issued pursuant to Stock Incentives shall normally carry equal voting rights with other Stock on matters where such vote is permitted by applicable law.

SECTION 6    GENERAL PROVISIONS

        6.1    Withholding.    The Company must deduct from all cash distributions under the Plan any taxes required to be withheld by federal, state or local government. Whenever the Company proposes or is required to issue or transfer shares of Stock under the Plan or upon the vesting of any Stock Award, the Company has the right to require the recipient to remit to the Company an amount sufficient to satisfy any federal, state and local tax withholding requirements prior to the delivery of any certificate or certificates for such shares or the vesting of such Stock Award. A Participant may pay the withholding obligation in cash, or, if the applicable Stock Incentive Agreement or Stock Incentive Program provides, a Participant may elect to have the number of shares of Stock he is to receive reduced by, or with respect to a Stock Award, tender back to the Company, the smallest number of whole shares of Stock which, when multiplied by the Fair Market Value of the shares of Stock determined as of the Tax Date (defined below), is sufficient to satisfy federal, state and local, if any, withholding obligation arising from exercise or payment of a Stock Incentive (a "Withholding Election"). A Participant may make a Withholding Election only if both of the following conditions are met:

        (a)   The Withholding Election must be made on or prior to the date on which the amount of tax required to be withheld is determined (the "Tax Date") by executing and delivering to the Company a properly completed notice of Withholding Election as prescribed by the Committee; and

        (b)   Any Withholding Election made will be irrevocable except on six months advance written notice delivered to the Company; however, the Committee may in its sole discretion disapprove and give no effect to the Withholding Election.

        6.2    Changes in Capitalization; Merger; Liquidation.

        (a)   The number of shares of Stock reserved for the grant of Options, Dividend Equivalent Rights, Performance Unit Awards, Phantom Shares, Stock Appreciation Rights and Stock Awards; the number of shares of Stock reserved for issuance upon the exercise or payment, as applicable, of each outstanding Option, Dividend Equivalent Right, Phantom Share and Stock Appreciation Right and upon vesting or grant, as applicable, of each Stock Award; the Exercise Price of each outstanding Option and the specified number of shares of Stock to which each outstanding Dividend Equivalent Right, Phantom Share and Stock Appreciation Right pertains must be proportionately adjusted in the event of a stock split, reverse stock split, stock dividend, recapitalization, combination, reclassification or other distribution of Stock without the receipt of consideration by the Company, of or on Stock.

        (b)   In the event of a merger, consolidation, reorganization, extraordinary dividend, spin-off, sale of substantially all of the Company's assets, other change in capital structure of the Company, tender offer for shares of Stock, or a change in control of the Company (as defined by the Committee in the applicable Stock Incentive Agreement) the Committee may make such adjustments with respect to awards and take such other action as it deems necessary or appropriate, including, without limitation, the substitution of new awards, or the adjustment of outstanding awards, the acceleration of awards, the removal of restrictions on outstanding awards, or the termination of outstanding awards in exchange for the cash value determined in good faith by the Committee of the vested and/or unvested portion of the award. Any adjustment pursuant to

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this Section 6.2 may provide, in the Committee's discretion, for the elimination without payment therefor of any fractional shares that might otherwise become subject to any Stock Incentive, but except as set forth in this Section may not otherwise diminish the then value of the Stock Incentive.

        (c)   The existence of the Plan and the Stock Incentives granted pursuant to the Plan must not affect in any way the right or power of the Company to make or authorize any adjustment, reclassification, reorganization or other change in its capital or business structure, any merger or consolidation of the Company, any issue of debt or equity securities having preferences or priorities as to the Stock or the rights thereof, the dissolution or liquidation of the Company, any sale or transfer of all or any part of its business or assets, or any other corporate act or proceeding.

        6.3    Cash Awards.    The Committee may, at any time and in its discretion, grant to any holder of a Stock Incentive the right to receive, at such times and in such amounts as determined by the Committee in its discretion, a cash amount which is intended to reimburse such person for all or a portion of the federal, state and local income taxes imposed upon such person as a consequence of the receipt of the Stock Incentive or the exercise of rights thereunder.

        6.4    Compliance with Code.    All Incentive Stock Options to be granted hereunder are intended to comply with Code Section 422, and all provisions of the Plan and all Incentive Stock Options granted hereunder must be construed in such manner as to effectuate that intent.

        6.5    Right to Terminate Employment.    Nothing in the Plan or in any Stock Incentive confers upon any Participant the right to continue as an employee or officer of the Company or any of its Affiliates or affect the right of the Company or any of its Affiliates to terminate the Participant's employment or services at any time.

        6.6    Non-Alienation of Benefits.    Other than as provided herein, no benefit under the Plan may be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or charge; and any attempt to do so shall be void. No such benefit may, prior to receipt by the Participant, be in any manner liable for or subject to the debts, contracts, liabilities, engagements or torts of the Participant.

        6.7    Restrictions on Delivery and Sale of Shares; Legends.    Each Stock Incentive is subject to the condition that if at any time the Committee, in its discretion, shall determine that the listing, registration or qualification of the shares covered by such Stock Incentive upon any securities exchange or under any state or federal law is necessary or desirable as a condition of or in connection with the granting of such Stock Incentive or the purchase or delivery of shares thereunder, the delivery of any or all shares pursuant to such Stock Incentive may be withheld unless and until such listing, registration or qualification shall have been effected. If a registration statement is not in effect under the Securities Act of 1933 or any applicable state securities laws with respect to the shares of Stock purchasable or otherwise deliverable under Stock Incentives then outstanding, the Committee may require, as a condition of exercise of any Option or as a condition to any other delivery of Stock pursuant to a Stock Incentive, that the Participant or other recipient of a Stock Incentive represent, in writing, that the shares received pursuant to the Stock Incentive are being acquired for investment and not with a view to distribution and agree that the shares will not be disposed of except pursuant to an effective registration statement, unless the Company shall have received an opinion of counsel that such disposition is exempt from such requirement under the Securities Act of 1933 and any applicable state securities laws. The Company may include on certificates representing shares delivered pursuant to a Stock Incentive such legends referring to the foregoing representations or restrictions or any other applicable restrictions on resale as the Company, in its discretion, shall deem appropriate.

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        6.8    Listing and Legal Compliance.    The Committee may suspend the exercise or payment of any Stock Incentive so long as it determines that securities exchange listing or registration or qualification under any securities laws is required in connection therewith and has not been completed on terms acceptable to the Committee.

        6.9    Termination and Amendment of the Plan.    The Board of Directors at any time may amend or terminate the Plan without stockholder approval; provided, however, that the Board of Directors may condition any amendment on the approval of stockholders of the Company if such approval is necessary or advisable with respect to tax, securities or other applicable laws. No such termination or amendment without the consent of the holder of a Stock Incentive may adversely affect the rights of the Participant under such Stock Incentive.

        6.10    Stockholder Approval.    The Plan must be submitted to the stockholders of the Company for their approval within twelve (12) months before or after the adoption of the Plan by the Board of Directors of the Company. If such approval is not obtained, any Stock Incentive granted hereunder will be void.

        6.11    Annual Financial Statements.    The Company shall deliver annual financial statements to each employee granted a Stock Incentive hereunder until such award expires or is otherwise canceled.

        6.12    Choice of Law.    The laws of the State of California shall govern the Plan, to the extent not preempted by federal law, without reference to the principles of conflict of laws.

        6.13    Effective Date of Plan.    This Plan was approved by the Board of Directors as of September 26, 2005 (the "Effective Date").

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Grant No.    [GRANT NUMBER]

Other than Officer, Director,
Manager, or Consultant

FORM OF NONQUALIFIED STOCK OPTION AWARD FOR EXECUTIVE OFFICERS AND DIRECTORS
PURSUANT TO
THE ENSIGN GROUP, INC. 2005 STOCK INCENTIVE PLAN

        THIS AWARD is made as of the Grant Date, by The Ensign Group, Inc. (the "Company") to [NAME OF OPTIONEE] (the "Optionee"). Upon and subject to the Terms and Conditions attached hereto and incorporated herein by reference, the Company hereby awards as of the Grant Date to Optionee a nonqualified stock option (the "Option"), as described below, to purchase the Option Shares.

A.

Grant Date: [GRANT DATE].

B.

Type of Option: Nonqualified Stock Option.

C.

Plan (under which Option is granted): The Ensign Group, Inc. 2005 Stock Incentive Plan.

D.

Option Shares: All or any part of [NUMBER OF SHARES] shares of the Company's common stock (the "Common Stock"), subject to adjustment as provided in the attached Terms and Conditions.

E.

Exercise Price: [EXERCISE PRICE] per share, subject to adjustment as provided in the attached Terms and Conditions.

F.

Option Period: The Option may be exercised only during the Option Period which commences on the Grant Date and ends on the earliest of:

(i)

the tenth (10th) anniversary of the Grant Date;

(ii)

three (3) months following the date the Optionee ceases to be an employee, director, or contractor of the Company or an Affiliate (as defined in the Plan) for any reason other than death, Disability (defined in the Plan) or termination of the Optionee's employment or services by the Company with Cause; or

(iii)

six (6) months following the date the Optionee ceases to be an employee, director, or contractor of the Company or an Affiliate due to death or Disability.

Notwithstanding the foregoing, (a) the Option shall cease to be exercisable, to the extent that it is not vested, upon the date the Optionee ceases to be an employee, director, or contractor of the Company or an Affiliate for any reason, and (b) the Option, whether or not vested, shall cease to be exercisable upon the date the Optionee ceases to be an employee, director, or contractor of the Company or an Affiliate due to termination of the Optionee's employment or services by the Company or an Affiliate with Cause.

Note that other restrictions to exercising the Option, as
described in the attached Terms and Conditions, may apply.

G.

Vesting Schedule: The Option shall become vested in accordance with the vesting schedule attached hereto as Exhibit 1. Any portion of the Option which is not vested at the time of Optionee's termination of employment or services with the Company shall be forfeited to the Company.

IN WITNESS WHEREOF, the Company has executed and sealed this Award as of the Grant Date above.

THE ENSIGN GROUP, INC.
By:	/s/ CHRISTOPHER R. CHRISTENSEN Christopher R. Christensen, President

TERMS AND CONDITIONS TO THE
NONQUALIFIED STOCK OPTION AWARD
PURSUANT TO THE
THE ENSIGN GROUP, INC. 2005 STOCK INCENTIVE PLAN

        1.    Exercise of Option.    Subject to the provisions provided herein or in the Award made pursuant to The Ensign Group, Inc. 2005 Stock Incentive Plan;

        (a)   the Option may be exercised with respect to all or any portion of the Option Shares in a number of Option Shares no less than 1000 (provided, however, that this provision shall not apply to the extent it would prevent the Optionee being able to exercise at least 20% of the Option Shares under the Award per year over five years from the Grant Date) at any time during the Option Period by the delivery to the Company, at its principal place of business, of (i) a written notice of exercise in substantially the form attached hereto as Exhibit 2, which shall be actually delivered to the Company at least ten (10) days prior to the date upon which Optionee desires to exercise all or any portion of the Option (unless such prior notice is waived by the Company) and not more than thirty (30) days prior to such date, and (ii) payment to the Company of the Exercise Price multiplied by the number of shares being purchased (the "Purchase Price") in the manner provided in Subsection (b). Upon acceptance of such notice and receipt of payment in full of the Purchase Price and any tax withholding liability, to the extent applicable, Company shall cause to be issued a certificate representing the Option Shares purchased. The Option Shares acquired by the Optionee shall be subject to a Restricted Stock Agreement in the form attached hereto as Exhibit 3, and the Optionee shall be required to execute and deliver to the Company the Restricted Stock Agreement as a condition to the exercise of the Option.

        (b)   The Purchase Price shall be paid in full upon the exercise of an Option and no Option Shares shall be issued or delivered until full payment therefor has been made. Payment of the Purchase Price for all Option Shares purchased pursuant to the exercise of an Option shall be made in cash, certified check, or, alternatively, as follows:

          (i)  by delivery to the Company of a number of shares of Common Stock which have been owned by the Optionee for at least six (6) months prior to the date of the Option's exercise, having a Fair Market Value, as determined under the Plan, on the date of exercise either equal to the Purchase Price or in combination with cash to equal the Purchase Price; or

         (ii)  by receipt of the Purchase Price in cash from a broker, dealer or other "creditor" as defined by Regulation T issued by the Board of Governors of the Federal Reserve System following delivery by the Optionee to the Committee (defined in the Plan) of instructions in a form acceptable to the Committee regarding delivery to such broker, dealer or other creditor of that number of Option Shares with respect to which the Option is exercised.

        (c)   As a condition to exercising the Option, the Optionee shall, if requested by the Company, execute a shareholder agreement in the form provided by the Company; provided, however, that no term of such shareholder agreement shall be inconsistent with the laws of the state upon which the Company is relying in issuing the Option and selling Option Shares to the Optionee.

        2.    Withholding.    To the extent necessary, the Optionee must satisfy his federal, state, and local, if any, withholding taxes imposed by reason of the exercise of the Option either by paying to the Company the full amount of the withholding obligation (i) in cash; (ii) by tendering shares of Common Stock which have been owned by the Optionee for at least six (6) months prior to the date of exercise having a Fair Market Value equal to the withholding obligation (a "Withholding Election"); (iii) by electing, irrevocably and in writing (also a "Withholding Election"), to have the smallest number of whole shares of Common Stock withheld by the Company which, when multiplied by the Fair Market Value of the Common Stock as of the date the Option is exercised, is sufficient to satisfy the amount of

withholding tax; or (iv) by any combination of the above. Optionee may make a Withholding Election only if the following conditions are met:

        (a)   the Withholding Election is made on or prior to the date on which the amount of tax required to be withheld is determined (the "Tax Date") by executing and delivering to the Company a properly completed Notice of Withholding Election in substantially the form attached hereto as Exhibit 4; and

        (b)   any Withholding Election will be irrevocable; however, the Committee (as defined in the Plan) may, in its sole discretion, disapprove and give no effect to the Withholding Election.

        3.    Rights as Shareholder.    Until the stock certificates reflecting the Option Shares accruing to the Optionee upon exercise of the Option are issued to the Optionee, the Optionee shall have no rights as a shareholder with respect to such Option Shares. The Company shall make no adjustment for any dividends or distributions or other rights on or with respect to Option Shares for which the record date is prior to the issuance of that stock certificate, except as the Plan or this Award otherwise provides.

        4.    Restriction on Transfer of Option and Option Shares.    The Option evidenced hereby is nontransferable other than by will or the laws of descent and distribution, and, shall be exercisable during the lifetime of the Optionee only by the Optionee (or in the event of his disability, by his legal representative) and after his death, only by legal representative of the Optionee's estate.

        5.    Changes in Capitalization.

        (a)   The number of Option Shares and the Exercise Price shall be proportionately adjusted in the event of a stock split, reverse stock split, stock dividend, recapitalization, combination, reclassification or other distribution of Common Stock without the receipt of consideration by the Company, of or on Common Stock. The determination of any adjustment made by the Committee pursuant to this Section 5(a) will be final and binding on the Optionee.

        (b)   The existence of the Plan and this Award shall not affect in any way the right or power of the Company to make or authorize any adjustment, reclassification, reorganization or other change in its capital or business structure, any merger or consolidation of the Company, any issue of debt or equity securities having preferences or priorities as to the Common Stock or the rights thereof, the dissolution or liquidation of the Company, any sale or transfer of all or any part of its business or assets, or any other corporate act or proceeding.

        6.    Special Limitations on Exercise.    Any exercise of the Option is subject to the condition that if at any time the Committee, in its discretion, shall determine that the listing, registration or qualification of the shares covered by the Option upon any securities exchange or under any state or federal law is necessary or desirable as a condition of or in connection with the delivery of shares thereunder, the delivery of any or all shares pursuant to the Option may be withheld unless and until such listing, registration or qualification shall have been effected. The Optionee shall deliver to the Company, prior to the exercise of the Option, such information, representations and warranties as the Company may reasonably request in order for the Company to be able to satisfy itself that the Option Shares being acquired in accordance with the terms of an applicable exemption from the securities registration requirements of applicable federal and state securities laws.

        7.    Legend on Stock Certificates.    Certificates evidencing the Option Shares, to the extent appropriate at the time, shall have noted conspicuously on the certificates a legend intended to give all persons full notice of the existence of the conditions, restrictions, rights and obligations set forth in this Award and in the Plan.

        8.    Governing Laws.    This Award shall be construed, administered and enforced according to the laws of the State of California; provided, however, no option may be exercised except, in the reasonable judgment of the Board of Directors, in compliance with exemptions under applicable state securities laws of the state in which the Optionee resides, and/or any other applicable securities laws.

        9.    Successors.    This Award shall be binding upon and inure to the benefit of the heirs, legal representatives, successors and permitted assigns of the parties.

        10.    Notice.    Except as otherwise specified herein, all notices and other communications under this Award shall be in writing and shall be deemed to have been given if personally delivered or if sent by registered or certified United States mail, return receipt requested, postage prepaid, addressed to the proposed recipient at the last known address of the recipient. Any party may designate any other address to which notices shall be sent by giving notice of the address to the other parties in the same manner as provided herein.

        11.    Severability.    In the event that any one or more of the provisions or portion thereof contained in this Award shall for any reason be held to be invalid, illegal or unenforceable in any respect, the same shall not invalidate or otherwise affect any other provisions of this Award, and this Award shall be construed as if the invalid, illegal or unenforceable provision or portion thereof had never been contained herein.

        12.    Entire Agreement.    Subject to the terms and conditions of the Plan, this Award expresses the entire understanding and agreement of the parties. This Award may be executed in two or more counterparts, each of which shall be deemed an original but all of which shall constitute one and the same instrument.

        13.    Violation.    Any transfer, pledge, sale, assignment, or hypothecation of the Option or any portion thereof shall be a violation of the terms of this Award and shall be void and without effect.

        14.    Headings.    Paragraph headings used herein are for convenience of reference only and shall not be considered in construing this Award.

        15.    Specific Performance.    In the event of any actual or threatened default in, or breach of, any of the terms, conditions and provisions of this Award, the party or parties who are thereby aggrieved shall have the right to specific performance and injunction in addition to any and all other rights and remedies at law or in equity, and all such rights and remedies shall be cumulative.

        16.    No Right to Continued Employment.    Neither the establishment of the Plan nor the award of Option Shares hereunder shall be construed as giving the Optionee the right to continued employment by the Company or the continued use of the Optionee's services by the Company.

        17.    Definitions.    As used in these Terms and conditions and this Award,

        (a)   "Cause" means "Cause" as defined in any employment or other agreement between the Optionee and the Company or an Affiliate, or if none, (i) willful and continued failure (other than such failure resulting from his incapacity during physical or mental illness) by the Optionee to substantially perform his duties with the Company or an Affiliate; (ii) willful misconduct by the Optionee; (iii) gross negligence by the Optionee causing material harm to the Company or an Affiliate or; (iv) any act by the Optionee of fraud, misappropriation, dishonesty or embezzlement; (v) commission by the Optionee of a felony or any other crime involving moral turpitude or dishonesty; or (vi) illegal drug use.

        (b)   Other capitalized terms that are not defined herein have the meaning set forth in the Plan, except where the context does not reasonably permit.

EXHIBIT 1

VESTING SCHEDULE
THE ENSIGN GROUP, INC. 2005 STOCK INCENTIVE PLAN

        The Option shall vest as to 20% of the Option Shares on each anniversary of the Grant Date, provided that the Optionee continually remains employed by, or performs services as a director or consultant for, the Company or an Affiliate through such anniversary.

EXHIBIT 2

NOTICE OF EXERCISE OF
STOCK OPTION TO PURCHASE
COMMON STOCK OF
THE ENSIGN GROUP, INC.

Name:	[NAME OF OPTIONEE]
Address:	[REDACTED]
Date:

The Ensign Group, Inc.
27101 Puerta Real, Suite 450
Mission Viejo, CA 92691
Attention: Corporate Secretary

Re: Exercise of Nonqualified Stock Option; Grant No. [GRANT NUMBER]

Dear Sir or Madam:

        Subject to acceptance hereof in writing by The Ensign Group, Inc. (the "Company") pursuant to the provisions of The Ensign Group, Inc. 2005 Stock Incentive Plan, I hereby give at least ten days but not more than thirty days prior notice of my election to exercise options granted to me to purchase            of the [NUMBER OF SHARES] shares of Common Stock of the Company under the Nonqualified Stock Option Award No. [GRANT NUMBER] (the "Award") pursuant to The Ensign Group, Inc. 2005 Stock Incentive Plan dated as of [GRANT DATE]. The purchase shall take place as of                        ,             (the "Exercise Date").

        On or before the Exercise Date, I will pay the applicable purchase price as follows:

o

by delivery of cash or a certified check for $                        for the full purchase price payable to the order of the Company.



o

by delivery of a certified check for $                        representing a portion of the purchase price with the balance to consist of shares of Common Stock that I have owned for at least six months and that are represented by a stock certificate I will surrender to the Company with my endorsement. If the number of shares of Common Stock represented by such stock certificate exceed the number to be applied against the purchase price, I understand that a new stock certificate will be issued to me reflecting the excess number of shares.



o

by delivery of a stock certificate representing shares of Common Stock that I have owned for at least six months which I will surrender to the Company with my endorsement as payment of the purchase price. If the number of shares of Common Stock represented by such certificate exceed the number to be applied against the purchase price, I understand that a new certificate will be issued to me reflecting the excess number of shares.



o

by delivery of the purchase price by                        , a broker, dealer or other "creditor" as defined by Regulation T issued by the Board of Governors of the Federal Reserve System. I hereby authorize the Company to issue a stock certificate in the number of shares indicated above in the name of said broker, dealer or other creditor or its nominee pursuant to instructions received by the Company and to deliver said stock certificate directly to that broker, dealer or other creditor (or to such other party specified in the instructions received by the Company from the broker, dealer or other creditor) upon receipt of the purchase price.

        As soon as the stock certificate is registered in my name, please deliver it to me at the above address.

        If the Common Stock being acquired is not registered for issuance to and resale by the Optionee pursuant to an effective registration statement on Form S-8 (or successor form) filed under the Securities Act of 1933, as amended (the "1933 Act"), I hereby represent, warrant, covenant, and agree with the Company as follows:

        The shares of the Common Stock being acquired by me will be acquired for my own account without the participation of any other person, with the intent of holding the Common Stock for investment and without the intent of participating, directly or indirectly, in a distribution of the Common Stock and not with a view to, or for resale in connection with any distribution of the Common Stock, nor am I aware of the existence of any distribution of the Common Stock;

        I am not acquiring the Common Stock based upon any representation, oral or written, by any person with respect to the future value of, or income from, the Common Stock but rather upon an independent examination and judgment as to the prospects of the Company;

        The Common Stock was not offered to me by means of any publicly disseminated advertisements or sales literature, nor am I aware of any offers made to other persons by such means;

        I am able to bear the economic risks of the investment in the Common Stock, including the risk of a complete loss of my investment therein;

        I understand and agree that the Common Stock will be issued and sold to me without registration under any state law relating to the registration of securities for sale, and will be issued and sold in reliance on the exemptions from registration under the 1933 Act, provided by Sections 3(b) and/or 4(2) thereof and the rules and regulations promulgated thereunder;

        The Common Stock cannot be offered for sale, sold or transferred by me other than pursuant to: (A) an effective registration under the 1933 Act or in a transaction otherwise in compliance with the 1933 Act; and (B) evidence satisfactory to the Company of compliance with the applicable securities laws of other jurisdictions. The Company shall be entitled to rely upon an opinion of counsel satisfactory to it with respect to compliance with the above laws;

        The Company will be under no obligation to register the Common Stock or to comply with any exemption available for sale of the Common Stock without registration or filing, and the information or conditions necessary to permit routine sales of securities of the Company under Rule 144 under the 1933 Act may not now be available and no assurance has been given that it or they will become available. The Company is under no obligation to act in any manner so as to make Rule 144 available with respect to the Common Stock;

        I have and have had complete access to and the opportunity to review and make copies of all material documents related to the business of the Company, including, but not limited to, contracts, financial statements, tax returns, leases, deeds and other books and records. I have examined such of these documents as I wished and am familiar with the business and affairs of the Company. I realize that the purchase of the Common Stock is a speculative investment and that any possible profit therefrom is uncertain;

        I have had the opportunity to ask questions of and receive answers from the Company and any person acting on its behalf and to obtain all material information reasonably available with respect to the Company and its affairs. I have received all information and data with respect to the Company which I have requested and which I have deemed relevant in connection with the evaluation of the merits and risks of my investment in the Company;

        I acknowledge having received from the Company material describing, among other things, the terms of the Plan, my stock Incentive Agreement and some of the risks associated with making an investment in the Common Stock. I have had adequate opportunity to review these materials and ask any questions in connection therewith. The Company has responded to any questions asked to my satisfaction;

        I have such knowledge and experience in financial and business matters that I am capable of evaluating the merits and risks of the purchase of the Common Stock hereunder and I am able to bear the economic risk of such purchase; and

        The agreements, representations, warranties and covenants made by me herein extend to and apply to all of the Common Stock of the Company issued to me pursuant to this Award. Acceptance by me of the certificate representing such Common Stock shall constitute a confirmation by me that all such agreements, representations, warranties and covenants made herein shall be true and correct at that time.

        I understand that the certificates representing the shares being purchased by me in accordance with this notice shall bear a legend referring to the foregoing covenants, representations and warranties and restrictions on transfer, and I agree that a legend to that effect may be placed on any certificate which may be issued to me as a substitute for the certificates being acquired by me in accordance with this notice.

Very truly yours,

[NAME OF OPTIONEE]

AGREED TO AND ACCEPTED:

THE ENSIGN GROUP, INC.

By:

Title:

Number of Shares Exercised:
Number of Shares Remaining:	Date:

EXHIBIT 3

RESTRICTED STOCK AGREEMENT
THE ENSIGN GROUP, INC. 2005 STOCK INCENTIVE PLAN

FORM OF RESTRICTED STOCK AGREEMENT FOR EXECUTIVE OFFICERS AND DIRECTORS
PURSUANT TO
THE ENSIGN GROUP, INC. 2005 STOCK INCENTIVE PLAN

        THIS AGREEMENT is made as of the Option Exercise Date, by The Ensign Group, Inc. (the "Company") to [NAME OF OPTIONEE] (the "Recipient") in connection with the exercise of an option (the "Option") under the Nonqualified Stock Option Award No. [GRANT NUMBER] issued by the Company to the Recipient as of [GRANT DATE] (the "Option Agreement").

        Upon and subject to the Terms and Conditions attached hereto and incorporated herein by reference as part of this Agreement, the Company hereby issues as of the Option Exercise Date to the Recipient the Restricted Shares (the "Restricted Stock Grant") subject to acceptance by the Recipient.

A.

Option Exercise Date:                        .

B.

Plan: (under which Restricted Stock Grant is granted): The Ensign Group, Inc. 2005 Stock Incentive Plan.

C.

Restricted Shares:            shares of the Company's common stock ("Common Stock"), subject to adjustment as provided in the attached Terms and Conditions, reflecting shares of Common Stock issued pursuant to exercise of the Option.

D.

Vesting Schedule: The Restricted Shares shall become vested in accordance with the Vesting Schedule attached hereto as Appendix A. The Restricted Shares which have not become vested pursuant to the Vesting Schedule are referred to herein as the "Non-vested Restricted Shares," and the Restricted Shares which have become vested pursuant to the Vesting Schedule are herein referred to as the "Vested Restricted Shares." Any portion of the Restricted Shares which have not become Vested Restricted Shares at the time of the Recipient's Termination of Employment with the Company shall become Vested Restricted Shares 91 days after the date of the Recipient's Termination of Employment, unless the Company has exercised its "Repurchase Option" (as defined in this Agreement).

        IN WITNESS WHEREOF, the Company and the Recipient have executed this Agreement as of the Option Exercise Date set forth above.

THE ENSIGN GROUP, INC.

By:

Title:

RECIPIENT

[NAME OF OPTIONEE]

TERMS AND CONDITIONS TO THE
RESTRICTED STOCK AGREEMENT
PURSUANT TO
THE ENSIGN GROUP, INC. 2005 STOCK INCENTIVE PLAN

        1.    Restricted Shares Held by the Share Custodian.    The Recipient hereby authorizes and directs the Company to deliver any share certificate issued by the Company to evidence Restricted Shares to the person designated by the management of the Company as the stock plan administrator (the "Share Custodian") to be held by the Share Custodian until the Restricted Shares become Vested Restricted Shares in accordance with the Vesting Schedule. When the Restricted Shares become Vested Restricted Shares, the Share Custodian shall deliver the Restricted Shares to the Recipient. In the event that the Recipient forfeits any of the Restricted Shares, and the number of Vested Restricted Shares includes a fraction of a share, the Share Custodian shall not be required to deliver the fractional share, and the Company may pay the Recipient the amount determined by the Company to be the estimated fair market value therefor. The Recipient hereby irrevocably appoints the Share Custodian, and any successor thereto, as the true and lawful attorney-in-fact of the Recipient with full power and authority to execute any stock transfer power or other instrument necessary to transfer the Restricted Shares to the Company in accordance with this Agreement, in the name, place, and stead of the Recipient. The term of such appointment shall commence on the Option Exercise Date and shall continue until the Restricted Shares are delivered to the Recipient as provided above. During the period that the Share Custodian holds the shares of Common Stock subject to this Section 1, the Recipient shall be entitled to all rights applicable to shares of Common Stock not so held. In the event of an adjustment to the Restricted Shares pursuant to Section 7(a), or otherwise, the Recipient agrees that any certificate representing shares of Common Stock or other securities of the Company issued as a result of any of the foregoing shall be delivered to the Share Custodian and shall be subject to all of the provisions of this Agreement as if initially granted thereunder. To effect the provisions of this Section, the Recipient shall complete an irrevocable stock power in favor of the Share Custodian in the form attached hereto as Appendix B.

        2.    Tax Withholding.

        (a)   The Recipient must deliver to the Company, within ten (10) days after written notification from the Company as to the amount of the tax withholding that is due, either (i) cash, or (ii) a certified check payable to the Company, in the amount of all tax withholding obligations imposed on the Company by reason of any Restricted Shares becoming Vested Restricted Shares or by reason of the Participant making an election pursuant to Section 83(b) of the Internal Revenue Code (an "83(b) Election") of Common Stock issuable hereunder, except as provided in Section 2(b), or (iii) by tendering a number of whole shares of Common Stock which, when multiplied by the Fair Market Value of the Common Stock on the date the Common Stock is issuable to the Recipient, is sufficient to satisfy the minimum amount of the required tax withholding obligations imposed on the Company (the "Stock Tendering Election"); provided, however, the Committee may in its sole discretion, disapprove and give no effect to the Stock Tendering Election by giving written notice to the Recipient within ten (10) days after receipt of the Stock Tendering Election, in which event the Recipient must deliver, within ten (10) days after receiving such notice, the tax withholding in the manner provided in clause (i) or (ii). If the Recipient does not timely satisfy payment of the tax withholding obligation, the Recipient will forfeit the Restricted Shares to which such tax withholding relates. A form of 83(b) Election, along with an accompanying memorandum, is attached hereto as Appendix C.

        (b)   If the Recipient does not make an 83(b) Election, in lieu of paying the tax withholding obligation as described in Section 2(a), the Recipient may elect to have the actual number of Vested Restricted Shares reduced by the number of whole shares of Common Stock which, when multiplied by the Fair Market Value of the Common Stock on the date the Restricted Shares become Vested Restricted Shares, is sufficient to satisfy the minimum amount of the required tax obligations imposed on the Company by reason of the Restricted Shares becoming Vested

Restricted Shares (the "Withholding Election"). The Recipient may make a Withholding Election only if all of the following conditions are met:

          (i)  the Withholding Election must be made within ten (10) days after the Recipient receives written notification from the Company as to the amount of the tax withholding that is due (the "Tax Notice Date"), by executing and delivering to the Company a properly completed Notice of Withholding Election, in substantially the form of Appendix D attached hereto; and

         (ii)  any Withholding Election made will be irrevocable; however, the Committee may, in its sole discretion, disapprove and give no effect to any Withholding Election, by giving written notice to the Recipient no later than ten (10) days after the Company's receipt of the Notice of Withholding Election, in which event the Recipient must deliver to the Company, within ten (10) days after receiving such notice, the amount of the tax withholding pursuant to Section 2(a).

        3.    Market Stand-Off Agreement.    The Recipient hereby agrees that, during the period specified by the Company and the underwriter or underwriters of the initial public offering of Stock, following the effective date of a registration statement of the Company filed under the Securities Act of 1933, as amended (the "1933 Act"), the Recipient shall not, to the extent requested by the Company and such underwriter, directly or indirectly, sell, offer or contract to sell (including, without limitation, any short sale), grant any option to purchase or otherwise transfer or dispose of (other than to donees, who agree to be similarly bound) any securities of the Company at any time during such period except stock included in such registration. In order to enforce the foregoing covenant, the Recipient hereby agrees to be bound by any stop-transfer instructions imposed by the Company with respect to Restricted Shares until the end of such period.

        4.    Repurchase Option.

        (a)   In the event of the Recipient's Termination of Employment, then the Company may exercise its Repurchase Option described below. A leave of absence (regardless of the reason therefor) shall be deemed to constitute a Termination of Employment by the Recipient, unless such leave is authorized by the Company in writing and the Recipient returns to work within the time specified in such authorization or in any amendment thereto or such leave of absence is mandated by federal or state law and the Recipient returns to work within the time required by such law. If such leave is authorized by the Company in writing or mandated by federal or state law and the Recipient fails to return to work when required above, the date the Recipient fails to return to work will be deemed to be the date of Termination of Employment of the Recipient.

        (b)   The Company may, at any time within ninety (90) days after the Recipient's Termination of Employment, purchase all or any of the Non-vested Restricted Shares from the holder thereof (the "Repurchase Option") at the Exercise Price per share paid pursuant to the terms of the Option (the "Repurchase Price"). The Repurchase Option, if exercised by the Company, shall be exercised by written notice signed by an officer of the Company and delivered to the Recipient. The Company may pay for the Restricted Shares it has elected to repurchase (i) by delivery of a check in the amount of the Repurchase Price for the Non-vested Restricted Shares being repurchased, (ii) by cancellation by the Company of an amount of the Recipient's indebtedness to the Company, or (iii) by a combination of (i) and (ii) so that the combined payment and cancellation of indebtedness equals the Repurchase Price.

        (c)   In the event the Company for any reason elects not to exercise its Repurchase Option, the Company may assign its Repurchase Option, provided that the Repurchase Option shall not extend beyond the ninety (90) days described herein. If exercised by an assignee or assignees, the Repurchase Option shall be exercised by written notice signed by the exercising assignee(s) and delivered or mailed to the Recipient. Such assignees shall pay for the Non-vested Restricted Shares they have elected to purchase by delivery of a check in the amount of the Repurchase Price to the holder thereof.

        (d)   In the event that the Company or an assignee does not elect to exercise the Repurchase Option as to any of the Restricted Shares subject to it within the time allotted therefor, the Repurchase Option shall expire as to such shares as the Company and/or its assignees have not elected to purchase.

        5.    Restrictions on Transfer of Restricted Shares.

        (a)    Restricted Shares.    Except for the transfer of any Restricted Shares by bequest or inheritance, the Recipient shall not have the right to make or permit to exist any transfer or hypothecation, whether outright or as security, with or without consideration, voluntary or involuntary, of all or any part of any right, title or interest in any Vested Restricted Shares except as provided in Section 5(b) herein, or in any Non-vested Restricted Shares. Any such disposition not made in accordance with this Agreement shall be deemed null and void. Any permitted transferee under this Section shall be bound by the terms of this Agreement to the same extent as the Recipient would if the Recipient had retained the Restricted Shares.

        (b)    First Refusal Rights.    The Recipient may transfer Vested Restricted Shares to a bona fide third party offeror subject to this Section 5(b). At least 60 days prior to making any transfer of Vested Restricted Shares, the Recipient will deliver a written notice (the "Sale Notice") to the Company. The Sale Notice will disclose in reasonable detail the identity of the prospective transferee(s) and the terms and conditions of the proposed transfer. The Company may elect to purchase all (but not less than all) of the Vested Restricted Shares to be transferred upon the same terms and conditions as those set forth in the Sale Notice (or if the consideration set forth in the Sale Notice is other than cash, then the Company may pay cash in lieu of such consideration) by delivering a written notice of such election to the Recipient within 30 days after the receipt of the Sale Notice by the Company and by completing the purchase by tendering the consideration to the Recipient within 60 days of the Company's receipt of the Sale Notice or such longer period as is offered by the bona fide third party offeror. The Company may assign its rights in this Section 5(b). If the Company does not elect to purchase all of the Vested Restricted Shares specified in the Sale Notice or does not assign its rights, the Recipient may transfer during the 180-day period immediately following the delivery of the Sale Notice, the Vested Restricted Shares specified in the Sale Notice to the transferee(s) identified in the Sale Notice at a price and on terms no more favorable to the transferee(s) than specified in the Sale Notice. Any Vested Restricted Shares not transferred to the transferee(s) identified in the Sale Notice within such 180-day period will be subject to the provisions of this Section 5(b) upon subsequent transfer.

        (c)   The Company's rights under Section 5(b) shall terminate upon any offering by the Company of its equity securities to the public pursuant to an effective registration statement under the 1933 Act or any comparable statement under any similar federal statute then in force in which the equity securities are sold (a "Qualified IPO"), provided that a Qualified IPO shall not include an offering made in connection with a business acquisition or combination or an employee benefit plan.

        6.    Additional Restrictions on Transfer.

        In addition to any legends required under applicable securities laws or otherwise determined by the Company to be appropriate, the certificates representing the Restricted Shares shall be endorsed with the following legend and the Recipient shall not make any transfer of the Restricted Shares without first complying with the restrictions on transfer described in such legend.

TRANSFER IS RESTRICTED

THE SECURITIES EVIDENCED BY THIS CERTIFICATE ARE SUBJECT TO RESTRICTIONS ON TRANSFER AND FORFEITURE PROVISIONS WHICH ALSO APPLY TO THE TRANSFEREE AS SET FORTH IN A RESTRICTED STOCK AGREEMENT DATED             , A COPY OF WHICH IS AVAILABLE FROM THE COMPANY.

THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO DISTRIBUTION OR RESALE, AND MAY NOT BE TRANSFERRED UNLESS AN EFFECTIVE REGISTRATION STATEMENT FOR SUCH SHARES UNDER THE SECURITIES ACT OF 1933 AS AMENDED, IS THEN IN EFFECT; OR PURSUANT TO RULE 144; OR A WRITTEN OPINION TO THE ISSUER FROM LEGAL COUNSEL SATISFACTORY TO THE ISSUER IS OBTAINED TO THE EFFECT THAT AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND ANY APPLICABLE STATE SECURITIES LAWS IS AVAILABLE WITH RESPECT TO THE PROPOSED SALE OR TRANSFER AND THAT NO SUCH REGISTRATION IS REQUIRED.

        Unless otherwise agreed to in writing by the Company the obligation to furnish any such foregoing legal opinion will be the obligation of the Recipient and the cost of such opinion shall not be borne by the Company.

        7.    Change in Capitalization.

        (a)   The number and kind of Restricted Shares shall be proportionately adjusted in the event of a stock split, reverse stock split, stock dividend, recapitalization, combination, reclassification or other distribution of Common Stock without receipt of consideration by the Company, of or on Common Stock. The determination of any adjustment made by the Committee pursuant to this Section 7(a) will be final and binding on the Optionee. No fractional shares shall be issued in making such adjustment.

        (b)   The existence of the Plan and this Agreement shall not affect the right or power of the Company to make or authorize any adjustment, reclassification, reorganization or other change in its capital or business structure, any merger or consolidation of the Company, any issue of debt or equity securities having preferences or priorities as to the Common Stock or the rights thereof, the dissolution or liquidation of the Company, any sale or transfer of all or part of its business or assets, or any other corporate act or proceeding.

        8.    Governing Laws.    This Agreement shall be construed, administered and enforced according to the laws of the State of California; provided, however, no Restricted Shares shall be issued except, in the reasonable judgment of the Committee, in compliance with exemptions under applicable state securities laws of the state in which the Recipient resides, and/or any other applicable securities laws.

        9.    Successors.    This Agreement shall be binding upon and inure to the benefit of the heirs, legal representatives, successors, and permitted assigns of the parties.

        10.    Notice.    Except as otherwise specified herein, all notices and other communications under this Agreement shall be in writing and shall be deemed to have been given if personally delivered or if sent by registered or certified United States mail, return receipt requested, postage prepaid, addressed to the proposed recipient at the last known address of the recipient. Any party may designate any other address to which notices shall be sent by giving notice of the address to the other parties in the same manner as provided herein.

        11.    Severability.    In the event that any one or more of the provisions or portion thereof contained in this Agreement shall for any reason be held to be invalid, illegal, or unenforceable in any respect, the same shall not invalidate or otherwise affect any other provisions of this Agreement, and this Agreement shall be construed as if the invalid, illegal or unenforceable provision or portion thereof had never been contained herein.

        12.    Entire Agreement.    Subject to the terms and conditions of the Plan, this Agreement expresses the entire understanding and agreement of the parties with respect to the subject matter.

        13.    Headings and Capitalized Terms.    Paragraph headings used herein are for convenience of reference only and shall not be considered in construing this Agreement. Capitalized terms used, but not defined, in this Agreement shall be given the meaning ascribed to them in the Plan.

        14.    Specific Performance.    In the event of any actual or threatened default in, or breach of, any of the terms, conditions and provisions of this Agreement, the party or parties who are thereby aggrieved shall have the right to specific performance and injunction in addition to any and all other rights and remedies at law or in equity, and all such rights and remedies shall be cumulative.

        15.    No Right to Continued Retention.    Neither the establishment of the Plan nor the award of Restricted Shares hereunder shall be construed as giving the Recipient the right to continued service with the Company or an Affiliate.

APPENDIX A

VESTING SCHEDULE
THE ENSIGN GROUP, INC. 2005 STOCK INCENTIVE PLAN

Vesting Schedule

        The Restricted Shares shall become Vested Restricted Shares at a rate of 20% of the Restricted Shares on each anniversary of the Grant Date (as defined in the Option Agreement) of the Option, provided that the Recipient continually remains employed by, or performs services as a director or consultant for, the Company or an Affiliate through such anniversary.

APPENDIX B

IRREVOCABLE STOCK POWER

        The undersigned hereby assigns and transfers to The Ensign Group, Inc. (the "Company"),            shares of the Common Stock of the Company registered in the name of the undersigned on the stock transfer records of the Company and represented by Stock Certificate No.                        of the Company; and the undersigned does hereby irrevocably constitute and appoint                        , his attorney-in-fact, to transfer the aforesaid shares on the books of the Company, with full power of substitution; and the undersigned does hereby ratify and confirm all that said attorney-in-fact lawfully shall do by virtue hereof.

Date:		Signed:
		Print Name:
IN THE PRESENCE OF:
	(Print Name)
	(Signature)

APPENDIX C

83(B) ELECTION FORM AND MEMO

ELECTION TO INCLUDE VALUE OF RESTRICTED PROPERTY IN GROSS INCOME IN YEAR OF TRANSFER UNDER CODE SECTION 83(b)

        The undersigned hereby elects to be taxed pursuant to Section 83(b) of the Internal Revenue Code of 1986, as amended, with respect to the property described below and supplies the following information in accordance with the regulations promulgated thereunder:

1.

The name, address and taxpayer identification number of the undersigned are:

        [NAME OF OPTIONEE]            

        [REDACTED]                        

        Taxpayer I.D. No. [REDACTED]

2.

Description of property with respect to which the election is being made:
[                        ] shares of common stock of The Ensign Group, Inc.; Grant No. [GRANT NUMBER]

3.

The date on which property was transferred is                        , 2000  .
The taxable year to which this election relates is the calendar year 200  .

4.

The nature of the restriction(s) to which the property is subject is:
The shares become vested after      years of service from the grant of the option pursuant to which the common stock of The Ensign Group, Inc. was acquired by exercising such option. Until such shares become vested, The Ensign Group, Inc. has the right to buy back the share at the option exercise price per share paid by the taxpayer. While the property is subject to these restrictions, it is also non-transferable in the taxpayer's hands.

5.

Fair market value:
The fair market value at time of transfer (determined without regard to any restrictions other than restrictions which by their terms will never lapse) of the property with respect to which this election is being made is $        per share, or $            for all the shares purchased.

6.

Amount paid for property:
The amount paid by taxpayer for said property is $[EXERCISE PRICE] per share, or $            for all the shares awarded.

7.

Furnishing statement to the person for whom services are performed:
A copy of this statement has been furnished to The Ensign Group, Inc.

Dated:
	[NAME OF OPTIONEE]

MEMORANDUM

To:	[NAME OF OPTIONEE]
From:	The Ensign Group, Inc.
Re:	Section 83(b) election; Grant No. [GRANT NUMBER]

        Attached is a form on which you can make an election for immediate taxation under Section 83(b) of the Internal Revenue Code of 1986, as amended (the "Code") with respect to any nonvested common stock of The Ensign Group, Inc. (the "Company") that you have acquired by exercising an option under a Nonqualified Stock Option Award (the "Option Award") and executing a Restricted Stock Agreement under The Ensign Group, Inc. 2005 Stock Incentive Plan. You do not need to make an election under Section 83(b) as to any common stock that is vested when you have acquired it.

        To qualify for a Section 83(b) election, you must file the election with the Internal Revenue Service ("IRS") within 30 days of the Option Exercise Date (pursuant to the Restricted Stock Agreement).

        If you make a timely Code Section 83(b) election, your tax on the award will be determined based on the excess of the value of the nonvested stock you have acquired over the option exercise price you paid. The following steps must be completed for you to make a timely Code Section 83(b) election:

1.

The attached election form should be completed with your name and address. Your social security number should be provided in the space labeled "Taxpayer I.D. No." and the election form should be dated and signed.



2.

The election form should be mailed to the IRS bearing a postmark no later than 30 days after the issuance date (as indicated on the Restricted Stock Agreement). The election form should be mailed to the same IRS Center where your tax returns are filed.



3.

A copy of the election form must be sent to the Company at the following address:

        The Ensign Group, Inc.
        27101 Puerta Real, Suite 450
        Mission Viejo, CA 92691
        Attention: Corporate Secretary

4.

A copy of the election form should be included with your income tax return for the calendar year in which the Option Exercise Date occurred.

        A recipient of nonvested stock has a choice on how he or she wishes to be taxed. Under the normal rules, an individual will be taxed when the stock vests. At the time of vesting, the then current value of the shares is includable in the individual's ordinary income. Alternatively, an individual can make an election under Code Section 83(b) to include the excess of the value of the nonvested stock on the Option Exercise Date over the option exercise price in ordinary income in the year of receipt. The main advantage of this election is that only the excess of the current value of the stock over the option exercise price will be taxed at ordinary income rates, while all appreciation in the shares after they are issued will be considered capital gain, which is taxed at a reduced rate if the stock is held for longer than one year. To obtain the Company's determination of the fair market value per share as of the Option Exercise Price, please contact Greg Stapley, Counsel, at 27101 Puerta Real, Suite 450, Mission Viejo, CA 92691 or (949) 487-9500 (although this determination is not binding on the IRS). Your option exercise price is set forth in your Option Award.

        The potential disadvantage of the Code Section 83(b) election is that taxes are owed sooner, rather than later. Additionally, if the shares are subsequently forfeited, you will not be entitled to a loss deduction for tax purposes. Of course, if the fair market value of the stock and the option exercise price are the same, neither of these features is a disadvantage.

APPENDIX D

NOTICE OF WITHHOLDING ELECTION
PURSUANT TO THE ENSIGN GROUP, INC.
2005 STOCK INCENTIVE PLAN

TO:	The Ensign Group, Inc. 27101 Puerta Real, Suite 450 Mission Viejo, CA 92691 Attn: Corporate Secretary
FROM:	[NAME OF OPTIONEE]
RE:	Withholding Election; Grant No. [GRANT NUMBER]

        This election relates to the Restricted Shares identified in Paragraph 3 below. I hereby certify that:

(1)

My correct name and social security number and my current address are set forth at the end of this document.

(2)

I am (check one, whichever is applicable).

        [    ] the original recipient of the Restricted Shares.

        [    ] the legal representative of the estate of the original recipient of the Restricted Shares.

        [    ] a legatee of the original recipient of the Restricted Shares.

        [    ] the legal guardian of the original recipient of the Restricted Shares.

(3)

The Restricted Shares pursuant to which this election relates were issued with an Option Exercise Date of                        under The Ensign Group, Inc. Stock Incentive Plan (the "Plan") in the name of [NAME OF OPTIONEE] for a total of                        shares of Common Stock. This election relates to            Restricted Shares, provided that the numbers set forth above shall be deemed changed as appropriate to reflect stock splits and other adjustments contemplated by the applicable Plan provisions.

(4)

I hereby elect:

[    ] to have certain of the Restricted Shares withheld by the Company for the purpose of having the value of the shares applied to pay federal, state and local, if any, taxes arising from the exercise.

[    ] to tender shares of Common Stock held by me for a period of at least six (6) months prior to the Restricted Shares becoming Vested Restricted Shares for the purpose of having the value of the shares applied to pay any federal, state, and local, if any, taxes arising from the exercise.

(5)

This Withholding Election is made no later than ten (10) days after the Tax Notice Date and is otherwise timely made pursuant to the Plan.

(6)

I further understand that, if this Withholding Election is not disapproved by the Committee, the Company shall withhold from the Common Stock a whole number of shares of Common Stock having the value specified in Paragraph 4 above.

(7)

The Plan has been made available to me by the Company, I have read and understand the Plan and I have no reason to believe that any of the conditions therein to the making of this Withholding Election have not been met. Capitalized terms used in this Notice of Withholding Election without definition shall have the meanings given to them in the Plan.

Dated:

Signature:

Name (Printed)

Street Address

City, State, Zip Code

EXHIBIT 4

NOTICE OF WITHHOLDING ELECTION
THE ENSIGN GROUP, INC. 2005 STOCK INCENTIVE PLAN

TO:	The Ensign Group, Inc. 27101 Puerta Real, Suite 450 Mission Viejo, CA 92691 Attn: Corporate Secretary
FROM:	[NAME OF OPTIONEE]
RE:	Withholding Election; Grant No. [GRANT NUMBER]

        This election relates to the Option identified in Paragraph 3 below. I hereby certify that:

(1)

My correct name and social security number and my current address are set forth at the end of this document.

(2)

I am (check one, whichever is applicable).

        [    ] the original recipient of the Option.

        [    ] the legal representative of the estate of the original recipient of the Option.

        [    ] the legal guardian of the original recipient of the Option.

(3)

The Option to which this election relates was issued under The Ensign Group, Inc. 2005 Stock Incentive Plan (the "Plan") in the name of [NAME OF OPTIONEE] for the purchase of a total of [NUMBER OF SHARES] shares of Common Stock of the Company. This election relates to [NUMBER OF SHARES] shares of Common Stock issuable upon exercise of the Option, provided that the numbers set forth above shall be deemed changed as appropriate to reflect the applicable Plan provisions.

(4)

In connection with any exercise of the Option with respect to the Common Stock, I hereby elect:

[    ] to have certain of the shares issuable pursuant to the exercise withheld by the Company for the purpose of having the value of the shares applied to pay federal, state, and local, if any, taxes arising from the exercise.

[    ] to tender shares held by me for a period of at least six (6) months prior to the exercise of the Option for the purpose of having the value of the shares applied to pay such taxes.

The shares to be withheld or tendered, as applicable, in addition to $            in cash to be tendered to the Company by the Optionee shall have, as of the Tax Date applicable to the exercise, a Fair Market Value equal to the minimum statutory tax withholding requirement under federal, state, and local law in connection with the exercise.

(5)

This Withholding Election is made no later than the Tax Date and is otherwise timely made pursuant to the Plan.

(6)

I understand that this Withholding Election may not be revised, amended or revoked by me.

(7)

The Plan has been made available to me by the Company. I have read and understand the Plan and I have no reason to believe that any of the conditions to the making of this Withholding Election have not been met.

(8)

Capitalized terms used in this Notice of Withholding Election without definition shall have the meanings given to them in the Plan.

Dated:
	Signature
Social Security Number	Name (Printed)
	Street Address
	City, State, Zip Code

SCHEDULE OF MATERIAL DIFFERENCES

GRANT NUMBER	NAME OF OPTIONEE	GRANT DATE	NUMBER OF SHARES	EXERCISE PRICE
1	Alan John Norman	November 1, 2005	30,000	$	5.75
47	Alan John Norman	July 26, 2006	5,000	$	7.50
31	Antoinette T. Hubenette	November 1, 2005	10,000	$	5.75
27	Barry Port	November 1, 2005	10,000	$	5.75
45	Barry Port	July 26, 2006	8,000	$	7.50
72	Barry Port	July 26, 2006	51,000	$	7.50
29	Charles M. Blalack	November 1, 2005	10,000	$	5.75
2	Cory R. Monette	November 1, 2005	25,000	$	5.75
68	Cory R. Monette	July 26, 2006	40,000	$	7.50
12	David M. Sedgwick	November 1, 2005	20,000	$	5.75
40	David M. Sedgwick	July 26, 2006	19,000	$	7.50
67	David M. Sedgwick	July 26, 2006	2,500	$	7.50
9	John Albrechtsen	November 1, 2005	20,000	$	5.75
51	John Albrechtsen	July 26, 2006	43,000	$	7.50
11	Michael C. Dalton	November 1, 2005	20,000	$	5.75
48	Michael C. Dalton	July 26, 2006	5,000	$	7.50
50	Michael C. Dalton	July 26, 2006	40,000	$	7.50
30	Thomas A. Maloof	November 1, 2005	10,000	$	5.75

EX-10.8

Exhibit 10.8

Loan Nos. 07-0004261
07-0024261
07-0034261
07-0044261

CONSOLIDATED, AMENDED AND RESTATED
PROMISSORY NOTE

$64,692,111.67 December 29, 2006

1.    Promise to Pay.

        FOR VALUE RECEIVED, SKY HOLDINGS AZ LLC, TERRACE HOLDINGS AZ LLC, ENSIGN HIGHLAND LLC, VALLEY HEALTH HOLDINGS LLC, PLAZA HEALTH HOLDINGS LLC, RILLITO HOLDINGS LLC, MOUNTAINVIEW COMMUNITYCARE LLC, MEADOWBROOK HEALTH ASSOCIATES LLC, CEDAR AVENUE HOLDINGS LLC and GRANADA INVESTMENTS LLC, each a Nevada limited liability company (each a "Borrower" and collectively the "Borrowers"), whose address is 27101 Puerta Real, Suite 450, Mission Viejo, California 92691, promise to pay to the order of GENERAL ELECTRIC CAPITAL CORPORATION, INC., a Delaware corporation, and its successors and assigns (in its individual capacity, "GECC", and as agent for Lenders (as defined below), "Agent"), the sum of Sixty Four Million Six Hundred Ninety Two Thousand One Hundred Eleven and 67/100th Dollars ($64,692,111.67), together with all other amounts added thereto pursuant to this Note or otherwise payable to GECC under the Loan Documents (as hereinafter defined), including, but not limited to, any Prepayment Premium as defined and set forth in the Loan Agreement (as hereinafter defined) (or so much thereof as may from time to time be outstanding), together with interest thereon as hereinafter set forth, all payable in lawful money of the United States of America. Payments shall be made at the offices of Agent at GEMSA, File 59229, Los Angeles, California 90074-9229 (or such other address as Agent may hereafter designate in writing to Borrowers). Except as otherwise provided herein, capitalized terms used in this Note shall have the same meanings as are assigned to such terms in the Loan Agreement.

        This Note is secured by, among other things, those certain Security Documents encumbering, among other things, the Projects. This Note, the Security Documents, the Third Amended and Restated Loan Agreement of even date herewith among GECC and the other financial institutions who are or hereafter become parties to the Third Amended and Restated Loan Agreement (together with GECC, collectively or individually, as the context may require, "Lender"), Borrowers and Agent (as amended from time to time, the "Loan Agreement") and any other documents evidencing or securing the Loan or executed by any Person in connection therewith on or after the date hereof, and any modification, renewal or extension of any of the foregoing are collectively called the "Loan Documents". Reference is hereby made to the Loan Agreement for a statement of all of the terms and conditions under which the Loan evidenced hereby is made and to be repaid.

2.    Payments.

        The principal amount of the indebtedness evidenced hereby shall be payable in the amounts and on the dates specified in the Loan Agreement, the terms of which are hereby incorporated herein by reference. Interest thereon shall be paid until such principal amount is paid in full at such interest rates and at such times, and pursuant to such calculations, as are specified in the Loan Agreement. If any payment on this Note becomes due and payable on a day other than a Business Day, the maturity thereof shall be extended to the next succeeding Business Day, and, with respect to payments of principal, interest thereon shall be payable at the then applicable rate during such extension. Payments will be applied in accordance with the term of the Loan Agreement. Borrowers may prepay this Note, if at all, only to the extent permitted by and in accordance with the provisions of the Loan Agreement,

including the payment of any applicable Make Whole Breakage Amount and Prepayment Premium then due.

EXCEPT AS OTHERWISE EXPRESSLY PERMITTED IN THIS NOTE, THE LOAN AGREEMENT OR THE OTHER LOAN DOCUMENTS, MAKERS HEREBY EXPRESSLY (A) WAIVE ANY RIGHTS THEY MAY HAVE UNDER LAW, PURSUANT TO CALIFORNIA CIVIL CODE SECTION 2954.10 OR OTHERWISE, TO PREPAY THIS NOTE, IN WHOLE OR IN PART, WITHOUT PENALTY, UPON ACCELERATION OF THE MATURITY DATE, AND (B) AGREE THAT IF, FOR ANY REASON, A PREPAYMENT OF ALL OR ANY PORTION OF THE PRINCIPAL AMOUNT OF THIS NOTE IS MADE INCLUDING, WITHOUT LIMITATION, UPON OR FOLLOWING ANY ACCELERATION OF THE MATURITY DATE BY AGENT OR LENDER ON ACCOUNT OF ANY DEFAULT BY BORROWERS, INCLUDING, WITHOUT LIMITATION, ANY TRANSFER, DISPOSITION, OR FURTHER ENCUMBRANCE PROHIBITED OR RESTRICTED BY THE LOAN AGREEMENT, THEN BORROWERS SHALL BE OBLIGATED TO PAY CONCURRENTLY WITH SUCH PREPAYMENT THE PREPAYMENT PREMIUM AND/OR THE MAKE WHOLE BREAKAGE AMOUNT, IF ANY, TO THE EXTENT REQUIRED UNDER THE LOAN AGREEMENT. BY INITIALING THIS PROVISION IN THE SPACE PROVIDED BELOW, BORROWERS HEREBY DECLARES THAT (1) LENDER'S AGREEMENT TO MAKE THE LOAN EVIDENCED BY THIS NOTE AT INTEREST RATE AND FOR THE TERM SET FORTH IN THE LOAN AGREEMENT CONSTITUTES ADEQUATE CONSIDERATION FOR THIS WAIVER AND AGREEMENT, AND HAS BEEN GIVEN INDIVIDUAL WEIGHT BY BORROWERS, AGENT AND LENDER, (2) BORROWERS ARE SOPHISTICATED AND KNOWLEDGEABLE REAL ESTATE INVESTORS WITH COMPETENT AND INDEPENDENT LEGAL COUNSEL, AND (3) BORROWERS FULLY UNDERSTAND THE EFFECT OF THIS WAIVER AND AGREEMENT.

INITIALS OF ALAN J. NORMAN ON BEHALF OF EACH BORROWER:

/s/ AN.

3.    Default.

        Upon and after the occurrence of any Event of Default, this Note may, as provided in the Loan Agreement, and without demand, notice or legal process of any kind, be declared, and immediately shall become, due and payable.

4.    APPLICABLE LAW; SEVERABILITY.

        THIS NOTE SHALL BE GOVERNED BY AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF ILLINOIS, WITHOUT REGARD TO CONFLICTS OF LAW PRINCIPLES. THE INVALIDITY, ILLEGALITY OR UNENFORCEABILITY OF ANY PROVISION OF THIS NOTE SHALL NOT AFFECT OR IMPAIR THE VALIDITY, LEGALITY OR ENFORCEABILITY OF THE REMAINDER OF THIS NOTE, AND TO THIS END, THE PROVISIONS OF THIS NOTE ARE DECLARED TO BE SEVERABLE.

5.    Waiver.

        Each Borrower, for itself and all endorsers, guarantors and sureties of this Note, and their heirs, legal representatives, successors and assigns, hereby waives presentment for payment, demand, notice of nonpayment, notice of dishonor, protest of any dishonor, notice of protest and protest of this Note, and all other notices in connection with the delivery, acceptance, performance, default or enforcement of the payment of this Note, and agrees that their respective liability shall be unconditional and without regard to the liability of any other party and shall not be in my manner affected by any indulgence, extension of time, renewal, waiver or modification granted or consented to by Agent. Each Borrower, for itself and all endorsers, guarantors and sureties of this Note, including but not limited to Guarantor

and their respective heirs, legal representatives, successors and assigns, hereby consents to every extension of time, renewal, waiver or modification that may be granted by Agent with respect to the payment or other provisions of this Note, and to the release of any makers, endorsers, guarantors or sureties, and their respective heirs, legal representatives, successors and assigns, and of any collateral given to secure the payment hereof, or any part hereof, with or without substitution, and agrees that additional makers, endorsers, guarantors or sureties and their heirs, legal representatives, successors and assigns, may become parties hereto without notice to Borrowers or to any endorser, guarantor or surety and without affecting the liability of any of them.

6.    Miscellaneous.

        6.1.    Amendments.

        This Note may not be terminated or amended orally, but only by a termination or amendment in writing signed by Agent.

        6.2.    Lawful Rate of Interest.

        In no event whatsoever shall the amount of interest paid or agreed to be paid pursuant to this Note or any of the Loan Documents exceed the highest lawful rate of interest permissible under applicable law. If, from any circumstances whatsoever, fulfillment of any provision of this Note and the other Loan Documents shall involve exceeding the lawful rate of interest which a court of competent jurisdiction may deem applicable hereto ("Excess Interest"), then ipso facto, the obligation to be fulfilled shall be reduced to the highest lawful rate of interest permissible under such law and if, for any reason whatsoever, Agent or Lender shall receive, as interest, an amount which would be deemed unlawful under such applicable law, such interest shall be applied to the Loan (whether or not due and payable), and not to the payment of interest, or refunded to Borrowers if such Loan has been paid in full. No Borrower, Guarantor or any other guarantor, endorser or surety nor any of their respective heirs, legal representatives, successors or assigns shall have any action against Agent or Lender for any damages whatsoever arising out of the payment or collection of any such Excess Interest.

        Borrowers agree to an effective rate of interest that is the rate stated above plus any additional rate of interest resulting from any other charges in the nature of interest paid or to be paid by or on behalf of Borrowers, or any benefit received or to be received by Agent or Lender, in connection with this Note.

        6.3.    Captions.

        The captions of the Paragraphs of this Note are for convenience of reference only and shall not be deemed to modify, explain, enlarge or restrict any of the provisions hereof.

        6.4.    Notices.

        Notices shall be given under this Note in conformity with the terms and conditions of the Loan Agreement.

        6.5.    Joint and Several.

        The obligations of Borrowers under this Note shall be joint and several obligations of Borrowers and of each Borrower, if more than one, and of each Borrower's heirs, personal representatives, successors and assigns.

        6.6.    Time of Essence.

        Time is of the essence of this Note and the performance of each of the covenants and agreements contained herein.

7.    Sale of Loan.

        Agent or Lender, at any time and without the consent of any Borrower, may grant participations in or sell, transfer, assign and convey all or any portion of its right, title and interest in and to the

Loan, this Note, the Security Documents and the other Loan Documents, any guaranties given in connection with the Loan and any collateral given to secure the Loan.

8.    Amendment and Restatement.

        This Note is a consolidation, amendment and restatement of those certain notes made by Sky Holdings AZ LLC, Terrace Holdings AZ LLC, Ensign Highland LLC, Valley Health Holdings LLC, Plaza Health Holdings LLC, Rillito Holdings LLC, Mountainview Communitycare LLC and Meadowbrook Health Associates LLC in favor of GECC, dated as of June 30, 2006 in the aggregate face amount of $47,795,000 (the "Existing Notes") and is being delivered in full substitution for and replacement of the Existing Notes.

        IN WITNESS WHEREOF, Borrowers have executed this Senior Note or has caused the same to be executed by its duly authorized representatives as of the date first set forth above.

BORROWERS:
SKY HOLDINGS AZ LLC, a Nevada limited liability company
By:	The Ensign Group, Inc., a Delaware corporation, its sole member
	By:	/s/  GREGORY K. STAPLEY
	Name:	Gregory K. Stapley
	Its:	Vice President
TERRACE HOLDINGS AZ LLC, a Nevada limited liability company
By:	The Ensign Group, Inc., a Delaware corporation, its sole member
	By:	/s/  GREGORY K. STAPLEY
	Name:	Gregory K. Stapley
	Its:	Vice President
ENSIGN HIGHLAND LLC, a Nevada limited liability company
By:	The Ensign Group, Inc., a Delaware corporation, its sole member
	By:	/s/  GREGORY K. STAPLEY
	Name:	Gregory K. Stapley
	Its:	Vice President

(Signature Page to Consolidated, Amended and Restated Promissory Note)

VALLEY HEALTH HOLDINGS LLC, a Nevada limited liability company
By:	The Ensign Group, Inc., a Delaware corporation, its sole member and manager
	By:	/s/  GREGORY K. STAPLEY
	Name:	Gregory K. Stapley
	Its:	Vice President
PLAZA HEALTH HOLDINGS LLC, a Nevada limited liability company
By:	The Ensign Group, Inc., a Delaware corporation, its sole member and manager
	By:	/s/  GREGORY K. STAPLEY
	Name:	Gregory K. Stapley
	Its:	Vice President
RILLITO HOLDINGS LLC, a Nevada limited liability company
By:	The Ensign Group, Inc., a Delaware corporation, its sole member
	By:	/s/  GREGORY K. STAPLEY
	Name:	Gregory K. Stapley
	Its:	Vice President
MOUNTAINVIEW COMMUNITYCARE LLC, a Nevada limited liability company
By:	The Ensign Group, Inc., a Delaware corporation, its sole member
	By:	/s/  GREGORY K. STAPLEY
	Name:	Gregory K. Stapley
	Its:	Vice President

(Signature Page to Consolidated, Second Amended and Restated Promissory Note)

MEADOWBROOK. HEALTH ASSOCIATES LLC, a Nevada limited liability company
By:	The Ensign Group, Inc., a Delaware corporation, its sole member
	By:	/s/  GREGORY K. STAPLEY
	Name:	Gregory K. Stapley
	Its:	Vice President
CEDAR AVENUE HOLDINGS LLC, a Nevada limited liability company
By:	The Ensign Group, Inc., a Delaware corporation, its sole member
	By:	/s/  GREGORY K. STAPLEY
	Name:	Gregory K. Stapley
	Its:	Vice President
GRANADA INVESTMENTS LLC, a Nevada limited liability company
By:	The Ensign Group, Inc., a Delaware corporation, its sole member
	By:	/s/  GREGORY K. STAPLEY
	Name:	Gregory K. Stapley
	Its:	Vice President

        GECC hereby consents and agrees to the terms of this Note.

GENERAL ELECTRIC CAPITAL CORPORATION a Delaware corporation
By:	/s/  JIM MCMAHON
Name:	Jim McMahon
Its:	Vice President & Duly Authorized Signatory

(Signature Page to Consolidated, Second Amended and Restated Promissory Note)

EX-10.9

Exhibit 10.9

No. 07-0004261,
07-0024261,
07-0034261,
07-0044261

THIRD AMENDED AND RESTATED GUARANTY OF PAYMENT AND PERFORMANCE

        THIS THIRD AMENDED AND RESTATED GUARANTY OF PAYMENT AND PERFORMANCE dated as of the 29th day of December, 2006 (the "Guaranty") is made by THE ENSIGN GROUP, INC., a Delaware corporation ("Guarantor"), in favor of GENERAL ELECTRIC CAPITAL CORPORATION, a Delaware corporation (in its individual capacity, "GECC" and as agent for Lenders, "Agent"), as Agent.

RECITALS

        A.    Financial Accommodations.    SKY HOLDINGS AZ LLC, TERRACE HOLDINGS AZ LLC, ENSIGN HIGHLAND LLC, VALLEY HEALTH HOLDINGS LLC, PLAZA HEALTH HOLDINGS LLC, RILLITO HOLDINGS LLC, MOUNTAINVIEW COMMUNITYCARE LLC, MEADOWBROOK HEALTH ASSOCIATES LLC, CEDAR AVENUE HOLDINGS LLC and GRANADA INVESTMENTS LLC, each a Nevada limited liability company, (each a "Borrower" and collectively the "Borrowers") are concurrently herewith entering into that certain Third Amended and Restated Loan Agreement (as it may be amended from time to time, the "Loan Agreement") of even date herewith among Borrowers, Agent, GECC and the other financial institutions who are or hereafter become parties to the Loan Agreement as a Lender (together with GECC, collectively or individually, as the context may require, ("Lender"), pursuant to which Lender shall extend financial accommodations to Borrowers. The Loan (as defined in the Loan Agreement) is an amendment and restatement of an existing loan facility made by GECC to certain of the Borrowers (the "Existing Loan"). In connection with the Existing Loan, Guarantor executed that certain Second Amended and Restated Guaranty of Payment and Performance dated as of June 30, 2006 in favor of Agent (the "Existing Guaranty"). This Guaranty restates and supersedes the Existing Guaranty in its entirety.

        B.    Inducement.    To induce Lender and Agent to enter into the Loan Agreement and to induce Lender to extend to Borrowers the financial accommodations set forth in the Loan Agreement, Guarantor has agreed to enter into this Guaranty, Guarantor acknowledging that without this Guaranty, Lender would be unwilling to make the Loan (as defined in this Loan Agreement).

AGREEMENTS

        NOW, THEREFORE, in consideration of the foregoing, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Guarantor hereby agrees as follows:

        1.    DEFINED TERMS.    All capitalized terms used herein and not otherwise defined shall have the meanings assigned to such terms in the Loan Agreement.

        2.    THE GUARANTY

        2.1.    Guaranty of Obligations.    Guarantor unconditionally and absolutely guarantees to Lender and Agent the full and prompt payment and performance when due, whether at maturity or earlier, by reason of acceleration or otherwise, and at all times thereafter, of the indebtedness, liabilities and obligations of every kind and nature of Borrowers to Lender and Agent arising under or in any way relating to the Loan Agreement or any of the other Loan Documents, howsoever created, incurred or evidenced, whether direct or indirect, absolute or contingent, now or hereafter existing, due or to become due, and howsoever owned, held or acquired by Lender and/or Agent including but not limited to repayment of the Loan, the Make Whole Breakage

Amount and the Prepayment Premium (collectively, the "Obligations"). Without limitation to the foregoing, the Obligations shall include (a) all attorneys' and paralegals' fees, including the cost of in-house attorneys and paralegals, costs and expenses and all court costs and costs of appeal incurred by Lender or Agent in collecting any amount due Lender or Agent under this Guaranty or in prosecuting any action against any Borrower, Guarantor or any other guarantor with respect to all or any part of the Obligations (collectively, the "Enforcement Costs"), and (b) all interest, fees, costs and expenses due Lender and/or Agent after the filing of a bankruptcy petition by or against any Borrower regardless of whether such amounts can be collected during the pendency of the bankruptcy proceedings.

        2.2.    Continuing Guaranty; Guaranty of Payment.    This Guaranty is a continuing guaranty of the Obligations, and Guarantor agrees that the obligations of Guarantor to Lender and Agent hereunder shall be primary obligations, shall not be subject to any counterclaim, set-off, abatement, deferment or defense based upon any claim that Guarantor may have against Lender, Agent, any Borrower or any other Person. Guarantor shall be regarded, and shall be in the same position, as the principal debtors with respect to the Obligations. Guarantor agrees that any notice or directive given at any time to Agent or Lender which is inconsistent with the first sentence of this Section 2.2 shall be null and void and may be ignored by Agent and Lender, and, in addition, may not be pleaded or introduced as evidence in any litigation relating to this Guaranty for the reason that such pleading or introduction would be at variance with the written terms of this Guaranty, unless Agent and Lender have specifically agreed otherwise in writing.

        2.3.    Liability of Guarantor Not Affected.    This Guaranty shall remain in full force and effect without regard to, and shall not be released, discharged or affected in any way by any circumstances or condition, including, without limitation:

        (a)   the attempt or the absence of any attempt by Lender or Agent to obtain payment or performance by any Borrower or any other guarantor (this being a guaranty of payment and performance and not of collection);

        (b)   Lender's or Agent's delay in enforcing or absence of action to enforce Guarantor's obligations hereunder or of any other party under the Loan Documents, or any prior partial exercise by Lender or Agent of any right or remedy hereunder or under any of the other Loan Documents;

        (c)   the fact that Borrowers are not liable for the payment or performance of the Obligations, or any portion thereof, for any reason whatsoever, Guarantor being liable for the Obligations notwithstanding that Borrowers may not be;

        (d)   any renewal, extension, substitution, modification, settlement, compromise, replacement of or indulgence with respect to, the Obligations, all of which Agent is hereby authorized to make;

        (e)   any sale, exchange, release, surrender or other disposition of, or realization upon, any collateral securing the Obligations, or any amendment, waiver, settlement or compromise of any guaranties of the Obligations, or any other obligation of any Person with respect to the Loan Documents;

        (f)    the acceptance by Lender or Agent of any additional security for the Obligations;

        (g)   the lack of genuineness, validity, regularity or enforceability of or Lender's or Agent's amendment, waiver or consent with respect to, any provision of any instrument evidencing, securing or otherwise relating to the Obligations, or any part thereof, including without limitation, the other Loan Documents;

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        (h)   the existence, value or condition of, or the failure by Lender or Agent to take any steps to perfect, maintain, or enforce, Lender's or Agent's security interests or remedies under the Loan Documents, or to preserve Lender's or Agent's rights to or protect any security or collateral, for the Obligations;

        (i)    any voluntary or involuntary bankruptcy, insolvency, reorganization, arrangement, readjustment, assignment for the benefit of creditors, composition, receivership, liquidation, marshalling of assets and liabilities or similar event or proceedings with respect to any Borrower or any other Person, as applicable, or any of their respective properties (each, an "Insolvency Proceeding"), or any action taken by Lender, Agent, any trustee or receiver or by any court in any such proceeding;

        (i)    the failure by Lender or Agent to file or enforce a claim against the estate (either in an Insolvency Proceeding or other proceeding) of any Borrower or any other Person;

        (k)   in any proceeding under Title 11 of the United States Code (11 U.S.C. Section 101 et seq.), as amended (the "Bankruptcy Code"): (i) any election by Lender or Agent under Section 1111 (b) (2) of the Bankruptcy Code, (ii) any borrowing or grant of a security interest by any Borrower as debtor-in-possession under Section 364 of the Bankruptcy Code, (iii) the inability of Lender or Agent to enforce the Obligations against any Borrower by application of the automatic stay provisions of Section 362 of the Bankruptcy Code, or (iv) the disallowance, under Section 502 of the Bankruptcy Code, of all or any portion of Lender's or Agent's claim(s) against any Borrower for repayment of the Obligations;

        (j)    the failure of Guarantor to receive notice of any intended disposition of the collateral for the Obligations;

        (m)  any merger or consolidation of any Borrower into or with any other entity, or any sale, lease or transfer of any of the assets of any Borrower to any other Person;

        (n)   any change in the ownership of any Borrower, or any change in the relationship between any Borrower and Guarantor or any termination of any such relationship;

        (o)   the death, incapacity, insanity, disability, dissolution or other change in status of any Borrower,

        (p)   the making of additional loans to Borrowers, the increase or reduction of the maximum principal amount of the Obligations, the increase or reduction in the interest rate provided in the Notes, or any other modification, amendment, release or waiver of the terms of the Loan Documents;

        (q)   the absence, impairment or loss of any right of reimbursement or subrogation or other right or remedy of Guarantor; and

        (r)   any other action or circumstance which might otherwise constitute a legal or equitable discharge or defense of any Borrower, or any other guarantor.

        Guarantor hereby expressly waives and surrenders any defense to its liability under this Guaranty based upon any of the foregoing acts, omissions, agreements, waivers or matters, whether or not Guarantor had notice or knowledge of same, It is the purpose and intent of this Guaranty that the obligations of Guarantor hereunder shall be absolute and unconditional under any and all circumstances.

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        2.4.    Rights of Agent.    Agent is hereby authorized, without notice to or demand of Guarantor and without affecting the liability of Guarantor hereunder, to take any of the following actions from time to time:

        (a)   increase or decrease the amount of, or renew, extend, accelerate or otherwise change the time, place or terms for payment of, or other terms relating to, the Obligations, or otherwise modify, amend or change the terms of any promissory note or other agreement evidencing, securing or otherwise relating to any of the Obligations, including, without limitation, the making of additional advances thereunder;

        (b)   accept and apply any payments on or recoveries against the Obligations from any source, and any proceeds of any security therefor, to the Obligations in such manner, order and priority as Agent may elect in Agent's sole discretion;

        (c)   take, hold, sell, exchange, dispose of, release or otherwise dispose of all or any property pledged, mortgaged or conveyed, or in which Agent or Lender has been granted a lien, as security for the Obligations or the payment of this Guaranty;

        (d)   settle, release, compromise, collect or otherwise liquidate the Obligations or any portion thereof;

        (e)   accept, hold, substitute, add or release any other guaranty or endorsements of the Obligations;

        (f)    take any action under or in respect of the Loan Documents in the exercise of any remedy, power or privilege contained therein or available to Agent or Lender at law, equity or otherwise, or waive or refrain from exercising any such remedies, powers or privileges;

        (g)   amend or modify, in any manner whatsoever, the Loan Documents;

        (h)   extend or waive the time for any Person's performance of, or compliance with, any term, covenant or agreement on its part to be performed or observed under the Loan Documents, or waive such performance or compliance or consent to a failure of, or departure from, such performance or compliance;

        (i)    release anyone who may be liable in any manner for the payment of any amounts owed by any Borrower or Loan Party to Agent or Lender;

        (l)    modify or terminate the terms of any intercreditor or subordination agreement pursuant to which claims of other creditors of any Guarantor, Borrower or Loan Party are subordinated to the claims of Agent and Lender; and

        (k)   at any time after maturity of the Obligations, appropriate and apply toward payment of the Obligations (i) any indebtedness due or to become due from Lender or Agent to Guarantor, and (ii) any moneys, credits, or other property belonging to Guarantor at any time held by or coming into the possession of Lender, Agent or any affiliates thereof, whether for deposit or otherwise;

and Agent and Lender shall not incur any liability to Guarantor as a result thereof, and no such action shall impair or release the Obligations of Guarantor under this Guaranty.

        2.5.    Subordination.    All indebtedness now or hereafter owing by any Borrower to Guarantor for borrowed money or otherwise is hereby subordinated to the payment of the Obligations, and, subsequent to any monetary default or any Event of Default hereunder or under any of the other Loan Documents, Guarantor shall not accept payment of all or any portion of such subordinated indebtedness until satisfaction in full of the Obligations. All security interests, liens and encumbrances which Guarantor now or hereafter may have upon any of the assets of Borrowers,

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or any one of them, are hereby subordinated to all security interests, liens and encumbrances heretofore, now or hereafter granted to Agent, for the benefit of Lender and Agent, pursuant to any of the Loan Documents.

        3.    GUARANTOR'S ADDITIONAL WAIVERS

        3.1.    Statutes of Limitation.    Guarantor irrevocably waives all statutes of limitation as a defense to any action or proceeding brought against Guarantor, any Borrower or any Loan Party by Lender or Agent, to the fullest extent permitted by law.

        3.2.    Election of Remedies.    If Agent may, under applicable law, proceeds to realize benefits under any of the Loan Documents giving Agent and/or Lender a lien upon any collateral owned by any Borrower or other Loan Party, either by judicial foreclosure or by non-judicial sale or enforcement, Agent may, at its sole option, determine which of such remedies or rights it may pursue without affecting any of Agent's or Lender's rights and remedies under this Guaranty. If, in the exercise of any of Agent's or Lender's rights and remedies against any Borrower or any other Person liable with respect to the Obligations, Agent or Lender shall forfeit any of its rights or remedies, including its right to enter a deficiency judgment against any Borrower, whether because of any applicable laws pertaining to "election of remedies" or the like, Guarantor hereby consents to such action by Agent and/or Lender, as applicable, and waives any claim or defense based upon such action, even if such action by Agent or Lender shall result in a full or partial loss of any rights of subrogation which Guarantor might otherwise have had but for such action by Agent or Lender. In the event Agent or Lender shall bid at any foreclosure or trustee's sale or at any private sale permitted by law or the Loan Documents, Agent or Lender may bid all or less than the amount of the Obligations and the amount of such bid need not be paid by Agent or Lender but shall be credited against the Obligations. The amount of the successful bid at any such sale shall be conclusively deemed to be the fair market value of the collateral, notwithstanding any present or future law or court decision or ruling that may have the effect of reducing the amount of any deficiency claim to which Agent and Lender might otherwise be entitled but for such bidding at any such sale. Any election of remedies which results in the denial or impairment of the right of Agent or Lender to seek a deficiency judgment against any Borrower shall not impair Guarantor's obligation to pay the full amount of the Obligations, and Guarantor hereby irrevocably waives any defense based upon an election of remedies made by Lender or Agent or any other election afforded to Lender or Agent pursuant to applicable law, including, without limitation, (a) any election to proceed by judicial or nonjudicial foreclosure or by Uniform Commercial Code sale or by deed or assignment in lieu thereof, or any election of remedies which destroys or otherwise impairs the subrogation rights of the Guarantor or the rights of the Guarantor to proceed against any Borrower or any other Person for reimbursement, or both, (b) the waiver by Lender or Agent, either by action or inaction of Lender or Agent or by operation of law, of a deficiency judgment against any Borrower, and (c) any election pursuant to an Insolvency Proceeding.

        3.3.    Rights of Subrogation and Other Rights.    Guarantor hereby:

        (a)   expressly and irrevocably waives, on behalf of itself and its successors and assigns (including any surety) (i) any and all rights at law or in equity to seek subrogation, contribution, indemnification or any other form of reimbursement or repayment from any Borrower or any other Person now or hereafter primarily or secondarily liable for any of the Obligations for any disbursements made by any Guarantor under or in connection with this Guaranty, (ii) all claims of any kind or type against any Borrower as a result of any payment made by Guarantor to Lender or Agent, and (iii) any right to participate in any security now or hereafter held by Lender or Agent. In furtherance, and not in limitation, of the foregoing, Guarantor agrees that any payment to Lender or Agent pursuant to this Guaranty shall be

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deemed a contribution to the capital of Borrowers or other obligated party and shall not constitute Guarantor a creditor of Borrowers or such other party.

        (b)   further acknowledges and agrees that (i) this waiver is intended to benefit Agent and Lender and shall not limit or otherwise affect Guarantor's liability hereunder or the enforceability of this Guaranty (ii) Agent, Lender and their respective successors and assigns are intended third party beneficiaries of the waivers and agreements set forth in this Section 3.3 and their rights under this Section 3.3 shall survive payment in full of the Obligations, and (iii) to the extent the waiver of its rights of subrogation as set forth herein is found by a court of competent jurisdiction to be void or voidable for any reason, any rights of subrogation Guarantor may have against any Borrower or against any collateral or security for any of the Obligations shall be junior and subordinate to any rights Lender or Agent may have against Borrowers and to all right, title and interest Lender or Agent may have in such collateral or security.

        3.4.    Demands and Notices.    Guarantor irrevocably waives all presentments, demands for performance, protests, notices of protest, notices of dishonor, notice of acceleration to Borrowers, any other Person or any other party with respect to the Loan or the Retained Liabilities, notices of acceptance of this Guaranty and of the existence, creation or incurring of new or additional Obligations, notices of defaults by Borrowers or any other Person liable for the Obligations and demands and notices of every kind that may be required to be given by any statute or rule or law.

        3.5.    Borrower Information.    Guarantor irrevocably waives (a) any duty of Lender or Agent to advise Guarantor of any facts that may now or hereafter be known to Lender or Agent regarding Borrowers regardless of whether Agent or Lender has reason to believe that any such facts materially increase the risk beyond that which Guarantor intends to assume or has reason to believe that such facts are unknown to Guarantor, Guarantor acknowledging that Guarantor is fully responsible for being and keeping informed of the financial conditions and affairs of Borrowers, and (b) any defense based on any claim that Guarantor's obligations exceed or are more burdensome than those of Borrowers, or any of them.

        3.6.    Limitation of Liability.    Guarantor irrevocably waives any impairment, modification, change, release or limitation of the liability of, or stay of actions or lien enforcement proceedings against, any Borrower, their property, or their estate in bankruptcy, resulting from the operation of any provision of the state or federal bankruptcy laws, or from the decision of any court.

        3.7.    Lack of Diligence.    Guarantor irrevocably waives any and all claims or defenses based upon lack of diligence in: (a) collection of any Obligations; (b) protection of any collateral or other security for the Indebtedness or Obligations; or (c) realization upon any collateral or under any of the other Loan Documents.

        3.8.    Other Defenses.    Guarantor irrevocably waives any other defenses, setoffs or counterclaims which may be available to any Borrower and any and all other defenses now or at any time hereafter available to Guarantor (including without limitation those given to sureties) at law or in equity, including but not limited to any defenses based upon:

        (a)   the incapacity, lack of authority, death or disability of any Borrower, any other Person;

        (b)   the failure of Agent or Lender to commence an action against any Borrower or any other Person or to proceed against or exhaust any security held by Agent at any time or to pursue any other remedy whatsoever at any time;

        (c)   the consideration for this Guaranty;

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        (d)   any acts or omissions of Agent or Lender which vary, increase or decrease the risk of Guarantor;

        (e)   the application by Borrower of the proceeds of the Loan for purposes other than the purposes represented by Borrowers to Agent or intended or understood by Agent or Guarantor;

        (f)    any statute or rule of law which provides that the obligation of a surety must be neither larger in amount nor in any other aspects more burdensome than that of a principal;

        (g)   Agent's or Lender's election, in any proceeding instituted under the Bankruptcy Code, of the application of Section 111(b)(2) of the Bankruptcy Code or any successor statute; and

        (h)   any borrowing or any grant of a security interest under Section 364 of the Bankruptcy Code.

        It is agreed among Guarantor, Agent and Lender that the waivers set forth in this Guaranty (both in this Section and elsewhere) are of the essence of the transaction contemplated by the Loan Documents and that, but for this Guaranty and such waivers, Agent and Lender would decline to enter into the Loan Agreement.

        3.9.    California Provisions.    Guarantor hereby waives, to the maximum extent permitted by California Civil Code Section 2856 and/or other applicable law, all suretyship rights and defenses which might otherwise be available to Guarantor under or pursuant to California Civil Code Sections 2787 through 2855 inclusive.

        (a)   Guarantor hereby waives all rights and defenses that Guarantor may have because the Borrowers' debt is secured by real property. This means, among other things:

        (i)    Agent may collect from Guarantor without first foreclosing on any real or personal property collateral pledged by the Borrowers;

        (ii)   If Agent forecloses on any real property collateral pledged by the Borrowers:

        (A)  The amount of the debt may be reduced only by the price for which that collateral is sold at the foreclosure sale, even if the collateral is worth more than the sale price.

        (B)  Agent may collect from Guarantor even if Agent, by foreclosing on the real property collateral, has destroyed any right Guarantor may have to collect from Borrowers.

        This is an unconditional and irrevocable waiver of any rights and defenses Guarantor may have because the Borrowers' debt is secured by real property, These rights and defenses include, but are not limited to, any rights or defenses based upon Section 580a, 580b, 580d or 726 of the California Code of Civil Procedure.

        (b)   Guarantor hereby waives all rights and defenses arising out of an election of remedies by Agent or Lender, even though that election of remedies, such as non judicial foreclosure with respect to security for a guaranteed obligation, has destroyed Guarantor's rights of subrogation and reimbursement against Borrowers by the operation of Section 580d of the California Code of Civil Procedure or otherwise.

        Without limiting the generality of the foregoing, Guarantor hereby expressly: (a) waives any and all benefits which might otherwise be available to it under California Civil Code Sections 2809, 2810, 2819, 2839, 2845 through 2847, 2849, 2850, 2899 and 3433, and California Code of Civil Procedure Sections 580a, 580b, 580d and 726, or any similar statutes of other

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states; (b) acknowledges that Section 2856 of the California Civil Code authorizes and validates waivers of a guarantor's rights of subrogation and reimbursement and certain other rights and defenses available to Guarantor under California law; and (c) waives all rights of subrogation, reimbursement, indemnification and contribution and all other rights and defenses that are or may become available by reason of Sections 2787 to 2855, inclusive, of the California Civil Code.

        3.10.    Arizona Provisions.    Without limiting the generality of the foregoing or any other provision hereof, Guarantor further expressly waives, to the extent permitted by law, (i) the benefits of any statutory or other provision limiting the liability of a surety, including without limitation, any and all rights and defenses which might otherwise be available to Guarantor under Arizona Revised Statutes Section 12-1641 et seq. and Rule 17(f) of the Arizona Rules of Civil Procedure; and (b) the benefits of any statutory provision limiting the right of Lenders or Agent to recover a deficiency judgment, or to otherwise proceed against any person or entity obligated for payment of the indebtedness, after any foreclosure or trustee's sale of any security for the indebtedness, including without limitation the benefits to Guarantor of Arizona Revised Statutes Sections 33-814 and 12-1566.

        4.    REPRESENTATIONS, WARRANTIES AND COVENANTS.    Guarantor represents, warrants and covenants to Lender and Agent as follows:

        4.1.    Organization.    Guarantor is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware with its principal place of business at 27101 Puerta Real, Suite 450, Mission Viejo, California 92691. Guarantor indirectly owns one hundred percent (100%) of the membership interests in each Borrower clear of all liens, claims and encumbrances. Guarantor has full right, power and authority to execute the Loan Documents to which it is a party on its own behalf.

        4.2.    Governing Documents.    A true, complete and correct copy of the articles of incorporation and by-laws creating and governing Guarantor and any amendments thereto and all other documents creating and governing Guarantor (collectively, the "Guarantor Documents") have been furnished to Agent. The Guarantor Documents constitute the entire agreement among the shareholders of Guarantor and are binding upon and enforceable against each of the shareholders in accordance with their terms. There are no other agreements, oral or written, among any of the shareholders with respect to Guarantor or any Borrower. No breach exists under any of the Guarantor Documents and no condition exists which, with the giving of notice or the passage of time would constitute a breach under any of the Guarantor Documents.

        4.3.    Existence.    Guarantor shall preserve and keep in full force and effect its existence, entity status, franchises, rights and privileges under the laws of its state of formation. Guarantor shall not wind up, liquidate, dissolve, reorganize, merge, or consolidate with or into, or convey, sell, assign, transfer, lease or otherwise dispose of all or substantially all of its assets, or acquire all or substantially all of the assets of the business of any Person, or permit any subsidiary or Affiliate of Borrower to do so. Guarantor shall not amend or terminate or permit the amendment or termination of the Guarantor Documents or any Borrower's membership agreement without the prior written consent of Agent. Guarantor shall not change its name, identity, or organizational structure, the location of its chief executive office or Guarantor place of business or its state of organization unless Agent has been notified in writing in advance. Guarantor shall maintain its separateness as an entity, including maintaining separate books, records, and accounts and observing corporate and/or partnership formalities independent of any other entity, shall pay its obligations with its own funds and shall not commingle funds or assets with those of any other Person.

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        4.4.    Financial Statements.    All financial statements and other financial information furnished or to be furnished to Lender or Agent (a) are or will be true and correct in all material respects and do or will fairly represent the financial condition of Guarantor (including all contingent liabilities), and (b) were or will be prepared in accordance with generally accepted accounting principles, consistently applied. There has been no material adverse change in Guarantor's financial condition since the dates of the statements most recently furnished Lender or Agent.

        4.5.    No Defaults.    There is no existing event of default, and no event has occurred which with the passage of time and/or the giving of notice will constitute an event of default, under any agreement to which Guarantor is a party, which event of default could reasonably be expected to have a material adverse effect on Guarantor's ability to perform the Obligations under this Guaranty, and neither the execution and delivery of this Guaranty nor compliance with the terms and provisions hereof will violate any presently existing provision of law or any presently existing regulation, order, writ, injunction or decree of any court or governmental department, commission, board, bureau, agency or instrumentality, or constitute a default under, any agreement to which Guarantor is a party or by which Guarantor or its property is bound.

        4.6.    No Litigation.    There are no actions, suits or proceedings pending or threatened against Guarantor before any court or any governmental, administrative, regulatory, adjudicatory or arbitrational body or agency of any kind which, if decided adversely, could reasonably be expected to adversely affect performance by Guarantor of Guarantor's obligations pursuant to and as contemplated by the terms and provisions of this Guaranty.

        4.7.    Accuracy.    Neither this Guaranty nor any document, financial statement, credit information, certificate or statement heretofore furnished or required herein to be furnished to Lender or Agent by Guarantor contains any untrue statement of fact or omits to state a fact material to this Guaranty.

        4.8.    No Defenses.    As of the date of this Guaranty, Guarantor's obligations under this Guaranty are not subject to any offsets or defenses against Agent or Lender of any kind.

        5.    COVENANTS

        5.1.    No Defenses.    Guarantor agrees that its obligations under this Guaranty shall not be subject to any counterclaims, offsets or defenses against Agent or Lender of any kind which may arise in the future.

        5.2.    Determination of Compliance by Agent.    Agent shall determine, in its reasonable discretion, whether Guarantor has complied with each of the foregoing covenants in this Section 5.

        5.3.    Financial Information.    Guarantor hereby covenants and agrees to deliver to Agent all financial statements and other financial information required to be delivered by Borrowers under the Loan Agreement with respect to Guarantor.

        6.    EVENTS OF DEFAULT.    Upon the occurrence of any of the following events, Agent may, without notice to Borrowers or Guarantor, declare any or all of the Obligations, whether or not then due, immediately due and payable, and Agent shall be entitled to all available remedies under the Loan Documents, at law or in equity as a result thereof.

        6.1.    Default by Borrower.    Borrowers shall default in the payment or performance of any of the Obligations guaranteed hereby, after giving effect to any applicable notice and cure provisions set forth in the Loan Documents.

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        6.2.    Failure to Perform.    Guarantor fails to perform any of its obligations under this Guaranty or any agreement under which security is given herefor or any other breach of this Guaranty occurs, or this Guaranty is revoked or terminated by Guarantor, or any representation or warranty made or given by Guarantor to Lender or Agent proves to be false or misleading in any material respect.

        6.3.    Insolvency Proceeding.    The making by Guarantor of any assignment for the benefit of creditors, or a trustee or receiver being appointed for Guarantor or for any property of Guarantor, or Guarantor becoming insolvent or the subject of any Insolvency Proceeding and, in the case of such a proceeding being commenced against Guarantor, such proceeding is not dismissed within thirty (30) days following the commencement date thereof.

        6.4.    Event of Default Under Other Loans.    The occurrence of a default which continues beyond any applicable notice and cure periods under any documents evidencing or securing or otherwise pertaining to any indebtedness of Guarantor for borrowed money.

        6.5.    Dissolution, Merger, Etc.    Guarantor dissolves or liquidates, or merges or consolidates with another entity, or sells, assigns, conveys, transfers or otherwise disposes of or leases all or substantially all of Guarantor's assets, or the business of Guarantor is suspended or terminated for any reason.

        6.6.    Event of Default under Loan Documents.    The occurrence of an "Event of Default" under any of the other Loan Documents.

        7.    MISCELLANEOUS

        7.1.    Reserved.

        7.2.    Revival and Reinstatement.    This Guaranty shall remain in full force and effect and continue to be effective should any petition be filed by or against any Borrower or any Loan Party for liquidation or reorganization, should any Borrower or any Loan Party become insolvent or make an assignment for the benefit of creditors or should a receiver or trustee be appointed for all or any significant part of such Borrower or Loan Party's assets. This Guaranty shall continue to be effective or be reinstated, as the case may be, if at any time payment and performance of the Obligations, or any part thereof, is, pursuant to applicable law, rescinded or reduced in amount, or must otherwise be restored or returned by Agent or Lender, whether as a "voidable preference", "fraudulent conveyance", or otherwise, all as though such payment or performance had not been made to Agent or Lender in the first place. 1n the event that any payment of any Obligation, or any part thereof, is rescinded, reduced, restored or returned, the Obligations shall be reinstated and deemed reduced only by such amount paid and not so rescinded, reduced, restored or returned.

        7.3.    No Marshaling.    Neither Lender nor Agent has any obligation to marshal any assets in favor of Guarantor, or against or in payment of (a) any of the Obligations, or (b) any other obligation owed to Lender or Agent by Guarantor, Borrowers or any other Person.

        7.4.    No Modification, Waiver or Release Without Writing.    Except as may otherwise be expressly set forth herein, this Guaranty may not be modified, amended, revised, revoked, terminated, changed or varied in any way whatsoever, nor shall any waiver of any of the provisions of this Guaranty be binding upon Lender or Agent, except as expressly set forth in a writing duly executed by Agent. No waiver by Lender or Agent of any default shall operate as a waiver of any other default or the same default on a future occasion, and no action by Lender or Agent permitted hereunder shall in any way affect or impair Lender's or Agent's rights or the obligations of Guarantor under this Guaranty.

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        7.5.    Assignment; Successors and Assigns.    Guarantor may not assign Guarantor's obligations or liability under this Guaranty. Subject to the preceding sentence, this Guaranty shall be binding upon the parties hereto and their respective heirs, executors, successors, representatives and assigns and shall inure to the benefit of the parties hereto and their respective successors and assigns. Lender or Agent may, without notice to anyone, sell or assign the Obligations, the Notes or other Loan Documents or any part thereof, or grant participations therein, and in any such event each and every assignee or holder of, or participant in, all or any of the Obligations shall have the right to enforce this Guaranty, by suit or otherwise for the benefit of such assignee, holder, or participant, as fully as if herein by name specifically given such right, but Agent shall have an unimpaired right, prior and superior to that of any such assignee, holder or participant, to enforce this Guaranty for the benefit of Lender and Agent.

        7.6.    Integration.    This Guaranty is the entire agreement of Guarantor with respect to the subject matter of this Guaranty, provided that this Guaranty shall not in any way limit or abrogate the obligations of Guarantor under the other Loan Documents, including, without limitation, the Environmental Indemnity of even date herewith.

        7.7.    Rights Cumulative.    All of Lender's rights under this Guaranty and the other Loan Documents are cumulative. The exercise of any one right does not exclude the exercise of any other right given in this Guaranty or the other Loan Documents or any other right of Lender or Agent not set forth in this Guaranty or the other Loan Documents.

        7.8.    Severability.    Whenever possible each provision of this Guaranty shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Guaranty shall be prohibited by or invalid under such law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Guaranty.

        7.9.    Material Inducement; Consideration.    Guarantor acknowledges and agrees that Lender and Agent are specifically relying upon the representations, warranties, agreements and waivers contained herein and that such representations, warranties, agreements and waivers constitute a material inducement to Lender and Agent to accept this Guaranty and to enter into the Loan Agreement and the transaction contemplated therein. Guarantor further acknowledges that it expects to benefit from Lender's and Agent's extension of financing accommodations to Borrowers because of its relationship to Borrowers, and that it is executing this Guaranty in consideration of that anticipated benefit.

        7.10.    Indemnification.    Guarantor agrees to indemnify, pay and hold Lender and Agent and their respective officers, directors, employees, agents, and attorneys (collectively called the "Indemnitees") harmless from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, claims, costs, expenses and disbursements of any kind or nature whatsoever (including the fees and disbursements of counsel for such Indemnitees in connection with any investigative, administrative or judicial proceeding commenced or threatened, whether or not such Indemnitee shall be designated a party thereto) that may be imposed on, incurred by, or asserted against that Indemnitee, in any manner relating to or arising out of this Guaranty, the Loan, the Loan Documents or the exercise of any right or remedy hereunder or under the other documents pertaining to the Obligations (the "Indemnified Liabilities"); provided that Guarantor shall have no obligation to an Indemnitee under this subsection with respect to Indemnified Liabilities arising from the gross negligence or willful misconduct of that Indemnitee as determined by a court of competent jurisdiction. To the extent that the undertaking to indemnify, pay and hold harmless set forth in the preceding sentence may be unenforceable because it is violative of any law or public policy, Guarantor shall contribute the maximum portion that it is permitted to pay

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and satisfy under applicable law to the payment and satisfaction of all Indemnified Liabilities incurred by the Indemnitees or any of them.

        7.11.    Counterparts,    This Guaranty may be executed in counterparts, each of which shall be deemed an original, but all of which, when taken together, shall be deemed one and the same agreement.

        7.12.    Governing Law.    This Guaranty shall be governed by and construed in accordance with the internal laws of the State of Illinois, without regard to conflicts of law provisions.

        7.13.    Assignment of Rights in Insolvency Proceedings.    In the event any Insolvency Proceeding is instituted by or against any Borrower, whether voluntary or involuntary, Agent shall have the right to: (a) file claims in any such proceeding on behalf of Guarantor; and (b) vote Guarantor's claims in any such proceeding.

        7.14.    Time of Essence.    Time is of the essence in this Guaranty.

        7.15.    Joint and Several Liability.    The Obligations of Guarantors hereunder shall be joint and several Obligations of each Guarantor, if more than one, and of each Guarantor's heirs, personal representatives, successors and assigns.

        7.16.    VENUE.    GUARANTOR HEREBY CONSENTS TO THE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED WITHIN THE COUNTY OF COOK, STATE OF ILLINOIS AND IRREVOCABLY AGREES THAT, SUBJECT TO AGENT'S ELECTION, ALL ACTIONS OR PROCEEDINGS ARISING OUT OF OR RELATING TO THIS GUARANTY SHALL BE LITIGATED IN SUCH COURTS. GUARANTOR EXPRESSLY SUBMITS AND CONSENTS TO THE JURISDICTION OF THE AFORESAID COURTS AND WAIVES ANY DEFENSE OF FORUM NON CONVENIENS. GUARANTOR HEREBY WAIVES PERSONAL SERVICE OF ANY AND ALL PROCESS AND AGREES THAT ALL SUCH SERVICE OF PROCESS MAY BE MADE UPON GUARANTOR BY CERTIFIED OR REGISTERED MAIL, RETURN RECEIPT REQUESTED, ADDRESSED TO GUARANTOR, AT THE ADDRESS SET FORTH IN THE LOAN AGREEMENT AND SERVICE SO MADE SHALL BE COMPLETE TEN (10) DAYS AFTER THE SAME HAS BEEN POSTED.

        7.17.    WAIVER OF JURY TRIAL.    GUARANTOR, AND BY THEIR ACCEPTANCE OF THIS GUARANTY, LENDER AND AGENT, HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, OR RELATED TO, THE SUBJECT MATTER OF THIS GUARANTY AND THE BUSINESS RELATIONSHIP THAT IS BEING ESTABLISHED. THIS WAIVER IS KNOWINGLY, INTENTIONALLY AND VOLUNTARILY MADE BY GUARANTOR, AND BY THEIR ACCEPTANCE OF THIS GUARANTY, LENDER AND AGENT. LENDER, AGENT AND GUARANTOR ACKNOWLEDGE THAT NEITHER LENDER, AGENT NOR ANY PERSON ACTING ON BEHALF OF LENDER OR AGENT HAS MADE ANY REPRESENTATIONS OF FACT TO INDUCE THIS WAIVER OF TRIAL BY JURY OR HAS TAKEN ANY ACTIONS WHICH IN ANY WAY MODIFY OR NULLIFY ITS EFFECT. GUARANTY, AGENT AND LENDER ACKNOWLEDGE THAT TH1S WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT GUARANTOR, AGENT AND LENDER HAVE ALREADY RELIED ON THIS WAIVER IN ENTERING INTO THIS AGREEMENT AND THAT EACH OF THEM WILL CONTINUE TO RELY ON THIS WAIVER IN THEIR RELATED FUTURE DEALINGS. GUARANTOR, AGENT AND LENDER FURTHER ACKNOWLEDGE THAT THEY HAVE BEEN REPRESENTED (OR HAVE HAD THE OPPORTUNITY TO BE REPRESENTED) IN THE SIGNING OF THIS AGREEMENT AND IN THE MAKING OF THIS WAIVER BY INDEPENDENT LEGAL COUNSEL.

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        7.18.    WAIVERS.    THE WAIVERS SET FORTH IN THIS GUARANTY (INCLUDING, WITHOUT LIMITATION, SECTIONS 7.17 AND 7.18 ABOVE) ARE KNOWINGLY, INTENTIONALLY, AND VOLUNTARILY MADE BY GUARANTOR, AND GUARANTOR ACKNOWLEDGES THAT NEITHER LENDER, AGENT NOR ANY PERSON ACTING ON BEHALF OF IT, HAS MADE ANY REPRESENTATIONS OF FACT TO INDUCE THESE WAIVERS OR IN ANY WAY TO MODIFY OR NULLIFY THEIR EFFECT. GUARANTOR FURTHER ACKNOWLEDGES THAT IT HAS BEEN REPRESENTED (OR HAS HAD THE OPPORTUNITY TO BE REPRESENTED) IN THE SIGNING OF THIS GUARANTY AND IN THE MAKING OF THESE WAIVERS BY INDEPENDENT LEGAL COUNSEL, SELECTED OF ITS OWN FREE WILL, AND THAT IT HAS HAD THE OPPORTUNITY TO DISCUSS THESE WAIVERS WITH COUNSEL.

[Signatures appear on the following page.]

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        The undersigned has duly executed this Guaranty. as of the date and year first above written.

GUARANTOR:
THE ENSIGN GROUP, INC., a Delaware
By:
	Name: Christophor R. Christensen Its: President

        Agent hereby consents and agrees to the terms of this Guaranty.

AGENT:
GENERAL ELECTRIC CAPITAL CORPORATION a Delaware corporation
By:
	Name: Its:

Signature Page to Third Amended and Restated Guaranty of Payment and Performance

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EX-10.10

Exhibit 10.10

THIS DOCUMENT PREPARED
UNDER THE ASSISTANCE OF AN
ATTORNEY LICENSED IN THE
STATE OF ARIZONA AND AFTER

RECORDING RETURN TO:
Jami L. Brodey, Esq.
Goldberg, Kohn, Bell, Black,
Rosenbloom & Moritz, Ltd.
55 East Monroe Street
Suite 3700
Chicago, Illinois 60603

SPACE ABOVE THIS LINE FOR RECORDER'S USE

Loan No. 07-0004261

AMENDED AND RESTATED DEED OF TRUST, ASSIGNMENT OF RENTS,
SECURITY AGREEMENT AND FIXTURE FINANCING STATEMENT
([NAME OF FACILITY], County of Maricopa, State of Arizona)

        This AMENDED AND RESTATED DEED OF TRUST, ASSIGNMENT OF RENTS, SECURITY AGREEMENT AND FIXTURE FINANCING STATEMENT (this "Deed of Trust") is made as of this 30 day of June, 2006, between [NAME OF GRANTOR], a Nevada limited liability company ("Grantor"), whose mailing address is c/o Ensign Facility Services, Inc., 27101 Puerta Real, Suite 450, Mission Viejo, California 92691 unto CHICAGO TITLE INSURANCE COMPANY ("Trustee"), whose mailing address is 1201 South Alma School Road, #6550, Mesa, Arizona 85210-2011 for the benefit of GENERAL ELECTRIC CAPITAL CORPORATION, a Delaware corporation (in its individual capacity, "GECC"), whose mailing address is 2 Bethesda Metro Center, Suite 600, Bethesda, Maryland 20814, as agent (GECC in its capacity as agent, "Agent") for Lenders (as such term is defined in the Loan Agreement referred to below).

RECITALS

        A.    On or about December 3, 2004, Grantor, certain Affiliates of Grantor (the "Existing Borrowers"), GECC and Agent entered into a certain Amended and Restated Loan Agreement, pursuant to which the lenders thereunder agreed to make a loan (the "Existing Loan") to the Existing Borrowers. The Existing Loan is secured by, among other things, that certain Deed of Trust, Assignment of Rents, Security Agreement and Fixture Financing Statement dated as of [ORIGINAL DEED OF TRUST DATE]made by Grantor for the benefit of Agent and recorded on [DATE OF RECORDING] in the Official Records of the Maricopa County Recorder as Document No. [ORIGINAL DOCUMENT NUMBER], [AMENDMENT REFERENCE] [AMENDMENT DOCUMENT NUMBER] (as amended, the "Original Deed of Trust"). This Deed of Trust amends and restates, in its entirety, the Original Deed of Trust.

        B.    Concurrently herewith, Lender has agreed, subject to the terms and conditions of that certain Second Amended and Restated Loan Agreement dated of even date herewith (said Loan Agreement, as amended from time to time being hereinafter referred to as the "Loan Agreement"), executed by and among Grantor, certain Affiliates of Grantor (together with Grantor, the "Borrower Parties"), GECC and the other financial institutions who are or hereafter become parties to the Loan Agreement (together with GECC, collectively or individually, as the context may require, as "Lender") and Agent, to amend and restate the terms of the Existing Loan and to make additional advances (the Existing Loan, as amended and restated, together with the additional advances to be made pursuant to the Loan Agreement are collectively referred to herein as the "Loan") to Borrower Parties. The Loan is

evidenced by that certain Consolidated, Amended and Restated Promissory Note of even date herewith in the original principal amount of Forty Seven Million Seven Hundred Ninety Five Thousand and No/100 Dollars ($47,795,000.00) (which note, together with all notes issued in full or partial replacements thereof, or in substitution or exchange therefor, and all amendments thereto, are hereinafter collectively referred to as the "Note") providing for monthly payments as set forth in the Loan Agreement, with the balance thereof, due and payable on June 29, 2016 (said date, any later date to which the maturity date may be extended in accordance with the Loan Agreement, or any earlier date on which the entire unpaid principal amount shall be paid or required to be paid in full, whether by prepayment, acceleration or otherwise is hereinafter called the "Maturity Date"). The terms and provisions of the Loan Agreement and the Note are hereby incorporated by reference in this Deed of Trust. Capitalized terms used but not defined herein shall have the meaning provided in the Loan Agreement.

        C.    Lender and Agent wish to secure: (i) the payment of the Note, together with all interest, premiums, the Make Whole Breakage Amount, the Prepayment Premium (as such terms are defined in the Loan Agreement) and other amounts, if any, due in accordance with the terms of the Note, as well as the payment of any additional indebtedness accruing to Lender or Agent on account of any future payments, advances or expenditures made by Lender or Agent pursuant to the Note, the Loan Agreement or this Deed of Trust or any of the other Loan Documents (hereinafter defined); (ii) the performance of each and every covenant, condition, and agreement contained in the Note, the Loan Agreement, this Deed of Trust, those certain Deeds of Trust, Assignments of Rents, Security Agreements and Fixture Financing Statements (or documents of similar title) executed by the other Borrower Parties (as amended from time to time), the Environmental Indemnity (as defined in the Loan Agreement) and that certain Second Amended and Restated Guaranty of Payment and Performance of even date herewith made by Guarantor (as defined in the Loan Agreement) in favor of Agent and any other documents evidencing or securing the Loan or executed in connection therewith (such documents together with any modifications, renewals, extensions or replacements thereof are collectively referred to as the "Loan Documents"); (iii) the payment and performance of any and all other debts, claims, obligations, demands, monies, liabilities and indebtedness of any kind or nature now or hereafter owing, arising, due or payable from Borrower Parties or Guarantor to Lender or Agent in connection with the Loan; and (iv) the payment of all amounts due from Master Tenants, Guarantor and the other borrowers under and in accordance with the terms of the Accounts Receivable Loan Documents and the performance of each and every covenant, condition, and agreement contained therein. All payment obligations of Borrower Parties or Guarantor to Lender or Agent with respect to the Loan or under any of the Loan Documents and all payment obligations of Master Tenants, Guarantor and the other borrowers thereunder to GECC under the Accounts Receivable Loan Documents are hereinafter sometimes collectively referred to as the "Indebtedness," and all other obligations of Borrower Parties or Guarantor to Agent with respect to the Loan or under any of the Loan Documents and all other obligations of Master Tenants, Guarantor and the other borrowers thereunder to GECC under the Accounts Receivable Loan Documents are hereinafter sometimes collectively referred to as the "Obligations".

        NOW, THEREFORE, TO SECURE the repayment of the Indebtedness and the performance of the Obligations, and also in consideration of the sum of Ten and No/100 Dollars ($10.00), the receipt of which is acknowledged by Grantor, Grantor by these presents irrevocably grants, bargains, sells, assigns, releases, transfers, pledges, conveys and warrants specially unto Trustee, its successors and assigns forever, in trust, with power of sale, for the benefit and security of Agent and Lender, all right, title, and interest of Grantor in and to the fee simple estates in the following described property and all proceeds thereof (which property is hereinafter sometimes collectively referred to as the "Property"):

        A.    The real estate described on Exhibit A attached hereto (the "Land");

        B.    All of the following (collectively, the "Improvements"): all buildings, improvements and fixtures now or in the future located or to be constructed on the Land; to the extent not owned by tenants of the Property, all machinery, appliances, equipment, furniture, fixtures and all other personal property of every kind or nature located in or on, or attached to, or used or to be used in connection

with the Land, buildings, improvements or fixtures; all building materials and goods procured for use or in connection with the foregoing; and all additions, substitutions and replacements to any of the foregoing;

        C.    To the extent assignable by Grantor, all plans, specifications, architectural renderings, drawings, soil test reports, other reports of examination or analysis of the Land or the Improvements;

        D.    All easements, rights-of-way, water courses, mineral rights, water rights, air rights and appurtenances in any way belonging, relating or appertaining to any of the Land or Improvements, or which hereafter shall in any way belong, relate or be appurtenant thereto (collectively, "Appurtenances");

        E.    Subject to the rights of Agent under Section 6 hereof, all leases, master leases, subleases, licenses, patient and resident care agreements and other agreements with regard to the use or occupancy of all or any portion of the Land and/or the Improvements, including without limitation that certain Long-Term Care Facility Lease Agreement dated as of [FACILITY LEASE AGREEMENT DATE] by and between [NAME OF MASTER TENANT], a Nevada limited liability company ("Master Tenant") and Grantor (the "Master Lease"), service agreements which include an occupancy agreement and all guaranties, amendments, extensions and renewals of any such lease, license or agreement, now or hereafter entered into (collectively, the "Leases") and all rents, incomes, receipts, prepayments, security deposits, termination payments, royalties, profits, issues and revenues, prepayment of the same including without limitation, lease termination, cancellation or similar fees, and all other amounts of any nature now due or which may become due or to which Grantor may now or shall hereafter become entitled or which it may demand or claim and arising or accruing directly or indirectly from the Leases or from the Land and/or Improvements from time to time (collectively, the "Rents"), reserving to Grantor, however, so long as no Event of Default has occurred, the right to receive and apply the Rents in accordance with the terms and conditions of Section 6 of this Deed of Trust;

        F.     To the extent assignable by Grantor, all claims, demands, judgments, insurance proceeds, refunds, reserves, deposits, rights of action, awards of damages, compensation, settlements and other rights to the payment of money hereafter made resulting from or relating to (i) the taking of the Land or the Improvements or any part thereof under the power of eminent domain, (ii) any damage (whether caused by such taking, by casualty or otherwise) to the Land, Improvements, Appurtenances or other Property or any part thereof, or (iii) the ownership or operation of the Property;

        G.    To the extent assignable by Grantor, all management contracts, permits, certificates, licenses, approvals, contracts, purchase and sale agreements, purchase options, entitlements, development rights and authorizations, however characterized, issued or in any way furnished for the acquisition, construction, development, operation and use of the Land, Improvements and/or Leases, including building permits, environmental certificates, licenses, certificates of operation, warranties and guaranties;

        H.    All of the following types of collateral, as defined in the Uniform Commercial Code as in effect from time to time in the State of Illinois (the Illinois Uniform Commercial Code being referred to as the "UCC", unless the context requires a reference to the Uniform Commercial Code in effect in another state): accounts, contract rights, general intangibles, chattel paper, documents, instruments, inventory, goods, equipment, investment property, deposit accounts, letter of credit rights, commercial tort claims, healthcare insurance receivables and all books and records relating to the foregoing; provided that Grantor will cooperate with Agent in obtaining "control" as defined in the UCC, with respect to collateral consisting of deposit accounts, investment property, letter of credit rights and electronic chattel paper;

        I.     Any monies on deposit with or for the benefit of Agent, including deposits for the payment of real estate taxes, insurance premiums and any cash collateral account;

        J.     All proceeds, products, replacements, additions, substitutions, renewals and accessions of and to the Land, Improvements, Appurtenances or any other property of the types described in the preceding granting clauses; and

        K.    Any and all after-acquired right, title or interest of Grantor in and to any property of the types described in the preceding granting clauses.

        TO HAVE AND TO HOLD the Property and all parts thereof together with the rents, issues, profits and proceeds thereof, unto Trustee to its own proper use, benefit, and advantage forever, subject, however, to the terms, covenants, and conditions herein.

        It is the intention of Grantor and Agent that this Deed of Trust shall, for all purposes, be deemed to be a Real Property Deed of Trust within the meaning of Arizona Revised Statutes ("A.R.S.") §§ 33-801 through 33-821 (the "Arizona Deed of Trust Act"). For purposes of the Arizona Deed of Trust Act, Grantor shall be the "Trustor," Agent shall be the "Beneficiary" and Chicago Title Insurance Company shall be the "Trustee." Agent and Trustee shall have all rights, benefits and remedies conferred upon beneficiaries and trustees respectively by the Arizona Deed of Trust Act. The Property, including without limitation, the Land, Improvements, Appurtenances and Leases shall constitute "Trust Property" pursuant to A.R.S. §33-801.

        Grantor covenants and agrees with Agent as follows:

        1.    Payment of Indebtedness; Performance of Obligations.    Grantor shall promptly pay when due the Indebtedness and shall promptly perform all Obligations.

        2.    Taxes and Other Obligations; Insurance and Condemnation Proceeds.    

        (a)   Grantor shall pay or cause to be paid, when due, and before any interest, collection fees or penalties shall accrue, all Taxes in accordance with Section 7.3 of the Loan Agreement.

        (b)   Should Grantor fail to make any of such payments, Agent may, at its option and at the expense of Grantor, pay the amounts due for the account of Grantor. Upon the request of Agent, Grantor shall immediately furnish to Agent copies of all notices of amounts due and receipts evidencing payment. Grantor shall promptly notify Agent of any lien on all or any part of the Property and shall promptly discharge any unpermitted lien or encumbrance.

        (c)   Insurance and condemnation proceeds shall be paid and applied in accordance with Section 3.2 and 3.3 of the Loan Agreement.

        3.    Preservation and Maintenance of Property.    Grantor shall: (a) not commit waste or permit impairment or deterioration of the Property; (b) not abandon the Property; (c) keep the Property (or cause the Property to be kept) in good repair and restore or repair promptly, in a good and workmanlike manner, all or any part of the Property to the equivalent of its -original condition as of the date of this Deed of Trust, or such other condition as Agent may approve in writing, upon any damage or loss thereto; (d) comply (or cause compliance) in all material respects with all laws, ordinances, regulations and requirements of any governmental body applicable to the Property and (e) give notice in writing to Agent of and, unless otherwise directed in writing by Agent, appear in and defend any action or proceeding purporting to affect the Property, the security granted by the Loan Documents or the rights or powers of Agent. Neither Grantor nor any tenant or other person shall remove, demolish or alter any Improvement on the Land except when incident to the replacement of fixtures, equipment, machinery and appliances with items of like kind.

        4.    Protection of Agent's and/or Lender's Security.    If (a) Grantor fails to pay the Indebtedness or to perform the Obligations, (b) any action or proceeding is commenced which affects or could affect the Property or Trustee's or Lender's interest therein, including any loss, damage, cost, expense or liability incurred by Trustee, Agent or Lender with respect to (i) any environmental matters relating to the Property or (ii) the preparation of the commencement or defense of any action or proceeding or any threatened action or proceeding affecting the Loan Documents or the Property, then Agent, at Agent's option, may make such appearances, disburse such sums and take such action as Agent deems necessary, in its sole discretion, to protect the Property or Agent's or Lender's interest therein,

including entry upon the Property to take such actions Agent determines appropriate to preserve, protect or restore the Property. Any amounts disbursed by Agent or Lender pursuant to this Section 4 (including attorneys' fees, costs and expenses), together with interest thereon at the "Default Rate" (defined in the Note) from the date of disbursement, shall become additional Indebtedness of Grantor secured by the lien of this Deed of Trust and the other Loan Documents and shall be due and payable on demand. Nothing contained in this Section 4 shall require Agent or Lender to incur any expense or take any action hereunder.

        5.    Warranty of Title; Actions.    Except as disclosed in the exceptions to title in the title policy approved by Agent issued by Chicago Title Insurance Company insuring the priority of this Deed of Trust, Grantor shall warrant, and hereby does warrant, that Grantor owns marketable and fee simple title to the Property, free and clear of all liens and encumbrances. Grantor shall appear in and defend any claim or any action or other proceeding purporting to affect title or other interests relating to any part of the Property, the security of this Deed of Trust or the rights of Agent or Lender, and give Agent prompt written notice of any such claim, action or proceeding. Agent may, at the expense of Grantor, appear in and defend any such claim, action or proceeding and any claim, action or other proceeding asserted or brought against Agent or Lender in connection with or relating to any part of the Property or this Deed of Trust or involving the priority, validity or enforceability of any Loan Document.

        6.    Assignment of Rents.    

        (a)   To facilitate the payment and performance of the Indebtedness and Obligations, Grantor absolutely and unconditionally assigns and transfers to Agent, for the benefit of Agent and Lender, all of Grantor's right, title and interest in and to (i) the Leases, (ii) the Rents and the immediate and continuing right to collect and receive all of the Rents, and (iii) any and all rights and claims of any kind that Grantor may have now or in the future against any present or future tenant (including Master Tenant), subtenant or occupant of the Property (a "Tenant"). In furtherance of this assignment, and not in lieu thereof, promptly upon request by Agent, Grantor agrees to execute and deliver such further assignments as Agent may from time to time require.

        (b)   All of the Rents and all proceeds payable under any policy of insurance covering loss of rents resulting from untenantability caused by damage to any part of the Property, together with any and all rights that Grantor may have against any Tenant under the Leases or any subtenants or occupants of any part of the Property and any award made hereafter to Grantor in any court proceedings involving any of the Tenants or in any bankruptcy, insolvency, or reorganization proceedings in any state or federal court, and all payments by Tenants in lieu of Rent, are hereby absolutely and unconditionally assigned to Agent, for the benefit of Agent and Lender, to be applied by Agent in accordance with the terms of the Loan Agreement. It is understood and agreed by the parties that this assignment of the Leases and Rents is intended to be and is a present, absolute, and unconditional assignment from Grantor to Agent, and not merely the passing of a security interest, and shall, immediately upon execution, give Agent the right to collect the Rents and to apply them in payment of the Indebtedness. Such assignment and grant shall continue in effect until the Indebtedness is paid in full. Subject to the provisions set forth herein and, so long as there shall not have occurred an Event of Default which is continuing, Grantor shall have a license, without joinder of Agent, to enforce the Leases subject to the terms of the Loan Documents, and to collect the Rents as they come due (but not more than one (1) month in advance and excluding any lease termination, cancellation or similar payments which Grantor agrees shall be held in trust and turned over to Agent to be applied to the Indebtedness in accordance with the terms of the Loan Agreement) and to retain, use and enjoy the same. The Rents shall be held by Grantor in trust, to be applied first to the payment of all impositions, levies, taxes, assessments and other charges upon the Property, second to maintenance of insurance policies upon the Property required hereby, third to the expenses of Property operations, including maintenance and repairs required hereby (other than payment of fees to Affiliates of Grantor), fourth to the payment of that portion of the Indebtedness then due and payable, and fifth, the balance, if any, to or as directed by Grantor. Grantor shall deliver such other Rents to Agent as are necessary for the payment of the Indebtedness as such sums become due. If an Event of Default has occurred, Grantor's right to collect

and secure the Rents shall cease and Agent shall have the sole right, with or without taking possession of the Property to collect all Rents.

        (c)   Grantor hereby irrevocably appoints Agent its true and lawful attorney-in-fact, with full power of substitution and with full power of substitution and with full power for Agent in its own name and capacity or in the name and capacity of Grantor to demand and collect any and all Rents and to file any claim or take any other action or proceeding and make any settlement regarding the Leases. All Tenants are hereby expressly authorized and directed to pay to Agent, or to such nominee as Agent may designate in a writing delivered to such Tenants, all amounts due Grantor pursuant to the Leases. All Tenants are expressly relieved of all duty, liability or obligation to Grantor in respect of all payments so made to Agent or such nominee.

        (d)   After an Event of Default, Agent may, at any time without notice, either in person, by agent or by a receiver appointed by a court, and without regard to the adequacy of any security for the Indebtedness and the Obligations and without regard to solvency of Grantor:

          (i)  Enter upon, take possession of and manage the Property, or any part thereof, for the purpose of collecting the Rents in its own name sue for or otherwise collect the Rents, including those past due and unpaid, and apply the same, less costs and expenses of operation and collection, including reasonable attorney's fees, upon the Indebtedness and in such order as Agent may so determine;

         (ii)  Dispossess by the usual summary proceedings any Tenant defaulting in the payment thereof to Grantor, lease the Property or any party thereof, repair, restore, and improve the Property;

        (iii)  Apply the Rent after payment of Property expenses as determined by Agent to the Indebtedness in accordance with the terms of the Loan Agreement; and

        (iv)  Apply to any court of competent jurisdiction for specific performance of this Deed of Trust, an injunction against the violation hereof and/or the appointment of a receiver.

        (e)   The collection of Rents, or the entering upon and taking possession of the Property, or the application thereof as aforesaid, shall note cure or waive any Event of Default or notice of an Event of Default hereunder or invalidate any act done in response to such Event of Default pr pursuant to such notice of an Event of Default. In the event Grantor, as lessor under the Leases, shall fail to perform and fulfill in any material respect any material term, covenant, condition, or provision in the Leases, on its part to be performed or fulfilled, at the time and in the manner in the Leases provided, or if the Grantor shall suffer or permit to occur any breach or default under the provisions of the Leases, or any of them, and such default shall give the Tenant thereunder the right to terminate its Lease or otherwise shall continue for a period of thirty (30) days following the giving of written notice of such default to Grantor, then and in any such event, such breach or default shall constitute an Event of Default.

        (f)    In the event Grantor fails to perform any Lease covenant, Agent may, at its option, upon prior notice to Grantor (except in the event of an emergency) perform any Lease covenant for and on behalf of Grantor, and all monies expended in so doing shall be chargeable to Grantor and added to the Indebtedness and shall be immediately due and payable.

        (g)   Grantor hereby covenants and agrees as follows:

          (i)  This Deed of Trust transfers to Agent all of Grantor's right, title, and interest in any security deposits held by Grantor, provided that Grantor shall have the right to retain and apply the security deposit so long as no Event of Default has occurred under this Deed of Trust or the Loan Documents. Agent shall have no obligation to any Tenant with respect to its security deposit unless and until Agent comes into possession of the deposit.

         (ii)  Agent may assign its right, title and interest in the Leases, Rents and other Property, and any subsequent assignee shall have all of the rights and powers provided to Agent by this Deed of Trust.

        (iii)  Grantor shall not without the prior written consent of Agent: (a) perform any act or execute any other instrument which might interfere with the exercise of Agent's or Lender's rights hereunder; (b) execute any assignment, pledge or hypothecation of Rents or any of the Leases; or (c) suffer or permit any of the Leases to become subordinate to any lien other than the lien of this Deed of Trust.

        (h)   This Deed of Trust shall not be deemed to impose upon Agent or Lender any of the obligations or duties of the landlord or Grantor provided in any Lease. Grantor hereby acknowledges and agrees: (i) Grantor is and will remain liable under the Leases to the same extent as though this Deed of Trust had not been made; and (ii) Agent has not by this Deed of Trust assumed any of the obligations of Grantor under the Leases, except as to such obligations which arise after such time as Agent shall have assumed actual ownership or control of the Property. This Deed of Trust shall not make Agent responsible for the control, care, management, or repair of the Property or any personal property or for the carrying out of any of the terms of the Leases unless and until Agent takes possession or actual control of the Property. Agent and Lender shall not be liable in any way for any injury or damage to person or property sustained by any person or persons, firm, or corporation in or about the Property absent gross negligence or willful misconduct by such Person.

        (i)    In the event any Tenant should be the subject of any proceeding under the Federal Bankruptcy Code or any other federal, state, or local statute which provides for the possible termination or rejection of any Lease, Grantor covenants and agrees no settlement for damages shall be made without the prior written consent of Agent, which consent shall not be unreasonably withheld or delayed, and any check in payment of damages for rejection of any Lease will be made payable both to Grantor and Agent. Grantor hereby assigns any such payment to Agent and further covenants and agrees that it will duly endorse to the order of Agent any such check.

        (j)    After an Event of Default, then, without notice to, or the consent of, Grantor, Agent shall be entitled to exercise all of the rights and remedies contained in this Deed of Trust or in any other Loan Document or otherwise available at law or in equity including, without limitation, the right to do any one or more of the following:

          (i)  To enter upon, take possession of and manage the Property for the purpose of collecting the Rents;

         (ii)  Dispossess by the usual summary proceedings any Tenant defaulting in the payment thereof to Grantor;

        (iii)  Lease the Property or any part thereof;

        (iv)  Repair, restore, and improve the Property;

         (v)  Apply the Rents after payment of Property expenses as determined by Agent to the Indebtedness and the Obligations in such order as Agent may determine; and

        (vi)  Apply to any court of competent jurisdiction for specific performance of this Deed of Trust, an injunction against the violation hereof and/or the appointment of a receiver.

        (k)   Grantor hereby agrees to indemnify Agent and Lender to hold Agent and Lender harmless from any liability, loss or damages including, without limitation, reasonable attorney's fees, costs and expenses which may or might be incurred by Agent under the Leases or by reason of this Deed of Trust, and from any and all claims and demands which may be asserted against Agent or Lender by reason of any term, covenant or agreement contained in any of the Leases, except for any such liability, loss or damage resulting solely from Agent's or Lender's gross negligence or willful misconduct.

        (l)    The assignment of Leases and Rents set forth in this Section 6 and the granting clauses of this Deed of Trust shall run with the land and be good and valid against Grantor or those claiming by, under or through Grantor, from the date hereof and such assignment shall continue to be operative during the foreclosure or any other proceeding taken to enforce this Deed of Trust. In the event of a sale or foreclosure which shall result in a deficiency, such assignment shall stand as security during the redemption period of the payment of such deficiency. Agent shall be permitted, at its sole option, to exercise remedies under such assignment separately from remedies exercised against other portions of the Property.

        7.    Statements by Grantor.    Grantor shall within ten (10) days after Agent's request, furnish Agent with a written statement, duly acknowledged, setting forth the sums, according to Grantor's books and records, secured by the Loan Documents and any right of set-off, counterclaim or other defense which exists against such sums and the Obligations.

        8.    No Additional Liens, Encumbrances or Indebtedness.    Grantor covenants not to execute any mortgage, deed of trust, security agreement, assignment of leases and rents or other agreement granting a lien (except the liens granted to Agent by the Loan Documents) against or encumbrance on the Property or take or fail to take any other action which would result in a lien against the Property or the interest of Grantor (or Guarantor) in the Property without the prior written consent of Agent; provided, however, Grantor may in good faith, by appropriate proceeding, contest the validity or amount of any asserted lien in accordance with the terms of the Loan Agreement and pending such contest, Grantor shall not be deemed to be in default hereunder.

        9.    Grantor and Lien Not Released.    Without affecting the liability of Grantor for any of the Indebtedness or the Obligations, or any other person liable for the payment of the Indebtedness or the performance of any Obligations, and without affecting the lien or charge of this Deed of Trust as security for the payment of the Indebtedness, Agent may, from time to time and without notice to any junior lien holder or holder of any right or other interest in and to the Property: (a) release any person liable for payment of all or any portion of the Indebtedness or performance of the Obligations; (b) waive or modify any provision of this Deed of Trust or the other Loan Documents or grant other indulgences; (c) release all or any part of the Property; (d) take additional security for any obligation herein mentioned; (e) subordinate the lien or charge of this Deed of Trust; (f) consent to the granting of any easement; or (g) consent to any map, plat or plan of the Property.

        10.    Uniform Commercial Code Security Agreement.

        (a)   This Deed of Trust shall cover, and the Property shall include, all property now or hereafter affixed or attached to the Land, which to the fullest extent permitted by law, shall be deemed fixtures and a part of the Land. In addition, this Deed of Trust shall constitute a security agreement pursuant to the UCC for any portion of the Property which, under applicable law, may be subject to a security interest pursuant to the UCC (such portion of the Property is hereinafter called the "Personal Property") and Grantor hereby grants to Agent, for the benefit of Agent and Lender, a security interest in the Personal Property. Agent shall have all of the rights and remedies of a secured party under the UCC as well as all other rights and remedies available at law or in equity.

        (b)   Grantor hereby authorizes Agent to file any financing statements, as well as extensions, renewals and amendments thereof, and reproductions of this Deed of Trust, all in such form as Agent may require to perfect a security interest with respect to the Personal Property. Grantor hereby authorizes and empowers Agent and irrevocably appoints Agent its agent and attorney-in-fact to execute and file, on Grantor's behalf, all financing statements and refilings and continuations thereof as Agent deems necessary or advisable to create, preserve and protect such lien. Grantor shall pay all costs of filing such financing statements and any extensions, renewals, amendments and releases thereof, and shall pay all reasonable costs and expenses of any record searches for financing statements as Agent may reasonably require.

        (c)   Grantor shall not, without the prior written consent of Agent, sell, assign, transfer, encumber, remove or permit to be removed from the Property any of the Personal Property. So long as no Event

of Default exists, Grantor may sell or otherwise dispose of the Personal Property when obsolete, worn out, inadequate, unserviceable or unnecessary for use in the operation of the Property, but only upon replacing the same with other Personal Property at least equal in value and utility to the disposed Personal Property. Any replacement or substituted Personal Property shall be subject to the security interest granted herein.

        (d)   To the extent permitted by law, Grantor, Lender and Agent agree that with respect to all items of Personal Property which are or will become fixtures on the Land, this Deed of Trust, upon recording or registration in the real estate records of the proper office, shall constitute a "fixture filing" within the meaning of the UCC, generally, and specifically under A.R.S. §§ 47-9334 and 47-9502.B and C of the UCC, as amended or recodified from time to time.

        (e)   After an Event of Default, Agent may exercise in respect of the Personal Property, in addition to all other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party on default under the UCC (whether or not the UCC applies to the affected Personal Property) and also may: (i) require Grantor to, and Grantor hereby agrees that it will, at its expense and upon request of Agent, forthwith assemble all or part of the Personal Property as directed by Agent and make it available to Agent at any reasonable place or places designated by Agent; and (ii) without notice except as specified below, sell, lease or otherwise dispose of the Personal Property or any part thereof in one or more parcels at public or private sale, and without the necessity of gathering at the place of sale of the property to be sold, at any of Agent's offices or elsewhere, at such time or times, for cash, on credit or for future delivery, and at such price or prices and upon such other terms as Agent may deem commercially reasonable.

        (f)    Grantor agrees that, to the extent notice of sale shall be required by law, a reasonable authenticated notification of disposition shall be a notification given at least ten (10) days prior to any such sale and such notice shall (i) describe Agent and Grantor, (ii) describe the Personal Property that is the subject of the intended disposition, (iii) state the method of intended disposition, (iv) state that Grantor is entitled to an accounting of the Indebtedness and stating the charge, if any, for an accounting, and (v) state the time and place of any public disposition or the time after which any private sale is to be made. Notwithstanding the foregoing, to the contrary, no notification need be given to Grantor if it has authenticated after default a statement renouncing or modifying any right to notification of sale or other intended disposition. At any sale of the Personal Property, if permitted by law, Agent may bid (which bid may be, in whole or in part, in the form of cancellation of indebtedness) for the purchase, lease, license or other disposition of the Personal Property or any portion thereof for the account of Agent. Agent shall not be obligated to make any sale of Personal Property regardless of notice of sale having been given. Agent may disclaim any warranties that might arise in connection with the sale, lease, license or other disposition of the Personal Property and have no obligation to provide any warranties at such time. Agent may adjourn any public or private sale from time to time by announcement at the time and place fixed therefore, and such sale may, without further notice, be made at the time and place to which it was so adjourned. To the extent permitted by law, Grantor hereby specifically waives all rights of redemption, stay or appraisal which it has or may have under any applicable law now existing or hereafter enacted.

        (g)   After an Event of Default, Agent or its agents or attorneys shall have the right without further notice or demand or legal process (unless the same shall be required by applicable law), personally, or by its agents or attorneys, (i) to enter upon, occupy and use any premises owned or leased by Grantor or where the Personal Property is located (or is believed to be located) for so long as such entry, occupancy and use is necessary, without any obligation to pay rent to Grantor, to render the Personal Property useable or saleable and to remove the Personal Property or any part thereof therefrom to the premises of Agent or any agent of Agent for such time as Agent may desire in order to effectively collect or liquidate the Personal Property and use in connection with such removal any and all services, supplies and other facilities of Grantor; (ii) to make copies of and have access to Grantor's original books and records, to obtain access to Grantor's data processing equipment, computer hardware and software relating to the Personal Property and to use all of the foregoing and the information contained therein in any manner Agent deems appropriate; and (iii) to notify postal authorities to

change the address for delivery of Grantor's mail to an address designated by Agent and to receive, open and dispose of all mail addressed to Grantor.

        11.    Events of Default; Acceleration of Indebtedness.    The occurrence of any one or more of the following events shall constitute an "Event of Default" under this Deed of Trust:

        (a)   failure of Borrower Parties to pay, within five (5) days after the due date, any of the Indebtedness, including any payment due under the Note, or Borrower Parties' failure to pay the Loan at the Maturity Date, whether by acceleration or otherwise; or

        (b)   failure of Grantor to strictly comply with Section 8 (no additional liens) 6(f)(iii) (no interference with Agent's liens on Leases and Rents) of this Deed of Trust; or

        (c)   failure of Borrower Parties to satisfy each and every Obligation not set forth in subsection (b) above, and the continuance of such failure for ten (10) days after notice by Agent to Borrower Parties; provided, however, Borrower Parties shall have an additional thirty (30) days to cure such failure if (a) such Obligation cannot by its nature reasonably be cured within ten (10) days; (b) such failure does not involve the failure to make payments on a monetary obligation; (c) if Borrower Parties commence to cure such failure promptly after written notice thereof and thereafter diligently pursues the curing thereof, and (d) Borrower Parties provide Agent with security reasonably satisfactory to Agent against any interruption of payment or impairment of collateral as a result of such continuing failure, Borrower Parties shall not be in default hereunder during such additional thirty (30) day period of diligent curing;

        (d)   Grantor changes the state of its formation or its name without providing Agent thirty (30) days prior written notice;

        (e)   the occurrence of an Event of Default (as such term is defined in the applicable Loan Document) under any other Loan Document; or

        (f)    any default under, or termination of, the Master Lease.

Upon the occurrence of an Event of Default, at the option of Agent, the Indebtedness shall become immediately due and payable without notice to Grantor and Agent shall be entitled to all of the rights and remedies provided in the Loan Documents or at law or in equity. Each remedy provided in the Loan Documents is distinct and cumulative to all other rights or remedies under the Loan Documents or afforded by law or equity, and may be exercised concurrently, independently, or successively, in any order whatsoever.

        12.    Entry; Certain Remedies; Foreclosure.

        (a)   Upon the occurrence of an Event of Default, Grantor, upon demand of Agent or Trustee, shall forthwith surrender to Agent the actual possession of the Property, or to the extent permitted by law, Agent or a receiver appointed by a court of competent jurisdiction, may enter and take possession of all or any part of the Property, and may exclude Grantor and its agents and employees wholly therefrom, and may have joint access with Grantor to the books, papers and accounts of Grantor. If Grantor shall for any reason fail to surrender or deliver the Property or any part thereof after such demand by Agent, Agent or such receiver may obtain a judgment or decree conferring on Agent or such receiver, the right to immediate possession of the Property or requiring the delivery of the Property to Agent or such receiver, and Grantor specifically consents to the entry of such judgment or decree. Upon every such entering upon or taking of possession, Agent or such receiver may hold, store, use, operate, manage and control the Property and conduct the business thereof, and Agent or such receiver may take any action required by applicable law or which Agent or such receiver believes necessary to enforce compliance with the environmental provisions contained herein or in the other Loan Documents, and negotiate with governmental authorities with respect to the Property's environmental compliance and remedial measures in connection therewith. Agent and such receiver and their representatives shall have no liability for any loss, damage, injury, cost or expense resulting from any action or omission which was taken or omitted in good faith. Neither the appointment of a receiver for the Property by any court at the request of Agent or by agreement with Grantor nor the

entering into possession of all or any of the Property by such receiver shall constitute Agent a "mortgagee in possession" or otherwise make Agent responsible or liable in any manner with respect to the Property or the occupancy, operation or use thereof. Grantor agrees that Agent shall have the absolute and unconditional right to the appointment of a receiver in any independent and/or separate action brought by Agent regardless of whether Agent seeks any relief in such action other than the appointment of a receiver.

        (b)   When the Indebtedness or any part thereof shall become due, whether by acceleration or otherwise, Agent may, either with or without entry or taking possession as herein provided or otherwise, proceed by suit or suits at law or in equity or by any other appropriate proceeding or remedy to: (i) enforce payment of the Note or the performance of any term, covenant, condition or agreement of Grantor under any of the Loan Documents; (ii) cause the lien hereof to be foreclosed in the manner described below; (iii) exercise its rights under Section 10 with respect to all or any portion of the Personal Property in accordance with the provisions of the UCC; provided Agent shall have no obligation to clean up or otherwise prepare such Personal Property for sale nor marshal any Personal Property in favor of Grantor or any other secured party; and/or (iv) pursue any other right or remedy available to it hereunder, or under or by the law and decisions of the State in which the Land is located. All rights, powers and remedies granted Agent herein, or otherwise available to Agent, are for the sole benefit and protection of Agent, and Agent may exercise any such right, power or remedy at its option and in its sole and absolute discretion without any obligation to do so. In addition, if, under the terms hereof, Agent is given two or more alternative courses of action, Agent may elect any alternative or combination of alternatives, at its option and in its sole and absolute discretion. Agent may comply with any applicable state or federal law requirements in connection with a disposition of the Personal Property and compliance will not be considered adversely to affect the commercial reasonableness of any sale of the Personal Property. Notwithstanding any statute or rule of law to the contrary, the failure to join any tenant or tenants of the Property as party defendant or defendants in any foreclosure action or the failure of any such order or judgment to foreclose their rights shall not be asserted by Grantor as a defense in any civil action instituted to collect (A) the Indebtedness, or any part thereof or (B) any deficiency remaining unpaid after foreclosure and sale of the Property. To the extent a notice of sale shall be required by law for the sale or disposition of the Personal Property, a reasonable authenticated notification of disposition shall be notification given at least ten (10) days prior to any such sale, provided however, that no notification need be given to Grantor if it has authenticated after default a statement renouncing or modifying any right to notification of sale or other intended disposition.

        (c)   In furtherance and not in limitation of the foregoing, upon the occurrence of an Event of Default:

          (i)  Agent may give such notice of default and of election to cause the Property to be sold as may be required by law or as may be necessary to cause Trustee to exercise the power of sale granted herein. Trustee shall then record and give such notice of trustee's sale as then required by law and, after the expiration of such time as may be required by law, may sell the Property at the time and place specified in the notice of sale, as a whole or in separate parcels as directed by Agent, or by Grantor to the extent required by law, at public auction to the highest bidder for cash in lawful money of the United States, payable at time of sale, all in accordance with applicable law. Trustee, from time to time, may postpone or continue the sale of all or any portion of the Property by public declaration at the time and place last appointed for the sale. No other notice of the postponed sale shall be required except as required by applicable law. Upon any sale, Trustee shall deliver its deed conveying the property sold, without any covenant or warranty, express or implied, to the purchaser or purchasers at the sale. The recitals in such deed of any matters or facts shall be conclusive as to the accuracy thereof. Any person, including Agent, Trustee or Grantor, may purchase at the sale.

         (ii)  Agent may commence proceedings for foreclosure of this Deed of Trust in the manner provided by law for the foreclosure of a real property mortgage.

        (iii)  In any foreclosure proceeding, Grantor agrees that all property of every nature and description, whether real or personal, covered by this Deed of Trust, together with all personal property used on or in connection with the Property or any business conducted thereon by Grantor and covered by separate security agreements, is encumbered as one unit, that this Deed of Trust and such security interests, at Agent's option, may be foreclosed or sold in the same proceeding, and that all property encumbered (both realty and personalty), at Agent's option, may be sold as such in one unit, subject to the provisions of applicable law.

        (d)   Upon the completion of any foreclosure or trustee's sale of all or a portion of the Property, Agent may commence an action to recover any of the Indebtedness and Obligations that remains unpaid or unsatisfied. For purposes of this Deed of Trust the Indebtedness and Obligations shall be deemed to be paid or satisfied only to the extent that Agent actually receives immediately available funds, to the extent of any credit bid by Agent at any foreclosure or trustee's sale of any of the Property, or to the extent agreed in writing by Agent. In any action by Agent to recover a deficiency judgment for any balance due under the Note upon the foreclosure of this Deed of Trust or in any action to recover the Obligations secured hereby, and as a material inducement to making the Loan evidenced by the Note, Grantor acknowledges and agrees that the successful bid amount made at any judicial or non-judicial foreclosure sale, if any, shall be conclusively deemed to constitute the fair market value of the Property, that such bid amount shall be binding against Grantor in any proceeding seeking to determine or contest the fair market value of the Property and that such bid amount shall be the preferred alternative means of determining and establishing the fair market value of the Property. Grantor hereby waives and relinquishes any right to have the fair market value of the Property determined by a judge or jury in any action seeking a deficiency judgment or any action on the Obligations secured hereby, including, without limitation, a hearing to determine fair market value pursuant to A.R.S., §§ 12-1566, 33-814, 33-725 or 33-727.

        13.    Appointment of Receiver or Mortgagee in Possession.    If an Event of Default is continuing or if Agent shall have accelerated the Indebtedness, Trustee, upon application to a court of competent jurisdiction, shall be entitled as a matter of strict right, without notice, and without regard to the occupancy or value of any security for the Indebtedness or the insolvency of any party bound for its payment, to the appointment, at its option, of itself as mortgagee in possession, or of a receiver to take possession of and to operate the Property, and to collect and apply the Rents.

        14.    Expenditures and Expenses.    In any action to foreclose the lien hereof or otherwise enforce Trustee's, Agent's or Lender's rights and remedies hereunder, there shall be allowed and included as additional Indebtedness all costs and expenses which may be paid or incurred by or on behalf of Trustee, Agent or Lender, including without limitation, the costs of collection, enforcement, retaining, holding, preparing for disposition, processing and disposing of the Personal Property, appraiser's fees, outlays for documentary and expert evidence, stenographic changes, publication costs and costs (which may be estimated as the items to be expended after the entry of the decree) of procuring all such abstracts of title, title searches and examination, UCC record searches, title insurance policies, and similar data and assurance with respect to title as Agent may deem to be reasonably necessary either to prosecute any foreclosure action or to evidence to the bidder at any sale pursuant thereto the true condition of the title to or the value of the Property. All such costs and expenses, together with such other costs and expenses as may be incurred by Trustee, Agent or Lender in the protection of the Property, maintenance of the lien of this Deed of Trust or in any workout or restructuring of the Loan including, attorneys' fees and costs in any negotiation, litigation or other proceeding affecting this Deed of Trust, the Note, the other Loan Documents, the Property or the Personal Property, including probate, appellate, and bankruptcy proceedings and any post-judgment proceedings to collect or enforce any judgment or order relating to this Deed of Trust or the other Loan Documents or in preparation for the commencement or defense of any action or proceeding or threatened action or proceeding, shall be immediately due and payable to Agent, with interest thereon at the Default Rate, and shall be secured by this Deed of Trust.

        15.    Application of Proceeds of Foreclosure Sale.    Unless otherwise required by applicable law, the proceeds of any foreclosure sale of the Property shall be distributed and applied in the order of priority

set forth in the Note with the excess, if any, being applied, to any party entitled thereto as their rights may appear. Only with respect to the Personal Property and only to the extent required by law, including A.R.S. § 47-9615 of the UCC (or any other then-applicable provision of the UCC), shall it be necessary for Agent to account for any surplus to Grantor. To the extent permitted by applicable law, Grantor waives all claims, damages, and demands against Agent arising out of the disposition, repossession or retention of the Property.

        16.    Future Advances.    This Deed of Trust is given to secure not only the existing Indebtedness and Obligations, but also future advances (whether such advances are obligatory or are made at the option of Lender or Agent, or otherwise) made by Agent or Lender under the Loan Agreement, the Note, this Deed of Trust or any of the other Loan Documents, to the same extent as if such future advances were made on the date of the execution of this Deed of Trust. It is the intent hereof to secure payment of the Indebtedness whether the entire amount shall have been advanced to Borrower Parties at the date hereof, or at a later date, and to secure any other amount or amounts that may be added to the Indebtedness or Obligations. The total amount of the Indebtedness and Obligations secured hereby may decrease or increase from time to time, but the total unpaid balance so secured at any one time shall not exceed five (5) times the aggregate face amount of the Note in principal plus interest thereon and any disbursements made for the payment of taxes, levies, or insurance on the Property with interest thereon. This Deed of Trust shall secure any and all additional or further monies which may be advanced by Lender or Agent to Borrower Parties after the date hereof, which future advances of money, if made, may be evidenced by a note or notes executed by one or more Borrower Parties to Lender and Agent bearing such rate of interest and with such maturities as shall be determined from time to time. Nothing herein contained shall be deemed an obligation on the part of Lender or Agent to make any future advances.

        17.    Waiver of Statute of Limitations.    Grantor hereby waives the right to assert any statute of limitations as a bar to the enforcement of the lien created by any of the Loan Documents or to any action brought to enforce the Note or any other obligation secured by any of the Loan Documents.

        18.    Waiver of Homestead and Redemption; Other Waivers and Agreements.    Grantor hereby waives all right of homestead exemption in the Property. Grantor hereby waives all right of redemption on behalf of Grantor and on behalf of all other persons acquiring any interest or title in the Property subsequent to the date of this Deed of Trust, except decree or judgment creditors of Grantor.

        In the event Grantor is deemed to have signed this Deed of Trust as a surety or accommodation party, or to have subjected its property to this Deed of Trust to secure the indebtedness of another, to the extent permitted by applicable law, Grantor hereby expressly waives the benefits of any statutory provision limiting the liability of a surety, including without limitation, the provisions of A.R.S. §§ 12-1641, et seq. and Rule 17(f) of the Arizona Rules of Civil Procedures, and any defense arising by reason of any disability or other defense of Grantor or by reason of the cessation from any cause whatsoever of the liability of Grantor.

        Grantor further waives and agrees not to assert: (i) any right to require Agent to proceed against any guarantor, to proceed against or exhaust any other security for the Indebtedness and Obligations secured hereby, to pursue any other remedy available to Agent, or to pursue any remedy in any particular order or manner; (ii) the benefits of any legal or equitable doctrine or principle of marshalling; (iii) demand, diligence, presentment for payment, protest and demand, and notice of extension, dishonor, protest, demand and nonpayment, relating to the indebtedness secured hereby; and (iv) any benefit of, and any right to participate in, any other security now or hereafter held by Agent.

        Grantor further agrees that at any time or from time to time, without liability therefor and without notice, without affecting personal liability of any person for the payment of the indebtedness secured hereby, and without affecting the lien of this Deed of Trust upon the Property for the full amount of all amounts secured hereby, Agent, or Trustee at the direction of Agent, may (i) reconvey all or any part of the Property, (ii) consent to the making of any map of plat thereof; (iii) join in granting any easement thereon or in creating any covenants or conditions restricting use or occupancy thereof, or (iv) join in any extension agreement or in any agreement subordinating the lien or charge hereof.

        19.    Governing Law; Severability.    This Deed of Trust shall be governed by and construed in accordance with the internal laws of the State of Illinois except that the provisions of the laws of the jurisdiction in which the Land is located shall be applicable to the creation, perfection and enforcement of the lien created by this Deed of Trust (excluding, however, the creation, attachment and grant of the security interest in Personal Property which shall be governed by the Illinois UCC). The invalidity, illegality or unenforceability of any provision of this Deed of Trust shall not affect or impair the validity, legality or enforceability of the remainder of this Deed of Trust, and to this end, the provisions of this Deed of Trust are declared to be severable.

        20.    Notice.    Notices shall be given under this Deed of Trust in conformity with the terms and conditions of the Loan Agreement and in conformity with applicable law.

        21.    Successors and Assigns Bound; Joint and Several Liability; Agents; Captions.    The covenants and agreements contained in the Loan Documents shall bind, and the rights thereunder shall inure to, the respective successors and assigns of Agent, Lender and Grantor, subject to the transfer restrictions set forth in the Loan Agreement. All covenants and agreements of Grantor and Borrower Parties shall be joint and several. In exercising any rights under the Loan Documents or taking any actions provided for therein, Agent may act through its employees, agents or independent contractors as authorized by Agent. The captions and headings of the paragraphs of this Deed of Trust are for convenience only and are not to be used to interpret or define the provisions hereof.

        22.    Release.    Upon payment in full of all Indebtedness and the performance of all Obligations or release of the Property pursuant to Section 2.10 of the Loan Agreement, Agent shall release this Deed of Trust. In such event, Agent shall, at the request of Grantor, deliver to Grantor in recordable form, all such documents as shall be necessary to release the Property from the liens, security interests, conveyances, and assignments created or evidenced by this Deed of Trust. The recitals in such reconveyance of any matters or facts shall be conclusive as to the accuracy thereof. The grantee in such reconveyance may be described as "the person or persons legally entitled thereto". Grantor shall pay Agent's reasonable costs incurred in releasing or assigning this Deed of Trust and in preparing and filing any terminations or assignments of financing statements related thereto, as a condition to Agent's obligation to deliver the same.

        23.    Loss of Note.    Upon notice from Agent of the loss, theft, or destruction of the Note (or any of them) and upon receipt of an affidavit of lost note and an indemnity reasonably satisfactory to Grantor from Agent, or in the case of mutilation of the Note (or any of them), upon surrender of the mutilated Note, Grantor shall make and deliver a new note of like tenor in lieu of the then to be superseded Note (or any of them). Any one or more of the financial institutions which are or become a party to the Loan Agreement as Lenders may from time to time be replaced and, accordingly, one or more of the Notes may from time to time be replaced, provided that the terms of the Notes following such replacement, including the principal amount evidenced thereby, shall remain the same. As the indebtedness secured by this Deed of Trust shall remain the same, such replacement of the Notes shall not be construed as a novation and shall not affect, diminish or abrogate Grantor's liability under this Deed of Trust or the priority of this Deed of Trust.

        24.    Further Assurances.    Grantor agrees to execute any further documents, and to take any further actions reasonably requested by Agent to evidence or perfect the security interests granted herein, to maintain the first priority of the security interests, and to effectuate the rights specifically granted to Agent and Lender hereunder.

        25.    Subrogation.    Agent is hereby subrogated (a) to the lien(s) of each and every mortgage, deed of trust, lien or other encumbrance on all or any part of the Property which is fully or partially paid or satisfied out of the proceeds of the Indebtedness, and (b) to the rights of the owner(s) and holder(s) of any such mortgage, deed of trust, lien or other encumbrance. The respective rights under and priorities of all such mortgages, deeds of trust, liens or other encumbrances shall be preserved and shall pass to and be held by Agent as additional security for the Indebtedness, to the same extent as if such rights and priorities had been duly assigned by separate instrument of assignment and notwithstanding that the same may have been cancelled and satisfied of record. Notwithstanding the foregoing, Agent agrees

that only the terms and provisions set forth in this Deed of Trust and the other Loan Documents shall govern and control Grantor's rights and obligations hereunder and thereunder.

        26.    Time of Essence.    Time is of the essence of this Deed of Trust and the performance of each of the covenants and agreement contained herein.

        27.    Venue.    GRANTOR HEREBY CONSENTS TO THE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED WITHIN THE COUNTY OF COOK, STATE OF ILLINOIS AND IRREVOCABLY AGREES THAT, SUBJECT TO AGENTS ELECTION, ALL ACTIONS OR PROCEEDINGS ARISING OUT OF OR RELATING TO THIS DEED OF TRUST SHALL BE LITIGATED IN SUCH COURTS. GRANTOR EXPRESSLY SUBMITS AND CONSENTS TO THE JURISDICTION OF THE AFORESAID COURTS AND WAIVES ANY DEFENSE OF FORUM NON CONVENIENS. GRANTOR HEREBY WAIVES PERSONAL SERVICE OF ANY AND ALL PROCESS AND AGREES THAT ALL SUCH SERVICE OF PROCESS MAY BE MADE UPON GRANTOR BY CERTIFIED OR REGISTERED MAIL, RETURN RECEIPT REQUESTED, ADDRESSED TO GRANTOR, AT THE ADDRESS SET FORTH IN THIS AGREEMENT AND SERVICE SO MADE SHALL BE COMPLETE TEN (10) DAYS AFTER THE SAME HAS BEEN POSTED.

        28.    Jury Trial Waiver.    GRANTOR, AND AGENT AND LENDER BY THEIR ACCEPTANCE OF THIS DEED OF TRUST, HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, OR RELATED TO, THE SUBJECT MATTER OF THIS DEED OF TRUST AND THE BUSINESS RELATIONSHIP THAT IS BEING ESTABLISHED. THIS WAIVER IS KNOWINGLY, INTENTIONALLY AND VOLUNTARILY MADE BY GRANTOR, LENDER AND AGENT, AND GRANTOR ACKNOWLEDGES THAT NEITHER AGENT NOR LENDER, NOR ANY PERSON ACTING ON BEHALF OF AGENT OR LENDER, HAS MADE ANY REPRESENTATIONS OF FACT TO INDUCE THIS WAIVER OF TRIAL BY JURY OR HAS TAKEN ANY ACTIONS WHICH IN ANY WAY MODIFY OR NULLIFY ITS EFFECT. GRANTOR, LENDER AND AGENT ACKNOWLEDGE THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH OF THEM HAS ALREADY RELIED ON THIS WAIVER IN ENTERING INTO THIS DEED OF TRUST AND THAT EACH OF THEM WILL CONTINUE TO RELY ON THIS WAIVER IN THEIR RELATED FUTURE DEALINGS. GRANTOR, LENDER AND AGENT FURTHER ACKNOWLEDGE THAT THEY HAVE BEEN REPRESENTED (OR HAVE HAD THE OPPORTUNITY TO BE REPRESENTED) IN THE SIGNING OF THIS DEED OF TRUST AND IN THE MAKING OF THIS WAIVER BY INDEPENDENT LEGAL COUNSEL.

        29.    Tenants' Financial Statements.    Grantor shall deliver to Agent, promptly upon its receipt thereof, any and all financial statements and other reports, notices or documents delivered to Grantor by Tenants.

        30.    Acceptance of Trust.    Trustee hereby accepts the trust created by this Deed of Trust, upon the terms and subject to the conditions set forth herein, including the following:

        (a)   Trustee assumes no responsibility for and makes no warranties whatsoever as to (i) the description, identification or value of any or all of the Property, (ii) the validity of Loan Documents, (iii) Grantor's present or future financial condition, or (iv) the validity or collectibility of the Note.

        (b)   Trustee (i) may exercise Trustee's powers and perform Trustee's duties hereunder by or through such attorneys or agents and servants as they shall appoint, and (ii) shall not be answerable or liable (1) for the acts, negligence or default of any such attorney, agent or servant which they may so appoint, so long as they select them with reasonable care, or (2) for any act or omission of Lender, or (3) for any other cause arising under this Deed of Trust or otherwise, except for Trustee's own willful misconduct.

        (c)   Trustee, in Trustee's discretion may consult with legal counsel to be selected and employed by them, and Trustee shall incur no liability to Grantor, Agent or any other person by reason of anything

done, suffered to be done or omitted to be done by Trustee in accordance with the opinion of such counsel.

        (d)   Trustee shall not be under any obligation to sell any or all of the Property upon a default hereunder, or to take any other action authorized to be taken by Trustee in the event of any default hereunder, except upon the written demand of Agent furnishing security or indemnity satisfactory to Trustee against costs, expenses, and liabilities incurred or which may be incurred in selling the Property or taking such other action authorized to be taken by Trustee hereunder.

        31.    Remedies Regarding Assignment of Rents.    In addition to, and not in limitation of, any other remedy provided in or available under this instrument, during an Event of Default, Agent and Lenders shall have all the rights set forth in A.R.S. § 33-702B (as amended, supplemented or supplanted) regarding enforcement of the assignment of rents contained herein.

        32.    Realty Mortgage.    If this Deed of Trust should be or become ineffective as a deed of trust, then this Deed of Trust shall be construed and enforced as a realty mortgage.

        33.    Provisions Regarding Trustee.

        (a)   Trustee shall be entitled to reasonable compensation for all services rendered or expenses incurred in the administration or execution of the trusts hereby created and Grantor hereby agrees to pay same, subject to all legal limitations. Trustee shall be indemnified, held harmless and reimbursed by Grantor for any liability, damage or expense, including attorneys' fees and amounts paid in settlement, which Trustee may incur or sustain in the execution of this Deed of Trust or in the doing of any act which Trustee is required or permitted to do by the terms hereof or by law.

        (b)   Agent may substitute Trustee hereunder from time to time by instrument in writing in any manner now or hereafter provided by law. Such writing shall be conclusive proof of proper substitution of such successor Trustee or Trustees, who shall thereupon and without conveyance from the predecessor Trustee, succeed to all its title, estate, rights, powers and duties.

        (c)   The acceptance by Trustee of this trust shall be evidenced when this Deed of Trust, duly executed and acknowledged, is made a public record as provided by law.

        (d)   The trust created hereby is irrevocable by Grantor.

        34.    No Merger.    No obligation of Grantor to pay fees or costs or to indemnify Lender shall merge into any final judgment of foreclosure, it being the intent of the parties that such obligations shall survive foreclosure.

        35.    Entire Agreement.    This Deed of Trust constitutes the entire agreement of the parties with respect to the matters discussed herein. This Deed of Trust cannot be changed except by agreement, in writing, signed by Grantor and Agent.

        36.    Limitation on Interest.    Grantor agrees to pay an effective rate of interest equal to the rate stated in the documents evidencing the Indebtedness plus any additional rate, if any, resulting from any charge or fee in the nature of interest paid or to be paid by Grantor in connection with the Indebtedness, or any benefit received or to be received by Agent, Lender or Trustee in connection with the Indebtedness.

        37.    Community Facilities District.    Without obtaining the prior written consent of Agent, Grantor shall not consent to, or vote in favor of, the inclusion of all or any part of the Property in any Community Facilities District formed pursuant to the Community Facilities District Act, §§ 48-701, et seq., as amended from time to time. Grantor shall immediately give notice to Agent of any notification or advice that Grantor may receive from any municipality or other third party of any intent or proposal to include all or any part of the Property in a Community Facilities District. Agent shall have the right to file a written objection to the inclusion of all or any part of the Property in a Community Facilities District, either in its own name or in the name of Grantor, and to appear at, and participate in, any hearing with respect to the formation of any such district.

[Signatures appear on the following page.]

        IN WITNESS WHEREOF, Grantor has executed this Deed of Trust or has caused the same to be executed by its duly authorized representatives as of the date first above written

GRANTOR:
[NAME OF GRANTOR] a Nevada limited liability company
By:	The Ensign Group, Inc., a Delaware corporation, its [MEMBER TYPE] member
	By:	/s/  GREGORY K. STAPLEY
	Name:	Gregory K. Stapley
	Its:	[TITLE]
AGENT:
GENERAL ELECTRIC CAPITAL CORPORATION, a Delaware corporation, as Agent
By:	/s/  JIM MCMAHON
Name:	Jim McMahon
Title:	Duly Authorized Signatory

(Signature Page to Deed of Trust ([NAME OF FACILITY], AZ))

STATE OF CALIFORNIA
COUNTY OF ORANGE	Title of Document: Acknowledgment Certificate

        On June 27, 2006, before me, YOLANDA VILLEGAS STAFF, a Notary Public in and for the above county, personally appeared GREGORY K. STAPLEY personally known to me, whose name is subscribed to the within instrument and acknowledged to me that he executed the same in his authorized capacity, and that by his signature on the instrument the person or the entity upon behalf of which the person acted, executed the instrument.

        WITNESS my hand and seal.

My Commission Expires:	May 27, 2009	/s/  YOLANDA VILLEGAS STAFF NOTARY SIGNATURE
NOTARY SEAL		YOLANDA VILLEGAS STAFF Commission # 1562875 Notary Public—California San Mateo County My Comm. Expires May 27, 2009

ACKNOWLEDGMENT

STATE OF IL	)
	)	SS
COUNTY OF Cook	)

        On this 28 of June, 2006, before me, the undersigned officer, personally appeared Jim McMahon, personally known to me, or proved to me on the basis of satisfactory evidence, and who acknowledged that he is the VP of GENERAL ELECTRIC CAPITAL CORPORATION, and that as such officer, being duly authorized to do so pursuant to the company's bylaws or a resolution of its board of directors, executed, subscribed and acknowledged the foregoing instrument for the purposes therein contained, by signing the name of the company by himself in his authorized capacity as such officer, as his free and voluntary act and deed and the free and voluntary act and deed of the company.

        IN WITNESS WHEREOF, I hereunto set my hand and official seal.

[NOTARIAL SEAL]	/s/  CATHERINE M CARELLA Notary Public
OFFICIAL SEAL	My Commission Expires:
CATHERINE M CARELLA
Notary Public—State of Illinois My Commission Expires Jun 15, 2009	June 15, 2009

EXHIBIT A

Legal Description

DISCLOSURE PURSUANT TO
A.R.S. § 33-404

        The following information is provided pursuant to A.R.S. § 33-404:

        The beneficiary under this Deed of Trust is acting pursuant to the authority granted to it under that certain Loan Agreement dated of even date herewith executed by and among Borrower Parties and General Electric Capital Corporation, a Delaware corporation, and the other financial institutions who hereafter become parties to the Loan Agreement, for the benefit of the following, as the Lenders.

General Electric Capital Corporation
2 Bethesda Metro Center, Suite 600, Bethesda, MD, 20814

SCHEDULE OF MATERIAL DIFFERENCES

Name of Facility	Name of Grantor	Original Deed of Trust Date	Date of Recording	Original Document Number	Amendment Reference	Amendment Document Number	Facility Lease Agreement Date	Name of Master Tenant	Member Type	Title
Desert Terrace Nursing Center	Terrace Holdings AZ LLC	March 25, 2004	March 25, 2004	20040305689	*	20041424526	March 22, 2002	24th Street Healthcare Associates LLC	Managing	President
Desert Sky Nursing Home	Sky Holdings AZ LLC	March 25, 2004	March 25, 2004	20040305693	*	20041424528	March 22, 2002	Glendale Healthcare Associates LLC	Sole	President
Highland Manor Health and Rehabilitation Center	Ensign Highland LLC	March 25, 2004	March 25, 2004	20040305691	*	20041424530	November 1, 2001	Highland Healthcare LLC	Sole	Vice-President
North Mountain Medical and Rehabilitation Center	Valley Health Holdings LLC	December 3, 2004	December 3, 2004	20041424523			July 28, 2004	Radiant Hills Health Associates LLC	Sole and Managing	Vice-President

*

as amended by that certain First Amendment to Deed of Trust, Assignment of Rents, Security Agreement and Fixture Financing Statement dated as of December 3, 2004 made by Grantor for the benefit of Agent and recorded on December 3, 2004 in the Official Records of the Maricopa County Recorder as Document No.

EX-10.11

Exhibit 10.11

THIS DOCUMENT PREPARED UNDER
THE SUPERVISION OF AN ATTORNEY
LICENSED IN THE STATE OF
WASHINGTON AND AFTER

RECORDING RETURN TO:

Amanda J. Fanaroff, Esq.
Goldberg, Kohn, Bell, Black,
Rosenbloom & Moritz, Ltd.
55 East Monroe Street, Suite 3700
Chicago, Illinois 60603

SPACE ABOVE THIS LINE FOR RECORDER'S USE

Loan No. 07-0004261

DEED OF TRUST, ASSIGNMENT OF RENTS, SECURITY
AGREEMENT AND FIXTURE FINANCING STATEMENT
(Park Manor, County of Walla Walla, State of Washington)

Grantor:		PLAZA HEALTH HOLDINGS LLC
	o    Additional on page
Grantees:		Beneficiary:	GENERAL ELECTRIC CAPITAL CORPORATION, as Agent
		Trustee:	CHICAGO TITLE INSURANCE COMPANY
	o    Additional on page
Legal Description (abbreviated):
	o    Additional on:    Exhibit A
Assessor's Tax Parcel ID #:
Reference Nos. of Documents Released or Assigned:    N/A

        NOTICE TO RECORDER:    FOR PURPOSES OF ARTICLE 9 OF THE UNIFORM COMMERCIAL CODE (RCW 62A.9), THIS DEED OF TRUST CONSTITUTES A SECURITY AGREEMENT AND FIXTURE FILING WITH GRANTOR BEING THE DEBTOR AND AGENT BEING THE SECURED PARTY. THIS DEED OF TRUST COVERS GOODS THAT ARE OR ARE TO BECOME FIXTURES, IS EFFECTIVE AS A FINANCING STATEMENT FILED AS A FIXTURE FILING, AND IS TO BE FILED IN THE REAL ESTATE RECORDS.

        This DEED OF TRUST, ASSIGNMENT OF RENTS, SECURITY AGREEMENT AND FIXTURE FINANCING STATEMENT (this "Deed of Trust") is made as of this 30th day of June, 2006, between PLAZA HEALTH HOLDINGS LLC, a Nevada limited liability company ("Borrower"), whose mailing address is c/o Ensign Facility Services, Inc., 27101 Puerta Real, Suite 450, Mission Viejo, California 92691, unto Chicago Title Insurance Company, a Missouri corporation, whose mailing address is P.O. Box 429, Walla Walla, Washington 99362, as trustee ("Trustee"), for the benefit of GENERAL ELECTRIC CAPITAL CORPORATION, a Delaware corporation, (in its individual capacity, "GECC"), as agent (GECC in its capacity as agent, "Agent") for Lenders (as such term is defined in the Loan Agreement referred to below), whose mailing address is 2 Bethesda Metro Center, Suite 600, Bethesda, Maryland 20814.

RECITALS

        A.    Lender has agreed, subject to the terms and conditions of that certain Second Amended and Restated Loan Agreement dated of even date herewith (said Loan Agreement, as amended from time to time being hereinafter referred to as the "Loan Agreement"), executed by and among Borrower, certain Affiliates of Borrower (together with Borrower, the "Borrower Parties"), General Electric Capital Corporation, a Delaware corporation (in its individual capacity as a lender ("GECC")) and the other financial institutions who are or hereafter become parties to the Loan Agreement (together with GECC, collectively or individually, as the context may require, as "Lender") and Agent, to make a loan (the "Loan") to Borrower Parties. The Loan is evidenced by that certain Consolidated, Amended and Restated Promissory Note of even date herewith in the aggregate original principal amount of Forty-Seven Million Seven Hundred Ninety-Five Thousand and No/100 Dollars ($47,795,000.00) (which note, together with all notes issued in full or partial replacements thereof, or in substitution or exchange therefor, and all amendments thereto, are hereinafter collectively referred to as the "Note"), providing for monthly payments as set forth in the Loan Agreement, with the balance thereof, due and payable on June 29, 2016 (said date, any later date to which the maturity date may be extended in accordance with the Loan Agreement, or any earlier date on which the entire unpaid principal amount shall be paid or required to be paid in full, whether by prepayment, acceleration or otherwise is hereinafter called the "Maturity Date"). The terms and provisions of the Loan Agreement and Note are hereby incorporated by reference in this Deed of Trust. Capitalized terms used but not defined herein shall have the meaning provided in the Loan Agreement.

        B.    Lender and Agent wish to secure: (i) the payment of the Note, together with all interest, premiums, Prepayment Premium, Make Whole Breakage Amount (as each term is defined in the Loan Agreement), and other amounts, if any, due in accordance with the terms of the Note, as well as the payment of any additional indebtedness accruing to Lender or Agent on account of any future payments, advances or expenditures made by Lender or Agent pursuant to the Note, the Loan Agreement or this Deed of Trust or any of the other Loan Documents (hereinafter defined); (ii) the performance of each and every covenant, condition, and agreement contained in the Note, the Loan Agreement, this Deed of Trust, those certain Deeds of Trust, Assignments of Rents, Security Agreements and Fixture Financing Statements (or documents of similar title) executed by the other Borrower Parties (as amended from time to time), and any other documents evidencing or securing the Loan or executed in connection therewith (such documents together with any modifications, renewals, extensions or replacements thereof are collectively referred to as the "Loan Documents"); (iii) the payment and performance of any and all other debts, claims, obligations, demands, monies, liabilities and indebtedness of any kind or nature now or hereafter owing, arising, due or payable from Borrower Parties to Lender or Agent in connection with the Loan; and (iv) the payment of all amounts due from Master Tenants, Guarantor and the other borrowers under and in accordance with the terms of the Accounts Receivable Loan Documents and the performance of each and every covenant, condition, and agreement contained therein. All payment obligations of Borrower Parties or Guarantor to Lender or Agent with respect to the Loan or under any of the Loan Documents and all payment obligations of Master Tenants, Guarantor and the other borrowers thereunder to GECC under the Accounts Receivable Loan Documents are hereinafter sometimes collectively referred to as the "Indebtedness," and all other obligations of Borrower Parties or Guarantor to Agent with respect to the Loan or under

any of the Loan Documents and all other obligations of Master Tenants, Guarantor and the other borrowers thereunder to GECC under the Accounts Receivable Loan Documents are hereinafter sometimes collectively referred to as the "Obligations".

        NOW, THEREFORE, TO SECURE the repayment of the Indebtedness and the performance of the Obligations, Borrower has executed this Deed of Trust and hereby irrevocably GRANTS, TRANSFERS, BARGAINS, SELLS, CONVEYS and ASSIGNS to Trustee, IN TRUST, WITH POWER OF SALE, and with right of entry and possession as provided herein, for the benefit of Agent and Lender, the following described property and all proceeds thereof (which property is hereinafter sometimes collectively referred to as the "Property"), which Property is not used primarily or principally for agricultural or farming purposes:

        A.    The real estate described on Exhibit A attached hereto (the "Land");

        B.    All of the following (collectively, the "Improvements"): all buildings, improvements and fixtures now or in the future located or to be constructed on the Land; to the extent not owned by tenants of the Property, all machinery, appliances, equipment, furniture, fixtures and all other personal property of every kind or nature located in or on, or attached to, or used or to be used in connection with the Land, buildings, improvements or fixtures; all building materials and goods procured for use or in connection with the foregoing; and all additions, substitutions and replacements to any of the foregoing;

        C.    To the extent assignable by Borrower, all plans, specifications, architectural renderings, drawings, soil test reports, other reports of examination or analysis of the Land or the Improvements;

        D.    All casements, rights-of-way, water courses, mineral rights, water rights, air rights and appurtenances in any way belonging, relating or appertaining to any of the Land or Improvements, or which hereafter shall in any way belong, relate or be appurtenant thereto (collectively, "Appurtenances");

        E.    Subject to the rights of Agent under Section 6 hereof, all leases, master leases, subleases, licenses, patient and resident care agreements and other agreements with regard to the use or occupancy of all or any portion of the Land and/or the Improvements, including without limitation, that certain Long-Term Care Facility Lease Agreement dated as of April 11, 2006 by and between Manor Park Healthcare LLC, a Nevada limited liability company ("Master Tenant") and Grantor (the "Master Lease"), service agreements which include an occupancy agreement and all guaranties, amendments, extensions and renewals of any such lease, license or agreement, now or hereafter entered into (collectively, the "Leases") and all rents, incomes, receipts, prepayments, security deposits, termination payments, royalties, profits, issues and revenues, prepayment of the same including without limitation, lease termination, cancellation or similar fees, and all other amounts of any nature now due or which may become due or to which Borrower may now or shall hereafter become entitled or which it may demand or claim and arising or accruing directly or indirectly from the Leases or from the Land and/or Improvements from time to time (collectively, the "Rents"), reserving to Grantor, however, so long as no Event of Default has occurred, the right to receive and apply the Rents in accordance with the terms and conditions of Section 6 of this Deed of Trust;

        F.     To the extent assignable by Borrower, all claims, demands, judgments, insurance proceeds, refunds, reserves, deposits, rights of action, awards of damages, compensation, settlements and other rights to the payment of money hereafter made resulting from or relating to (i) the taking of the Land or the Improvements or any part thereof under the power of eminent domain, (ii) any damage (whether caused by such taking, by casualty or otherwise) to the Land, Improvements, Appurtenances or other Property or any part thereof, or (iii) the ownership or operation of the Property;

        G.    To the extent assignable by Borrower, all management contracts, permits, certificates, licenses, approvals, contracts, purchase and sale agreements, purchase options, entitlements, development rights and authorizations, however characterized, issued or in any way furnished for the acquisition, construction, development, operation and use of the Land, Improvements and/or Leases, including

building permits, environmental certificates, licenses, certificates of operation, warranties and guaranties;

        H.    All of the following types of collateral, as defined in the Uniform Commercial Code as in effect from time to time in the State of Illinois (the "UCC"): accounts, contract rights, general intangibles, chattel paper, documents, instruments, inventory, goods, equipment, investment property, deposit accounts, letter of credit rights, commercial tort claims, healthcare insurance receivables and all books and records relating to the foregoing; provided that Borrower will cooperate with Agent in obtaining "control" as defined in the UCC, with respect to collateral consisting of deposit accounts, investment property, letter of credit rights and electronic chattel paper;

        I.     Any monies on deposit with or for the benefit of Agent, including deposits for the payment of real estate taxes, insurance premiums and any cash collateral account;

        J.     All proceeds, products, replacements, additions, substitutions, renewals and accessions of and to the Land, Improvements, Appurtenances or any other property of the types described in the preceding granting clauses; and

        K.    Any and all after-acquired right, title or interest of Borrower in and to any property of the types described in the preceding granting clauses.

        TO HAVE AND TO HOLD the Property and all parts thereof together with the rents, issues, profits and proceeds thereof, unto Trustee to its own proper use, benefit, and advantage forever, subject, however, to the terms, covenants, and conditions herein.

        Borrower covenants and agrees with Agent as follows:

        1.    Payment of Indebtedness; Performance of Obligations.    Borrower shall promptly pay when due the indebtedness and shall promptly perform all Obligations.

        2.    Taxes and Other Obligations; Insurance and Condemnation Proceeds.

        (a)   Borrower shall pay or cause to be paid, when due, and before any interest, collection fees or penalties shall accrue, all Taxes in accordance with Section 7.3 of the Loan Agreement.

        (b)   Should Borrower fail to make any of such payments, Agent may, at its option and at the expense of Borrower, pay the amounts due for the account of Borrower. Upon the request of Agent, Borrower shall immediately furnish to Agent copies of all notices of amounts due and receipts evidencing payment. Borrower shall promptly notify Agent of any lien on all or any part of the Property and shall promptly discharge any unpermitted lien or encumbrance.

        (c)   Insurance and condemnation proceeds shall be paid and applied in accordance with Sections 3.2 and 3.3 of the Loan Agreement.

        3.    Preservation and Maintenance of Property.    Borrower shall: (a) not commit waste or permit impairment or deterioration of the Property; (b) not abandon the Property; (c) keep the Property (or cause the Property to be kept) in good repair and restore or repair promptly, in a good and workmanlike manner, all or any part of the Property to the equivalent of its original condition as of the date of this Deed of Trust, or such other condition as Agent may approve in writing, upon any damage or loss thereto; (d) comply (or cause compliance) in all material respects with all laws, ordinances, regulations and requirements of any governmental body applicable to the Property; and (e) give notice in writing to Agent of and, unless otherwise directed in writing by Agent, appear in and defend any action or proceeding purporting to affect the Property, the security granted by the Loan Documents or the rights or powers of Agent. Neither Borrower nor any tenant or other person shall remove, demolish or alter any Improvement on the Land except when incident to the replacement of fixtures, equipment, machinery and appliances with items of like kind.

        4.    Protection of Agent's and/or Lender's Security.    If (a) Borrower fails to pay the Indebtedness or to perform the Obligations, (b) any action or proceeding is commenced which affects or could affect the Property or Trustee's or Lender's interest therein, including any loss, damage, cost, expense or

liability incurred by Trustee, Agent or Lender with respect to (i) any environmental matters relating to the Property or (ii) the preparation of the commencement or defense of any action or proceeding or any threatened action or proceeding affecting the Loan Documents or the Property, then Agent, at Agent's option, may make such appearances, disburse such sums and take such action as Agent deems necessary, in its sole discretion, to protect the Property or Agent's or Lender's interest therein, including entry upon the Property to take such actions Agent determines appropriate to preserve, protect or restore the Property. Any amounts disbursed by Agent or Lender pursuant to this Section 4 (including attorneys' fees, costs and expenses), together with interest thereon at the "Default Rate" (defined in the Note) from the date of disbursement, shall become additional Indebtedness of Borrower secured by the lien of this Deed of Trust and the other Loan Documents and shall be due and payable on demand. Nothing contained in this Section 4 shall require Agent or Lender to incur any expense or take any action hereunder.

        5.    Actions.    Except as disclosed in the exceptions to title in the title policy approved by Agent issued by Chicago Title Insurance Company insuring the priority of this Deed of Trust, Borrower shall warrant title and appear in and defend any claim or any action or other proceeding purporting to affect title or other interests relating to any part of the Property, the security of this Deed of Trust or the rights of Agent or Lender, and give Agent prompt written notice of any such claim, action or proceeding. Agent may, at the expense of Borrower, appear in and defend any such claim, action or proceeding and any claim, action or other proceeding asserted or brought against Agent or Lender in connection with or relating to any part of the Property or this Deed of Trust or involving the priority, validity or enforceability of any Loan Document.

        6.    Assignment of Rents.

        (a)   To secure payment and performance of the Indebtedness and Obligations, in addition to, and not in contravention of, the assignment of the Leases and Rents in the preceding granting clauses of this Deed of Trust, Borrower absolutely and.unconditionally assigns and transfers to Agent, for the benefit of Agent and Lender, all of Borrower's right, title and interest in and to (i) the Leases, (ii) the Rents and the immediate and continuing right to collect and receive all of the Rents, and (iii) any and all rights and claims of any kind that Borrower may have now or in the future against any present or future tenant (including Master Tenant), subtenant or occupant of the Property (a "Tenant"). In furtherance of this assignment, and not in lieu thereof, promptly upon request by Agent, Borrower agrees to execute and deliver such further assignments as Agent may from time to time require.

        (b)   All of the Rents and all proceeds payable under any policy of insurance covering loss of rents resulting from untenantability caused by damage to any part of the Property, together with any and all rights that Borrower may have against any Tenant under the Leases or any subtenants or occupants of any part of the Property and any award made hereafter to Borrower in any court proceedings involving any of the Tenants or in any bankruptcy, insolvency, or reorganization proceedings in any state or federal court, and all payments by Tenants in lieu of Rent, are hereby absolutely and unconditionally assigned to Agent, for the benefit of Agent and Lender, to be applied by Agent in accordance with the terms of the Loan Agreement. It is understood and agreed by the parties that this assignment of the Leases and Rents is intended to be and is a present, absolute, and unconditional assignment from Borrower to Agent, and not merely the passing of a security interest, and shall, immediately upon execution, give Agent the right to collect the Rents and to apply them in payment of the Indebtedness. Such assignment and grant shall continue in effect until the Indebtedness is paid in full. Subject to the provisions set forth herein and, so long as there shall not have occurred an Event of Default which is continuing, Borrower shall have a license, without joinder of Agent, to enforce the Leases subject to the terms of the Loan Documents, and to collect the Rents as they come due (but not more than one (1) month in advance and excluding any lease termination, cancellation or similar payments which Borrower agrees shall be held in trust and turned over to Agent to be applied to the Indebtedness in accordance with the terms of the Loan Agreement and to retain, use and enjoy the same. The Rents shall be held by Borrower in trust, to be applied first to the payment of all impositions, levies, taxes, assessments and other charges upon the Property, second to maintenance of insurance policies upon the Property required hereby, third to the expenses of Property operations, including maintenance and

repairs required hereby (other than payment of fees to Affiliates of Borrower), fourth to the payment of that portion of the Indebtedness then due and payable, and fifth, the balance, if any, to or as directed by Borrower. Borrower shall deliver such other Rents to Agent as are necessary for the payment of the Indebtedness as such sums become due. If an Event of Default has occurred, Borrower's right to collect and secure the Rents shall cease and Agent shall have the sole right, with or without taking possession of the Property to collect all Rents.

        (c)   Borrower hereby irrevocably appoints Agent its true and lawful attorney-in-fact, with full power of substitution and with full power of substitution and with full power for Agent in its own name and capacity or in the name and capacity of Borrower to demand and collect any and all Rents and to file any claim or take any other action or proceeding and make any settlement regarding the Leases. All Tenants are hereby expressly authorized and directed to pay to Agent, or to such nominee as Agent may designate in a writing delivered to such Tenants, all amounts due Borrower pursuant to the Leases. All Tenants are expressly relieved of all duty, liability or obligation to Borrower in respect of all payments so made to Agent or such nominee.

        (d)   After an Event of Default, Agent may, at any time without notice, either in person, by agent or by a receiver appointed by a court, and without regard to the adequacy of any security for the Indebtedness and the Obligations and without regard to solvency of Borrower:

          (i)  Enter upon, take possession of and manage Property, or any part thereof, for the purpose of collecting the Rents in its own name sue for or otherwise collect the Rents, excluding those past due and unpaid, and apply the same, less costs and expenses of operation and collection, including reasonable attorney's fees, upon the Indebtedness and in such order as Agent may so determine;

         (ii)  Dispossess by the usual summary proceedings any Tenant defaulting in the payment thereof to Borrower, lease the Property or any party thereof, repair, restore, and improve the Property;

        (iii)  Apply the Rent after payment of Property expenses as determined by Agent to the Indebtedness in accordance with the terms of the Loan Agreement; and

        (iv)  Apply to any court of competent jurisdiction for specific performance of this Deed of Trust, an injunction against the violation hereof and/or the appointment of a receiver.

        (e)   The collection of Rents, or the entering upon and taking possession of the Property, or the application thereof as aforesaid, shall note cure or waive any Event of Default or notice of an Event of Default hereunder or invalidate any act done in response to such Event of Default pr pursuant to such notice of an Event of Default. In the event Borrower, as lessor under the Leases, shall fail to perform and fulfill in any material respect any material term, covenant, condition, or provision in the Leases, on its part to be performed or fulfilled, at the time and in the manner in the Leases provided, or if the Borrower shall suffer or permit to occur any breach or default under the provisions of the Leases, or any of them, and such default shall give the Tenant thereunder the right to terminate its Lease or otherwise shall continue for a period of thirty (30) days following the giving of written notice of such default to Borrower, then and in any such event, such breach or default shall constitute an Event of Default.

        (f)    In the event Borrower fails to perform any Lease covenant, Agent may, at its option, upon prior notice to Borrower (except in the event of an emergency) perform any Lease covenant for and on behalf of Borrower, and all monies expended in so doing shall be chargeable to Borrower and added to the Indebtedness and shall be immediately due and payable.

        (g)   Borrower hereby covenants and agrees as follows:

          (i)  This Deed of Trust transfers to Agent all of Borrower's right, title, and interest in any security deposits held by Borrower, provided that Borrower shall have the right to retain and apply the security deposit so long as no Event of Default has occurred under this Deed of Trust or the Loan Documents. Agent shall have no obligation to any Tenant with respect to its security deposit unless and until Agent comes into possession of the deposit.

         (ii)  Agent may assign its right, title and interest in the Leases, Rents and other Property, and any subsequent assignee shall have all of the rights and powers provided to Agent by this Deed of Trust.

        (iii)  Borrower shall not without the prior written consent of Agent: (a) perform any act or execute any other instrument which might interfere with the exercise of Agent's or Lender's rights hereunder, (b) execute any assignment, pledge or hypothecation of Rents or any of the Leases; or (c) suffer or permit any of the Leases to become subordinate to any lien other than the lien of this Deed of Trust.

        (h)   This Deed of Trust shall not be deemed to impose upon Agent or Lender any of the obligations or duties of the landlord or Borrower provided in any Lease. Borrower hereby acknowledges and agrees: (i) Borrower is and will remain liable under the Leases to the same extent as though this Deed of Trust had not been made; and (ii) Agent has not by this Deed of Trust assumed any of the obligations of Borrower under the Leases, except as to such obligations which arise after such time as Agent shall have assumed actual ownership or control of the Property. This Deed of Trust shall not make Agent responsible for the control, care, management, or repair of the Property or any personal property or for the carrying out of any of the terms of the Leases unless and until Agent takes possession or actual control of the Property. Agent and Lender shall not be liable in any way for any injury or damage to person or property sustained by any person or persons, firm, or corporation in or about the Property absent gross negligence or willful misconduct by such Person.

        (i)    In the event any Tenant should be the subject of any proceeding under the Federal Bankruptcy Code or any other federal, state, or local statute which provides for the possible termination or rejection of any Lease, Borrower covenants and agrees no settlement for damages shall be made without the prior written consent of Agent, which consent shall not be unreasonably withheld or delayed, and any check in payment of damages for rejection of any Lease will be made payable both to Borrower and Agent. Borrower hereby assigns any such payment to Agent and further covenants and agrees that it will duly endorse to the order of Agent any such check.

        (j)    After an Event of Default, then, without notice to, or the consent of, Borrower, Agent shall be entitled to exercise all of the rights and remedies contained in this Deed of Trust or in any other Loan Document or otherwise available at law or in equity including, without limitation, the right to do any one or more of the following:

          (i)  To enter upon, take possession of and manage the Property for the purpose of collecting the Rents;

         (ii)  Dispossess by the usual summary proceedings any Tenant defaulting in the payment thereof to Borrower;

        (iii)  Lease the Property or any part thereof;

        (iv)  Repair, restore, and improve the Property;

         (v)  Apply the Rents after payment of Property expenses as determined by Agent to the indebtedness and the Obligations in such order as Agent may determine; and

        (vi)  Apply to any court of competent jurisdiction for specific performance of this Deed of Trust, an injunction against the violation hereof and/or the appointment of a receiver.

        (k)   Borrower hereby agrees to indemnify Agent and Lender to hold Agent and Lender harmless from any liability, loss or damages including, without limitation, reasonable attorney's fees, costs and expenses which may or might be incurred by Agent under the Leases or by reason of this Deed of Trust, and from any and all claims and demands which may be asserted against Agent or Lender by reason of any term, covenant or agreement contained in any of the Leases, except for any such liability, loss or damage resulting solely from Agent's or Lender's gross negligence or willful misconduct.

        (l)    The assignment of Leases and Rents set forth in this Section 6 and the granting clauses of this Deed of Trust shall run with the land and be good and valid against Borrower or those claiming by,

under or through Borrower, from the date hereof and such assignment shall continue to be operative during the foreclosure or any other proceeding taken to enforce this Deed of Trust. In the event of a sale or foreclosure which shall result in a deficiency, such assignment shall stand as security during the redemption period of the payment of such deficiency. Agent shall be permitted, at its sole option, to exercise remedies under such assignment separately from remedies exercised against other portions of the Property.

        7.    Statements by Borrower.    Borrower shall within ten (10) days after Agent's request, furnish Agent with a written statement, duly acknowledged, setting forth the sums, according to Borrower's books and records, secured by the Loan Documents and any right of set-off, counterclaim or other defense which exists against such sums and the Obligations.

        8.    No Additional Liens, Encumbrances or Indebtedness.    Borrower covenants not to execute any mortgage, deed of trust, security agreement, assignment of leases and rents or other agreement granting a lien (except the liens granted to Agent by the Loan Documents) against or encumbrance on the Property or take or fail to take any other action which would result in a lien against the Property or the interest of Borrower (or Guarantor) in the Property without the prior written consent of Agent; provided, however, Borrower may in good faith, by appropriate proceeding, contest the validity or amount of any asserted lien in accordance with the term of the Loan Agreement and pending such contest, Borrower shall not be deemed to be in default hereunder. Borrower shall take such action as is necessary to prevent third parties from acquiring prescriptive easements or similar rights to the use of or ingress and egress over the vacant land located to the west of the buildings on the Land.

        9.    Borrower and Lien Not Released.    Without affecting the liability of Borrower for any of the Indebtedness or the Obligations, or any other person liable for the payment of the Indebtedness or the performance of any Obligations, and without affecting the lien or charge of this Deed of Trust as security for the payment of the indebtedness, Agent may, from time to time and without notice to any junior lien holder or holder of any right or other interest in and to the Property: (a) release any person liable for payment of all or any portion of the Indebtedness or performance of the Obligations; (b) waive or modify any provision of this Deed of Trust or the other Loan Documents or grant other indulgences; (c) release all or any part of the Property, (d) take additional security for any obligation herein mentioned; (e) subordinate the lien or charge of this Deed of Trust; (f) consent to the granting of any easement; or (g) consent to any map, plat or plan of the Property.

        10.    Uniform Commercial Code Security Agreement.

        (a)   This Deed of Trust shall cover, and the Property shall include, all property now or hereafter affixed or attached to the Land, which to the fullest extent permitted by law, shall be deemed fixtures and a part of the Land. In addition, this Deed of Trust shall constitute a security agreement pursuant to the UCC for any portion of the Property which, under applicable law, may be subject to a security interest pursuant to the UCC (such portion of the Property is hereinafter called the "Personal Property") and Borrower hereby grants to Agent, for the benefit of Agent and Lender, a security interest in the Personal Property. Agent shall have all of the rights and remedies of a secured party under the UCC as well as all other rights and remedies available at law or in equity.

        (b)   Borrower hereby authorizes Agent to file any financing statements, as well as extensions, renewals and amendments thereof, and reproductions of this Deed of Trust, all in such form as Agent may require to perfect a security interest with respect to the Personal Property. Borrower hereby authorizes and empowers Agent and irrevocably appoints Agent its agent and attorney-in-fact to execute and file, on Borrower's behalf, all financing statements and refilings and continuations thereof as Agent deems necessary or advisable to create, preserve and protect such lien Borrower shall pay all costs of filing such financing statements and any extensions, renewals, amendments and releases thereof, and shall pay all reasonable costs and expenses of any record searches for financing statements as Agent may reasonably require.

        (c)   Borrower shall not, without the prior written consent of Agent, sell assign, transfer, encumber, remove or permit to be removed from the Property any of the Personal Property. So long as no Event

of Default exists, Borrower may sell or otherwise dispose of the Personal Property when obsolete, worn out, inadequate, unserviceable or unnecessary for use in the operation of the.Property, but only upon replacing the same with other Personal Property at least equal in value and utility to the disposed Personal Property. Any replacement or substituted Personal Property shall be subject to the security interest granted herein.

        (d)   To the extent permitted by law, Borrower, Lender and Agent agree that with respect to all items of Personal Property which are or will become fixtures on the Land, this Deed of Trust, upon recording or registration in the real estate records of the proper office, shall constitute a "fixture filing" within the meaning of the UCC.

        (e)   After an Event of Default, Agent may exercise in respect of the Personal Property, in addition to all other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party on default under the UCC (whether or not the UCC applies to the affected Personal Property) and also may: (i) require Borrower to, and Borrower hereby agrees that it will, at its expense and upon request of Agent, forthwith assemble all or part of the Personal Property as directed by Agent and make it available to Agent at any reasonable place or places designated by Agent; and (ii) without notice except as specified below, sell, lease or otherwise dispose of the Personal Property or any part thereof in one or more parcels at public or private sale, and without the necessity of gathering at the place of sale of the property to be sold, at any of Agent's offices or elsewhere, at such time or times, for cash, on credit or for future delivery, and at such price or prices and upon such other terms as Agent may deem commercially reasonable.

        (f)    Borrower agrees that, to the extent notice of sale shall be required by law, a reasonable authenticated notification of disposition shall be a notification given at least ten (10) days prior to any such sale and such notice shall (i) describe Agent and Borrower, (ii) describe the Personal Property that is the subject of the intended disposition, (iii) state the method of intended disposition, (iv) state that Borrower is entitled to an accounting of the Indebtedness and stating the charge, if any, for an accounting, and (v) state the time and place of any public disposition or the time after which any private sale is to be made. Notwithstanding the foregoing, to the contrary, no notification need be given to Borrower if it has authenticated after default a statement renouncing or modifying any right to notification of sale or other intended disposition. At any sale of the Personal Property, if permitted by law, Agent may bid (which bid may be, in whole or in part, in the form of cancellation of indebtedness) for the purchase, lease, license or other disposition of the Personal Property or any portion thereof for the account of Agent. Agent shall not be obligated to make any sale of Personal Property regardless of notice of sale having been given. Agent may disclaim any warranties that might arise in connection with the sale, lease, license or other disposition of the Personal Property and have no obligation to provide any warranties at such time. Agent may adjourn any public or private sale from time to time by announcement at the time and place fixed therefore, and such sale may, without further notice, be made at the time and place to which it was so adjourned. To the extent permitted by law, Borrower hereby specifically waives all rights of redemption, stay or appraisal which it has or may have under any applicable law now existing or hereafter enacted.

        (g)   After an Event of Default, Agent or its agents or attorneys shall have the right without further notice or demand or legal process (unless the same shall be required by applicable law), personally, or by its agents or attorneys, (i) to enter upon, occupy and use any premises owned or leased by Borrower or where the Personal Property is located (or is believed to be located) for so long as such entry, occupancy and use is necessary, without any obligation to pay rent to Borrower, to render the Personal Property useable or saleable and to remove the Personal Property or any part thereof therefrom to the premises of Agent or any agent of Agent for such time as Agent may desire in order to effectively collect or liquidate the Personal Property and use in connection with such removal any and all services, supplies and other facilities of Borrower; (ii) to make copies of and have access to Borrower's original books and records, to obtain access to Borrower's data processing equipment, computer hardware and software relating to the Personal Property and to use all of the foregoing and the information contained therein in any manner Agent deems appropriate; and (iii) to notify postal authorities to

change the address for delivery of Borrower's mail to an address designated by Agent and to receive, open and dispose of all mail addressed to Borrower.

        11.    Events of Default; Acceleration of indebtedness.    The occurrence of any one or more of the following events shall constitute an "Event of Default" under this Deed of Trust:

        (a)   failure of Borrower Parties to pay, within five (5) days after the due date, any of the Indebtedness, including any payment due under the Note, or Borrower Parties' failure to pay the Loan at the Maturity Date, whether by acceleration or otherwise; or

        (b)   failure of Borrower to strictly comply with Section 8 (no additional liens) 6(f)(iii) (no interference with Agent's liens on Leases and Rents) of this Deed of Trust; or

        (c)   failure of Borrower Parties to satisfy each and every Obligation not set forth in subsection (b) above, and the continuance of such failure for ten (10) days after notice by Agent to Borrowers; provided, however, Borrower Parties shall have an additional thirty (30) days to cure such failure if (a) such Obligation cannot by its nature reasonably be cured within ten (10) days; (b) such-failure does not involve the failure to make payments on a monetary obligation; (c) if Borrower Parties commence to cure such failure promptly after written notice thereof and thereafter diligently pursues the curing thereof, and (d) Borrower Parties provide Agent with security reasonably satisfactory, to Agent against any interruption of payment or impairment of collateral as a result of such continuing failure, Borrower Parties shall not be in default hereunder during such additional thirty (30) day period of diligent curing;

        (d)   Borrower changes the state of its formation or its name without providing Agent thirty (30) days prior written notice;

        (e)   the occurrence of an Event of Default (as such term is defined in the applicable Loan Document) under any other Loan Document; or

        (f)    any default under, or termination of, the Master Lease.

Upon the occurrence of an Event of Default, at the option of Agent, the Indebtedness shall become immediately due and payable without notice to Borrower and Agent shall be entitled to all of the rights and remedies provided in the Loan Documents or at law or in equity. Each remedy provided in the Loan Documents is distinct and cumulative to all other rights or remedies under the Loan Documents or afforded by law or equity, and may be exercised concurrently, independently, or successively, in any order whatsoever.

        12.    Entry; Foreclosure.

        (a)   Upon the occurrence of an Event of Default, Borrower, upon demand of Agent or Trustee, shall forthwith surrender to Agent the actual possession of the Property, or to the extent permitted by law, Agent or a receiver appointed by a court of competent jurisdiction, may enter and take possession of all or any part of the Property, and may exclude Borrower and its agents and employees wholly therefrom, and may have joint access with Borrower to the books, papers and accounts of Borrower. If Borrower shall for any reason fail to surrender or deliver the Property or any part thereof after such demand by Agent, Agent or such receiver may obtain a judgment or decree conferring on Agent or such receiver, the right to immediate possession of the Property or requiring the delivery of the Property to Agent or such receiver, and Borrower specifically consents to the entry of such judgment or decree. Upon every such entering upon or taking of possession, Agent or such receiver may hold, store, use, operate, manage and control the property and conduct the business thereof, and Agent or such receiver may take any action required by applicable law or which Agent or such receiver believes necessary to enforce compliance with the environmental provisions contained herein or in the other Loan Documents, and negotiate with governmental authorities with respect to the Property's environmental compliance and remedial measures in connection therewith. Agent and such receiver and their representatives shall have no liability for any loss, damage, injury, cost or expense resulting from any action or omission which was taken or omitted in good faith.

        (b)   When the Indebtedness or any part thereof shall become due, whether by acceleration or otherwise, Agent may, either with or without entry or taking possession as herein provided or otherwise, proceed by suit or suits at law or in equity or by any other appropriate proceeding or remedy to: (i) enforce payment of the Note or the performance of any term, covenant, condition or agreement of Borrower under any of the Loan Documents; (ii) foreclose the lien hereof for the Indebtedness or part thereof and sell the Property as an entirety or otherwise, as Agent may determine; (iii) exercise its rights under Section 10 with respect to all or any portion of the Personal Property in accordance with the provisions of the UCC; provided Agent shall have no obligation to clean up or otherwise prepare such Personal Property for sale nor marshal any Personal Property in favor of Borrower or any other secured party; and/or (iv) pursue any other right or remedy available to it under or by the law and decisions of the State in which the Land is located. Agent may comply with any applicable state or federal law requirements in connection with a disposition of the Personal Property and compliance will not be considered adversely to affect the commercial reasonableness of any sale of the Personal Property. Notwithstanding any statute or rule of law to the contrary, the failure to join any tenant or tenants of the Property as party defendant or defendants in any foreclosure action or the failure of any such order or judgment to foreclose their rights shall not be asserted by Borrower as a defense in any civil action instituted to collect (A) the Indebtedness, or any part thereof or (B) any deficiency remaining unpaid after foreclosure and sale of the Property.

        (c)   Upon any foreclosure sale, Agent may bid for and purchase the Property and shall be entitled to apply all or any part of the Indebtedness as a credit to the purchase price.

        13.    Appointment of Receiver or Deed of Trust in Possession.    If an Event of Default is continuing or if Agent shall have accelerated the Indebtedness, Trustee, upon application to a court of competent jurisdiction, shall subject to applicable law be entitled as a matter of strict right, without notice, and without regard to the occupancy or value of any security for the Indebtedness or the insolvency of any party bound for its payment, to the appointment, at its option, of itself as mortgagee in possession, or of a receiver to take possession of and to operate the Property, and to collect and apply the Rents.

        14.    Expenditures and Expenses.    In any action to foreclose the lien hereof or otherwise enforce Trustee's or Lender's rights and remedies hereunder, there shall be allowed and included as additional Indebtedness all costs and expenses which may be paid or incurred by or on behalf of Trustee or Lender, including without limitation, the costs of collection, enforcement, retaining, holding, preparing for disposition, processing and disposing of the Personal Property, appraiser's fees, receivership fees and the fees of any professional hired by an receiver outlays for documentary and expert evidence, stenographic changes, publication costs and costs (which may be estimated as the items to be expended after the entry of the decree) of procuring all such abstracts of title, title searches and examination, UCC record searches, title insurance policies, and similar data and assurance with respect to title as Agent may deem to be reasonably necessary either to prosecute any foreclosure action or to evidence to the bidder at any sale pursuant thereto the true condition of the title to or the value of the Property. All such costs and expenses, together with such other costs and expenses as may be incurred by Trustee or Lender in the protection of the Property, maintenance of the lien of this Deed of Trust or in any workout or restructuring of the Loan including, attorneys' fees and costs in any negotiation, litigation or other proceeding affecting this Deed of Trust, the Note, the other Loan Documents, the Property or the Personal Property, including probate, appellate, and bankruptcy proceedings and any post-judgment proceedings to collect or enforce any judgment or order relating to this Deed of Trust or the other Loan Documents or in preparation for the commencement or defense of any action or proceeding or threatened action or proceeding, shall be immediately due and payable to Agent, with interest thereon at the Default Rate, and shall be secured by this Deed of Trust.

        15.    Application of Proceeds of Foreclosure Sale.    The proceeds of any foreclosure sale of the Property shall be distributed and applied in the order of priority set forth in the Loan Agreement with the excess, if any, being applied, to any party entitled thereto as their rights may appear. With respect to the Personal Property and only to the extent required by law, including the UCC, need Agent account for any surplus to the Borrower. To the extent permitted by applicable law, Borrower waives all

claims, damages, and demands against Agent or Lender arising out of the disposition, repossession or retention of the Property.

        16.    Future Advances.    This Deed of Trust is given to secure not only the existing Indebtedness and Obligations, but also future advances (whether such advances are obligatory or are made at the option of Lender or Agent, or otherwise) made by Agent or Lender under the Loan Agreement, the Note, this Deed of Trust or any of the other Loan Documents, to the same extent as if such future advances were made on the date of the execution of this Deed of Trust. It is the intent hereof to secure payment of the Indebtedness whether the entire amount shall have been advanced to Borrower Parties at the date hereof, or at a later date, and to secure any other amount or amounts that may be added to the Indebtedness or Obligations. The total amount of the Indebtedness and Obligations secured hereby may decrease or increase from time to time, but the total unpaid balance so secured at any one time shall not exceed five (5) times the aggregate face amount of the Note in principal plus interest thereon and any disbursements made for the payment of taxes, levies, or insurance on the Property with interest thereon. This Deed of Trust shall secure any and all additional or further monies which may be advanced by Lender or Agent to Borrower Parties after the date hereof, which future advances of money, if made, may be evidenced by a note or notes executed by one or more Borrower Parties to Lender and Agent bearing such rate of interest and with such maturities as shall be determined from time to time. Nothing herein contained shall be deemed an obligation on the part of Lender or Agent to make any future advances.

        17.    Waiver of Statute of Limitations.    Subject to applicable law, Borrower hereby waives the right to assert any statute of limitations as a bar to the enforcement of the lien created by any of the Loan Documents or to any action brought to enforce the Note or any other obligation secured by any of the Loan Documents.

        18.    Waiver of Homestead and Redemption.    Borrower hereby waives all right of homestead exemption in the Property. Borrower hereby waives all right of redemption on behalf of Borrower and on behalf of all other persons acquiring any interest or title in the Property subsequent to the date of this Deed of Trust, except decree or judgment creditors of Borrower.

        19.    Governing Law Severability.

        (a)   This Deed of Trust shall be governed by and construed in accordance with the internal laws of the State of Illinois without regard to the conflict law principles of the State of Illinois or any other state except that the provisions of the laws of the jurisdiction in which the Land is located shall be applicable to the creation, perfection and enforcement of the lien created by this Deed of Trust (excluding, however, the creation, attachment and grant of Security Interest in Personal Property which shall be governed by the Illinois UCC).

        (b)   Both Age and Lender have significant ties to the State of Illinois, and Borrower, Agent and Lender have specifically negotiated and entered into this choice of law provisions selecting the substantive law of Illinois to provide for certainty in the law governing this Deed of Trust, the Loan Agreement and the other Loan Documents. Borrower specifically acknowledges and agrees (i) that it is aware that the laws of other states in which property encumbered by one or more of the deeds or trusts or mortgages made by Borrower securing the Loan is located may provide certain rights and defenses to Borrower that are not available under the laws of the State of Illinois; (ii) that under the law of Illinois Borrower will not be entitled to the bents of an "security first," "one-form-of-action," "fair value," or "anti-deficiency" statutes of other states in the context of judicial or non judicial foreclosure proceedings or personal actions on the Loan; (iii) that if an Event of Default occurs under the Loan, Agent shall be entitled under Illinois law to bring any action in any order against Borrower, any guarantor, Guarantor, and any of the property encumbered by the deeds of trust or mortgages made by Borrower securing the Loan; and (iv) that Agent and Lender would not be willing to make the Loan if Borrower did not agree to this choice of law provisions.

        (c)   Insofar as Borrower, in the absence of this choice of law provision, may have had rights and defenses under certain state laws disallowing deficiency judgments, requiring lenders to proceed against

property securing a loan before proceeding in personam against the Borrower, requiring a fair-value hearing in foreclosure proceedings, requiring all property securing a loan to be included in a single action, or other similar requirements, Borrower knowingly, intentionally, unconditionally, and irrevocably waives any and all such rights, defenses, or other benefits it may have had under or pursuant to such state laws.

        (d)   The invalidity, illegality or unenforceability of any provision of this Deed of Trust shall not affect or impair the validity, legality or enforceability of the remainder of this Deed of Trust, and to this end, the provisions of this Deed of Trust are declared to be severable.

        20.    Notice.    Notices shall be given under this Deed of Trust in conformity with the terms and conditions of the Loan Agreement and in conformity with applicable law.

        21.    Successors and Assigns Bound; Joint and Several Liability; Agents; Captions.    The covenants and agreements contained in the Loan Documents shall bind, and the rights thereunder shall inure to, the respective successors and assigns of Agent, Lender and Borrower, subject to the transfer restrictions set forth in the Loan Document. All covenants and agreements of Borrower and Borrower Parties shall be joint and several. In exercising any rights under the Loan Documents or taking any actions provided for therein, Agent may act through its employees, agents or independent contractors as authorized by Agent. The captions and headings of the paragraphs of this Deed of Trust are for convenience only and are not to be used to interpret or define the provisions hereof.

        22.    Reconvevance/Release.    Upon payment in full of all Indebtedness and the performance of all Obligations, Agent shall request Trustee in writing to reconvey the Property, and shall surrender this Deed of Trust and all notes and instruments evidencing the Obligations to Trustee. The recitals in such reconveyance of any matters or facts shall be conclusive as to the accuracy thereof. The grantee in such reconveyance may be described as "the person or persons legally entitled thereto." Notwithstanding the foregoing, Agent will (without recourse, representation or warranty of any kind whatsoever, except for a representation (i) that Lender owns the Loan free and clear of all liens or encumbrances, and (ii) as to the outstanding principal balance of the Loan) assign the Loan and the collateral therefor to a transferee designated by Borrower. In such event, Agent shall, at the request of Borrower, deliver to Borrower in recordable form, all such documents as shall be necessary to assign this Deed of Trust, at Borrower's sole cost and expense (and without recourse, representation or warranty of any kind whatsoever). Borrower shall pay the reasonable costs of Agent and Trustee incurred in reconveying or assigning this Deed of Trust and in preparing and filing any terminations or assignments of financing statements related thereto, as a condition to Agent's obligation to deliver the same.

        23.    Loss of Note.    Upon notice from Agent of the loss, theft, or destruction of the Note (or any of them) and upon receipt of an affidavit of lost note and an indemnity reasonably satisfactory to Borrower from Agent, or in the case of mutilation of the Note (or any of them), upon surrender of the mutilated Note, Borrower shall make and deliver a new note of like tenor in lieu of the then to be superseded Note (or any of them). Any one or more of the financial institutions which are or become a party to the Loan Agreement as Lenders may from time to time be replaced and, accordingly, one or more of the Notes may from time to time be replaced, provided that the terms of the Notes following such replacement, including the principal amount evidenced thereby, shall remain the same. As the indebtedness "secured by this Deed of Trust shall remain the same, such replacement of the Notes shall not be construed as a novation and shall not affect, diminish or abrogate Borrower's liability under this Deed of Trust or the priority of this Deed of Trust.

        24.    Further Assurances.    Borrower agrees to execute any further documents, and to take any further actions reasonably requested by Agent to evidence or perfect the security interests granted herein, to maintain the first priority of the security interests, and to effectuate the rights specifically granted to Agent and Lender hereunder.

        25.    Subrogation.    Agent is hereby subrogated (a) to the lien(s) of each and every mortgage, deed of trust, lien or other encumbrance on all or any part of the Property which is fully or partially paid or satisfied out of the proceeds of the Indebtedness, and (b) to the rights of the owner(s) and holder(s) of

any such mortgage, deed of trust, lien or other encumbrance. The respective rights under and priorities of all such mortgages, deeds of trust, liens or other encumbrances shall be preserved and shall pass to and be held by Agent as additional security for the Indebtedness, to the same extent as if such rights and priorities had been duly assigned by separate instrument of assignment and notwithstanding that the same may have been cancelled and satisfied of record. Notwithstanding the foregoing, Agent agrees that only the terms and provisions set forth in this Deed of Trust and the other Loan Documents shall govern and control Borrower's rights and obligations hereunder and thereunder.

        26.    Time of Essence.    Time is of the essence of this Deed of Trust and the performance of each of the covenants and agreement contained herein.

        27.    Venue.    BORROWER HEREBY CONSENTS TO THE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED WITHIN THE COUNTY OF COOK, STATE OF ILLINOIS AND IRREVOCABLY AGREES THAT, SUBJECT TO AGENT'S ELECTION, AND, WITH THE EXCEPTION OF ANY ACTION THAT INVOLVES JUDICIAL OR NON-JUDICIAL FORECLOSURE OF THIS DEED OF TRUST, JURISDICTION OVER WHICH SHALL LIE IN THE STATE COURTS OF THE COUNTY IN WHICH THE PROPERTY ENCUMBERED BY SUCH DEED OF TRUST S LOCATED, ALL ACTIONS OR PROCEEDINGS ARISING OUT OF OR RELATING TO THIS DEED OF TRUST SHALL BE LITIGATED IN SUCH COURTS. BORROWER EXPRESSLY SUBMITS AND CONSENTS TO THE JURISDICTION OF THE AFORESAID COURTS AND WAIVES ANY DEFENSE OF FORUM NON CONVENIENS, BORROWER HEREBY WAIVES. PERSONAL SERVICE OF ANY AND ALL PROCESS AND AGREES THAT ALL SUCH SERVICE OF PROCESS MAY BE MADE UPON BORROWER BY CERTIFIED OR REGISTERED MAIL, RETURN RECEIPT REQUESTED, ADDRESSED TO BORROWER, AT THE ADDRESS SET FORTH IN THIS AGREEMENT AND SERVICE SO MADE SHALL BE COMPLETE TEN (10) DAYS AFTER THE SAME HAS BEEN POSTED.

        28.    Jury Trial Waiver.    BORROWER, AND AGENT AND LENDER BY THEIR ACCEPTANCE OF THIS DEED OF TRUST, HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, OR RELATED TO, THE SUBJECT MATTER OF THIS DEED OF TRUST AND THE BUSINESS RELATIONSHIP THAT IS BEING ESTABLISHED. THIS WAIVER IS KNOWINGLY, INTENTIONALLY AND VOLUNTARILY MADE BY BORROWER, LENDER AND AGENT, AND BORROWER ACKNOWLEDGES THAT NEITHER AGENT NOR LENDER, NOR ANY PERSON ACTING ON BEHALF OF AGENT OR LENDER HAS MADE ANY REPRESENTATIONS OF FACT TO INDUCE THIS WAIVER OF TRIAL BY JURY OR HAS TAKEN ANY ACTIONS WHICH IN ANY WAY MODIFY OR NULLIFY ITS EFFECT. BORROWER, LENDER AND AGENT ACKNOWLEDGE THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH OF THEM HAS ALREADY RELIED ON THIS WAIVER IN ENTERING INTO THIS DEED OF TRUST AND THAT EACH OF THEM WILL CONTINUE TO RELY ON THIS WAIVER IN THEIR RELATED FUTURE DEALINGS. BORROWER, LENDER AND AGENT FURTHER ACKNOWLEDGE THAT THEY HAVE BEEN REPRESENTED (OR HAVE HAD THE OPPORTUNITY TO BE REPRESENTED) IN THE SIGNING OF THIS DEED OF TRUST AND IN THE MAKING OF THIS WAIVER BY INDEPENDENT LEGAL COUNSEL.

        29.    Tenants' Financial Statements.    Borrower shall deliver to Agent, promptly upon its receipt thereof, any and all financial statements and other reports, notices or documents delivered to Borrower by Tenants.

        30.    No Merger.    No obligation of Borrower to pay fees or costs or to indemnify Lender shall merge into any final judgment of foreclosure, it being the intent of the parties that such obligations shall survive foreclosure.

        31.    Title of Deed of Trust.    The parties acknowledge and agree that it is their intent that the title of this document comply with all applicable provisions of Washington law, so as to make the

assignment of all interests in real property provided for in this Deed of Trust effectual against creditors or subsequent purchasers in law or equity.

        32.    Successor Trustee.    In accordance with applicable law, Agent may from time to time appoint a successor trustee to any Trustee appointed hereunder. Without conveyance of the Property, the successor trustee, shall succeed to all the title, power and duties conferred upon the Trustee herein and by applicable law.

        33.    Oral Agreements Notice.    ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON LAW.

        34.    Exclusion.    Notwithstanding anything to the contrary herein, this Deed of Trust does not secure any Environmental Indemnity Agreement or the Guaranty (as defined in the Loan Agreement) and none of the covenants, representations, or other obligations of Borrower set forth in this Deed of Trust are intended by the parties to be the substantial equivalent of obligations of Borrower arising under such agreements. To the extent any such representations, covenants, or obligations may nonetheless subsequently be determined to be the substantial equivalent of obligations arising under the Environmental Indemnity Agreement or the Guaranty, without in any way limiting or affecting the other rights and remedies of Agent, Lender, or Trustee hereunder, this Deed of Trust will cease to secure any such provisions and a default under any such provision shall not constitute a basis for a non judicial foreclosure hereunder. Nothing in this provision shall be construed as affecting, diminishing, or abrogating any other security for any such Environmental Indemnity Agreement or the Guaranty.

THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK

        IN WITNESS WHEREOF, Borrower has executed this Deed of Trust or has caused the same to be executed by its duly authorized representatives as of the date first above written.

BORROWER:
PLAZA HEALTH HOLDINGS LLC a Nevada limited liability company
By:	The Ensign Group, Inc., a Delaware corporation, its sole member and manager
	By:	/s/  GREGORY K. STAPLEY
	Name:	Gregory K. Stapley
	Its:	Vice President

Signature Page to Washington Deed of Trust

STATE OF CALIFORNIA
COUNTY OF ORANGE	Title of Document: Acknowledgment Certificate

        On June 27, 2006, before me, YOLANDA VILLEGAS STAFF, a Notary Public in and for the above county, personally appeared GREGORY K. STAPLEY personally known to me, whose name is subscribed to the within instrument and acknowledged to me that he executed the same in his authorized capacity, and that by his signature on the instrument the person or the entity upon behalf of which the person acted, executed the instrument.

        WITNESS my hand and seal.

My Commission Expires:
May 27, 2009
/s/  YOLANDA VILLEGAS STAFF NOTARY SIGNATURE

NOTARY SEAL

YOLANDA VILLEGAS STAFF
Commission # 1562875
Notary Public—California
San Mateo County
My Comm. Expires May 27, 2009

EXHIBIT A

Legal Description

EX-10.12

Exhibit 10.12

THIS DOCUMENT PREPARED
UNDER THE ASSISTANCE OF AN
ATTORNEY LICENSED IN THE
STATE OF ARIZONA AND AFTER

RECORDING RETURN TO:
Jami L. Brodey, Esq.
Goldberg, Kohn, Bell, Black,
Rosenbloom & Moritz, Ltd.
55 East Monroe Street
Suite 3700
Chicago, Illinois 60603

SPACE ABOVE THIS LINE FOR RECORDER'S USE

Loan No. 07-0004261

DEED OF TRUST, ASSIGNMENT OF RENTS, SECURITY AGREEMENT AND
FIXTURE FINANCING STATEMENT
(Catalina Care and Rehabilitation Center
County of Pima, State of Arizona)

        This DEED OF TRUST, ASSIGNMENT OF RENTS, SECURITY AGREEMENT AND FIXTURE FINANCING STATEMENT (this "Deed of Trust") is made as of this 30^th day of June, 2006, between RILLITO HOLDINGS LLC, a Nevada limited liability company ("Grantor"), whose mailing address is c/o Ensign Facility Services, Inc., 27101 Puerta Real, Suite 450, Mission Viejo, California 92691 unto CHICAGO TITLE INSURANCE COMPANY ("Trustee"), whose mailing address is 1201 South Alma School Road, #6550, Mesa, Arizona 85210-2011 for the benefit of GENERAL ELECTRIC CAPITAL CORPORATION, a Delaware corporation (in its individual capacity, "GECC"), whose mailing address is 2 Bethesda Metro Center, Suite 600, Bethesda, Maryland 20814, as agent (GECC in its capacity as agent, "Agent") for Lenders (as such term is defined in the Loan Agreement referred to below).

RECITALS

        A.    Lender has agreed, subject to the terms and conditions of that certain Second Amended and Restated Loan Agreement dated of even date herewith (said Loan Agreement, as amended from time to time being hereinafter referred to as the "Loan Agreement"), executed by and among Grantor, certain Affiliates of Grantor (together with Grantor, the "Borrower Parties"), General Electric Capital Corporation, a Delaware corporation (in its individual capacity as a lender ("GECC")) and the other financial institutions who are or hereafter become parties to the Loan Agreement (together with GECC, collectively or individually, as the context may require, as "Lender") and Agent, to make a loan (the "Loan") to Borrower Parties. The Loan is evidenced by that certain promissory note of even date herewith in the aggregate original principal amount of Forty Seven Million Seven Hundred Ninety Five Thousand and No/100 Dollars ($47,795,000.00) (which note, together with all notes issued in full or partial replacements thereof, or in substitution or exchange therefor, and all amendments thereto, are hereinafter collectively referred to as the "Note"), providing for monthly payments as set forth in the Loan Agreement, with the balance thereof, due and payable on June 29, 2016 (said date, any later date to which the maturity date may be extended in accordance with the Loan Agreement, or any earlier date on which the entire unpaid principal amount shall be paid or required to be paid in full, whether by prepayment, acceleration or otherwise is hereinafter called the "Maturity Date"). The terms and provisions of the Loan Agreement and Note are hereby incorporated by reference in this-Deed of Trust. Capitalized terms used but not defined herein shall have the meaning provided in the Loan Agreement.

        B.    Lender and Agent wish to secure: (i) the payment of the Note, together with all interest, premiums, the Make Whole Breakage Amount, the Prepayment Premium (as such terms are defined in the Loan Agreement) and other amounts, if any, due in accordance with the terms of the Note, as well as the payment of any additional indebtedness accruing to Lender or Agent on account of any future payments, advances or expenditures made by Lender or Agent pursuant to the Note, the Loan Agreement or this Deed of Trust or any of the other Loan Documents (hereinafter defined); (ii) the performance of each and every covenant, condition, and agreement contained in the Note, the Loan Agreement, this Deed of Trust, those certain Deeds of Trust, Assignments of Rents, Security Agreements and Fixture Financing Statements (or documents of similar title) executed by the other Borrower Parties (as amended from time to time), the Environmental Indemnity (as defined in the Loan Agreement) and that certain Second Amended and Restated Guaranty of Payment and Performance of even date herewith made by Guarantor (as defined in the Loan Agreement) in favor of Agent and any other documents evidencing or securing the Loan or executed in connection therewith (such documents together with any modifications, renewals, extensions or replacements thereof are collectively referred to as the "Loan Documents"); (iii) the payment and performance of any and all other debts, claims, obligations, demands, monies, liabilities and indebtedness of any kind or nature now or hereafter owing, arising, due or payable from Borrower Parties or Guarantor to Lender or Agent in connection with the Loan; and (iv) the payment of all amounts due from Master Tenants, Guarantor and the other borrowers under and in accordance with the terms of the Accounts Receivable Loan Documents and the performance of each and every covenant, condition, and agreement contained therein. All payment obligations of Borrower Parties or Guarantor to Lender or Agent with respect to the Loan or under any of the Loan Documents and all payment obligations of Master Tenants, Guarantor and the other borrowers thereunder to GECC under the Accounts Receivable Loan Documents are hereinafter sometimes collectively referred to as the "Indebtedness," and all other obligations of Borrower Parties or Guarantor to Agent with respect to the Loan or under any of the Loan Documents and all other obligations of Master Tenants, Guarantor and the other borrowers thereunder to GECC under the Accounts Receivable Loan Documents are hereinafter sometimes collectively referred to as the "Obligations".

        NOW, THEREFORE, TO SECURE the repayment of the Indebtedness and the performance of the Obligations, and also in consideration of the sum of Ten and No/100 Dollars ($10.00), the receipt of which is acknowledged by Grantor, Grantor by these presents irrevocably grants, bargains, sells, assigns, releases, transfers, pledges, conveys and warrants specially unto Trustee, its successors and assigns forever, in trust, with power of sale, for the benefit and security of Agent and Lender, all right, title, and interest of Grantor in and to the fee simple estates in the following described property and all proceeds thereof (which property is hereinafter sometimes collectively referred to as the "Property"):

        A.    The real estate described on Exhibit A attached hereto (the "Land");

        B.    All of the following (collectively, the "Improvements"): all buildings, improvements and fixtures now or in the future located or to be constructed on the Land; to the extent not owned by tenants of the Property, all machinery, appliances, equipment, furniture, fixtures and all other personal property of every kind or nature located in or on, or attached to, or used or to be used in connection with the Land, buildings, improvements or fixtures; all building materials and goods procured for use or in connection with the foregoing; and all additions, substitutions and replacements to any of the foregoing;

        C.    To the extent assignable by Grantor, all plans, specifications, architectural renderings, drawings, soil test reports, other reports of examination or analysis of the Land or the Improvements;

        D.    All easements, rights-of-way, water courses, mineral rights, water rights, air rights and appurtenances in any way belonging, relating or appertaining to any of the Land or Improvements, or

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which hereafter shall in any way belong, relate or be appurtenant thereto (collectively, "Appurtenances");

        E.    Subject to the rights of Agent under Section 6 hereof, all leases, master leases, subleases, licenses, patient and resident care agreements and other agreements with regard to the use or occupancy of all or any portion of the Land and/or the Improvements, including without limitation that certain Long-Term Care Facility Lease Agreement dated as of May 16, 2003 by and between Presidio Health Associates LLC, a Nevada limited liability company ("Master Tenant") and Grantor (the "Master Lease"), service agreements which include an occupancy agreement and all guaranties, amendments, extensions and renewals of any such lease, license or agreement, now or hereafter entered into (collectively, the "Leases") and all rents, incomes, receipts, prepayments, security deposits, termination payments, royalties, profits, issues and revenues, prepayment of the same including without limitation, lease termination, cancellation or similar fees, and all other amounts of any nature now due or which may become due or to which Grantor may now or shall hereafter become entitled or which it may demand or claim and arising or accruing directly or indirectly from the Leases or from the Land and/or Improvements from time to time (collectively, the "Rents"), reserving to Grantor, however, so long as no Event of Default has occurred, the right to receive and apply the Rents in accordance with the terms and conditions of Section 6 of this Deed of Trust;

        F.     To the extent assignable by Grantor, all claims, demands, judgments, insurance proceeds, refunds, reserves, deposits, rights of action, awards of damages, compensation, settlements and other rights to tie payment of money hereafter made resulting from or relating to (i) the taking of the Land or the Improvements or any part thereof under the power of eminent domain, (ii) any Mme (whether caused by such taking, by casualty or otherwise) to the Land, Improvements, Appurtenances or other Property or any part thereof, or (iii) the ownership or operation of the Property;

        G.    To the extent assignable by Grantor, all management contracts, permits, certificates, licenses, approvals, contracts, purchase and sale agreements, purchase options, entitlements, development rights and authorizations, however characterized, issued or any way furnished for the acquisition, construction, development, operation and use of the Land, Improvements and/or Leases, including building permits, environmental certificates, licenses, certificates of operation, warranties and guaranties;

        H.    All of the following types of collateral, as defined in the Uniform Commercial Code as in effect from time to time in the State of Illinois (the Illinois Uniform Commercial Code being referred to as the "UCC", unless the context requires a reference to the Uniform Commercial Code in effect in another state): accounts, contract rights, general intangibles, chattel paper, documents, instruments, inventory, goods, equipment, investment property, deposit accounts, letter of credit rights, commercial tort claims, healthcare insurance receivables and all books and records relating to the foregoing; provided that Grantor will cooperate with Agent in obtaining "control" as defined in the UCC, with respect to collateral consisting of deposit accounts, investment property, letter of credit rights and electronic chattel paper;

        I.     Any monies on deposit with or for the benefit of Agent, including deposits for the payment of real estate taxes, insurance premiums and any cash collateral account;

        J.     All proceeds, products, reply additions, substitutions, renewals and accessions of and to the Land, Improvements, Appurtenances or any other property of the types described in the preceding granting clauses; and

        K.    Any and all after-acquired right, title or interest of Grantor in and to any property of the types described in the preceding granting clauses.

        TO HAVE AND TO HOLD the Property and all parts thereof together with the rents, issues, profits and proceeds thereof, unto Trustee to its own proper use, benefit, and advantage forever, subject, however, to the terms, covenants, and conditions herein.

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        It is the intention of Grantor and Agent that this Deed of Trust shall, for all purposes, be deemed to be a Real Property Deed of Trust within the meaning of Arizona Revised Statutes ("A.R.S.") §§ 33-801 through 33-821 (the "Arizona Deed of Trust Act"). For purposes of the Arizona Deed of Trust Act, Grantor shall be the "Trustor," Agent shall be the "Beneficiary" and Chicago Title Insurance Company shall be the "Trustee." Agent and Trustee shall have all rights, benefits and remedies conferred upon beneficiaries and trustees respectively by the Arizona Deed of Trust Act. The Property, including without limitation, the Land, Improvements, Appurtenances and Leases shall constitute "Trust Property" pursuant to A.R.S. § 33-801.

        Grantor covenants and agrees with Agent as follows:

        1.    Payment of Indebtedness; Performance of Obligations.    Grantor shall promptly pay when due the Indebtedness and shall promptly perform all Obligations.

        2.    Taxes and Other Obligations; Insurance and Condemnation Proceeds.

        (a)   Grantor shall pay or cause to be paid, when due, and before any interest, collection fees or penalties shall accrue, all Taxes in accordance with Section 7.3 of the Loan Agreement.

        (b)   Should Grantor fail to make any of such payments, Agent may, at its option and at the expense of Grantor, pay the amounts due for the account of Grantor. Upon the request of Agent, Grantor shall immediately furnish to Agent copies of all notices of amounts due and receipts evidencing payment. Grantor shall promptly notify Agent of any lien on all or any part of the Property and shall promptly discharge any unpermitted lien or encumbrance.

        (c)   Insurance and condemnation proceeds shall be paid and applied in accordance with Section 3.2 and 3.3 of the Loan Agreement.

        3.    Preservation and Maintenance of Property.    Grantor shall: (a) not commit waste or permit impairment or deterioration of the Property; (b) not abandon the Property; (c) keep the Property (or cause the Property to be kept) in good repair and restore or repair promptly, in a good and workmanlike manner, all or any part of the Property to the equivalent of its original condition as of the date of this Deed of Trust, or such other condition as Agent may approve in writing, upon any damage or loss thereto; (d) comply (or cause compliance) in all material respects with all laws, ordinances, regulations and requirements of any governmental body applicable to the Property and (e) give notice in writing to Agent of and, unless otherwise directed in writing-by Agent, appear in and defend any action or proceeding purporting to affect the Property, the security granted by the Loan Documents or the rights or powers of Agent. Neither Grantor nor any tenant or other person shall remove, demolish or alter any Improvement on the Land except when incident to the replacement of fixtures, equipment, machinery and appliances with items of like kind.

        4.    Protection of Agent's and/or Lender's Security.    If (a) Grantor fails to pay the Indebtedness or to perform the Obligations, (b) any action or proceeding is commenced which affects or could affect the Property or Trustee's or Lender's interest therein, including any loss, damage, cost, expense or liability incurred by Trustee, Agent or Lender with respect to (i) any environmental matters relating to the Property or (ii) the preparation of the commencement or defense of any action or proceeding or any threatened action or proceeding affecting the Loan Documents or the Property, then Agent, at Agent's option, may make such appearances, disburse such sums and take such action as Agent deems necessary, in its sole discretion, to protect the Property or Agent's or Lender's interest therein, including entry upon the Property to take such actions Agent determines appropriate to preserve, protect or restore the Property. Any amounts disbursed by Agent or Lender pursuant to this Section 4 (including attorneys' fees, costs and expenses), together with interest thereon at the "Default Rate" (defined in the Note) from the date of disbursement, shall become additional Indebtedness of Grantor secured by the lien of this Deed of Trust and the other Loan Documents and shall be due and payable

4

on demand. Nothing contained in this Section 4 shall require Agent or Lender to incur any expense or take any action hereunder.

        5.    Warranty of Title; Actions.    Except as disclosed in the exceptions to title in the title policy approved by Agent issued by Chicago Title Insurance Company insuring the priority of this Deed of Trust, Grantor shall warrant, and hereby does warrant, that Grantor owns marketable and fee simple title to the Property, free and clear of all liens and encumbrances. Grantor shall appear in and defend any claim or any action or other proceeding purporting to affect title or other interests relating to any part of the Property, the security of this Deed of Trust or the rights of Agent or Lender, and give Agent prompt written notice of any such claim, action or proceeding. Agent may, at the expense of Grantor, appear in and defend any such claim, action or proceeding and any claim, action or other proceeding asserted or brought against Agent or Lender in connection with or relating to any part of the Property or this Deed of Trust or involving the priority, validity or enforceability of any Loan Document.

        6.    Assignment of Rents.

        (a)   To facilitate the payment and performance of the Indebtedness and Obligations, Grantor absolutely and unconditionally assigns and transfers to Agent, for the benefit of Agent and Lender, all of Grantor's right, title and interest in and to (i) the Leases, (ii) the Rents and the immediate and continuing right to collect and receive all of the Rents, and (iii) any and all rights and claims of any kind that Grantor may have now or in the future against any present or future tenant (including Master Tenant), subtenant or occupant of the Property (a "Tenant"). In furtherance of this assignment, and not in lieu thereof, promptly upon request by Agent, Grantor agrees to execute and deliver such further assignments as Agent may from time to time require.

        (b)   All of the Rents and all proceeds payable under any policy of insurance covering loss of rents resulting from untenantability caused by damage to any part of the Property, together with any and all rights that Grantor may have against any Tenant under the Leases or any subtenants or occupants of any part of the Property and any award made hereafter to Grantor in any court proceedings involving any of the Tenants or in any bankruptcy, insolvency, or reorganization proceedings in any state or federal court, and all payments by Tenants in lieu of Rent, are hereby absolutely and unconditionally assigned to Agent, for the benefit of Agent and Lender, to be applied by Agent in accordance with the terms of the Loan Agreement. It is understood and agreed by the parties that this assignment of the Leases and Rents is intended to be and is a present, absolute, and unconditional assignment from Grantor to Agent, and not merely the passing of a security interest, and shall, immediately upon execution, give Agent the right to collect the Rents and to apply them in payment of the Indebtedness. Such assignment and grant shall continue in effect until the Indebtedness is paid in full. Subject to the provisions set forth herein and, so long as there shall not have occurred an Event of Default which is continuing, Grantor shall have a license, without joinder of Agent, to enforce the Leases subject to the terms of the Loan Documents, and to collect the Rents as they come due (but not more than one (1) month in advance and excluding any lease termination, cancellation or similar payments which Grantor agrees shall be held in trust and turned over to Agent to be applied to the Indebtedness in accordance with the terms of the Loan Agreement) and to retain, use and enjoy the same. The Rents shall be held by Grantor in trust, to be applied first to the payment of all impositions, levies, taxes, assessments and other charges upon the Property, second to maintenance of insurance policies upon the Property required hereby, third to the expenses of Property operations, including maintenance and repairs required hereby (other than payment of fees to Affiliates of Grantor), fourth to the payment of that portion of the Indebtedness then due and payable, and fifth, the balance, if any, to or as directed by Grantor. Grantor shall deliver such other Rents to Agent as are necessary for the payment of the Indebtedness as such sums become due. If an Event of Default has occurred, Grantor's right to collect and secure the Rents shall cease and Agent shall have the sole right, with or without taking possession of the Property to collect all Rents.

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        (c)   Grantor hereby irrevocably appoints Agent its true and lawful attorney-in-fact, with full power of substitution and with full power of substitution and with full power for Agent in its own name and capacity or in the name and capacity of Grantor to demand and collect any and all Rents and to file any claim or take any other action or proceeding and make any settlement regarding the Leases. All Tenants are hereby expressly authorized and directed to pay to Agent, or to such nominee as Agent may designate in a writing delivered to such Tenants, all amounts due Grantor pursuant to the Leases. All Tenants are expressly relieved of all duty, liability or obligation to Grantor in respect of all payments so made to Agent or such nominee.

        (d)   After an Event of Default, Agent may, at any time without notice, either in person, by agent or by a receiver appointed by a court, and without regard to the adequacy of any security for the Indebtedness and the Obligations and without regard to solvency of Grantor:

          (i)  Enter upon, take possession of and manage the Property, or any part thereof, for the purpose of collecting the Rents in its own name sue for or otherwise collect the Rents, including those past due and unpaid, and apply the same, less costs and expenses of operation and collection, including reasonable attorney's fees, upon the Indebtedness and in such order as Agent may so determine;

         (ii)  Dispossess by the usual summary proceedings any Tenant defaulting in the payment thereof to Grantor, lease the Property or any party thereof, repair, restore, and improve the Property;

        (iii)  Apply the Rent after payment of Property expenses as determined by Agent to the Indebtedness in accordance with the terms of the Loan Agreement; and

        (iv)  Apply to any court of competent jurisdiction for specific performance of this Deed of Trust, an injunction against the violation hereof and/or the appointment of a receiver.

        (e)   The collection of Rents, or the entering upon and taking possession of the Property, or the application thereof as aforesaid, shall note cure or waive any Event of Default or notice of an Event of Default hereunder or invalidate any act done in response to such Event of Default pr pursuant to such notice of an Event of Default. In the event Grantor, as lessor under the Leases, shall fail to perform and fulfill in any material respect any material term, covenant, condition, or provision in the Leases, on its part to be performed or fulfilled, at the time and in the manner in the Leases provided, or if the Grantor shall suffer or permit to occur any breach or default under the provisions of the Leases, or any of them, and such default shall give the Tenant thereunder the right to terminate its Lease or otherwise shall continue for a period of thirty (30) days following the giving of written notice of such default to Grantor, then and in any such event, such breach or default shall constitute an Event of Default.

        (f)    In the event Grantor fails to perform any Lease covenant, Agent may, at its option, upon prior notice to Grantor (except in the event of an emergency) perform any Lease covenant for and on behalf of Grantor, and all monies expended in so doing shall be chargeable to Grantor and added to the Indebtedness and shall be immediately due and payable.

        (g)   Grantor hereby covenants and agrees as follows:

          (i)  This Deed of Trust transfers to Agent all of Grantor's right, title, and interest in any security deposits held by Grantor, provided that Grantor shall have the right to retain and apply the security deposit so long as no Event of Default has occurred under this Deed of Trust or the Loan Documents. Agent shall have no obligation to any Tenant with respect to its security deposit unless and until Agent comes into possession of the deposit.

         (ii)  Agent may assign its right, title and interest in the Leases, Rents and other Property, and any subsequent assignee shall have all of the rights and powers provided to Agent by this Deed of Trust.

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        (iii)  Grantor shall not without the prior written consent of Agent: (a) perform any act or execute any other instrument which might interfere with the exercise of Agent' s or Lender's rights hereunder; (b) execute any assignment, pledge or hypothecation of Rents or any of the Leases; or (c) suffer or permit any of the Leases to become subordinate to any lien other than the lien of this Deed of Trust.

        (h)   This Deed of Trust shall not be deemed to impose upon Agent or Lender any of the obligations or duties of the landlord or Grantor provided in any Lease. Grantor hereby acknowledges and agrees: (i) Grantor is and will remain liable under the Leases to the same extent as though this Deed of Trust had not been made; and (ii) Agent has not by this Deed of Trust assumed any of the obligations of Grantor under the Leases, except as to such obligations which arise after such time as Agent shall have assumed actual ownership or control of the Property. This Deed of Trust shall not make Agent responsible for the control, care, management, or repair of the Property or any personal property or for the carrying out of any of the terms of the Leases unless and until Agent takes possession or actual control of the Property. Agent and Lender shall not be liable in any way for any injury or damage to person or property sustained by any person or persons, firm, or corporation in or about the Property absent gross negligence or willful misconduct by such Person.

        (i)    In the event any Tenant should be the subject of any proceeding under the Federal Bankruptcy Code or any other federal, state, or local statute which provides for the possible termination or rejection of any Lease, Grantor covenants and agrees no settlement for damages shall be made without the prior written consent of Agent, which consent shall not be unreasonably withheld or delayed, and any check in payment of damages for rejection of any Lease will be made payable both to Grantor and Agent. Grantor hereby assigns any such payment to Agent and further covenants and agrees that it will duly endorse to the order of Agent any such check.

        (j)    After an Event of Default, then, without notice to, or the consent of, Grantor, Agent shall be entitled to exercise all of the rights and remedies contained in this Deed of Trust or in any other Loan Document or otherwise available at law or in equity including, without limitation, the right to do any one or more of the following:

          (i)  To enter upon, take possession of and manage the Property for the purpose of collecting the Rents;

         (ii)  Dispossess by the usual summary proceedings any Tenant defaulting in the payment thereof to Grantor;

        (iii)  Lease the Property or any part thereof;

        (iv)  Repair, restore, and improve the Property;

         (v)  Apply the Rents after payment of Property expenses as determined by Agent to the Indebtedness and the Obligations in such order as Agent may determine; and

        (vi)  Apply to any court of competent jurisdiction for specific performance of this Deed of Trust, an injunction against the violation hereof and/or the appointment of a receiver.

        (k)   Grantor hereby agrees to indemnify Agent and Lender to hold Agent and Lender harmless from any liability, loss or damages including, without limitation, reasonable attorney's fees, costs and expenses which may or might be incurred by Agent under the Leases or by reason of this Deed of Trust, and from any and all claims and demands which may be asserted against Agent or Lender by reason of any term, covenant or agreement contained in any of the Leases, except for any such liability, loss or damage resulting solely from Agent's or Lender's gross negligence or willful misconduct.

        (l)    The assignment of Leases and Rents set forth in this Section 6 and the granting clauses of this Deed of Trust shall run with the land and be good and valid against Grantor or those claiming by,

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under or through Grantor, from the date hereof and such assignment shall continue to be operative during the foreclosure or any other proceeding taken to enforce this Deed of Trust. In the event of a sale or foreclosure which shall result in a deficiency, such assignment shall stand as security during the redemption period of the payment of such deficiency. Agent shall be permitted, at its sole option, to exercise remedies under such assignment separately from remedies exercised against other portions of the Property.

        7.    Statements by Grantor.    Grantor shall within ten (10) days after Agent's request, furnish Agent with a written statement, duly acknowledged, setting forth the sums, according to Grantor's books and records, secured by the Loan Documents and any right of set-off, counterclaim or other defense which exists against such sums and the Obligations.

        8.    No Additional Liens, Encumbrances or Indebtedness.    Grantor covenants not to execute any mortgage, deed of trust, security agreement, assignment of leases and rents or other agreement granting a lien (except the liens granted to Agent by the Loan Documents) against or encumbrance on the Property or take or fail to take any other action which would result in a lien against the Property or the interest of Grantor (or Guarantor) in the Property without the prior written consent of Agent; provided, however, Grantor may in good faith, by appropriate proceeding, contest the validity or amount of any asserted lien in accordance with the terms of the Loan Agreement and pending such contest, Grantor shall not be deemed to be in default hereunder.

        9.    Grantor and Lien Not Released.    Without affecting the liability of Grantor for any of the Indebtedness or the Obligations, or any other person liable for the payment of the Indebtedness or the performance of any Obligations, and without affecting the lien or charge of this Deed of Trust as security for the payment of the Indebtedness, Agent may, from time to time and without notice to any junior lien holder or holder of any right or other interest in and to the Property: (a) release any person liable for payment of all or any portion of the Indebtedness or performance of the Obligations; (b) waive or modify any provision of this Deed of Trust or the other Loan Documents or grant other indulgences; (c) release all or any part of the Property; (d) take additional security for any obligation herein mentioned; (e) subordinate the lien or charge of this Deed of Trust; (f) consent to the granting of any easement; or (g) consent to any map, plat or plan of the Property.

        10.    Uniform Commercial Code Security Agreement.

        (a)   This Deed of Trust shall cover, and the Property shall include, all property now or hereafter affixed or attached to the Land, which to the fullest extent permitted by law, shall be deemed fixtures and a part of the Land. In addition, this Deed of Trust shall constitute a security agreement pursuant to the UCC for any portion of the Property which, under applicable law, may be subject to a security interest pursuant to the UCC (such portion of the Property is hereinafter called the "Personal Property") and Grantor hereby grants to Agent, for the benefit of Agent and Lender, a security interest in the Personal Property. Agent shall have all of the rights and remedies of a secured party under the UCC as well as all other rights and remedies available at law or in equity.

        (b)   Grantor hereby authorizes Agent to file any financing statements, as well as extensions, renewals and amendments thereof, and reproductions of this Deed of Trust, all in such form as Agent may require to perfect a security interest with respect to the Personal Property. Grantor hereby authorizes and empowers Agent and irrevocably appoints Agent its agent and attorney-in-fact to execute and file, on Grantor's behalf, all financing statements and ref lings and continuations thereof as Agent deems necessary or advisable to create, preserve and protect such lien. Grantor shall pay all costs of filing such financing statements and any extensions, renewals, amendments and releases thereof, and shall pay all reasonable costs and expenses of any record searches for financing statements as Agent may reasonably require.

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        (c)   Grantor shall not, without the prior written consent of Agent, sell, assign, transfer, encumber, remove or permit to be removed from the Property any of the Personal Property. So long as no Event of Default exists, Grantor may sell or otherwise dispose of the Personal Property when obsolete, worn out, inadequate, unserviceable or unnecessary for use in the operation of the Property, but only upon replacing the same with other Personal Property at least equal in value and utility to the disposed Personal Property. Any replacement or substituted Personal Property shall be subject to the security interest granted herein.

        (d)   To the extent permitted by law, Grantor, Lender and Agent agree that with respect to all items of Personal Property which are or will become fixtures on the Land, this Deed of Trust, upon recording or registration in the real estate records of the proper office, shall constitute a "fixture filing" within the meaning of the UCC, generally, and specifically under A.R.S. §§47-9334 and 47-9502.B and C of the UCC, as amended or recodified from time to time.

        (e)   After an Event of Default, Agent may exercise in respect of the Personal Property, in addition to all other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party on default under the UCC (whether or not the UCC applies to the affected Personal Property) and also may: (i) require Grantor to, and Grantor hereby agrees that it will, at its expense and upon request of Agent, forthwith assemble all or part of the Personal Property as directed by Agent and make it available to Agent at any reasonable place or places designated by Agent; and (ii) without notice except as specified below, sell, lease or otherwise dispose of the Personal Property or any part thereof in one or more parcels at public or private sale, and without the necessity of gathering at the place of sale of the property to be sold, at any of Agent's offices or elsewhere, at such time or times, for cash, on credit or for future delivery, and at such price or prices and upon such other terms as Agent may deem commercially reasonable.

        (f)    Grantor agrees that, to the extent notice of sale shall be required by law, a reasonable authenticated notification of disposition shall be a notification given at least ten (10) days prior to any such sale and such notice shall (i) describe Agent and Grantor, (ii) describe the Personal Property that is the subject of the intended disposition, (iii) state the method of intended disposition, (iv) state that Grantor is entitled to an accounting of the Indebtedness and stating the charge, if any, for an accounting, and (v) state the time and place of any public disposition or the time after which any private sale is to be made. Notwithstanding the foregoing, to the contrary, no notification need be given to Grantor if it has authenticated after default a statement renouncing or modifying any right to notification of sale or other intended disposition. At any sale of the Personal Property, if permitted by law, Agent may bid (which bid may be, in whole or in part, in the form of cancellation of indebtedness) for the purchase, lease, license or other disposition of the Personal Property or any portion thereof for the account of Agent. Agent shall not be obligated to make any sale of Personal Property regardless of notice of sale having been given. Agent may disclaim any warranties that might arise in connection with the safe, lease, license or other disposition of the Personal Property and have no obligation to provide any warranties at such time. Agent may adjourn any public or private sale from time to time by announcement at the time and place fixed therefore, and such sale may, without further notice, be made at the time and place to which it was so adjourned. To the extent permitted by law, Grantor hereby specifically waives all rights of redemption, stay or appraisal which it has or may have under any applicable law now existing or hereafter enacted.

        (g)   After an Event of Default, Agent or its agents or attorneys shall have the right without further notice or demand or legal process (unless the same shall be required by applicable law), personally, or by its agents or attorneys, (i) to enter upon, occupy and use any premises owned or leased by Grantor or where the Personal Property is located (or is believed to be located) for so long as such entry, occupancy and use is necessary, without any obligation to pay rent to Grantor, to render the Personal Property useable or saleable and to remove the Personal Property or any part thereof therefrom to the premises of Agent or any agent of Agent for such time as Agent may desire in order to effectively

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collect or liquidate the Personal Property and use in connection with such removal any and all services, supplies and other facilities of Grantor; (ii) to make copies of and have access to Grantor's original books and records, to obtain access to Grantor's data processing equipment, computer hardware and software relating to the Personal Property and to use all of the foregoing and the information contained therein in any manner Agent deems appropriate; and (iii) to notify postal authorities to change the address for delivery of Grantor's mail to an address designated by Agent and to receive, open and dispose of all mail addressed to Grantor.

        11.    Events of Default; Acceleration of Indebtedness.    The occurrence of any one or more of the following events shall constitute an "Event of Default" under this Deed of Trust:

        (a)   failure of Borrower Parties to pay, within five (5) days after the due date, any of the Indebtedness, including any payment due under the Note, or Borrower Parties' failure to pay the Loan at the Maturity Date, whether by acceleration or otherwise; or

        (b)   failure of Grantor to strictly comply with Section 8 (no additional liens) 6(f)(iii) (no interference with Agent's liens on Leases and Rents) of this Deed of Trust; or

        (c)   failure of Borrower Parties to satisfy each and every Obligation not set forth in subsection (b) above, and the continuance of such failure for ten (10) days after notice by Agent to Borrower Parties; provided, however, Borrower Parties shall have an additional thirty (30) days to cure such failure if (a) such Obligation cannot by its nature reasonably be cured within ten (10) days; (b) such failure does not involve the failure to make payments on a monetary obligation; (c) if Borrower Parties commence to cure such failure promptly after written notice thereof and thereafter diligently pursues the curing thereof, and (d) Borrower Parties provide Agent with security reasonably satisfactory to Agent against any interruption of payment or impairment of collateral as a result of such continuing failure, Borrower Parties shall not be in default hereunder during such additional thirty (30) day period of diligent curing;

        (d)   Grantor changes the state of its formation or its name without providing Agent thirty (30) days prior written notice;

        (e)   the occurrence of an Event of Default (as-such term is defined in the applicable Loan Document) under any other Loan Document; or

        (f)    any default under, or termination of, the Master Lease.

Upon the occurrence of an Event of Default, at the option of Agent, the Indebtedness shall become immediately due and payable without notice to Grantor and Agent shall be entitled to alt of the rights and remedies provided in the Loan Documents or at law or in equity. Each remedy provided in the Loan Documents is distinct and cumulative to all other rights or remedies under the Loan Documents or afforded by law or equity, and may be exercised concurrently, independently, or successively, in any order whatsoever.

        12.    Entry; Certain Remedies; Foreclosure.

        (a)   Upon the occurrence of an Event of Default, Grantor, upon demand of Agent or Trustee, shall forthwith surrender to Agent the actual possession of the Property, or to the extent permitted by law, Agent or a receiver appointed by a court of competent jurisdiction, may enter and take possession of all or any part of the Property, and may exclude Grantor and its agents and employees wholly therefrom, and may have joint access with Grantor to the books, papers and accounts of Grantor. If Grantor shall for any reason fail to surrender or deliver the Property or any part thereof after such demand by Agent, Agent or such receiver may obtain a judgment or decree conferring on Agent or such receiver, the right to immediate possession of the Property or requiring the delivery of the Property to Agent or such receiver, and Grantor specifically consents to the entry of such judgment or decree. Upon every such entering upon or taking of possession, Agent or such receiver may hold, store,

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use, operate, manage and control the Property and conduct the business thereof, and Agent or such receiver may take any action required by applicable law or which Agent or such receiver believes necessary to enforce compliance with the environmental provisions contained herein or in the other Loan Documents, and negotiate with governmental authorities with respect to the Property's environmental compliance and remedial measures in connection therewith. Agent and such receiver and their representatives shall have no liability for any loss, damage, injury, cost or expense resulting from any action or omission which was taken or omitted in good faith. Neither the appointment of a receiver for the Property by any court at the request of Agent or by agreement with Grantor nor the entering into possession of all or any of the Property by such receiver shall constitute Agent a "mortgagee in possession" or otherwise make Agent responsible or liable in any manner with respect to the Property or the occupancy, operation or use thereof. Grantor agrees that Agent shall have the absolute and unconditional right to the appointment of a receiver in any independent and/or separate action brought by Agent regardless of whether Agent seeks any relief in such action other than the appointment of a receiver.

        (b)   When the Indebtedness or any part thereof shall become due, whether by acceleration or otherwise, Agent may, either with or without entry or taking possession as herein provided or otherwise, proceed by suit or suits at law or in equity or by any other appropriate proceeding or remedy to: (i) enforce payment of the Note or the performance of any term, covenant, condition or agreement of Grantor under any of the Loan Documents; (ii) cause the lien hereof to be foreclosed in the manner described below; (iii) exercise its rights under Section 10 with respect to all or any portion of the Personal Property in accordance with the provisions of the UCC; provided Agent shall have no obligation to clean up or otherwise prepare such Personal Property for sale nor marshal any Personal Property in favor of Grantor or any other secured party; and/or (iv) pursue any other right or remedy available to it hereunder, or under or by the law and decisions of the State in which the Land is located. All rights, powers and remedies granted Agent herein, or otherwise available to Agent, are for the sole benefit and protection of Agent, and Agent may exercise any such right, power or remedy at its option and in its sole and absolute discretion without any obligation to do so. In addition, if, under the terms hereof, Agent is given two or more alternative courses of action, Agent may elect any alternative or combination of alternatives, at its option and in its sole and absolute discretion. Agent may comply with any applicable state or federal law requirements in connection with a disposition of the Personal Property and compliance will not be considered adversely to affect the commercial reasonableness of any sale of the Personal Property. Notwithstanding any statute or rule of law to the contrary, the failure to join any tenant or tenants of the Property as party defendant or defendants in any foreclosure action or the failure of any such order or judgment to foreclose their rights shall not be asserted by Grantor as a defense in any civil action instituted to collect (A) the Indebtedness, or any part thereof or (B) any deficiency remaining unpaid after foreclosure and sale of the Property. To the extent a notice of sale shall be required by law for the sale or disposition of the Personal Property, a reasonable authenticated notification of disposition shall be notification given at least ten (10) days prior to any such sale, provided however, that no notification need be given to Grantor if it has authenticated after default a statement renouncing or modifying any right to notification of sale or other intended disposition.

        (c)   In furtherance and not in limitation of the foregoing, upon the occurrence of an Event of Default:

          (i)  Agent may give such notice of default and of election to cause the Property to be sold as may be required by law or as may be necessary to cause Trustee to exercise the power of sale granted herein. Trustee shall then record and give such notice of trustee's sale as then required by law and, after the expiration of such time as may be required by law, may sell the Property at the time and place specified in the notice of sale, as a whole or in separate parcels as directed by Agent, or by Grantor to the extent required by law, at public auction to the highest bidder for cash

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in lawful money of the United States, payable at time of sale, all in accordance with applicable law. Trustee, from time to time, may postpone or continue the sale of all or any portion of the Property by public declaration at the time and place last appointed for the sale. No other notice of the postponed sale shall be required except as required by applicable law. Upon any sale, Trustee shall deliver its deed conveying the property sold, without any covenant or warranty, express or implied, to the purchaser or purchasers at the sale. The recitals in such deed of any matters or facts shall be conclusive as to the accuracy thereof. Any person, including Agent, Trustee or Grantor, may purchase at the sale.

         (ii)  Agent may commence proceedings for foreclosure of this Deed of Trust in the manner provided by law for the foreclosure of a real property mortgage.

        (iii)  In any foreclosure proceeding, Grantor agrees that all property of every nature and description, whether real or personal, covered by this Deed of Trust, together with all personal property used on or in connection with the Property or any business conducted thereon by Grantor and covered by separate security agreements, is encumbered as one unit, that this Deed of Trust and such security interests, at Agent's option, may be foreclosed or sold in the same proceeding, and that all property encumbered (both realty and personalty), at Agent's option, may be sold as such in one unit, subject to the provisions of applicable law.

        (d)   Upon the completion of any foreclosure or trustee's sale of all or a portion of the Property, Agent may commence an action to recover any of the Indebtedness and Obligations that remains unpaid or unsatisfied. For purposes of this Deed of Trust the Indebtedness and Obligations shall be deemed to be paid or satisfied only to the extent that Agent actually receives immediately available funds, to the extent of any credit bid by Agent at any foreclosure or trustee's sale of any of the Property, or to the extent agreed in writing by Agent. In any action by Agent to recover a deficiency judgment for any balance due under the Note upon the foreclosure of this Deed of Trust or in any action to recover the Obligations secured hereby, and as a material inducement to making the Loan evidenced by the Note, Grantor acknowledges and agrees that the successful bid amount made at any judicial or non-judicial foreclosure sale, if any, shall be conclusively deemed to constitute the fair market value of the Property, that such bid amount shall be binding against Grantor in any proceeding seeking to determine or contest the fair market value of the Property and that such bid amount shall be the preferred alternative means of determining and establishing the fair market value of the Property. Grantor hereby waives and relinquishes any right to have the fair market value of the Property determined by a judge or jury in any action seeking a deficiency judgment or any action on the Obligations secured hereby, including, without limitation, a hearing to determine fair market value pursuant to A.R.S., §§ 12-1566, 33-814, 33-725 or 33-727.

        13.    Appointment of Receiver or Mortgagee in Possession.    If an Event of Default is continuing or if Agent shall have accelerated the Indebtedness, Trustee, upon application to a court of competent jurisdiction, shall be entitled as a matter of strict right, without notice, and without regard to the occupancy or value of any security for the Indebtedness or the insolvency of any party bound for its payment, to the appointment, at its option, of itself as mortgagee in possession, or of a receiver to take possession of and to operate the Property, and to collect and apply the Rents.

        14.    Expenditures and Expenses.    In any action to foreclose the lien hereof or otherwise enforce Trustee's, Agent's or Lender's rights and remedies hereunder, there shall be allowed and included as additional Indebtedness all costs and expenses which may be paid or incurred by or on behalf of Trustee, Agent or Lender, including, without limitation, the costs of collection, enforcement, retaining, holding, preparing for disposition, processing and disposing of the Personal Property, appraiser's fees, outlays for documentary and expert evidence, stenographic changes, publication costs and costs (which may be estimated as the items to be expended after the entry of the decree) of procuring all such abstracts of title, title searches and examination, UCC record searches, title insurance policies, and

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similar data and assurance with respect to title as Agent may deem to be reasonably necessary either to prosecute any foreclosure action or to evidence to the bidder at any sale pursuant thereto the true condition of the title to or the value of the Property. All such costs and expenses, together with such other costs and expenses as may be incurred by Trustee, Agent or Lender in the protection of the Property, maintenance of the lien of this Deed of Trust or in any workout or restructuring of the Loan including, attorneys fees and costs in any negotiation, litigation or other proceeding affecting this Deed of Trust, the Note, the other Loan Documents, the Property or the Personal Property, including probate, appellate, and bankruptcy proceedings and any post-judgment proceedings to collect or enforce any judgment or order relating to this Deed of Trust or the other Loan Documents or in preparation for the commencement or defense of any action or proceeding or threatened action or proceeding, shall be immediately due and payable to Agent, with interest thereon at the Default Rate, and shall be secured by this Deed of Trust.

        15.    Application of Proceeds of Foreclosure Sale.    Unless otherwise required by applicable law, the proceeds of any foreclosure sale of the Property shall be distributed and applied in the order of priority set forth in the Note with the excess, if any, being applied, to any party entitled thereto as their rights may appear. Only with respect to the Personal Property and only to the extent required by law, including A.R.S. § 47-9615 of the UCC (or any other then-applicable provision of the UCC), shall it be necessary for Agent to account for any surplus to Grantor. To the extent permitted by applicable law, Grantor waives all claims, damages, and demands against Agent arising out of the disposition, repossession or retention of the Property.

        16.    Future Advances.    This Deed of Trust is given to secure not only the existing Indebtedness and Obligations, but also future advances (whether such advances are obligatory or are made at the option of Lender or Agent, or otherwise) made by Agent or Lender under the Loan Agreement, the Note, this Deed of Trust or any of the other Loan Documents, to the same extent as if such future advances were made on the date of the execution of this Deed of Trust. It is the intent hereof to secure payment of the Indebtedness whether the entire amount shall have been advanced to Borrower Parties at the date hereof, or at a later date, and to secure any other amount or amounts that may be added to the Indebtedness or Obligations. The total amount of the Indebtedness and Obligations secured hereby may decrease or increase from time to time, but the total unpaid balance so secured at any one time shall not exceed five (5) times the aggregate face amount of the Note in principal plus interest thereon and any disbursements made for the payment of taxes, levies, or insurance on the Property with interest thereon. This Deed of Trust shall secure any and all additional or further monies which may be advanced by Lender or Agent to Borrower Parties after the date hereof, which future advances of money, if made, may be evidenced by a note or notes executed by one or more Borrower Parties to Lender and Agent bearing such rate of interest and with such maturities as shall be determined from time to time. Nothing herein contained shall be deemed an obligation on the part of Lender or Agent to make any future advances.

        17.    Waiver of Statute of Limitations.    Grantor hereby waives the right to assert any statute of limitations as a bar to the enforcement of the lien created by any of the Loan Documents or to any action brought to enforce the Note or any other obligation secured by any of the Loan Documents.

        18.    Waiver of Homestead and Redemption; Other Waivers and Agreements.    Grantor hereby waives all right of homestead exemption in the Property. Grantor hereby waives all right of redemption on behalf of Grantor and on behalf of all other persons acquiring any interest or title in the Property subsequent to the date of this Deed of Trust, except decree or judgment creditors of Grantor.

        In the event Grantor is deemed to have signed this Deed of Trust as a surety or accommodation party, or to have subjected its property to this Deed of Trust to secure the indebtedness of another, to the extent permitted by applicable law, Grantor hereby expressly waives the benefits of any statutory provision limiting the liability of a surety, including without limitation, the provisions of A.R.S. §§

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12-1641, et seq. and Rule 17(f) of the Arizona Rules of Civil Procedures, and any defense arising by reason of any disability or other defense of Grantor or by reason of the cessation from any cause whatsoever of the liability of Grantor.

        Grantor further waives and agrees not to assert: (i) any right to require Agent to proceed against any guarantor, to proceed against or exhaust any other security for the Indebtedness and Obligations secured hereby, to pursue any other remedy available to Agent, or to pursue any remedy in any particular order or manner; (ii) the benefits of any legal or equitable doctrine or principle of marshalling; (iii) demand, diligence, presentment for payment, protest and demand, and notice of extension, dishonor, protest, demand and nonpayment, relating to the indebtedness secured hereby; and (iv) any benefit of, and any right to participate in, any other security now or hereafter held by Agent.

        Grantor further agrees that at any time or from time to time, without liability therefor and without notice, without affecting personal liability of any person for the payment of the indebtedness secured hereby, and without affecting the lien of this Deed of Trust upon the Property for the full amount of all amounts secured hereby, Agent, or Trustee at the direction of Agent, may (i) reconvey all or any part of the Property, (ii) consent to the making of any map of plat thereof; (iii) join in granting any easement thereon or in creating any covenants or conditions restricting use or occupancy thereof, or (iv) join in any extension agreement or in any agreement subordinating the lien or charge hereof.

        19.    Governing Law; Severability.    This Deed of Trust shall be governed by and construed in accordance with the internal laws of the State of Illinois except that the provisions of the laws of the jurisdiction in which the Land is located shall be applicable to the creation, perfection and enforcement of the lien created by this Deed of Trust (excluding, however, the creation, attachment and grant of the security interest in Personal Property which shall be governed by the Illinois UCC). The invalidity, illegality or unenforceability of any provision of this Deed of Trust shall not affect or impair the validity, legality or enforceability of the remainder of this Deed of Trust, and to this end, the provisions of this Deed of Trust are declared to be severable.

        20.    Notice.    Notices shall be given under this Deed of Trust in conformity with the terms and conditions of the Loan Agreement and in conformity with applicable law.

        21.    Successors and Assigns Bound; Joint and Several Liability; Agents; Captions.    The covenants and agreements contained in the Loan Documents shall bind, and the rights thereunder shall inure to, the respective successors and assigns of Agent, Lender and Grantor, subject to the transfer restrictions set forth in the Loan Agreement. All covenants and agreements of Grantor and Borrower Parties shall be joint and several. In exercising any rights under the Loan Documents or taking any actions provided for therein, Agent may act through its employees, agents or independent contractors as authorized by Agent. The captions and headings of the paragraphs of this Deed of Trust are for convenience only and are not to be used to interpret or define the provisions hereof.

        22.    Release.    Upon payment in full of all Indebtedness and the performance of all Obligations or release of the Property pursuant to Section 2.10 of the Loan Agreement, Agent shall release this Deed of Trust. In such event, Agent shall, at the request of Grantor, deliver to Grantor in recordable form, all such documents as shall be necessary to release the Property from the liens, security interests, conveyances, and assignments created or evidenced by this Deed of Trust. The recitals in such reconveyance of any matters or facts shall be conclusive as to the accuracy thereof. The grantee in such reconveyance may be described as "the person or persons legally entitled thereto". Grantor shall pay Agent's reasonable costs incurred in releasing or assigning this Deed of Trust and in preparing and filing any terminations or assignments of financing statements related thereto, as a condition to Agent's obligation to deliver the same.

        23.    Loss of Note.    Upon notice from Agent of the loss, theft, or destruction of the Note (or any of them) and upon receipt of an affidavit of lost note and an indemnity reasonably satisfactory to

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Grantor from Agent, or in the case of mutilation of the Note (or any of them), upon surrender of the mutilated Note, Grantor shall make and deliver a new note of like tenor in lieu of the then to be superseded Note (or any of them). Any one or more of the financial institutions which are or become a party to the Loan Agreement as Lenders may from time to time be replaced and, accordingly, one or more of the Notes may from time to time be replaced, provided that the terms of the Notes following such replacement, including the principal amount evidenced thereby, shall remain the same. As the indebtedness secured by this Deed of Trust shall remain the same, such replacement of the Notes shall not be construed as a novation and shall not affect, diminish or abrogate Grantor's liability under this Deed of Trust or the priority of this Deed of Trust.

        24.    Further Assurances.    Grantor agrees to execute any further documents, and to take any further actions reasonably requested by Agent to evidence or perfect the security interests granted herein, to maintain the first priority of the security interests, and to effectuate the rights specifically granted to Agent and Lender hereunder.

        25.    Subrogation.    Agent is hereby subrogated (a) to the lien(s) of each and every mortgage, deed of trust, lien or other encumbrance on all or any part of the Property which is fully or partially paid or satisfied out of the proceeds of the Indebtedness, and (b) to the rights of the owner(s) and holder(s) of any such mortgage, deed of trust, lien or other encumbrance. The respective rights under and priorities of all such mortgages, deeds of trust, liens or other encumbrances shall be preserved and shall pass to and be held by Agent as additional security for the Indebtedness, to the same extent as if such rights and priorities had been duly assigned by separate instrument of assignment and notwithstanding that the same may have been cancelled and satisfied of record. Notwithstanding the foregoing, Agent agrees that only the terms and provisions set forth in this Deed of Trust and the other Loan Documents shall govern and control Grantor's rights and obligations hereunder and thereunder.

        26.    Time of Essence.    Time is of the essence of this Deed of Trust and the performance of each of the covenants and agreement contained herein.

        27.    Venue.    GRANTOR HEREBY CONSENTS TO THE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED WITHIN THE COUNTY OF COOK, STATE OF ILLINOIS AND IRREVOCABLY AGREES THAT, SUBJECT TO AGENT'S ELECTION, ALL ACTIONS OR PROCEEDINGS ARISING OUT OF OR RELATING TO THIS DEED OF TRUST SHALL BE LITIGATED IN SUCH COURTS. GRANTOR EXPRESSLY SUBMITS AND CONSENTS TO THE JURISDICTION OF THE AFORESAID COURTS AND WAIVES ANY DEFENSE OF FORUM NON CONVENIENS. GRANTOR HEREBY WAIVES PERSONAL SERVICE OF ANY AND ALL PROCESS AND AGREES THAT ALL SUCH SERVICE OF PROCESS MAY BE MADE UPON GRANTOR BY CERTIFIED OR REGISTERED MAIL, RETURN RECEIPT REQUESTED, ADDRESSED TO GRANTOR, AT THE ADDRESS SET FORTH IN THIS AGREEMENT AND SERVICE SO MADE SHALL BE COMPLETE TEN (10) DAYS AFTER THE SAME HAS BEEN POSTED.

        28.    Jury Trial Waiver.    GRANTOR, AND AGENT AND LENDER BY THEIR ACCEPTANCE OF THIS DEED OF TRUST, HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, OR RELATED TO, THE SUBJECT MATTER OF THIS DEED OF TRUST AND THE BUSINESS RELATIONSHIP THAT IS BEING ESTABLISHED. THIS WAIVER IS KNOWINGLY, INTENTIONALLY AND VOLUNTARILY MADE BY GRANTOR, LENDER AND AGENT, AND GRANTOR ACKNOWLEDGES THAT NEITHER AGENT NOR LENDER, NOR ANY PERSON ACTING ON BEHALF OF AGENT OR LENDER, HAS MADE ANY REPRESENTATIONS OF FACT TO INDUCE THIS WAIVER OF TRIAL BY JURY OR HAS TAKEN ANY ACTIONS WHICH IN ANY WAY MODIFY OR NULLIFY ITS EFFECT. GRANTOR, LENDER AND AGENT ACKNOWLEDGE THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP,

15

THAT EACH OF THEM HAS ALREADY RELIED ON THIS WAIVER IN ENTERING INTO THIS DEED OF TRUST AND THAT EACH OF THEM WILL CONTINUE TO RELY ON THIS WAIVER IN THEIR RELATED FUTURE DEALINGS. GRANTOR, LENDER AND AGENT FURTHER ACKNOWLEDGE THAT THEY HAVE BEEN REPRESENTED (OR HAVE HAD THE OPPORTUNITY TO BE REPRESENTED) IN THE SIGNING OF THIS DEED OF TRUST AND IN THE MAKING OF THIS WAIVER BY INDEPENDENT LEGAL COUNSEL.

        29.    Tenants' Financial Statements.    Grantor shall deliver to Agent, promptly upon its receipt thereof, any and all financial statements and other reports, notices or documents delivered to Grantor by Tenants.

        30.    Acceptance of Trust.    Trustee hereby accepts the trust created by this Deed of Trust, upon the terms and subject to the conditions set forth herein, including the following:

        (a)   Trustee assumes no responsibility for and makes no warranties whatsoever as to (i) the description, identification or value of any or all of the Property, (ii) the validity of Loan Documents, (iii) Grantor's present or future financial condition, or (iv) the validity or collectibility of the Note.

        (b)   Trustee (i) may exercise Trustee's powers and perform Trustee's duties hereunder by or through such attorneys or agents and servants as they shall appoint, and (ii) shall not be answerable or liable (1) for the acts, negligence or default of any such attorney, agent or servant which they may so appoint, so long as they select them with reasonable care, or (2) for any act or omission of Lender, or (3) for any other cause arising under this Deed of Trust or otherwise, except for Trustee's own willful misconduct.

        (c)   Trustee, in Trustee's discretion may consult with legal counsel to be selected and employed by them, and Trustee shall incur no liability to Grantor, Agent or any other person by reason of anything done, suffered to be done or omitted to be done by Trustee in accordance with the opinion of such counsel.

        (d)   Trustee shall not be under any obligation to sell any or all of the Property upon a default hereunder, or to take any other action authorized to be taken by Trustee in the event of any default hereunder, except upon the written demand of Agent furnishing security or indemnity satisfactory to Trustee against costs, expenses, and liabilities incurred or which may be incurred in selling the Property or taking such other action authorized to be taken by Trustee hereunder.

        31.    Remedies Regarding Assignment of Rents.    In addition to, and not in limitation of, any other remedy provided in or available under this instrument, during an Event of Default, Agent and Lenders shall have all the rights set forth in A.R.S. §33-702B (as amended, supplemented or supplanted) regarding enforcement of the assignment of rents contained herein.

        32.    Realty Mortgage.    If this Deed of Trust should be or become ineffective as a deed of trust, then this Deed of Trust shall be construed and enforced as a realty mortgage.

        33.    Provisions Regarding Trustee.

        (a)   Trustee shall be entitled to reasonable compensation for all services rendered or expenses incurred in the administration or execution of the trusts hereby created and Grantor hereby agrees to pay same, subject to all legal limitations. Trustee shall be indemnified, held harmless and reimbursed by Grantor for any liability, damage or expense, including attorneys' fees and amounts paid in settlement, which Trustee may incur or sustain in the execution of this Deed of Trust or in the doing of any act which Trustee is required or permitted to do by the terms hereof or by law.

        (b)   Agent may substitute Trustee hereunder from time to time by instrument in writing in any manner now or hereafter provided by law. Such writing shall be conclusive proof of proper substitution

16

of such successor Trustee or Trustees, who shall thereupon and without conveyance from the predecessor Trustee, succeed to all its title, estate, rights, powers and duties.

        (c)   The acceptance by Trustee of this trust shall be evidenced when this Deed of Trust, duly executed and acknowledged, is made a public record as provided by law.

        (d)   The trust created hereby is irrevocable by Grantor.

        34.    No Merger.    No obligation of Grantor to pay fees or costs or to indemnify Lender shall merge into any final judgment of foreclosure, it being the intent of the parties that such obligations shall survive foreclosure.

        35.    Entire Agreement.    This Deed of Trust constitutes the entire agreement of the parties with respect to the matters discussed herein. This Deed of Trust cannot be changed except by agreement, in writing, signed by Grantor and Agent.

        36.    Limitation on Interest.    Grantor agrees to pay an effective rate of interest equal to the rate stated in the documents evidencing the Indebtedness plus any additional rate, if any, resulting from any charge or fee in the nature of interest paid or to be paid by Grantor in connection with the Indebtedness, or any benefit received or to be received by Agent, Lender or Trustee in connection with the Indebtedness.

        37.    Community Facilities District.    Without obtaining the prior written consent of Agent, Grantor shall not consent to, or vote in favor of, the inclusion of all or any part of the Property in any Community Facilities District formed pursuant to the Community Facilities District Act, §§ 48-701, et seq., as amended from time to time. Grantor shall immediately give notice to Agent of any notification or advice that Grantor may receive from any municipality or other third party of any intent or proposal to include all or any part of the Property in a Community Facilities District. Agent shall have the right to file a written objection to the inclusion of all or any part of the Property in a Community Facilities District, either in its own name or in the name of Grantor, and to appear at, and participate in, any hearing with respect to the formation of any such district.

[Signatures appear on the following page.]

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        IN WITNESS WHEREOF, Grantor has executed this Deed of Trust or has caused the same to be executed by its duly authorized representatives as of the date first above written.

GRANTOR:
RILLITO HOLDINGS LLC a Nevada limited liability company
By:	The Ensign Group, Inc., a Delaware corporation, its sole member
	By:	/s/  GREGORY K. STAPLEY
	Name:	Gregory K. Stapley
	Its:	Vice President

(Signature Page to Deed of Trust (Catalina, AZ))

STATE OF CALIFORNIA
COUNTY OF ORANGE	Title of Document: Acknowledgment Certificate

        On June 27, 2006, before me, YOLANDA VILLEGAS STAFF, a Notary Public in and for the above county, personally appeared GREGORY K STAPLEY personally known to me, whose "name is subscribed to the within instrument and acknowledged to me that he executed the same in his authorized capacity, and that by his signature on the instrument the person or the entity upon behalf of which the person acted, executed the instrument.

        WITNESS my hand and seal.

My Commission Expires: May 27, 2009 /s/  YOLANDA VILLEGAS STAFF NOTARY SIGNATURE

NOTARY SEAL

YOLANDA VILLEGAS STAFF
Commission # 1562875
Notary Public—California
San Mateo County
My Comm. Expires May 27, 2009

EXHIBIT A

Legal Description

A-1

DISCLOSURE PURSUANT TO
A.R.S. § 33-404

        The following information is provided pursuant to A.R.S. § 33-404:

        The beneficiary under this Deed of Trust is acting pursuant to the authority granted to it under that certain Loan Agreement dated of even date herewith executed by and among Borrower Parties and General Electric Capital Corporation, a Delaware corporation, and the other financial institutions who hereafter become parties to the Loan Agreement, for the benefit of the following, as the Lenders.

General Electric Capital Corporation
2 Bethesda Metro Center, Suite 600, Bethesda, MD, 20814

EX-10.13

Exhibit 10.13

THIS DOCUMENT PREPARED
UNDER THE ASSISTANCE OF AN
ATTORNEY LICENSED IN THE
STATE OF CALIFORNIA AND AFTER

RECORDING RETURN TO:
Jami L. Brodey, Esq.
Goldberg, Kohn, Bell, Black,
Rosenbloom & Moritz, Ltd.
55 East Monroe Street
Suite 3700
Chicago, Illinois 60603

SPACE ABOVE THIS LINE FOR RECORDER'S USE

Loan No. 07-0004261

DEED OF TRUST, ASSIGNMENT OF RENTS, SECURITY AGREEMENT AND
FIXTURE FINANCING STATEMENT
(Park View Gardens at Montgomery
County of Sonoma, State of California)

        This DEED OF TRUST, ASSIGNMENT OF RENTS, SECURITY AGREEMENT AND FIXTURE FINANCING STATEMENT (this "Deed of Trust") is made as of this 16th day of October, 2006, between MOUNTAINVIEW COMMUNITYCARE LLC, a Nevada limited liability company ("Grantor"), whose mailing address is c/o Ensign Facility Services, Inc., 27101 Puerta Real, Suite 450, Mission Viejo, California 92691 unto CHICAGO TITLE INSURANCE COMPANY ("Trustee"), whose mailing address is 2544 Cleveland Avenue, Suite 110, Santa Rosa, California 95403 for the benefit of GENERAL ELECTRIC CAPITAL CORPORATION, a Delaware corporation (in its individual capacity, "GECC"), whose mailing address is 2 Bethesda Metro Center, Suite 600, Bethesda, Maryland 20814, as agent (GECC in its capacity as agent, "Agent") for Lenders (as such term is defined in the Loan Agreement referred to below).

RECITALS

        A.    Lender has agreed, subject to the terms and conditions of that certain Second Amended and Restated Loan Agreement dated as of June 30, 2006 (said Loan Agreement, as amended from time to time being hereinafter referred to as the "Loan Agreement"), executed by and among Grantor, certain Affiliates of Grantor (together with Grantor, the "Borrower Parties"), General Electric Capital Corporation, a Delaware corporation (in its individual capacity as a lender ("GECC")) and the other financial institutions who are or hereafter become parties to the Loan Agreement (together with GECC, collectively or individually, as the context may require, as "Lender") and Agent, to make a loan (the "Loan") to Borrower Parties. The Loan is evidenced by that certain promissory note dated as of June 30, 2006 in the aggregate original principal amount of Forty Seven Million Seven Hundred Ninety Five Thousand and No/100 Dollars ($47,795,000.00) (which note, together with all notes issued in full or partial replacements thereof, or in substitution or exchange therefor, and all amendments thereto, are hereinafter collectively referred to as the "Note"), providing for monthly payments as set forth in the Agreement, with the balance thereof, due and payable on June 29, 2016 (said date, any later date to which the maturity date may be extended in accordance with the Loan Agreement, or any earlier date on which the entire unpaid principal amount shall be paid or required to be paid in full, whether by prepayment, acceleration or otherwise is hereinafter called the "Maturity Date"). The terms and

provisions of the Loan Agreement and Note are hereby incorporated by reference in this Deed of Trust. Capitalized terms used but not defined herein shall have the meaning provided in the Loan Agreement.

        B.    Lender and Agent wish to secure: (i) the payment of the Note, together with all interest, premiums, the Make Whole Breakage Amount, the payment Premium (as such terms are defined in the Loan Agreement) and other amounts, if any, due in accordance with the terms of the Note, as well as the payment of any additional indebtedness accruing to Lender or Agent on account of any future payments, advances or expenditures made by Lender or Agent pursuant to the Note, the Loan Agreement or this Deed of Trust or any of the other Loan Documents (hereinafter defined); (ii) the performance of each and every covenant, condition, and agreement contained in the Note, the Loan Agreement, this Deed of Trust, those certain Deeds of Trust, Assignments of Rents, Security Agreements and Fixture Financing Statements (or documents of similar title) executed by the other Borrower Parties (as amended from time to time) and any other documents evidencing or securing the Loan or executed in connection therewith (such documents together with any modifications, renewals, extensions or replacements thereof are collectively referred to as the "Loan Documents"); (iii) the payment and performance of any and all other debts, claims, obligations, demands, monies, liabilities and indebtedness of any kind or nature now or hereafter owing, arising, due or payable from Borrower Parties to Lender or Agent in connection with the Loan; provided that the instrument or agreement evidencing any such debt, claim, obligation, money, liability or indebtedness specifically states that it is secured by this Deed of Trust; and (iv) the payment of all amounts due from Master Tenants, Guarantor and the other borrowers under and in accordance with the terms of the Accounts Receivable Loan Documents and the performance of each and every covenant, condition, and agreement contained therein. All payment obligations of Borrower Parties to Lender or Agent with respect to the Loan or under any of the Loan Documents and all payment obligations of Master Tenants, Guarantor and the other borrowers thereunder to GECC under the Accounts Receivable Loan Documents are hereinafter sometimes collectively referred to as the "Indebtedness," and all other obligations of Borrower Parties to Agent with respect to the Loan or under any of the Loan Documents and all other obligations of Master Tenants, Guarantor and the other borrowers thereunder to GECC under the Accounts Receivable Loan Documents are hereinafter sometimes collectively referred to as the "Obligations".

        NOW, THEREFORE, TO SECURE the repayment of the Indebtedness and the performance of the Obligations, and also in consideration of the sum of Ten and No/100 Dollars ($10.00), the receipt of which is acknowledged by Grantor, Grantor by these presents irrevocably grants, bargains, sells, assigns, mortgages, releases, transfers, pledges, conveys and warrants specially unto Trustee, its successors and assigns forever, IN TRUST, WITH POWER OF SALE, and right of entry and possession, under and subject to the terms and conditions hereof, for the benefit and security of Agent and Lender, all right, title, and interest of Grantor in and to the fee simple estates in the following described property and all proceeds thereof (which property is hereinafter sometimes collectively referred to as the "Property"):

        A.    The real estate described on Exhibit A attached hereto (the "Land");

        B.    All of the following (collectively, the "Improvements"): all buildings, improvements and fixtures now or in the future located or to be constructed on the Land; to the extent not owned by tenants of the Property, all machinery, appliances, equipment, furniture, fixtures and all other personal property of every kind or nature located in or on, or attached to, or used or to be used in connection with the Land, buildings, improvements or fixtures; all building materials and goods procured for use or in connection with the foregoing; and all additions, substitutions and replacements to any of the foregoing;

        C.    To the extent assignable by Grantor, all plans, specifications, architectural renderings, drawings, soil test reports, other reports of examination or analysis of the Land or the Improvements;

        D.    All easements, rights-of-way, water courses, mineral rights, water rights, air rights and appurtenances in any way belonging, relating or appertaining to any of the Land or Improvements, or

which hereafter shall in any way belong, relate or be appurtenant thereto (collectively, "Appurtenances");

        E.    Subject to the rights of Agent under Section 6 hereof, all leases, master leases, subleases, licenses, patient and resident care agreements and other agreements with regard to the use or occupancy of all or any portion of the Land and/or the Improvements, including without limitation that certain Long-Term Care Facility Lease Agreement dated as of August 22, 2006 by and between Ensign Montgomery LLC, a Nevada limited liability company ("Master Tenant") and Grantor (the "Master Lease"), service agreements which include an occupancy agreement and all guaranties, amendments, extensions and renewals of any such lease, license or agreement, now or hereafter entered into (collectively, the "Leases") and all rents, incomes, receipts, prepayments, security deposits, termination payments, royalties, profits, issues and revenues, prepayment of the same including without limitation, lease termination, cancellation or similar fees, and all other amounts of any nature now due or which may become due or to which Grantor may now or shall hereafter become entitled or which it may demand or claim and arising or accruing directly or indirectly from the Leases or from the Land and/or Improvements from time to time (collectively, the "Rents"), reserving to Grantor, however, so long as no Event of Default has occurred, the right to receive and apply the Rents in accordance with the terms and conditions of Section 6 of this Deed of Trust;

        F.     To the extent assignable by Grantor, all claims, demands, judgments, insurance proceeds, refunds, reserves, deposits, rights of action, awards of damages, compensation, settlements and other rights to the payment of money hereafter made resulting from or relating to (i) the taking of the Land or the Improvements or any part thereof under the power of eminent domain, (ii) any damage (whether caused by such taking, by casualty or otherwise) to the Land, Improvements, Appurtenances or other Property or any part thereof, or (iii) the ownership or operation of the Property;

        G.    To the extent assignable by Grantor, all management contracts, permits, certificates, licenses, approvals, contracts, purchase and sale agreements, purchase options, entitlements, development rights and authorizations, however characterized, issued or in any way furnished for the acquisition, construction, development, operation and use of the Land, Improvements and/or Leases, including building permits, environmental certificates, licenses, certificates of operation, warranties and guaranties;

        H.    All of the following types of collateral, as defined in the Uniform Commercial Code as in effect from time to time in the State of Illinois (the Illinois Uniform Commercial Code being referred to as the "UCC", unless the context requires a reference to the Uniform Commercial Code in effect in another state): accounts, contract rights, general intangibles, chattel paper, documents, instruments, inventory, goods, equipment, investment property, deposit accounts, letter of credit rights, commercial tort claims, healthcare insurance receivables and all books and records relating to the foregoing; provided that Grantor will cooperate with Agent in obtaining "control" as defined in the UCC, with respect to collateral consisting of deposit accounts, investment property, letter of credit rights and electronic chattel paper;

        I.     Any monies on deposit with or for the benefit of Agent, including deposits for the payment of real estate taxes, insurance premiums and any cash collateral account;

        J.     All proceeds, products, replacements, additions, substitutions, renewals and accessions of and to the Land, Improvements, Appurtenances or any other property of the types described in the preceding granting clauses; and

        K     Any and all after acquired right, title or interest of Grantor in and to any property of the types described in the preceding granting clauses.

        TO HAVE AND TO HOLD the Property and all parts thereof together with the rents, issues, profits and proceeds thereof, unto Trustee to its own proper use, benefit, and advantage forever, subject, however, to the terms, covenants, and conditions herein.

        Grantor covenants and agrees with Agent as follows:

        1.    Payment of Indebtedness; Performance of Obligations.    Grantor shall promptly pay when due the Indebtedness and shall promptly perform all Obligations.

        2.    Taxes and Other Obligations; Insurance and Condemnation Proceeds.

        (a)   Grantor shall pay or cause to be paid, when due, and before any interest, collection fees or penalties shall accrue, all Taxes in accordance with Section 7.3 of the Loan Agreement.

        (b)   Should Grantor fail to make any of such payments, Agent may, at its option and at the expense of Grantor, pay the amounts due for the account of Grantor. Upon the request of Agent, Grantor shall immediately furnish to Agent copies of all notices of amounts due and receipts evidencing payment. Grantor shall promptly notify Agent of any lien on all or any part of the Property and shall promptly discharge any unpermitted lien or encumbrance.

        (c)   Insurance and condemnation proceeds shall be paid and applied in accordance with Sections 3.2 and 3.3 of the Loan Agreement.

        (d)   Any implied covenant in this Deed of Trust or the Loan Agreement restricting the right of Lender to make an election as to the application of proceeds, is waived by Borrower. In addition, Borrower hereby waives the provisions of any law prohibiting Lender from making such an election, including, without limitation, the provisions of California Code of Civil Procedure commencing with Section 1265.2 10.

        3.    Preservation and Maintenance of Property.    Grantor shall: (a) not commit waste or permit impairment or deterioration of the Property; (b) not abandon the Property, (c) keep the Property (or cause the Property to be kept) in good repair and restore or repair promptly, in a good and workmanlike manner, all or any part of the Property to the equivalent of its original condition as of the date of this Deed of Trust, or such other condition as Agent may approve in writing, upon any damage or loss thereto; (d) comply (or cause compliance) in all material respects with all laws, ordinances, regulations and requirements of any governmental body applicable to the Property and (e) give notice in writing to Agent of and, unless otherwise directed in writing by Agent, appear in and defend any action or proceeding purporting to affect the Property, the security granted by the Loan Documents or the rights or powers of Agent. Neither Grantor nor any tenant or other person shall remove, demolish or alter any Improvement on the Land except when incident to the replacement of fixtures, equipment, machinery and appliances with items of like kind.

        4.    Protection of Agent's and/or Lender's Security.    If (a) Grantor fails to pay the Indebtedness or to perform the Obligations, (b) any action or proceeding is commenced which affects or could affect the Property or Trustee's or Lender's interest therein, including any loss, damage, cost, expense or liability incurred by Trustee, Agent or Lender with respect to (i) any environmental matters relating to the Property or (ii) the preparation of the commencement or defense of any action or proceeding or any threatened action or proceeding affecting the Loan Documents or the Property, then Agent, at Agent's option, may make such appearances, disburse such sums and take such action as Agent deems necessary, in its sole discretion, to protect the Property or Agent's or Lender's interest therein, including entry upon the Property to take such actions Agent determines appropriate to preserve, protect or restore the Property. Any amounts disbursed by Agent or Lender pursuant to this Section 4 (including attorneys' fees, costs and expenses), together with interest thereon at the "Default Rate" (defined in the Note) from the date of disbursement, shall become additional Indebtedness of Grantor secured by the lien of this Deed of Trust and the other Loan Documents and shall be due and payable on demand. Nothing contained in this Section 4 shall require Agent or Lender to incur any expense or take any action hereunder.

        5.    Warranty of Title; Actions.    Except as disclosed in the exceptions to title in the title policy approved by Agent issued by Chicago Title Insurance Company insuring the priority of this Deed of Trust, Grantor shall warrant, and hereby does warrant, that Grantor owns marketable and fee simple title to the Property, free and clear of all liens and encumbrances. Grantor shall appear in and defend

any claim or any action or other proceeding purporting to affect title or other interests relating to any part of the Property, the security of this Deed of Trust or the rights of Agent or Lender, and give Agent prompt written notice of any such claim, action or proceeding. Agent may, at the expense of Grantor, appear in and defend any such claim, action or proceeding and any claim, action or other proceeding asserted or brought against Agent or Lender in connection with or relating to any part of the Property or this Deed of Trust or involving the priority, validity or enforceability of any Loan Document.

        6.    Assignment of Rents.

        (a)   To facilitate the payment and performance of the Indebtedness and Obligations, Grantor absolutely and unconditionally assigns and transfers to Agent, for the benefit of Agent and Lender, all of Grantor's right, title and interest in and to (i) the Leases, (ii) the Rents and the immediate and continuing right to collect and receive all of the Rents, and (iii) any and all rights and claims of any kind that Grantor may have now or in the future against any present or future tenant (including Master Tenant), subtenant or occupant of the Property (a "Tenant"). In furtherance of this assignment, and not in lieu thereof, promptly upon request by Agent, Grantor agrees to execute and deliver such further assignments as Agent may from time to time require.

        (b)   All of the Rents and all proceeds payable under any policy of insurance covering loss of rents resulting from untenantability caused by damage to any part of the Property, together with any and all rights that Grantor may have against any Tenant under the Leases or any subtenants or occupants of any part of the Property and any award made hereafter to Grantor in any court proceedings involving any of the Tenants or in any bankruptcy, insolvency, or reorganization proceedings in any state or federal court, and all payments by Tenants in lieu of Rent, are hereby absolutely and unconditionally assigned to Agent, for the benefit of Agent and Lender, to be applied by Agent in accordance with the terms of the Loan Agreement. It is understood and agreed by the parties that this assignment of the Leases and Rents is intended to be and is a present, absolute, and unconditional assignment from Grantor to Agent, and not merely the passing of a security interest, and shall, immediately upon execution, give Agent the right to collect the Rents and to apply them in payment of the Indebtedness. Such assignment and grant shall continue in effect until the Indebtedness is paid in full. Subject to the provisions set forth herein and, so long as there shall not have occurred an Event of Default which is continuing, Grantor shall have a license, without joinder of Agent, to enforce the Leases subject to the terms of the Loan Documents, and to collect the Rents as they come due (but not more than one (i) month in advance and excluding any lease termination, cancellation or similar payments which Grantor agrees shall be held in trust and turned over to Agent to be applied to the Indebtedness in accordance with the terms of the Loan Agreement) and to retain, use and enjoy the same. The Rents shall be held by Grantor in trust, to be applied first to the payment of all impositions, levies, taxes, assessments and other charges upon the Property, second to maintenance of insurance policies upon the Property required hereby, third to the expenses of Property operations, including maintenance and repairs required hereby (other than payment of fees to Affiliates of Grantor), fourth to the payment of that portion of the Indebtedness then due and payable, and fifth, the balance, if any, to or as directed by Grantor. Grantor shall deliver such other Rents to Agent as are necessary for the payment of the Indebtedness as such sums become due. If an Event of Default has occurred, Grantor's right to collect and secure the Rents shall cease and Agent shall have the sole right, with or without taking possession of the Property to collect all Rents.

        (c)   Grantor hereby irrevocably appoints Agent its true and lawful attorney-in-fact, with full power of substitution and with full power of substitution and with full power for Agent in its own name and capacity or in the name and capacity of Grantor to demand and collect any and all Rents and to file any claim or take any other action or proceeding and make any settlement regarding the Leases. All Tenants are hereby expressly authorized and directed to pay to Agent, or to such nominee as Agent may designate in a writing delivered to such Tenants, all amounts due Grantor pursuant to the Leases. All Tenants are expressly relieved of all duty, liability or obligation to Grantor in respect of all payments so made to Agent or such nominee.

        (d)   After an Event of Default, Agent may, at any time without notice, either in person, by agent or by a receiver appointed by a court, and without regard to the adequacy of any security for the Indebtedness and the Obligations and without regard to solvency of Grantor:

          (i)  Enter upon, take possession of and manage the Property, or any part thereof, for the purpose of collecting the Rents in its own name sue for or otherwise collect the Rents, including those past due and unpaid, and apply the same, less costs and expenses of operation and collection, including reasonable attorney's fees, upon the Indebtedness and in such order as Agent may so determine;

         (ii)  Dispossess by the usual summary proceedings any Tenant defaulting in the payment thereof to Grantor, lease the Property or any party thereof, repair, restore, and improve the Property;

        (iii)  Apply the Rent after payment of Property expenses as determined by Agent to the Indebtedness in accordance with the terms of the Loan Agreement; and

        (iv)  Apply to any court of competent jurisdiction for specific performance of this Deed of Trust, an injunction against the violation hereof and/or the appointment of a receiver.

        (e)   The collection of Rents, or the entering upon and taking possession of the Property, or the application thereof as aforesaid, shall note cure or waive any Event of Default or notice of an Event of Default hereunder or invalidate any act done in response to such Event of Default pr pursuant to such notice of an Event of Default. In the event Grantor, as lessor under the Leases, shall fail to perform and fulfill in any material respect any material term, covenant, condition, or provision in the Leases, on its part to be performed or fulfilled, at the time and in the manner in the Leases provided, or if the Grantor shall suffer or permit to occur any breach or default under the provisions of the Leases, or any of them, and such default shall give the Tenant thereunder the right to terminate its Lease or otherwise shall continue for a period of thirty (30) days following the giving of written notice of such default to Grantor, then and in any such event, such breach or default shall constitute an Event of Default.

        (f)    In the event Grantor fails to perform any Lease covenant, Agent may, at its option, upon prior notice to Grantor (except in the event of an emergency) perform any Lease covenant for and on behalf of Grantor, and all monies expended in so doing shall be chargeable to Grantor and added to the Indebtedness and shall be immediately due and payable.

        (g)   Grantor hereby covenants and agrees as follows:

          (i)  This Deed of Trust transfers to Agent all of Grantor's right, title, and interest in any security deposits held by Grantor, provided that Grantor shall have the right to retain and apply the security deposit so long as no Event of Default has occurred under this Deed of Trust or the Loan Documents. Agent shall have no obligation to any Tenant with respect to its security deposit unless and until Agent comes into possession of the deposit.

         (ii)  Agent may assign its right, title and interest in the Leases, Rents and other Property, and any subsequent assignee shall have all of the rights and powers provided to Agent by this Deed of Trust.

        (iii)  Grantor shall not without the prior written consent of Agent: (a) perform any act or execute any other instrument which might interfere with the exercise of Agent's or Lender's rights hereunder; (b) execute any assignment, pledge or hypothecation of Rents or any of the Leases; or (c) suffer or permit any of the Leases to become subordinate to any lien other than the lien of this Deed of Trust.

        (h)   This Deed of Trust shall not be deemed to impose upon Agent or Lender any of the obligations or duties of the landlord or Grantor provided in any Lease. Grantor hereby acknowledges and agrees: (i) Grantor is and will remain liable under the Leases to the same extent as though this Deed of Trust had not been made; and (ii) Agent has not by this Deed of Trust assumed any of the obligations of Grantor under the Leases, except as to such obligations which arise after such time as

Agent shall have assumed actual ownership or control of the Property. This Deed of Trust shall not make Agent responsible for the control, care, management, or repair of the Property or any personal property or for the carrying out of any of the terms of the Leases unless and until Agent takes possession or actual control of the Property. Agent and Lender shall not be liable in any way for any injury or damage to person or property sustained by any person or persons, firm, or corporation in or about the Property absent gross negligence or willful misconduct by such Person.

        (i)    In the event any Tenant should be the subject of any proceeding under the Federal Bankruptcy Code or any other federal, state, or local statute which provides for the possible termination or rejection of any Lease, Grantor covenants and agrees no settlement for damages shall be made without the prior written consent of Agent, which consent shall not be unreasonably withheld or delayed, and any check in payment of damages for rejection of any Lease will be made payable both to Grantor and Agent. Grantor hereby assigns any such payment to Agent and further covenants and agrees that it will duly endorse to the order of Agent any such check.

        (j)    After an Event of Default, then, without notice to, or the consent of, Grantor, Agent shall be entitled to exercise all of the rights and remedies contained in this Deed of Trust or in any other Loan Document or otherwise available at law or in equity including, without limitation, the right to do any one or more of the following:

          (i)  To enter upon, take possession of and manage the Property for the purpose of collecting the Rents;

         (ii)  Dispossess by the usual summary proceedings any Tenant defaulting in the payment thereof to Grantor;

        (iii)  Lease the Property or any part thereof;

        (iv)  Repair, restore, and improve the Property,

         (v)  Apply the Rents after payment of Property expenses as determined by Agent to the Indebtedness and the Obligations in such order as Agent may determine; and

        (vi)  Apply to any court of competent jurisdiction for specific performance of this Deed of Trust, an injunction against the violation hereof and/or the appointment of a receiver.

        (k)   Grantor hereby agrees to indemnify Agent and Lender to hold Agent and Lender harmless from any liability, loss or damages including, without limitation, reasonable attorney's fees, costs and expenses which may or might be incurred by Agent under the Leases or by reason of this Deed of Trust, and from any and all claims and demands which may be asserted against Agent or Lender by reason of any term, covenant or agreement contained in any of the Leases, except for any such liability, loss or damage resulting solely from Agent's or Lender's gross negligence or willful misconduct.

        (l)    The assignment of Leases and Rents set forth in this Section 6 and the granting clauses of this Deed of Trust shall run with the land and be good and valid against Grantor or those claiming by, under or through Grantor, from the date hereof and such assignment shall continue to be operative during the foreclosure or any other proceeding taken to enforce this Deed of Trust. In the event of a sale or foreclosure which shall result in a deficiency, such assignment shall stand as security during the redemption period of the payment of such deficiency. Agent shall be permitted, at its sole option, to exercise remedies under such assignment separately from remedies exercised against other portions of the Property.

        7.    Statements by Grantor.    Grantor shall within ten (10) days after Agent's request, furnish Agent with a written statement, duly acknowledged, setting forth the sums, according to Grantor's books and records, secured by the Loan Documents and any right of set-off, counterclaim or other defense which exists against such sums and the Obligations.

        8.    No Additional Liens, Encumbrances or Indebtedness.    Grantor covenants not to execute any mortgage, deed of trust, security agreement, assignment of leases and rents or other agreement granting a lien (except the liens granted to Agent by the Loan Documents) against or encumbrance on

the Property or take or fail to take any other action which would result in a lien against the Property or the interest of Grantor (or Guarantor) in the Property without the prior written consent of Agent; provided, however, Grantor may in good faith, by appropriate proceeding, contest the validity or amount of any asserted lien in accordance with the terms of the Loan Agreement and pending such contest, Grantor shall not be deemed to be in default hereunder.

        9.    Grantor and Lien Not Released.    Without affecting the liability of Grantor for any of the Indebtedness or the Obligations, or any other person liable for the payment of the Indebtedness or the performance of any Obligations, and without affecting the lien or charge of this Deed of Trust as security for the payment of the Indebtedness, Agent may, from time to time and without notice to any junior lien holder or holder of any right or other interest in and to the Property: (a) release any person liable for payment of all or any portion of the Indebtedness or performance of the Obligations; (b) waive or modify any provision of this Deed of Trust or the other Loan Documents or grant other indulgences; (c) release all or any part of the Property; (d) take additional security for any obligation herein mentioned; (e) subordinate the lien or charge of this Deed of Trust; (f) consent to the granting of any easement; or (g) consent to any map, plat or plan of the Property.

        In accordance with California Code of Civil Procedure Section 726.5, Lender may waive its lien against the Property or any portion thereof, together with fixtures or personal property thereon, to the extent such property is found to be environmentally impaired, and may exercise any and all rights and remedies of an unsecured creditor against Borrower and all of Borrower's assets and property for the recovery of any deficiency, including, without limitation, seeking an attachment order under California Code of Civil Procedure Section 483.010. No such waiver shall be final or binding on Lender unless and until a final money judgment is obtained against Borrower. As between Lender and Borrower, for purposes of California Code of Civil Procedure Section 726.5, Borrower shall have the burden of proving that the release or threatened release of any Hazardous Materials was not knowingly or negligently caused or contributed to, or knowingly or willfully permitted or acquiesced to by Borrower or any related party (or any affiliate or agent of Borrower or any related party) and that Borrower made written disclosure of the release to Lender or that Lender otherwise obtained actual knowledge thereof prior to the making of the loan evidenced by the Note. Notwithstanding anything to the contrary contained in this Deed of Trust or the other Loan Documents, Borrower shall be fully and personally liable for all judgments and awards entered against Borrower pursuant to California Code of Civil Procedure 726.5 and such liability shall be an exception to any non-recourse or exculpatory provision in this Deed of Trust or the other Loan Documents and shall not be limited to the original principal amount of the obligations secured by this Deed of Trust. Borrower's obligations hereunder shall survive the foreclosure, deed in lieu of foreclosure, release, reconveyance or any other transfer of the Property or this Deed of Trust. For the purpose of any action brought under this Section, Borrower hereby waives the defense of laches and any applicable statute of limitations. For purposes of California Code of Civil Procedure 726.5, the acts, knowledge and notice of each "726.5 Party" shall be attributed to and be deemed to have been performed by the party or parties then obligated on and liable for payment of the Note, As used herein, "726.5 Party" shall mean Borrower, any successor owner to Borrower of all or any portion of the Property, any related party of Borrower or any such successor and any affiliate or agent of Borrower, any such successor or any such related party.

        10.    Uniform Commercial Code Security Agreement.

        (a)   This Deed of Trust shall cover, and the Property shall include, all property now or hereafter affixed or attached to the Land, which to the fullest extent permitted by law, shall be deemed fixtures and a part of the Land. In addition, this Deed of Trust shall constitute a security agreement pursuant to the UCC for any portion of the Property which, under applicable law, may be subject to a security interest pursuant to the UCC (such portion of the Property is hereinafter called the "Personal Property") and Grantor hereby grants to Agent, for the benefit of Agent and Lender, a security interest in the Personal Property. Agent shall have all of the rights and remedies of a secured party under the UCC as well as all other rights and remedies available at law or in equity.

        (b)   Grantor hereby authorizes Agent to file any financing statements, as well as extensions, renewals and amendments thereof, and reproductions of this Deed of Trust, all in such form as Agent may require to perfect a security interest with respect to the Personal Property. Grantor hereby authorizes and empowers Agent and irrevocably appoints Agent its agent and attorney-in-fact to execute and file, on Grantor's behalf, all financing statements and refilings and continuations thereof as Agent deems necessary or advisable to create, preserve and protect such lien. Grantor shall pay all costs of filing such financing statements and any extensions, renewals, amendments and releases thereof, and shall pay all reasonable costs and expenses of any record searches for financing statements as Agent may reasonably require.

        (c)   Grantor shall not, without the prior written consent of Agent, sell, assign, transfer, encumber, remove or permit to be removed from the Property any of the Personal Property. So long as no Event of Default exists, Grantor may sell or otherwise dispose of the Personal Property when obsolete, worn out, inadequate, unserviceable or unnecessary for use in the operation of the Property, but only upon replacing the same with other Personal Property at least equal in value and utility to the disposed Personal Property. Any replacement or substituted Personal Property shall be subject to the security interest granted herein.

        (d)   To the extent permitted by law, Grantor, Lender and Agent agree that with respect to all items of Personal Property which are or will become fixtures on the Land, this Deed of Trust, upon recording or registration in the real estate records of the proper office, shall constitute a "fixture filing" within the meaning of the UCC.

        (e)   After an Event of Default, Agent may exercise in respect of the Personal Property, in addition to all other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party on default under the UCC (whether or not the UCC applies to the affected Personal Property) and also may: (i) require Grantor to, and Grantor hereby agrees that it will, at its expense and upon request of Agent, forthwith assemble all or part of the Personal Property as directed by Agent and make it available to Agent at any reasonable place or places designated by Agent; and (ii) without notice except as specified below, sell, lease or otherwise dispose of the Personal Property or any part thereof in one or more parcels at public or private sale, and without the necessity of gathering at the place of sale of the property to be sold, at any of Agent's offices or elsewhere, at such time or times, for cash, on credit or for future delivery, and at such price or prices and upon such other terms as Agent may deem commercially reasonable.

        (f)    Grantor agrees that, to the extent notice of sale shall be required by law, a reasonable authenticated notification of disposition shall be a notification given at least ten (10) days prior to any such sale and such notice shall (i) describe Agent and Grantor, (ii) describe the Personal Property that is the subject of the intended disposition, (iii) state the method of intended disposition, (iv) state that Grantor is entitled to an accounting of the Indebtedness and stating the charge, if any, for an accounting, and (v) state the time and place of any public disposition or the time after which any private sale is to be made. Notwithstanding the foregoing, to the contrary, no notification need be given to Grantor if it has authenticated after default a statement renouncing or modifying any right to notification of sale or other intended disposition. At any sale of the Personal Property, if permitted by law, Agent may bid (which bid may be, in whole or in part, in the form of cancellation of indebtedness) for the purchase, lease, license or other disposition of the Personal Property or any portion thereof for the account of Agent. Agent shall not be obligated to make any sale of Personal Property regardless of notice of sale having been given. Agent may disclaim any warranties that might arise in connection with the sale, lease, license or other disposition of the Personal Property and have no obligation to provide any warranties at such time. Agent may adjourn any public or private sale from time to time by announcement at the time and place fixed therefore, and such sale may, without further notice, be made at the time and place to which it was so adjourned. To the extent permitted by law, Grantor hereby specifically waives all rights of redemption, stay or appraisal which it has or may have under any applicable law now existing or hereafter enacted.

        (g)   After an Event of Default, Agent or its agents or attorneys shall have the right without further notice or demand or legal process (unless the same shall be required by applicable law), personally, or by its agents or attorneys, (i) to enter upon, occupy and use any premises owned or leased by Grantor or where the Personal Property is located (or is believed to be located) for so long as such entry, occupancy and use is necessary, without any obligation to pay rent to Grantor, to render the Personal Property useable or saleable and to remove the Personal Property or any part thereof therefrom to the premises of Agent or any agent of Agent for such time as Agent may desire in order to effectively collect or liquidate the Personal Property and use in connection with such removal any and all services, supplies and other facilities of Grantor; (ii) to make copies of and have access to Grantor's original books and records, to obtain access to Grantor's data processing equipment, computer hardware and software relating to the Personal Property and to use all of the foregoing and the information contained therein in any manner Agent deems appropriate; and (iii) to notify postal authorities to change the address for delivery of Grantor's mail to an address designated by Agent and to receive, open and dispose of all mail addressed to Grantor.

        11.    Events of Default; Acceleration of Indebtedness.    The occurrence of any one or more of the following events shall constitute an "Event of Default" under this Deed of Trust:

        (a)   failure of Borrower Parties to pay, within five (5) days after the due date, any of the Indebtedness, including any payment due under the Note, or Borrower Parties' failure to pay the Loan at the Maturity Date, whether by acceleration or otherwise; or

        (b)   failure of Grantor to strictly comply with Section 8 (no additional liens) 6(f)(iii) (no interference with Agent's liens on Leases and Rents) of this Deed of Trust; or

        (c)   failure of Borrower Parties to satisfy each and every Obligation not set forth in subsection (b) above, and the continuance of such failure for ten (10) days after notice by Agent to Borrower Parties; provided, however, Borrower Parties shall have an additional thirty (30) days to cure such failure if (a) such Obligation cannot by its nature reasonably be cured within ten (10) days; (b) such failure does not involve the failure to make payments on a monetary obligation; (c) if Borrower Parties commence to cure such failure promptly after written notice thereof and thereafter diligently pursues the curing thereof, and (d) Borrower Parties provide Agent with security reasonably satisfactory to Agent against any interruption of payment or impairment of collateral as a result of such continuing failure, Borrower Parties shall not be in default hereunder during such additional thirty (30) day period of diligent curing;

        (d)   Grantor changes the state of its formation or its name without providing Agent thirty (30) days prior written notice;

        (e)   the occurrence of an Event of Default (as such term is defined in the applicable Loan Document) under any other Loan Document; or

        (f)    any default under, or termination of, the Master Lease.

        Upon the occurrence of an Event of Default, at the option of Agent, the Indebtedness shall become immediately due and payable without notice to Grantor and Agent shall be entitled to all of the rights and remedies provided in the Loan Documents or at law or in equity. Each remedy provided in the Loan Documents is distinct and cumulative to all other rights or remedies under the Loan Documents or afforded by law or equity, and may be exercised concurrently, independently, or successively, in any order whatsoever.

        12.    Enforcement.    In an Event of Default exits, Lender may elect to foreclose the interest of Borrower in the Land and other Property pursuant to applicable law. Commencement of such an action shall be deemed a declaration by Lender that any and all of the Indebtedness and Obligations are to be due and payable immediately. Upon the election of Lender to effect a trustee's sale of the Land or

other Property in lieu of judicial foreclosure, then Lender may instruct Trustee to commence such sale and consummate such sale in the following manner:

        (a)   Lender shall initiate such action by delivery to Trustee of a written declaration of the Event of Default and demand for sale and of written notice of the Event of Default and of election to cause to be sold the Land and any other Property designated by Lender, which notice Trustee shall cause to be duly filed for record in case of foreclosure by exercise of the power of sale herein. Should Lender elect to foreclose by exercise of the power of sale herein, Lender shall also deposit with Trustee this Deed of Trust and the Note and such receipts and evidence of expenditures made and secured hereby as Trustee may require, and notice of sale having been given as then required by law and after lapse of such time as may then be required by law after recordation of such notice of the Event of Default, Trustee, without demand on Borrower, shall sell the Land and any other Property designated by Lender at time and place of sale fixed by it in such notice of sale as Lender may direct, either as a whole or in separate parcels, as Lender may determine, at public auction to the highest bidder for cash in lawful money of the United States, payable at time of sale. Lender shall have the right to direct the order in which separate parcels shall be sold and Borrower shall have no right to direct the order in which separate parcels shall be sold. Trustee may postpone sale of all or any portion of the Land and other Property by public announcement at such time and place of sale, and from time to time thereafter may postpone such sale by public announcement at the time fixed by the preceding postponement. Any person, including Borrower, Trustee or Lender, may purchase at such sale. Lender may proceed as to the Property constituting personal property in accordance with Lender's rights and remedies in respect to the Land or sell the Property constituting personal property separately and without regard to the remainder of the Land in accordance with Lender's rights and remedies provided by the Uniform Commercial Code as well as other rights and remedies available at law or in equity. Borrower waives all rights to direct the order in which any of the Land and other Property shall be sold in the event of any sale under this Deed of Trust, and also any right to have any of the Land and other Property marshalled upon any sale.

        (b)   Lender, from time to time before Trustee's sale pursuant to this Section 12 may rescind any notice of breach or the Event of Default and of election to cause to be sold the Land or other Property by executing and delivering to Trustee a written notice of such rescission, which notice, when recorded, shall also constitute a cancellation of any prior declaration of an Event of Default and demand for sale. The exercise by Lender of such right of rescission shall not constitute a waiver of any breach or Event of Default then existing or subsequently occurring or impair the right of Lender to execute and deliver to Trustee, as above provided, other declarations of an Event of Default and demand for sale, and notices of breach or Event of Default, the obligations hereof, nor otherwise affect any provisions, covenant or condition of the Note and/or of this Deed of Trust or any of the rights, obligations or remedies of the parties thereunder or hereunder.

        (c)   Trustee shall deliver to the purchaser at any such trustee's sale its deed, without warranty, which shall convey to the purchaser the interest in the Land and other Property then sold which Borrower has or has the power to convey at the time of the execution of this Deed of Trust, and such as it may have acquired hereafter. The Trustee's deed shall recite the facts showing that the sale was conducted in compliance with all the requirements of law and of this Deed of Trust, which recital shall be prima facie evidence of such compliance and conclusive evidence thereof in favor of bona fide purchasers and encumbrances for value.

        (d)   In the case of a sale under this Deed of Trust, the said Land and other Property, real, personal and mixed, may be sold in one parcel or more than one parcel.

        (e)   Upon any sale made under or by virtue of this Section (whether made under the power of sale herein granted or under or by virtue of judicial proceedings or of a judgment or decree of foreclosure and sale) (any such sale or disposition, a "Foreclosure Sale;" and any two or more, "Foreclosure Sales"), Lender may bid for and acquire the Land and other Property, or any part thereof, and in lieu of paying cash therefore may make settlement for the purchase price by crediting upon the Indebtedness and Obligations the net sale price after deducting therefrom the expenses of the

sale and the costs of the action and any other sums which Lender is authorized to deduct under this Deed of Trust.

        (f)    In the event of any Foreclosure Sale, the entire Indebtedness and Obligations, if not previously due and payable, immediately thereupon shall, anything in the Note or in the Deed of Trust to the contrary notwithstanding, become due and payable.

        (g)   In the Event of Default exists, Lender may enter upon the Land, take possession of the Property, or any part thereof, with or, to the extent permitted by law, without judicial process, and, in connection therewith, without any responsibility or liability on the part of Lender, take possession of any property located on or in the Property which is not a part of the Property and hold or store such property at Borrower's expense and Lender may exercise any or all of the remedies available to a secured party under the Uniform Commercial Code including the following: Lender may require Borrower to assemble the personal property constituting part of the Property, and make such available to Lender at a place to be designated by Lender which is reasonably convenient to Borrower and Lender. After notification, if any, as hereafter provided in this subsection, Lender may sell, lease, or otherwise dispose of (herein, a "disposition"), at the office of Lender, or on the Land, or elsewhere, as chosen by Lender, all or any part of said personal property in its then condition or following any commercially reasonable preparation or processing, and each disposition may be as a unit or in parcels, by pubic or private proceedings, and by way of one or more contracts, and, at any disposition, it shall not be necessary to have present or exhibit said personal property, or any part thereof being sold. The disposition of any part of said personal property shall not exhaust Lender's power of disposition, but dispositions may be made from time to time until the Indebtedness and Obligations are paid and performed in full. Reasonable notification of the time and place of any public disposition pursuant to this subsection, or reasonable notification of the time after which any private disposition is to be made pursuant to this subsection, shall be sent to Borrower and to any other person entitled to receive notice under the Uniform Commercial Code. It is agreed that notice sent or given not less than five (5) calendar days prior to the taking of the action to which the notice relates, is reasonable notification for the purposes of this subsection.

        (h)   If an Event of Default exists, Lender may bring an action in a court of competent jurisdiction to foreclose this instrument or to enforce any of the covenants hereof.

        (i)    Lender shall, as a matter of right, without notice and without giving bond to Borrower or anyone claiming by, under or through Borrower, and without regard for the solvency or insolvency of Borrower or the then value of the Property, pursuant to California Civil Code Section 2929.5 or other applicable law, be entitled to have a receiver appointed for all or any part of the Property and the Rents, and the proceeds, issues and profits thereof, with the rights and powers referenced below and such other rights and powers as the court making such appointment shall confer, and Borrower hereby consents to the appointment of such receiver and shall not oppose any such appointment. Such receiver shall have all powers and duties prescribed by applicable law, all other powers which are necessary or usual in such cases for the protection, possession, control, management and operation of the Property, and such rights and powers as Lender would have, upon entering and taking possession of the Property under subsection (c) below. Without limiting the generality of the foregoing, Lender shall have the right to appoint a receiver in order to enforce Lender's rights under Section 2929.5 of the California Civil Code.

        13.    Other Remedies.    Lender may exercise all rights and remedies contained in any other instrument, document, agreement or other writing heretofore, concurrently or in the future executed by Borrower or any other person or entity in favor of Lender in connection with the Obligations or any part thereof, without prejudice to the right of Lender thereafter to enforce any appropriate remedy against Borrower. Lender shall have the right to pursue all remedies afforded to a beneficiary under a deed of trust under applicable law, and shall have the benefit of all of the provisions of such applicable law, including all amendments thereto which may become effective from time to time after the date hereof.

        (a)   CCP Sections 726.5 and 736. Without limiting the foregoing, Lender may (i) in accordance with California Code of Civil Procedure Section 736, as such Section may be amended from time to time, recover any costs, expenses or liabilities, including without limitation attorneys' fees, incurred by Lender and arising from any breach of any covenant, warranty or agreement pertaining to any environmental requirements, or any order, consent decree or settlement relating to the cleanup of toxic or hazardous waste or waste products, or any other "environmental provision" (as defined in such Section 736) relating to the Land or other Property or any portion thereof, and (ii) in accordance with California Code of Civil Procedure Section 726.5, as such Section may be amended from time to time, waive the security of the Deed of Trust as to any parcel of the Land and other Property that is "environmentally impaired" or is an "affected parcel" (as such terms are defined in such Section), and thereafter exercise against Borrower, to the extent permitted by such Section 726.5, the rights and remedies of an unsecured creditor, including reduction of Lender's claim against Borrower to judgment, and any other rights and remedies permitted by law,

        (b)   Action for Environmental Claims. In accordance with, and subject to limitations of, California Code of Civil Procedure Section 736, Lender may seek a judgment that Borrower has breached its covenants, representations and/or warranties with respect to the environmental matters contained in this Deed of Trust, the Indemnity Agreements and the Loan Agreement (the "Environmental Provisions"), and may commence and maintain an action or actions in any court of competent jurisdiction for enforcement of the Environmental Provisions and/or recovery of any all costs, damages, expenses, fees, penalties, fines, judgments, indemnification payments to third parties, and other out-of-pocket costs or expenses (including, without limitation, court costs, consultants' fees and attorneys' fees, whether incurred in litigation or not and whether before or after judgment), incurred or advanced by Lender pursuant to the Environmental Provisions (collectively, the "Environmental Costs"), excluding, however, any Environmental Costs not permitted to be recovered pursuant to Section 736 of the California Code of Civil Procedure. Environmental Costs that are not permitted to be recovered pursuant to Section 736 may be referred to hereinafter as the "Unsecured Environmental Costs," and Environmental Costs other than the Unsecured Environmental Costs may be referred to hereinafter as the "Secured Environmental Costs." Any Unsecured Environmental Costs shall not be secured by this Deed of Trust; however, nothing herein shall prevent Lender from recovering any Unsecured Environmental Costs pursuant to the Environmental Obligations set forth in the Loan Agreement, to the extent they are recoverable in accordance with Loan Agreement. All Secured Environmental Costs incurred by Lender shall bear interest at the default rate provided under the Note. All Secured Environmental Costs together with interest thereon at the rate then in effect under the Note shall be secured by this Deed of Trust and shall enjoy the same priority as the original principal amount of the Note. Borrower acknowledges and agrees that notwithstanding any term or provision contained in this Deed of Trust or in the other Loan Documents, Environmental Costs shall be exceptions to any nonrecourse or exculpatory provision, if any, and Borrower shall be fully and personally liable for Environmental Costs. Such liability shall not be limited to the original principal amount of the obligations secured by this Deed of Trust. Borrower's obligations hereunder shall survive foreclosure, deed in lieu of foreclosure, release, reconveyance or any other transfer of the Property or this Deed of Trust. For the purposes of any action brought under this subparagraph, Borrower hereby waives the defense of laches and any applicable statute of limitations.

        14.    Expenditures and Expenses.    In any action to foreclose the lien hereof or otherwise enforce Trustee's, Agent's or Lender's rights and remedies hereunder, there shall be allowed and included as additional Indebtedness all costs and expenses which may be paid or incurred by or on behalf of Trustee, Agent or Lender, including without limitation, the costs of collection, enforcement, retaining, holding, preparing for disposition, processing and disposing of the Personal Property, appraiser's fees, outlays for documentary and expert evidence, stenographic changes, publication costs and costs (which may be estimated as the items to be expended after the entry of the decree) of procuring all such abstracts of title, title searches and examination, UCC record searches, title insurance policies, and similar data and assurance with respect to title as Agent may deem to be reasonably necessary either to prosecute any foreclosure action or to evidence to the bidder at any sale pursuant thereto the true condition of the title to or the value of the Property. All such costs and expenses, together with such

other costs and expenses as may be incurred by Trustee, Agent or Lender in the protection of the Property, maintenance of the lien of this Deed of Trust or in any workout or restructuring of the Loan including, attorneys' fees and costs in any negotiation, litigation or other proceeding affecting this Deed of Trust, the Note, the other Loan Documents, the Property or the Personal Property, including probate, appellate, and bankruptcy proceedings and any post judgment proceedings to collect or enforce any judgment or order relating to this Deed of Trust or the other Loan Documents or in preparation for the commencement or defense of any action or proceeding or threatened action or proceeding, and further including, attorneys' fees and costs in any negotiation, litigation or other proceeding, including costs and expenses in connection with obtaining any court order or the appointment of a receiver to enforce Agent's rights pursuant to Section 564 of the California Code of Civil Procedure and/or Section 2929.5 of the California Civil Code, shall be immediately due and payable to Agent, with interest thereon at the Default Rate, and shall be secured by this Deed of Trust.

        15.    Application of Proceeds of Foreclosure Sale.    Unless otherwise required by applicable law, the proceeds of any foreclosure sale of the Property shall be distributed and applied in the order of priority set forth in the Note with the excess, if any, being applied, to any party entitled thereto as their rights may appear. Only with respect to the Personal Property and only to the extent required by law, shall it be necessary for Agent to account for any surplus to Grantor. To the extent permitted by applicable law, Grantor waives all claims, damages, and demands against Agent arising out of the disposition, repossession or retention of the Property.

        16.    Future Advances.    This Deed of Trust is given to secure not only the existing Indebtedness and Obligations, but also future advances (whether such advances are obligatory or are made at the option of Lender or Agent, or otherwise) made by Agent or Lender under the Loan Agreement, the Note, this Deed of Trust or any of the other Loan Documents, to the same extent as if such future advances were made on the date of the execution of this Deed of Trust. It is the intent hereof to secure payment of the Indebtedness whether the entire amount shall have been advanced to Borrower Parties at the date hereof, or at a later date, and to secure any other amount or amounts that may be added to the Indebtedness or Obligations. The total amount of the Indebtedness and Obligations secured hereby may decrease or increase from time to time, but the total unpaid balance so secured at any one time shall not exceed five (5) times the aggregate face amount of the Note in principal plus interest thereon and any disbursements made for the payment of taxes, levies, or insurance on the Property with interest thereon. This Deed of Trust shall secure any and all additional or further monies which may be advanced by Lender or Agent to Borrower Parties after the date hereof, which future advances of money, if made, may be evidenced by a note or notes executed by one or more Borrower Parties to Lender and Agent bearing such rate of interest and with such maturities as shall be determined from time to time. Nothing herein contained shall be deemed an obligation on the part of Lender or Agent to make any future advances.

        17.    Waiver of Statute of Limitations.    Grantor hereby waives the right to assert any statute of limitations as a bar to the enforcement of the lien created by any of the Loan Documents or to any action brought to enforce the Note or any other obligation secured by any of the Loan Documents.

        18.    Waiver of Homestead and Redemption; Other Waivers and Agreements.

        (a)   Grantor hereby waives all right of homestead exemption in the Property. Grantor hereby waives all right of redemption on behalf of Grantor and on behalf of all other persons acquiring any interest or title in the Property subsequent to the date of this Deed of Trust, except decree or judgment creditors of Grantor.

        (b)   In the event Grantor is deemed to have signed this Deed of Trust as a surety or accommodation party, or to have subjected its property to this Deed of Trust to secure the indebtedness of another, to the extent permitted by applicable law, Grantor hereby expressly waives the benefits of any statutory provision limiting the liability of a surety, and any defense arising by reason of any disability or other defense of Grantor or by reason of the cessation from any cause whatsoever of the liability of Grantor. Without limiting the foregoing, Grantor hereby waives any and all benefits and defenses under California Civil Code Section 2810 and agrees that by doing so Grantor shall be liable

even if such other party had no liability at the time of execution of the Note or any other Loan Document, or thereafter ceases to be liable. Grantor hereby waives any and all benefits and defenses under California Civil Code Section 2809 and agrees that by doing so Grantor's liability may be larger in amount and more burdensome than that of such other party, Grantor waives all rights to require Agent to pursue any other remedy it may have against such other party, or any other Borrower Party, including any and all benefits under California Civil Code Section 2845, 2849 and 2850. Grantor further waives any rights, defenses and benefits that may be derived from Sections 2787 to 2855, inclusive, of the California Civil Code or comparable provisions of the laws of any other jurisdiction and further waives all other suretyship defenses Grantor would otherwise have under the laws of California or any other jurisdiction.

        (c)   Upon a default by Borrower Parties, Agent in its sole discretion, without prior notice to or consent of Grantor (except such notice or consent as is expressly required under the Loan Documents), may elect to: (1) foreclose either judicially or nonjudicially against any real or personal property security it may hold for the Loan; (ii) accept a transfer of any such security in lieu of foreclosure; (iii) compromise or adjust the Loan or any part of it or make any other accommodation with Borrower Parties; or (iv) exercise any other remedy against Borrower Parties or any security. No such action by Agent shall release or limit the liability of Grantor, who shall remain liable under the Loan Documents after the action, even if the effect of the action is to deprive Grantor of any subrogation rights, rights of indemnity, or other rights to collect reimbursement from the other Borrower Parties for any sums paid to Agent, whether contractual or arising by operation of law or otherwise. Grantor expressly agrees that under no circumstances shall they be deemed to have any right, title, interest or claim in or to any real or personal property to be held by Agent or any third party after any foreclosure or transfer in lieu of foreclosure of any security for the Loan.

        (d)   Regardless of whether Grantor may have made any payments to Agent, Grantor hereby waives: (i) all rights of subrogation, indemnification, contribution and any other rights to collect reimbursement from the other Borrower Parties or any other party for any sums paid to Agent, whether contractual or arising by operation of law (including the United States Bankruptcy Code or any successor or similar statute) or otherwise; (ii) all rights to enforce any remedy that Agent may have against the other Borrower Parties; and (iii) all rights to participate in any security now or later to be held by Agent for the Loan. The waivers given in this paragraph shall be effective until the Loan has been paid and performed in full.

        (e)   Grantor waives all rights and defenses arising out of an election of remedies by Agent, even though that election of remedies, such as a nonjudicial foreclosure with respect to security for a guarantied obligation, has destroyed Grantor's rights of subrogation and reimbursement against the other Borrower Parties by operation of Section 580d of the California Code of Civil Procedure or otherwise. Grantor further waives any right to a fair value bearing under California Code of Civil Procedure Section 580a, or any other similar law, to determine the size of any deficiency owing (for which any Grantor would be liable hereunder) following a non judicial foreclosure sale.

        (f)    Without limiting the foregoing or anything else contained in this Deed of Trust, Grantor waives all rights and defenses that Grantor may have because the Loan is secured by real property. This mew, among other things:

          (i)  That Leer may collect from Grantor without first foreclosing on any real or personal property collateral pledged by any other Borrower Party, and

         (ii)  If Agent forecloses on any real property collateral pledged by any Borrower Party: (x) the amount of the Loan may be reduced only by the price for which that collateral is sold at tie foreclosure sale, even if the collateral is worth more than the sale price; and (y) Lender may collect from Grantor even if Agent, by foreclosing on the real property collateral, has destroyed any right Grantor may have to collect from any other Borrower Patty.

        This subsection (f) is an unconditional and irrevocable waiver of any rights and defenses Grantor may have because the Loan is secured by real property. These rights and defenses include, but are not

limited to, any rights or defenses based upon Sections 580a, 580b, 580d, or 726 of the California Code of Civil Procedure.

        (g)   Grantor waives all rights and defenses arising out of any failure of the Agent or Lender to disclose to the Grantor any information relating to the financial condition, operations, properties or prospects of any other Borrower Party now or in the future known to the Agent or Lender (tutor waiving any duty on the part of the Agent or Lender to disclose such information).

        (h)   Grantor further waives and agrees not to assert: (i) any right to require Agent to proceed against any guar, to proceed against or exhaust any other security for the Indebtedness and Obligations secured hereby, to pursue any other remedy available to Agent, or to pursue any remedy in any particular order or manner; (ii) the benefits of any legal or equitable doctrine or principle of marshalling; (iii) demand, diligence, presentment for payment, protest and demand, and notice of extension, dishonor, protest, demand and nonpayment, relating to the indebtedness secured hereby; and (iv) any benefit of, and any right to participate in, any other security now or hereafter held by Agent.

        (i)    Grantor f agrees that at any time or from time to time, without liability therefor and without notice, without affecting personal liability of any person for the payment of the indebtedness std hereby, and without affecting the lien of this Deed of Trust upon the Property for the full amount of all amounts secured hereby, Agent, or Trustee at the direction of Agent, may (i) reconvey all or any par' off the Property, (ii) consent to the making of any map of plat thereof, (iii) join in granting-any easement thereon or in creating any covenants or conditions restricting use or occupancy thereof, or (iv) join in any extension agreement or in any agreement subordinating the lien or change hereof.

        19.    Governing Law; Severability.    This Deed of Trust shall be governed by and construed in accordance with the internal laws of the State of Illinois except that the provisions of the laws of the jurisdiction in which the Land' is located shall be applicable to the creation, perfection and enforcement of the lien created by this Deed of Trust (excluding, however, the creation, attachment and grant of the security interest in Personal Property which shall be governed by the Illinois UCC). The invalidity, illegality or unenforceability of any provision of this Deed of Trust shall not affect or impair the validity, legality or enforceability of the remainder of this Deed of Trust, and to this end, the provisions of this Deed of Trust are declared to be severable.

        20.    Notice.    Notices shall be given under this Deed of Trust in conformity with the terms and conditions of the Loan Agreement and in conformity with applicable law.

        21.    Successors and Assigns Bound; Joint and Several Liability; Agents; Captions.    The covenants and agreements contained in the Loan Documents shall bind, and the rights thereunder shall inure to, the respective successors and assigns of Agent, Lender and Grantor, subject to the transfer restrictions set forth in the Loan Agreement. All covenants and agreements of Grantor and Borrower Parties shall be joint and several. In exercising any rights under the Loan Documents or taking any actions provided for therein, Agent may act through its employees, agents or independent contractors as authorized by Agent. The captions and headings of the paragraphs of this Deed of Trust are for convenience only and are not to be used to interpret or define the provisions hereof.

        22.    Release.    Upon payment in full of all Indebtedness and the performance of all Obligations or release of the Property pursuant to Section 2.10 of the Loan Agreement, Agent shall release this Deed of Trust. In such event, Agent shall, at the request of Grantor, deliver to Grantor in recordable form, all such documents as shall be necessary to release the Property from the liens, security interests, conveyances, and assignments created or evidenced by this Deed of Trust. The recitals in such reconveyance of any matters or facts shall be conclusive as to the accuracy thereof. The grantee in such reconveyance may be described as "the person or persons legally entitled thereto". Grantor shall pay Agent's reasonable costs incurred in releasing or assigning this Deed of Trust and in preparing and filing any terminations or assignments of financing statements related thereto, as a condition to Agent's obligation to deliver the same.

        23.    Loss of Note.    Upon notice from Agent of the loss, theft, or destruction of the Note (or any of them) and upon receipt of an affidavit of lost note and an indemnity reasonably satisfactory to

Grantor from Agent, or in the case of mutilation of the Note (or any of them), upon surrender of the mutilated Note, Grantor shall make and deliver a new note of like tenor in lieu of the then to be superseded Note (or any of them). Any one or more of the financial institutions which are or become a party to the Loan Agreement as Lenders may from time to time be replaced and, accordingly, one or more of the Notes may from time to time be replaced, provided that the terms of the Notes following such replacement, including the principal amount evidenced thereby, shall remain the same. As the indebtedness secured by this Deed of Trust shall remain the same, such replacement of the Notes shall not be construed as a novation and shall not affect, diminish or abrogate Grantor's liability under this Deed of Trust or the priority of this Deed of Trust.

        24.    Further Assurances.    Grantor agrees to execute any further documents, and to take any further actions reasonably requested by Agent to evidence or perfect the security interests granted herein, to maintain the first priority of the security interests, and to effectuate the rights specifically granted to Agent and Lender hereunder.

        25.    Subrogation.    Agent is hereby subrogated (a) to the lien(s) of each and every mortgage, deed of trust, lien or other encumbrance on all or any part of the Property which is fully or partially paid or satisfied out of the proceeds of the Indebtedness, and (b) to the rights of the owner(s) and bolder(s) of any such mortgage, deed of trust, lien or other encumbrance. The respective rights under and priorities of all such mortgages, deeds of trust, liens or other encumbrances shall be preserved and shall pass to and be held by Agent as additional security for the Indebtedness, to the same extent as if such rights and priorities had been duly assigned by separate instrument of assignment and notwithstanding that the same may have been cancelled and satisfied of record. Notwithstanding the foregoing, Agent agrees that only the terms and provisions set forth in this Deed of Trust and the other Loan Documents shall govern and control Grantor's rights and obligations hereunder and thereunder.

        26.    Time of Essence.    Time is of the essence of this Deed of Trust and the performance of each of the covenants and agreement contained herein.

        27.    Venue.    GRANTOR HEREBY CONSENTS TO THE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED WITHIN THE COUNTY OF COOK, STATE OF ILLINOIS AND IRREVOCABLY AGREES THAT, SUBJECT TO AGENTS ELECTION, ALL ACTIONS OR PROCEEDINGS ARISING OUT OF OR RELATING TO THIS DEED OF TRUST SHALL BE LITIGATED IN SUCH COURTS. GRANTOR EXPRESSLY SUBMITS AND CONSENTS TO THE JURISDICTION OF THE AFORESAID COURTS AND WAIVES ANY DEFENSE OF FORUM NON CONVENIENS. GRANTOR HEREBY WAIVES PERSONAL SERVICE OF ANY AND ALL PROCESS AND AGREES THAT ALL SUCH SERVICE OF PROCESS MAY BE MADE UPON GRANTOR BY CERTIFIED OR REGISTERED MAIL, RETURN RECEIPT REQUESTED, ADDRESSED TO GRANTOR, AT THE ADDRESS SET FORTH IN THIS AGREEMENT AND SERVICE SO MADE SHALL BE COMPLETE TEN (10) DAYS AY1 ER THE SAME HAS BEEN POSTED.

        28.    Jury Trial Waiver.    GRANTOR, AND AGENT AND LENDER BY THEIR ACCEPTANCE OF THIS DEED OF TRUST, HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, OR RELATED TO, THE SUBJECT MATTER OF THIS DEED OF TRUST AND THE BUSINESS RELATIONSHIP THAT IS BEING ESTABLISHED. THIS WAIVER IS KNOWINGLY, INTENTIONALLY AND VOLUNTARILY MADE BY GRANTOR, LENDER AND AGENT, AND GRANTOR ACKNOWLEDGES THAT NEITHER AGENT NOR LENDER, NOR ANY PERSON ACTING ON BEHALF OF AGENT OR LENDER, HAS MADE ANY REPRESENTATIONS OF FACT TO INDUCE THIS WAIVER OF TRIAL BY JURY OR HAS TAKEN ANY ACTIONS WHICH IN ANY WAY MODIFY OR NULLIFY ITS EFFECT. GRANTOR, LENDER AND AGENT ACKNOWLEDGE THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH OF THEM HAS ALREADY RELIED ON THIS WAIVER IN ENTERING INTO THIS DEED OF TRUST AND THAT EACH OF THEM WILL CONTINUE TO RELY ON THIS WAIVER IN THEIR RELATED FUTURE DEALINGS. GRANTOR, LENDER AND AGENT

FURTHER ACKNOWLEDGE THAT THEY HAVE BEEN REPRESENTED (OR HAVE HAD THE OPPORTUNITY TO BE REPRESENTED) IN THE SIGNING OF THIS DEED OF TRUST AND IN THE MAKING OF THIS WAIVER BY INDEPENDENT LEGAL COUNSEL.

        29.    Tenants' Financial Statements.    Grantor shall deliver to Agent, promptly upon its receipt thereof, any and all financial statements and other reports, notices or documents delivered to Grantor by Tenants.

        30.    Acceptance of Trust.    Trustee hereby accepts the trust created by this Deed of Trust, upon the terms and subject to the conditions set forth herein, including the following:

        (a)   Trustee assumes no responsibility for and makes no warranties whatsoever as to (1) the description, identification or value of any or all of the Property, (ii) the validity of Loan Documents, (iii) Grantor's present or future financial condition, or (iv) the validity or collectibility of the Note.

        (b)   Trustee (i) may exercise Trustee's powers and perform Trustee's duties hereunder by or through such attorneys or agents and servants as they shall appoint, and (ii) shall not be answerable or liable (1) for the acts, negligence or default of any such attorney, agent or servant which they may so appoint, so long as they select them with reasonable care, or (2) for any act or omission of Lender, or (3) for any other cause arising under this Deed of Trust or otherwise, except for Trustee's own willful misconduct.

        (c)   Trustee, in Trustee's discretion may consult with legal counsel to be selected and employed by them, and Trustee shall incur no liability to Grantor, Agent or any other person by reason of anything done, suffered to be done or omitted to be done by Trustee in accordance with the opinion of such counsel.

        (d)   Trustee shall not be under any obligation to sell any or all of the Property upon a default hereunder, or to take any other action authorized to be taken by Trustee in the event of any default hereunder, except upon the written demand of Agent furnishing security or indemnity satisfactory to Trustee against costs, expenses, and liabilities incurred or which may be incurred in selling the Property or taking such other action authorized to be taken by Trustee hereunder.

        31.    Trustee Provisions.

        (a)   From time to time upon written request of Lender and presentation of this Deed of Trust for endorsement and without affecting the personal liability of any person for payment of the indebtedness evidenced by the Note or performance of the obligations under the Loan Documents, Trustee may, without liability therefor and without notice: reconvey all or any part of the Property; consent to the making of any map or plat thereof; join in granting any easement thereon; join in any declaration of covenants and restrictions; or join in any extension agreement or any agreement subordinating the lien or charge hereof Trustee or Lender may from time to time apply in any court of competent jurisdiction for aid and direction in the execution of the trusts hereunder and the enforcement of the rights and remedies available hereunder, and Trustee or Lender may obtain orders or decrees directing or confirming or approving acts in the execution of such trusts and the enforcement of such remedies. Trustee has no obligation to notify any party of any pending sale or any action or proceeding unless held or commenced and maintained by Trustee under this Deed of Trust. Borrower shall pay to Trustee reasonable compensation and reimbursement for services and expenses in the enforcement of the trusts created hereunder, including reasonable attorney's fees. Borrower shall indemnify Trustee and Lender against all losses, claims, demands and liabilities which either may incur, suffer or sustain in the execution of the trusts created hereunder or in the performance of any act required or permitted hereunder or by law.

        (b)   From time to time, by a writing signed by Lender, Lender may appoint another trustee to act in the place and stead of Trustee or any successor, with the same effect as if originally named Trustee herein.

        32.    Lender's Lien for Service Charge and Expenses.    At all times, regardless of whether any Loan proceeds have been disbursed, this Deed of Trust secures (in addition to any Loan proceeds disbursed

from time to time) the payment of any and all loan commissions, service charges, liquidated damages, expenses and advances due to or incurred by Lender not to exceed the maximum amount secured hereby.

        33.    Hazardous Materials Representations, Warranties and Covenants.

        (a)   Borrower covenants and agrees that it (a) shall not use, generate, store or allow to be generated, stored or used, any Hazardous Materials (as hereinafter defined) on the Property, except in the ordinary course of Borrower's business and in accordance with all Hazardous Materials Laws (as hereinafter defined), (b) shall at all times maintain the Property in full compliance with all applicable Hazardous Materials Laws, including timely remediating the Property if and when required, and (c) shall comply with all provisions of the relating to environmental matters.

        (b)   Borrower shall promptly notify Lender in writing of (1) any investigation, claim or other proceeding by any party caused or threatened in connection with any Hazardous Materials on the Property, or the failure or alleged failure of the Property to comply with any applicable Hazardous Materials Laws, or (ii) Borrower's discovery of any condition on or in the vicinity of the Property that could cause the Property to fail to comply with applicable Hazardous Materials Laws.

        (c)   Borrower represents and warrants to the best of its knowledge, and covenants that there are no, nor will there be, for as long as any indebtedness or obligations remain outstanding under the Loan, any Hazardous Materials generated, released, stored, buried or deposited over, beneath, in or upon the Project or any part thereof or on or beneath the surface of adjacent property, except as such Hazardous Materials may be generated, used, stored or transported in connection with the permitted uses of the Project or any part thereof and then only to the extent permitted by law after obtaining all necessary permits and licenses therefor. "Hazardous Materials" shall mean and include gasoline, any pollutants, flammables, explosives, petroleum (including crude oil) or any fraction thereof, radioactive materials, hazardous wastes, dangerous or toxic substances or related materials, polychlorinated biphenyls, including substances defined as or included in the definition of toxic or hazardous substances, wastes or materials under any federal, state or local laws, ordinances, regulations or guidances which relate to pollution, the environment or the protection of public health and safety, or limiting, prohibiting or otherwise regulating the presence, sale, recycling, generation, manufacture, use, transportation, disposal, release, storage, treatment of, or response or exposure to, toxic or hazardous substances, wastes or materials, and shall include Hazardous Substances, as defined by the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. §9601 et seq., any petroleum or petroleum products (excluding a small quantity of gasoline and oil used in maintenance equipment on the Property), asbestos or asbestos containing material, or any other hazardous substances, hazardous wastes or hazardous materials as defined by other Hazardous Materials Laws (as hereinafter defined). Such laws, ordinances and regulations, now or hereafter in effect, and as the same may be amended from tune to time, are hereinafter collectively referred to as the "Hazardous Materials Laws."

        (d)   Borrower hereby represents, warrants and certifies to the best of its knowledge, based on due inquiry, that (a) there are no underground or above ground storage tanks or surface impoundments located on, under or about the Property or any part thereof that are subject to the notification requirements under Section 9002 of the Solid Waste Disposal Act, as now or hereafter amended (42 U.S.C. § 6991 or any other applicable Laws); and (b) there is no facility located on the Property or any part thereof that is subject to the reporting requirements of Section 312 of the Federal Emergency Planning and Community Right to Know Act of 1986 and the Federal regulations promulgated thereunder (42 U.S.C. § 11022).

        34.    Delivery of Recorded Deed of Trust.    If California Civil Code Section 3110.5 is applicable to Borrower Parties in connection with the Loan, as soon as practicable following recordation of this Deed of Trust, Borrower shall delivery to any general contractor a copy of the recorded Deed of Trust, certified by the county recorder and shall otherwise fully comply with said Section 3110.5.

        35.    Agent.    If pursuant to the provisions of the Loan Agreement, the Loan is evidenced by more than one note and such notes are held by more than one person or entity, then (i) as provided in Article 9 of the Loan Agreement, all grants of security interest provided herein in favor of Trustee shall automatically constitute grants in favor of Trustee for the benefit of each of the Co-Lenders (as defined in the Loan Agreement) and Agent (as defined in the Loan Agreement), and (ii) each grant of security interest provided herein shall be deemed to be repeated separately in favor of the Trustee for the benefit of the Agent and each of the Co-Lenders separately, as though the granting clauses were physically repeated in this instrument one time for each of such notes from time to time outstanding.

        36.    No Merger.    No obligation of Grantor to pay fees or costs or to indemnify Lender shall merge into any final judgment of foreclosure, it being the intent of the parties that such obligations shall survive foreclosure.

        37.    Entire Agreement.    This Deed of Trust constitutes the entire agreement of the parties with respect to the matters discussed herein. This Deed of Trust cannot be changed except by agreement, in writing, signed by Grantor and Agent.

        38.    Limitation on Interest.    Grantor agrees to pay an effective rate of interest equal to the rate stated in the documents evidencing the Indebtedness plus any additional rate, if any, resulting from any charge or fee in the nature of interest paid or to be paid by Grantor in connection with the Indebtedness, or any benefit received or to be received by Agent, Lender or Trustee in connection with the Indebtedness.

[Signatures appear on the following page.]

        IN WITNESS WHEREOF, Grantor has executed this Deed of Trust or has caused the same to be executed by its duly authorized representatives as of the date first above written.

GRANTOR:
MOUNTAINVIEW COMMUNITYCARE LLC a Nevada limited liability company
By:	The Ensign Group, Inc., a Delaware corporation, its sole member
	By:	/s/ GREGORY STAPLEY
	Name:	Gregory K. Stapley
	Its:	Vice President

(Signature Page to Deed of Trust (Park View Gardens, CA))

STATE OF CALIFORNIA
COUNTY OF ORANGE	Title of Document: Acknowledgment Certificate

        On October 12, 2006, before me, YOLANDA VILLEGAS STAFF, a Notary Public in and for the above county, personally appeared GREGORY K. STAPLEY personally known to me, to be the person whose name is subscribed to the within instrument and acknowledged to me that he executed the same in his authorized capacity, and that by his signature on the instrument the person or the entity upon behalf of which the person acted, executed the instrument.

        WITNESS my hand and seal.

My Commission Expires: May 27, 2009 /s/ YOLANDA VILLEGAS STAFF NOTARY PUBLIC

NOTARY SEAL

YOLANDA VILLEGAS STAFF
Commission # 1562875
Notary Public—California
San Mateo County
My Comm. Expires May 27, 2009

EXHIBIT A

Legal Description

EX-10.14

Exhibit 10.14

THIS DOCUMENT PREPARED
UNDER THE ASSISTANCE OF AN
ATTORNEY LICENSED IN THE
STATE OF ARIZONA AND AFTER

RECORDING RETURN TO:

Jami L. Brodey, Esq.
Goldberg, Kohn, Bell, Black,
Rosenbloom & Moritz, Ltd.
55 East Monroe Street
Suite 3700
Chicago, Illinois 60603

SPACE ABOVE THIS LINE FOR RECORDER'S USE

Loan No. 07-0004261

DEED OF TRUST, ASSIGNMENT OF RENTS, SECURITY AGREEMENT AND
FIXTURE FINANCING STATEMENT
(Sabino Canyon Rehabilitation and Care Center County of Pima, State of Arizona)

        This DEED OF TRUST, ASSIGNMENT OF RENTS, SECURITY AGREEMENT AND FIXTURE FINANCING STATEMENT (this "Deed of Trust") is made as of this 16th day of October, 2006, between MEADOWBROOK HEALTH ASSOCIATES LLC, a Nevada limited liability company ("Grantor"), whose mailing address is c/o Ensign Facility Services, Inc., 27101 Puerta Real, Suite 450, Mission Viejo, California 92691 unto CHICAGO TITLE INSURANCE COMPANY ("Trustee"), whose mailing address is 1201 South Alma School Road, #6550, Mesa, Arizona 85210-2011 for the benefit of GENERAL ELECTRIC CAPITAL CORPORATION, a Delaware corporation (in its individual capacity, "GECC"), whose mailing address is 2 Bethesda Metro Center, Suite 600, Bethesda, Maryland 20814, as agent (GECC in its capacity as agent, "Agent") for Lenders (as such term is defined in the Loan Agreement referred to below).

RECITALS

        A.    Lender has agreed, subject to the terms and conditions of that certain Second Amended and Restated Loan Agreement dated as of June 30, 2006 (said Loan Agreement, as amended from time to time being hereinafter referred to as the "Loan Agreement"), executed by and among Grantor, certain Affiliates of Grantor (together with Grantor, the "Borrower Parties"), General Electric Capital Corporation, a Delaware corporation (in its individual capacity as a lender ("GECC")) and the other financial institutions who are or hereafter become parties to the Loan Agreement (together with GECC, collectively or individually, as the context may require, as "Lender") and Agent, to make a loan (the "Loan") to Borrower Parties. The Loan is evidenced by that certain promissory note dated as of June 30, 2006 in the aggregate original principal amount of Forty Seven Million Seven Hundred Ninety Five Thousand and No/100 Dollars ($47,795,000.00) (which note, together with all notes issued in full or partial replacements thereof, or in substitution or exchange therefor, and all amendments thereto, are hereinafter collectively referred to as the "Note"), providing for monthly payments as set forth in the Loan Agreement, with the balance thereof, due and payable on June 29, 2016 (said date, any later date to which the maturity date may be extended in accordance with the Loan Agreement, or any earlier date on which the entire unpaid principal amount shall be paid or required to be paid in full, whether by prepayment, acceleration or otherwise is hereinafter called the "Maturity Date"). The terms and provisions of the Loan Agreement and Note are hereby incorporated by reference in this Deed of Trust. Capitalized terms used but not defined herein shall have the meaning provided in the Loan Agreement.

        B.    Lender and Agent wish to secure: (i) the payment of the Note, together with all interest, premiums, the Make Whole Breakage Amount, the Prepayment Premium (as such terms are defined in the Loan Agreement) and other amounts, if any, due in accordance with the terms of the Note, as well as the payment of any additional indebtedness accruing to Lender or Agent on account of any future payments, advances or expenditures made by Lender or Agent pursuant to the Note, the Loan Agreement or this Deed of Trust or any of the other Loan Documents (hereinafter defined); (ii) the performance of each and every covenant, condition, and agreement contained in the Note, the Loan Agreement, this Deed of Trust, those certain Deeds of Trust, Assignments of Rents, Security Agreements and Fixture Financing Statements (or documents of similar title) executed by the other Borrower Parties (as amended from time to time), the Environmental Indemnity (as defined in the Loan Agreement) and that certain Second Amended and Restated Guaranty of Payment and Performance dated as of June 30, 2006 made by Guarantor (as defined in the Loan Agreement) in favor of Agent and any other documents evidencing or securing the Loan or executed in connection therewith (such documents together with any modifications, renewals, extensions or replacements thereof are collectively referred to as the "Loan Documents"); (iii) the payment and performance of any and all other debts, claims, obligations, demands, monies, liabilities and indebtedness of any kind or nature now or hereafter owing, arising, due or payable from Borrower Parties or Guarantor to Lender or Agent in connection with the Loan; and (iv) the payment of all amounts due from Master Tenants, Guarantor and the other borrowers under and in accordance with the terms of the Accounts Receivable Loan Documents and the performance of each and every covenant, condition, and agreement contained therein. All payment obligations of Borrower Parties or Guarantor to Lender or Agent with respect to the Loan or under any of the Loan Documents and all payment obligations of Master Tenants, Guarantor and the other borrowers thereunder to GECC under the Accounts Receivable Loan Documents are hereinafter sometimes collectively referred to as the "Indebtedness," and all other obligations of Borrower Parties or Guarantor to Agent with respect to the Loan or under any of the Loan Documents and all other obligations of Master Tenants, Guarantor and the other borrowers thereunder to GECC under the Accounts Receivable Loan Documents are hereinafter sometimes collectively referred to as the "Obligations".

        NOW, THEREFORE, TO SECURE the repayment of the Indebtedness and the performance of the Obligations, and also in consideration of the sum of Ten and No/100 Dollars ($10.00), the receipt of which is acknowledged by Grantor, Grantor by these presents irrevocably grants, bargains, sells, assigns, releases, transfers, pledges, conveys and warrants specially unto Trustee, its successors and assigns forever, in trust, with power of sale, for the benefit and security of Agent and Lender, all right, title, and interest of Grantor in and to the fee simple estates in the following described property and all proceeds thereof (which property is hereinafter sometimes collectively referred to as the "Property"):

        A.    The real estate described on Exhibit A attached hereto (the "Land");

        B.    All of the following (collectively, the "Improvements"): all buildings, improvements and fixtures now or in the future located or to be constructed on the Land; to the extent not owned by tenants of the Property, all machinery, appliances, equipment, furniture, fixtures and all other personal property of every kind or nature located in or on, or attached to, or used or to be used in connection with the Land, buildings, improvements or fixtures; all building materials and goods procured for use or in connection with the foregoing; and all additions, substitutions and replacements to any of the foregoing;

        C.    To the extent assignable by Grantor, all plans, specifications, architectural renderings, drawings, soil test reports, other reports of examination or analysis of the Land or the Improvements;

        D.    All easements, rights-of-way, water courses, mineral rights, water rights, air rights and appurtenances in any way belonging, relating or appertaining to any of the Land or Improvements, or which hereafter shall in any way belong, relate or be appurtenant thereto (collectively, "Appurtenances");

        E.    Subject to the rights of Agent under Section 6 hereof, all leases, master leases, subleases, licenses, patient and resident care agreements and other agreements with regard to the use or

occupancy of all or any portion of the Land and/or the Improvements, including without limitation that certain Long-Term Care Facility Lease Agreement dated as of August 22, 2006 by and between Ensign Sabino LLC, a Nevada limited liability company ("Master Tenant") and Grantor (the "Master Lease"), service agreements which include an occupancy agreement and all guaranties, amendments, extensions and renewals of any such lease, license or agreement, now or hereafter entered into (collectively, the "Leases") and all rents, incomes, receipts, prepayments, security deposits, termination payments, royalties, profits, issues and revenues, prepayment of the same including without limitation, lease termination, cancellation or similar fees, and all other amounts of any nature now due or which may become due or to which Grantor may now or shall hereafter become entitled or which it may demand or claim and arising or accruing directly or indirectly from the Leases or from the Land and/or Improvements from time to time (collectively, the "Rents"), reserving to Grantor, however, so long as no Event of Default has occurred, the right to receive and apply the Rents in accordance with the terms and conditions of Section 6 of this Deed of Trust;

        F.     To the extent assignable by Grantor, all claims, demands, judgments, insurance proceeds, refunds, reserves, deposits, rights of action, awards of damages, compensation, settlements and other rights to the payment of money hereafter made resulting from or relating to (i) the taking of the Land or the Improvements or any part thereof under the power of eminent domain, (ii) any damage (whether caused by such taking, by casualty or otherwise) to the Land, Improvements, Appurtenances or other Property or any part thereof, or (iii) the ownership or operation of the Property;

        G.    To the extent assignable by Grantor, all management contracts, permits, certificates, licenses, approvals, contracts, purchase and sale agreements, purchase options, entitlements, development rights and authorizations, however characterized, issued or in any way furnished for the acquisition, construction, development, operation and use of the Land, Improvements and/or Leases, including building permits, environmental certificates, licenses, certificates of operation, warranties and guaranties;

        H.    All of the following types of collateral, as defined in the Uniform Commercial Code as in effect from time to time in the State of Illinois (the Illinois Uniform Commercial Code being referred to as the "UCC", unless the context requires a reference to the Uniform Commercial Code in effect in another state): accounts, contract rights, general intangibles, chattel paper, documents, instruments, inventory, goods, equipment, investment property, deposit accounts, letter of credit rights, commercial tort claims, healthcare insurance receivables and all books and records relating to the foregoing; provided that Grantor will cooperate with Agent in obtaining "control" as defined in the UCC, with respect to collateral consisting of deposit accounts, investment property, letter of credit rights and electronic chattel paper;

        I.     Any monies on deposit with or for the benefit of Agent, including deposits for the payment of real estate taxes, insurance premiums and any cash collateral account,

        J.     All proceeds, products, replacements, additions, substitutions, renewals and accessions of and to the Land, Improvements, Appurtenances or any other property of the types described in the preceding granting clauses; and

        K.    Any and all after-acquired right, title or interest of Grantor in and to any property of the types described in the preceding granting clauses.

        TO HAVE AND TO HOLD the Property and all parts thereof together with the rents, issues, profits and proceeds thereof, unto Trustee to its own proper use, benefit, and advantage forever, subject, however, to the terms, covenants, and conditions herein.

        It is the intention of Grantor and Agent that this Deed of Trust shall, for all purposes, be deemed to be a Real Property Deed of Trust within the meaning of Arizona Revised Statutes ("A.R.S.") §§ 33-801 through 33-821 (the "Arizona Deed of Trust Act"). For purposes of the Arizona Deed of Trust Act, Grantor shall be the "Trustor," Agent shall be the "Beneficiary" and Chicago Title Insurance Company shall be the "Trustee." Agent and Trustee shall have all rights, benefits and remedies conferred upon beneficiaries and trustees respectively by the Arizona Deed of Trust Act, The Property,

including without limitation, the Land, Improvements, Appurtenances and Leases shall constitute "Trust Property" pursuant to A.R.S. § 33-801.

        Grantor covenants and agrees with Agent as follows:

        1.    Payment of Indebtedness; Performance of Obligations.    Grantor shall promptly pay when due the Indebtedness and shall promptly perform all Obligations.

        2.    Taxes and Other Obligations; Insurance and Condemnation Proceeds.

        (a)   Grantor shall pay or cause to be paid, when due, and before any interest, collection fees or penalties shall accrue, all Taxes in accordance with Section 7.3 of the Loan Agreement.

        (b)   Should Grantor fail to make any of such payments, Agent may, at its option and at the expense of Grantor, pay the amounts due for the account of Grantor. Upon the request of Agent, Grantor shall immediately furnish to Agent copies of all notices of amounts due and receipts evidencing payment. Grantor shall promptly notify Agent of any lien on all or any part of the Property and shall promptly discharge any unpermitted lien or encumbrance.

        (c)   Insurance and condemnation proceeds shall be paid and applied in accordance with Section 3.2 and 3.3 of the Loan Agreement.

        3.    Preservation and Maintenance of Property.    Grantor shall: (a) not commit waste or permit impairment or deterioration of the Property; (b) not abandon the Property; (c) keep the Property (or cause the Property to be kept) in good repair and restore or repair promptly, in a good and workmanlike manner, all or any part of the Property to the equivalent of its original condition as of the date of this Deed of Trust, or such other condition as Agent may approve in writing, upon any damage or loss thereto; (d) comply (or cause compliance) in all material respects with all laws, ordinances, regulations and requirements of any governmental body applicable to the Property and (e) give notice in writing to Agent of and, unless otherwise directed in writing by Agent, appear in and defend any action or proceeding purporting to affect the Property, the security granted by the Loan Documents or the rights or powers of Agent. Neither Grantor nor any tenant or other person shall remove, demolish or alter any Improvement on the Land except when incident to the replacement of fixtures, equipment, machinery and appliances with items of like kind.

        4.    Protection of Agent's and/or Lender's Security.    If (a) Grantor fails to pay the Indebtedness or to perform the Obligations, (b) any action or proceeding is commenced which affects or could affect the Property or Trustee's or Lender's interest therein, including any loss, damage, cost, expense or liability incurred by Trustee, Agent or Lender with respect to (i) any environmental matters relating to the Property or (ii) the preparation of the commencement or defense of any action or proceeding or any threatened action or proceeding affecting the Loan Documents or the Property, then Agent, at Agent's option, may make such appearances, disburse such sums and take such action as Agent deems necessary, in its sole discretion, to protect the Property or Agent's or Lender's interest therein, including entry upon the Property to take such actions Agent determines appropriate to preserve, protect or restore the Property. Any amounts disbursed by Agent or Lender pursuant to this Section 4 (including attorneys' fees, costs and expenses), together with interest thereon at the "Default Rate" (defined in the Note) from the date of disbursement, shall become additional Indebtedness of Grantor secured by the lien of this Deed of Trust and the other Loan Documents and shall be due and payable on demand. Nothing contained in this Section 4 shall require Agent or Lender to incur any expense or take any action hereunder.

        5.    Warranty of Title; Actions.    Except as disclosed in the exceptions to title in the title policy approved by Agent issued by Chicago Title Insurance Company insuring the priority of this Deed of Trust, Grantor shall warrant, and hereby does warrant, that Grantor owns marketable and fee simple title to the Property, free and clear of all liens and encumbrances. Grantor shall appear in and defend any claim or any action or other proceeding purporting to affect title or other interests relating to any part of the Property, the security of this Deed of Trust or the rights of Agent or Lender, and give Agent prompt written notice of any such claim, action or proceeding. Agent may, at the expense of

Grantor, appear in and defend any such claim, action or proceeding and any claim, action or other proceeding asserted or brought against Agent or Lender in connection with or relating to any part of the Property or this Deed of Trust or involving the priority, validity or enforceability of any Loan Document.

        6.    Assignment of Rents.

        (a)   To facilitate the payment and performance of the Indebtedness and Obligations, Grantor absolutely and unconditionally assigns and transfers to Agent, for the benefit of Agent and Lender, all of Grantor's right, title and interest in and to (i) the Leases, (ii) the Rents and the immediate and continuing right to collect and receive all of the Rents, and (iii) any and all rights and claims of any kind that Grantor may have now or in the future against any present or future tenant (including Master Tenant), subtenant or occupant of the Property (a "Tenant"). In furtherance of this assignment, and not in lieu thereof, promptly upon request by Agent, Grantor agrees to execute and deliver such further assignments as Agent may from time to time require.

        (b)   All of the Rents and all proceeds payable under any policy of insurance covering loss of rents resulting from untenantability caused by damage to any part of the Property, together with any and all rights that Grantor may have against any Tenant under the Leases or any subtenants or occupants of any part of the Property and any award made hereafter to Grantor in any court proceedings involving any of the Tenants or in any bankruptcy, insolvency, or reorganization proceedings in any state or federal court, and all payments by Tenants in lieu of Rent, are hereby absolutely and unconditionally assigned to Agent, for the benefit of Agent and Lender, to be applied by Agent in accordance with the terms of the Loan Agreement. It is understood and agreed by the parties that this assignment of the Leases and Rents is intended to be and is a present, absolute, and unconditional assignment from Grantor to Agent, and not merely the passing of a security interest, and shall, immediately upon execution, give Agent the right to collect the Rents and to apply them in payment of the Indebtedness. Such assignment and grant shall continue in effect until the Indebtedness is paid in full. Subject to the provisions set forth herein and, so long as there shall not have occurred an Event of Default which is continuing, Grantor shall have a license, without joinder of Agent, to enforce the Leases subject to the terms of the Loan Documents, and to collect the Rents as they come due (but not more than one (1) month in advance and excluding any lease termination, cancellation or similar payments which Grantor agrees shall be held in trust and turned over to Agent to be applied to the Indebtedness in accordance with the terms of the Loan Agreement) and to retain, use and enjoy the same. The Rents shall be held by Grantor in trust, to be applied first to the payment of all impositions, levies, taxes, assessments and other charges upon the Property, second to maintenance of insurance policies upon the Property required hereby, third to the expenses of Property operations, including maintenance and repairs required hereby (other than payment of fees to Affiliates of Grantor), fourth to the payment of that portion of the Indebtedness then due and payable, and fifth, the balance, if any, to or as directed by Grantor. Grantor shall deliver such other Rents to Agent as are necessary for the payment of the Indebtedness as such sums become due. If an Event of Default has occurred, Grantor's right to collect and secure the Rents shall cease and Agent shall have the sole right, with or without taking possession of the Property to collect all Rents.

        (c)   Grantor hereby irrevocably appoints Agent its true and lawful attorney-in-fact, with full power of substitution and with full power of substitution and with full power for Agent in its own name and capacity or in the name and capacity of Grantor to demand and collect any and all Rents and to file any claim or take any other action or proceeding and make any settlement regarding the Leases. All Tenants are hereby expressly authorized and directed to pay to Agent, or to such nominee as Agent may designate in a writing delivered to such Tenants, all amounts due Grantor pursuant to the Leases. All Tenants are expressly relieved of all duty, liability or obligation to Grantor in respect of all payments so made to Agent or such nominee.

        (d)   After an Event of Default, Agent may, at any time without notice, either in person, by agent or by a receiver appointed by a court, and without regard to the adequacy of any security for the Indebtedness and the Obligations and without regard to solvency of Grantor:

          (i)  Enter upon, take possession of and manage the Property, or any part thereof, for the purpose of collecting the Rents in its own name sue for or otherwise collect the Rents, including those past due and unpaid, and apply the same, less costs and expenses of operation and collection, including reasonable attorney's fees, upon the Indebtedness and in such order as Agent may so determine;

         (ii)  Dispossess by the usual summary proceedings any Tenant defaulting in the payment thereof to Grantor, lease the Property or any party thereof, repair, restore, and improve the Property;

        (iii)  Apply the Rent after payment of Property expenses as determined by Agent to the Indebtedness in accordance with the terms of the Loan Agreement; and

        (iv)  Apply to any court of competent jurisdiction for specific performance of this Deed of Trust, an injunction against the violation hereof and/or the appointment of a receiver.

        (e)   The collection of Rents, or the entering upon and taking possession of the Property, or the application thereof as aforesaid, shall note cure or waive any Event of Default or notice of an Event of Default hereunder or invalidate any act done in response to such Event of Default pr pursuant to such notice of an Event of Default. In the event Grantor, as lessor under the Leases, shall fail to perform and fulfill in any material respect any material term, covenant, condition, or provision in the leases, on its part to be performed or fulfilled, at the time and in the manner in the Leases provided, or if the Grantor shall suffer or permit to occur any breach or default under the provisions of the Leases, or any of them, and such default shall give the Tenant thereunder the right to terminate its Lease or otherwise shall continue for a period of thirty (30) days following the giving of written notice of such default to Grantor, then and in any such event, such breach or default shall constitute an Event of Default.

        (f)    In the event Grantor fails to perform any Lease covenant, Agent may, at its option, upon prior notice to Grantor (except in the event of an emergency) perform any Lease covenant for and on behalf of Grantor, and all monies expended in so doing shall be chargeable to Grantor and added to the Indebtedness and shall be immediately due and payable.

        (g)   Grantor hereby covenants and agrees as follows:

          (i)  This Deed of Trust transfers to Agent all of Grantor's right, title, and interest in any security deposits held by Grantor, provided that Grantor shall have the right to retain and apply the security deposit so long as no Event of Default has occurred under this Deed of Trust or the Loan Documents. Agent shall have no obligation to any Tenant with respect to its security deposit unless and until Agent comes into possession of the deposit.

         (ii)  Agent may assign its right, title and interest in the Leases, Rents and other Property, and any subsequent assignee shall have all of the rights and powers provided to Agent by this Deed of Trust.

        (iii)  Grantor shall not without the prior written consent of Agent: (a) perform any act or execute any other instrument which might interfere with the exercise of Agent's or Lender's rights hereunder; (b) execute any assignment, pledge or hypothecation of Rents or any of the Leases; or (c) suffer or permit any of the Leases to become subordinate to any lien other than the lien of this Deed of Trust.

        (h)   This Deed of Trust shall not be deemed to impose upon Agent or Lender any of the obligations or duties of the landlord or Grantor provided in any Lease. Grantor hereby acknowledges and agrees: (i) Grantor is and will remain liable under the Leases to the same extent as though this Deed of Trust had not been made; and (ii) Agent has not by this Deed of Trust assumed any of the obligations of Grantor under the Leases, except as to such obligations which arise after such time as

Agent shall have assumed actual ownership or control of the Property. This Deed of Trust shall not make Agent responsible for the control, care, management, or repair of the Property or any personal property or for the carrying out of any of the terms of the Leases unless and until Agent takes possession or actual control of the Property. Agent and Lender shall not be liable in any way for any injury or damage to person or property sustained by any person or persons, firm, or corporation in or about the Property absent gross negligence or willful misconduct by such Person.

        (i)    In the event any Tenant should be the subject of any proceeding under the Federal Bankruptcy Code or any other federal, state, or local statute which provides for the possible termination or rejection of any Lease, Grantor covenants and agrees no settlement for damages shall be made without the prior written consent of Agent, which consent shall not be unreasonably withheld or delayed, and any check in payment of damages for rejection of any Lease will be made payable both to Grantor and Agent. Grantor hereby assigns any such payment to Agent and further covenants and agrees that it will duly endorse to the order of Agent any such check

        (j)    After an Event of Default, then, without notice to, or the consent of, Grantor, Agent shall be entitled to exercise all of the rights and remedies contained in this Deed of Trust or in any other Loan Document or otherwise available at law or in equity including, without limitation, the right to do any one or more of the following:

          (i)  To enter upon, take possession of and manage the Property for the purpose of collecting the Rents;

         (ii)  Dispossess by the usual summary proceedings any Tenant defaulting in the payment thereof to Grantor;

        (iii)  Lease the Property or any part thereof;

        (iv)  Repair, restore, and improve the Property;

         (v)  Apply the Rents after payment of Property expenses as determined by Agent to the Indebtedness and the Obligations in such order as Agent may determine; and

        (vi)  Apply to any court of competent jurisdiction for specific performance of this Deed of Trust, an injunction against the violation hereof and/or the appointment of a receiver.

        (k)   Grantor hereby agrees to indemnify Agent and Lender to hold Agent and Lender harmless from any liability, loss or damages including, without limitation, reasonable attorney's fees, costs and expenses which may or might be incurred by Agent under the Leases or by reason of this Deed of Trust, and from any and all claims and demands which may be asserted against Agent or Lender by reason of any term, covenant or agreement contained in any of the Leases, except for any such liability, loss or damage resulting solely from Agent's or Lender's gross negligence or willful misconduct.

        (l)    The assignment of Leases and Rents set forth in this Section 6 and the granting clauses of this Deed of Trust shall run with the land and be good and valid against Grantor or those claiming by, under or through Grantor, from the date hereof and such assignment shall continue to be operative during the foreclosure or any other proceeding taken to enforce this Deed of Trust. In the event of a sale or foreclosure which shall result in a deficiency, such assignment shall stand as security during the redemption period of the payment of such deficiency. Agent shall be permitted, at its sole option, to exercise remedies under such assignment separately from remedies exercised against other portions of the Property.

        7.    Statements by Grantor.    Grantor shall within ten (10) days after Agent's request, furnish Agent with a written statement, duly acknowledged, setting forth the sums, according to Grantor's books and records, secured by the Loan Documents and any right of set-off, counterclaim or other defense which exists against such sums and the Obligations.

        8.    No Additional Liens, Encumbrances or Indebtedness.    Grantor covenants not to execute any mortgage, deed of trust, security agreement, assignment of leases and rents or other agreement granting a lien (except the liens granted to Agent by the Loan Documents) against or encumbrance on

the Property or take or fail to take any other action which would result in a lien against the Property or the interest of Grantor (or Guarantor) in the Property without the prior written consent of Agent; provided, however, Grantor may in good faith, by appropriate proceeding, contest the validity or amount of any asserted lien in accordance with the terms of the Loan Agreement and pending such contest, Grantor shall not be deemed to be in default hereunder.

        9.    Grantor and Lien Not Released.    Without affecting the liability of Grantor for any of the index or the Obligations, or any other person liable for the payment of the Indebtedness or the performance of any Obligations, and without affecting the lien or charge of this Deed of Trust as security for the payment of the Indebtedness, Agent may, from time to time and without notice to any junior lien holder or holder of any right or other interest in and to the Property: (a) release any person liable for payment of all or any portion of the Indebtedness or performance of the Obligations; (b) waive or modify any provision of this Deed of Trust or the other Loan Documents or grant other indulgences; (c) release all or any part of the Property; (d) take additional security for any obligation herein mentioned; (e) subordinate the lien or charge of this Deed of Trust; (f) consent to the granting of any easement; or (g) consent to any map, plat or plan of the Property.

        10.    Uniform Commercial Code Security Agreement.

        (a)   This Deed of Trust shall cover, and the Property shall include, all property now or hereafter affixed or attached to the Land, which to the fullest extent permitted by law, shall be deemed fixtures and a part of the Land. In addition, this Deed of Trust shall constitute a security agreement pursuant to the UCC for any portion of the Property which, under applicable law, may be subject to a security interest pursuant to the UCC (such portion of the Property is hereinafter called the "Personal Property") and Grantor hereby grants to Agent, for the benefit of Agent and Lender, a security interest in the Personal Property. Agent shall have all of the rights and remedies of a secured party under the UCC as well as all other rights and remedies available at law or in equity.

        (b)   Grantor hereby authorizes Agent to file any financing statements, as well as extensions, renewals and amendments thereof, and reproductions of this Deed of Trust, all in such form as Agent may require to perfect a security interest with respect to the Personal Property. Grantor hereby authorizes and empowers Agent and irrevocably appoints Agent its agent and attorney-in-fact to execute and file, on Grantor's behalf, all financing statements and refilings and continuations thereof as Agent deems necessary or advisable to create, preserve and protect such lien. Grantor shall pay all costs of filing such financing statements and any extensions, renewals, amendments and releases thereof, and shall pay all reasonable costs and expenses of any record searches for financing statements as Agent may reasonably require.

        (c)   Grantor shall not, without the prior written consent of Agent, sell, assign, transfer, encumber, remove or permit to be removed from the Property any of the Personal Property. So long as no Event of Default exists, Grantor may sell or otherwise dispose of the Personal Property when obsolete, worn out, inadequate, unserviceable or unnecessary for use in the operation of the Property, but only upon replacing the same with other Personal Property at least equal in value and utility to the disposed Personal Property, Any replacement or substituted Personal Property shall be subject to the security interest granted herein.

        (d)   To the extent permitted by law, Grantor, Lender and Agent agree that with respect to all items of Personal Property which are or will become fixtures on the Land, this Deed of Trust, upon recording or registration in the real estate records of the proper office, shall constitute a "fixture filing" within the meaning of the UCC, generally, and specifically under A.R.S. §§ 47-9334 and 47-9502.B and C of the UCC, as amended or recodified from time to time.

        (e)   After an Event of Default, Agent may exercise in respect of the Personal Property, in addition to all other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party on default under the UCC (whether or not the UCC applies to the affected Personal Property) and also may: (i) require Grantor to, and Grantor hereby agrees that it will, at its expense and upon request of Agent, forthwith assemble all or part of the Personal Property

as directed by Agent and make it available to Agent at any reasonable place or places designated by Agent; and (ii) without notice except as specified below, sell, lease or otherwise dispose of the Personal Property or any part thereof in one or more parcels at public or private sale, and without the necessity of gathering at the place of sale of the property to be sold, at any of Agent's offices or elsewhere, at such time or times, for cash, on credit or for future delivery, and at such price or prices and upon such other terms as Agent may deem commercially reasonable.

        (f)    Grantor agrees that, to the extent notice of sale shall be required by law, a reasonable authenticated notification of disposition shall be a notification given at least ten (10) days prior to any such sale and such notice shall (i) describe Agent and Grantor, (ii) describe the Personal Property that is the subject of the intended disposition, (iii) state the method of intended disposition, (iv)state that Grantor is entitled to an accounting of the Indebtedness and stating the charge, if any, for an accounting, and (v) state the time and place of any public disposition or the time after which any private sale is to be made. Notwithstanding the foregoing, to the contrary, no notification need be given to Grantor if it has authenticated after default a statement renouncing or modifying any right to notification of sale or other intended disposition. At any sale of the Personal Property, if permitted by law, Agent may bid (which bid may be, in whole or in part, in the form of cancellation of indebtedness) for the purchase, lease, license or other disposition of the Personal Property or any portion thereof for the account of Agent. Agent shall not be obligated to make any sale of Personal Property regardless of notice of sale having been given. Agent may disclaim any warranties that might arise in connection with the sale, lease, license or other disposition of the Personal Property and have no obligation to provide any warranties at such time. Agent may adjourn any public or private sale from time to time by announcement at the time and place fixed therefore, and such a may, without further notice, be made at the time and place to which it was so adjourned. To the extent permitted by law, Grantor hereby specifically waives all rights of redemption, stay or appraisal which it has or may have under any applicable law now existing or hereafter enacted.

        (g)   After an Event of Default, Agent or its agents, or attorneys shall have the right without further notice or demand or legal process (unless the same shall be required by applicable law), personally, or by its agents or attorneys, (i) to enter upon, occupy and use any premises owned or leased by Grantor or where the Personal Property is located (or is believed to be located) for so long as such entry, occupancy and use is necessary, without any obligation to pay rent to Grantor, to render the Personal Property useable or saleable and to remove the Personal Property or any part thereof therefrom to the premises of Agent or any agent of Agent for such time as Agent may desire in order to effectively collect or liquidate the Personal Property and use in connection with such removal any and all services, supplies and other facilities of Grantor; (ii) to make copies of and have access to Grantor's original books and records, to obtain access to Grantor's data processing equipment, computer hardware and software relating to the Personal Property and to use all of the foregoing and the information contained therein in any manner Agent deems appropriate; and (iii) to notify postal authorities to change the address for delivery of Grantor's mail to an address designated by Agent and to receive, open and dispose of all mail addressed to Grantor.

        11.    Events of Default; Acceleration of Indebtedness.    The occurrence of any one or more of the following events shall constitute an "Event of Default" under this Deed of Trust:

        (a)   failure of Borrower Parties to pay, within five (5) days after the due dale, any of the Indebtedness, including any payment due under the Note, or Borrower Parties' failure to pay the Loan at the Maturity Date, whether by acceleration or otherwise; or

        (b)   failure of Grantor to strictly comply with Section 8 (no additional liens) 6(f)(iii) (no interference with Agent's liens on Leases and Rents) of this Deed of Trust; or

        (c)   failure of Borrower Parties to satisfy each and every Obligation not set forth in subsection (b) above, and the continuance of such failure for ten (10) days after notice by Agent to Borrower Parties; provided, however, Borrower Parties shall have an additional thirty (30) days to cure such failure if (a) such Obligation cannot by its nature reasonably be cured within ten (10) days; (b) such failure does not involve the failure to make payments on a monetary obligation; (c) if Borrower Parties

commence to cure such failure promptly after written notice thereof and thereafter diligently pursues the curing thereof, and (d) Borrower Parties provide Agent with security reasonably satisfactory to Agent against any interruption of payment or impairment of collateral as a result of such continuing failure, Borrower Parties shall not be in default hereunder during such additional thirty (30) day period of diligent curing;

        (d)   Grantor changes the state of its formation or its name without providing Agent thirty (30) days prior written notice;

        (e)   the occurrence of an Event of Default (as such term is defined in the applicable Loan Document) under any other Loan Document; or

        (f)    any default under, or termination of, the Master Lease.

Upon the occurrence of an Event of Default, at the option of Agent, the Indebtedness shall become immediately due and payable without notice to Grantor and Agent shall be entitled to all of the rights and remedies provided in the Loan Documents or at law or in equity. Each remedy provided in the Loan Documents is distinct and cumulative to all other rights or remedies under the Loan Documents or afforded by law or equity, and may be exercised concurrently, independently, or successively, in any order whatsoever.

        12.    Entry; Certain Remedies; Foreclosure.

        (a)   Upon the occurrence of an Event of Default, Grantor, upon demand of Agent or Trustee, shall forthwith surrender to Agent the actual possession of the Property, or to the extent permitted by law, Agent or a receiver appointed by a court of competent jurisdiction, may enter and take possession of all or any part of the Property, and may exclude Grantor and its agents and employees wholly therefrom, and may have joint access with Grantor to the books, papers and accounts of Grantor. If Grantor shall for any reason fail to surrender or deliver the Property or any part thereof after such demand by Agent, Agent or such receiver may obtain a judgment or decree conferring on Agent or such receiver, the right to immediate possession of the Property or requiring the delivery of the Property to Agent or such receiver, and Grantor specifically consents to the entry of such judgment or decree. Upon every such entering upon or taking of possession, Agent or such receiver may hold, store, use, operate, manage and control the Property and conduct the business thereof, and Agent or such receiver may take any action required by applicable law or which Agent or such receiver believes necessary to enforce compliance with the environmental provisions contained herein or in the other Loan Documents, and negotiate with governmental authorities with respect to the Property's environmental compliance and remedial measures in connection therewith. Agent and such receiver and their representatives shall have no liability for any loss, damage, injury, cost or expense resulting from any action or omission which was taken or omitted in good faith. Neither the appointment of a receiver for the Property by any court at the request of Agent or by agreement with Grantor nor the entering into possession of all or any of the Property by such receiver shall constitute Agent a "mortgagee in possession" or otherwise make Agent responsible or liable in any manner with respect to the Property or the occupancy, operation or use thereof. Grantor agrees that Agent shall have the absolute and unconditional right to the appointment of a receiver in any independent and/or separate action brought by Agent regardless of whether Agent seeks any relief in such action other than the appointment of a receiver.

        (b)   When the Indebtedness or any part thereof shall become due, whether by acceleration or otherwise, Agent may, either with or without entry or taking possession as herein provided or otherwise, proceed by suit or suits at law or in equity or by any other appropriate proceeding or remedy to: (i) enforce payment of the Note or the performance of any term, covenant, condition or agreement of Grantor under any of the Loan Documents; (ii) cause the lien hereof to be foreclosed in the manner described below; (iii) exercise its rights under Section 10 with respect to all or any portion of the Personal Property in accordance with the provisions of the UCC; provided Agent shall have no obligation to clean up or otherwise prepare such Personal Property for sale nor marshal any Personal Property in favor of Grantor or any other secured party; and/or (iv) pursue any other right or remedy available to it hereunder, or under or by the law and decisions of the State in which the Land is located. All rights, powers and remedies granted Agent herein, or otherwise available to Agent, are for the sole benefit and protection of Agent, and Agent may exercise any such right, power or remedy at its option and in its sole and absolute discretion without any obligation to do so. In addition, if, under the terms hereof, Agent is given two or more alternative courses of action, Agent may elect any alternative or combination of alternatives, at its option and in its sole and absolute discretion. Agent may comply with any applicable state or federal law requirements in connection with a disposition of the Personal Property and compliance will not be considered adversely to affect the commercial reasonableness of any sale of the Personal Property. Notwithstanding any statute or rule of law to the contrary, the failure to join any tenant or tenants of the Property as party defendant or defendants in any foreclosure action or the failure of any such order or judgment to foreclose their rights shall not be asserted by Grantor as a defense in any civil action instituted to collect (A) the Indebtedness, or any part thereof or (B) any deficiency remaining unpaid after foreclosure and sale of the Property. To the extent a notice of sale shall be required by law for the sale or disposition of the Personal Property, a reasonable authenticated notification of disposition shall be notification given at least ten (10) days prior to any such sale, provided however, that no notification need be given to Grantor if it has authenticated after default a statement renouncing or modifying any right to notification of sale or other intended disposition.

        (c)   In furtherance and not in limitation of the foregoing, upon the occurrence of an Event of Default:

          (i)  Agent may give such notice of default and of election to cause the Property to be sold as may be required by law or as may be necessary to cause Trustee to exercise the power of sale granted herein. Trustee shall then record and give such notice of trustee's sale as then required by law and, after the expiration of such time as may be required by law, may sell the Property at the time and place specified in the notice of sale, as a whole or in separate parcels as directed by Agent, or by Grantor to the extent required by law, at public auction to the highest bidder for cash in lawful money of the United States, payable at time of sale, all in accordance with applicable law. Trustee, from time to time, may postpone or continue the sale of all or any portion of the Property by public declaration at the time and place last appointed for the sale. No other notice of the postponed sale shall be required except as required by applicable law. Upon any sale, Trustee shall deliver its deed conveying the property sold, without any covenant or warranty, express or implied, to the purchaser or purchasers at the sale. The recitals in such deed of any matters or facts shall be conclusive as to the accuracy thereof. Any person, including Agent, Trustee or Grantor, may purchase at the sale.

         (ii)  Agent may commence proceedings for foreclosure of this Deed of Trust in the manner provided by law for the foreclosure of a real property mortgage.

        (iii)  In any foreclosure proceeding, Grantor agrees that all property of every nature and description, whether real or personal, covered by this Deed of Trust, together with all personal property used on or in connection with the Property or any business conducted thereon by Grantor and covered by separate security agreements, is encumbered as one unit, that this Deed of Trust and such security interests, at Agent's option, may be foreclosed or sold in the same proceeding, and that all property encumbered (both realty and personalty), at Agent's option, may be sold as such in one unit, subject to the provisions of applicable law.

        (d)   Upon the completion of any foreclosure or trustee's sale of all or a portion of the Property, Agent may commence an action to recover any of the Indebtedness and Obligations that remains unpaid or unsatisfied. For purposes of this Deed of Trust the Indebtedness and Obligations shall be deemed to be paid or satisfied only to the extent that Agent actually receives immediately available funds, to the extent of any credit bid by Agent at any foreclosure or trustee's sale of any of the Property, or to the extent agreed in writing by Agent. In any action by Agent to recover a deficiency judgment for any balance due under the Note upon the foreclosure of this Deed of Trust or in any action to recover the Obligations secured hereby, and as a material inducement to making the Loan evidenced by the Note, Grantor acknowledges and agrees that the successful bid amount made at any judicial or non-judicial foreclosure sale, if any, shall be conclusively deemed to constitute the fair market value of the Property, that such bid amount shall be binding against Grantor in any proceeding seeking to determine or contest the fair market value of the Property and that such bid amount shall be the preferred alternative means of determining and establishing the fair market value of the Property. Grantor hereby waives and relinquishes any right to have the fair market value of the Property determined by a judge or jury in any action seeking a deficiency judgment or any action on the Obligations secured hereby, including, without limitation, a hearing to determine fair market value pursuant to A.R.S., §§ 12-1566, 33-814, 33-725 or 33-727.

        13.    Appointment of Receiver or Mortgagee in Possession.    If an Event of Default is continuing or if Agent shall have accelerated the Indebtedness, Trustee, upon application to a court of competent jurisdiction, shall be entitled as a matter of strict right, without notice, and without regard to the occupancy or value of any security for the Indebtedness or the insolvency of any party bound for its payment, to the appointment, at its option, of itself as mortgagee in possession, or of a receiver to take possession of and to operate the Property, and to collect and apply the Rents.

        14.    Expenditures and Expenses.    In any action to foreclose the lien hereof or otherwise enforce Trustee's, Agent's or Lender's rights and remedies hereunder, there shall be allowed and included as additional Indebtedness all costs and expenses which may be paid or incurred by or on behalf of Trustee, Agent or Lender, including without limitation, the costs of collection, enforcement, retaining, holding, preparing for disposition, processing and disposing of the Personal Property, appraiser's fees, outlays for documentary and expert evidence, stenographic changes, publication costs and costs (which may be estimated as the items to be expended after the entry of the decree) of procuring all such abstracts of title, title searches and examination, UCC record searches, title insurance policies, and similar data and assurance with respect to title as Agent may deem to be reasonably necessary either to prosecute any foreclosure action or to evidence to the bidder at any sale pursuant thereto the true condition of the title to or the value of the Property. All such costs and expenses, together with such other costs and expenses as may be incurred by Trustee, Agent or Lender in the protection of the Property, maintenance of the lien of this Deed of Trust or in any workout or restructuring of the Loan including, attorneys' fees and costs in any negotiation, litigation or other proceeding affecting this Deed of Trust, the Note, the other Loan Documents, the Property or the Personal Property, including probate, appellate, and bankruptcy proceedings and any post judgment proceedings to collect or enforce any judgment or order relating to this Deed of Trust or the other Loan Documents or in preparation for the commencement or defense of any action or proceeding or threatened action or proceeding, shall be immediately due and payable to Agent, with interest in at the Default Rate, and shall be secured by this Deed of Trust.

        15.    Application of Proceeds of Foreclosure Sale.    Unless otherwise required by applicable law, the proceeds of any foreclosure sale of the Property shall be distributed and applied in the order of priority set forth in the Note with the excess, if any, being applied, to any party entitled thereto as their rights may appear. Only with respect to the Personal Property and only to the extent required by law, including A.R.S. § 47-9615 of the UCC (or any other then-applicable provision of the UCC), shall it be necessary for Agent to account for any surplus to Grantor. To the extent permitted by applicable law, Grantor waives all claims, damages, and demands against Agent arising out of the disposition, repossession or retention of the Property.

        16.    Future Advances.    This Deed of Trust is given to secure not only the existing Indebtedness and Obligations, but also future advances (whether such advances are obligatory or are made at the option of Lender or Agent, or otherwise) made by Agent or Lender under the Loan Agreement, the Note, this Deed of Trust or any of the other Loan Documents, to the same extent as if such future advances were made on the date of the execution of this Deed of Trust. It is the intent hereof to secure payment of the Indebtedness whether the entire amount shall have been advanced to Borrower Parties at the date hereof, or at a later date, and to secure any other amount or amounts that may be added to the Indebtedness or Obligations. The total amount of the Indebtedness and Obligations secured hereby may decrease or increase from time to time, but the total unpaid balance so secured at any one time shall not exceed five (5) times the aggregate face amount of the Note in principal plus interest thereon and any disbursements made for the payment of taxes, levies, or insurance on the Property with interest thereon. This Deed of Trust shall secure any and all additional or further monies which may be advanced by Lender or Agent to Borrower Parties after the date hereof, which future advances of money, if made, may be evidenced by a note or notes executed by one or more Borrower Parties to Lender and Agent bearing such rate of interest and with such maturities as shall be determined from time to time. Nothing herein contained shall be deemed an obligation on the part of Lender or Agent to make any future advances.

        17.    Waiver of Statute of Limitations.    Grantor hereby waives the right to assert any statute of limitations as a bar to the enforcement of the lien created by any of the Loan Documents or to any action brought to enforce the Note or any other obligation secured by any of the Loan Documents.

        18.    Waiver of Homestead and Redemption; Other Waivers and Agreements.    Grantor hereby waives all right of homestead exemption in the Property. Grantor hereby waives all right of redemption on behalf of Grantor and on behalf of all other persons acquiring any interest or title in the Property subsequent to the date of this Deed of Trust, except decree or judgment creditors of Grantor.

        In the event Grantor is deemed to have signed this Deed of Trust as a surety or accommodation party, or to have subjected its property to this Deed of Trust to secure the indebtedness of another, to the extent permitted by applicable law, Grantor hereby expressly waives the benefits of any statutory provision limiting the liability of a surety, including without limitation, the provisions of A.R.S. §§ 12-1641, et seq. and Rule 17(f) of the Arizona Rules of Civil Procedures, and any defense arising by reason of any disability or other defense of Grantor or by reason of the cessation from any cause whatsoever of the liability of Grantor.

        Grantor further waives and agrees not to assert: (i) any right to require Agent to proceed against any guarantor, to proceed against or exhaust any other security for the Indebtedness and Obligations secured hereby, to pursue any other remedy available to Agent, or to pursue any remedy in any particular order or manner; (ii) the benefits of any legal or equitable doctrine or principle of marshalling; (iii) demand, diligence, presentment for payment, protest and demand, and notice of extension, dishonor, protest, demand and nonpayment, relating to the indebtedness secured hereby; and (iv) any benefit of, and any right to participate in, any other security now or hereafter held by Agent.

        Grantor further agrees that at any time or from time to time, without liability therefor and without notice, without affecting personal liability of any person for the payment of the indebtedness secured hereby, and without affecting the lien of this Deed of Trust upon the Property for the full amount of all amounts secured hereby, Agent, or Trustee at the direction of Agent, may (i) reconvey all or any part of the Property, (ii) consent to the making of any map of plat thereof; (iii) join in granting any easement thereon or in creating any covenants or conditions restricting use or occupancy thereof, or (iv) join in any extension agreement or in any agreement subordinating the lien or charge hereof.

        19.    Governing Law; Severability.    This Deed of Trust shall be governed by and construed in accordance with the internal laws of the State of Illinois except that the provisions of the laws of the jurisdiction in which the Land is located shall be applicable to the creation, perfection and enforcement of the lien created by this Deed of Trust (excluding, however, the creation, attachment and grant of the security interest in Personal Property which shall be governed by the Illinois UCC). The invalidity, illegality or unenforceability of any provision of this Deed of Trust shall not affect or impair the

validity, legality or enforceability of the remainder of this Deed of Trust, and to this end, the provisions of this Deed of Trust are declared to be severable.

        20.    Notice.    Notices shall be given under this Deed of Trust in conformity with the terms and conditions of the Loan Agreement and in conformity with applicable law.

        21.    Successors and Assigns Bound; Joint and Several Liability; Agents; Captions.    The covenants and agreements contained in the Loan Documents shall bind, and the rights thereunder shall inure to, the respective successors and assigns of Agent, Lender and Grantor, subject to the transfer restrictions set forth in the Loan Agreement. All covenants and agreements of Grantor and Borrower Parties shall be joint and several. In exercising any rights under the Loan Documents or taking any actions provided for therein, Agent may act through its employees, agents or independent contractors as authorized by Agent. The captions and headings of the paragraphs of this Deed of Trust are for convenience only and are not to be used to interpret or define the provisions hereof.

        22.    Release.    Upon payment in full of all Indebtedness and the performance of all Obligations or release of the Property pursuant to Section 2.10 of the Loan Agreement, Agent shall release this.Deed of Trust. In such event, Agent shall, at the request of Grantor, deliver to Grantor in recordable form, all such documents as shall be necessary to release the Property from the liens, security interests, conveyances, and assignments created or evidenced by this Deed of Trust. The recitals in such reconveyance of any matters or facts shall be conclusive as to the accuracy thereof. The grantee in such reconveyance may be described as "the person or persons legally entitled thereto". Grantor shall pay Agent's reasonable costs incurred in releasing or assigning this Deed of Trust and in preparing and filing any terminations or assignments of financing statements related thereto, as a condition to Agent's obligation to deliver the same.

        23.    Loss of Note.    Upon notice from Agent of the loss, theft, or destruction of the Note (or any of them) and upon receipt of an affidavit of lost note and an indemnity reasonably satisfactory to Grantor from Agent, or in the case of mutilation of the Note (or any of them), upon surrender of the mutilated Note, Grantor shall make and deliver a new note of like tenor in lieu of the then to be superseded Note (or any of them). Any one or more of the financial institutions which are or become a party to the Loan Agreement as Lenders may from time to time be replaced and, accordingly, one or more of the Notes may from time to time be replaced, provided that the terms of the Notes following such replacement, including the principal amount evidenced thereby, shall remain the same. As the indebtedness secured by this Deed of Trust shall remain the same, such replacement of the Notes shall not be construed as a novation and shall not affect, diminish or abrogate Grantor's liability under this Deed of Trust or the priority of this Deed of Trust.

        24.    Further Assurances.    Grantor agrees to execute any further documents, and to take any further actions reasonably requested by Agent to evidence or perfect the security interests granted herein, to maintain the first priority of the security interests, and to effectuate the rights specifically granted to Agent and Lender hereunder.

        25.    Subrogation.    Agent is hereby subrogated (a) to the lien(s) of each and every mortgage, deed of trust, lien or other encumbrance on all or any part of the Property which is fully or partially paid or satisfied out of the proceeds of the Indebtedness, and (b) to the rights of the owner(s) and holder(s) of any such mortgage, deed of trust, lien or other encumbrance. The respective rights under and priorities of all such mortgages, deeds of trust, liens or other encumbrances shall be preserved and shall pass to and be held by Agent as additional security for the Indebtedness, to the same extent as if such rights and priorities had been duly assigned by separate instrument of assignment and notwithstanding that the same may have been cancelled and satisfied of record. Notwithstanding the foregoing, Agent agrees that only the terms and provisions set forth in this Deed of Trust and the other Loan Documents shall govern and control Grantor's rights and obligations hereunder and thereunder.

        26.    Time of Essence.    Time is of the essence of this Deed of Trust and the performance of each of the covenants and agreement contained herein.

        27.    Venue.    GRANTOR HEREBY CONSENTS TO THE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED WITHIN THE COUNTY OF COOK, STATE OF ILLINOIS AND IRREVOCABLY AGREES THAT, SUBJECT TO AGENT'S ELECTION, ALL ACTIONS OR PROCEEDINGS ARISING OUT OF OR RELATING TO THIS DEED OF TRUST SHALL BE LITIGATED IN SUCH COURTS. GRANTOR EXPRESSLY SUBMITS AND CONSENTS TO THE JURISDICTION OF AFORESAID COURTS AND WAIVES ANY DEFENSE OF FORUM NON CONVENIENS. GRANTOR HEREBY WAIVES PERSONAL SERVICE OF ANY AND ALL PROCESS AND AGREES THAT ALL SUCH SERVICE OF PROCESS MAY BE MADE UPON GRANTOR BY CERTIFIED OR REGISTERED MAIL, RETURN RECEIPT REQUESTED, ADDRESSED TO GRANTOR, AT THE ADDRESS SET FORTH IN THIS AGREEMENT AND SERVICE SO MADE SHALL BE COMPLETE TEN (10) DAYS AFTER THE SAME HAS BEEN POSTED.

        28.    Jury Trial Waiver.    GRANTOR, AND AGENT AND LENDER BY THEIR ACCEPTANCE OF THIS DEED OF TRUST, HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, OR RELATED TO, THE SUBJECT MATTER OF THIS DEED OF TRUST AND THE BUSINESS RELATIONSHIP THAT IS BEING ESTABLISHED. THIS WAIVER IS KNOWINGLY, INTENTIONALLY AND VOLUNTARILY MADE BY GRANTOR, LENDER AND AGENT, AND GRANTOR ACKNOWLEDGES THAT NEITHER AGENT NOR LENDER, NOR ANY PERSON ACTING ON BEHALF OF AGENT OR LENDER, HAS MADE ANY REPRESENTATIONS OF FACT TO INDUCE THIS WAIVER OF TRIAL BY JURY OR HAS TAKEN ANY ACTIONS WHICH IN ANY WAY MODIFY OR NULLIFY ITS EFFECT. GRANTOR, LENDER AND AGENT ACKNOWLEDGE THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH OF THEM HAS ALREADY RELIED ON THIS WAIVER IN ENTERING INTO THIS DEED OF TRUST AND THAT EACH OF THEM WILL CONTINUE TO RELY ON THIS WAIVER IN THEIR RELATED FUTURE DEALINGS. GRANTOR, LENDER AND AGENT FURTHER ACKNOWLEDGE THAT THEY HAVE BEEN REPRESENTED (OR HAVE HAD THE OPPORTUNITY TO BE REPRESENTED) IN THE SIGNING OF THIS DEED OF TRUST AND IN THE MAKING OF THIS WAIVER BY INDEPENDENT LEGAL COUNSEL.

        29.    Tenants' Financial Statements.    Grantor shall deliver to Agent, promptly upon its receipt thereof, any and all financial statements and other reports, notices or documents delivered to Grantor by Tenants.

        30.    Acceptance of Trust.    Trustee hereby accepts the trust created by this Deed of Trust, upon the terms and subject to the conditions set forth herein, including the following:

        (a)   Trustee assumes no responsibility for and makes no warranties whatsoever as to (i) the description, identification or value of any or all of the Property, (ii) the validity of Loan Documents, (iii) Grantor's present or future financial condition, or (iv) the validity or collectibility of the Note.

        (b)   Trustee (i) may exercise Trustee's powers and perform Trustee's duties hereunder by or through such attorneys or agents and servants as they shall appoint, and (ii) shall not be answerable or liable (1) for the acts, negligence or default of any such attorney, agent or servant which they may so appoint, so long as they select them with reasonable care, or (2) for any act or omission of Lender, or (3) for any other cause arising under this Deed of Trust or otherwise, except for Trustee's own willful misconduct.

        (c)   Trustee, in Trustee's discretion may consult with legal counsel to be selected and employed by them, and Trustee shall incur no liability to Grantor, Agent or any other person by reason of anything done, suffered to be done or omitted to be done by Trustee in accordance with the opinion of such counsel.

        (d)   Trustee shall not be under any obligation to sell any or all of the Property upon a default hereunder, or to take any other action authorized to be taken by Trustee in the event of any default hereunder, except upon the written demand of Agent furnishing security or indemnity satisfactory to

Trustee against costs, expenses, and liabilities incurred or which may be incurred in selling the Property or taking such other action authorized to be taken by Trustee hereunder,

        31.    Remedies Regarding Assignment of Rents.    In addition to, and not in limitation of, any other remedy provided in or available under this instrument, during an Event of Default, Agent and Lenders shall have all the rights set forth in A.R.S. § 33-702B (as amended, supplemented or supplanted) regarding enforcement of the assignment of rents contained herein.

        32.    Realty Mortgage.    If this Deed of Trust should be or become ineffective as a deed of trust, then this Deed of Trust shall be construed and enforced as a realty mortgage.

        33.    Provisions Regarding Trustee.

        (a)   Trustee shall be entitled to reasonable compensation for all services rendered or expenses incurred in the administration or execution of the trusts hereby created and Grantor hereby agrees to pay same, subject to all legal limitations. Trustee shall be indemnified, held harmless and reimbursed by Grantor for any liability, damage or expense, including attorneys' fees and amounts paid in settlement, which Trustee may incur or sustain in the execution of this Deed of Trust or in the doing of any act which Trustee is required or permitted to do by the terms hereof or by law.

        (b)   Agent may substitute Trustee hereunder from time to time by instrument in writing in any manner now or hereafter provided by law. Such writing shall be conclusive proof of proper substitution of such successor Trustee or Trustees, who shall thereupon and without conveyance from the predecessor Trustee, succeed to all its title, estate, rights, powers and duties.

        (c)   The acceptance by Trustee of this trust shall be evidenced when this Deed of Trust, duly executed and acknowledged, is made a public record as provided by law.

        (d)   The trust created hereby is irrevocable by Grantor.

        34.    No Merger.    No obligation of Grantor to pay fees or costs or to indemnify Lender shall merge into any final judgment of foreclosure, it being the intent of the parties that such obligations shall survive foreclosure.

        35.    Entire Agreement.    This Deed of Trust constitutes the entire agreement of the parties with respect to the matters discussed herein. This Deed of Trust cannot be changed except by agreement, in writing, signed by Grantor and Agent.

        36.    Limitation on Interest.    Grantor agrees to pay an effective rate of interest equal to the rate stated in the documents evidencing the Indebtedness plus any additional rate, if any, resulting from any charge or fee in the nature of interest paid or to be paid by Grantor in connection with the Indebtedness, or any benefit received or to be received by Agent, Lender or Trustee in connection with the Indebtedness.

        37.    Community Facilities District.    Without obtaining the prior written consent of Agent, Grantor shall not consent to, or vote in favor of, the inclusion of all or any part of the Property in any Community Facilities District formed pursuant to the Community Facilities District Act, §§ 48-701, et seq., as amended from time to time. Grantor shall immediately give notice to Agent of any notification or advice that Grantor may receive from any municipality or other third party of any intent or proposal to include all or any part of the Property in a Community Facilities District. Agent shall have the right to file a written objection to the inclusion of all or any part of the Property in a Community Facilities District, either in its own name or in the name of Grantor, and to appear at, and participate in, any hearing with respect to the formation of any such district.

[Signatures appear on the following page.]

        IN WITNESS WHEREOF, Grantor has executed this Deed of Trust or has caused the same to be executed by its duly authorized representatives as of the date first above written.

GRANTOR:
MEADOWBROOK HEALTH ASSOCIATES LLC a Nevada limited liability company
By:	The Ensign Group, Inc., a Delaware corporation, its sole member
	By:	/s/  GREGORY K. STAPLEY
	Name:	Gregory K. Stapley
	Its:	Vice President

(Signature Page to Deed of Trust (Sabino, AZ))

DISCLOSURE PURSUANT TO
A.R.S. § 33-404

        The following information is provided pursuant to A.R.S. § 33-404:

        The beneficiary under this Deed of Trust is acting pursuant to the authority granted to it under that certain Second Amended and Restated Loan Agreement dated as of June 30, 2006 executed by and among Borrower Parties and General Electric Capital Corporation, a Delaware corporation, and the other financial institutions who hereafter become parties to the Loan Agreement, for the benefit of the following, as the Lenders.

General Electric Capital Corporation
2 Bethesda Metro Center, Suite 600, Bethesda, MD, 20814

EXHIBIT A

Legal Description

A-1

EX-10.15

Exhibit 10.15

THIS DOCUMENT PREPARED
UNDER THE ASSISTANCE OF
AN ATTORNEY LICENSED IN THE
STATE OF CALIFORNIA AND AFTER

RECORDING RETURN TO:
Jami L. Brodey, Esq.
Goldberg, Kohn, Bell, Black,
Rosenbloom & Moritz, Ltd.
55 East Monroe Street
Suite 3700
Chicago, Illinois 60603

SPACE ABOVE THIS LINE FOR RECORDER'S USE

Loan Nos. 07-0004261
07-0024261
07-0034261
07-0044261

DEED OF TRUST, ASSIGNMENT OF RENTS, SECURITY AGREEMENT AND
FIXTURE FINANCING STATEMENT
([NAME OF FACILITY])
(County of [COUNTY], State of California)

        This DEED OF TRUST, ASSIGNMENT OF RENTS, SECURITY AGREEMENT AND FIXTURE FINANCING STATEMENT (this "Deed of Trust") is made as of this 29th day of December, 2006, between [NAME OF GRANTOR] LLC, a Nevada limited liability company ("Grantor"), whose mailing address is c/o Ensign Facility Services, Inc., 27101 Puerta Real, Suite 450, Mission Viejo, California 92691 unto CHICAGO TITLE INSURANCE COMPANY ("Trustee"), whose mailing address is 2544 Cleveland Avenue, Suite 110, Santa Rosa, California 95403 for the benefit of GENERAL ELECTRIC CAPITAL CORPORATION, a Delaware corporation (in its individual capacity, "GECC"), whose mailing address is 2 Bethesda Metro Center, Suite 600, Bethesda, Maryland 20814, as agent (GECC in its capacity as agent, "Agent") for Lender (as defined below).

RECITALS

        A.    Lender has agreed, subject to the terms and conditions of that certain Third Amended and Restated Loan Agreement dated as of December 29, 2006 (said Loan Agreement, as amended from time to time being hereinafter referred to as the "Loan Agreement"), executed by and among Grantor, certain Affiliates of Grantor (together with Grantor, the "Borrower Parties"), General Electric Capital Corporation, a Delaware corporation (in its individual capacity as a lender ("GECC")) and the other financial institutions who are or hereafter become parties to the Loan Agreement (together with GECC, collectively or individually, as the context may require, as "Lender") and Agent, to make a loan (the "Loan") to Borrower Parties. The Loan is evidenced by that certain promissory note dated as of December 29, 2006 in the face amount of Sixty Four Million Six Hundred Ninety Two Thousand One Hundred Eleven and 67/100^th Dollars ($64,692,111.67) (which note, together with all notes issued in full or partial replacements thereof, or in substitution or exchange therefor, and all amendments thereto, are hereinafter collectively referred to as the "Note"), providing for monthly payments as set forth in the Loan Agreement, with the balance thereof, due and payable on June 29, 2016 (said date, any later date to which the maturity date may be extended in accordance with the Loan Agreement, or any earlier date on which the entire unpaid principal amount shall be paid or required to be paid in full, whether by prepayment, acceleration or otherwise is hereinafter called the "Maturity Date"). The terms

and provisions of the Loan Agreement and Note are hereby incorporated by reference in this Deed of Trust. Capitalized terms used but not defined herein shall have the meaning provided in the Loan Agreement.

        B.    Lender and Agent wish to secure: (i) the payment of the Note, together with all interest, premiums, the Make Whole Breakage Amount, the Prepayment Premium (as such terms are defined in the Loan Agreement) and other amounts, if any, due in accordance with the terms of the Note, as well as the payment of any additional indebtedness accruing to Lender or Agent on account of any future payments, advances or expenditures made by Lender or Agent pursuant to the Note, the Loan Agreement or this Deed of Trust or any of the other Loan Documents (hereinafter defined); (ii) the performance of each and every covenant, condition, and agreement contained in the Note, the Loan Agreement, this Deed of Trust, those certain Deeds of Trust, Assignments of Rents, Security Agreements and Fixture Financing Statements (or documents of similar title) executed by the other Borrower Parties (as amended from time to time) and any other documents evidencing or securing the Loan or executed in connection therewith (such documents together with any modifications, renewals, extensions or replacements thereof are collectively referred to as the "Loan Documents"); (iii) the payment and performance of any and all other debts, claims, obligations, demands, monies, liabilities and indebtedness of any kind or nature now or hereafter owing, arising, due or payable from Borrower Parties to Lender or Agent in connection with the Loan; provided that the instrument or agreement evidencing any such debt, claim, obligation, demand, money, liability or indebtedness specifically states that it is secured by this Deed of Trust; and (iv) the payment of all amounts due from Master Tenants, Guarantor and the other borrowers under and in accordance with the terms of the Accounts Receivable Loan Documents and the performance of each and every covenant, condition, and agreement contained therein. All payment obligations of Borrower Parties to Lender or Agent with respect to the Loan or under any of the Loan Documents and all payment obligations of Master Tenants, Guarantor and the other borrowers thereunder to GECC under the Accounts Receivable Loan Documents are hereinafter sometimes collectively referred to as the "Indebtedness," and all other obligations of Borrower Parties to Agent with respect to the Loan or under any of the Loan Documents and all other obligations of Master Tenants, Guarantor and the other borrowers thereunder to GECC under the Accounts Receivable Loan Documents are hereinafter sometimes collectively referred to as the "Obligations".

        NOW, THEREFORE, TO SECURE the repayment of the Indebtedness and the performance of the Obligations, and also in consideration of the sum of Ten and No/100 Dollars ($10.00), the receipt of which is acknowledged by Grantor, Grantor by these presents irrevocably grants, bargains, sells, assigns, mortgages, releases, transfers, pledges, conveys and warrants specially unto Trustee, its successors and assigns forever, IN TRUST, WITH POWER OF SALE, and right of entry and possession, under and subject to the terms and conditions hereof, for the benefit and security of Agent and Lender, all right, title, and interest of Grantor in and to the fee simple estates in the following described property and all proceeds thereof (which property is hereinafter sometimes collectively referred to as the "Property"):

        A.    The real estate described on Exhibit A attached hereto (the "Land");

        B.    All of the following (collectively, the "Improvements"): all buildings, improvements and fixtures now or in the future located or to be constructed on the Land; to the extent not owned by tenants of the Property, all machinery, appliances, equipment, furniture, fixtures and all other personal property of every kind or nature located in or on, or attached to, or used or to be used in connection with the Land, buildings, improvements or fixtures; all building materials and goods procured for use or in connection with the foregoing; and all additions, substitutions and replacements to any of the foregoing;

        C.    To the extent assignable by Grantor, all plans, specifications, architectural renderings, drawings, soil test reports, other reports of examination or analysis of the Land or the Improvements;

        D.    All easements, rights-of-way, water courses, mineral rights, water rights, air rights and appurtenances in any way belonging, relating or appertaining to any of the Land or Improvements, or

which hereafter shall in any way belong, relate or be appurtenant thereto (collectively, "Appurtenances");

        E.    Subject to the rights of Agent under Section 6 hereof, all leases, master leases, subleases, licenses, patient and resident care agreements and other agreements with regard to the use or occupancy of all or any portion of the Land and/or the Improvements, including without limitation that certain Long-Term Care Facility Lease Agreement dated as of [DATE OF LEASE AGREEMENT] by and between [NAME OF MASTER TENANT], a Nevada corporation ("Master Tenant") and Grantor (the "Master Lease"), service agreements which include an occupancy agreement and all guaranties, amendments, extensions and renewals of any such lease, license or agreement, now or hereafter entered into (collectively, the "Leases") and all rents, incomes, receipts, prepayments, security deposits, termination payments, royalties, profits, issues and revenues, prepayment of the same including without limitation, lease termination, cancellation or similar fees, and all other amounts of any nature now due or which may become due or to which Grantor may now or shall hereafter become entitled or which it may demand or claim and arising or accruing directly or indirectly from the Leases or from the Land and/or Improvements from time to time (collectively, the "Rents"), reserving to Grantor, however, so long as no Event of Default has occurred, the right to receive and apply the Rents in accordance with the terms and conditions of Section 6 of this Deed of Trust;

        F.     To the extent assignable by Grantor, all claims, demands, judgments, insurance proceeds, refunds, reserves, deposits, rights of action, awards of damages, compensation, settlements and other rights to the payment of money hereafter made resulting from or relating to (i) the taking of the Land or the Improvements or any part thereof under the power of eminent domain, (ii) any damage (whether caused by such taking, by casualty or otherwise) to the Land, Improvements, Appurtenances or other Property or any part thereof, or (iii) the ownership or operation of the Property;

        G.    To the extent assignable by Grantor, all management contracts, permits, certificates, licenses, approvals, contracts, purchase and sale agreements, purchase options, entitlements, development rights and authorizations, however characterized, issued or in any way furnished for the acquisition, construction, development, operation and use of the Land, Improvements and/or Leases, including building permits, environmental certificates, licenses, certificates of operation, warranties and guaranties;

        H.    All of the following types of collateral, as defined in the Uniform Commercial Code as in effect from time to time in the State of Illinois (the Illinois Uniform Commercial Code being referred to as the "UCC", unless the context requires a reference to the Uniform Commercial Code in effect in another state): accounts, contract rights, general intangibles, chattel paper, documents, instruments, inventory, goods, equipment, investment property, deposit accounts, letter of credit rights, commercial tort claims, healthcare insurance receivables and all books and records relating to the foregoing; provided that Grantor will cooperate with Agent in obtaining "control" as defined in the UCC, with respect to collateral consisting of deposit accounts, investment property, letter of credit rights and electronic chattel paper;

        I.     Any monies on deposit with or for the benefit of Agent, including deposits for the payment of real estate taxes, insurance premiums and any cash collateral account;

        J.     All proceeds, products, replacements, additions, substitutions, renewals and accessions of and to the Land, Improvements, Appurtenances or any other property of the types described in the preceding granting clauses; and

        K.    Any and all after-acquired right, title or interest of Grantor in and to any property of the types described in the preceding granting clauses.

        TO HAVE AND TO HOLD the Property and all parts thereof together with the rents, issues, profits and proceeds thereof, unto Trustee to its own proper use, benefit, and advantage forever, subject, however, to the terms, covenants, and conditions herein.

        Grantor covenants and agrees with Agent as follows:

1.    Payment of Indebtedness; Performance of Obligations.    Grantor shall promptly pay when due the Indebtedness and shall promptly perform all Obligations.

2.    Taxes and Other Obligations; Insurance and Condemnation Proceeds.

        (a)   Grantor shall pay or cause to be paid, when due, and before any interest, collection fees or penalties shall accrue, all Taxes in accordance with Section 7.3 of the Loan Agreement.

        (b)   Should Grantor fail to make any of such payments, Agent may, at its option and at the expense of Grantor, pay the amounts due for the account of Grantor. Upon the request of Agent, Grantor shall immediately furnish to Agent copies of all notices of amounts due and receipts evidencing payment. Grantor shall promptly notify Agent of any lien on all or any part of the Property and shall promptly discharge any unpermitted lien or encumbrance.

        (c)   Insurance and condemnation proceeds shall be paid and applied in accordance with Section 3.2 and 3.3 of the Loan Agreement.

        (d)   Any implied covenant in this Deed of Trust or the Loan Agreement restricting the right of Lender to make an election as to the application of proceeds, is waived by Borrower. In addition, Borrower hereby waives the provisions of any law prohibiting Lender from making such an election, including, without limitation, the provisions of California Code of Civil Procedure commencing with Section 1265.210.

3.    Preservation and Maintenance of Property.    Grantor shall: (a) not commit waste or permit impairment or deterioration of the Property; (b) not abandon the Property; (c) keep the Property (or cause the Property to be kept) in good repair and restore or repair promptly, in a good and workmanlike manner, all or any part of the Property to the equivalent of its original condition as of the date of this Deed of Trust, or such other condition as Agent may approve in writing, upon any damage or loss thereto; (d) comply (or cause compliance) in all material respects with all laws, ordinances, regulations and requirements of any governmental body applicable to the Property and (e) give notice in writing to Agent of and, unless otherwise directed in writing by Agent, appear in and defend any action or proceeding purporting to affect the Property, the security granted by the Loan Documents or the rights or powers of Agent. Neither Grantor nor any tenant or other person shall remove, demolish or alter any Improvement on the Land except when incident to the replacement of fixtures, equipment, machinery and appliances with items of like kind.

4.    Protection of Agent's and/or Lender's Security.    If (a) Grantor fails to pay the Indebtedness or to perform the Obligations, (b) any action or proceeding is commenced which affects or could affect the Property or Trustee's or Lender's interest therein, including any loss, damage, cost, expense or liability incurred by Trustee, Agent or Lender with respect to (i) any environmental matters relating to the Property or (ii) the preparation of the commencement or defense of any action or proceeding or any threatened action or proceeding affecting the Loan Documents or the Property, then Agent, at Agent's option, may make such appearances, disburse such sums and take such action as Agent deems necessary, in its sole discretion, to protect the Property or Agent's or Lender's interest therein, including entry upon the Property to take such actions Agent determines appropriate to preserve, protect or restore the Property. Any amounts disbursed by Agent or Lender pursuant to this Section 4 (including attorneys' fees, costs and expenses), together with interest thereon at the "Default Rate" (defined in the Note) from the date of disbursement, shall become additional Indebtedness of Grantor secured by the lien of this Deed of Trust and the other Loan Documents and shall be due and payable on demand. Nothing contained in this Section 4 shall require Agent or Lender to incur any expense or take any action hereunder.

5.    Warranty of Title; Actions.    Except as disclosed in the exceptions to title in the title policy approved by Agent issued by Chicago Title Insurance Company insuring the priority of this Deed of Trust, Grantor shall warrant, and hereby does warrant, that Grantor owns marketable and fee simple title to the Property, free and clear of all liens and encumbrances. Grantor shall appear in and defend

any claim or any action or other proceeding purporting to affect title or other interests relating to any part of the Property, the security of this Deed of Trust or the rights of Agent or Lender, and give Agent prompt written notice of any such claim, action or proceeding. Agent may, at the expense of Grantor, appear in and defend any such claim, action or proceeding and any claim, action or other proceeding asserted or brought against Agent or Lender in connection with or relating to any part of the Property or this Deed of Trust or involving the priority, validity or enforceability of any Loan Document.

6.    Assignment of Rents.

        (a)   To facilitate the payment and performance of the Indebtedness and Obligations, Grantor absolutely and unconditionally assigns and transfers to Agent, for the benefit of Agent and Lender, all of Grantor's right, title and interest in and to (i) the Leases, (ii) the Rents and the immediate and continuing right to collect and receive all of the Rents, and (iii) any and all rights and claims of any kind that Grantor may have now or in the future against any present or future tenant (including Master Tenant), subtenant or occupant of the Property (a "Tenant"). In furtherance of this assignment, and not in lieu thereof, promptly upon request by Agent, Grantor agrees to execute and deliver such further assignments as Agent may from time to time require.

        (b)   All of the Rents and all proceeds payable under any policy of insurance covering loss of rents resulting from untenantability caused by damage to any part of the Property, together with any and all rights that Grantor may have against any Tenant under the Leases or any subtenants or occupants of any part of the Property and any award made hereafter to Grantor in any court proceedings involving any of the Tenants or in any bankruptcy, insolvency, or reorganization proceedings in any state or federal court, and all payments by Tenants in lieu of Rent, are hereby absolutely and unconditionally assigned to Agent, for the benefit of Agent and Lender, to be applied by Agent in accordance with the terms of the Loan Agreement. It is understood and agreed by the parties that this assignment of the Leases and Rents is intended to be and is a present, absolute, and unconditional assignment from Grantor to Agent, and not merely the passing of a security interest, and shall, immediately upon execution, give Agent the right to collect the Rents and to apply them in payment of the Indebtedness. Such assignment and grant shall continue in effect until the Indebtedness is paid in full. Subject to the provisions set forth herein and, so long as there shall not have occurred an Event of Default which is continuing, Grantor shall have a license, without joinder of Agent, to enforce the Leases subject to the terms of the Loan Documents, and to collect the Rents as they come due (but not more than one (1) month in advance and excluding any lease termination, cancellation or similar payments which Grantor agrees shall be held in trust and turned over to Agent to be applied to the Indebtedness in accordance with the terms of the Loan Agreement) and to retain, use and enjoy the same. The Rents shall be held by Grantor in trust, to be applied first to the payment of all impositions, levies, taxes, assessments and other charges upon the Property, second to maintenance of insurance policies upon the Property required hereby, third to the expenses of Property operations, including maintenance and repairs required hereby (other than payment of fees to Affiliates of Grantor), fourth to the payment of that portion of the Indebtedness then due and payable, and fifth, the balance, if any, to or as directed by Grantor. Grantor shall deliver such other Rents to Agent as are necessary for the payment of the Indebtedness as such sums become due. If an Event of Default has occurred, Grantor's right to collect and secure the Rents shall cease and Agent shall have the sole right, with or without taking possession of the Property to collect all Rents.

        (c)   Grantor hereby irrevocably appoints Agent its true and lawful attorney-in-fact, with full power of substitution and with full power of substitution and with full power for Agent in its own name and capacity or in the name and capacity of Grantor to demand and collect any and all Rents and to file any claim or take any other action or proceeding and make any settlement regarding the Leases. All Tenants are hereby expressly authorized and directed to pay to Agent, or to such nominee as Agent may designate in a writing delivered to such Tenants, all amounts due Grantor pursuant to the Leases. All Tenants are expressly relieved of all duty, liability or obligation to Grantor in respect of all payments so made to Agent or such nominee.

        (d)   After an Event of Default, Agent may, at any time without notice, either in person, by agent or by a receiver appointed by a court, and without regard to the adequacy of any security for the Indebtedness and the Obligations and without regard to solvency of Grantor:

          (i)  Enter upon, take possession of and manage the Property, or any part thereof, for the purpose of collecting the Rents in its own name sue for or otherwise collect the Rents, including those past due and unpaid, and apply the same, less costs and expenses of operation and collection, including reasonable attorney's fees, upon the Indebtedness and in such order as Agent may so determine;

         (ii)  Dispossess by the usual summary proceedings any Tenant defaulting in the payment thereof to Grantor, lease the Property or any party thereof, repair, restore, and improve the Property;

        (iii)  Apply the Rent after payment of Property expenses as determined by Agent to the Indebtedness in accordance with the terms of the Loan Agreement; and

        (iv)  Apply to any court of competent jurisdiction for specific performance of this Deed of Trust, an injunction against the violation hereof and/or the appointment of a receiver.

        (e)   The collection of Rents, or the entering upon and taking possession of the Property, or the application thereof as aforesaid, shall note cure or waive any Event of Default or notice of an Event of Default hereunder or invalidate any act done in response to such Event of Default pr pursuant to such notice of an Event of Default. In the event Grantor, as lessor under the Leases, shall fail to perform and fulfill in any material respect any material term, covenant, condition, or provision in the Leases, on its part to be performed or fulfilled, at the time and in the manner in the Leases provided, or if the Grantor shall suffer or permit to occur any breach or default under the provisions of the Leases, or any of them, and such default shall give the Tenant thereunder the right to terminate its Lease or otherwise shall continue for a period of thirty (30) days following the giving of written notice of such default to Grantor, then and in any such event, such breach or default shall constitute an Event of Default.

        (f)    In the event Grantor fails to perform any Lease covenant, Agent may, at its option, upon prior notice to Grantor (except in the event of an emergency) perform any Lease covenant for and on behalf of Grantor, and all monies expended in so doing shall be chargeable to Grantor and added to the Indebtedness and shall be immediately due and payable.

        (g)   Grantor hereby covenants and agrees as follows:

          (i)  This Deed of Trust transfers to Agent all of Grantor's right, title, and interest in any security deposits held by Grantor, provided that Grantor shall have the right to retain and apply the security deposit so long as no Event of Default has occurred under this Deed of Trust or the Loan Documents. Agent shall have no obligation to any Tenant with respect to its security deposit unless and until Agent comes into possession of the deposit.

         (ii)  Agent may assign its right, title and interest in the Leases, Rents and other Property, and any subsequent assignee shall have all of the rights and powers provided to Agent by this Deed of Trust.

        (iii)  Grantor shall not without the prior written consent of Agent: (a) perform any act or execute any other instrument which might interfere with the exercise of Agent's or Lender's rights hereunder; (b) execute any assignment, pledge or hypothecation of Rents or any of the Leases; or (c) suffer or permit any of the Leases to become subordinate to any lien other than the lien of this Deed of Trust.

        (h)   This Deed of Trust shall not be deemed to impose upon Agent or Lender any of the obligations or duties of the landlord or Grantor provided in any Lease. Grantor hereby acknowledges and agrees: (i) Grantor is and will remain liable under the Leases to the same extent as though this Deed of Trust had not been made; and (ii) Agent has not by this Deed of Trust assumed any of the obligations of Grantor under the Leases, except as to such obligations which arise after such time as

Agent shall have assumed actual ownership or control of the Property. This Deed of Trust shall not make Agent responsible for the control, care, management, or repair of the Property or any personal property or for the carrying out of any of the terms of the Leases unless and until Agent takes possession or actual control of the Property. Agent and Lender shall not be liable in any way for any injury or damage to person or property sustained by any person or persons, firm, or corporation in or about the Property absent gross negligence or willful misconduct by such Person.

        (i)    In the event any Tenant should be the subject of any proceeding under the Federal Bankruptcy Code or any other federal, state, or local statute which provides for the possible termination or rejection of any Lease, Grantor covenants and agrees no settlement for damages shall be made without the prior written consent of Agent, which consent shall not be unreasonably withheld or delayed, and any check in payment of damages for rejection of any Lease will be made payable both to Grantor and Agent. Grantor hereby assigns any such payment to Agent and further covenants and agrees that it will duly endorse to the order of Agent any such check.

        (j)    After an Event of Default, then, without notice to, or the consent of, Grantor, Agent shall be entitled to exercise all of the rights and remedies contained in this Deed of Trust or in any other Loan Document or otherwise available at law or in equity including, without limitation, the right to do any one or more of the following:

          (i)  To enter upon, take possession of and manage the Property for the purpose of collecting the Rents;

         (ii)  Dispossess by the usual summary proceedings any Tenant defaulting in the payment thereof to Grantor;

        (iii)  Lease the Property or any part thereof;

        (iv)  Repair, restore, and improve the Property;

         (v)  Apply the Rents after payment of Property expenses as determined by Agent to the Indebtedness and the Obligations in such order as Agent may determine; and

        (vi)  Apply to any court of competent jurisdiction for specific performance of this Deed of Trust, an injunction against the violation hereof and/or the appointment of a receiver.

        (k)   Grantor hereby agrees to indemnify Agent and Lender to hold Agent and Lender harmless from any liability, loss or damages including, without limitation, reasonable attorney's fees, costs and expenses which may or might be incurred by Agent under the Leases or by reason of this Deed of Trust, and from any and all claims and demands which may be asserted against Agent or Lender by reason of any term, covenant or agreement contained in any of the Leases, except for any such liability, loss or damage resulting solely from Agent's or Lender's gross negligence or willful misconduct.

        (l)    The assignment of Leases and Rents set forth in this Section 6 and the granting clauses of this Deed of Trust shall run with the land and be good and valid against Grantor or those claiming by, under or through Grantor, from the date hereof and such assignment shall continue to be operative during the foreclosure or any other proceeding taken to enforce this Deed of Trust. In the event of a sale or foreclosure which shall result in a deficiency, such assignment shall stand as security during the redemption period of the payment of such deficiency. Agent shall be permitted, at its sole option, to exercise remedies under such assignment separately from remedies exercised against other portions of the Property.

7.    Statements by Grantor.    Grantor shall within ten (10) days after Agent's request, furnish Agent with a written statement, duly acknowledged, setting forth the sums, according to Grantor's books and records, secured by the Loan Documents and any right of set-off, counterclaim or other defense which exists against such sums and the Obligations.

8.    No Additional Liens, Encumbrances or Indebtedness.    Grantor covenants not to execute any mortgage, deed of trust, security agreement, assignment of leases and rents or other agreement granting a lien (except the liens granted to Agent by the Loan Documents) against or encumbrance on

the Property or take or fail to take any other action which would result in a lien against the Property or the interest of Grantor (or Guarantor) in the Property without the prior written consent of Agent; provided, however, Grantor may in good faith, by appropriate proceeding, contest the validity or amount of any asserted lien in accordance with the terms of the Loan Agreement and pending such contest, Grantor shall not be deemed to be in default hereunder.

9.    Grantor and Lien Not Released.    Without affecting the liability of Grantor for any of the Indebtedness or the Obligations, or any other person liable for the payment of the Indebtedness or the performance of any Obligations, and without affecting the lien or charge of this Deed of Trust as security for the payment of the Indebtedness, Agent may, from time to time and without notice to any junior lien holder or holder of any right or other interest in and to the Property: (a) release any person liable for payment of all or any portion of the Indebtedness or performance of the Obligations; (b) waive or modify any provision of this Deed of Trust or the other Loan Documents or grant other indulgences; (c) release all or any part of the Property; (d) take additional security for any obligation herein mentioned; (e) subordinate the lien or charge of this Deed of Trust; (f) consent to the granting of any easement; or (g) consent to any map, plat or plan of the Property.

        In accordance with California Code of Civil Procedure Section 726.5, Lender may waive its lien against the Property or any portion thereof, together with fixtures or personal property thereon, to the extent such property is found to be environmentally impaired, and may exercise any and all rights and remedies of an unsecured creditor against Borrower and all of Borrower's assets and property for the recovery of any deficiency, including, without limitation, seeking an attachment order under California Code of Civil Procedure Section 483.010. No such waiver shall be final or binding on Lender unless and until a final money judgment is obtained against Borrower. As between Lender and Borrower, for purposes of California Code of Civil Procedure Section 726.5, Borrower shall have the burden of proving that the release or threatened release of any Hazardous Materials was not knowingly or negligently caused or contributed to, or knowingly or willfully permitted or acquiesced to by Borrower or any related party (or any affiliate or agent of Borrower or any related party) and that Borrower made written disclosure of the release to Lender or that Lender otherwise obtained actual knowledge thereof prior to the making of the loan evidenced by the Note. Notwithstanding anything to the contrary contained in this Deed of Trust or the other Loan Documents, Borrower shall be fully and personally liable for all judgments and awards entered against Borrower pursuant to California Code of Civil Procedure 726.5 and such liability shall be an exception to any non-recourse or exculpatory provision in this Deed of Trust or the other Loan Documents and shall not be limited to the original principal amount of the obligations secured by this Deed of Trust. Borrower's obligations hereunder shall survive the foreclosure, deed in lieu of foreclosure, release, reconveyance or any other transfer of the Property or this Deed of Trust. For the purpose of any action brought under this Section, Borrower hereby waives the defense of laches and any applicable statute of limitations. For purposes of California Code of Civil Procedure 726.5, the acts, knowledge and notice of each "726.5 Party" shall be attributed to and be deemed to have been performed by the party or parties then obligated on and liable for payment of the Note. As used herein, "726.5 Party" shall mean Borrower, any successor owner to Borrower of all or any portion of the Property, any related party of Borrower or any such successor and any affiliate or agent of Borrower, any such successor or any such related party.

10.    Uniform Commercial Code Security Agreement.

        (a)   This Deed of Trust shall cover, and the Property shall include, all property now or hereafter affixed or attached to the Land, which to the fullest extent permitted by law, shall be deemed fixtures and a part of the Land. In addition, this Deed of Trust shall constitute a security agreement pursuant to the UCC for any portion of the Property which, under applicable law, may be subject to a security interest pursuant to the UCC (such portion of the Property is hereinafter called the "Personal Property") and Grantor hereby grants to Agent, for the benefit of Agent and Lender, a security interest in the Personal Property. Agent shall have all of the rights and remedies of a secured party under the UCC as well as all other rights and remedies available at law or in equity.

        (b)   Grantor hereby authorizes Agent to file any financing statements, as well as extensions, renewals and amendments thereof, and reproductions of this Deed of Trust, all in such form as Agent may require to perfect a security interest with respect to the Personal Property. Grantor hereby authorizes and empowers Agent and irrevocably appoints Agent its agent and attorney-in-fact to execute and file, on Grantor's behalf, all financing statements and refilings and continuations thereof as Agent deems necessary or advisable to create, preserve and protect such lien. Grantor shall pay all costs of filing such financing statements and any extensions, renewals, amendments and releases thereof, and shall pay all reasonable costs and expenses of any record searches for financing statements as Agent may reasonably require.

        (c)   Grantor shall not, without the prior written consent of Agent, sell, assign, transfer, encumber, remove or permit to be removed from the Property any of the Personal Property. So long as no Event of Default exists, Grantor may sell or otherwise dispose of the Personal Property when obsolete, worn out, inadequate, unserviceable or unnecessary for use in the operation of the Property, but only upon replacing the same with other Personal Property at least equal in value and utility to the disposed Personal Property. Any replacement or substituted Personal Property shall be subject to the security interest granted herein.

        (d)   To the extent permitted by law, Grantor, Lender and Agent agree that with respect to all items of Personal Property which are or will become fixtures on the Land, this Deed of Trust, upon recording or registration in the real estate records of the proper office, shall constitute a "fixture filing" within the meaning of the UCC.

        (e)   After an Event of Default, Agent may exercise in respect of the Personal Property, in addition to all other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party on default under the UCC (whether or not the UCC applies to the affected Personal Property) and also may: (i) require Grantor to, and Grantor hereby agrees that it will, at its expense and upon request of Agent, forthwith assemble all or part of the Personal Property as directed by Agent and make it available to Agent at any reasonable place or places designated by Agent; and (ii) without notice except as specified below, sell, lease or otherwise dispose of the Personal Property or any part thereof in one or more parcels at public or private sale, and without the necessity of gathering at the place of sale of the property to be sold, at any of Agent's offices or elsewhere, at such time or times, for cash, on credit or for future delivery, and at such price or prices and upon such other terms as Agent may deem commercially reasonable.

        (f)    Grantor agrees that, to the extent notice of sale shall be required by law, a reasonable authenticated notification of disposition shall be a notification given at least ten (10) days prior to any such sale and such notice shall (i) describe Agent and Grantor, (ii) describe the Personal Property that is the subject of the intended disposition, (iii) state the method of intended disposition, (iv) state that Grantor is entitled to an accounting of the Indebtedness and stating the charge, if any, for an accounting, and (v) state the time and place of any public disposition or the time after which any private sale is to be made. Notwithstanding the foregoing, to the contrary, no notification need be given to Grantor if it has authenticated after default a statement renouncing or modifying any right to notification of sale or other intended disposition. At any sale of the Personal Property, if permitted by law, Agent may bid (which bid may be, in whole or in part, in the form of cancellation of indebtedness) for the purchase, lease, license or other disposition of the Personal Property or any portion thereof for the account of Agent. Agent shall not be obligated to make any sale of Personal Property regardless of notice of sale having been given. Agent may disclaim any warranties that might arise in connection with the sale, lease, license or other disposition of the Personal Property and have no obligation to provide any warranties at such time. Agent may adjourn any public or private sale from time to time by announcement at the time and place fixed therefore, and such sale may, without further notice, be made at the time and place to which it was so adjourned. To the extent permitted by law, Grantor hereby specifically waives all rights of redemption, stay or appraisal which it has or may have under any applicable law now existing or hereafter enacted.

        (g)   After an Event of Default, Agent or its agents or attorneys shall have the right without further notice or demand or legal process (unless the same shall be required by applicable law), personally, or by its agents or attorneys, (i) to enter upon, occupy and use any premises owned or leased by Grantor or where the Personal Property is located (or is believed to be located) for so long as such entry, occupancy and use is necessary, without any obligation to pay rent to Grantor, to render the Personal Property useable or saleable and to remove the Personal Property or any part thereof therefrom to the premises of Agent or any agent of Agent for such time as Agent may desire in order to effectively collect or liquidate the Personal Property and use in connection with such removal any and all services, supplies and other facilities of Grantor; (ii) to make copies of and have access to Grantor's original books and records, to obtain access to Grantor's data processing equipment, computer hardware and software relating to the Personal Property and to use all of the foregoing and the information contained therein in any manner Agent deems appropriate; and (iii) to notify postal authorities to change the address for delivery of Grantor's mail to an address designated by Agent and to receive, open and dispose of all mail addressed to Grantor.

11.    Events of Default; Acceleration of Indebtedness.    The occurrence of any one or more of the following events shall constitute an "Event of Default" under this Deed of Trust:

        (a)   failure of Borrower Parties to pay, within five (5) days after the due date, any of the Indebtedness, including any payment due under the Note, or Borrower Parties' failure to pay the Loan at the Maturity Date, whether by acceleration or otherwise; or

        (b)   failure of Grantor to strictly comply with Section 8 (no additional liens) 6(f)(iii) (no interference with Agent's liens on Leases and Rents) of this Deed of Trust; or

        (c)   failure of Borrower Parties to satisfy each and every Obligation not set forth in subsection (b) above, and the continuance of such failure for ten (10) days after notice by Agent to Borrower Parties; provided, however, Borrower Parties shall have an additional thirty (30) days to cure such failure if (a) such Obligation cannot by its nature reasonably be cured within ten (10) days; (b) such failure does not involve the failure to make payments on a monetary obligation; (c) if Borrower Parties commence to cure such failure promptly after written notice thereof and thereafter diligently pursues the curing thereof, and (d) Borrower Parties provide Agent with security reasonably satisfactory to Agent against any interruption of payment or impairment of collateral as a result of such continuing failure, Borrower Parties shall not be in default hereunder during such additional thirty (30) day period of diligent curing;

        (d)   Grantor changes the state of its formation or its name without providing Agent thirty (30) days prior written notice;

        (e)   the occurrence of an Event of Default (as such term is defined in the applicable Loan Document) under any other Loan Document; or

        (f)    any default under, or termination of, the Master Lease.

Upon the occurrence of an Event of Default, at the option of Agent, the Indebtedness shall become immediately due and payable without notice to Grantor and Agent shall be entitled to all of the rights and remedies provided in the Loan Documents or at law or in equity. Each remedy provided in the Loan Documents is distinct and cumulative to all other rights or remedies under the Loan Documents or afforded by law or equity, and may be exercised concurrently, independently, or successively, in any order whatsoever.

12.    Enforcement.    In an Event of Default exits, Lender may elect to foreclose the interest of Borrower in the Land and other Property pursuant to applicable law. Commencement of such an action shall be deemed a declaration by Lender that any and all of the Indebtedness and Obligations are to be due and payable immediately. Upon the election of Lender to effect a trustee's sale of the Land or

other Property in lieu of judicial foreclosure, then Lender may instruct Trustee to commence such sale and consummate such sale in the following manner:

        (a)   Lender shall initiate such action by delivery to Trustee of a written declaration of the Event of Default and demand for sale and of written notice of the Event of Default and of election to cause to be sold the Land and any other Property designated by Lender, which notice Trustee shall cause to be duly filed for record in case of foreclosure by exercise of the power of sale herein. Should Lender elect to foreclose by exercise of the power of sale herein, Lender shall also deposit with Trustee this Deed of Trust and the Note and such receipts and evidence of expenditures made and secured hereby as Trustee may require, and notice of sale having been given as then required by law and after lapse of such time as may then be required by law after recordation of such notice of the Event of Default, Trustee, without demand on Borrower, shall sell the Land and any other Property designated by Lender at time and place of sale fixed by it in such notice of sale as Lender may direct, either as a whole or in separate parcels, as Lender may determine, at public auction to the highest bidder for cash in lawful money of the United States, payable at time of sale. Lender shall have the right to direct the order in which separate parcels shall be sold and Borrower shall have no right to direct the order in which separate parcels shall be sold. Trustee may postpone sale of all or any portion of the Land and other Property by public announcement at such time and place of sale, and from time to time thereafter may postpone such sale by public announcement at the time fixed by the preceding postponement. Any person, including Borrower, Trustee or Lender, may purchase at such sale. Lender may proceed as to the Property constituting personal property in accordance with Lender's rights and remedies in respect to the Land or sell the Property constituting personal property separately and without regard to the remainder of the Land in accordance with Lender's rights and remedies provided by the Uniform Commercial Code as well as other rights and remedies available at law or in equity. Borrower waives all rights to direct the order in which any of the Land and other Property shall be sold in the event of any sale under this Deed of Trust, and also any right to have any of the Land and other Property marshalled upon any sale.

        (b)   Lender, from time to time before Trustee's sale pursuant to this Section 12, may rescind any notice of breach or the Event of Default and of election to cause to be sold the Land or other Property by executing and delivering to Trustee a written notice of such rescission, which notice, when recorded, shall also constitute a cancellation of any prior declaration of an Event of Default and demand for sale. The exercise by Lender of such right of rescission shall not constitute a waiver of any breach or Event of Default then existing or subsequently occurring or impair the right of Lender to execute and deliver to Trustee, as above provided, other declarations of an Event of Default and demand for sale, and notices of breach or Event of Default, the obligations hereof, nor otherwise affect any provisions, covenant or condition of the Note and/or of this Deed of Trust or any of the rights, obligations or remedies of the parties thereunder or hereunder.

        (c)   Trustee shall deliver to the purchaser at any such trustee's sale its deed, without warranty, which shall convey to the purchaser the interest in the Land and other Property then sold which Borrower has or has the power to convey at the time of the execution of this Deed of Trust, and such as it may have acquired hereafter. The Trustee's deed shall recite the facts showing that the sale was conducted in compliance with all the requirements of law and of this Deed of Trust, which recital shall be prima facie evidence of such compliance and conclusive evidence thereof in favor of bona fide purchasers and encumbrances for value.

        (d)   In the case of a sale under this Deed of Trust, the said Land and other Property, real, personal and mixed, may be sold in one parcel or more than one parcel.

        (e)   Upon any sale made under or by virtue of this Section (whether made under the power of sale herein granted or under or by virtue of judicial proceedings or of a judgment or decree of foreclosure and sale) (any such sale or disposition, a "Foreclosure Sale;" and any two or more, "Foreclosure Sales"), Lender may bid for and acquire the Land and other Property, or any part thereof, and in lieu of paying cash therefore may make settlement for the purchase price by crediting upon the Indebtedness and Obligations the net sale price after deducting therefrom the expenses of the

sale and the costs of the action and any other sums which Lender is authorized to deduct under this Deed of Trust.

        (f)    In the event of any Foreclosure Sale, the entire Indebtedness and Obligations, if not previously due and payable, immediately thereupon shall, anything in the Note or in the Deed of Trust to the contrary notwithstanding, become due and payable.

        (g)   In the Event of Default exists, Lender may enter upon the Land, take possession of the Property, or any part thereof, with or, to the extent permitted by law, without judicial process, and, in connection therewith, without any responsibility or liability on the part of Lender, take possession of any property located on or in the Property which is not a part of the Property and hold or store such property at Borrower's expense and Lender may exercise any or all of the remedies available to a secured party under the Uniform Commercial Code including the following: Lender may require Borrower to assemble the personal property constituting part of the Property, and make such available to Lender at a place to be designated by Lender which is reasonably convenient to Borrower and Lender. After notification, if any, as hereafter provided in this subsection, Lender may sell, lease, or otherwise dispose of (herein, a "disposition"), at the office of Lender, or on the Land, or elsewhere, as chosen by Lender, all or any part of said personal property in its then condition or following any commercially reasonable preparation or processing, and each disposition may be as a unit or in parcels, by pubic or private proceedings, and by way of one or more contracts, and, at any disposition, it shall not be necessary to have present or exhibit said personal property, or any part thereof being sold. The disposition of any part of said personal property shall not exhaust Lender's power of disposition, but dispositions may be made from time to time until the Indebtedness and Obligations are paid and performed in full. Reasonable notification of the time and place of any public disposition pursuant to this subsection, or reasonable notification of the time after which any private disposition is to be made pursuant to this subsection, shall be sent to Borrower and to any other person entitled to receive notice under the Uniform Commercial Code. It is agreed that notice sent or given not less than five (5) calendar days prior to the taking of the action to which the notice relates, is reasonable notification for the purposes of this subsection.

        (h)   If an Event of Default exists, Lender may bring an action in a court of competent jurisdiction to foreclose this instrument or to enforce any of the covenants hereof.

        (i)    Lender shall, as a matter of right, without notice and without giving bond to Borrower or anyone claiming by, under or through Borrower, and without regard for the solvency or insolvency of Borrower or the then value of the Property, pursuant to California Civil Code Section 2929.5 or other applicable law, be entitled to have a receiver appointed for all or any part of the Property and the Rents, and the proceeds, issues and profits thereof, with the rights and powers referenced below and such other rights and powers as the court making such appointment shall confer, and Borrower hereby consents to the appointment of such receiver and shall not oppose any such appointment. Such receiver shall have all powers and duties prescribed by applicable law, all other powers which are necessary or usual in such cases for the protection, possession, control, management and operation of the Property, and such rights and powers as Lender would have, upon entering and taking possession of the Property under subsection (c) below. Without limiting the generality of the foregoing, Lender shall have the right to appoint a receiver in order to enforce Lender's rights under Section 2929.5 of the California Civil Code.

13.    Other Remedies.    Lender may exercise all rights and remedies contained in any other instrument, document, agreement or other writing heretofore, concurrently or in the future executed by Borrower or any other person or entity in favor of Lender in connection with the Obligations or any part thereof, without prejudice to the right of Lender thereafter to enforce any appropriate remedy against Borrower. Lender shall have the right to pursue all remedies afforded to a beneficiary under a deed of trust under applicable law, and shall have the benefit of all of the provisions of such applicable law, including all amendments thereto which may become effective from time to time after the date hereof.

        (a)    CCP Sections 726.5 and 736.    Without limiting the foregoing, Lender may (i) in accordance with California Code of Civil Procedure Section 736, as such Section may be amended from time to time, recover any costs, expenses or liabilities, including without limitation attorneys' fees, incurred by Lender and arising from any breach of any covenant, warranty or agreement pertaining to any environmental requirements, or any order, consent decree or settlement relating to the cleanup of toxic or hazardous waste or waste products, or any other "environmental provision" (as defined in such Section 736) relating to the Land or other Property or any portion thereof; and (ii) in accordance with California Code of Civil Procedure Section 726.5, as such Section may be amended from time to time, waive the security of the Deed of Trust as to any parcel of the Land and other Property that is "environmentally impaired" or is an "affected parcel" (as such terms are defined in such Section), and thereafter exercise against Borrower, to the extent permitted by such Section 726.5, the rights and remedies of an unsecured creditor, including reduction of Lender's claim against Borrower to judgment, and any other rights and remedies permitted by law.

        (b)    Action for Environmental Claims.    In accordance with, and subject to limitations of, California Code of Civil Procedure Section 736, Lender may seek a judgment that Borrower has breached its covenants, representations and/or warranties with respect to the environmental matters contained in this Deed of Trust, the Indemnity Agreements and the Loan Agreement (the "Environmental Provisions"), and may commence and maintain an action or actions in any court of competent jurisdiction for enforcement of the Environmental Provisions and/or recovery of any all costs, damages, expenses, fees, penalties, fines, judgments, indemnification payments to third parties, and other out-of-pocket costs or expenses (including, without limitation, court costs, consultants' fees and attorneys' fees, whether incurred in litigation or not and whether before or after judgment), incurred or advanced by Lender pursuant to the Environmental Provisions (collectively, the "Environmental Costs"), excluding, however, any Environmental Costs not permitted to be recovered pursuant to Section 736 of the California Code of Civil Procedure. Environmental Costs that are not permitted to be recovered pursuant to Section 736 may be referred to hereinafter as the "Unsecured Environmental Costs," and Environmental Costs other than the Unsecured Environmental Costs may be referred to hereinafter as the "Secured Environmental Costs." Any Unsecured Environmental Costs shall not be secured by this Deed of Trust; however, nothing herein shall prevent Lender from recovering any Unsecured Environmental Costs pursuant to the Environmental Obligations set forth in the Loan Agreement, to the extent they are recoverable in accordance with Loan Agreement. All Secured Environmental Costs incurred by Lender shall bear interest at the default rate provided under the Note. All Secured Environmental Costs together with interest thereon at the rate then in effect under the Note shall be secured by this Deed of Trust and shall enjoy the same priority as the original principal amount of the Note. Borrower acknowledges and agrees that notwithstanding any term or provision contained in this Deed of Trust or in the other Loan Documents, Environmental Costs shall be exceptions to any nonrecourse or exculpatory provision, if any, and Borrower shall be fully and personally liable for Environmental Costs. Such liability shall not be limited to the original principal amount of the obligations secured by this Deed of Trust. Borrower's obligations hereunder shall survive foreclosure, deed in lieu of foreclosure, release, reconveyance or any other transfer of the Property or this Deed of Trust. For the purposes of any action brought under this subparagraph, Borrower hereby waives the defense of laches and any applicable statute of limitations.

14.    Expenditures and Expenses.    In any action to foreclose the lien hereof or otherwise enforce Trustee's, Agent's or Lender's rights and remedies hereunder, there shall be allowed and included as additional Indebtedness all costs and expenses which may be paid or incurred by or on behalf of Trustee, Agent or Lender, including without limitation, the costs of collection, enforcement, retaining, holding, preparing for disposition, processing and disposing of the Personal Property, appraiser's fees, outlays for documentary and expert evidence, stenographic changes, publication costs and costs (which may be estimated as the items to be expended after the entry of the decree) of procuring all such abstracts of title, title searches and examination, UCC record searches, title insurance policies, and similar data and assurance with respect to title as Agent may deem to be reasonably necessary either to prosecute any foreclosure action or to evidence to the bidder at any sale pursuant thereto the true condition of the title to or the value of the Property. All such costs and expenses, together with such

other costs and expenses as may be incurred by Trustee, Agent or Lender in the protection of the Property, maintenance of the lien of this Deed of Trust or in any workout or restructuring of the Loan including, attorneys' fees and costs in any negotiation, litigation or other proceeding affecting this Deed of Trust, the Note, the other Loan Documents, the Property or the Personal Property, including probate, appellate, and bankruptcy proceedings and any post-judgment proceedings to collect or enforce any judgment or order relating to this Deed of Trust or the other Loan Documents or in preparation for the commencement or defense of any action or proceeding or threatened action or proceeding, and further including, attorneys' fees and costs in any negotiation, litigation or other proceeding, including costs and expenses in connection with obtaining any court order or the appointment of a receiver to enforce Agent's rights pursuant to Section 564 of the California Code of Civil Procedure and/or Section 2929.5 of the California Civil Code, shall be immediately due and payable to Agent, with interest thereon at the Default Rate, and shall be secured by this Deed of Trust.

15.    Application of Proceeds of Foreclosure Sale.    Unless otherwise required by applicable law, the proceeds of any foreclosure sale of the Property shall be distributed and applied in the order of priority set forth in the Note with the excess, if any, being applied, to any party entitled thereto as their rights may appear. Only with respect to the Personal Property and only to the extent required by law, shall it be necessary for Agent to account for any surplus to Grantor. To the extent permitted by applicable law, Grantor waives all claims, damages, and demands against Agent arising out of the disposition, repossession or retention of the Property.

16.    Future Advances.    This Deed of Trust is given to secure not only the existing Indebtedness and Obligations, but also future advances (whether such advances are obligatory or are made at the option of Lender or Agent, or otherwise) made by Agent or Lender under the Loan Agreement, the Note, this Deed of Trust or any of the other Loan Documents, to the same extent as if such future advances were made on the date of the execution of this Deed of Trust. It is the intent hereof to secure payment of the Indebtedness whether the entire amount shall have been advanced to Borrower Parties at the date hereof, or at a later date, and to secure any other amount or amounts that may be added to the Indebtedness or Obligations. The total amount of the Indebtedness and Obligations secured hereby may decrease or increase from time to time, but the total unpaid balance so secured at any one time shall not exceed five (5) times the aggregate face amount of the Note in principal plus interest thereon and any disbursements made for the payment of taxes, levies, or insurance on the Property with interest thereon. This Deed of Trust shall secure any and all additional or further monies which may be advanced by Lender or Agent to Borrower Parties after the date hereof, which future advances of money, if made, may be evidenced by a note or notes executed by one or more Borrower Parties to Lender and Agent bearing such rate of interest and with such maturities as shall be determined from time to time. Nothing herein contained shall be deemed an obligation on the part of Lender or Agent to make any future advances.

17.    Waiver of Statute of Limitations.    Grantor hereby waives the right to assert any statute of limitations as a bar to the enforcement of the lien created by any of the Loan Documents or to any action brought to enforce the Note or any other obligation secured by any of the Loan Documents.

18.    Waiver of Homestead and Redemption; Other Waivers and Agreements.

        (a)   Grantor hereby waives all right of homestead exemption in the Property. Grantor hereby waives all right of redemption on behalf of Grantor and on behalf of all other persons acquiring any interest or title in the Property subsequent to the date of this Deed of Trust, except decree or judgment creditors of Grantor.

        (b)   In the event Grantor is deemed to have signed this Deed of Trust as a surety or accommodation party, or to have subjected its property to this Deed of Trust to secure the indebtedness of another, to the extent permitted by applicable law, Grantor hereby expressly waives the benefits of any statutory provision limiting the liability of a surety, and any defense arising by reason of any disability or other defense of Grantor or by reason of the cessation from any cause whatsoever of the liability of Grantor. Without limiting the foregoing, Grantor hereby waives any and all benefits and defenses under California Civil Code Section 2810 and agrees that by doing so Grantor shall be liable

even if such other party had no liability at the time of execution of the Note or any other Loan Document, or thereafter ceases to be liable. Grantor hereby waives any and all benefits and defenses under California Civil Code Section 2809 and agrees that by doing so Grantor's liability may be larger in amount and more burdensome than that of such other party, Grantor waives all rights to require Agent to pursue any other remedy it may have against such other party, or any other Borrower Party, including any and all benefits under California Civil Code Section 2845, 2849 and 2850. Grantor further waives any rights, defenses and benefits that may be derived from Sections 2787 to 2855, inclusive, of the California Civil Code or comparable provisions of the laws of any other jurisdiction and further waives all other suretyship defenses Grantor would otherwise have under the laws of California or any other jurisdiction.

        (c)   Upon a default by Borrower Parties, Agent in its sole discretion, without prior notice to or consent of Grantor (except such notice or consent as is expressly required under the Loan Documents), may elect to: (i) foreclose either judicially or nonjudicially against any real or personal property security it may hold for the Loan; (ii) accept a transfer of any such security in lieu of foreclosure; (iii) compromise or adjust the Loan or any part of it or make any other accommodation with Borrower Parties; or (iv) exercise any other remedy against Borrower Parties or any security. No such action by Agent shall release or limit the liability of Grantor, who shall remain liable under the Loan Documents after the action, even if the effect of the action is to deprive Grantor of any subrogation rights, rights of indemnity, or other rights to collect reimbursement from the other Borrower Parties for any sums paid to Agent, whether contractual or arising by operation of law or otherwise. Grantor expressly agrees that under no circumstances shall they be deemed to have any right, title, interest or claim in or to any real or personal property to be held by Agent or any third party after any foreclosure or transfer in lieu of foreclosure of any security for the Loan.

        (d)   Regardless of whether Grantor may have made any payments to Agent, Grantor hereby waives: (i) all rights of subrogation, indemnification, contribution and any other rights to collect reimbursement from the other Borrower Parties or any other party for any sums paid to Agent, whether contractual or arising by operation of law (including the United States Bankruptcy Code or any successor or similar statute) or otherwise; (ii) all rights to enforce any remedy that Agent may have against the other Borrower Parties; and (iii) all rights to participate in any security now or later to be held by Agent for the Loan. The waivers given in this paragraph shall be effective until the Loan has been paid and performed in full.

        (e)   Grantor waives all rights and defenses arising out of an election of remedies by Agent, even though that election of remedies, such as a nonjudicial foreclosure with respect to security for a guarantied obligation, has destroyed Grantor's rights of subrogation and reimbursement against the other Borrower Parties by operation of Section 580d of the California Code of Civil Procedure or otherwise. Grantor further waives any right to a fair value hearing under California Code of Civil Procedure Section 580a, or any other similar law, to determine the size of any deficiency owing (for which any Grantor would be liable hereunder) following a non-judicial foreclosure sale.

        (f)    Without limiting the foregoing or anything else contained in this Deed of Trust, Grantor waives all rights and defenses that Grantor may have because the Loan is secured by real property. This means, among other things:

          (i)  That Lender may collect from Grantor without first foreclosing on any real or personal property collateral pledged by any other Borrower Party; and

         (ii)  If Agent forecloses on any real property collateral pledged by any Borrower Party: (x) the amount of the Loan may be reduced only by the price for which that collateral is sold at the foreclosure sale, even if the collateral is worth more than the sale price; and (y)Lender may collect from Grantor even if Agent, by foreclosing on the real property collateral, has destroyed any right Grantor may have to collect from any other Borrower Party.

This subsection (f) is an unconditional and irrevocable waiver of any rights and defenses Grantor may have because the Loan is secured by real property. These rights and defenses include, but are not

limited to, any rights or defenses based upon Sections 580a, 580b, 580d, or 726 of the California Code of Civil Procedure.

        (g)   Grantor waives all rights and defenses arising out of any failure of the Agent or Lender to disclose to the Grantor any information relating to the financial condition, operations, properties or prospects of any other Borrower Party now or in the future known to the Agent or Lender (Grantor waiving any duty on the part of the Agent or Lender to disclose such information).

        (h)   Grantor further waives and agrees not to assert: (i) any right to require Agent to proceed against any guarantor, to proceed against or exhaust any other security for the Indebtedness and Obligations secured hereby, to pursue any other remedy available to Agent, or to pursue any remedy in any particular order or manner; (ii) the benefits of any legal or equitable doctrine or principle of marshalling; (iii) demand, diligence, presentment for payment, protest and demand, and notice of extension, dishonor, protest, demand and nonpayment, relating to the indebtedness secured hereby; and (iv) any benefit of, and any right to participate in, any other security now or hereafter held by Agent.

        (i)    Grantor further agrees that at any time or from time to time, without liability therefor and without notice, without affecting personal liability of any person for the payment of the indebtedness secured hereby, and without affecting the lien of this Deed of Trust upon the Property for the full amount of all amounts secured hereby, Agent, or Trustee at the direction of Agent, may (i) reconvey all or any part of the Property, (ii) consent to the making of any map of plat thereof; (iii) join in granting any easement thereon or in creating any covenants or conditions restricting use or occupancy thereof, or (iv) join in any extension agreement or in any agreement subordinating the lien or charge hereof.

19.    Governing Law; Severability.    This Deed of Trust shall be governed by and construed in accordance with the internal laws of the State of Illinois except that the provisions of the laws of the jurisdiction in which the Land is located shall be applicable to the creation, perfection and enforcement of the lien created by this Deed of Trust (excluding, however, the creation, attachment and grant of the security interest in Personal Property which shall be governed by the Illinois UCC). The invalidity, illegality or unenforceability of any provision of this Deed of Trust shall not affect or impair the validity, legality or enforceability of the remainder of this Deed of Trust, and to this end, the provisions of this Deed of Trust are declared to be severable.

20.    Notice.    Notices shall be given under this Deed of Trust in conformity with the terms and conditions of the Loan Agreement and in conformity with applicable law.

21.    Successors and Assigns Bound; Joint and Several Liability; Agents; Captions.    The covenants and agreements contained in the Loan Documents shall bind, and the rights thereunder shall inure to, the respective successors and assigns of Agent, Lender and Grantor, subject to the transfer restrictions set forth in the Loan Agreement. All covenants and agreements of Grantor and Borrower Parties shall be joint and several. In exercising any rights under the Loan Documents or taking any actions provided for therein, Agent may act through its employees, agents or independent contractors as authorized by Agent. The captions and headings of the paragraphs of this Deed of Trust are for convenience only and are not to be used to interpret or define the provisions hereof.

22.    Release.    Upon payment in full of all Indebtedness and the performance of all Obligations or release of the Property pursuant to Section 2.10 of the Loan Agreement, Agent shall release this Deed of Trust. In such event, Agent shall, at the request of Grantor, deliver to Grantor in recordable form, all such documents as shall be necessary to release the Property from the liens, security interests, conveyances, and assignments created or evidenced by this Deed of Trust. The recitals in such reconveyance of any matters or facts shall be conclusive as to the accuracy thereof. The grantee in such reconveyance may be described as "the person or persons legally entitled thereto". Grantor shall pay Agent's reasonable costs incurred in releasing or assigning this Deed of Trust and in preparing and filing any terminations or assignments of financing statements related thereto, as a condition to Agent's obligation to deliver the same.

23.    Loss of Note.    Upon notice from Agent of the loss, theft, or destruction of the Note (or any of them) and upon receipt of an affidavit of lost note and an indemnity reasonably satisfactory to Grantor from Agent, or in the case of mutilation of the Note (or any of them), upon surrender of the mutilated Note, Grantor shall make and deliver a new note of like tenor in lieu of the then to be superseded Note (or any of them). Any one or more of the financial institutions which are or become a party to the Loan Agreement as Lenders may from time to time be replaced and, accordingly, one or more of the Notes may from time to time be replaced, provided that the terms of the Notes following such replacement, including the principal amount evidenced thereby, shall remain the same. As the indebtedness secured by this Deed of Trust shall remain the same, such replacement of the Notes shall not be construed as a novation and shall not affect, diminish or abrogate Grantor's liability under this Deed of Trust or the priority of this Deed of Trust.

24.    Further Assurances.    Grantor agrees to execute any further documents, and to take any further actions reasonably requested by Agent to evidence or perfect the security interests granted herein, to maintain the first priority of the security interests, and to effectuate the rights specifically granted to Agent and Lender hereunder.

25.    Subrogation.    Agent is hereby subrogated (a) to the lien(s) of each and every mortgage, deed of trust, lien or other encumbrance on all or any part of the Property which is fully or partially paid or satisfied out of the proceeds of the Indebtedness, and (b) to the rights of the owner(s) and holder(s) of any such mortgage, deed of trust, lien or other encumbrance. The respective rights under and priorities of all such mortgages, deeds of trust, liens or other encumbrances shall be preserved and shall pass to and be held by Agent as additional security for the Indebtedness, to the same extent as if such rights and priorities had been duly assigned by separate instrument of assignment and notwithstanding that the same may have been cancelled and satisfied of record. Notwithstanding the foregoing, Agent agrees that only the terms and provisions set forth in this Deed of Trust and the other Loan Documents shall govern and control Grantor's rights and obligations hereunder and thereunder.

26.    Time of Essence.    Time is of the essence of this Deed of Trust and the performance of each of the covenants and agreement contained herein.

27.    Venue.    GRANTOR HEREBY CONSENTS TO THE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED WITHIN THE COUNTY OF COOK, STATE OF ILLINOIS AND IRREVOCABLY AGREES THAT, SUBJECT TO AGENT'S ELECTION, ALL ACTIONS OR PROCEEDINGS ARISING OUT OF OR RELATING TO THIS DEED OF TRUST SHALL BE LITIGATED IN SUCH COURTS. GRANTOR EXPRESSLY SUBMITS AND CONSENTS TO THE JURISDICTION OF THE AFORESAID COURTS AND WAIVES ANY DEFENSE OF FORUM NON CONVENIENS. GRANTOR HEREBY WAIVES PERSONAL SERVICE OF ANY AND ALL PROCESS AND AGREES THAT ALL SUCH SERVICE OF PROCESS MAY BE MADE UPON GRANTOR BY CERTIFIED OR REGISTERED MAIL, RETURN RECEIPT REQUESTED, ADDRESSED TO GRANTOR, AT THE ADDRESS SET FORTH IN THIS AGREEMENT AND SERVICE SO MADE SHALL BE COMPLETE TEN (10) DAYS AFTER THE SAME HAS BEEN POSTED.

28.    Jury Trial Waiver.    GRANTOR, AND AGENT AND LENDER BY THEIR ACCEPTANCE OF THIS DEED OF TRUST, HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, OR RELATED TO, THE SUBJECT MATTER OF THIS DEED OF TRUST AND THE BUSINESS RELATIONSHIP THAT IS BEING ESTABLISHED. THIS WAIVER IS KNOWINGLY, INTENTIONALLY AND VOLUNTARILY MADE BY GRANTOR, LENDER AND AGENT, AND GRANTOR ACKNOWLEDGES THAT NEITHER AGENT NOR LENDER, NOR ANY PERSON ACTING ON BEHALF OF AGENT OR LENDER, HAS MADE ANY REPRESENTATIONS OF FACT TO INDUCE THIS WAIVER OF TRIAL BY JURY OR HAS TAKEN ANY ACTIONS WHICH IN ANY WAY MODIFY OR NULLIFY ITS EFFECT. GRANTOR, LENDER AND AGENT ACKNOWLEDGE THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH OF THEM HAS ALREADY RELIED ON THIS WAIVER IN ENTERING INTO

THIS DEED OF TRUST AND THAT EACH OF THEM WILL CONTINUE TO RELY ON THIS WAIVER IN THEIR RELATED FUTURE DEALINGS. GRANTOR, LENDER AND AGENT FURTHER ACKNOWLEDGE THAT THEY HAVE BEEN REPRESENTED (OR HAVE HAD THE OPPORTUNITY TO BE REPRESENTED) IN THE SIGNING OF THIS DEED OF TRUST AND IN THE MAKING OF THIS WAIVER BY INDEPENDENT LEGAL COUNSEL.

29.    Tenants' Financial Statements.    Grantor shall deliver to Agent, promptly upon its receipt thereof, any and all financial statements and other reports, notices or documents delivered to Grantor by Tenants.

30.    Acceptance of Trust.    Trustee hereby accepts the trust created by this Deed of Trust, upon the terms and subject to the conditions set forth herein, including the following:

        (a)   Trustee assumes no responsibility for and makes no warranties whatsoever as to (i) the description, identification or value of any or all of the Property, (ii) the validity of Loan Documents, (iii) Grantor's present or future financial condition, or (iv) the validity or collectibility of the Note.

        (b)   Trustee (i) may exercise Trustee's powers and perform Trustee's duties hereunder by or through such attorneys or agents and servants as they shall appoint, and (ii) shall not be answerable or liable (1) for the acts, negligence or default of any such attorney, agent or servant which they may so appoint, so long as they select them with reasonable care, or (2) for any act or omission of Lender, or (3) for any other cause arising under this Deed of Trust or otherwise, except for Trustee's own willful misconduct.

        (c)   Trustee, in Trustee's discretion may consult with legal counsel to be selected and employed by them, and Trustee shall incur no liability to Grantor, Agent or any other person by reason of anything done, suffered to be done or omitted to be done by Trustee in accordance with the opinion of such counsel.

        (d)   Trustee shall not be under any obligation to sell any or all of the Property upon a default hereunder, or to take any other action authorized to be taken by Trustee in the event of any default hereunder, except upon the written demand of Agent furnishing security or indemnity satisfactory to Trustee against costs, expenses, and liabilities incurred or which may be incurred in selling the Property or taking such other action authorized to be taken by Trustee hereunder.

31.    Trustee Provisions.

        (a)   From time to time upon written request of Lender and presentation of this Deed of Trust for endorsement and without affecting the personal liability of any person for payment of the indebtedness evidenced by the Note or performance of the obligations under the Loan Documents, Trustee may, without liability therefor and without notice: reconvey all or any part of the Property; consent to the making of any map or plat thereof; join in granting any easement thereon; join in any declaration of covenants and restrictions; or join in any extension agreement or any agreement subordinating the lien or charge hereof. Trustee or Lender may from time to time apply in any court of competent jurisdiction for aid and direction in the execution of the trusts hereunder and the enforcement of the rights and remedies available hereunder, and Trustee or Lender may obtain orders or decrees directing or confirming or approving acts in the execution of such trusts and the enforcement of such remedies. Trustee has no obligation to notify any party of any pending sale or any action or proceeding unless held or commenced and maintained by Trustee under this Deed of Trust. Borrower shall pay to Trustee reasonable compensation and reimbursement for services and expenses in the enforcement of the trusts created hereunder, including reasonable attorney's fees. Borrower shall indemnify Trustee and Lender against all losses, claims, demands and liabilities which either may incur, suffer or sustain in the execution of the trusts created hereunder or in the performance of any act required or permitted hereunder or by law.

        (b)   From time to time, by a writing signed by Lender, Lender may appoint another trustee to act in the place and stead of Trustee or any successor, with the same effect as if originally named Trustee herein.

32.    Lender's Lien for Service Charge and Expenses.    At all times, regardless of whether any Loan proceeds have been disbursed, this Deed of Trust secures (in addition to any Loan proceeds disbursed from time to time) the payment of any and all loan commissions, service charges, liquidated damages, expenses and advances due to or incurred by Lender not to exceed the maximum amount secured hereby.

33.    Hazardous Materials Representations, Warranties and Covenants.

        (a)   Borrower covenants and agrees that it (a) shall not use, generate, store or allow to be generated, stored or used, any Hazardous Materials (as hereinafter defined) on the Property, except in the ordinary course of Borrower's business and in accordance with all Hazardous Materials Laws (as hereinafter defined), (b) shall at all times maintain the Property in full compliance with all applicable Hazardous Materials Laws, including timely remediating the Property if and when required, and (c) shall comply with all provisions of the relating to environmental matters.

        (b)   Borrower shall promptly notify Lender in writing of (i) any investigation, claim or other proceeding by any party caused or threatened in connection with any Hazardous Materials on the Property, or the failure or alleged failure of the Property to comply with any applicable Hazardous Materials Laws, or (ii) Borrower's discovery of any condition on or in the vicinity of the Property that could cause the Property to fail to comply with applicable Hazardous Materials Laws.

        (c)   Borrower represents and warrants to the best of its knowledge, and covenants that there are no, nor will there be, for as long as any indebtedness or obligations remain outstanding under the Loan, any Hazardous Materials generated, released, stored, buried or deposited over, beneath, in or upon the Project or any part thereof or on or beneath the surface of adjacent property, except as such Hazardous Materials may be generated, used, stored or transported in connection with the permitted uses of the Project or any part thereof and then only to the extent permitted by law after obtaining all necessary permits and licenses therefor. "Hazardous Materials" shall mean and include gasoline, any pollutants, flammables, explosives, petroleum (including crude oil) or any fraction thereof, radioactive materials, hazardous wastes, dangerous or toxic substances or related materials, polychlorinated biphenyls, including substances defined as or included in the definition of toxic or hazardous substances, wastes or materials under any federal, state or local laws, ordinances, regulations or guidances which relate to pollution, the environment or the protection of public health and safety, or limiting, prohibiting or otherwise regulating the presence, sale, recycling, generation, manufacture, use, transportation, disposal, release, storage, treatment of, or response or exposure to, toxic or hazardous substances, wastes or materials, and shall include Hazardous Substances, as defined by the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. §9601 et seq., any petroleum or petroleum products (excluding a small quantity of gasoline and oil used in maintenance equipment on the Property), asbestos or asbestos containing material, or any other hazardous substances, hazardous wastes or hazardous materials as defined by other Hazardous Materials Laws (as hereinafter defined). Such laws, ordinances and regulations, now or hereafter in effect, and as the same may be amended from time to time, are hereinafter collectively referred to as the "Hazardous Materials Laws."

        (d)   Borrower hereby represents, warrants and certifies to the best of its knowledge, based on due inquiry, that (a) there are no underground or above ground storage tanks or surface impoundments located on, under or about the Property or any part thereof that are subject to the notification requirements under Section 9002 of the Solid Waste Disposal Act, as now or hereafter amended (42 U.S.C. § 6991 or any other applicable Laws); and (b) there is no facility located on the Property or any part thereof that is subject to the reporting requirements of Section 312 of the Federal Emergency Planning and Community Right to Know Act of 1986 and the Federal regulations promulgated thereunder (42 U.S.C. § 11022).

34.    Delivery of Recorded Deed of Trust.    If California Civil Code Section 3110.5 is applicable to Borrower Parties in connection with the Loan, as soon as practicable following recordation of this Deed of Trust, Borrower shall delivery to any general contractor a copy of the recorded Deed of Trust, certified by the county recorder and shall otherwise fully comply with said Section 3110.5.

35.    Agent.    If pursuant to the provisions of the Loan Agreement, the Loan is evidenced by more than one note and such notes are held by more than one person or entity, then (i) as provided in Article 9 of the Loan Agreement, all grants of security interest provided herein in favor of Trustee shall automatically constitute grants in favor of Trustee for the benefit of each of the Co-Lenders (as defined in the Loan Agreement) and Agent (as defined in the Loan Agreement), and (ii) each grant of security interest provided herein shall be deemed to be repeated separately in favor of the Trustee for the benefit of the Agent and each of the Co-Lenders separately, as though the granting clauses were physically repeated in this instrument one time for each of such notes from time to time outstanding.

36.    No Merger.    No obligation of Grantor to pay fees or costs or to indemnify Lender shall merge into any final judgment of foreclosure, it being the intent of the parties that such obligations shall survive foreclosure.

37.    Entire Agreement.    This Deed of Trust constitutes the entire agreement of the parties with respect to the matters discussed herein. This Deed of Trust cannot be changed except by agreement, in writing, signed by Grantor and Agent.

38.    Limitation on Interest.    Grantor agrees to pay an effective rate of interest equal to the rate stated in the documents evidencing the Indebtedness plus any additional rate, if any, resulting from any charge or fee in the nature of interest paid or to be paid by Grantor in connection with the Indebtedness, or any benefit received or to be received by Agent, Lender or Trustee in connection with the Indebtedness.

39.    Request for Notice.    In accordance with California Civil Code Section 2924b, Trustor hereby requests a copy of any notice of default and any notice of sale hereunder be mailed to it at the address set forth on the cover page of this Deed of Trust.

[Signatures appear on the following page.]

        IN WITNESS WHEREOF, Grantor has executed this Deed of Trust or has caused the same to be executed by its duly authorized representatives as of the date first above written.

GRANTOR:
[NAME OF GRANTOR] LLC, a Nevada limited liability company
By:	The Ensign Group, Inc., a Delaware corporation, its sole member
	By:	/s/  GREGORY K. STAPLEY
	Name:	Gregory K. Stapley
	Its:	Vice President

(Signature Page to Deed of Trust ([NAME OF FACILITY], CA))

ACKNOWLEDGMENT

STATE OF	California
COUNTY OF	Orange

        On this 22 day of December, 2006, before me, Yolanda Villegas Staff, a Notary Public, personally appeared Gregory K. Stapley, the Vice President of The Ensign Group, Inc., a Delaware corporation, the sole member of [NAME OF GRANTOR], LLC, a Nevada limited liability company, who proved to me on the basis of satisfactory evidence to be the person whose name is subscribed to the within instrument and acknowledged to me that he executed the same in his authorized capacity, and that by his signature on the instrument, the person, or the entity upon behalf of which the person acted, executed the instrument.

        IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year last above written.

YOLANDA VILLEGAS STAFF
Commission # 156275
Notary Public—California
San Mateo County
My Comm. Expires May 27, 2009 /s/  YOLANDA VILLEGAS STAFF Notary Public

My Commission Expires:
May 27, 2009

(Signature Page to Deed of Trust ([NAME OF FACILITY], CA))

EXHIBIT A

Legal Description

SCHEDULE OF MATERIAL DIFFERENCES

NAME OF FACILITY	COUNTY	NAME OF GRANTOR	DATE OF LEASE AGREEMENT	NAME OF MASTER TENANT
Camarillo Care Center	Ventura	Granada Investments	August 23, 2005	Camarillo Community Care, Inc.
Upland Care and Rehabilitation Center	San Bernardino	Cedar Avenue Holdings	August 6, 2005	Upland Community, Inc.

EX-10.16

Exhibit 10.16

THIS DOCUMENT PREPARED
UNDER THE ASSISTANCE OF AN
ATTORNEY LICENSED IN THE
STATE OF [NAME OF STATE] AND AFTER

RECORDING RETURN TO:
Jami L. Brodey, Esq.
Goldberg, Kohn, Bell, Black,
Rosenbloom & Moritz, Ltd.
55 East Monroe Street
Suite 3700
Chicago, Illinois 60603

SPACE ABOVE THIS LINE FOR RECORDER'S USE

Loan Nos. 07-0004261
07-0024261
07-0034261
07-0044261

FIRST AMENDMENT TO [TITLE OF DOCUMENT AMENDED]
([NAME OF FACILITY], County of [NAME OF COUNTY], State of [NAME OF STATE])

        This FIRST AMENDMENT TO [TITLE OF DOCUMENT AMENDED] (this "Amendment") is made as of this 29th day of December, 2006, between [NAME OF GRANTOR], a Nevada limited liability company ("Grantor"), whose mailing address is c/o Ensign Facility Services, Inc., 27101 Puerta Real, Suite 450, Mission Viejo, California 92691 and GENERAL ELECTRIC CAPITAL CORPORATION, a Delaware corporation (in its individual capacity, "GECC"), whose mailing address is 2 Bethesda Metro Center, Suite 600, Bethesda, Maryland 20814, as agent (GECC in its capacity as agent, "Agent") for Lender (as defined below).

RECITALS

        A.    On or about June 30, 2006, Grantor, certain Affiliates of Grantor (the "Existing Borrowers"), GECC and Agent entered into a certain Second Amended and Restated Loan Agreement, pursuant to which the lenders thereunder agreed to make a loan (as amended, the "Existing Loan") to the Existing Borrowers. The Existing Loan is secured by, among other things, that certain [TITLE OF DOCUMENT AMENDED] dated as of [DATE OF DOCUMENT AMENDED], 2006 made by Grantor for the benefit of Agent and recorded on [DATE OF RECORDING], 2006 in the Official Records of [PLACE OF RECORD] (as amended, the "Deed of Trust"). The Deed of Trust encumbers certain property more particularly defined therein including the parcel of land which is legally described in Exhibit A attached hereto.

        B.    Concurrently herewith, Lender has agreed, subject to the terms and conditions of that certain Third Amended and Restated Loan Agreement dated of even date herewith (said Third Amended and Restated Loan Agreement, as amended from time to time being hereinafter referred to as the "Amended Loan Agreement"), executed by and among Grantor, certain Affiliates of Grantor (together with Grantor, the "Borrower Parties"), GECC and the other financial institutions who are or hereafter become parties to the Amended Loan Agreement (together with GECC, collectively or individually, as the context may require, as "Lender") and Agent, to amend and restate the terms of the Existing Loan and to make additional advances (the Existing Loan, as amended and restated, together with the additional advances to be made pursuant to the Amended Loan Agreement are collectively referred to herein as the "Amended Loan") to Borrower Parties. The Amended Loan is evidenced by that certain

Consolidated, Amended and Restated Promissory Note of even date herewith in the original principal amount of Sixty Four Million Six Hundred Ninety Two Thousand One Hundred Eleven and 67/100ths Dollars ($64,692,111.67) (together with all notes issued in full or partial replacements thereof, or in substitution or exchange therefor, and all amendments thereto, are hereinafter collectively referred to as the "Note"). The terms and provisions of the Amended Loan Agreement and the Note are hereby incorporated by reference in this Amendment.

        C.    Agent and Grantor wish to amend certain terms of the Deed of Trust to reflect to the terms of the Amended Loan Agreement and the Amended Loan.

AGREEMENTS

        Grantor and Agent agree as follows:

        1.     Unless otherwise defined herein or in the Deed of Trust, all capitalized terms used in this Amendment and in the Deed of Trust shall have the meanings ascribed to them in the Amended Loan Agreement.

        2.     Any reference in the Deed of Trust to the "Loan", the "Loan Agreement" and the "Note" (or "Notes") shall mean, respectively, the Amended Loan, the Amended Loan Agreement and Note, as each term is defined herein.

        3.     Any reference in the Deed of Trust to the Guaranty or the Environmental Indemnity Agreement shall mean, respectively, the Guaranty and the Environmental Indemnity Agreement as defined in the Amended Loan Agreement and any reference in the Deed of Trust to any "Loan Document" or the "Loan Documents" shall be references to such Loan Document or the Loan Documents as defined in the Amended Loan Agreement and amended to date.

        4.     Any reference in the Deed of Trust to the "Default Rate" shall mean the Default Rate as defined in the Amended Loan Agreement.

        5.     This Amendment shall be governed by and construed in accordance with the internal laws of the State of Illinois, except that the provisions of the laws of the State of [CHOICE OF LAW STATE] shall be applicable to the creation, perfection and enforcement of the lien created by the Deed of Trust and this Amendment.

        6.     The Deed of Trust shall remain in full force and effect in accordance with its terms as amended by this Amendment. Grantor hereby remakes, reaffirms and ratifies as of the date hereof, all of its representations, warranties, agreements, obligations and undertakings under the Deed of Trust.

        7.     This Amendment may be executed in one or more counterparts, which, taken together, shall constitute one and the same instrument.

[SIGNATURES ON THE FOLLOWING PAGE]

        IN WITNESS WHEREOF, Grantor and Agent have executed this Amendment or have caused the same to be executed by its duly authorized representatives as of the date first above written.

GRANTOR:
[NAME OF GRANTOR], a Nevada limited liability company
By:	The Ensign Group, Inc., a Delaware corporation, its [MEMBER STATUS] member
	By:	/s/  [SIGNATORY]
	Name: [SIGNATORY] Its: [TITLE]
AGENT:
GENERAL ELECTRIC CAPITAL CORPORATION, a Delaware corporation
By:	/s/  JIM MCMAHON
Name: Jim McMahon Its: Vice President & Duly Authorized Signatory

(Signature Page to 1^st Amendment to [TITLE OF DOCUMENT AMENDED] ([NAME OF FACILITY], [NAME OF STATE]))

ACKNOWLEDGMENT

STATE OF California

COUNTY OF Orange

        On this 22 day of December, 2006, before me, the undersigned officer, personally appeared [SIGNATORY], personally known to me, or proved to me on the basis of satisfactory evidence, and who acknowledged that he is the [TITLE] of The Ensign Group, Inc., a Delaware corporation, the [MEMBER STATUS] member of [NAME OF GRANTOR], a Nevada limited liability company, and that as such officer, being duly authorized to do so pursuant to the company's bylaws or a resolution of its board of directors, executed, subscribed and acknowledged the foregoing instrument for the purposes therein contained, by signing the name of the company by himself in his authorized capacity as such officer, as his free and voluntary act and deed and the free and voluntary act and deed of the company.

        IN WITNESS WHEREOF, I hereunto set my hand and official seal.

[NOTARIAL SEAL]	/s/  YOLANDA VILLEGAS STAFF Notary Public
YOLANDA VILLEGAS STAFF
Commission # 1562875
Notary Public—California	My Commission Expires:
San Mateo County
My Comm. Expires May 27, 2009	May 27, 2009

(Acknowledgment Page to 1st Amendment to [TITLE OF DOCUMENT AMENDED] ([NAME OF FACILITY], [NAME OF STATE]))

ACKNOWLEDGMENT

STATE OF IL

COUNTY Cook

        On this 27 day of December, 2006, before me, the undersigned officer, personally appeared Jim McMahon, personally known to me, or proved to me on this basis of satisfactory evidence, and who acknowledged that he is the VP of GENERAL ELECTRIC CAPITAL CORPORATION, and that as such officer, being duly authorized to do so pursuant to the company's bylaws or a resolution of its board of directors, executed., subscribed and acknowledged the foregoing instrument for the purposes therein contained, by signing the name of the company by himself in his authorized capacity as such officer, as his free and voluntary act and deed and the free and voluntary act and deed of the company.

        IN WITNESS WHEREOF, I hereunto set my hand and official seal.

[NOTARIAL SEAL]	/s/  CATHERINE M CARELLA Notary Public
OFFICIAL SEAL
CATHERINE M CARELLA
Notary Public—State of Illinois	My Commission Expires:
My Commission Expires Jun 15, 2009
	June 15, 2009

(Acknowledgment Page to 1st Amendment to [TITLE OF DOCUMENT AMENDED] ([NAME OF FACILITY], [NAME OF STATE]))

SCHEDULE OF MATERIAL DIFFERENCES

NAME OF FACILITY	NAME OF STATE	TITLE OF DOCUMENT AMENDED	NAME OF COUNTY	NAME OF GRANTOR	DATE OF DOCUMENT AMENDED
Desert Terrace Nursing Center	Arizona	AMENDED AND RESTATED DEED OF TRUST, ASSIGNMENT OF RENTS, SECURITY AGREEMENT AND FIXTURE FINANCING STATEMENT	Maricopa	TERRACE HOLDINGS AZ LLC	June 30
Desert Sky Nursing Home	Arizona	AMENDED AND RESTATED DEED OF TRUST, ASSIGNMENT OF RENTS, SECURITY AGREEMENT AND FIXTURE FINANCING STATEMENT	Maricopa	SKY HOLDINGS AZ LLC	June 30
Highland Manor Health and Rehabilitation Center	Arizona	AMENDED AND RESTATED DEED OF TRUST, ASSIGNMENT OF RENTS, SECURITY AGREEMENT AND FIXTURE FINANCING STATEMENT	Maricopa	ENSIGN HIGHLAND LLC	June 30
North Mountain Medical and Rehabilitation Center	Arizona	AMENDED AND RESTATED DEED OF TRUST, ASSIGNMENT OF RENTS, SECURITY AGREEMENT AND FIXTURE FINANCING STATEMENT	Maricopa	VALLEY HEALTH HOLDINGS LLC	June 30
Catalina Care and Rehabilitation Center	Arizona	DEED OF TRUST, ASSIGNMENT OF RENTS, SECURITY AGREEMENT AND FIXTURE FINANCING STATEMENT	Pima	RILLITO HOLDINGS LLC	June 30
Park Manor	Washington	DEED OF TRUST, ASSIGNMENT OF RENTS, SECURITY AGREEMENT AND FIXTURE FINANCING STATEMENT	Walla Walla	PLAZA HEALTH HOLDINGS LLC	June 30
Park View Gardens at Montgomery	California	DEED OF TRUST, ASSIGNMENT OF RENTS, SECURITY AGREEMENT AND FIXTURE FINANCING STATEMENT	Sonoma	MOUNTAINVIEW COMMUNITYCARE LLC	October 16
Sabino Canyon Rehabilitation and Care Center	Arizona	DEED OF TRUST, ASSIGNMENT OF RENTS, SECURITY AGREEMENT AND FIXTURE FINANCING STATEMENT	Pima	MEADOWBROOK HEALTH ASSOCIATES LLC	October 16

NAME OF FACILITY	DATE OF RECORDING	PLACE OF RECORD	CHOICE OF LAW STATE	MEMBER STATUS	SIGNATORY	TITLE
Desert Terrace Nursing Center	July 3	the Maricopa County Recorder as Document No. 20060892456	Arizona	sole	Gregory K. Stapley	Vice President
Desert Sky Nursing Home	July 3	the Maricopa County Recorder as Document No. 20060892458	Arizona	sole	Alan Norman	CFO
Highland Manor Health and Rehabilitation Center	July 3	the Maricopa County Recorder as Document No. 20060892460	Arizona	sole	Gregory K. Stapley	Vice President
North Mountain Medical and Rehabilitation Center	July 3	the Maricopa County Recorder as Document No. 20060892453	Arizona	sole	Gregory K. Stapley	Vice President
Catalina Care and Rehabilitation Center	June 30	the Pima County Recorder in Docket No. 12837, Page 4612	Arizona	managing	Gregory K. Stapley	Vice President
Park Manor	August 19	the Walla Walla County Recorder as Document 2006-09502	Arizona	sole	Gregory K. Stapley	Vice President
Park View Gardens at Montgomery	October 18	Sonoma County as Document No. 2006128240	California	sole	Gregory K. Stapley	Vice President
Sabino Canyon Rehabilitation and Care Center	October 17	the Pima County Recorder as Docket No. 12911, Page No. 421 and re-recorded on December 5, 2006 in the official Records of the Pima County Recorder as Document No. 12944, and Page No. 421	Arizona	sole	Gregory K. Stapley	Vice President

EX-10.19

Exhibit 10.19

SECOND AMENDED AND RESTATED
REVOLVING CREDIT NOTE

$20,000,000.00 December 3, 2004

FOR VALUE RECEIVED, each of the undersigned THE ENSIGN GROUP, INC., a Delaware corporation, ENSIGN WHITTIER WEST LLC, a Nevada limited liability company, ENSIGN WHITTIER EAST LLC, a Nevada limited liability company, ENSIGN SANTA ROSA LLC, a Nevada limited liability company, and ENSIGN PANORAMA LLC, a Nevada limited liability company, ENSIGN SABINO LLC, a Nevada limited liability company, ENSIGN SAN DIMAS LLC, a Nevada limited liability company, ENSIGN MONTGOMERY LLC, a Nevada limited liability company, ENSIGN CLOVERDALE LLC, a Nevada limited liability company, ENSIGN PALM I LLC, a Nevada limited liability company, ENSIGN SONOMA LLC, a Nevada limited liability company, ENSIGN WILLITS LLC, a Nevada limited liability company, ENSIGN PLEASANTON LLC, a Nevada limited liability company, 24th STREET HEALTHCARE ASSOCIATES LLC, a Nevada limited liability company, GLENDALE HEALTHCARE ASSOCIATES LLC, a Nevada limited liability company, ATLANTIC MEMORIAL HEALTHCARE ASSOCIATES,  INC., a Nevada corporation, and ROSE PARK HEALTHCARE ASSOCIATES, INC., a Nevada corporation, LEMON GROVE HEALTH ASSOCIATES LLC, a Nevada limited liability company, PRESIDIO HEALTH ASSOCIATES LLC, a Nevada limited liability company, BELL VILLA CARE ASSOCIATES LLC, a Nevada limited liability company, DOWNEY COMMUNITY CARE LLC, a Nevada limited liability company, COSTA VICTORIA HEALTHCARE LLC, a Nevada limited liability company, WEST ESCONDIDO HEALTHCARE LLC, a Nevada limited liability company, REDBROOK HEALTHCARE ASSOCIATES LLC, a Nevada limited liability company, HB HEALTHCARE ASSOCIATES LLC, a Nevada limited liability company, NORTH MOUNTAIN HEALTHCARE LLC, a Nevada limited liability company, PARK WAVERLY HEALTHCARE LLC, a Nevada limited liability company, SUNLAND HEALTH ASSOCIATES LLC, a Nevada limited liability company, VISTA WOODS HEALTH ASSOCIATES LLC, a Nevada limited liability company, CITY HEIGHTS HEALTH ASSOCIATES LLC, a Nevada limited liability company, CLAREMONT FOOTHILLS HEALTH ASSOCIATES LLC, a Nevada limited liability company, C STREET HEALTH ASSOCIATES LLC, a Nevada limited liability company, and VICTORIA VENTURA HEALTHCARE LLC, a Nevada limited liability company (collectively and individually, "Continuing Borrower"), RADIANT HILLS HEALTH ASSOCIATES LLC, a Nevada limited liability company, HIGHLAND HEALTHCARE LLC, a Nevada limited liability company, GATE THREE HEALTHCARE LLC, a Nevada limited liability company, SOUTHLAND MANAGEMENT LLC, a Nevada limited liability company, MANOR PARK HEALTHCARE LLC, a Nevada limited liability company, NORTHERN OAKS HEALTHCARE, INC., a Nevada corporation, SALADO CREEK SENIOR CARE, INC., a Nevada corporation, MCALLEN COMMUNITY HEALTHCARE,  INC., a Nevada corporation, WELLINGTON HEALTHCARE, INC., a Nevada corporation ("New Borrower", and together with Continuing Borrower, "Borrower"), jointly and severally, promises to pay, in lawful money of the United Stares, to the order of GENERAL ELECTRIC CAPITAL CORPORATION, a Delaware corporation (together with its successors and assigns, "Lender"), the principal sum of TWENTY MILLION and No/100 Dollars ($20,000,000.00), or so much of such principal sum as shall be advanced or readvanced and shall remain unpaid under the Loan established pursuant to that certain Amended and Restated Loan and Security Agreement dated as of March 25, 2004, as amended, by and among Borrower and Lender. This Second Amended and Restated Revolving Credit Note (this "Note") amends and restates in its entirety the Amended and Restated Revolving Credit Note dated February 28, 2004 (the "Original Note"), made previously by Continuing Borrower and Ensign Highland LLC and payable to Lender in the principal amount of $20,000,000.00. This Note shall not be construed or interpreted as a novation of the indebtedness evidenced by the Original Note or any predecessor note.

        1.     All capitalized terms used and not otherwise specifically defined in this Note shall have the meanings given to them in the Loan Agreement.

        2.     This Note shall evidence the undersigned's obligation to repay all sums advanced by Lender from time to time under the Loan Agreement and as part of the Loan. The actual amount due and owing from time to time under this Note shall be evidenced by Lender's records of receipts and disbursements with respect to the Loan, which shall be conclusive evidence of that amount, absent manifest error.

        3.     Interest due pursuant to this Note shall be payable monthly, in arrears, on the first Business Day of each month after the date of this Note (for the previous month).

4.     This Note shall become due and payable upon the earlier to occur of (a) the expiration of the Term, or (b) the occurrence of any Event of Default under the Loan Agreement, or any other event under any other Loan Documents which would result in this Note becoming due and payable. At such time, the entire principal balance of this Note and all other fees, costs and expenses, if any, shall be due and payable in full. Lender shall then have the option at any time and from time to time to exercise all of the rights and remedies set forth in this Note and in the other Loan Documents, as well as all rights and remedies otherwise available to Lender at law or in equity, to collect the unpaid indebtedness under this Note and the other Loan Documents. This Note is secured by the Collateral, as defined in and described in the Loan Agreement.

5.     Whenever any principal and/or interest and/or fee under this Note shall not be paid when due, whether at the stated maturity or by acceleration, interest on such unpaid amounts shall thereafter be payable at a rate per annum equal to five (5) percentage points above the stated rate of interest on this Note until such amounts shall be paid.

6.     The undersigned and Lender intend to conform strictly to the applicable usury laws in effect from time to time during the term of the Loan. Accordingly, if any transaction contemplated by the Loan Agreement or this Note would be usurious under such laws, then notwithstanding any other provision hereof: (a) the aggregate of all interest that is contracted for, charged, or received under this Note or under any other Loan Document shall not exceed the maximum amount of interest allowed by applicable law, and any excess shall be promptly credited to the undersigned by Lender (or, to the extent that such consideration shall have been paid, such excess shall be promptly refunded to the undersigned by Lender); (b) neither the undersigned nor any other Person (as defined in the Loan Agreement) now or hereafter liable hereunder shall be obligated to pay the amount of such interest to the extent that it is in excess of the maximum interest permitted by applicable law; and (c) the effective rate of interest shall be reduced to the Highest Lawful Rate (as defined in the Loan Agreement). All sums paid, or agreed to be paid, to Lender for the use, forbearance, and detention of the debt of Borrower to Lender shall, to the extent permitted by applicable law, be allocated throughout the full term of this Note until payment is made in full so that the actual rate of interest does not exceed the Highest Lawful Rate in effect at any particular time during the full term thereof. If at any time the rate of interest under this Note exceeds the Highest Lawful Rate, the rate of interest to accrue pursuant to this Note shall be limited, notwithstanding anything to the contrary in this Note, to the Highest Lawful Rate, but any subsequent reductions in the Base Rate shall not reduce the interest to accrue pursuant to this Note below the Highest Lawful Rate until the total amount of interest accrued equals the amount of interest that would have accrued if a varying rate per annum equal to the interest rate under the Note had at all times been in effect. If the total amount of interest paid or accrued pursuant to this Note under the foregoing provisions is less than the total amount of interest that would have accrued if a varying rate per annum equal to the interest rate under this Note had been in effect, then the undersigned agrees to pay to Lender an amount equal to the difference between (x) the lesser of (A) the amount of interest that would have accrued if the Highest Lawful Rate had at all times been in effect, or (B) the amount of interest that would have accrued if a varying rate per annum equal to the interest rate under the Note had at all times been in effect, and (y) the amount of interest accrued in accordance with the other provisions of this Note and the Loan Agreement.

7.     This Note is the "Note" referred to in the Loan Agreement, and is issued pursuant to the Loan Agreement. Reference is made to the Loan Agreement for a statement of the additional rights and obligations of the undersigned and Lender. In the event of any conflict between the terms of this Note and the terms of the Loan Agreement, the terms of the Loan Agreement shall prevail. All of the terms, covenants, provisions, conditions, stipulations, promises and agreements contained in the Loan Documents to be kept, observed and/or performed by the undersigned are made a part of this Note and are incorporated into this Note by this reference to the same extent and with the same force and effect as if they were fully set forth in this Note; the undersigned promises and agrees to keep, observe and perform them or cause them to be kept, observed and performed, strictly in accordance with the terms and provisions thereof.

8.     Each party liable on this Note in any capacity, whether as maker, endorser, surety, guarantor or otherwise, (a) waives presentment for payment, demand, protest and notice of presentment, notice of protest, notice of non-payment and notice of dishonor of this debt and each and every other notice of any kind respecting this Note and all lack of diligence or delays in collection or enforcement hereof; (b) agrees that Lender at any time or times, without notice to the undersigned or its consent, may grant extensions of time, without limit as to the number of the aggregate period of such extensions, for the payment of any principal, interest or other sums due hereunder; (c) to the extent permitted by law, waives all exemptions under the laws of the State of Maryland and/or any state or territory of the United States; (d) to the extent permitted by law, waives the benefit of any law or rule of law intended for its advantage or protection as an obligor under this Note or providing for its release or discharge from liability on this Note, in whole or in part, on account of any facts or circumstances other than full and complete payment of all amounts due under this Note; and (e) agrees to pay, in addition to all other sums of money due, all cost of collection and attorney's fees, whether suit be brought or not, if this Note is not paid in full when due, whether at the stated maturity or by acceleration.

9.     No waiver by Lender of any one or more defaults by the undersigned in the performance of any of its obligations under this Note shall operate or be construed as a waiver of any future default or defaults, whether of a like or different nature. No failure or delay on the part of Lender in exercising any right, power or remedy under this Note (including, without limitation, the right to declare this Note due and payable) shall operate as a waiver of such right, power or remedy nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise of such right, power or remedy or the exercise of any other right, power or remedy.

        10.   If any term, provision, covenant or condition of this Note or the application of any term, provision, covenant or condition of this Note to any party or circumstance shall be found by a court of competent jurisdiction to be, to any extent, invalid or unenforceable, then the remainder of this Note and the application of such term, provision, covenant, or condition to parties or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby, and each term, provision, covenant or condition shall be valid and enforced to the fullest extent permitted by law. Upon determination that any such term, provision, covenant or condition is invalid, illegal or unenforceable, Lender may, but is not obligated to, advance funds to Borrower under this Note until Borrower and Lender amend this Note so as to effect the original intent of the parties as closely as possible in a valid and enforceable manner.

        11.   No amendment, supplement or modification of this Note nor any waiver of any provision of this Note shall be made except in writing executed by the party against whom enforcement is sought.

        12.   This Note shall be binding upon the undersigned and its successors and assigns. Notwithstanding the foregoing, the undersigned may not assign any of its rights or delegate any of its obligations under this Note without the prior written consent of Lender, which may be withheld in its sole discretion.

        13.   Each entity constituting Borrower shall be jointly and severally liable for all of the obligations of Borrower under this Note.

14.   THIS NOTE IS TO BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF MARYLAND WITHOUT RESPECT TO ANY OTHERWISE APPLICABLE CONFLICTS-OF-LAWS PRINCIPLES, BOTH AS TO INTERPRETATION AND PERFORMANCE, AND THE PARTIES EXPRESSLY CONSENT AND AGREE TO THE NON-EXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE OF MARYLAND AND THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MARYLAND AND TO THE LAYING OF VENUE IN THE STATE OF MARYLAND, WAIVING ALL CLAIMS OR DEFENSES BASED ON LACK OF PERSONAL JURISDICTION, IMPROPER VENUE, INCONVENIENT FORUM OR THE LIKE. BORROWER HEREBY CONSENTS TO SERVICE OF PROCESS BY MAILING A COPY OF THE SUMMONS TO BORROWER, BY CERTIFIED OR REGISTERED MAIL, POSTAGE PREPAID, TO BORROWER'S ADDRESS SET FORTH IN SECTION 9.4 OF THE LOAN AGREEMENT. BORROWER FURTHER WAIVES ANY CLAIM FOR CONSEQUENTIAL DAMAGES IN RESPECT OF ANY ACTION TAKEN OR OMITTED TO BE TAKEN BY LENDER IN GOOD FAITH.

15.   IN ANY LITIGATION, TRIAL, ARBITRATION OR OTHER DISPUTE RESOLUTION PROCEEDING RELATING TO THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS, ALL DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS OF BORROWER OR OF ITS AFFILIATES SHALL BE DEEMED TO BE EMPLOYEES OR MANAGING AGENTS OF BORROWER FOR PURPOSES OF ALL APPLICABLE LAW OR COURT RULES REGARDING THE PRODUCTION OF WITNESSES BY NOTICE FOR TESTIMONY (WHETHER IN A DEPOSITION, AT TRIAL OR OTHERWISE). BORROWER AGREES THAT LENDER'S COUNSEL IN ANY SUCH DISPUTE RESOLUTION PROCEEDING MAY EXAMINE ANY OF THESE INDIVIDUALS AS IF UNDER CROSS-EXAMINATION AND THAT ANY DISCOVERY DEPOSITION OF ANY OF THEM MAY BE USED IN THAT PROCEEDING AS IF IT WERE AN EVIDENCE DEPOSITION. BORROWER IN ANY EVENT WILL USE ALL COMMERCIALLY REASONABLE EFFORTS TO PRODUCE IN ANY SUCH DISPUTE RESOLUTION PROCEEDING, AT THE TIME AND IN THE MANNER REQUESTED BY LENDER, ALL PERSONS, DOCUMENTS (WHETHER IN TANGIBLE, ELECTRONIC OR OTHER FORM) OR OTHER THINGS UNDER ITS CONTROL AND RELATING TO THE DISPUTE IN ANY JURISDICTION THAT RECOGNIZES THAT (OR ANY SIMILAR) DISTINCTION.

16.   THE UNDERSIGNED HEREBY (A) COVENANTS AND AGREES NOT TO ELECT A TRIAL BY JURY OF ANY ISSUE TRIABLE OF RIGHT BY A JURY, AND (B) WAIVES ANY RIGHT TO TRIAL BY JURY FULLY TO THE EXTENT THAT ANY SUCH RIGHT SHALL NOW OR HEREAFTER EXIST. THIS WAIVER OF RIGHT TO TRIAL BY JURY IS GIVEN KNOWINGLY AND VOLUNTARILY BY THE UNDERSIGNED, AND THIS WAIVER IS INTENDED TO ENCOMPASS INDIVIDUALLY EACH INSTANCE AND EACH ISSUE AS TO WHICH THE RIGHT TO A JURY TRIAL WOULD OTHERWISE ACCRUE. LENDER IS HEREBY AUTHORIZED AND REQUESTED TO SUBMIT THIS NOTE TO ANY COURT HAVING JURISDICTION OVER THE SUBJECT MATTER AND THE PARTIES HERETO, SO AS TO SERVE AS CONCLUSIVE EVIDENCE OF THE UNDERSIGNED'S WAIVER OF THE RIGHT TO JURY TRIAL. FURTHER, THE UNDERSIGNED HEREBY CERTIFIES THAT NO REPRESENTATIVE OR AGENT OF LENDER (INCLUDING LENDER'S COUNSEL) HAS REPRESENTED, EXPRESSLY OR OTHERWISE, TO ANY BORROWER THAT LENDER WILL NOT SEEK TO ENFORCE THIS WAIVER OF RIGHT TO JURY TRIAL PROVISION.

17.   THE UNDERSIGNED HEREBY AUTHORIZES ANY ATTORNEY ADMITTED TO PRACTICE BEFORE ANY COURT OF RECORD IN THE UNITED STATES OR THE CLERK OF SUCH COURT TO APPEAR ON BEHALF OF THE UNDERSIGNED IN ANY COURT IN ONE OR MORE PROCEEDINGS, OR BEFORE ANY CLERK THEREOF OF PROTHONOTARY OR OTHER COURT OFFICIAL, AND TO CONFESS JUDGMENT AGAINST THE UNDERSIGNED IN FAVOR OF LENDER IN THE FULL AMOUNT DUE ON THIS NOTE (INCLUDING PRINCIPAL, ACCRUED INTEREST AND ANY AND ALL CHARGES, FEES AND COSTS) PLUS ATTORNEYS' FEES EQUAL TO FIFTEEN PERCENT (15%) OF THE AMOUNT DUE, PLUS COURT COSTS, ALL WITHOUT PRIOR NOTICE OR OPPORTUNITY OF BORROWER FOR PRIOR HEARING. THE

UNDERSIGNED AGREES AND CONSENTS THAT VENUE AND JURISDICTION SHALL BE PROPER IN THE CIRCUIT COURT OF ANY COUNTY OF THE STATE OF MARYLAND OR OF BALTIMORE CITY, MARYLAND, OR IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MARYLAND. THE UNDERSIGNED WAIVES THE BENEFIT OF ANY AND EVERY STATUTE, ORDINANCE, OR RULE OF COURT WHICH MAY BE LAWFULLY WAIVED CONFERRING UPON BORROWER ANY RIGHT OR PRIVILEGE OF EXEMPTION, HOMESTEAD RIGHTS, STAY OF EXECUTION, OR SUPPLEMENTARY PROCEEDINGS, OR OTHER RELIEF FROM THE ENFORCEMENT OR IMMEDIATE ENFORCEMENT OF A JUDGMENT OR RELATED PROCEEDINGS ON A JUDGMENT. THE AUTHORITY AND POWER TO APPEAR FOR AND ENTER JUDGMENT AGAINST THE UNDERSIGNED SHALL NOT BE EXHAUSTED BY ONE OR MORE EXERCISES THEREOF, OR BY ANY IMPERFECT EXERCISE THEREOF, AND SHALL NOT BE EXTINGUISHED BY ANY JUDGMENT ENTERED PURSUANT THERETO; SUCH AUTHORITY AND POWER MAY BE EXERCISED ON ONE OR MORE OCCASIONS FROM TIME TO TIME, IN THE SAME OR DIFFERENT JURISDICTIONS, AS OFTEN AS LENDER SHALL DEEM NECESSARY, CONVENIENT, OR PROPER.

[SIGNATURES FOLLOW]

        IN WITNESS WHEREOF, the undersigned have executed this Note as of the date first above written.

		BORROWER:
ATTEST/WITNESS:		THE ENSIGN GROUP, INC. a Delaware corporation
By:	/s/  ALAN J. NORMAN Alan J. Norman Vice President	By:	/s/  CHRISTOPHER R. CHRISTENSEN Christopher R. Christensen President
		ENSIGN WHITTIER WEST LLC ENSIGN WITTIER EAST LLC ENSIGN SANTA ROSA LLC ENSIGN PANORAMA LLC ENSIGN SAN DIMAS LLC ENSIGN SABINO LLC ENSIGN MONTGOMERY LLC ENSIGN CLOVERDALE LLC ENSIGN PALM I LLC ENSIGN SONOMA LLC ENSIGN WILLITS LLC ENSIGN PLEASANTON LLC 24TH STREET HEALTHCARE ASSOCIATES LLC GLENDALE HEALTHCARE ASSOCIATES LLC each, a Nevada limited liability company
ATTEST/WITNESS:		By:	The Ensign Group, Inc. Its Sole Member
By:	/s/  ALAN J. NORMAN Alan J. Norman Vice President	By:	/s/  CHRISTOPHER R. CHRISTENSEN Christopher R. Christensen President
		ATLANTIC MEMORIAL HEALTHCARE ASSOCIATES, INC.
ATTEST/WITNESS:		ROSE PARK HEALTHCARE ASSOCIATES, INC. each, a Nevada corporation
By:	/s/  ALAN J. NORMAN Alan J. Norman Vice President	By:	/s/  CHRISTOPHER R. CHRISTENSEN Christopher R. Christensen President

		LEMON GROVE HEALTH ASSOCIATES LLC PRESIDIO HEALTH ASSOCIATES LLC BELL VILLA CARE ASSOCIATES LLC DOWNEY COMMUNITY CARE LLC COSTA VICTORIA HEALTHCARE LLC WEST ESCONDIDO HEALTHCARE LLC REDBROOK HEALTHCARE ASSOCIATES LLC HB HEALTHCARE ASSOCIATES LLC NORTH MOUNTAIN HEALTHCARE LLC PARK WAVERLY HEALTHCARE LLC SUNLAND HEALTH ASSOCIATES LLC VISTA WOODS HEALTH ASSOCIATES LLC CITY HEIGHTS HEALTH ASSOCIATES LLC CLAREMONT FOOTHILLS HEALTH ASSOCIATES LLC C STREET HEALTH ASSOCIATES LLC VICTORIA VENTURA HEALTH CARE LLC each, a Nevada limited liability company
ATTEST/WITNESS:		By:	The Ensign Group, Inc. Its Sole Member
By:	/s/  ALAN J. NORMAN Alan J. Norman Vice President	By:	/s/  CHRISTOPHER R. CHRISTENSEN Christopher R. Christensen President
		RADIANT HILLS HEALTH ASSOCIATES LLC HIGHLAND HEALTHCARE LLC GATE THREE HEALTHCARE LLC SOUTHLAND MANAGEMENT LLC MANOR PARK HEALTHCARE LLC each, a Nevada limited liability company
ATTEST/WITNESS:		By:	The Ensign Group, Inc. Its Sole Member
By:	/s/  ALAN J. NORMAN Alan J. Norman Vice President	By:	/s/  CHRISTOPHER R. CHRISTENSEN Christopher R. Christensen President
		NORTHERN OAKS HEALTHCARE, INC. SALADO CREEK SENIOR CARE, INC. MCALLEN COMMUNITY HEALTHCARE, INC.
ATTEST/WITNESS:		WELLINGTON HEALTHCARE, INC. each, a Nevada corporation
By:	/s/  ALAN J. NORMAN Alan J. Norman Vice President	By:	/s/  CHRISTOPHER R. CHRISTENSEN Christopher R. Christensen President

ACCEPTANCE BY LENDER:

        The undersigned, as the payee named in the Amended and Restated Revolving Credit Note dated as of February 28, 2004 (the "Original Note"), hereby consents to this Second Amended and Restated Revolving Credit Note (this "Note") and accepts this Note as an amendment to and restatement of the Original Note.

GE HFS HOLDINGS, INC. f/k/a Heller Healthcare Finance, Inc. a Delaware corporation
By:	/s/  DEBRA OWEN
Name:	Debra Owen
Title:	Duly Authorized Signatory

EX-10.21

Exhibit 10.21

$20,000,000.00

AMENDMENT NO. 3 TO

AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT

originally dated as of March 25, 2004 by and among

THE ENSIGN GROUP, INC., ENSIGN WHITTIER WEST LLC,
ENSIGN WHITTIER EAST LLC, ENSIGN SANTA ROSA LLC, ENSIGN PANORAMA LLC, ENSIGN
SABINO LLC, ENSIGN SAN DIMAS LLC, ENSIGN MONTGOMERY LLC,
ENSIGN PALM I LLC, ENSIGN SONOMA LLC, ENSIGN CLOVERDALE LLC,
ENSIGN WILLITS LLC, ENSIGN PLEASANTON LLC,
24^TH STREET HEALTHCARE ASSOCIATES LLC,
GLENDALE HEALTHCARE ASSOCIATES LLC,
ATLANTIC MEMORIAL HEALTHCARE ASSOCIATES, INC.,
ROSE PARK HEALTHCARE ASSOCIATES, INC.,
LEMON GROVE HEALTH ASSOCIATES LLC,
PRESIDIO HEALTH ASSOCIATES LLC, BELL VILLA CARE ASSOCIATES LLC,
DOWNEY COMMUNITY CARE LLC, COSTA VICTORIA HEALTHCARE LLC,
WEST ESCONDIDO HEALTHCARE LLC, REDBROOK HEALTHCARE ASSOCIATES LLC,
HB HEALTHCARE ASSOCIATES LLC, NORTH MOUNTAIN HEALTHCARE LLC,
PARK WAVERLY HEALTHCARE LLC, SUNLAND HEALTH ASSOCIATES LLC,
VISTA WOODS HEALTH ASSOCIATES LLC, CITY HEIGHTS HEALTH ASSOCIATES LLC,
CLAREMONT FOOTHILLS HEALTH ASSOCIATES LLC,
C STREET HEALTH ASSOCIATES LLC, VICTORIA VENTURA HEALTHCARE LLC
RADIANT HILLS HEALTH ASSOCIATES LLC, HIGHLAND HEALTHCARE LLC,
GATE THREE HEALTHCARE LLC, SOUTHLAND MANAGEMENT LLC,
MANOR PARK HEALTHCARE LLC, NORTHERN OAKS HEALTHCARE, INC.,
SALADO CREEK SENIOR CARE, INC., MCALLEN COMMUNITY HEALTHCARE, INC.,
WELLINGTON HEALTHCARE, INC.
(collectively, "Borrower")

and

GENERAL ELECTRIC CAPITAL CORPORATION
("Lender")

Amended as of June 22, 2007

AMENDMENT NO. 3 TO AMENDED AND
RESTATED LOAN AND SECURITY AGREEMENT

THIS AMENDMENT NO. 3 TO AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT (this "Amendment") is made as of this 22nd day of June 2007, by and among THE ENSIGN GROUP, INC., a Delaware corporation, ENSIGN WHITTIER WEST LLC, a Nevada limited liability company, ENSIGN WHITTIER EAST LLC, a Nevada limited liability company, ENSIGN SANTA ROSA LLC, a Nevada limited liability company, and ENSIGN PANORAMA LLC, a Nevada limited liability company, ENSIGN SABINO LLC, a Nevada limited liability company, ENSIGN SAN DIMAS LLC, a Nevada limited liability company, ENSIGN MONTGOMERY LLC, a Nevada limited liability company, ENSIGN CLOVERDALE LLC, a Nevada limited liability company, ENSIGN PALM I LLC, a Nevada limited liability company, ENSIGN SONOMA LLC, a Nevada limited liability company, ENSIGN WILLITS LLC, a Nevada limited liability company, ENSIGN PLEASANTON LLC, a Nevada limited liability company, 24^th STREET HEALTHCARE ASSOCIATES LLC, a Nevada limited liability company, GLENDALE HEALTHCARE ASSOCIATES LLC, a Nevada limited liability company, ATLANTIC MEMORIAL HEALTHCARE ASSOCIATES, INC., a Nevada corporation, and ROSE PARK HEALTHCARE ASSOCIATES, INC., a Nevada corporation, LEMON GROVE HEALTH ASSOCIATES LLC, a Nevada limited liability company, PRESIDIO HEALTH ASSOCIATES LLC, a Nevada limited liability company, BELL VILLA CARE ASSOCIATES LLC, a Nevada limited liability company, DOWNEY COMMUNITY CARE LLC, a Nevada limited liability company, COSTA VICTORIA HEALTHCARE LLC, a Nevada limited liability company, WEST ESCONDIDO HEALTHCARE LLC, a Nevada limited liability company, REDBROOK HEALTHCARE ASSOCIATES LLC, a Nevada limited liability company, HB HEALTHCARE ASSOCIATES LLC, a Nevada limited liability company, NORTH MOUNTAIN HEALTHCARE LLC, a Nevada limited liability company, PARK WAVERLY HEALTHCARE LLC, a Nevada limited liability company, SUNLAND HEALTH ASSOCIATES LLC, a Nevada limited liability company, VISTA WOODS HEALTH ASSOCIATES LLC, a Nevada limited liability company, CITY HEIGHTS HEALTH ASSOCIATES LLC, a Nevada limited liability company, CLAREMONT FOOTHILLS HEALTH ASSOCIATES LLC, a Nevada limited liability company, C STREET HEALTH ASSOCIATES LLC, a Nevada limited liability company, and VICTORIA VENTURA HEALTHCARE LLC, a Nevada limited liability company, RADIANT HILLS HEALTH ASSOCIATES LLC, a Nevada limited liability company, HIGHLAND HEALTHCARE LLC, a Nevada limited liability company, GATE THREE HEALTHCARE LLC, a Nevada limited liability company, SOUTHLAND MANAGEMENT LLC, Nevada limited liability company, MANOR PARK HEALTHCARE LLC, a Nevada limited liability company, NORTHERN OAKS HEALTHCARE, INC., a Nevada corporation, SALADO CREEK SENIOR CARE, INC., a Nevada corporation, McALLEN COMMUNITY HEALTHCARE,  INC., a Nevada corporation, WELLINGTON HEALTHCARE, INC., a Nevada corporation (collectively "Borrower"), and GENERAL ELECTRIC CAPITAL CORPORATION, a Delaware corporation ("Lender").

RECITALS

        A.    Pursuant to that certain Amended and Restated Loan and Security Agreement dated as of March 25, 2004 by and between Borrower and Lender (as amended, modified and restated from time to time, the "Loan Agreement"), the parties have established certain financing arrangements that allow funds to be borrowed from Lender in accordance with the terms and conditions set forth in the Loan Agreement.

        B.    The parties now desire to amend the Loan Agreement in accordance with the terms and conditions set forth below.

NOW, THEREFORE, in consideration of the premises set forth above, the terms and conditions contained in this Amendment, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties have agreed to the following amendments to the Loan Agreement. Capitalized terms used but not defined in this Amendment shall have the meanings that are set forth in the Loan Agreement.

1.Amendment to Loan Agreement    Section 2.8(a) of the Loan Agreement is hereby amended by deleting the existing Section 2.8(a) in its entirety and by inserting in lieu thereof the following new Section 2.8(a):

"(a) Subject to Lender's right to cease making Revolving Credit Loans to Borrower upon or after any Event of Default, this Agreement shall be in effect until August 1, 2007, unless terminated as provided in this Section 2.8 (the "Term"); provided, however, that notwithstanding anything set forth in this Agreement to the contrary (including, without limitation, Section 6.23), in no event shall Borrower be entitled to terminate this Agreement prior to the repayment in full of all amounts owed to Lender pursuant to the Real Estate Loan Documents."

2.Confirmation of Representations and Warranties.    Borrower hereby (a) confirms that all of the representations and warranties set forth in Article IV of the Loan Agreement are true and correct, and (b) specifically represents and warrants to Lender that it has good and marketable title to all of its respective Collateral, free and clear of any lien or security interest in favor of any other person or entity, except as identified in Schedule 1.39 and Schedule 4.19 to the Loan Agreement, each as updated, and as otherwise permitted pursuant to the Loan Agreement.

3.Effective Date.    This Amendment shall be effective Lender's receipt of this Amendment executed by a duly authorized member and/or officer of each Borrower.

4.Fees and Expenses    Borrower shall be responsible for the payment of all costs and expenses incurred by Lender in connection with the preparation of this Amendment including any and all fees and expenses of Lender's in-house counsel.

5.Updated Schedules.    As a condition precedent to Lender's agreement to enter into this Amendment, and in order for this Amendment to be effective, Borrower shall revise, update and deliver to Lender all Schedules to the Loan Agreement to update all information as necessary to make the Schedules previously delivered correct. Borrower hereby represents and warrants that the information set forth on the attached Schedules is true and correct as of the date of this Amendment. The attached Schedules are hereby incorporated into the Loan Agreement as if originally set forth therein.

6.Enforceability.    This Amendment constitutes the legal, valid and binding obligation of each Borrower and is enforceable against each such Borrower in accordance with its terms.

7.Reference to the Effect on the Loan Agreement.

        (a)   Upon the effectiveness of this Amendment, each reference in the Loan Agreement to "this Agreement," "hereunder," "hereof," "herein" or words of similar import shall mean and be a reference to the Loan Agreement as amended by this Amendment.

        (b)   Except as specifically amended above, the Loan Agreement and all other Loan Documents shall remain in full force and effect and are hereby ratified and confirmed.

        (c)   The execution, delivery and effectiveness of this Amendment shall not, except as expressly provided in this Amendment, operate as a waiver of any right, power or remedy of Lender, nor constitute a waiver of any provision of the Loan Agreement or any other documents, instruments and agreements executed or delivered in connection with the Loan Agreement.

        (d)   This Amendment (together with any other document executed in connection herewith) is not intended to be, nor shall it be construed as, a novation of the Loan Agreement.

8.Governing Law.    This Amendment shall be governed by and construed in accordance with the laws of the State of Maryland.

9.Headings.    Section headings in this Amendment are included for convenience of reference only and shall not constitute a part of this Amendment for any other purpose.

10.Counterparts.    This Amendment may be executed in counterparts, and such counterparts taken together shall be deemed to constitute one and the same instrument.

[SIGNATURES FOLLOW]

IN WITNESS WHEREOF, intending to be legally bound, the parties have caused this Amendment to be executed as of the date first written above.

LENDER:
GENERAL ELECTRIC CAPITAL CORPORATION a Delaware corporation
By:	/s/  MATTHEW SAWYER
Name:	Matthew Sawyer
Title:	Duly Authorized Signatory

		BORROWER:
ATTEST/WITNESS:		THE ENSIGN GROUP, INC. a Delaware corporation
By:	/s/  ALAN J. NORMAN, Alan J. Norman Vice President	By:	/s/  CHRISTOPHER R. CHRISTENSEN Christopher R. Christensen President
		ENSIGN WHITTIER WEST LLC ENSIGN WHITTIER EAST LLC ENSIGN PANORAMA LLC LEMON GROVE HEALTH ASSOCIATES LLC BELL VILLA CARE ASSOCIATES LLC DOWNEY COMMUNITY CARE LLC COSTA VICTORIA HEALTHCARE LLC WEST ESCONDIDO HEALTHCARE LLC HB HEALTHCARE ASSOCIATES LLC VISTA WOODS HEALTH ASSOCIATES LLC CITY HEIGHTS HEALTH ASSOCIATES LLC C STREET HEALTH ASSOCIATES LLC VICTORIA VENTURA HEALTH CARE LLC GATE THREE HEALTHCARE LLC SOUTHLAND MANAGEMENT LLC MANOR PARK HEALTHCARE LLC each, a Nevada limited liability company
ATTEST/WITNESS:		By:	The Flagstone Group, Inc. Its Sole Member
By:	/s/  SOON BURNAM Soon Burnam Treasurer	By:	/s/  V. JAY BRADY, V. Jay Brady President
		ENSIGN SANTA ROSA LLC ENSIGN MONTGOMERY LLC ENSIGN CLOVERDALE LLC ENSIGN SONOMA LLC ENSIGN WILLITS LLC ENSIGN PLEASANTON LLC each, a Nevada limited liability company
ATTEST/WITNESS:		By:	Northern Pioneer Healthcare, Inc. Its Sole Member
By:	/s/  SOON BURNAM Soon Burnam Treasurer	By:	/s/  CORY E. MONETTE Cory E. Monette President

		ENSIGN SAN DIMAS LLC ENSIGN PALM I LLC REDBROOK HEALTHCARE ASSOCIATES LLC CLAREMONT FOOTHILLS HEALTH ASSOCIATES LLC each, a Nevada limited liability company
ATTEST/WITNESS:		By:	Touchstone Care, Inc. Its Sole Member
By:	/s/  SOON BURNAM Soon Burnam Treasurer	By:	/s/  JOHN ALBRECHTSEN John Albrechtsen President
		ENSIGN SABINO LLC 24TH STREET HEALTHCARE ASSOCIATES LLC GLENDALE HEALTHCARE ASSOCIATES LLC PRESIDIO HEALTH ASSOCIATES LLC NORTH MOUNTAIN HEALTHCARE LLC PARK WAVERLY HEALTHCARE LLC SUNLAND HEALTH ASSOCIATES LLC RADIANT HILLS HEALTH ASSOCIATES LLC HIGHLAND HEALTHCARE LLC each, a Nevada limited liability company
ATTEST/WITNESS:		By:	Bandera Healthcare, Inc. Its Sole Member
By:	/s/  SOON BURNAM Soon Burnam Treasurer	By:	/s/  MICHAEL C. DALTON Michael C. Dalton President
		ATLANTIC MEMORIAL HEALTHCARE ASSOCIATES, INC. ROSE PARK HEALTHCARE ASSOCIATES, INC.
ATTEST/WITNESS:		each, a Nevada corporation
By:	/s/  SOON BURNAM Soon E. Burnam	By:	/s/  CHRISTOPHER R. CHRISTENSEN Christopher R. Christensen President
		NORTHERN OAKS HEALTHCARE, INC. SALADO CREEK SENIOR CARE, INC. MCALLEN COMMUNITY HEALTHCARE, INC. WELLINGTON HEALTHCARE, INC.
ATTEST/WITNESS:		each, a Nevada corporation
By:	/s/  SOON BURNAM Soon E. Burnam	By:	/s/  CHRISTOPHER R. CHRISTENSEN Christopher R. Christensen President

LIST OF SCHEDULES

Schedule 1.39—Permitted Liens

Schedule 4.1—Subsidiaries

Schedule 4.5—Litigation

Schedule 4.13—Non-Compliance with Law

Schedule 4.14—Environmental Matters

Schedule 4.15—Places of Business with patient census

Schedule 4.16—Licenses

Schedule 4.17—Stock Ownership

Schedule 4.19—Borrowings and Guarantees

Schedule 4.21—Trade Names

Schedule 4.22—Joint Ventures

Schedule 7.12—Transactions with Affiliates

EX-10.22

Exhibit 10.22

Capmark Loan #01-1017791

EXCEPTIONS TO NONRECOURSE GUARANTY

        THIS EXCEPTIONS TO NONRECOURSE GUARANTY ("Agreement") is entered into as of October     , 2006, by the undersigned ("Guarantor"), for the benefit of and in order to induce WELLS FARGO BANK, N.A. (formerly known as Norwest Bank Minnesota, National Association), as Trustee for GMAC Commercial Mortgage Securities, Inc., Mortgage Pass-Through Certificates, Series 1999-C 1 (the "Lender) to consent to the assumption of a loan in the original principal amount of $2,475,000.00 (the "Loan") by CHERRY HEALTH HOLDINGS, INC., a Nevada corporation (the "Borrower").

RECITALS

        A.    The Loan is evidenced by a Promissory Note from G&L Hoquiam, LLC ("Original Borrower") to GMAC Commercial Mortgage Corporation ("Former Lender") dated August 6, 1998 (the "Note"). The Loan is secured by a Deed of Trust and Security Agreement dated August 6, 1998 (the "Deed of Trust"), covering the property described in the Deed of Trust and located at 3035 Cherry Street, Hoquiam, Washington 98550 (the "Property").

        B.    The Note, as may be amended from time to time, shall be referred to in this Agreement as the "Note." The Deed of Trust and Security Agreement, as may be amended from time to time, shall be referred to in this Agreement as the "Deed of Trust," The term "Loan Documents" when used in this Agreement, shall mean, collectively, the following documents: (i) the Note, (ii) the Deed of Trust, (iii) the Loan Agreement by and between Original Borrower and Original Lender of even date herewith, and (iv) all other documents or agreements executed in connection with the Loan and the assumption of the Loan by Borrower, whether presently existing or hereinafter entered into, as such Loan Documents may be amended from time to time.

        C.    Lender is the holder of the Note and is the successor in interest to Former Lender in and to the Loan Documents.

        D.    The Property is being conveyed by Original Borrower to Borrower as of the date hereof, and as part of the consideration for such conveyance, Borrower has agreed to assume the obligations of Original Borrower under the Loan Documents and comply with the covenants and obligations of Original Borrower contained in the Loan Documents, upon the terms and conditions set forth in that certain Loan Assumption Agreement of even date herewith (the "Assumption Agreement").

        E.    Original Borrower and Borrower have requested that Lender consent to the assumption of the Loan and waive the due on sale restrictions of the Deed of Trust to permit the conveyance of the Property to Borrower.

        F.     Lender is not willing to consent to the assumption of the Loan unless the undersigned Guarantor executes this Agreement.

AGREEMENT

        NOW, THEREFORE, in order to induce Lender to consent to Borrower's assumption of the Loan evidenced by the Note and secured by the Deed of Trust, and in consideration thereof, Guarantor hereby (i) irrevocably and unconditionally guarantees the full and prompt payment to Lender of all amounts which may from time to time while the Note is outstanding and unpaid become due and owing by Borrower, whether principal, interest or other sums, for which Borrower may from time to time, or at any time be personally liable for payment to Lender under the Note (due to the applicability of the exceptions to nonrecourse liability provisions contained in Section 12.19 of the Note) (the "Guaranteed Obligations"), and (ii) agrees to pay, on demand, all costs and expenses, including reasonable attorneys' fees and disbursements, incurred by Lender in enforcing its rights under this Agreement. All obligations of Guarantor under this Agreement shall be joint and several among all persons (if more than one) included as a Guarantor. This Agreement is an unconditional guaranty of payment, and not a guaranty of collection, and may be enforced by Lender directly against Guarantor without any requirement that Lender must first exercise its rights against Borrower or any general partner of Borrower or any collateral or other security for payment of the Note.

        The obligations of Guarantor under this Agreement shall be performed without demand by Lender and shall be unconditional irrespective of the genuineness, validity, regularity or enforceability of the Note, the Deed of Trust, the Loan Agreement, the Loan Documents, or any other circumstance which might otherwise constitute a legal or equitable discharge of a surety or a guarantor. Guarantor hereby waives the benefit of all principles or provisions of law, statutory or otherwise, which are or might be in conflict with the terms of this Agreement, and agrees that the obligations of Guarantor shall not be affected by any circumstances, whether or not referred to in this Agreement, which might otherwise constitute a legal or equitable discharge of a surety or guarantor. Guarantor hereby waives the benefits of any right of discharge under any and all statutes or other laws relating to guarantors or sureties and any other rights of sureties and guarantors thereunder. Without limiting the generality of the foregoing, Guarantor hereby waives diligence, presentment, demand for payment, protest, all notices which may be required by statute, rule of law or otherwise to preserve intact Lender's rights against Guarantor under this Agreement, including, but not limited to, notice of acceptance, notice of any amendment of the Loan Documents, notice of the occurrence of any default, notice of intent to accelerate, notice of acceleration, notice of dishonor, notice of foreclosure, notice of protest, notice of the incurring by Borrower of any of the Guaranteed Obligations, and generally, all demands, notices and other formalities of every kind in connection with this Agreement, and all rights to require Lender to (a) proceed against Borrower or, if Borrower is a partnership, any general partner of Borrower, (b) proceed against or exhaust any collateral held by Lender to secure the payment of the Loan, or (c) pursue any other remedy it may now or hereafter have against Borrower, or, if Borrower is a partnership, any general partner of Borrower.

        Guarantor hereby agrees that, at any time or from time to time and any number of times, without notice to Guarantor and without affecting the liability of Guarantor, (a) the time for payment of the principal and/or interest on the Note may be extended or the Note may be renewed in whole or in part one or more times; (b) the time for Borrower's performance of or compliance with any covenant or agreement contained in the Note, the Deed of Trust, the Loan Agreement, or any of the other Loan Documents evidencing, securing or governing the Loan, whether presently existing or hereinafter entered into, may be extended or such performance or compliance may be waived; (c) the maturity of the Note may be accelerated as provided therein or in the Deed of Trust, or any of the other Loan Documents; (d) the Note, the Deed of Trust, the Loan Agreement, or any other Loan Documents, may be modified or amended by Lender and Borrower in any respect, including, but not limited to, an increase in the principal amount; and (e) any security for the Loan may be modified, exchanged, surrendered or otherwise dealt with or additional security may be pledged or mortgaged for the Loan.

        If any payment by Borrower is held to constitute a preference under any applicable bankruptcy or similar laws, or if for any reason Lender is required to refund any sums to Borrower, such amounts shall not constitute a release of any liability of Guarantor hereunder. It is the intention of Lender and Guarantor that Guarantor's obligations hereunder shall not be discharged except by Guarantor's performance of such obligations and then only to the extent of such performance.

        Guarantor agrees that any indebtedness of Borrower now or hereafter held by Guarantor is hereby and shall be subordinated to all indebtedness of Borrower to Lender and any such indebtedness of Borrower shall be collected, enforced and received by Guarantor, as trustee for Lender, but without reducing or affecting in any manner the liability of Guarantor under the other provisions of this Agreement.

        Guarantor agrees that Lender, in its sole and absolute discretion, may (a) bring suit against Guarantor, or any one or more of the individuals constituting a Guarantor, and any guarantor(s) of the Loan, if any, jointly and severally, or against any one or more of them; (b) compromise or settle with any one or more of the individuals constituting a Guarantor for such consideration as Lender may deem proper; (c) release one or more of the individuals constituting Guarantor, or any guarantor(s) of the Loan, if any, from liability thereunder; and (d) otherwise deal with Guarantor and any guarantor(s) of the Loan, if any, or any one or more of them, in any manner whatsoever, and that no such action

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shall impair the rights of Lender to collect the Guaranteed Obligations from Guarantor. Nothing contained in this paragraph shall in any way affect or impair the rights or obligations of the Guarantor with respect to any guarantor of the Loan, if any.

        Lender may assign its rights under this Agreement in whole or in part and upon any such assignment, all the terms and provisions of this Agreement shall inure to the benefit of such assignee to the extent so assigned. The terms used to designate any of the parties herein shall be deemed to include the heirs, legal representatives, successors and assigns of such parties; and the term "Lender" shall include, in addition to Lender, any lawful owner, holder or pledgee of the Note.

        Guarantor shall have no right of, and hereby waives any claim for, subrogation or reimbursement against the Borrower or any general partner of Borrower by reason of any payment by Guarantor under this Agreement, whether such right or claim arises at law or in equity or under any contract or statute.

        GUARANTOR HEREBY WAIVES TRIAL BY JURY IN ANY ACTION OR PROCEEDING COMMENCED BY LENDER AGAINST GUARANTOR UNDER THIS AGREEMENT.

        Guarantor irrevocably submits to the jurisdiction of any state or federal court sitting in the State of Washington over any suit, action, or proceeding arising out of or relating to this Agreement. Guarantor irrevocably waives, to the fullest extent permitted by law, any objection that it may now or hereafter have to the laying of the venue of any such suit, action or proceeding brought in any such court and any claim that any such suit, action, or proceeding brought in any such court has been brought in an inconvenient forum. Final judgment in any such suit, action, or proceeding brought in any such court shall be conclusive and binding upon the Guarantor and may be enforced in any court to whose jurisdiction the Guarantor is subject, by a suit upon such judgment provided that service of process is effected upon the Guarantor in a manner specified in this Agreement or as otherwise permitted by applicable law.

        Guarantor hereby irrevocably designates and appoints Christie Bohnsack of 1710 Plaza Way, Walla Walla, Washington 99362, as its authorized agent to accept and acknowledge on its behalf service of any and all process that may be served in any suit, action, or proceeding instituted in connection with this Agreement in any state or federal court sitting in the State of Washington. If such agent shall cease so to act, Guarantor shall irrevocably designate and appoint without delay another such agent in the State of Washington satisfactory to the Lender and shall promptly deliver to the Lender evidence in writing of such agent's acceptance of such appointment and its agreement that such appointment shall be irrevocable.

        Guarantor hereby consents to process being served in any suit, action, or proceeding instituted in connection with' this Agreement by (a) the mailing of a copy thereof by certified mail, postage prepaid, return receipt requested, to it at its address designated hereinbelow and (b) serving a copy thereof upon the agent, if any, hereinabove designated and appointed by the Guarantor as the Guarantor's agent for service of process. Guarantor irrevocably agrees that such service shall be deemed in every respect to be effective service of process in any such suit, action, or proceeding. Nothing in this Agreement shall affect the right of the Lender to serve process in any manner otherwise permitted by law and nothing in this Agreement will limit the right of the Lender otherwise to bring proceedings against the Guarantor, or any of them, in the courts of any other appropriate jurisdiction.

        THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE LENDER AND GUARANTOR AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS. GUARANTOR COVENANTS AND AGREES THAT THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE LENDER AND GUARANTOR AND ALL PRIOR OR CONTEMPORANEOUS AGREEMENTS, UNDERSTANDINGS, REPRESENTATIONS, AND STATEMENTS, ORAL OR WRITTEN, ARE MERGED INTO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS. NEITHER THIS AGREEMENT NOR ANY PROVISION HEREOF MAY BE WAIVED, MODIFIED, AMENDED, DISCHARGED, OR TERMINATED EXCEPT BY AN AGREEMENT IN WRITING SIGNED BY THE PARTY AGAINST WHICH THE ENFORCEMENT OF SUCH WAIVER, MODIFICATION, AMENDMENT, DISCHARGE, OR TERMINATION IS SOUGHT, AND THEN ONLY TO THE EXTENT SET FORTH IN SUCH AGREEMENT.

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        Guarantor has the full power and authority to enter into this Agreement and the New Guarantor Environmental Agreement (as defined in the Assumption Agreement), both of even date herewith. The execution, delivery and performance of this Agreement and the other documents contemplated herein by Guarantor (1) has been duly and validly authorized by all necessary action on the part of Guarantor, (2) does not conflict with or result in a violation of Guarantor's organizational documents or any judgment, order or decree of any court or arbiter in any proceeding to which Guarantor is a party, (3) does not conflict with, or constitute a material breach of, or constitute a material default under, any contract, agreement or other instrument by which Guarantor is bound or to which Guarantor is a party; and (4) constitute the valid and binding obligations of Guarantor, as applicable, enforceable against Guarantor, as applicable, in accordance with their terms.

        Guarantor represents and warrants to Lender as follows:

        (a)   Guarantor has received and reviewed all of the Loan Documents;

        (b)   All information and materials, including financial information, regarding Guarantor was true and correct in all material respects as of the date provided to Lender and remains materially true and correct as of the date hereof; and

        (c)   There is no bankruptcy, receivership or insolvency proceeding pending or threatened against Guarantor.

        Guarantor acknowledge that Lender is relying upon the foregoing representations and warranties as a material inducement to Lender's consent to the assumption of the Loan.

        Guarantor hereby jointly and severally, unconditionally and irrevocably, finally and completely RELEASES AND FOREVER DISCHARGES Lender and its respective successors, assigns, affiliates, subsidiaries, parents, officers, shareholders, directors, employees, attorneys and agents, past, present and future (collectively and individually, "Lender Parties"), of and from any and all claims, controversies, disputes, liabilities, obligations, demands, damages, debts, liens, actions and causes of action of any and every nature whatsoever, known or unknown, whether at law, by statute or in equity, in contract or in tort, under state or federal jurisdiction, and whether or not the economic effects of such alleged matters arise or are discovered in the future, which Guarantor has as of the Effective Date or may claim to have against Lender Parties arising out of or with respect to any and all transactions relating the Loan, or the Loan Documents occurring on or before the Effective Date, including any loss, cost or damage of any kind or character arising out of or in any way connected with or in any way resulting from the acts, actions or omissions of Lender Parties occurring on or before the Effective Date. The foregoing release is intended to be, and is, a full, complete and general release in favor of Lender Parties with respect to all claims, demands, actions, causes of action and other matters described therein, including specifically, without limitation, any claims, demands or causes of action based upon allegations of breach of fiduciary duty, breach of any alleged duty of fair dealing in good faith, economic coercion, usury, or any other theory, cause of action, occurrence, matter or thing which might result in liability upon Lender Parties arising or occurring on or before the Effective Date. Guarantor understands and agrees that the foregoing general release is in consideration for the agreements of Lender contained herein and that it will receive no further consideration for such release. Guarantor represents and warrants to Lender that Guarantor has not previously assigned or transferred to any person or entity any matter released hereunder and Guarantor agrees to indemnify, protect and hold the Lender Parties harmless from and against any and all claims based on or arising out of any such assignment or transfer.

4

Capmark Loan #01-1017791

GUARANTOR: THE ENSIGN GROUP, INC., a Delaware corporation
By:	/s/

Name: Gregory V. Stapley

Title:	Vice President
Guarantor's Designated Notice Address:
27101 Puerta Real, Suite 450 Mission Viejo, CA 92691

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EX-10.24

Exhibit 10.24

This instrument was prepared by and, upon recording should be returned to:	Vern Spatz Grays Harbor Co. Auditor '98 AUG 6 PM 5 01 # 1 980807023 # 2 980807023
Graham & James LLP One Maritime Plaza, Suite 300 San Francisco, CA 94111 Attn.: Bruce W. Hyman, Esq.	NOTE: The Auditor, Recorder will rely on the information provided on the form. The staff will not read the document to verify the accuracy or completeness of the indexing information provided herein.
40412

DEED OF TRUST AND SECURITY AGREEMENT

G&L HOQUIAM. LLC,
a Delaware limited liability company,

GRANTOR,

TO

TICOR TITLE INSURANCE COMPANY,
AS TRUSTEE,

FOR THE BENEFIT OF

GMAC COMMERCIAL MORTGAGE CORPORATION,
BENEFICIARY

DATE: AS OF August 6, 1998

ABBREVIATED LEGAL DESCRIPTION:

HEERMANS ANNEX LOTS 1 & 2 BLK 86 AND 7-17-9

ASSESSOR'S PROPERTY TAX PARCEL NOS. 052208600100 and 517090721006

DEED OF TRUST AND SECURITY AGREEMENT

THIS DEED OF TRUST AND SECURITY AGREEMENT (this "Instrument"), is made as of August 6, 1998, from G&L HOQUIAM, LLC, a Delaware limited liability company (the "Grantor"), whose address is c/o G&L Realty Partnership, L.P., 439 North Bedford Drive, Beverly Hills, California 90210, to TICOR TITLE INSURANCE COMPANY ("Trustee"), whose address is 211 E. Market, Aberdeen, WA 98520, for the benefit of GMAC COMMERCIAL MORTGAGE CORPORATION, a California corporation (together with its successors and assigns, the "Beneficiary"), whose address is 650 Dresher Road, PO Box 1015, Horsham, Pennsylvania 19044-8015.

RECITALS

        A.    Grantor is indebted to the Beneficiary for money loaned in the principal sum of Two Million Four Hundred Seventy Five Thousand and No/100 Dollars ($2.475,000.00) (the "Loan"), as is evidenced by a certain Promissory Note of even date herewith from the Grantor, payable to the order of Beneficiary in installments of principal and/or interest thereon, such final installment being due on September 1, 2008.

        B.    As a condition precedent to making the Loan, the Beneficiary has required that Grantor execute this Instrument as security for the Loan and the other Indebtedness (as hereinafter defined).

AGREEMENT

        NOW, THEREFORE, for and in consideration of the Indebtedness, and to secure the prompt payment thereof, Grantor does hereby irrevocably grant, bargain, sell, convey, assign, transfer, mortgage, pledge and set over unto Trustee, its successors and assigns, in trust with power of sale, the Mortgaged Property (defined below), for the benefit of Beneficiary, and grants to Beneficiary a security interest in, and to the Mortgaged Property.

        TO SECURE unto Beneficiary the repayment of the entire Indebtedness, at and in the manner stipulated herein, in the Note and in the other Loan Documents, and the performance of the covenants and agreements of Grantor contained in the Loan Documents, the Mortgaged Property and all parts thereof unto the Beneficiary, its successors and assigns forever, subject however to the terms and conditions herein:

        PROVIDED, HOWEVER, that if Grantor shall pay to the Beneficiary the entire Indebtedness described in the Note and in the other Loan Documents, all without any deduction or credit for taxes or other similar charges paid by Grantor, and shall cause all other obligated parties to, keep, perform, and observe all and singular the covenants and promises herein, in the Note and in each of the other Loan Documents to be kept, performed, and observed, all without fraud or delay, then this Instrument, and all the properties, interests, and rights hereby granted, bargained, and sold shall cease, terminate, and be void, but shall otherwise remain in full force and effect.

        AND Grantor and Beneficiary covenant and agree as follows:

        1.    DEFINITIONS.    The following terms, when used in this instrument (including when used in the above recitals), shall have the following meanings:

        (a)   "Accounts" means any rights of Grantor arising from the operation of the Facility to payment for goods sold or leased or for services rendered, not evidenced by an Instrument, including, without limitation, (i) all accounts arising from the operation of the Facility and (ii) all rights to payment from Medicare or Medicaid programs, or similar state or federal programs, boards, bureaus or agencies and rights to payment from residents, patients, private insurers, and others arising from the operation of the Facility, including rights to payment pursuant to Reimbursement Contracts. Accounts shall include the proceeds thereof (whether cash or noncash, moveable or immoveable, tangible or intangible) received from the sale, exchange, transfer, collection or other disposition or substitution thereof.

        (b)   "Affiliate" shall mean, with respect to any Person, (i) each Person that controls, is controlled by or is under common control with such Person, (ii) each Person that, directly or indirectly, owns or controls, whether beneficially or as a trustee, guardian or other fiduciary, any of the Stock of such Person, and (iii) each of such Person's officers, directors, members, joint venturers and partners.

        (c)   "Appurtenant Rights" means all air rights, development rights, zoning rights, easements, rights-of-way, strips and gores of land, vaults, streets, roads, alleys, tenements, passages, ditches and ditch rights, reservoir and reservoir rights, stock or interests in irrigation or ditch companies, sewer rights, waters, water courses, water rights and powers, minerals, oil and gas rights and royalties, flowers, shrubs, crops, trees, timber and other emblements now or hereafter appurtenant to, or used or useful in connection with, or located on, under or above the Land, or any part or parcel thereof, and all ground leases, estates, rights, titles, interests, privileges, liberties, tenements, hereditaments and appurtenances, reversions, and remainders whatsoever, in any way belonging, relating or appertaining to the Land, or any part thereof, now or hereafter.

        (d)   "Assignment of Leases and Rents" means that certain Assignment of Leases and Rents of even date herewith by and between Grantor and Beneficiary,

        (e)   "Beneficiary" means the entity identified as "Beneficiary" in the first paragraph of this Instrument, or any subsequent holder of the Note.

        (f)    "Collateral Agreements" means collectively, as applicable, the Capital Improvements Escrow and Security Agreement, Letter of Credit Agreement and/or the Debt Service Reserve Escrow and Security Agreement of even date herewith by and between Grantor and Beneficiary,

        (g)   "Control" shall mean, with respect to any Person, the possession, directly or indirectly, of the power to direct or cause the direction of its management or policies, whether through the ownership of voting securities, by contract or otherwise. For the purpose of this definition, "control" includes the correlative meanings of "controlled by" and "under common control with."

        (h)   "Equipment" means all beds, linen, televisions, carpeting, telephones, cash registers, computers, lamps, glassware, rehabilitation equipment, restaurant, restaurant and kitchen equipment, and other fixtures and equipment of Grantor located on, attached to or used or useful in connection with any of the Property or the Facility and all renewals and replacements thereof and substitutions therefor; provided, however, that with respect to any items which are leased for the benefit of the Facility and not owned by Grantor, the Equipment shall include the leasehold interest only of Grantor together with any options to purchase any of said items and any additional or greater rights with respect to such items which Grantor may hereafter acquire, but the foregoing shall not be construed to mean that such leasing shall be permitted hereunder and under the other Loan Documents.

        (i)    "Event of Default" means the occurrence of any event listed in Section 14.

        (j)    "Facility" means the 118-bed skilled nursing home facility known as "Pacific Care Center," presently located on the Land, as it may now or hereafter exist, together with any other general or specialized care facilities, if any (including any Alzheimer's care unit, subacute, and any licensed skilled nursing or assisted living facility), now or hereafter operated on the Land.

        (k)   "Fixtures" means all property which is now or hereafter so attached to the Land or the Improvements as to constitute a fixture under applicable law and all renewals and replacements thereof and substitutions therefor, including, without limitation: machinery, equipment, engines, boilers, incinerators, installed building materials; systems and equipment for the purpose of supplying or distributing heating, cooling, electricity, gas, water, air, or light; antennas, cable, wiring and conduits used in connection with radio, television, security, fire prevention, or fire detection or otherwise used to carry electronic signals; telephone systems and equipment; elevators and related machinery and equipment; fire detection, prevention and extinguishing systems and apparatus; security and access control systems and apparatus; plumbing systems; water heaters, ranges, stoves,

microwave ovens, refrigerators, dishwashers, garbage disposers, washers, dryers and other appliances; light fixtures, awnings, storm windows and storm doors; pictures, screens, blinds, shades, curtains and curtain rods; mirrors; cabinets, paneling, rugs and floor and wall coverings; fences, trees and plants; and exercise equipment.

        (l)    "General Intangibles" means all intangible personal property of Grantor arising out of or connected with the Land or the Facility (other than Accounts, Rents, Inventory, and Permits) and all renewals and replacements thereof and substitutions therefor, including, without limitation, things in action, contract rights and other rights to payment of money.

        (m)  "Governmental Authority" means any board, commission, department or body of any municipal, county, state or federal governmental unit or any subdivision of any of them, that has or acquires jurisdiction over the Mortgaged Property and/or the Improvements or the use, operation or improvement of the Mortgaged Property.

        (n)   "Grantor" means all persons or entities identified as Grantor in the first paragraph of this Instrument, together with their successors and assigns.

        (o)   "Guaranty Agreement" means that certain Exceptions to Nonrecourse Guaranty of even date herewith executed by G&L Realty Partnership, L.P., a Delaware limited partnership, for the benefit of Beneficiary.

        (p)   "Impositions" and "Imposition Deposits" are defined in Section 4.

        (q)   "Improvements" means all buildings, structures and improvements of every nature whatsoever now or hereafter situated on the Land, including, but not limited to, all gas and electric fixtures, radiators, heaters, engines and machinery, boilers, ranges, elevators and motors, plumbing and heating fixtures, carpeting and other floor coverings, water heaters, awnings and storm sashes, and cleaning apparatus which are or shall be attached to the Mortgaged Property or said buildings, structures or improvements and any future replacements, substitutions and additions and including the Facility.

        (r)   "Indebtedness" means the aggregate of the principal of and interest on the Note due and owing from time to time and all expenses, charges and other amounts due and owing from time to time under the Note, the Loan Agreement, this Instrument or any other Loan Document, including, without limitation, prepayment premiums, late charges, default interest and advances to protect the security of this Instrument under Section 7.

        (s)   "Instruments" means all instruments, chattel paper, documents or other writings obtained by Grantor from or in connection with the operation of the Land or the Facility (including without limitation, plans and specifications, contracts and subcontracts for the construction of the Improvements, bonds, permits, licenses, trademarks or trade names, utility contracts, maintenance contracts and agreements and service contracts, all ledger sheets, computer records and printouts, data bases, programs, books of account and files of Grantor relating thereto).

        (t)    "Inventory" means all inventories of food, beverages and other comestibles held by Grantor for sale or use at or from the Land or the Facility, and soap, paper supplies, medical supplies, drugs and all other such goods, wares and merchandise held by Grantor for sale to or for consumption by residents, guests or patients of the Land or the Facility and all such other goods returned to or repossessed by Grantor.

        (u)   "Land" means the land described in Exhibit "A" attached hereto and incorporated herein.

        (v)   "Leases" means all present and future leases, subleases, licenses, concessions or grants or other possessory interests now or hereafter in force, whether oral or written, covering or affecting the Mortgaged Property, or any portion of the Mortgaged Property and all modifications, extensions or renewals thereof.

        (w)  "Loan Agreement" means that certain Loan Agreement of even date herewith by and between Grantor and Beneficiary.

        (x)   "Loan Documents" means collectively the Note, the Loan Agreement, this Instrument, the Assignment of Leases and Rents, O&M Program, the Guaranty Agreement, all Collateral Agreements, and any other documents now or in the future executed by Grantor, any guarantor or any other Person in connection with the Loan evidenced by the Note, as such documents may be amended from time to time.

        (y)   "Medicaid" means that certain program of medical assistance, funded jointly by the federal government and the States, for impoverished individuals who are aged, blind and/or disabled, and/or members of families with dependent children, which program is more fully described in Title XIX of the Social Security Act (42 U.S.C. §§ 1396 et seq.) and the regulations promulgated thereunder.

        (z)   "Medicare" means that certain federal program providing health insurance for eligible elderly and other individuals, under which physicians, hospitals, skilled nursing homes, home health care, and other providers are reimbursed for certain covered services they provide to beneficiaries of such program, which program is more fully described in Title XVIII of the Social Security Act (42 U.S.C. §§ 1395 et seq.) and the regulations promulgated thereunder.

        (aa) "Mortgaged Property" means all of Grantor's present and future right, title and interest in and to all of the following:

        (1)   the Land;

        (2)   all Appurtenant Rights;

        (3)   all Equipment;

        (4)   all Improvements;

        (5)   all Fixtures;

        (6)   all Accounts;

        (7)   all General Intangibles;

        (8)   all Permits (to the extent assignable);

        (9)   all Instruments;

        (10) all Inventory;

        (11) all Reimbursement Contracts;

        (12) all Rents;

        (13) the Personalty,

        (14) all Leases;

        (15) all Proceeds;

        (16) all contracts, options and other agreements for the sale of the Land, the Improvements, the Fixtures, the Personalty or any other part of the Mortgaged Property entered into by Grantor now or in the future, including cash or securities deposited to secure performance by parties of their obligations;

        (17) all Imposition Deposits;

        (18) all refunds or rebates of Impositions by any municipal, state or federal authority or insurance company (other than refunds applicable to periods before the real property tax year in which this Instrument is dated);

        (19) all names under or by which any of the above Mortgaged Property may be operated or known, and all trademarks, trade names, and goodwill relating to any of the Mortgaged Property; and

        (20) all renewals, replacements and proceeds of any of the foregoing and any substitutions therefor.

        (bb) "Note" means the note evidencing the Loan, including all schedules, riders, allonges, endorsements, addenda or amendments together with any renewals, replacements, substitutions or extensions thereof.

        (cc) "O&M Program" has the meaning given to that term in the Loan Agreement.

        (dd) "Opinion of Counsel" means an opinion or opinions in writing signed by independent legal counsel to Grantor, designated by Grantor, and reasonably satisfactory to Beneficiary.

        (ee) "Permits" means all licenses, permits and certificates used or necessary in connection with the ownership, operation, use or occupancy of the Land and/or the Facility, including, without limitation, business licenses, state health department licenses, food service licenses, licenses to conduct business, certificates of need and all such other permits, licenses and rights, obtained from any governmental, quasi-governmental or private person or entity whatsoever concerning ownership, operation, use or occupancy.

        (ff)  "Permitted Encumbrances" has the meaning given to that term in the Loan Agreement.

        (gg) "Person" means any natural person, firm, corporation, limited liability company, partnership, trust or any other form of legal entity.

        (hh) "Personalty" means all furniture, furnishings, Equipment, machinery, building materials, appliances, goods, supplies, tools, books, records (whether in written or electronic form), computer equipment (hardware and software) and other tangible personal property (other than Fixtures) which are used now or in the future in connection with the ownership, management or operations of the Land or the Improvements or are located on the Land or in the Improvements, and any operating agreements relating to the Land or the Improvements, and any surveys, plans and specifications and contracts for architectural, engineering and construction services relating to the Land or the Improvements.

        (ii)   "Proceeds" means all awards, payments, earnings, royalties, issues, profits, liquidated claims, and proceeds (including proceeds of insurance and condemnation or any conveyance in lieu thereof) from the sale, conversion (whether voluntary or involuntary), exchange, transfer, collection, loss, damage, disposition, substitution or replacement of any of the Mortgaged Property.

        (jj)   "Reimbursement Contracts" shall mean all third-party reimbursement contracts for the Facility which are now or hereafter in effect with respect to patients or residents qualifying for coverage under the some, including Medicare, Medicaid and private insurance agreements, and any successor program or other similar reimbursement program.

        (kk) "Rents" means all rent and other payments of whatever nature from time to time payable pursuant to the Leases or for retail space or other space at the Facility (including, without limitation, rights to payments earned under leases for space in the Facility for the operation of ongoing retail businesses such as newsstands, barbershops, beauty shops, physicians' offices, pharmacies and specialty shops).

        (ll)   "Single Purpose Entity" shall mean a Person which owns no interest or property other than the Mortgaged Property or interests in Mortgagor.

        (mm) "Stock" shall mean all shares, options, warrants, general or limited partnership interests, membership interests, participation or other equivalents (regardless of how designated) in a corporation, limited liability company, partnership or any equivalent entity, whether voting or nonvoting, including, without limitation, common stock, preferred stock, or any other "equity security' (as such term is defined in Rule 3a11-1 of the General Rules and Regulations promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended).

        (nn) "Taxes" means all taxes, assessments, vault rentals and other charges, if any, general, special or otherwise, including all assessments for schools, public betterments and general or local improvements, which are levied, assessed or imposed by any public authority or quasi-public authority, and which, if not paid, will become a lien, on the Land or the Improvements.

        (oo) "Transfer" shall mean the conveyance, assignment, sale, transfer, mortgaging, collateral assignment, encumbrance, pledging, alienation, hypothecation, granting of a security interest in, granting of options with respect to, or other disposition of (directly or indirectly, voluntarily or involuntarily, by operation of law or otherwise, and whether or not for consideration or of record) all or any portion of any legal or beneficial interest (i) in all or any portion of the Mortgaged Property; (ii) in the Stock of any corporation which is Grantor, a member of Grantor (if Grantor is a limited liability company), a partner of Grantor or, if applicable, a partner of a general partner of Grantor; and (iii) in Grantor (or any trust of which Grantor is a trustee), or, if Grantor is a limited or general partnership, limited liability company, joint venture, trust, nominee trust, tenancy in common or other unincorporated form of business association or form of ownership interest, in any Person having a direct or indirect legal or beneficial ownership in Grantor, excluding any legal or beneficial interest in any constituent limited partner or member of Grantor but including the interest of such limited partner or member itself and further including any legal or beneficial interest in any constituent general partner of Grantor, if applicable, in any general partner of any constituent general partner of Grantor, or, if Grantor is a limited liability company, in any constituent corporate member of Grantor. The term "Transfer" shall also include, without limitation, the following: an installment sales agreement wherein Grantor agrees to sell the Mortgaged Property or any part thereof or any interest therein for a price to be paid in installments; an agreement by Grantor leasing all or a substantial part of the Mortgaged Property to one or more Persons pursuant to a single transaction or related transactions, or a sale, assignment or other transfer of, or the grant of a security interest in Grantor's right, title and interest in and to any Leases or any Rent; any instrument subjecting the Mortgaged Property to a condominium regime or transferring ownership to a cooperative corporation or other form of multiple ownership or governance; the dissolution or termination of Grantor, any general partner of Grantor, any general partner of any general partner of Grantor, if applicable, or, if Grantor is a limited liability company, any corporate member of Grantor; the issuance of new Stock in any corporation which is Grantor, a member of Grantor (if Grantor is a limited liability company), a partner of Grantor or, if applicable, a partner of a general partner of Grantor; and the merger or consolidation with any other Person of Grantor, any general partner of Grantor, any general partner of any general partner of Grantor, if applicable, or, if Grantor is a limited liability company, any corporate member of Grantor.

        (pp) "Trustee" means all persons or entities identified and as "Trustee" in the first paragraph of this Instrument together with their successors and assigns.

        2.    UNIFORM COMMERCIAL CODE SECURITY AGREEMENT.    This Instrument is also a security agreement under the Uniform Commercial Code as adopted in the State of Washington, for any of the Mortgaged Property which, under applicable law, may be subject to a security interest under the Uniform Commercial Code as adopted in the State of Washington, whether acquired now or in the future, and all products and cash and non-cash proceeds thereof (collectively, "UCC Collateral"), and Grantor hereby grants to Beneficiary a security interest in the UCC Collateral. Grantor shall execute and deliver to Beneficiary, upon Beneficiary's request, financing statements, continuation statements and amendments, in such form as Beneficiary may require to perfect or continue the perfection of this security interest. Grantor shall pay all filing costs and all costs and expenses of any record searches for financing statements that Beneficiary may require. Without the prior written consent of Beneficiary, Grantor shall not create or permit to exist any other lien or security interest in any of the UCC Collateral. If an Event of Default has occurred and is continuing, Beneficiary shall have the remedies of a secured party under the Uniform Commercial Code as adopted in the State of Washington, in addition to all remedies provided by this Instrument or existing under applicable law. In exercising any remedies, Beneficiary may exercise its remedies against the UCC Collateral separately or together and in any order, without in any way affecting the availability of Beneficiary's other remedies under and/or under applicable law.

        3.    LEASES.    Grantor shall not, without the prior written consent and approval of Beneficiary, enter into any Lease (except for any Lease for the admission of Facility patients or residents, the form of which shall be approved by Beneficiary in its sole discretion), or enter into or permit any management agreement of or affecting any part of the Mortgaged Property.

        4.    DEPOSITS FOR TAXES AND OTHER CHARGES.

        (a)   Grantor shall deposit with Beneficiary on the day monthly installments of principal and/or interest, or both, are due under the Note (or on another day designated in writing by Beneficiary), until the Indebtedness is paid in full, an additional amount sufficient to accumulate with Beneficiary the entire sum required to pay, when due (1) to the extent applicable, the yearly water and sewer charges which may be levied on all or any part of the Mortgaged Property, (2) the premiums for fire and other hazard insurance, business interruption insurance and such other insurance as Beneficiary may require under the Loan Agreement, (3) the yearly Taxes, and (4) amounts for other charges and expenses which Beneficiary at any time reasonably deems necessary to protect the Mortgaged Property, to prevent the imposition of liens on the Mortgaged Property, or otherwise to protect Beneficiary's interests, all as reasonably estimated from time to time by Beneficiary, plus one-sixth of such estimate. The amounts deposited under the preceding sentence are collectively referred to in this Instrument as the "Imposition Deposits". The obligations of Grantor for which the Imposition Deposits are required are collectively referred to in this Instrument as "Impositions". The amount of the Imposition Deposits shall be sufficient to enable Beneficiary to pay each Imposition before the last date upon which such payment may be made without any penalty or interest charge being added plus one-sixth of such estimate. Beneficiary shall maintain records indicating how much of the monthly Imposition Deposits and how much of the aggregate Imposition Deposits held by Beneficiary are held for the purpose of paying property taxes, insurance premiums and each other obligation of Grantor for which Imposition Deposits are required. Any waiver by Beneficiary of the requirement that Grantor remit Imposition Deposits to Beneficiary may be revoked by Beneficiary, in Beneficiary's discretion, at any time upon notice to Grantor.

        (b)   Imposition Deposits shall be held in an institution (which may be Beneficiary, if Beneficiary is such an institution) whose deposits or accounts are insured or guaranteed by a federal agency. Beneficiary shall not be obligated to open additional accounts or deposit Imposition Deposits in additional institutions when the amount of the Imposition Deposits exceeds the maximum amount of the federal deposit insurance or guaranty. Beneficiary shall apply the Imposition Deposits to pay Impositions so long as no Event of Default has occurred and is continuing. Unless applicable law requires, Beneficiary shall not be required to pay Grantor any interest, earnings or profits on the Imposition Deposits. Grantor hereby pledges and grants to Beneficiary a security interest in the Imposition Deposits as additional security for all of Grantor's obligations under this Instrument and the other Loan Documents. Any amounts deposited with Beneficiary under this Section 4 shall not be trust funds, nor shall they operate to reduce the Indebtedness, unless applied by Beneficiary for that purpose under Section 4(e).

        (c)   Grantor shall direct the applicable Governmental Authority to deliver the invoices and bills for all Impositions to Beneficiary. If Beneficiary receives a bill or invoice for an Imposition, Beneficiary shall pay the Imposition from the Imposition Deposits held by Beneficiary. Beneficiary shall have no obligation to pay any Imposition to the extent it exceeds Imposition Deposits then held by Beneficiary. Beneficiary may pay an Imposition according to any bill, statement or estimate from the appropriate public office or insurance company without inquiring into the accuracy of the bill, statement or estimate or into the validity of the Imposition.

        (d)   If at any time the amount of the Imposition Deposits held by Beneficiary for payment of a specific Imposition exceeds the amount reasonably deemed necessary by Beneficiary plus one-sixth of such estimate, the excess shall be credited against future installments of Imposition Deposits. If at any time the amount of the Imposition Deposits held by Beneficiary for payment of a specific Imposition is less than the amount reasonably estimated by Beneficiary to be necessary plus one-sixth of such estimate, Grantor shall pay to Beneficiary the amount of the deficiency within 15 days after notice from Beneficiary.

        (e)   If an Event of Default has occurred and is continuing, Beneficiary may apply any Imposition Deposits, in any amounts and in any order as Beneficiary determines, in Beneficiary's

sole discretion, to pay any Impositions or as a credit against the Indebtedness. Upon payment in full of the Indebtedness, Beneficiary shall refund to Grantor any Imposition Deposits held by Beneficiary,

        (f)    In the event of the passage of any law subsequent to the date of this Instrument in any manner changing or modifying the laws now in force governing the taxation of mortgages or debts secured by mortgages or the manner of collecting any such taxes so as to adversely affect Beneficiary (including, without limitation, a requirement that internal revenue stamps be affixed to this Instrument or any of the other Loan Documents). Grantor will promptly pay any such tax. If Grantor fails to make such prompt payment, or if any law prohibits Grantor from making such payment or would penalize Beneficiary if Grantor makes such payment, then the entire unpaid balance of the Indebtedness shall, without notice, immediately become due and payable at the sole option of Beneficiary. In no event, however, shall any income taxes of Beneficiary or franchise taxes of Beneficiary measured by income, or taxes in lieu of such income taxes or franchise taxes, be required to be paid by Grantor.

        5.    APPLICATION OF PAYMENTS.    If at any time Beneficiary receives, from Grantor or otherwise, any amount applicable to the Indebtedness which is less than all amounts due and payable at such time, then Beneficiary may apply that payment to amounts then due and payable in any manner and in any order determined by Beneficiary, in Beneficiary's sole discretion. Neither Beneficiary's acceptance of an amount which is less than all amounts then due and payable nor Beneficiary's application of such payment in the manner authorized in the immediately preceding sentence shall constitute or be deemed to constitute either a waiver of the unpaid amounts or an accord and satisfaction. Notwithstanding the application of any such amount to the Indebtedness, Grantor's obligations under this Instrument and the Note shall remain unchanged.

        6.    USE OF PROPERTY.    Unless required by applicable law, Grantor shall not (a) except for any change in use approved by Beneficiary, allow changes in the use for which all or any part of the Mortgaged Property is being used at the time this Instrument was executed, (b) convert any part of the Facility to commercial use, or (c) initiate or acquiesce in a change in the zoning classification of the Mortgaged Property.

        7.    PROTECTION OF BENEFICIARY'S SECURITY.

        (a)   If Grantor fails to perform any of its obligations under this Instrument or any other Loan Document, or if any action or proceeding is commenced which purports to affect the Mortgaged Property, Beneficiary's security or Beneficiary's rights under this Instrument, including eminent domain, insolvency, code enforcement, civil or criminal forfeiture, enforcement of Hazardous Materials Laws (as defined in the Loan Agreement), fraudulent conveyance or reorganizations or proceedings involving a bankrupt or decedent, then Beneficiary at Beneficiary's option may make such appearances, disburse such sums and take such actions as Beneficiary reasonably deems necessary to perform such obligations of Grantor and to protect Beneficiary's interest, including (1) disbursement of fees and out of pocket expenses of attorneys, accountants, inspectors and consultants, (2) entry upon the Mortgaged Property to make repairs or secure the Mortgaged Property, (3) procurement of the insurance coverages required under the Loan Agreement, and (4) payment of amounts which Grantor has failed to pay under Section 9.

        (b)   Any amounts disbursed by Beneficiary under this Section 7, or under any other provision of this Instrument, or under any of the other Loan Documents, that treats such disbursement as being made under this Section 7, shall be added to, and become part of the Indebtedness, shall be immediately due and payable and shall bear interest from the date of disbursement until paid at the "Default Rate", as defined in the Note.

        (c)   Nothing in this Section 7 shall require Beneficiary to incur any expense or take any action.

        8.    INSPECTION.    Beneficiary, its agents, representatives, and designees may make or cause to be made entries upon and inspections of the Mortgaged Property (including environmental inspections

and tests) during normal business hours, or at any other reasonable time, upon reasonable advance notice to Grantor (which may be oral) except in an emergency or during the continuance of an Event of Default in which event no advance notice needs to be given.

        9.    TAXES; OPERATING EXPENSES.

        (a)   Subject to the provisions of Section 9(c) and Section 9(d), Grantor shall pay, or cause to be paid, all Taxes when due and before the addition of any interest, fine, penalty or cost for nonpayment.

        (b)   Subject to the provisions of Section 9(c), Grantor shall pay or cause to be paid the expenses of operating, managing, maintaining and repairing the Mortgaged Property (including insurance premiums, utilities, repairs and replacements) before the last date upon which each such payment may be made without any penalty or interest charge being added or lien imposed.

        (c)   As long as no Event of Default has occurred and is continuing, Grantor shall not be obligated to pay Taxes or any other individual Imposition to the extent that Imposition Deposits are held by Beneficiary for the purpose of paying that specific Imposition. If an Event of Default exists, Beneficiary may exercise any rights Beneficiary may have with respect to Imposition Deposits without regard to whether Impositions are then due and payable.

        (d)   Grantor, at its own expense, may contest by appropriate legal proceedings, conducted diligently and in good faith, the amount or validity of any Imposition other than insurance premiums, if (1) Grantor notifies Beneficiary of the commencement or expected commencement of such proceedings, (2) the Mortgaged Property is not in danger of being sold or forfeited as determined by Beneficiary, (3) if requested by Beneficiary, Grantor deposits with Beneficiary cash reserves or other collateral sufficient to pay the contested Imposition, (4) Grantor furnishes whatever security is required in the proceedings or is reasonably requested by Beneficiary, which may include the delivery to Beneficiary of the reserves established by Grantor to pay the contested Imposition, as additional security, and (5) such contest operates to suspend enforcement of such Imposition.

        (e)   Grantor shall promptly deliver to Beneficiary a copy of all notices of and invoices for, Impositions, and if Grantor pays any Imposition directly, Grantor shall promptly furnish to Beneficiary receipts evidencing such payments.

        10.    LIENS; ENCUMBRANCES.    Except for Permitted Encumbrances, Grantor acknowledges that the existence of any Lien (as defined in the Loan Agreement) on the Mortgaged Property, whether voluntary, involuntary or by operation of law, is a "Transfer" which constitutes an Event of Default as provided under Section 14, and will subject Grantor to personal liability under the Note.

        11.    PRESERVATION, MANAGEMENT AND MAINTENANCE OF MORTGAGED PROPERTY.    Grantor (a) shall not commit waste or permit impairment or deterioration of the Mortgaged Property, (b) shall not abandon the Facility, (c) shall restore or repair promptly, in a good and workmanlike manner, any damaged part of the Mortgaged Property to the equivalent of its original condition, or such other condition as Beneficiary may approve in writing, whether or not insurance proceeds or condemnation awards are available to cover any costs of such restoration or repair except to the extent Beneficiary applies such insurance proceeds or condemnation awards to reduce the Indebtedness, (d) shall keep the Mortgaged Property in good repair, including the replacement of Personalty and Fixtures with items of equal or better function and quality, (e) shall provide for professional management of the Mortgaged Property by a manager satisfactory to Beneficiary, in its sole discretion, and (f) shall give notice to Beneficiary of and, unless otherwise directed in writing by Beneficiary, shall appear in and defend any action or proceeding purporting to affect the Mortgaged Property, Beneficiary's security or Beneficiary's rights under this Instrument. Grantor shall not (and shall not permit any other person to) remove, demolish or alter the Mortgaged Property or any part of the Mortgaged Property except in connection with the replacement of tangible Personalty.

        12.    CONDEMNATION.

        (a)   Grantor shall promptly notify Beneficiary of any action or proceeding relating to any condemnation or other taking, or conveyance in lieu thereof; of all or any part of the Mortgaged Property, whether direct or indirect (a "Condemnation"). Grantor shall appear in and prosecute or defend any proceeding relating to any Condemnation unless otherwise directed by Beneficiary in writing. Grantor authorizes and appoints Beneficiary as attorney-in-fact for Grantor to commence, appear in and prosecute, in Beneficiary's or Grantor's name, any action or proceeding relating to any Condemnation and to settle or compromise any claim in connection with any Condemnation. This power of attorney is coupled with an interest and therefore is irrevocable. However, nothing contained in this Section 12 shall require Beneficiary to incur any expense or take any action. Grantor hereby transfers and assigns to Beneficiary all right, title and interest of Grantor in and to any award or payment with respect to (i) any Condemnation, or any conveyance in lieu of Condemnation, and (ii) any damage to the Mortgaged Property caused by governmental action that does not result in a Condemnation.

        (b)   Subject to the provisions of Section 4.5 of the Loan Agreement, Beneficiary, in its sole discretion, may apply such awards or proceeds, after the deduction of Beneficiary's expenses incurred in the collection of such amounts, at Beneficiary's option, to the restoration or repair of the Mortgaged Property or to the payment of the Indebtedness, with the balance, if any, to Grantor. Unless Beneficiary otherwise agrees in writing, any application of any awards or proceeds to the Indebtedness shall not extend or postpone the due date of any monthly installments referred to in the Note, Section 4 of this Instrument or any Collateral Agreement, or change the amount of such installments. Grantor agrees to execute such further evidence of assignment of any awards or proceeds as Beneficiary may require.

        13.    TRANSFER RESTRICTIONS.

        (a)   Except as otherwise permitted under this Section 13, Transfers shall not be permitted. Any Transfer made in violation of this Section shall constitute an Event of Default. Notwithstanding any provision of this Section to the contrary, in no event shall a Transfer resulting in a change in control of Mortgagor or the Mortgaged Property be permitted without Mortgagee's prior written consent, which may be granted or denied in Mortgagee's sole, absolute and unreviewable discretion.

        (b)   Subject to the provisions of Section 13(c) below, the following Transfers shall be permitted, subject to Mortgagee's prior written consent, which consent shall not be unreasonably withheld or delayed, provided that (l) no such Transfer (in a series of one or more transactions) shall result in a change in control of Mortgagor. (2) in no event shall Mortgagor or, if Mortgagor is a limited partnership, the general partner of Mortgagor (or the general partner of the general partner of Mortgagor) or, if Mortgagor is a limited liability company, any corporate member of Mortgagor which is a Single-Purpose Entity, cease to be a Single-Purpose Entity, and (3) in no event shall any such Transfer result in the dissolution or termination of Mortgagor, any general partner of Mortgagor or any general partner of any general partner of Mortgagor, if applicable, or, if Mortgagor is a limited liability company, any corporate member of Mortgagor:

            i.  Transfers of Stock in any corporation which is Mortgagor, any general or limited partner or member of Mortgagor or any Person holding an interest therein;

           ii.  Transfers of limited partnership interests in any limited partnership which is Mortgagor, any general or limited partner or member of Mortgagor or any Person holding an interest therein;

        and

          iii.  Transfers of membership interests in any limited liability company which is Mortgagor, any general or limited partner or member of Mortgagor or any Person holding an interest therein.

        (c)   Notwithstanding any provision herein to the contrary, no Transfer otherwise permitted under this Section 13 shall occur unless Mortgagor shall have given Mortgagee not less than ten (10) Business Days prior notice of the intended Transfer together with a certificate of the financial officer of Mortgagor stating (i) the nature and size of the interest to be the subject of the Transfer, (ii) the name and address of the Person to which such interest shall be conveyed, sold or transferred unless such interest is to be conveyed, sold or transferred pursuant to a registered public sale pursuant to applicable securities laws, and (iii) that the proposed transaction is a bona fide sale, transfer or conveyance solely for cash or equivalent consideration, if applicable. Mortgagee reserves the right to condition any consent required pursuant to this Section 13 with respect to a Transfer upon (A) the payment of all expenses incurred by Mortgagee as set forth below and, in connection with the Transfer of any fee interest in the Mortgaged Property, an assumption fee equal to one percent (1.0%) of the outstanding balance of the Loan, (B) Mortgagee's approval of the financial condition, managerial capabilities and ownership structure of the proposed transferee, including requiring that the transferee of any fee interest in the Mortgaged Property be a Single-Purpose Entity, (C) if the Transfer shall result in a change in control of Mortgagor or the Mortgaged Property, execution of an assumption agreement by the proposed transferee, in form and content acceptable to Mortgagee, (D) the Loan being in good standing and free from any default, and (E) if required by Mortgagee, receipt of an Opinion of Counsel reasonably satisfactory to Mortgagee stating that, if effected, the proposed Transfer would have no effect on the enforceability of the Mortgage or the other Loan Documents, and would not result in the dissolution or termination of Mortgagor, the managing member of Mortgagor, if applicable, any general partner of Mortgagor or any general partner of any general partner of Mortgagor, if applicable. Mortgagor agrees to pay on demand all expenses (including, without limitation, reasonable attorney's fees and disbursements, title search costs and title insurance endorsement premiums) incurred by Mortgagee in connection with the review, approval and documentation of any Transfer. In no event shall any Transfer otherwise permitted under this Section occur if such Transfer is required to be registered under the Securities Act of 1933, as amended (the "1933 Act"), or any state securities or Blue Sky laws, or offered pursuant to Rule 144A under the 1933 Act.

        (d)   Notwithstanding any other provision of this Section 13 to the contrary, Transfers of partnership interests, membership interests or corporate shares in Mortgagor or any Person holding an interest in Mortgagor between or among partners, members or shareholders existing as such on the date hereof, or Transfers of such interests to immediate family members of existing partners, members or shareholders or to trusts for estate planning purposes for the benefit of existing partners, members or shareholders or members of the transferor's immediate family shall be permitted without Mortgagee's consent, provided that in no event shall Mortgagor and any Person holding an interest in Mortgagor who is a Single-Purpose Entity cease to be a Single-Purpose Entity and provided no such Transfer results in a change of control of Mortgagor.

        14.    EVENTS OF DEFAULT.    The occurrence of any one or more of the following shall constitute an Event of Default under this Instrument:

        (a)   any failure by Grantor to pay or deposit within five (5) days after the same becomes due any amount required by the Note, this Instrument or any other Loan Document;

        (b)   any failure by Grantor to maintain the insurance coverage required under the Loan Agreement;

        (c)   any failure by Grantor to comply with the provisions of Section 25;

        (d)   fraud or material misrepresentation or material omission by Grantor, any of its officers, directors, trustees, general partners or managers or any guarantor in connection with (A) the application for or creation of the Indebtedness, (B) any financial statement, financial report, certification, or other report or information required under the Loan Agreement required to be provided to Beneficiary during the term of the Indebtedness, or (C) any request for Beneficiary's

consent to any proposed action, including a request for disbursement of funds under any Collateral Agreement;

        (e)   a failure of Grantor to comply with the provisions of Section 13;

        (f)    the commencement of a forfeiture action or proceeding, whether civil or criminal, which, in Beneficiary's reasonable judgment, could result in a forfeiture of the Mortgaged Property or otherwise materially impair the lien created by this Instrument or Beneficiary's interest in the Mortgaged Property;

        (g)   any failure by Grantor to perform any of its obligations under this Instrument (other than those specified in Sections 14(a) through (f) and other than those specified in Sections 7.1(a), (b) and (c) of the Loan Agreement), as and when required, which continues for a period of 30 days after notice of such failure by Beneficiary to Grantor. However, no such notice or grace period shall apply in the case of any such failure which could, in Beneficiary's judgment, absent immediate exercise by Beneficiary of a right or remedy under this Instrument, result in harm to Beneficiary, impairment of the Note or this Instrument or any other security given under any other Loan Document;

        (h)   any failure by Grantor to perform any of its obligations as and when required under any Loan Document other than this Instrument which continues beyond the applicable cure period, if any, specified in that Loan Document;

        (i)    any exercise by the holder of any debt instrument secured by a mortgage, deed of trust or deed to secure debt on the Mortgaged Property of a right to declare all amounts due under that debt instrument immediately due and payable;

        (j)    the Mortgaged Property becomes part of a bankrupt debtor's estate pursuant to any chapter of the Federal Bankruptcy Code or the Mortgaged Property otherwise becomes subject to any reorganization, receivership (other than a receivership proceeding instituted by Beneficiary) or insolvency proceeding or any similar proceeding pursuant to any federal, state or foreign law affecting debtor and creditor rights; or

        (k)   if any representation or warranty made by Grantor in that certain Loan Closing Certification executed in connection with the Loan is not true and correct, or upon Grantor's breach of any covenant made in that Loan Closing Certification and, if susceptible of cure, such breach remains uncured for a period thirty (30) days after Beneficiary gives notice of such breach to Grantor.

        15.    REMEDIES.

        (a)    Acceleration of Maturity.    If an Event of Default shall have occurred, then the entire Indebtedness shall, at the option of Beneficiary, immediately become due and payable without notice or demand, time being of the essence of this Instrument, and no omission on the part of Beneficiary to exercise such option when entitled to do so shall be construed as a waiver of such right.

        (b)    Right to Enter and Take Possession.

        (1)   If an Event of Default shall have occurred and is continuing, Grantor, upon demand of Beneficiary, shall forthwith surrender to Beneficiary the actual possession of the Mortgaged Property and, if and to the extent permitted by law, Beneficiary itself, or by such officers or agents as it may appoint, may enter and take possession of all or any part of the Mortgaged Property without the appointment of a receiver or an application therefor, and may exclude Grantor and its agents and employees wholly therefrom, and take possession of the books, papers and accounts of Grantor relating thereto;

        (2)   If Grantor shall for any reason fail to surrender or deliver the Mortgaged Property or any part thereof after such demand by Beneficiary, Beneficiary may obtain a judgment or decree conferring upon Beneficiary the right to immediate possession or requiring Grantor to

deliver immediate possession of the Mortgaged Property to Beneficiary. Grantor will pay to Beneficiary, upon demand, all expenses of obtaining such judgment or decree, including costs and expense incurred by Beneficiary, its attorneys and agents, and all such expenses and costs shall, until paid, become part of the Indebtedness and shall be secured by this Instrument;

        (3)   Upon every such entering or taking of possession, Beneficiary may hold, store, use, operate, manage and control the Mortgaged Property and conduct the business thereof, and, from time to time (i) make all necessary and proper maintenance, repairs, renewals, replacements, additions, betterments and improvements thereto and thereon and purchase or otherwise acquire additional Fixtures, Personalty and Equipment; (ii) insure or keep the Mortgaged Property insured; (iii) manage and operate the Mortgaged Property and exercise all of the rights and powers of Grantor to the same extent as Grantor could in its own name; and/or (iv) enter into any and all agreements with respect to the exercise by others of any of the powers herein granted to Beneficiary, all as Beneficiary from time to time may determine to be in its best interest. Beneficiary may collect and receive all the Rents, including those past due as well as those accruing thereafter, and, after deducting (A) all expenses of taking, holding, managing and operating the Mortgaged Property (including compensation for the services of all persons employed for such purposes); (B) the cost of all such maintenance, repairs, renewals, replacements, additions, betterments, improvements, purchases and acquisitions; (C) the cost of such insurance deemed necessary by Grantor, (D) such taxes, assessments and other similar charges as Beneficiary may at its option pay; (E) other proper charges upon the Mortgaged Property or any part thereof; and (F) the actual fees, expenses and disbursements of the attorneys and agents of Beneficiary, Beneficiary shall apply the remainder of the monies and proceeds so received by Beneficiary, first, to the payment of accrued interest; second, to the payment of Imposition Deposits and to other sums required to be paid hereunder, and third, to the payment of overdue installments of principal and any other unpaid Indebtedness then due. Anything in this Section to the contrary notwithstanding, Beneficiary shall not incur any liability as a result of any exercise by Beneficiary of its rights under this Instrument, and Beneficiary shall be liable to account only for the Rents actually received by Beneficiary;

        (4)   If an Event of Default shall exist, Beneficiary may require that Grantor cause all of its Accounts to be paid to one or more deposit accounts with Beneficiary, or at Beneficiary's option, with another financial institution approved by Beneficiary. Grantor assigns and grants to Beneficiary a security interest in, pledge of and right of setoff against all moneys from time to time held in such deposit accounts, to the extent permitted by applicable law. Grantor agrees to promptly notify all of its account debtors, including the Medicare and Medicaid agencies and other account debtors pursuant to all Reimbursement Contracts, to the extent permitted under applicable law and to the extent Grantor maintains such Accounts, to make payments to one or more such deposit accounts upon Beneficiary's request and as designated by Beneficiary, and Grantor agrees to provide any necessary endorsements to checks, drafts and other forms of payment so that such payments will be properly deposited in such accounts. Beneficiary may require that the deposit accounts be established so as to comply with any applicable Medicaid, Medicare and other requirements applicable to payments of any accounts receivable. Beneficiary may cause moneys to be withdrawn from such deposit accounts and applied to the Indebtedness in such order as Beneficiary may elect, whether or not then due. Grantor appoints Beneficiary as Grantor's attorney-in-fact, which appointment is coupled with an interest and is irrevocable, to provide any notice, endorse any check, draft or other payment for deposit, or take any other action which Grantor agrees to undertake in accordance with this Section. Beneficiary shall not be liable for failure to collect or to enforce any Accounts or for any action or mission on the part of Beneficiary, its officers, agents and employees in collecting or enforcing such Accounts.

        (5)   Whenever all the Indebtedness shall have been paid and all Events of Default shall have been cured, Beneficiary shall surrender possession of the Mortgaged Property to Grantor, its successors and/or assigns. The same right of taking possession, however, shall exist if any subsequent Event of Default shall occur and be continuing.

        (c)    Performance by Beneficiary.    Upon the occurrence of an Event of Default, Beneficiary may, at its sole option, pay, perform or observe the same, and all payments made or costs or expenses incurred by Beneficiary in connection therewith, with interest thereon at the Default Rate (as defined in the Note) or at the maximum rate from time to time allowed by applicable law, whichever is less, shall be secured hereby and shall be, without demand, immediately repaid by Grantor to Beneficiary. Notwithstanding anything to the contrary herein, Beneficiary shall have no obligation, explicit or implied to pay, perform, or observe any term, covenant, or condition.

        (d)    Receiver.    If any Event of Default shall have occurred and be continuing, Beneficiary, upon application to a court of competent jurisdiction, shall be entitled as a matter of strict right, without notice and without regard to the sufficiency or value of any security for the Indebtedness or the solvency of any party bound for its payment, to the appointment of a receiver to take possession of and to operate the Facility and to collect and apply the Rents. The receiver shall have all the rights and powers permitted under the laws of the State wherein the Facility is situated. Grantor will pay unto Beneficiary upon demand all expenses, including receiver's fees, actual attorney's fees, costs and agent's compensation, incurred pursuant to the provisions of this Section, and upon any Grantor's failure to pay the same, any such amounts shall be added to the Indebtedness and shall be secured by this Instrument.

        (e)    Beneficiary's Power of Enforcement.    If an Event of Default shall have occurred and be continuing, the Beneficiary may, either with or without entry or taking possession as hereinabove provided or otherwise, proceed by suit or suits at law in equity or any other appropriate proceeding or remedy (a) to enforce payment of the Note or the performance of any term thereof or any other right, (b) to foreclose this Instrument and to sell, as an entirety or in separate lots or parcels, the Mortgaged Property, as provided by applicable law, and (c) to pursue any other remedy available to it, all as the Beneficiary shall deem most effectual for such purposes. The Beneficiary shall take action either by such proceedings or by the exercise of its powers with respect to entry or taking possession, as the Beneficiary may determine.

        (f)    Power of Sale.

        (1)   Beneficiary may institute a proceeding or proceedings, judicial or nonjudicial, by advertisement or otherwise, of the complete or partial foreclosure of this Instrument or the complete or partial sale of the Mortgaged Property under power of sale or under any applicable provision of law. Beneficiary may, through the Trustee, sell the Mortgaged Property, and all estate, right, title, interest, claim and demand of Grantor therein, and all rights of redemption thereof, at one or more sales, as an entirety or in parcels, with such elements of real and/or personal property, and at such time and place and upon such terms as it may deem expedient, or as may be required by applicable law, and in the event of a sale, by foreclosure or otherwise, of less than all of the Mortgaged Property, this Instrument shall continue as a lien and security interest on the remaining portion of the Mortgaged Property. In the event foreclosure proceedings are filed by Beneficiary, all expenses incident to such proceeding, including, but not limited to, attorneys' fees and costs, shall be paid by Grantor and secured by this Instrument and by all of the other Loan Documents securing all or any part of the indebtedness evidenced by the Note. The secured indebtedness and all other obligations secured by this Instrument, including, without limitation, interest at the Default Interest Rate (as defined in the Note), any prepayment premium required to be paid under the Note in order to prepay principal (to the extent permitted by applicable law), attorneys' fees and any other amounts due and unpaid to Beneficiary under the Loan Documents, may be bid by Beneficiary in the event of a foreclosure sale hereunder.

        (2)   Any sale made by Trustee hereunder may be as an entirety or in such parcels as Beneficiary may request, and any sale may be adjourned by announcement at the time and place appointed for such sale without further notice except as may be required by law. The sale by Trustee of less than the whole of the Mortgaged Property shall not exhaust the power of sale herein granted, and Trustee is specifically empowered to make successive sale or sales

under such power until the whole of the Mortgaged Property shall be sold; and, if the proceeds of such sale of less than the whole of the Mortgaged Property shall be less than the aggregate of the Indebtedness and the expense of executing this trust as provided herein, this Instrument and the lien hereof shall remain in full force and effect as to the unsold portion of the Mortgaged Property just as though no sale had been made; provided, however, that Grantor shall never have any right to require the sale of less than the whole of the Mortgaged Property but Beneficiary shall have the right, at its sole election, to request Trustee to sell less than the whole of the Mortgaged Property. After each sale, Trustee shall make to the purchaser or purchasers at such sale good and sufficient conveyances in the name of Grantor, conveying the property so sold to the purchaser or purchasers in fee simple with general warranty of title, and shall receive the proceeds of said sale or sales and apply the same as herein provided. Payment of the purchase price to Trustee shall satisfy the obligation of purchaser at such sale therefor, and such purchaser shall not be responsible for the application thereof. The power of sale granted herein shall not be exhausted by any sale held hereunder by Trustee or his substitute or successor, and such power of sale may be exercised from time to time and as many times as Beneficiary may deem necessary until all of the Mortgaged Property has been duly sold and all Indebtedness has been fully paid. In the event any sale hereunder is not completed or is defective in the opinion of Beneficiary, such sale shall not exhaust the power of sale hereunder and a Beneficiary shall have the right to cause a subsequent sale or sales to be made hereunder. Any and all statements of fact or other recitals made in any deed or deed given by Trustee or any successor or substitute appointed hereunder as to nonpayment of the Indebtedness, or as to the occurrence of any Event of Default, or as to Beneficiary having declared all of such Indebtedness to be due and payable, or as to the request to sell, or as to notice of time, place and terms of sale and of the properties to be sold having been duly given, or as to the refusal, failure or inability to act of Trustee or any substitute or successor, or as to the appointment of any substitute or successor Trustee, or as to any other act or thing having been duly done by Beneficiary or by Trustee or any substitute or successor, shall be take as prima facie evidence of the truth of the facts so stated and recited. Trustee, his successor or substitute, may appoint or delegate any one or more persons as agent to perform any act or acts necessary or incident to any sale held by Trustee, including, without limitation, the posting of notices and the conducting of sales, but in the name and on behalf of Trustee, his successor or substitute.

        (3)   If the Mortgaged Property is sold pursuant to this Section, Grantor or any person holding possession of the Mortgaged Property through Grantor shall immediately surrender possession of the Mortgaged Property to the purchaser at such sale upon the purchaser's written demand. If possession is not surrendered upon the purchaser's written demand, Grantor or such person shall be a tenant at sufferance and may be removed by writ of possession or by an action for forcible entry and detainer.

        (g)    Purchase by Beneficiary.    Upon any foreclosure sale, Beneficiary may bid for and purchase the Mortgaged Property and shall be entitled to apply all or any part of the Indebtedness as a credit to the purchase price.

        (h)    Application of Proceeds of Sale.    In the event of a foreclosure or other sale of all or any portion of the Mortgaged Property, the proceeds of said sale shall be applied, first, to the expenses of such sale and of all proceedings in connection therewith, including actual attorney's fees and expenses (and attorney's fees and expenses shall become absolutely due and payable whenever foreclosure is commenced); then to insurance premiums, liens, assessments, Impositions and charges, including utility charges and any other amounts advanced by Beneficiary hereunder, and interest thereon; then to payment of the Indebtedness in such order of priority as Beneficiary shall determine, in its sole discretion; and finally the remainder, if any, shall be paid to Grantor, or to the person or entity lawfully entitled thereto.

        (i)    Grantor as Tenant Holding Over.    In the event of any such foreclosure sale, Grantor (if Grantor shall remain in possession) shall be deemed a tenant holding over and shall forthwith

deliver possession to the purchaser or purchasers at such sale or be summarily dispossessed according to provisions of law applicable thereto.

        (j)    Waiver of Appraisement, Valuation, Etc.    Grantor agrees, to the full extent permitted by law, that in case of an Event of Default on the part of Grantor hereunder, neither Grantor nor anyone claiming through or under Grantor will assert, claim or seek to take advantage of any appraisement, redemption, marshalling, valuation, stay, homestead, extension, exemption or laws now or hereafter in force, in order to prevent or hinder the enforcement of foreclosure of this Instrument, or the absolute sale of the Mortgaged Property, or the delivery of possession thereof immediately after such sale to the purchaser at such sale.

        (k)    Discontinuance of Proceedings.    In case Beneficiary shall have proceeded to enforce any right, power or remedy under this Instrument by foreclosure, entry or otherwise, and such proceedings shall have been discontinued or abandoned for any reason, or shall have been determined adversely to Beneficiary, then in every such case, Grantor and Beneficiary shall be restored to their former positions and rights hereunder, and all rights, powers and remedies of Beneficiary shall continue as if no such proceedings had occurred.

        (l)    Waiver.

        (1)   No delay or omission by Beneficiary or by any holder of the Note to exercise any right, power or remedy accruing upon any default shall exhaust or impair any such right, power or remedy or shall be construed to be a waiver of any such default, or acquiescence therein, and every right, power and remedy given by this Instrument to Beneficiary may be exercised from time to time and as often as may be deemed expedient by Beneficiary. No consent or waiver expressed or implied by Beneficiary to or of any breach or default by Grantor in the performance of the obligations of Grantor hereunder shall be deemed or construed to be a consent or waiver to or of any other breach or default in the performance of the same or any other obligations of Grantor hereunder. Failure on the part of Beneficiary to complain of any act or failure to act or failure to declare an Event of Default, irrespective of how long such failure continues, shall not constitute a waiver by Beneficiary of its rights hereunder or impair any rights, powers or remedies of Beneficiary hereunder.

        (2)   No act or omission by Beneficiary shall release, discharge, modify, change or otherwise affect the original liability under the Note, this Instrument, other Loan Documents or any other obligation of Grantor or any subsequent purchaser of the Mortgaged Property or any part thereof, or any maker, co-signer, endorser, surety or guarantor, nor preclude Beneficiary from exercising any right, power or privilege herein granted or intended to be granted in any Event of Default then existing or of any subsequent default, nor alter the lien of this Instrument, except as expressly provided in an instrument or instruments executed by Beneficiary. Without limiting the generality of the foregoing, Beneficiary may (i) grant forbearance or an extension of time for the payment of all or any portion of the Indebtedness; (ii) take other or additional security for the payment of any of the Indebtedness; (iii) waive or fail to exercise any right granted herein, in the Note or in other Loan Documents; (iv) release any part of the Mortgaged Property from the security interest or lien of this Instrument or otherwise change any of the terms, covenants, conditions or agreements of the Note, this Instrument or other Loan Documents; (v) consent to the filing of any map, plat or replat affecting the Land; (vi) consent to the granting of any easement or other right affecting the Mortgaged Property; (vii) make or consent to any agreement subordinating the security title or lien hereof, or (viii) take or omit to take any action whatsoever with respect to the Note, this Instrument, the other Loan Documents, the Mortgaged Property or any document or instrument evidencing, securing or in any way related to this Instrument, all without releasing, discharging, modifying, changing or affecting any such liability, or precluding Beneficiary from exercising any such right, power or privilege with respect to the lien of this Instrument. In the event of the sale or transfer by operation of law or otherwise of all or any part of the Mortgaged Property, Beneficiary, without notice, is hereby authorized and empowered to deal

with any such vendee or transferee with respect to the Mortgaged Property or the Indebtedness, or with reference to any of the terms, covenants, conditions or agreements hereof, as fully and to the same extent as it might deal with the original parties hereto and without in any way releasing or discharging any liabilities, obligations or undertakings of Grantor, any guarantor of the Indebtedness or others.

        (3)   Grantor waives and relinquishes any and all rights it may have, whether at law or equity, to require Beneficiary to proceed to enforce or exercise any rights, powers and remedies it may have under the Loan Documents in any particular manner, in any particular order, or in any particular state or other jurisdiction. Grantor expressly waives and relinquishes any and all rights and remedies that Grantor may have or be able to assert by reason of the laws of the state of jurisdiction pertaining to the rights and remedies of sureties.

        Grantor makes these arrangements, waivers and relinquishments knowingly and as a material inducement to Beneficiary in making the Loan, after consulting with and considering the advice of independent legal counsel selected by Grantor.

        (m)    Suits to Protect the Mortgaged Property.    Beneficiary shall have power to institute and maintain such suits and proceedings as it may deem expedient (a) to prevent any impairment of the Mortgaged Property by any acts which may be unlawful or constitute an Event of Default under this Instrument; (b) to preserve or protect it interest in the Mortgaged Property and in the Rents arising therefrom; and (c) to restrain the enforcement of or compliance with any legislation or other governmental enactment, rule or order that may be unconstitutional or otherwise invalid, if the enforcement of or compliance with such enactment, rule or order would materially impair the security hereunder or be prejudicial to the interest of Beneficiary.

        (n)    Proofs of Claim.    In the case of any receivership, insolvency, bankruptcy, reorganization, arrangement, adjustment, composition or other proceedings affecting Grantor, its creditors or its properties, Beneficiary, to the extent permitted by law, shall be entitled to file such proofs of claim and other documents as may be necessary or advisable in order to have the claims of Beneficiary allowed in such proceedings for the entire amount due and payable by Grantor under this Instrument at the date of the institution of such proceedings and for any additional amount which may become due and payable by Grantor hereunder after such date.

        16.    REMEDIES CUMULATIVE.    Each right and remedy provided in this Instrument is distinct from all other rights or remedies under this Instrument or any other Loan Document or afforded by applicable law, and each shall be cumulative and may be exercised concurrently, independently, or successively, in any order.

        17.    FORBEARANCE.

        (a)   Beneficiary may agree with Grantor, from time to time, at Beneficiary's option and without giving notice to, or obtaining the consent of, or having any effect upon the obligations of any guarantor or other third party obligor, extend the time for payment of all or any part of the Indebtedness, reduce the payments due under this Instrument, the Note, or any other Loan Document, release anyone liable for the payment of any amounts under this Instrument, the Note, or any other Loan Document, accept a renewal of the Note, modify the terms and time of payment of the Indebtedness, join in any extension or subordination agreement, release any Mortgaged Property, take or release other or additional security, modify the rate of interest or period of amortization of the Note or change the amount of the monthly installments payable under the Note, or otherwise modify this Instrument, the Note, or any other Loan Document.

        (b)   Any forbearance by Beneficiary in exercising any right or remedy under the Note, this Instrument, or any other Loan Document or otherwise afforded by applicable law, shall not be a waiver of or preclude the exercise of any right or remedy. The acceptance by Beneficiary of payment of all or any part of the Indebtedness after the due date of such payment, or in an amount which is less than the required payment, shall not be a waiver of Beneficiary's right to require prompt payment when due of all other payments on account of the Indebtedness or to

exercise any remedies for any failure to make prompt payment. Enforcement by Beneficiary of any security for the Indebtedness shall not constitute an election by Beneficiary of remedies so as to preclude the exercise of any other right available to Beneficiary. Beneficiary's receipt of any insurance and/or condemnation proceeds shall not operate to cure or waive any Event of Default.

        18.    LOAN CHARGES.    If any applicable law limiting the amount of interest or other charges permitted to be collected from Grantor is interpreted so that any charge provided for in any Loan Document, whether considered separately or together with other charges levied in connection with any other Loan Document, violates that law, and Grantor is entitled to the benefit of that law, that charge is hereby reduced to the extent necessary to eliminate that violation. The amounts, if any, previously paid to Beneficiary in excess of the permitted amounts shall be applied by Beneficiary to reduce the principal of the Indebtedness. For the purpose of determining whether any applicable law limiting the amount of interest or other charges permitted to be collected from Grantor has been violated, all Indebtedness which constitutes interest, as well as all other charges levied in connection with the Indebtedness which constitute interest, shall be deemed to be allocated and spread over the stated term of the Note. Unless otherwise required by applicable law, such allocation and spreading shall be effected in such a manner that the rate of interest so computed is uniform throughout the stated term of the Note.

        19.    WAIVER OF STATUTE OF LIMITATIONS.    Grantor hereby waives the right to assert any statute of limitations as a bar to the enforcement of the lien of this Instrument or to any action brought to enforce any Loan Document.

        20.    WAIVER OF MARSHALLING.    Notwithstanding the existence of any other security interests in the Mortgaged Property held by Beneficiary or by any other party, Beneficiary shall have the right to determine the order in which any or all of the Mortgaged Property shall be subjected to the remedies provided in this Instrument, the Note, any other Loan Document or applicable law. Beneficiary shall have the right to determine the order in which any or all portions of the Indebtedness are satisfied from the proceeds realized upon the exercise of such remedies. Grantor and any party who now or in the future acquires a security interest in the Mortgaged Property and who has actual or constructive notice of this Instrument waives any and all right to require the marshalling of assets or to require that any of the Mortgaged Property be sold in the inverse order of alienation or that any of the Mortgaged Property be sold in parcels or as an entirety in connection with the exercise of any of the remedies permitted by applicable law or provided in this instrument.

        21.    FURTHER ASSURANCES.    Grantor shall execute, acknowledge, and deliver, at its sole cost and expense, all further acts, deeds, conveyances, assignments, estoppel certificates, financing statements, transfers and assurances as Beneficiary may require from time to time in order to better assure, grant, and convey to Beneficiary the rights intended to be granted, now or in the future, to Beneficiary under this Instrument and the Loan Documents.

        22.    ESTOPPEL CERTIFICATE.    Within 10 days after a request from Beneficiary, Grantor shall deliver to Beneficiary a written statement, signed and acknowledged by Grantor, certifying to Beneficiary or any person designated by Beneficiary, as of the date of such statement, (i) that the Loan Documents arc unmodified and in full force and effect (or, if there have been modification, that the Loan Documents are in full force and effect as modified and setting forth such modifications); (ii) the unpaid principal balance of the Note; (iii) the date to which interest under the Note has been paid; (iv) that Grantor is not in default in paying the Indebtedness or in performing or observing any of the covenants or agreements contained in this Instrument or any of the other Loan Documents (or, if the Grantor is in default, describing such default in reasonable detail); (v) whether or not there are then existing any setoffs or defenses known to Grantor against the enforcement of any right or remedy of Beneficiary under the Loan Documents; and (vi) any additional facts requested by Beneficiary.

        23.    GOVERNING LAW; CONSENT TO JURISDICTION AND VENUE.

        (a)   This Instrument, and any Loan Document which does not itself expressly identify the law that is to apply to it, shall be governed by the laws of the jurisdiction in which the Mortgaged Property is located (the "Property Jurisdiction").

        (b)   Each of Grantor and Beneficiary consents to the exclusive jurisdiction of any and all state and federal courts with jurisdiction in the Property Jurisdiction over Grantor and Grantor's assets. Grantor agrees that its assets shall be used first to satisfy all claims of creditors organized or domiciled in the United States and that no assets of Grantor in the United States shall be considered part of any foreign bankruptcy estate.

        (c)   Each of Grantor and Beneficiary agrees that any controversy arising under or in relation to the Note, this Instrument, or any other Loan Document shall be litigated exclusively in the Property Jurisdiction. The state and federal courts and authorities with jurisdiction in the Property Jurisdiction shall have exclusive jurisdiction over all controversies which shall arise under or in relation to the Note, any security for the Indebtedness, or any other Loan Document. Grantor irrevocably consents to service, jurisdiction, and venue of such courts for any such litigation and waives any other venue to which it might be entitled by virtue of domicile, habitual residence or otherwise.

        24.    NOTICE.

        (a)   All notices, demands and other communications ("notice") under or concerning this Instrument shall be in writing. Each notice shall be addressed to the intended recipient at its address set forth in this Instrument, and shall be deemed given on the earliest to occur of (1) the date when the notice is received by the addressee; (2) the first Business Day after the notice is delivered to a recognized overnight courier service, with arrangements made for payment of charges for next Business Day delivery; or (3) the third Business Day after the notice is deposited in the United States mail with postage prepaid, certified mail, return receipt requested. As used in this Section, the term "Business Day" means any day other than a Saturday, a Sunday or any other day on which Beneficiary is not open for business.

        (b)   Any party to this Instrument may change the address to which notices intended for it are to be directed by means of notice given to the other party in accordance with this Section. Each party agrees that it will not refuse or reject delivery of any notice given in accordance with this Section, that it will acknowledge, in writing, the receipt of any notice upon request by the other party and that any notice rejected or refused by it shall be deemed for purposes of this Section to have been received by the rejecting party on the date so refused or rejected, as conclusively established by the records of the U.S. Postal Service or the courier service.

        (c)   Any notice under the Note and any other Loan Document which does not specify how notices are to be given shall be given in accordance with this Section.

        (d)   A copy of any notice sent to the Beneficiary pursuant to this Section shall be sent to:

Graham & James LLP
One Maritime Plaza, Suite 300
San Francisco, CA 94111
Attn.: Bruce W. Hyman, Esq.

        A copy of any notice sent to the Grantor pursuant to this Section shall be sent to:

G&L Hoquiam, LLC
c/o G&L Realty Partnership, L.P.
439 North Bedford Drive
Beverly Hills, CA 90210
Attn.: Steven Lebowitz

        25.    SINGLE PURPOSE ENTITY.    Until the Indebtedness is paid in full, Mortgagor shall maintain its status as a Single Purpose Entity and comply with all those covenants with respect to its status as a Single Purpose Entity as set forth in Section 5.5 of the Loan Agreement

        26.    JOINT AND SEVERAL LIABILITY.    If more than one Person signs this Instrument as Grantor, the obligations of such Person shall be joint and several.

        27.    RELATIONSHIP OF PARTIES; NO THIRD PARTY BENEFICIARY.    The relationship between Beneficiary and Grantor shall be solely that of creditor and debtor, respectively, and nothing contained in this Instrument shall create any other relationship between Beneficiary and Grantor. No creditor of any party to this Instrument and no other person shall be a third party beneficiary of this Instrument or any other Loan Document.

        28.    SEVERABILITY; AMENDMENTS.    The invalidity or unenforceability of any provision of this Instrument shall not affect the validity or enforceability of any other provision, and all other provisions shall remain in full force and effect. This Instrument contains the entire agreement among the parties as to the rights granted and the obligations assumed in this Instrument. This Instrument may not be amended or modified except by a writing signed by the party against whom enforcement is sought.

        29.    MISCELLANEOUS PROVISIONS.    The captions and headings of the sections of this Instrument are for convenience only and shall be disregarded in construing this Instrument. Any reference in this Instrument to an "Exhibit" or a "Section" shall, unless otherwise explicitly provided, be construed as referring, respectively, to an Exhibit attached to this Instrument or to a section of this Instrument. All Exhibits attached to or referred to in this Instrument are incorporated by reference into this Instrument. Any reference in this Instrument to a statute or regulation shall be construed as referring to that statute or regulation as amended from time to time. Use of the singular in this Agreement includes the plural and use of the plural includes the singular. As used in this Instrument, the term "including" means "including, but not limited to."

        30.    WAIVER OF TRIAL BY JURY.GRANTOR AND BENEFICIARY EACH (A) COVENANTS AND AGREES NOT TO ELECT A TRIAL BY JURY WITH RESPECT TO ANY ISSUE THAT IS TRIABLE OF RIGHT BY A JURY AND (B) WAIVES ANY RIGHT TO TRIAL BY JURY TO THE EXTENT THAT ANY SUCH RIGHT EXISTS NOW OR IN THE FUTURE. THIS WAIVER OF RIGHT TO TRIAL BY JURY IS SEPARATELY GIVEN BY EACH PARTY, KNOWINGLY AND VOLUNTARILY WITH THE BENEFIT OF COMPETENT LEGAL COUNSEL, AND THIS WAIVER IS INTENDED TO ENCOMPASS INDIVIDUALLY EACH INSTANCE AND EACH ISSUE AS TO WHICH THE RIGHT TO A JURY TRIAL WOULD OTHERWISE EXIST. GRANTOR AND BENEFICIARY ARE AUTHORIZED TO SUBMIT THIS INSTRUMENT TO ANY COURT HAVING JURISDICTION OVER THE SUBJECT MATTER AND THE PARTIES TO ANY LOAN DOCUMENT, SO AS TO SERVE AS CONCLUSIVE EVIDENCE OF GRANTOR'S AND BENEFICIARY'S WAIVER OF THE RIGHT TO JURY TRIAL. FURTHER, GRANTOR AND BENEFICIARY EACH CERTIFIES THAT NEITHER GRANTOR'S NOR BENEFICIARY'S REPRESENTATIVES OR AGENTS HAVE REPRESENTED, EXPRESSLY OR OTHERWISE, THAT ENFORCEMENT OF THIS WAIVER WILL NOT BE SOUGHT.

        31.    WAIVER OF AUTOMATIC STAY.TO THE EXTENT PERMITTED UNDER APPLICABLE LAW, GRANTOR HEREBY AGREES THAT, IN CONSIDERATION OF BENEFICIARY'S AGREEMENT TO MAKE THE LOAN AND IN RECOGNITION THAT THE FOLLOWING COVENANT IS A MATERIAL INDUCEMENT FOR BENEFICIARY TO MAKE THE LOAN, IN THE EVENT THAT GRANTOR SHALL (I) FILE WITH ANY BANKRUPTCY COURT OF COMPETENT JURISDICTION OR BE THE SUBJECT OF ANY PETITION UNDER ANY SECTION OR CHAPTER OF TITLE 11 OF THE UNITED STATES CODE, AS AMENDED ("BANKRUPTCY CODE"), OR SIMILAR LAW OR STATUE; (II) BE THE SUBJECT OF ANY ORDER FOR RELIEF ISSUED UNDER THE BANKRUPTCY CODE OR SIMILAR LAW OR STATUTE; (III) FILE OR BE THE SUBJECT OF ANY PETITION SEEKING ANY REORGANIZATION, ARRANGEMENT, COMPOSITION, READJUSTMENT, LIQUIDATION, DISSOLUTION, OR SIMILAR RELIEF UNDER ANY PRESENT OR FUTURE FEDERAL OR STATE ACT OR LAW RELATING TO BANKRUPTCY,

INSOLVENCY, OR OTHER RELIEF FOR DEBTORS; (IV) HAVE SOUGHT OR CONSENTED TO OR ACQUIESCED IN THE APPOINTMENT OF ANY TRUSTEE, RECEIVER, CONSERVATOR, OR LIQUIDATOR; OR (V) BE THE SUBJECT OF AN ORDER, JUDGEMENT OR DECREE ENTERED BY ANY COURT OF COMPETENT JURISDICTION APPROVING A PETITION FILED AGAINST GRANTOR FOR ANY REORGANIZATION, ARRANGEMENT, COMPOSITION, READJUSTMENT, LIQUIDATION, DISSOLUTION, OR SIMILAR RELIEF UNDER ANY PRESENT OR FUTURE FEDERAL OR STATE ACT OR LAW RELATING TO BANKRUPTCY, INSOLVENCY OR RELIEF FOR DEBTORS, THEN, SUBJECT TO COURT APPROVAL, BENEFICIARY SHALL THEREUPON BE ENTITLED AND GRANTOR HEREBY IRREVOCABLY CONSENTS TO, AND WILL NOT CONTEST, AND AGREES TO STIPULATE TO RELIEF FROM ANY AUTOMATIC STAY OR OTHER INJUNCTION IMPOSED BY SECTION 362 OF THE BANKRUPTCY CODE, OR SIMILAR LAW OR STATUTE (INCLUDING, WITHOUT LIMITATION, RELIEF FROM ANY EXCLUSIVE PERIOD SET FORTH IN SECTION 1121 OF THE BANKRUPTCY CODE) OR OTHERWISE, ON OR AGAINST THE EXERCISE OF THE RIGHTS AND REMEDIES OTHERWISE AVAILABLE TO BENEFICIARY AS PROVIDED IN THE LOAN DOCUMENTS, AND AS OTHERWISE PROVIDED BY LAW, AND GRANTOR HEREBY IRREVOCABLY WAIVES ITS RIGHTS TO OBJECT TO SUCH RELIEF.

        32.    SUBSTITUTE TRUSTEE.    Beneficiary at Beneficiary's option, with or without cause, may from time to time remove Trustee and appoint a successor trustee to any Trustee appointed hereunder by an instrument recorded in the county in which this Instrument is recorded. Without conveyance of the Mortgaged Property, the successor trustee shall succeed to all the title, power and duties conferred upon the Trustee herein and by applicable law.

        33.    SUCCESSORS AND ASSIGNS BOUND.    This Instrument shall bind, and the rights granted by this Instrument shall inure to, the respective successors and assigns of Grantor and Beneficiary.

        34.    SPECIAL STATE OF WASHINGTON PROVISIONS.

        (a)   This Instrument shall constitute a Financing Statement filed as a fixture filing pursuant to Article 9 of the Uniform Commercial Code (RCW 62A.9-402(b)). Parts of the Mortgaged Property are or are to become Fixtures or Improvements.

        (b)   Grantor hereby represents, warrants and covenants that none of the Mortgaged Property is used principally or at all for agricultural or farming purposes. The Mortgaged Property does not constitute the homestead of Grantor.

        (c)   At Beneficiary's option, any written notice of default given to Grantor under this Instrument may be given in form of statutory notice of default under the Washington Deed of Trust Act.

        (d)   ORAL AGREEMENTS OR ORAL COMMITMENTS TO LEND MONEY, EXTEND CREDIT OR TO FORBEAR ENFORCING PAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON LAW.

[Signatures begin on next page.]

GRANTOR:
G&L HOQUIAM, LLC., a Delaware limited liability company
By:    G&L REALTY PARTNERSHIP, L.P., a Delaware limited partnership Managing Member
By:	G&L REALTY CORP., a Maryland corporation General Partner
	By:	/s/  STEVEN D. LEBOWITZ Name. Steven D. Lebowitz Title: President

ACKNOWLEDGMENT

STATE OF CALIFORNIA

COUNTY OF LOS ANGELES

On	July 30, 1998 Date	before me,	Helen Nelson Notary Public
personally appeared	Steven D. Lebowitz Name(s) of Signer(s)

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personally known to me - OR -
  
  
  
HELEN NELSON
COMM. # 1046995
NOTARY PUBLIC—CALIFORNIA
LOS ANGELES COUNTY
My Comm. Expires Dec. 11, 1998
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proved to me on the basis of satisfactory evidence to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument.
  
WITNESS my hand and official seal.
  
/s/  HELEN NELSON Signature Of Notary Public

EXHIBIT "A"
[DESCRIPTION OF THE LAND]

PARCEL A:

        Lots 1 and 2, Block 86, Heermans Annex to the City of Hoquiam, as per plat recorded in Volume 3 of Plats, page 71, records of Grays Harbor County;

        EXCEPTING THEREFROM the Southerly 12 feet thereof, as dedicated by Ordinance No. 1911 to the City of Hoquiam, filed May 18, 1953, as Auditor's File No. 563092, and recorded in Volume 337 of Deeds, page 18, records of Grays Harbor County;

        Situata in the County of Grays Harbor, State of Washington

PARCEL B:

        That portion of the South Half of the Northeast Quarter of the Northwest Quarter of Section 7, Township 17 North, Range 9 West of the Willamette Meridian, described as follows:

Beginning at the Northeast corner of said Lot 1:
Thence Northerly on the Westerly line of 31st Street in said Heermans Annex extended Northerly 161.2 feet;
Thence Westerly 180 feet parallel to Cherry Street in said Heermans Annex;
Thence Southerly 157.6 feet, more or less, parallel with the Westerly line of said 31st Street extended Northerly to the Northwest corner of said Lot 2;
Thence Easterly 180 feet along the Northerly line of said Lots 2 and 1 to the point of beginning;

        Situata in the County of Grays Harbor, State of Washington.

PARCEL C:

        That portion of the South Half of the Northeast Quarter of the Northwest Quarter of Section 7, Township 17 North, Range 9 West of the Willamette Meridian, described as follows:

Beginning at the Northeast corner of Lot 1, Block 86, Heermans Annex to the City of Hoquiam, as per plat recorded in volume 3 of Plats, page 72, records of Grays Harbor County;
Thence Northerly along the Westerly line of 31st Street extended Northerly a distance of 161.2 feet to the true point of beginning of the tract herein described:

Thence Westerly parallel to Cherry Street a distance of 180 feet;
Thence Northerly parallel to 31st Street extended Northerly, a distance of 100 feet;
Thence Easterly parallel to Cherry Street, a distance of 180 feet to the Westerly line of 31^st Street
extended Northerly;
Thence Southerly along the Westerly line of 31st Street extended Northerly 100 feet to the point
of beginning;

        Situata in the County of Grays Harbor, State of Washington.

EX-10.25

Exhibit 10.25

PACIFIC CARE CENTER

PROMISSORY NOTE

$2,475,000.00	Hoquiam, Washington
	August 6, 1998

        FOR VALUE RECEIVED, the undersigned G&L HOQUIAM, LLC, a Delaware limited liability company, having an address at c/o G&L Realty Partnership, L.P., 439 North Bedford Drive, Beverly Hills, California 90210 (the "Borrower"), hereby promises to pay to the order of GMAC COMMERCIAL MORTGAGE CORPORATION, a California corporation, having an address at 650 Dresher Road, P.O. Box 1015, Horsham, Pennsylvania 19044-8015 ("the Lender"), its successors and assigns as bolder of this Note or, if this Note has then been endorsed "to bearer," to the bearer of this Note (the Lender, its said successors and assigns, and any such bearer, being hereinafter sometimes referred to collectively as "the Holder"), at the Lender's said address or at such other place or to such other person as may be designated in writing to the Borrower by the Lender, the principal sum of TWO MILLION FOUR HUNDRED SEVENTY FIVE THOUSAND AND NO/100 DOLLARS ($2,475,000.00) (the "Loan"), together with interest on the unpaid balance thereof at the rate hereinafter set forth.

        ON THE TERMS AND SUBJECT TO THE CONDITIONS which are hereinafter set forth:

        Section 1.    Interest Rate and Initial Interest Payment.

        1.1    Interest Rate.    Interest shall accrue on the outstanding balance of the principal amount outstanding hereunder from time to time from and after the date hereof at the rate of SEVEN AND 49/100 PERCENT (7.49%) per annum (the "Regular Rate"). Interest for the period beginning on the date of this Note and ending on and including the last day of the month in which this Note is dated shall be payable on the date hereof. Interest shall be paid in arrears and shall be computed on the basis of a 360-day year and shall be charged on the principal balance outstanding from time to time for the actual number of days elapsed.

        1.2    Default Interest Rate.    If the Borrower fails to make any payment of principal, interest or fees on the date on which such payment becomes due and payable, whether at maturity or by acceleration or on any other date, such payment shall accrue interest from such date until paid at the per annum rate equal to the lesser of (i) eighteen percent (18%) or (ii) the maximum rate permitted by applicable law ("the Default Rate").

        1.3    Reimbursement for Increased Costs or Reduced Return.    If any law or guideline or interpretation or application thereof by any governmental authority charged with the interpretation or administration thereof or compliance with any request or directive of any governmental authority (whether or not having the force of law) now existing or hereafter adopted (i) subjects Holder to any tax or changes the basis of taxation with respect to this Note, the Loan or payments by Borrower of principal, interest or other amounts due from Borrower hereunder or thereunder (except for taxes on the overall net income or overall gross receipts of Holder imposed as a result of a present or former connection between the jurisdiction of the government or taxing authority imposing such tax on Holder; provided, that this exclusion shall not apply to a connection arising solely from Holder having executed, delivered, performed its obligations under or received a payment under, or enforced any of the Loan Documents (as defined in Section 8.1.1 below)), (ii) imposes, modifies or deems applicable any reserve, special deposit or similar requirement against credits or commitments to extend credit extended by, assets (funded or contingent) of, deposits with or for the account of, or other acquisition of funds by, Holder, or (iii) imposes upon Holder any other condition or expense with respect to this Note, the Loan or its making, maintenance or funding of any part of the Loan or any security therefor, and the result of any of the foregoing is to increase the cost to, reduce the income receivable by, or impose any

expense (including, without limitation, loss of margin) upon Holder with respect to the Note, or the making, maintenance or funding of any part of the Loan, by an amount which Holder deems to be material, Holder may from time to time notify Borrower of the amount determined in good faith (using any averaging and attribution methods) by Holder (which determination shall be conclusive) to be necessary to compensate Holder for such increase, reduction or imposition and, if Borrower is by law prohibited from paying any such amount, Holder may elect to declare the entire unpaid principal balance hereof and all interest accrued thereon immediately due and payable. Such amount shall be due and payable by Borrower to Holder seven (7) days after such notice is given,

        Section 2.    Payments.

        2.1    Principal and Interest Payments.    Commencing on October 1, 1998 and continuing on the first day of each calendar month thereafter to and including September 1, 2008, monthly payments of principal and interest shall be made in the amount of EIGHTEEN THOUSAND FOUR HUNDRED FORTY-EIGHT AND 79/100 DOLLARS ($18,448.79) each.

        Section 3.    Application of Payments.    Payments made by Borrower on account hereof shall be applied first, toward any Late Fees (hereinafter defined) or other fees and charges due hereunder, second, toward payment of any interest due at the Default Rate, third, toward payment of any interest due at the Regular Rate, and fourth, toward payment of principal. Notwithstanding the foregoing, if any advances made by Holder under the terms of any instruments securing this Note have not been repaid, any payments made may, at the option of Holder, be applied first, to repay such advances, and interest thereon, with the balance, if any, applied as set forth in the preceding sentence.

        Section 4.    Maturity Date.    Anything in this Note to the contrary notwithstanding, the entire unpaid balance of the principal amount hereof and all interest accrued thereon (including interest accruing at the Default Rate) and all Late Fees shall, unless sooner paid, and except to the extent that payment thereof is sooner accelerated, be and become due and payable on September 1, 2008 (the "Maturity Date").

        Section 5.    Loan Repayment and Defeasance.

        a.    Repayment.    Other than as set forth in this Section 5, or as required or permitted pursuant hereto in connection with a casualty or condemnation, Borrower shall have no right to prepay all or any portion of the Loan during the period commencing on the date hereof through, but not including, the Payment Date (hereinafter defined) which is six (6) months prior to the Maturity Date ("Optional Prepayment Date".) From and after the Optional Prepayment Date, the Loan may be prepaid in whole or in part, on any Payment Date, together with accrued interest to the date of such prepayment on the principal amount prepaid, without penalty or premium. Any such prepayment shall be subject, in each case, to the satisfaction of the condition precedent that Borrower shall provide not less than thirty (30) days prior written notice to Holder specifying the Payment Date on which such prepayment is to occur and indicating the principal amount of the Note to be so prepaid. For purposes of this subparagraph (a) "Payment Date" means the first day of each calendar month prior to the Maturity Date.

        b.    Voluntary Defeasance of the Note.    On or after that date ("Optional Defeasance Date") which is the earlier to occur of (i) three years after the date of this Note or (ii) two years after the Loan is sold into a securitization ("Securitization"), and subject to confirmation from applicable rating agencies ("Rating Agencies") having been obtained therefor and to the terms and conditions set forth in this Section 5(b), Borrower may defease all (but not less than all) of the Loan (hereinafter, "Defeasance"). No Defeasance shall be required on or after the Optional Prepayment Date. Defeasance shall be subject to satisfaction of each of the following conditions precedent:

          (i)  Borrower shall provide not less than thirty (30) days prior written notice to Holder specifying a date ("Defeasance Date") which shall be a Payment Date, on which the amount required to defease the Loan ("Defeasance Deposit") is to be made and on which the Defeasance is to occur, as well as the anticipated outstanding principal amount of this Note as of the Defeasance Date.

        (iii)  Borrower shall pay to Holder all accrued and unpaid interest on the outstanding principal balance of this Note to but not including the Defeasance Date.

        (iv)  Borrower shall pay to Holder all other sums, not including scheduled interest or principal payments, then due under this Note, the Deed of Trust (hereinafter defined) and any of the other Loan Documents.

         (v)  No Event of Default shall exist on the Defeasance Date.

        (vi)  Borrower shall pay to Holder the required Defeasance Deposit for the Defeasance.

       (vii)  Borrower shall execute and deliver one or more security agreements in form and substance satisfactory to Holder (collectively, the "Security Agreement"), creating a first priority lien on, and security interest in, the Defeasance Deposit and the U.S. Government Securities purchased with the Defeasance Deposit in accordance with the provisions of Section 5(c) below.

      (viii)  Borrower shall deliver to Holder an opinion of Borrower's counsel, which opinion shall be in form and substance satisfactory to Holder in its sole discretion, stating, among other things, that Holder has a perfected first priority security interest in the U.S. Government Securities purchased with the Defeasance Deposit.

        c.     If required by the applicable Rating Agencies, Borrower also shall deliver or cause to be delivered from Borrower's counsel a non-consolidation opinion with respect to the Successor Borrower (as defined below), if any, which opinion shall be in form and substance satisfactory to Holder in its sole discretion and to the applicable Rating Agencies. In addition, if the Loan is included in any REMIC formed pursuant to a Securitization, Borrower also shall deliver or cause to be delivered an opinion of Borrower's counsel, which opinion shall be in form and substance satisfactory to Holder in its sole discretion, stating that (A) after a Defeasance, the Loan will continue to be a "qualified mortgage" within the meaning of Section 860G of the United States Internal Revenue Code (as now or hereafter amended, "Code") and (B) the REMIC will not fail to maintain its status as a "real estate mortgage investment conduit" within the meaning of Section 860D of the Code as a result of such Defeasance.

        d.     Borrower shall deliver to Holder a certification from Borrower, in form and substance satisfactory to Holder, certifying that the requirements set forth in this Section 5(b) have been satisfied.

        e.     Borrower shall deliver such other certificates, documents or instruments as Holder may reasonably request, all of which shall be in form and substance acceptable to Holder.

        f.      Borrower shall pay all reasonable costs and expenses of Holder incurred in connection with the Defeasance, including any costs and expenses associated with the Release Instruments (as defined in Section 5.4 hereof) and reasonable attorneys fees and expenses.

        g.     Borrower shall deliver to Holder a confirmation, in form and substance satisfactory to Holder, by a "Big Six" independent certified public accounting firm, that Defeasance Deposit is sufficient to pay all Scheduled Defeasance Payments and other amounts required to be paid by Borrower hereunder in connection with the proposed Defeasance.

        h.     Borrower shall deliver to Holder confirmation, in form and substance satisfactory to Holder, that all conditions to Defeasance have been met from any applicable Rating Agency that has required as a condition to Defeasance that such conditions have been met.

        5.1    Purchase of U.S. Government Securities.    In connection with the Defeasance of this Note, Borrower hereby appoints Holder as its agent and attorney-in-fact for the purpose of using the Defeasance Deposit to purchase U.S. Government Securities (which purchases, if made by Holder, shall be made on an arms-length basis at then prevailing market rates) which provide payments on or prior to, but as close as possible to, all successive Payment Dates after the Defeasance Date, (including the outstanding principal balance of this Note due on the Maturity Date), and in amounts equal to the full amounts due on each Payment Date under this Note ("Scheduled Defeasance Payments"). Borrower, pursuant to the Security Agreement or other appropriate document, shall irrevocably authorize and

direct that the payments received from the U.S. Government Securities may be made directly to Holder and applied to satisfy the obligations of the Borrower under this Note. In connection with the Defeasance of the Loan, any portion of the Defeasance Deposit in excess of the amount necessary to purchase the U.S. Government Securities required by this Section 5 and satisfy Borrower's obligations under this Section 5 shall be remitted to Borrower. Any amounts received in payment on the U.S. Government Securities in excess of the amounts necessary to make monthly payments pursuant to Section 2 hereof (including payments due on the Maturity Date) shall be treated in accordance with the terms of Section 5 hereof.

        5.2    Successor Borrower Option.    If requested by Borrower, in connection with a Defeasance of the Loan, Holder, at Borrower's expense, shall establish or designate one or more successor entities ("Successor Borrower") and Borrower shall transfer and assign all obligations, rights and duties under and to this Note, together with the pledged U.S. Government Securities to the Successor Borrower. The obligation of the Holder to establish or designate a Successor Borrower shall be retained by the original Holder named herein notwithstanding the sale or transfer of this Loan unless such obligation is specifically assumed by the transferee. The Successor Borrower shall assume in writing the obligations under this Note, the Security Agreement and the other Loan Documents, by agreements in form and substance satisfactory to Holder, whereupon Borrower shall be relieved of its obligations thereunder. Borrower shall pay $1,000 to any such Successor Borrower as consideration for assuming Borrower's obligations under the Note and the Security Agreement. Notwithstanding anything in this Note or the Deed of Trust to the contrary, no other assumption fee shall be payable upon a transfer of this Note in accordance with this Section, but Borrower shall pay all out-of-pocket costs and expenses incurred by Holder, including Holder's reasonable attorneys fees and expenses, incurred in connection therewith.

        5.3    Repayment Upon Default.    If all or any part of the principal amount of this Note is prepaid upon acceleration of this Note following the occurrence of an Event of Default prior to the Optional Prepayment Date, then, in addition to such principal payment, Borrower shall be required to make such payments ("Yield Maintenance Payments") in an amount equal to the greater of (i) one percent (1%), or (ii) the excess, if any, of (A) the aggregate respective present values of all scheduled interest and principal payments payable on each Payment Date in respect of this Note for the period from the date of such prepayment upon acceleration to the Maturity Date, discounted monthly at a rate equal to the Treasury Constant Maturity Yield Index (defined below) and based on a 360-day year and actual days elapsed over (B) the then current outstanding principal amount of this Note. For purposes hereof, "Treasury Constant Maturity Yield Index" shall mean the average yield for "This Week" as reported by the Federal Reserve Board in Federal Reserve Statistical Release H.15(519) ("FRB Release") published during the second full week preceding the Prepayment Date for instruments having a maturity coterminous with the remaining term of this Note. In the event the FRB Release is no longer published, Holder shall select a comparable publication to determine the Treasury Constant Maturity Yield Index. If there is no Treasury Constant Maturity Yield Index for instruments having a maturity coterminous with the remaining term of this Note, then the weighted average yield to maturity of the Treasury Constant Maturity Yield Indices with maturities next longer and shorter than such remaining average life to maturity shall be used, calculated by averaging (and rounding upward to the nearest whole multiple of 1/100 of 1% per annum, if the average is not such a multiple) the yields of the relevant Treasury Constant Maturity Yield Indices (rounded, if necessary, to the nearest 1/100 of 1% with any figure of 1/200 of 1% or above rounded upward). The Yield Maintenance Payments to be paid in connection with any prepayment under this Section shall be determined by Holder and shall be conclusive and binding on Borrower (absent manifest error). For purposes of this Section, the unpaid principal amount due on this Note on the date of prepayment shall be determined after giving effect to any payment of scheduled amortization made on such date.

        5.4    Release of the Mortgaged Property.    No repayment, prepayment or Defeasance of all or any portion of this Note shall cause, give rise to a right to require, or otherwise result in, the release of the

real or personal property subject to the lien created by the Deed of Trust (referred to herein and defined in the Deed of Trust as the "Mortgaged Property"), except as follows:

        a.     If Borrower has elected Defeasance, and the requirements of Section 5(b) have been satisfied, the Mortgaged Property shall be released from the lien and mortgage created by the Security Instrument, whereupon the U.S. Government Securities pledged pursuant to the Security Agreement shall be the sole source of Borrower's collateral securing this Note. The Security Instrument shall otherwise remain in full force and effect as to provisions not pertaining to the Mortgaged Property.

        b.     In connection with the release of the Mortgaged Property contemplated in this Section, Borrower shall submit to Holder, not less than thirty (30) days prior to the Defeasance Date, a release of the Mortgaged Property (and related Loan Documents approved by Holder) for execution by Holder which shall be in a form appropriate in the applicable state and otherwise satisfactory to Holder in its reasonable discretion, along with all other documentation Holder reasonably requires to be delivered by Borrower in connection with such release (collectively, "Release Instruments"), together with a certification from Borrower, in form and substance satisfactory to Holder, certifying that such documentation (A) is in compliance with all applicable state and federal laws, and (B) will effect such releases in accordance with the terms of this Section 5.

        Section 6.    Method of Payment.    Each payment of the Loan Obligations (as defined in the Loan Agreement) shall be paid directly to the Holder in lawful tender of the United States of America. Each such payment shall be paid by 1:00 p.m. Horsham, Pennsylvania, time on the date such payment is due, except if such date is not a Business Day such payment shall then be due on the first Business Day after such date, but interest shall continue to accrue until the date payment is received. Any payment received after 1:00 p.m. Horsham, Pennsylvania, time shall be deemed to have been received on the immediately following Business Day for all purposes, including, without limitation, the accrual of interest on principal.

        Section 7.    Security.    The debt evidenced by this Note is to be secured by, among other things, (a) a Deed of Trust and Security Agreement (the "Deed of Trust") of even date herewith by and between Borrower and Holder, and intended to be recorded in the office of the Recorder of the County of Grays Harbor, State of Washington, and covering all of that real property located in Hoquiam, Grays Harbor County, Washington, which is described in Exhibit "A" thereto (the "Property") and the "Mortgaged Property", as defined in the Deed of Trust; and (b) an Exceptions to Nonrecourse Guaranty of even date herewith (the "Guaranty Agreement"), given by G&L Realty Partnership, L.P., a Delaware limited partnership (individually and collectively, the "Key Principal"), for the benefit of Holder.

        Section 8.    Default.

        8.1    Events of Default.    Anything in this Note to the contrary notwithstanding, on the occurrence of any of the following events (each of which is hereinafter referred to as an "Event of Default"), the Holder may, in the exercise of its sole and absolute discretion, accelerate the debt evidenced by this Note, in which event the entire outstanding principal balance and all interest and fees accrued thereon shall immediately be and become due and payable without further notice:

        8.1.1.    Failure to Pay or Perform.    If (a) the Borrower fails in making any payment to the Holder of any or all sums due hereunder within five (5) days after such payment becomes due or on the Maturity Date; or (b) there exists an uncured default under any other document or instrument evidencing or securing the Loan (collectively, the "Loan Documents") which has been executed by Borrower and/or Key Principal, and such default is not cured within the grace or cure period, if any, provided in any of such Loan Documents.

        8.1.2.    Bankruptcy.

        a.     If the Borrower or Key Principal (i) applies for or consents to the appointment of a receiver, trustee or liquidator of the Borrower or Key Principal, as the case may be, or of all or a substantial part of its assets, (ii) files a voluntary petition in bankruptcy, or admits in writing its inability to pay its

debts as they come due, (iii) makes an assignment for the benefit of creditors, (iv) files a petition or an answer seeking a reorganization or an arrangement with creditors or seeking to take advantage of any insolvency law, (v) performs any other act of bankruptcy, or (vi) files an answer admitting the material allegations of a petition filed against the Borrower or Key Principal in any bankruptcy, reorganization or insolvency proceeding; or

        b.     if (i) an order, judgment or decree is entered by any court of competent jurisdiction adjudicating the Borrower or Key Principal a bankrupt or an insolvent, or approving a receiver, trustee or liquidator of the Borrower or Key Principal or of all or a substantial part of its assets, or (ii) there otherwise commences with respect to the Borrower or Key Principal or any of its assets any proceeding under any bankruptcy, reorganization, arrangement, insolvency, readjustment, receivership or like law or statute, and if such order, judgment, decree or proceeding continues unstayed for any period of sixty (60) consecutive days after the expiration of any stay thereof,

        8.1.3.    Judgments.    If any judgment for the payment of money in excess of $25,000.00 hereafter awarded against the Borrower or Key Principal by any court of competent jurisdiction remains unsatisfied or otherwise in force and effect for a period of thirty (30) days after the date of such award.

        8.2    No Impairment of Rights.    Nothing in this Section shall be deemed in any way to alter or impair any right which the Holder has under this Note or the Deed of Trust, or any of the other Loan Documents or at law or in equity, to accelerate such debt on the occurrence of any other Event of Default provided herein or therein, whether or not relating to this Note.

        8.3    Late Fees.    Without limiting the generality of the foregoing provisions of this Section, if any payment of interest or principal is not made prior to five (5) days after the date on which it becomes due, the Borrower shall thereupon automatically become obligated immediately to pay to the Holder a late charge equal to the lesser of five percent (5%) of the amount of such payment or the maximum amount permitted by applicable law ("Late Fees") to defray the expenses incurred by Holder in handling and processing such delinquent payment and to compensate Holder for the loss of use of such delinquent payment, which sum shall be due and payable immediately thereupon.

        8.4    Confession of Judgment.    Upon the occurrence of an Event of Default, the Borrower hereby submits (and waives all rights to object) to nonexclusive personal jurisdiction in the State of Washington and authorizes any attorney designated by the Holder or any clerk of any court of record in State of Washington or elsewhere to appear for the Borrower in any court of record and confess judgment against the Borrower without prior hearing in favor of the Holder for, and in the amount of, the outstanding principal balance of this Note, all accrued and unpaid interest thereon all other amounts payable by the Borrower to the Holder under the terms of this Note, and costs of suit and actual attorneys' fees incurred by Holder in connection with such confession of judgment. The Holder agrees that in enforcing any judgment by confession, the Holder shall not demand, solely with respect to attorneys' fees incurred by the Holder in connection with such indebtedness for which such judgment is rendered, any amounts in excess of the actual amount of attorneys' fees charged or billed to the Holder.

        The Borrower hereby releases, to the extent permitted by applicable law, all errors and all rights of exemption, appeal, stay or execution, inquisition and other rights to which the Borrower may otherwise be entitled under the laws of the United States of America or of any state or possession of the United States of America now in force and which may hereafter be enacted. The Borrower hereby consents to the immediate execution of such judgment. The authority and power to appear for and enter judgment against the Borrower shall not be exhausted by one or more exercises thereof or by any imperfect exercise thereof and shall not be extinguished by any judgment entered pursuant thereto. Such authority may be exercised on one or more occasions or from time to time in the same or different jurisdictions as often as the Holder shall deem necessary and desirable, for all of which this Note shall be sufficient warrant.

        Section 9.    Costs of Enforcement.    The Borrower shall pay to the Holder on demand by the latter the amount of any and all expenses incurred by the Holder (a) in enforcing its rights here-under or under the Deed of Trust and/or the Loan Documents, or (b) as the result of a default by the Borrower in performing its obligations under this Note, including but not limited to the expense of collecting any amount owed hereunder, and of any and all attorneys' fees incurred by Holder in connection with such default, whether suit be brought or not, or (c) in protecting the security hereof. Such expenses shall be added to the principal sum hereof, secured by the Deed of Trust and accrue interest at the Default Rate.

        Section 10.    Borrower's Waiver of Certain Rights.    The Borrower and any endorser, guarantor or surety hereby waives the exercise of any and all exemption rights which it holds at law or in equity with respect to the debt evidenced by this Note, and of any and all rights which it holds at law or in equity to require any valuation or appraisal, or marshaling, or to have or receive any presentment, protest, demand and notice of dishonor, protest, demand and nonpayment as a condition to the Holder's exercise of any of its rights under this Note or the Loan Documents.

        Section 11.    Extensions.    The Maturity Date and/or any other date by which any payment is required to be made hereunder may be extended by the Holder from time to time in the exercise of its sole discretion, without in any way altering or impairing the Borrower's or any Key Principal's liability hereunder.

        Section 12.    Miscellaneous

        12.1.    Applicable Law.    This Note shall be given effect and construed by application of the laws of the State of Washington (without regard to the principles thereof governing conflicts of laws), and any action or proceeding arising hereunder, and each of Holder and Borrower submits (and waives all rights to object) to non-exclusive personal jurisdiction in the State of Washington, for the enforcement of any and all obligations under the Loan Documents except that if any such action or proceeding arises under the Constitution, laws or treaties of the United States of America, or if there is a diversity of citizenship between the parties thereto, so that it is to be brought in a United States District Court, it shall be brought in the United States District Court for the Western District of Washington, or in any successor federal court having original jurisdiction.

        12.1    Headings.    The headings of the Sections, subsections, paragraphs and subparagraphs hereof are provided herein for and only for convenience of reference, and shall not be considered in construing their contents.

        12.2    Construction.    As used herein, (a) the term "person" means a natural person, a trust, a firm, a corporation, a limited liability company, a partnership and any other form of legal entity, and (b) all references, made (i) in the neuter, masculine or feminine gender shall be deemed to have been made in all such genders, (ii) in the singular or plural number shall be deemed to have been made, respectively, in the plural or singular number as well, and (iii) to any Section, subsection, paragraph or subparagraph shall, unless therein expressly indicated to the contrary, be deemed to have been made to such Section, subsection, paragraph or subparagraph of this Note.

        12.3    Severability.    No determination by any court, governmental body or otherwise that any provision of this Note or any amendment hereof is invalid or unenforceable in any instance shall affect the validity or enforceability of (a) any other such provision, or (b) such provision in any circumstance not controlled by such determination. Each such provision shall be valid and enforceable to the fullest extent allowed by, and shall be construed wherever possible as being consistent with, applicable law.

        12.4    No Waiver.    The Holder shall not be deemed to have waived the exercise of any right which it holds hereunder unless such waiver is made expressly and in writing. No delay or omission by the Holder in exercising any such right (and no allowance by the Holder to the Borrower of an opportunity to cure a default in performing its obligations hereunder) shall be deemed a waiver of its future exercise. No such waiver made as to any instance involving the exercise of any such right shall be deemed a waiver as to any other such instance, or any other such right. Further, acceptance by Holder of all or any portion of any sum payable under, or partial performance of any covenant of, this Note,

the Deed of Trust or any of the other Loan Documents, whether before, on, or after the due date of such payment or performance, shall not be a waiver of Holder's right either to require prompt and full payment and performance when due of all other sums payable or obligations due thereunder or hereunder or to exercise any of Holder's rights and remedies hereunder or thereunder.

        12.5    Waiver of Jury Trial; Service of Process; Court Costs.    THE BORROWER HEREBY WAIVES TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO WHICH THE BORROWER AND THE HOLDER MAY BE PARTIES ARISING OUT OF, IN CONNECTION WITH, OR IN ANY WAY PERTAINING TO, THIS NOTE AND/OR ANY OF THE OTHER LOAN DOCUMENTS. IT IS AGREED AND UNDERSTOOD THAT THIS WAIVER CONSTITUTES A WAIVER OF TRIAL BY JURY OF ALL CLAIMS AGAINST ALL PARTIES TO SUCH ACTIONS OR PROCEEDINGS, INCLUDING CLAIMS AGAINST PARTIES WHO ARE NOT PARTIES TO THIS NOTE. THIS WAIVER IS KNOWINGLY, WILLINGLY AND VOLUNTARILY MADE BY THE BORROWER UPON CONSULTATION WITH COUNSEL OF BORROWER'S CHOICE, AND THE BORROWER HEREBY REPRESENTS THAT NO REPRESENTATIONS OF FACT OR OPINION HAVE BEEN MADE BY ANY INDIVIDUAL TO INDUCE THIS WAIVER OF TRIAL BY JURY OR TO IN ANY WAY MODIFY OR NULLIFY ITS EFFECT. THE BORROWER FURTHER REPRESENTS AND WARRANTS THAT IT HAS BEEN REPRESENTED IN THE SIGNING OF THIS NOTE AND IN THE MAKING OF THIS WAIVER BY INDEPENDENT LEGAL COUNSEL, OR HAS HAD THE OPPORTUNITY TO BE REPRESENTED BY INDEPENDENT LEGAL COUNSEL SELECTED OF ITS OWN FREE WILL, AND THAT IT HAS HAD THE OPPORTUNITY TO DISCUSS THIS WAIVER WITH COUNSEL. BORROWER HEREBY IRREVOCABLY DESIGNATES GEORGE NAGLER, AND HIS/HER SUCCESSORS IN OFFICE, AS THE TRUE AND LAWFUL ATTORNEY OF BORROWER FOR THE PURPOSE OF RECEIVING SERVICE OF ALL LEGAL NOTICES AND PROCESS ISSUED BY ANY COURT IN THE STATE OF WASHINGTON AS WELL AS SERVICE OF ALL PLEADINGS AND OTHER DOCUMENTS RELATED TO ANY LEGAL PROCEEDING OR ACTION ARISING OUT OF THIS NOTE. BORROWER AGREES THAT SERVICE UPON SAID GEORGE NAGLER SHALL BE VALID REGARDLESS OF BORROWER'S WHEREABOUTS AT THE TIME OF SUCH SERVICE AND REGARDLESS OF WHETHER BORROWER RECEIVES A COPY OF SUCH SERVICE, PROVIDED THAT THE HOLDER SHALL HAVE MAILED A COPY TO BORROWER IN ACCORDANCE WITH THE NOTICE PROVISIONS HEREIN. BORROWER AGREES TO PAY ALL COURT COSTS AND REASONABLE ATTORNEY'S FEES INCURRED BY HOLDER IN CONNECTION WITH ENFORCING ANY PROVISION OF THIS NOTE. NOTWITHSTANDING THE FOREGOING, HOLDER AGREES TO USE REASONABLE EFFORTS TO PROVIDE BORROWER WITH NOTICE OF THE FILING OF ANY LAWSUIT BY HOLDER AGAINST BORROWER.

        12.6    Offset.    Upon the occurrence of an Event of Default, the Holder may set-off against any principal and interest owing hereunder, any and all credits, money, stocks, bonds or other security or property of any nature whatsoever on deposit with, or held by, or in the possession of, the Holder, to the credit of or for the account of the Borrower, without notice to or consent of the Borrower or any Key Principal.

        12.7    Non-Exclusivity of Rights and Remedies.    None of the rights and remedies herein conferred upon or reserved to Holder is intended to be exclusive of any other right or remedy contained herein or in any of the other Loan Documents and each and every such right and remedy shall be cumulative and concurrent, and may be enforced separately, successively or together, and may be exercised from time to time as often as may be deemed necessary or desirable by Holder.

        12.8    Incorporation by Reference.    All of the agreements, conditions, covenants and provisions contained in each of the Loan Documents are hereby made a part of this Note to the same extent and with the same force and effect as if they were fully set forth herein. Borrower covenants and agrees to keep and perform, or cause to be kept and performed, all such agreements, conditions, covenants and provisions strictly in accordance with their terms.

        12.9    Joint and Several Liability.    If Borrower consists of more than one person, each such person agrees that the liability of each such person hereunder is joint and several.

        12.10    Business Purpose.    Borrower represents and warrants that the Loan evidenced by this Note is being obtained solely for the purpose of acquiring or carrying on a business, professional or commercial activity and is not for personal, agricultural, family or household purposes.

        12.11    Interest Limitation.    Notwithstanding anything to the contrary contained herein or in the Deed of Trust or in any other of the Loan Documents, the effective rate of interest on the obligation evidenced by this Note shall not exceed the lawful maximum rate of interest permitted to be paid. Without limiting the generality of the foregoing, in the event that the interest charged hereunder results in an effective rate of interest higher than that lawfully permitted to be paid, then such charges shall be reduced by the sum sufficient to result in an effective rate of interest permitted and any amount which would exceed the highest lawful rate already received and held by the Holder shall be applied to a reduction of principal and not to the payment of interest. Borrower agrees that for the purpose of determining highest rate permitted by law, any non-principal payment (including, without limitation, Late Fees and other fees) shall be deemed, to the extent permitted by law, to be an expense, fee or premium rather than interest.

        12.12    Modification.    This Note may be modified, amended, discharged or waived only by an agreement in writing signed by the party against whom enforcement of such modification, amendment, discharge or waiver is sought.

        12.13    Time of the Essence.    Time is strictly of the essence of this Note.

        12.14    Negotiable Instrument.    The Borrower agrees that this Note shall be deemed a negotiable instrument, even though this Note may not otherwise qualify, under applicable law, absent this paragraph, as a negotiable instrument.

        12.15    Interest Rate After Judgment.    If judgment is entered against the Borrower on this Note, the amount of the judgment entered (which may include principal, interest, fees, Late Fees and costs) shall bear interest at the Default Rate, to be determined on the date of the entry of the judgment.

        12.16    Relationship.    Borrower and Holder intend that the relationship between them shall be solely that of creditor and debtor. Nothing contained in this Note or in any of the other Loan Documents shall be deemed or construed to create a partnership, tenancy-in-common, joint tenancy, joint venture or co-ownership by or between Borrower and Holder.

        12.17    Waiver of Automatic Stay.    BORROWER HEREBY AGREES THAT, IN CONSIDERATION OF LENDER'S AGREEMENT TO MAKE THE LOAN AND IN RECOGNITION THAT THE FOLLOWING COVENANT IS A MATERIAL INDUCEMENT FOR LENDER TO MAKE THE LOAN, IN THE EVENT THAT BORROWER SHALL (I) FILE WITH ANY BANKRUPTCY COURT OF COMPETENT JURISDICTION OR BE THE SUBJECT OF ANY PETITION UNDER ANY SECTION OR CHAPTER OF TITLE 11 OF THE UNITED STATES CODE, AS AMENDED ("BANKRUPTCY CODE"), OR SIMILAR LAW OR STATUTE; (II) BE THE SUBJECT OF ANY ORDER FOR RELIEF ISSUED UNDER THE BANKRUPTCY CODE OR SIMILAR LAW OR STATUTE; (III) FILE OR BE THE SUBJECT OF ANY PETITION SEEKING ANY REORGANIZATION, ARRANGEMENT, COMPOSITION, READJUSTMENT, LIQUIDATION, DISSOLUTION, OR SIMILAR RELIEF UNDER ANY PRESENT OR FUTURE FEDERAL OR STATE ACT OR LAW RELATING TO BANKRUPTCY, INSOLVENCY, OR OTHER RELIEF FOR DEBTORS; (IV) HAVE SOUGHT OR CONSENTED TO OR ACQUIESCED IN THE APPOINTMENT OF ANY TRUSTEE, RECEIVER, CONSERVATOR, OR LIQUIDATOR; OR (V) BE THE SUBJECT OF AN ORDER, JUDGMENT OR DECREE ENTERED BY ANY COURT OF COMPETENT JURISDICTION APPROVING A PETITION FILED AGAINST ANY BORROWER FOR ANY REORGANIZATION, ARRANGEMENT, COMPOSITION, READJUSTMENT, LIQUIDATION, DISSOLUTION, OR SIMILAR RELIEF UNDER ANY PRESENT OR FUTURE FEDERAL OR STATE ACT OR LAW RELATING TO BANKRUPTCY, INSOLVENCY OR RELIEF FOR DEBTORS, THEN, SUBJECT TO COURT

APPROVAL, HOLDER SHALL THEREUPON BY ENTITLED AND BORROWER HEREBY IRREVOCABLY CONSENTS TO, AND WILL NOT CONTEST, AND AGREES TO STIPULATE TO RELIEF FROM ANY AUTOMATIC STAY OR OTHER INJUNCTION IMPOSED BY SECTION 362 OF THE BANKRUPTCY CODE, OR SIMILAR LAW OR STATUTE (INCLUDING, WITHOUT LIMITATION, RELIEF FROM ANY EXCLUSIVE PERIOD SET FORTH IN SECTION 1121 OF THE BANKRUPTCY CODE) OR OTHERWISE, ON OR AGAINST THE EXERCISE OF THE RIGHTS AND REMEDIES OTHERWISE AVAILABLE TO HOLDER AS PROVIDED IN THE LOAN DOCUMENTS, AND AS OTHERWISE PROVIDED BY LAW, AND BORROWER HEREBY IRREVOCABLY WAIVES ITS RIGHTS TO OBJECT TO SUCH RELIEF.

        12.18    [Intentionally omitted.]    

        12.19    Nonrecourse.    (a) Except as otherwise provided herein, Holder shall not enforce the liability and obligation of Borrower to perform and observe the obligations contained in this Note or the Deed of Trust by any action or proceeding wherein a money judgment shall be sought against Borrower, except that Holder may bring a foreclosure action, action for specific performance or other appropriate action or proceeding to enable Holder to enforce and realize upon the Deed of Trust, the other Loan Documents, and the Mortgaged Property; provided, however, that any judgment in any action or proceeding shall be enforceable against Borrower only to the extent of Borrower's interest in the Mortgaged Property. Holder, by accepting this Note and the Deed of Trust, agrees that it shall not, except as otherwise provided in the Loan Agreement, the Deed of Trust, or the Guaranty Agreement, sue for, seek or demand any deficiency judgment against Borrower in any action or proceeding, under or by reason of or under or in connection with this Note, the Deed of Trust or the other Loan Documents.

        (b)   The provisions of Section 12.19(a) above shall not (i) constitute a waiver, release or impairment of any obligation evidenced or secured by this Note, the Deed of Trust or the other Loan Documents; (ii) impair the right of Holder to name Borrower as a party defendant in any action or suit for judicial fore-closure and sale under the Deed of Trust; (iii) affect the validity or enforceability of any indemnity, guaranty, master lease or similar instrument made in connection with this Note, the Deed of Trust or the other Loan Documents; (iv) impair the right of Holder to obtain the appointment of a receiver; (v) impair the enforcement of that certain Assignment of Leases and Rents by and between Borrower and Holder dated of even date herewith and executed in connection herewith, if applicable; (vi) impair the right of Holder to obtain a deficiency judgment or judgment on this Note against Borrower if necessary to obtain any insurance proceeds or condemnation awards to which Holder would be otherwise entitled under the Deed of Trust; provided, however, that Holder shall only enforce such judgment against the insurance proceeds and/or condemnation awards; or (vii) impair the right of Holder to enforce the provisions of the Guaranty Agreement, Section 1.3 of this Note, Section 4 of the Deed of Trust, Section 5.7 and Article VI of the Loan Agreement.

        (c)   Notwithstanding the provisions of Section 12.19(a) above to the contrary, Borrower shall be personally liable to Holder for any and all claims, suits, liabilities (including, without limitation, strict liabilities), actions, proceedings, obligations, debts, damages, losses, costs, expenses, diminutions in value, fines, penalties, charges, fees, expenses, judgments, awards, amounts paid in settlement, punitive damages, foreseeable and unforeseeable consequential damages, of whatever kind or nature (including but not limited to reasonable attorneys' fees and other costs of defense) (collectively, "Losses") it incurs due to: (i) fraud or intentional misrepresentation by Borrower or any other person in connection with the execution and the delivery of this Note, the Deed of Trust or the other Loan Documents; (ii) Borrower's misapplication or misappropriation of accounts receivable received by Borrower after the occurrence of an Event of Default; (iii) Borrower's misappropriation of accounts receivable collected in advance; (iv) the misapplication or the misappropriation of insurance proceeds or condemnation awards; (v) Borrower's failure to pay Impositions (as defined in the Deed of Trust)(except to the extent that sums sufficient to pay such amounts have been deposited in escrow with Holder pursuant to the terms of the Deed of Trust) and charges for labor or materials or other charges that can create liens on the Mortgaged Property; (vi) Borrower's willful neglect of its obligations to manage, maintain, repair or restore and otherwise operate the Mortgaged Property in a

commercially reasonable manner in accordance with the Deed of Trust and the other Loan Documents; (vii) Borrower's failure to return or to reimburse Holder for any portion of the Mortgaged Property taken from the Mortgaged property by or on behalf of Borrower and not replaced with property of the same utility and of the same or greater value; (viii) any act of actual waste or arson by Borrower, any principal, affiliate, member or general partner thereof or by any indemnitor or guarantor; (ix) any fees or commissions paid by Borrower to any principal, affiliate, member or general partner thereof or to any indemnitor or guarantor in violation of the terms of this Note, the Deed of Trust or the other Loan Documents; (x) Borrower's failure to comply with the provisions of Section 13 of the Deed of Trust; (xi) Borrower's failure to comply with Section 5.7 of the Loan Agreement; (xii) Borrower's failure to pay all fees, charges and taxes with respect to the making of the Note and/or the recording of the Deed of Trust; (xiii) Borrower's failure to comply with Article VI of the Loan Agreement; (xiv) Borrower's failure to comply with Section 5.4 of the Loan Agreement; (xv) the occurrence of an Event of Default under Section 7.1(e) of the Loan Agreement; (xvi) the occurrence of an Event of Default under Section 7.1(f) of the Loan Agreement; (xvii) the Borrower's failure to maintain all certificates of need and other licensure and regulatory approvals required for operation of the Mortgaged Property, including, without limitation, any approvals required to obtain reimbursements under Medicare (as defined in the Loan Agreement), Medicaid (as defined in the Loan Agreement) and any veteran's program benefits; or (xviii) any conveyance, assignment, sale, transfer, mortgaging, collateral assignment, encumbrance, pledging, alienation, hypothecation, granting of a security interest in, granting of options with respect to, or other disposition of (directly or indirectly, voluntarily or involuntarily, by operation of law or otherwise, and whether or not for consideration or of record), all or any portion of any legal or beneficial interest in any certificate of need, license or other regulatory approval required for the operation of the Mortgaged Property, including, without limitation, any approval required to obtain reimbursements under Medicare, Medicaid and any veteran's program benefits.

        (d)   Notwithstanding the foregoing, the agreement of Holder not to pursue recourse liability as set forth in Section 12.19(a) above SHALL BECOME NULL AND VOID and shall be of no further force and effect in the event of Borrower's default under Section 13 or Section 25 of the Deed of Trust.

        (e)   Nothing herein shall be deemed to be a waiver of any right which Holder may have under Sections 506(a), 506(b), 1111(b) or any other provisions of the Bankruptcy Code to file a claim for the full amount of the Indebtedness (as defined in the Deed of Trust) secured by the Deed of Trust or to require that all collateral shall continue to secure all of the Indebtedness owing to Holder in accordance with this Note, the Deed of Trust and the other Loan Documents.

        12.20    Acknowledgment By Key Principal.    Key Principal has acknowledged this Note below for purposes of confirming its obligations all as more specifically set forth in the Guaranty Agreement.

[Signatures begin on next page.]

        IN WITNESS WHEREOF, the Borrower has executed and sealed this Note or caused it to be executed and sealed on its behalf by its duly authorized representatives, the day and year first above written, and the obligations under this Note shall be binding upon Borrower's successors and assigns.

BORROWER:
G&L HOQUIAM, LLC, a Delaware limited liability company
By:	G&L REALTY PARTNERSHIP, L.P., a Delaware limited partnership Managing Member
	By:	G&L REALTY CORP., a Maryland corporation, General Partner
		By:	/s/ STEVEN D. LEBOWITZ
			Name:	Steven D. Lebowitz
			Title:	President

(All signatures must be acknowledged.)
(Signatures continued on next page.]

ACKNOWLEDGMENT

STATE OF CALIFORNIA

COUNTY OF LOS ANGELES

On	July 30, 1998 Date	before me,	Helen Nelson Notary Public
personally appeared	Steven D. Lebowitz Name(s) of Signer(s)

ý personally known to me - OR - o    HELEN NELSON COMM. # 1046995 NOTARY PUBLIC—CALIFORNIA LOS ANGELES COUNTY My Comm. Expires Dec. 11, 1998	proved to me on the basis of satisfactory evidence to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument.
	WITNESS my hand and official seal.
	/s/ HELEN NELSON Signature of Notary Public

ACKNOWLEDGED BY KEY PRINCIPAL:

        THIS IS TO CERTIFY that this is the Note described in a certain Deed of Trust and Security Agreement, of even date herewith, secured on the premises located in Hoquiam, Grays Harbor County, Washington, as more particularly described in such Deed of Trust and Security Agreement.

G&L REALTY PARTNERSHIP, L.P., a Delaware limited partnership
By:	G&L REALTY CORP., a Maryland corporation General Partner
	By:	/s/ STEVEN D. LEBOWITZ
		Name:	Steven D. Lebowitz
		Title:	President

(All signatures must be acknowledged.)

ACKNOWLEDGMENT

STATE OF CALIFORNIA

COUNTY OF LOS ANGELES

On	July 30, 1998 Date	before me,	Helen Nelson Notary Public
personally appeared	Steven D. Lebowitz Name(s) of Signer(s)

ý personally known to me - OR - o    HELEN NELSON COMM. # 1046995 NOTARY PUBLIC—CALIFORNIA LOS ANGELES COUNTY My Comm. Expires Dec. 11, 1998	proved to me on the basis of satisfactory evidence to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument.
	WITNESS my hand and official seal.
	/s/ HELEN NELSON Signature of Notary Public

EX-10.27

Exhibit 10.27

Recording Requested By: Lawyers Title Insurance Company    When Recorded Mail To: Continental Wingate Associates, Inc. One Charles River Place 63 Kendrick Street Needham, MA 02494	THIS DOCUMENT IS AN EXACT COPY (NOT PREPARED BY THE COUNTY RECORDER) WHICH RECORDED IN THE LOS ANGELES COUNTY RECORDER'S OFFICE ON 1-30-01 AS INST. # 01061647. OFFICIAL RECORDS OF LOS ANGELES COUNTY L.T.C.
Attn: Gardner Hall	BY:	/s/ DENISE ANTHONY

DEED OF TRUST
with Assignment of Rents

THIS DEED OF TRUST, made this 30th day of January, 2001, by and between Ensign Southland LLC, a Nevada limited liability company, herein called Trustor(s), and Brian E. Callahan, Trustee, herein called Trustee(s), and Continental Wingate Associates, Inc., a Massachusetts corporation, herein called Beneficiary,

        WITNESSETH:    That Trustor grants, transfers, and assigns to Trustee in trust, upon the trusts, covenants, conditions and agreements and for the uses and purposes hereinafter contained, with power of sale, all that real property situate, lying and being in the City of Norwalk, Los Angeles County, State of California, described as follows:

        For legal description, see Exhibit "A" attached hereto and made a part hereof.

        Together with the rents, issues, and profits thereof, subject, however, to the right, power, and authority hereinafter given to and conferred upon Beneficiary to collect and apply such rents, issues, and profits; and together with all buildings and improvements of every kind and description now or hereafter erected or placed thereon, and all fixtures, including but not limited to all gas and electric fixtures, engines and machinery, radiators, heaters, furnaces, heating equipment, laundry equipment, steam and hot-water boilers, stoves, ranges, elevators and motors, bath tubs, sinks, water closets, basins, pipes, faucets and other plumbing and heating fixtures, mantels, cabinets, refrigerating plant and refrigerators, whether mechanical or otherwise, cooking apparatus and appurtenances, and all shades, awnings, screens, blinds and other furnishings, it being hereby agreed that all such fixtures and furnishings shall to the extent permitted by law be deemed to be permanently affixed to and a part of the realty; and

        Together with all building materials and equipment now or hereafter delivered to said premises and intended to be installed therein; and

        Together with all articles of personal property now or hereafter attached to or used in and about the building or buildings now erected or hereafter to be erected on the lands described which are necessary to the complete and comfortable use and occupancy of such building or buildings for the purposes for which they were or are to be erected, including all other goods and chattels and personal property as are ever used or furnished in operating a building, or the activities conducted therein, similar to the one herein described and referred to, and all renewals or replacements thereof or articles in substitution therefor, whether or not the same are, or shall be attached to said building or buildings in any manner, and said Trustor agrees to execute a Security Agreement covering the aforesaid fixtures and articles of personal property, at the time of placing such personal property or any part thereof in the building or buildings to be erected on the lands herein described in the manner and form required by law, at its expense and satisfactory to the Beneficiary.

        To have and to hold the property hereinbefore described together with appurtenances to the Trustee, its successors and assigns forever.

FOR THE PURPOSE of securing performance of each agreement of Trustor herein and payment of a just indebtedness of the Trustor to the Beneficiary in the principal sum of Seven Million Four Hundred Fifty-five Thousand One Hundred and No/100ths Dollars ($7,455,100.00), evidenced by its Note of even date herewith, bearing interest from date on outstanding balances at Seven and one-half percent (7.50%), per annum, said principal and interest being payable in monthly installments as provided in said note with a final maturity of February 1, 2027 which Note is identified as being secured hereby by a certificate thereon. Said Note and all of its terms are incorporated herein by reference and this conveyance shall secure any and all extensions thereof, however evidenced.

        And to Protect the Security of this Deed of Trust, Trustor Covenants and Agrees:

        1.     That it will pay the Note at the times and in the manner provided therein;

        2.     That it will not permit or suffer the use of any of the property for any purpose other than the use for which the same was intended at the time this Deed of Trust was executed;

        3.     That the Regulatory Agreement, if any, executed by the Trustor and the Secretary of Housing and Urban Development, acting by and through the Federal Housing Commissioner, which is being recorded simultaneously herewith, is incorporated in and made a part of this Deed of Trust. Upon default under the Regulatory Agreement and upon the request of the Secretary of Housing and Urban Development, acting by and through the Federal Housing Commissioner, the Beneficiary, at its option, may declare the whole of the indebtedness secured hereby to be due and payable;

        4.     That all rents, profits and income from the property covered by this Deed of Trust are hereby assigned to the Beneficiary for the purpose of discharging the debt hereby secured. Permission is hereby given to Trustor so long as no default exists hereunder, to collect such rents, profits and income for use in accordance with the provisions of the Regulatory Agreement;

        That the Trustor grants to the holder or holders of the Note secured hereby the right and power to appoint a substitute Trustee or Trustees hereunder for any reason whatsoever by instrument of appointment duly executed and acknowledged by the holder or holders of the Note and to be filed for record in the office wherein this Deed of Trust is recorded. Such power of appointment may be exercised as often as deemed necessary by the holder or holders of the Note. Upon such appointment, the substitute Trustee or Trustees shall be vested with all the rights, powers, authority and duties vested in the Trustee hereunder.

        5.     That upon default hereunder or under the aforementioned Regulatory Agreement, Beneficiary shall be entitled to the appointment of a receiver by any court having jurisdiction, without notice, to take possession and protect the property described herein and operate same and collect the rents, profits and income therefrom;

        6.     That at the option of the Trustor the principal balance secured hereby may be reamortized on terms acceptable to the Secretary of Housing and Urban Development, acting by and through the Federal Housing Commissioner if a partial prepayment results from an award in condemnation in accordance with provisions of Paragraph 21 herein, or from an insurance payment made in accordance with provisions of Paragraph 7 herein, where there is a resulting loss of project income;

        7.     That the Trustor will keep the improvements now existing or hereafter erected on the deeded property insured against loss by fire and such other hazards, casualties, and contingencies, as may be stipulated by the Secretary of Housing and Urban Development, acting by and through the Federal Housing Commissioner, upon the insurance of the Deed of Trust and other hazards as may be required from time to time by the Beneficiary, and all such insurance shall be evidenced by standard fire and extended coverage insurance policy or policies, in amounts not less than necessary to comply with the applicable Coinsurance Clause percentage, if any, but in no event shall the amounts of coverage be less than 80 percent of the Insurable Values or not less than the unpaid balance of the insured Deed of Trust, whichever is the lesser, and in default thereof the Beneficiary shall have the right to effect

insurance. Such policies shall be endorsed with standard Mortgagee clause with loss payable to the Beneficiary and the Secretary of Housing and Urban Development as interest may appear, and shall be deposited with the Beneficiary. The insurance carrier providing such insurance shall be selected by Trustor, subject to the approval of Beneficiary, which approval shall not be unreasonably withheld.

        That if the premises covered hereby, or any part thereof, shall be damaged by fire or other hazard against which insurance is held as hereinabove provided, the amounts paid by any insurance company in pursuance of the contract of insurance to the extent of the indebtedness then remaining unpaid, shall be paid to the Beneficiary, and, at its option, may be applied to the debt or released for the repairing or rebuilding of the premises. Any unexpired insurance shall inure to the benefit of, and pass to, the purchaser of the property covered thereby at any Trustee's sale held hereunder.

        8.     Together with and in addition to the monthly payments of interest or of principal and interest payable under the terms of said Note, to pay to Beneficiary monthly until said Note is fully paid, beginning on the first day of the first month after the date hereof, the following sums:

(a)

An amount sufficient to provide the Beneficiary with funds to pay the next mortgage insurance premium if this instrument and the Note secured hereby are insured, or a monthly service charge, if they are held by the Secretary of Housing and Urban Development, as follows:



(I)

If and so long as said Note of even date and this instrument are insured or are reinsured under the provisions of the National Housing Act, an amount sufficient to accumulate in the hands of the Beneficiary one month prior to its due date the annual mortgage insurance premium, in order to provide such Beneficiary with funds to pay such premium to the Secretary of Housing and Urban Development, pursuant to the National Housing Act, as amended, and applicable Regulations thereunder, or



(II)

Beginning with the first day of the month following an assignment of this instrument and the note secured hereby to the Secretary of Housing and Urban Development, a monthly service charge which shall be an amount equal to one-twelfth of one-half percent (¹/12 of ¹/2%) of the average outstanding principal balance due on the Note computed for each successive year beginning with the first of the month following such assignment, without taking into account delinquencies or prepayments.



(b)

A sum equal to the ground rents, if any, next due, plus the premiums that will next become due and payable on policies of fire and other property insurance covering the premises covered hereby, plus water rates, taxes and assessments next due on the premises covered hereby (all as estimated by the Beneficiary) less all sums already paid therefor divided by the number of months to elapse before one month prior to the date when such ground rents, premiums, water rates, taxes and assessments will become delinquent, such sums to be held by Beneficiary in trust to pay said ground rents, premiums, water rates, taxes, and special assessments.



(c)

All payments mentioned in the two preceding subsections of this paragraph and all payments to be made under the Note secured hereby shall be added together and the aggregate amount thereof shall be paid each month in a single payment to be applied by Beneficiary to the following items in the order set forth:



(I)

premium charges under the Contract of Insurance with the Secretary of Housing and Urban Development, acting by and through the Federal Housing Commissioner or service charge;



(II)

ground rents, taxes, special assessments, water rates, fire and other property insurance premiums;



(III)

interest on the Note secured hereby;



(IV)

amortization of the principal of said Note.

        9.     Any excess funds accumulated under paragraph (b) above remaining after payment of the items therein mentioned, shall be credited to subsequent monthly payments of the same nature required thereunder; but if any such item shall exceed the estimate therefor, the Trustor shall without demand forthwith make good the deficiency. Failure to do so before the due date of such item shall be a default hereunder. In case of termination of the Contract of Mortgage Insurance by prepayment of the mortgage in full, or otherwise (except as hereinafter provided), accumulations under paragraph (a) above not required to meet payments due under the Contract of Mortgage Insurance, shall be credited to the Trustor. If the property is sold under foreclosure or is otherwise acquired by the Beneficiary after default, any remaining balance of the accumulations under paragraph (b) above shall be credited to the principal of the debt as of the date of commencement of foreclosure proceedings or as of the date the property is otherwise acquired; and accumulations under paragraph (a) above shall be similarly applied unless required to pay sums due to the Secretary of Housing and Urban Development, acting by and through the Federal Housing Commissioner, under the Contract of Mortgage Insurance;

        10.   To keep said property in good condition and repair, not to remove or demolish any buildings thereon; to complete or restore promptly and in good and workmanlike manner any building which may be constructed, damaged, or destroyed thereon and to pay when due all claims for labor performed and materials furnished therefor; to comply with all laws affecting said property or requiring any alterations or improvements to be made thereon; not to commit or permit waste thereof; not to commit, suffer or permit any act upon said property in violation of law and/or covenants, conditions and/or restrictions affecting said property; not to permit or suffer any alteration of or addition to the buildings or improvements hereafter constructed in or upon said property without the consent of the Beneficiary;

        11.   To appear in and defend any action or proceeding purporting to affect the security hereof or the rights or powers of Beneficiary or Trustee, and to pay all costs and expenses, including cost of evidence of title and attorney's fees in a reasonable sum, in any such action or proceeding in which Beneficiary or Trustee may appear;

        12.   Should Trustor fail to make any payment or do any act as herein provided, then Beneficiary or Trustee, but without obligation so to do and without notice to or demand upon Trustor and without releasing Trustor from any obligation hereof, may make or do the same in such manner and to such extent as either may deem necessary to protect the security hereof, Beneficiary or Trustee being authorized to enter upon said property for such purposes; may commence, appear in and/or defend any action or proceeding purporting to affect the security hereof or the rights or powers of Beneficiary or Trustee; may pay, purchase, contest, or compromise any encumbrance, charge, or lien which in the judgment of either appears to be prior or superior hereto; and, in exercising any such powers, may pay necessary expenses, employ counsel and pay his reasonable fees;

        13.   The Beneficiary shall have the right to pay mortgage insurance premiums or fire and other property insurance premiums when due to the extent that monthly payments made hereunder for the purpose of meeting same are insufficient. All such payments made by the Beneficiary shall be added to the principal sum secured hereby;

        14.   To pay immediately and without demand all sums so expended by Beneficiary or Trustee, under permission given under this Deed of Trust, with interest from date of expenditure at the rate specified in said Note;

        15.   Reserved;

        16.   The Trustor further covenants that it will not voluntarily create, suffer, or permit to be created against the property subject to this Deed of Trust any lien or liens inferior or superior to the lien of this Deed of Trust and further that it will keep and maintain the same free from the claim of all persons supplying labor or materials on said premises;

        17.   That the improvements upon the premises, covered by the Deed of Trust, comply with all municipal ordinances and regulations and all of other regulations made or promulgated, now or hereafter, by lawful authority, and that the same will upon completion comply with all such municipal

ordinances and regulations and with the rules of the applicable fire rating or inspection organization, bureau, association or office;

        18.   That so long as this Deed of Trust and the said Note secured hereby are insured under the provisions of the National Housing Act, or held by the Secretary of Housing and Urban Development, it will not execute or file for record any instrument which imposes a restriction upon the sale or occupancy of the mortgaged property on the basis of race, color, religion, creed, national origin, sex, familial status, or handicap; and

        19.   Trustor herein agrees to pay to Beneficiary or to the authorized loan servicing representative of the Beneficiary a charge not to exceed the maximum permitted by California law at the time of the request for a statement or accounting under Section 2943 or 4954 of the California Civil code, notwithstanding any Federal exemption from state law maximum charges found in Section 2943.

It Is Mutually Agreed that:

        20.   That if the Trustor, its successors or assigns, fails to maintain the premises in accordance with the requirements of Paragraph 10 herein, the Beneficiary, after due notice to the Trustor or any subsequent owner, is hereby invested with full and complete authority to enter upon the said premises, employ watchmen to protect such improvements from depredation or injury and to preserve and protect the personal property therein, to make and enter into any contracts and obligations wherever necessary to cure such condition, either in its own name or in the name of the Trustor, and to pay and discharge all debts, obligations and liabilities incurred thereby. All such sums so advanced by the Beneficiary (exclusive of advances of the principal of the indebtedness secured hereby) shall be added to the principal of the indebtedness secured hereby and shall be secured by this Deed of Trust and shall be due and payable on demand with interest at the rate specified in said Note, but no such advances shall be insured unless same are specifically approved by the Secretary of Housing and Urban Development, acting by and through the Federal Housing Commissioner prior to the making thereof;

        21.   Should the property or any part thereof be taken or damaged by reason of any public improvement or condemnation proceeding, or damaged by fire, or earthquake, or in any other manner, the Beneficiary shall be entitled to all compensation, awards, and other payment or relief therefor, and shall be entitled at its option to commence, appear in and prosecute in its own name, any action or proceedings, or to make any compromise or settlement, in connection with such taking or damage. All awards of compensation in connection with condemnation for public use of or a taking of any of that property, shall be paid to the Beneficiary to be applied to the amount due under the Note secured hereby in (1) amounts equal to the next maturing installment or installments of principal and (2) with any balance to be credited to the next payment due under the Note. All awards of damages in connection with any condemnation for public use of or injury to any residue of that property, shall be paid to the Beneficiary to be applied to a fund held for and on behalf of the Trustor which fund shall, at the option of the Beneficiary, and with the prior approval of the Secretary of Housing and Urban Development, either be applied to the amount due under the Note as specified in the preceding sentence, or be disbursed for the restoration or repair of the damage to the residue. No amount applied to the reduction of the principal amount due in accordance with (1) shall be considered an optional prepayment as the term is used in this Deed of Trust and the Note secured hereby, nor relieve the Trustor from making regular monthly payments commencing on the first day of the first month following the date of receipt of the award. The Beneficiary is hereby authorized in the name of the Trustor to execute and deliver valid acquittances for such awards and to appeal from such awards;

        22.   Upon default by Trustor in making any monthly payment provided for herein or in the Note secured hereby, and if such default is not made good prior to the due date of the next such installment, or if Trustor shall fail to perform any covenant or agreement in this Deed of Trust, all sums secured hereby shall, at the option of Beneficiary, be deemed to have become immediately due and payable, and shall thereupon be collectable by foreclosure of this Deed of Trust. In the event of default, Trustee hereunder shall, and is hereby authorized and empowered to, cause the property to be sold when given notice to do so by Beneficiary after such default, which notice Trustee shall cause to be duly filed for record;

        23.   After the lapse of such time as may then be required by law following the recordation of said notice of defaults, and notice of sale having been given as then required by law, Trustee, without demand on Trustor, shall sell said property at the time and place fixed by it in said notice of sale, either as a whole or in separate parcels, and in such order as it may determine at public auction to the highest bidder for cash in lawful money of the United States, payable at time of sale. Trustee may postpone sale of all or any portion of said property by public announcement at the time and place of sale, and from time to time thereafter may postpone the sale by public announcement at the time fixed by the preceding postponement. Trustee shall deliver to the purchaser its Deed conveying the property so sold, but without any covenant or warranty, express or implied. The recitals in the Deed of any matters or facts shall be conclusive proof of the truthfulness thereof. Any person, including Trustor, Trustee, or Beneficiary, may purchase at the sale. The Trustee shall apply the proceeds of sale to payment of (1) the expenses of such sale, together with the reasonable expenses of this trust including therein reasonable Trustee's fees or attorney's fees for conducting the sale, and the actual cost of publishing, recording, mailing and posting notice of the sale; (2) the cost of any search and/or other evidence of title procured in connection with such sale and revenue stamps on Trustees' Deed; (3) all sums expended under the terms hereof, not then repaid, with accrued interest at the rate specified in said note; (4) all other sums then secured hereby; and (5) the remainder, if any, to the person or persons legally entitled thereto;

        24.   Beneficiary may from time to time substitute a successor or successors to any Trustee named herein or acting hereunder to execute this Trust. Upon such appointment, and without conveyance to the successor trustee, the latter shall be vested with all title, powers, and duties conferred upon any Trustee herein named or acting hereunder. Each such appointment and substitution shall be made by written instrument executed by Beneficiary, containing reference to this Deed, and its place of record, which, when duly recorded in the proper office of the county or counties in which the property is situated, shall be conclusive proof of proper appointment of the successor trustee.

        25.   The pleading of any statute of limitations as a defense to any and all obligations secured by the Deed is hereby waived to the full extent permissible by law;

        26.   Upon written request of Beneficiary stating that all sums secured hereby have been paid, and upon surrender of the Deed of Trust and said Note to Trustee for cancellation and retention and upon payment of its fees, Trustee shaft reconvey, without warranty, the property then held hereunder. The recitals in such reconveyance of any matters or fact shall be conclusive proof of the truthfulness thereof. The grantee in such reconveyance may be described as "the person or persons legally entitled thereto;"

        27.   The trust created hereby is irrevocable by Trustor;

        28.   This Deed of Trust applies to, inures to the benefit of, and binds all parties hereto, their heirs, legatees, devisees, administrators, executors, successors, and assigns. The term "Beneficiary" shall include not only the original Beneficiary hereunder but also any future owner and holder including pledgees, of the Note secured hereby. In this Deed, whenever the context so requires, the masculine gender includes the feminine and/or neuter, and the singular number includes the plural. All obligations of each Trustor hereunder are joint and several;

        29.   Trustee accepts this Trust when this Deed of Trust, duly executed and acknowledged, is made public record as provided by law. Except as otherwise provided by law the Trustee is not obligated to notify any party hereto of pending sale under this Deed of Trust or of any action of proceeding in which Trustor, Beneficiary, or Trustee shall be a party unless brought by Trustee;

        30.   Notwithstanding any other provision contained herein or in the Note, it is agreed that the execution of the Note shall impose no personal liability upon the Trustor for payment of the indebtedness evidenced thereby and in the event of a default, the holder of the Note shall look solely to the property subject to this Deed of Trust and/or any Security Agreement in connection herewith and to the rents, issues and profits thereof in satisfaction of the indebtedness evidenced by the Note and will not seek or obtain any deficiency or personal judgment against the Trustor except such

judgment or decree as may be necessary to foreclose or bar its interest in the property subject to this Deed of Trust and all other property mortgaged, pledged, conveyed or assigned to secure payment of the Note; provided, that nothing in this condition and no action so taken shall operate to impair any obligation of the Trustor under the Regulatory Agreement herein referred to and made a part hereof;

        31.   The Undersigned Trustor requests that a copy of any notice of default and of any notice of sale hereunder be mailed to him at the mailing address opposite his name hereto. Failure to insert such address shall be deemed a waiver of any request hereunder for a copy of such notices.

Mailing Address for Notices:

Name of Trustor:	Ensign Southland LLC, a Nevada limited liability company
Street and Number:	32232 Paseo Adelanto, Suite 100
City and State:	San Juan Capistrano, CA 92675

IN WITNESS WHEREOF the Trustor has caused its name to be hereunto subscribed on the day and year herein first above written.

Ensign Southland LLC, a Nevada limited liability company
By:	The Ensign Group, Inc., a Delaware corporation, sole Member and manager
	By:	/s/  CHRISTOPHER R. CHRISTENSEN Christopher R. Christensen, President

State of California	)
	) ss.
County of Los Angeles	)

        On this 26th day of January, 2001, before me, the undersigned, a notary public in and for said state, personally appeared Christopher R. Christensen, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person whose name is subscribed to the within instrument and acknowledged to me that he executed the same in his authorized capacity and that by his signature on the instrument the person, or the entity upon behalf of which the person acted, executed the instrument.

        WITNESS my hand and official seal.

/s/  MARCUS PAXMAN	MARCUS PAXMAN Comm. # 1271645 NOTARY PUBLIC—CALIFORNIA
Signature Marcus Paxman (print name)	Orange County My Comm. Expires July 23, 2004

EXHIBIT A

Parcel A:

        Parcel 2 of Parcel Map No. 4433, in the City of Norwalk, County of Los Angeles, State of California, as per the map recorded in Book 52 Page 64 of Parcel Maps, in—the Office of the County Recorder of said County.

Parcel B:

        A non-exclusive easement for parking on that property described as Parcel I of Parcel Map No. 4433 in the City of Norwalk, in the County of Los Angeles, State of California, as per map recorded in Book 52 Page 64 of Parcel Maps, in the Office of the County Recorder of said County, disclosed by that certain document entitled Reciprocal Parking Agreement recorded February 2, 1996 as Inst. No. 96-197911, Official Records.

EX-21.1

Exhibit 21.1

SUBSIDIARIES OF THE REGISTRANT

Name	Jurisdiction
24th Street Healthcare Associates LLC(2)	Nevada
Adipiscor LLC	Nevada
Arrow Tree Health Holdings LLC	Nevada
Atlantic Memorial Healthcare Associates, Inc.(1)	Nevada
Avenue N Holdings LLC	Nevada
Avenues Healthcare, Inc.(3)	Nevada
Bandera Healthcare, Inc.	Nevada
Bell Villa Care Associates LLC(1)	Nevada
Bernardo Heights Healthcare, Inc.(1)	Nevada
Brown Road Senior Housing LLC(2)	Nevada
C Street Health Associates LLC(1)	Nevada
Camarillo Community Care, Inc.(1)	Nevada
Carrollton Heights Healthcare, Inc.(4)	Nevada
Cedar Avenue Holdings LLC	Nevada
Cherry Health Holdings, Inc.	Nevada
City Heights Health Associates LLC(1)	Nevada
Claremont Foothills Health Associates LLC(6)	Nevada
CM Health Holdings LLC	Nevada
Costa Victoria Healthcare LLC(1)	Nevada
Cottonwood Health Holdings LLC	Nevada
Downey Community Care LLC(1)	Nevada
Ensign Bellflower LLC	Nevada
Ensign Cloverdale LLC(5)	Nevada
Ensign Facility Services, Inc.	Nevada
Ensign Highland LLC	Nevada
Ensign Montgomery LLC(5)	Nevada
Ensign Napa LLC	Nevada
Ensign Palm I LLC(6)	Nevada
Ensign Panorama LLC(1)	Nevada
Ensign Pleasanton LLC(5)	Nevada
Ensign Sabino LLC(2)	Nevada
Ensign San Dimas LLC(6)	Nevada
Ensign Santa Rosa LLC(5)	Nevada
Ensign Sonoma LLC(5)	Nevada
Ensign Southland LLC	Nevada
Ensign Whittier East LLC(1)	Nevada
Ensign Whittier West LLC(1)	Nevada
Ensign Willits LLC(5)	Nevada
Fort Street Health Holdings LLC	Nevada
Gate Three Healthcare LLC(1)	Nevada
Glendale Healthcare Associates LLC(2)	Nevada
Golfview Holdings LLC	Nevada
Granada Investments LLC	Nevada
Grand Villa Phx, Inc.	Nevada
Greenfields Assisted Living LLC(2)	Nevada
HB Healthcare Associates LLC(1)	Nevada
Highland Healthcare LLC(2)	Nevada
Hoquiam Healthcare, Inc.(1)	Nevada
Keystone Care, Inc.	Nevada
Lemon Grove Health Associates, Inc.(1)	Nevada
Livingston Care Associates, Inc.(4)	Nevada
Long Beach Health Associates LLC	Nevada

Lynnwood Health Services, Inc.(1)	Nevada
Manor Park Healthcare LLC(1)	Nevada
McAllen Community Healthcare, Inc.(4)	Nevada
Meadowbrook Health Associates LLC	Nevada
Mesquite Health Holdings LLC	Nevada
Milestone Healthcare, Inc.	Nevada
Moenium Holdings LLC	Nevada
Mountainview Communitycare LLC	Nevada
North Mountain Healthcare LLC(2)	Nevada
Northern Oaks Healthcare, Inc.(4)	Nevada
Northern Pioneer Healthcare, Inc.	Nevada
Olympus Health, Inc.	Nevada
Park Waverly Healthcare LLC(2)	Nevada
Permunitum LLC	Nevada
Plaza Health Holdings LLC	Nevada
Pocatello Health Services, Inc.(3)	Nevada
Polk Health Holdings LLC	Nevada
Presidio Health Associates LLC(2)	Nevada
Radiant Hills Health Associates LLC(2)	Nevada
Ramon Healthcare Associates, Inc.(1)	Nevada
Redbrook Healthcare Associates LLC(6)	Nevada
RenewCare of Scottsdale, Inc.(2)	Nevada
Richmond Senior Services, Inc.(4)	Nevada
Rillito Holdings LLC	Nevada
Rose Park Healthcare Associates, Inc.(1)	Nevada
Rosenburg Senior Living, Inc.(4)	Nevada
Salado Creek Senior Care, Inc.(4)	Nevada
Sky Holdings AZ LLC	Nevada
Snohomish Health Holdings LLC	Nevada
South Valley Healthcare, Inc.(3)	Nevada
Southland Management LLC(1)	Nevada
Standardbearer Insurance Company, Ltd.	Cayman Islands
Sunland Health Associates LLC(2)	Nevada
Tenth East Holdings LLC	Nevada
Terrace Holdings AZ LLC	Nevada
The Flagstone Group, Inc.	Nevada
Touchstone Care, Inc.	Nevada
Town East Healthcare, Inc.	Nevada
Trinity Mill Holdings LLC	Nevada
Upland Community Care, Inc.(6)	Nevada
Valley Health Holdings LLC	Nevada
Verde Villa Holdings LLC	Nevada
Victoria Ventura Healthcare LLC(1)	Nevada
Vista Woods Health Associates LLC(1)	Nevada
Walnut Grove Campuscare LLC	Nevada
Washington Heights Healthcare, Inc.(3)	Nevada
Wellington Healthcare, Inc.(4)	Nevada
West Escondido Healthcare LLC(1)	Nevada

(1)

Wholly-owned subsidiary of The Flagstone Group, Inc.

(2)

Wholly-owned subsidiary of Bandera Healthcare, Inc.

2

(3)

Wholly-owned subsidiary of Milestone Healthcare, Inc.

(4)

Wholly-owned subsidiary of Keystone Care, Inc.

(5)

Wholly-owned subsidiary of Northern Pioneer Healthcare, Inc.

(6)

Wholly-owned subsidiary of Touchstone Care, Inc.

3

EX-23.1

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Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

        We consent to the use in this Amendment No. 1 to Registration Statement No. 333-142897 of our report dated April 26, 2007 relating to the consolidated financial statements and the related financial statement schedule of The Ensign Group, Inc. and subsidiaries (the "Company") (which report expresses an unqualified opinion on the consolidated financial statements and financial statement schedule and includes explanatory paragraphs (i) referring to adoption of the provisions of Statement of Financial Accounting Standards No. 123 (revised 2004) Share Based Payment effective January 1, 2006 and (ii) referring to the restatement of the consolidated balance sheet as of December 31, 2005 and the related consolidated statement of cash flows for the two years then ended as discussed in Note 17) appearing in the Prospectus, which is a part of such Registration Statement, and to the reference to us under the headings "Experts" in such Prospectus.

/S/ DELOITTE & TOUCHE LLP

Costa Mesa, CA
July 25, 2007

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CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

CORRESP

July 25, 2007

VIA EDGAR AND FEDERAL EXPRESS

Paul Fischer
Staff Attorney
United States Security and Exchange Commission
100 F. Street, N.E.
Washington, D.C. 20549

Re: The Ensign Group, Inc.
Registration Statement on Form S-1
File No. 333-142897

Dear Mr. Fischer:

        We are in receipt of the comments of the Staff of the Securities and Exchange Commission (the "Commission") set forth in the Staff's letter dated June 13, 2007 (the "SEC Comment Letter") regarding Registration Statement on Form S-1 (File No. 333-142897) filed by The Ensign Group, Inc. (the "Registration Statement"). Concurrently herewith, The Ensign Group, Inc. (the "Company" or "Ensign") is filing with the Commission Amendment No. 1 (the "Amendment") to the Registration Statement. The changes made in the Amendment are principally in response to the Staff's comments as set forth in the SEC Comment Letter and to update information since the Company's previous filing. We are sending three copies of the redlined Amendment to your attention under separate cover that are marked to show the changes from the original Registration Statement filing.

        The numbered responses set forth below contain each of the Staff's comments in total, set off in bold type and correspond to the numbered comments contained in the SEC Comment Letter. Page references in the text of the response correspond to the pages of the Amendment. Capitalized terms not otherwise defined herein have the meanings given to them in the Amendment.

*****

General

1.    Please be advised that you should include the price range, the size of the offering, the beneficial ownership of your common stock, and all other required information in an amendment to your Form S-1 prior to any distribution of preliminary prospectuses so that we may complete our review. Note that we may have additional comments once you have provided this disclosure. Therefore, please allow us sufficient time to review your complete disclosure prior to any distribution of preliminary prospectuses.

        Response:    The Company acknowledges the Staff's comments and will file an amendment to the Registration Statement that includes all required information, once the price range and other information has been determined by the Company upon advice of the Underwriters, as applicable, with sufficient time for the Staff to review the Company's disclosures prior to any distribution of preliminary prospectuses.

2.    Update the financial statements and other financial information to include the interim period ended March 31, 2007, as required by Rule 3-12 of Regulation S-X.

        Response:    The Company has updated the financial statements and other financial information to include the interim period ended March 31, 2007, as required by Rule 3-12 of Regulation S-X.

1

3.    Please confirm that the artwork on the back of the prospectus cover page is all that you will be including in the prospectus. If not, provide us with copies of the additional artwork prior to circulating preliminary prospectuses. Since we may have comments that could result in material revisions to your artwork, we suggest that you provide us with enough time to finish commenting on your artwork prior to circulating preliminary prospectuses. See Item VIII of the March 31, 2001 quarterly update to the Division of Corporation Finance's "Current Issues and Rulemaking Projects Outline."

        Response:    The Company intends to include additional artwork in the prospectus. The Company will provide copies of the additional artwork to the Staff, with sufficient time for the Staff to review, prior to any distribution of preliminary prospectuses.

4.    As soon as practicable, please furnish to us a statement as to whether or not the amount of compensation to be allowed or paid to the underwriter(s) has been cleared with the NASD. Prior to the effectiveness of this registration statement, please provide us with a copy of the letter or a call from the NASD informing us that NASD has no additional concerns.

        Response:    An application regarding the underwriters' compensation has been submitted to the NASD. The Company will provide you with a copy of the NASD letter or arrange for a call to you from the NASD once the NASD indicates that it has no objections to the underwriting compensation in this offering.

5.    We note that you cite to industry research for information and statistics regarding economic trends and market share. Please provide us with marked copies of any materials that support these and other third party statements, clearly cross-referencing a statement with the underlying factual support. Confirm for us that these documents are publicly available. To the extent that any of these reports have been prepared specifically for this filing, file a consent from the party. Examples needing support include the estimate of skilled nursing market revenues on page 2, statistics prepared by the American Health Care Association and by CMS, on page 69, and your statement that skilled nursing and rehabilitative service markets are becoming one of the "fastest growing segments" of the long-term care industry on page 68.

        Response:    The Company is supplementally providing via Federal Express a copy of the studies published by the American Health Care Association (including in its Provider magazine), CMS, National Center for Health Statistics (as reported by The Lewin Group) and the U.S. Census Bureau marked to indicate the sections which are referenced in the Amendment, as well as copies of the industry statistics mentioned in the "Industry" section of the Amendment. The Company confirms that the studies are publicly available (upon payment of an applicable fee) and were not prepared specifically for the Company or this filing.

6.    We encourage you to file all exhibits with your next amendment or otherwise furnish us drafts of your legality opinion and underwriting agreement. We must review these documents before the registration statement is declared effective, and we may have additional comments.

        Response:    The Company acknowledges the Staff's comments and is filing certain additional exhibits with the Amendment. The Company will file any remaining exhibits with a subsequent amendment or as soon as possible after the documents have been finalized.

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Prospectus Cover Page

7.    Disclosure on page 4 and elsewhere in the prospectus indicates that there is a selling-shareholder component to the registration statement. Please revise your prospectus cover page to reflect this aspect of the offering. Refer to item 501(b)(3).

        Response:    The selling stockholders will provide the entire over-allotment option and will only participate in this offering to the extent the over-allotment option is exercised. Once the Company is able to finalize the share information, references to the over-allotment option in the Principal and Selling Stockholders table and on the cover of the prospectus will reflect that those shares will be sold by the selling stockholders. The Company has revised the disclosure below the table of contents and on pages 4 and 45 of the Amendment in response to the Staff's comment.

Prospectus Summary—page 1

8.    We note your statement that you are a "leading" provider of skilled nursing and rehabilitative care services. Please revise to indicate the measure by which you determined that you are a leading provider, be it based on revenues, market share, or some other standard.

        Response:    The Company has revised this sentence to delete the word "leading". Please see the revisions on pages 1, 53 and 90 of the Amendment.

9.    We are uncertain why you have included the transaction completed in 2006 under the heading "Recent Transactions." Given that these acquisitions are referenced elsewhere in the registration statement, it does not appear necessary to highlight them here. Please advise or revise.

        Response:    The Company has revised the heading to be labeled "Acquisitions in 2006 and 2007." Although these acquisitions are referenced elsewhere in the Amendment, the Company believes acquisitions are one of its key strategies and competitive strengths. The Company acquired a large number of facilities in 2006 and it believes that this information is an important disclosure for potential investors to understand the current nature of the Company's business and how it has changed in the past two years. Please see the revisions on page 2 of the Amendment.

10.    In the interest of providing balance to your prospectus summary, please revise to include principal risk factors in addition to the inclusion of your competitive strengths and growth strategy, including, for example, your dependence on Medicare and Medicaid for a large proportion of your revenues, the extent to which insiders will exert control over corporate actions subsequent to the initial public offering, and the fact that your subsidiaries have no obligation to make funds available to the holding company.

        Response:    The Company has revised the disclosure in the Prospectus Summary to include principal risk factors in response to the Staff's comment. Please see the revisions on page 3 of the Amendment.

Risk Factors, page 9

11.    Instead of using generic phrases such as "material and adverse effect" to describe the risks' effects, as you do, for example, in "Any changes in the interpretation and enforcement of the laws or regulations governing our business could cause us to modify our operations and could have a material adverse effect on our business," on page 13, please use more concrete and descriptive language to explain how each risk could affect the company, its business, or investors. For example, instead of saying that your "financial condition and results of operations could be materially and adversely

3

affected" if a risk occurs, replace this language with specific disclosure of the possible impact upon your operating results, business, liquidity, cash flow, financial condition, share price, etc.

        Response:    The Company has made a number of revisions to the Risk Factors section in accordance with the Staff's comments and has revised the risk factor indicated in the Staff's comment above to tailor those risks to the Company. Please see the revisions on page 15 of the Amendment that relate to the specific risk factor referenced above. Please also see the revisions on pages 10, 13-16, 19, 24, 27, 30, 37 and 38 of the Amendment that respond to the Staff's general comment above.

Risks related to our industry, page 9

12.    Several of the risk factors contained in the subsection pertain more to the company's business than the skilled healthcare industry in general. For example, the "probe reviews" described on page 11 directly relate to the operations at your facilities. In addition, you represent that the company has spent "considerable resources to respond to federal and state investigations and enforcement actions." These risks should be highlighted in the context of the company's operations rather than the industry in general. Furthermore, quantify the resources spent for the financial periods presented in the registration statement.

        Response:    The Company has made a number of revisions to the Risk Factors section in accordance with the Staff's comments and has revised the risk factors indicated in the Staff's comment above to tailor those risks to the Company. The Company has created a new risk factor on page 26 of the Amendment entitled "We are subject to reviews relating to Medicare overpayments, which could result in recoupment to the federal government of Medicare revenue," to highlight risks the Company faces relating to Medicare overpayments. In addition, the Company has created a new risk factor on page 27 of the Amendment entitled "Potential sanctions and remedies based upon alleged regulatory deficiencies could negatively affect our financial condition and results of operations," which highlights the resources utilized by the Company to respond to federal and state investigations and enforcement actions. These resources mainly relate to the time and energy utilized by management to respond to these issues. Because the resources mainly relate to time and energy of the Company's personnel, the Company cannot quantify the amount of resources spent for the financial periods presented in the Amendment. For this reason, the Company has not included such quantification in the Amendment in response to the Staff's comment.

        The Company respectfully submits that the probe reviews which it describes on page 12 of the Amendment are an industry risk. All companies that contract with the federal government will face periodic reviews, audits and investigations under federal government programs and contracts. The Company has described how the probe reviews have specifically affected it on pages 24 and 26 of the Amendment.

Our revenue could be impacted by federal and state changes to reimbursement and other aspects of Medicaid and Medicare, page 9

13.    Please revise this risk factor to significantly reduce its length, insofar as the risk you attempt to convey tends to become obscured because of the detail, at times generic in nature, that you provide here. To the extent that disclosure here is repetitive of disclosure found in "Government Regulation," consider revising to remove it from the risk factors section. Likewise, please revise to specifically identify the risk, and to indicate, as applicable, the extent to which you have experienced the risk in the past. Further, it appears that you are describing risks sufficiently different as to warrant separate risk factor headings. While the risks relating to Medicaid and Medicare, for example, appear appropriately included under the same heading, the risks related to the Deficit Reduction Act of 2005 and Reviews resulting from your participation in the Medicaid and Medicare programs would be better described under separate risk factor headings. Please revise. Please also revise "Any changes in

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the interpretation and enforcement of the laws or regulations governing our business could cause us to modify our operations and could have a material adverse effect on our business" on page 13, "We may be unable to complete future facility acquisitions at attractive prices or at all" on page 20, and "Significant legal actions and liability claims against us in excess of insurance limits or outside of our insurance coverage could subject us to increased insurance costs" on page 24.

        Response:    The Company has made a number of revisions to the Risk Factors section in accordance with the Staff's comments and has revised the risk factors indicated in the Staff's Comment above to tailor those risks to the Company. In addition, the Company has bifurcated certain of the risk factors into separate risk factors and has also included separate risk factor headings to describe different risks. Please see the revisions on pages 10-18, 25 to 27 and 29 to 31 of the Amendment.

We are subject to extensive and complex federal and state government laws and regulations, many of which are burdensome, and any of which could change at any time, page 12

14.    As drafted, this risk factor heading is more a statement of fact than of risk. Please revise to specify the risk to the Ensign Group from changes in federal and state government laws. When you revise, please indicate the extent to which changes in federal and state laws have had an adverse effect on the operations of the facilities you operate in six states. Other risk factor headings needing revision include:

•

Our operations are subject to environmental and occupational health and safety regulations.—page 18

•

Our business maybe affected by the actions of a national labor union that has been pursuing a negative publicity campaign criticizing our business.—page 27

        Response:    The Company has revised these risk factor headings in accordance with the Staff's comments. Please see the revisions on pages 14, 20 and 32 of the Amendment.

Overbuilding in certain markets, increased competition and increased operating costs may adversely affect our ability to generate and increase our revenue and profits and to pursue our growth strategy., page 17

15.    Please revise to indicate, as applicable, whether any of the markets in which you operate are overbuilt in the opinion of management.

        Response:    The Company has not done or commissioned any formal market study in any of the markets where it operates, and is not in a position to determine whether any of the markets in which it operates are overbuilt. This risk factor is intended to convey the risk that may occur if any of the markets in which it operates become overbuilt. The Company has revised this risk factor to clarify that this is a risk that may potentially occur. Please see the revisions on pages 18-19 of the Amendment.

We depend largely upon reimbursement from third-party payors..., page 19

16.    Please revise to quantify the percentage of revenues provided by government payors at a fixed rate.

        Response:    The Company has revised this disclosure in this risk factor in accordance with the Staff's comments. Please see the revisions on pages 20 and 21 of the Amendment.

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Increased competition for, or a shortage of, nurses and other skilled personnel, could increase our staffing and labor costs., page 19

17.    Please revise to indicate whether there are minimum staffing requirements in any of the six states in which you operate. As applicable, quantify the fines and other sanctions that would be payable if a company were unable to meet the minimum staffing requirements.

        Response:    The Company has revised the disclosure in this risk factor in accordance with the Staff's comments. Please see the revisions on pages 21-22 of the Amendment.

We believe, but we have not been officially notified, that the U.S. Department of Justice may be..., page 22

18.    Clarify how you became aware of the possible investigation into potential Medicare billing irregularities.

        Response:    The Company has revised this disclosure in this risk factor in accordance with the Staff's comments. Please see the revisions on pages 24 to 25 of the Amendment.

19.    We note your indication of potential damages amounting to $11,000 per false claim. To more clearly illustrate the magnitude of potential damages, disclose the average number of Medicare claims submitted at your facilities over a month's or year's time.

        Response:    In order to incur a fine, an actual false claim must be filed. There are various interpretations of the phrase "per false claim". Therefore, depending on the translation of this phrase, the quantification of this amount could significantly vary. The Company also believes that the quantification of this exposure is more complicated than a simple calculation would suggest. For example, the Company would need to determine for each resident if their stay was continuous or if they were discharged and re-admitted in a given month. The Company would then need to disaggregate each admittance by resident to determine which admittances should be counted as a separate claim. Therefore, the Company believes that it is unlikely that it could quantitatively disclose an amount of damages from potential false claims that would provide meaningful information to investors or accurately reflect how false Medicare claims would impact its financial statements. Therefore, rather than provide potentially confusing or subjective data, the Company has qualitatively described the risk. Please see the revisions on page 24 of the Amendment.

Our existing credit facilities and mortgage loans contain restrictive covenants and any default under such facilities or loans could result in a freeze on additional advances. page 29

20.    Please revise to indicate any past non-compliance with your debt covenants.

        Response:    The Company has revised this disclosure in this risk factor in accordance with the Staff's comments. Please see the revisions on page 34 of the Amendment.

Compliance with the regulations of the Department of Housing and Urban Development may require..., page 31

21.    Identify the problem that resulted in the failed HUD inspection at one of your HUD-insured mortgaged facilities.

        Response:    The facility that did not pass the U.S. Department of Housing and Urban Development's ("HUD") Real Estate Assessment Center ("REAC"), which conducts the inspections to evaluate compliance with HUD standards, inspection was cited for numerous deficiencies. The Company appealed 20 of those deficiencies and 19 of the 20 deficiencies were overturned on appeal. The Company has corrected the remaining deficiencies and is awaiting reinspection of the facility. The remaining deficiencies consisted of numerous minor deficiencies and the Company believes that specific

6

disclosure of these deficiencies would not provide meaningful information to investors. The REAC inspection protocol was designed around apartment specifications and is applied to skilled nursing facilities, even though they are very different from apartments. For example, REAC cited missing stoppers in three sinks as deficiencies and deducted points for each missing stopper. However, previously, the Company had been ordered by the California Department of Health Services ("DHS") to remove all sink stoppers, which DHS regarded as a safety hazard in a skilled nursing home setting. Occasionally, as in the sink stopper example, requirements imposed on our facilities by governmental organizations are not consistent with each other. As the Company does not believe additional disclosure regarding the specific deficiencies cited by REAC would provide meaningful information to investors, it has not included any additional disclosure in the Amendment.

We may not be able to maintain dividends and the failure to do so would adversely affect our stock price. page 33

22.    Please revise to reference the possible limitation on dividends associated with your revolving line of credit with General Electric Capital Corporation.

        Response:    The Company has revised the disclosure in this risk factor in accordance with the Staff's comments. Please see the revisions on page 37 of the Amendment.

Use of Proceeds, page 39

23.    To the extent possible, please revise to indicate the approximate amount of net proceeds you intend to use for each purpose. Please refer to Item 504 of Regulation S-K. In addition, confirm that you have not identified any specific acquisition targets.

        Response:    The Company has not yet determined the actual allocation of proceeds for a specific and definable use, and it believes that its current disclosure accurately reflects its current intentions with respect to the use of proceeds from the offering. One of the Company's growth strategies is to continue to acquire additional facilities in existing and new markets. The Company regularly seeks opportunities to purchase or lease additional facilities. While the Company is currently in discussions for acquisitions, these nonbinding discussions are at an early stage and no agreements have been entered into at this time. Furthermore, the Company is not sufficiently far enough in the process to adequately predict the likelihood of any potential transaction. Because the Company can and has historically terminated acquisition negotiations as it proceeds through both pre-contractual and post-contractual due diligence processes, any disclosure in the Amendment relating to possible acquisition targets may be misleading investors because the potential transactions might not occur. For this reason, the Company has not included any additional disclosure in the Amendment in response to the Staff's comment.

Dividend Policy, page 40

24.    Clarify whether the board has a policy for determining the amount of the company's past regularly quarterly dividend and, if so, whether that policy will continue to apply following this offering.

        Response:    The Company has revised this disclosure in the Dividend Policy section in accordance with the Staff's comments. Please see the revisions on page 46 of the Amendment.

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Dilution, page 42

25.    Please quantify the further dilution per share to new investors that will occur upon exercise of any of your outstanding stock options.

        Response:    The Company has revised the disclosure in the Dilution section in accordance with the Staff's comments. Please see the revisions on page 48 of the Amendment.

Selected Financial Data, page 43

26.    Move EBITDA from the face of the statement of income data to another section of the table of financial data, such as a section labeled "other financial data." Your current presentation results in presenting a non-GAAP measure on the face of your financial statements, which is prohibited by Item 10 of Regulation S-K. Also revise the information in the Summary Consolidated Financial Data at page 6.

        Response:    The Company has revised this disclosure in the Selected Financial Data table and in the Summary Consolidated Financial Data table in accordance with the Staff's comments. Please see the revisions starting on pages 7 and 50 of the Amendment.

27.    Please expand Note 2 at page 44 to disclose in more detail why you believe EBITDA is a useful indicator of operating performance since it excludes the impact of capital items that are necessary to generate revenues. Refer to Item 10 of Regulation S-K and Question 8 of our Frequently Asked Questions document on non-GAAP measures which is available on our website at: www.sec.gov/divisions/corpfin/faqs/nongaapfaq.htm. Your revised discussion should, at a minimum, disclose the following:

•

the economic substance behind management's decision to use such a measure;

•

the material limitations associated with the use of the non-GAAP measure as compared to the use of the most directly comparable GAAP measure, net income (loss); and

•

the manner in which management compensates for these limitations when using the non-GAAP financial measure.

•

Explain why you believe EBITDA "helps investors evaluate and compare the results of [y]our operations from period to period by removing the impact of [y]our capital structure and asset base from [y]our operating results." Since capital items are a necessary expenditure to enable you to generate revenues, please address in your disclosure why a financial measure that omits these expenditures is a relevant and useful measure of operating performance.

You disclose that you use EBITDA to evaluate the capacity to fund capital expenditures and expand your business and for planning purposes, including the preparation of your internal budget. If management uses this non-GAAP measure to evaluate liquidity, you should also reconcile it to the most closely comparable GAAP measure of liquidity, cash flows from operating activities.

You disclose that you use EBITDA to assess compliance with financial ratios and covenants contained in your credit facilities and mortgage loans. If these covenants are material terms to these agreements, please include a discussion of the agreements and the potential impact of these covenants on your financial condition and liquidity. Please see question 10 of our Frequently Asked Questions document on Non-GAAP financial measures.

        Response:    The Company has revised Note 2 to the Selected Consolidated Financial Data table and Note 3 to the Summary Consolidated Financial Data table in accordance with the Staff's comments. Please see the revisions on pages 7-9 and 50-52 of the Amendment.

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        The Company respectfully advises the Staff that it does not use EBITDA or EBITDAR as a measure of its liquidity. Accordingly, it has not provided a separate reconciliation to cash flow from operating activities.

        The Company has deleted the reference that it uses EBITDA to assess compliance with financial ratios and covenants contained in its credit facilities and mortgage loans. The debt covenants are calculated based on EBITDAR adjusted for selected items as defined in the Company's debt agreement. Please see the Description of Certain Indebtedness section on pages 132-133 for a discussion of the Company's debt.

Managements Discussion and Analysis, page 46

Overview, page 46

28.    Please revise to briefly indicate the meaning of "facility of choice."

        Response:    The Company has revised this disclosure in the Managements Discussion and Analysis section in accordance with the Staff's comments. Please see the revisions on page 53 of the Amendment. In addition, please see the revisions on page 86 of the Amendment.

Critical Accounting Policies

Revenue Recognition, page 50

29.    Expand the disclosure of your accounting policy for reimbursements under Medicare and Medicaid programs to quantify the impact of audits and retroactive adjustments on your estimates of revenue for each period. We note the disclosure of governmental reviews presented in the Risk Factors section on Medicare reviews at page 11.

        Response:    Consistent with healthcare industry accounting practices, any changes to governmental revenue estimates are recorded in the period the change or adjustment becomes known. Because of the complexity of the laws and regulations governing Medicare and state Medicaid assistance programs, the Company's estimates may potentially change by a material amount. As the Company is not able to quantify the impact of future audits, the Company has disclosed the impact as if, for the three-month period ended March 31, 2007, it were to experience a one percent decrease in its revenues. Please see the revisions on pages 58-59 of the Amendment.

Stock-Based Compensation, page 53

30.    Tell us how you determined the fair value of your common stock at each of the stock option grant dates in 2006 and for any options granted in 2007 through the date of your response letter. Describe in detail the valuation methodology and significant assumptions that you used in estimating the fair value. In order to help us evaluate your estimates, please provide a schedule showing for each option, or group of similar options:

•

the grant date

•

the grantee,

•

vesting terms,

•

exercise price,

•

estimated fair value of the option and the underlying common stock,

•

the total amount of compensation cost and

•

the amount recognized as expense

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We may have additional comments when you disclose the anticipated offering price.

        Response:    The Company has revised this disclosure in the Stock-Based Compensation section in accordance with the Staff's comments to incorporate the Company's determination of the fair value of the common stock at each of the stock option grant dates in 2006. The Company has not granted options during 2007. In addition, the Company has revised the disclosure to describe in detail the valuation methodology and significant assumptions that were used in estimating the fair value. Please see the revisions on pages 61-63 of the Amendment.

        The Company is supplementally providing the Staff with the following table, showing for each group of options granted during 2006, the grant date, the grantee, vesting terms, the weighted average exercise price, the estimated fair value of the option and the underlying common stock, the total amount of compensation cost and the amount recognized as expense:

Grant Date	No. of Options	Grantee(s)	Vesting Terms	Weighted Average Exercise Price		Stock Price Fair Value		Fair Value of Options		Total Stock Compensation Expense		Stock Compensation recognized in 2006
1/17/2006	22,500	Employees	Vest one fifth on each anniversary of grant date	$	7.05	$	5.96	$	2.51	$	56,475	$	8,384
7/26/06	663,500	Employees	Vest one fifth on each anniversary of grant date	$	7.50	$	15.09	$	9.69	$	6,429,315	$	433,370

        The Company also acknowledges the Staff's request for the anticipated offering price and will amend its response when this information becomes available, with sufficient time for the Staff to review the information prior to any distribution of preliminary prospectuses.

31.    Expand the disclosure of stock-based compensation to include a discussion of the significant factors, assumptions and methodologies used in determining fair value of your common stock during 2006 and the subsequent interim period in 2007. Also provide a discussion of each significant factor contributing to the difference between the fair value as of the date of each grant and the anticipated offering price.

Disclose in MD&A the intrinsic value of outstanding vested and unvested options based on the estimated IPO price and the options outstanding as of the most recent balance sheet date presented in your registration statement.

Disclose in Note 12 to your financial statements, at a minimum, the following information for equity instruments granted during the 12 months prior to the date of the most recent balance sheet included in the registration statement.

•

For each grant date, the number of options or shares granted, the exercise price, the fair value of the common stock, and the intrinsic value, if any, per option. The number of options may be aggregated by month or quarter and the information presented as weighted average per-share amounts;

•

Whether the valuation used to determine the fair value of the equity instruments was contemporaneous or retrospective;

•

If the valuation specialist was a related party, a statement indicating that fact.

        Response:    The Company has revised Critical Accounting policies and Note 12 to the Consolidated Financial Statements in accordance with the Staff's comments. Please see the revisions on pages 61-63 and F-35 to F-37 of the Amendment. The Company also acknowledges the Staff's request for the

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anticipated offering price and will amend its response when this information becomes available, with sufficient time for the Staff to review the information prior to any distribution of preliminary prospectuses.

        The valuation specialist that the Company used was an independent third-party valuation expert; however, the Company has chosen not to refer to the named expert or include the expert's consent as an exhibit. Therefore, the Company has revised the disclosure to describe the method and significant assumptions used in the valuations.

General and Administrative Expense, page 58

32.    Discuss and quantify, how the company becoming a public company, particularly Section 404 of the Sarbanes-Oxley Act of 2003 has impacted, and is expected to impact, the company's general and administrative expenses.

        Response:    The Company has revised the disclosure in the General and Administrative Expense section to discuss how becoming a public company will impact the Company. Please see the revisions on pages 57-58 of the Amendment. However the Company is still in the early stage of determining the required service levels and outsourcing costs that will result from becoming a public company. Therefore, the Company is not able to quantify the amount of such additional expenses at this time.

Contractual Obligations and Commitments, page 65

33.    Please revise, as applicable, to reflect any developments in your negotiation process to replace the collateralized revolver facility with a larger credit facility with a first priority security interest in company assets.

        Response:    The Company has negotiated another short-term extension of the revolving credit facility until August 1, 2007. The Company has revised the disclosure in the Contractual Obligations and Commitments section to disclose this extension, and to disclose that the Company anticipates that the larger credit facility will be secured by a pledge of the outstanding equity of the operating subsidiaries of the Company's portfolio company subsidiaries. Please see the revisions on page 80 of the Amendment. The Company will include in an amendment any future developments in its negotiation process.

Competition, page 71

34.    Please revise, to the extent known or reasonably available, to identify your competitive position within your industry. Please see Item 101(c)(x) or Regulation S-K.

        Response:    The Company has supplemented this disclosure in accordance with the Staff's comments. Please see the revisions on page 86 of the Amendment. However, the Company respectfully submits that it is not practicable to identify the Company's competitive position within its industry given the fragmented nature of the industry. The Company competes in an industry where there are some large companies and several small regional and local providers. Each of the Company's facilities competes with the facilities in its local market, and the competitive position of each facility within its market must be addressed on a facility-by-facility basis. For this reason, the Company has not included any additional disclosure in the Amendment in response to the Staff's comment.

Increase Mix of High Acuity Patients, page 78

35.    Please revise to briefly define "high acuity."

        Response:    The Company has revised this disclosure in accordance with the Staff's comments. Please see the revisions on pages 20, 56 and 94 of the Amendment.

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Compensation Discussion and Analysis, page 90

36.    We note that your compensation committee has reviewed compensation packages of executives of companies in the skilled nursing and assisted living industries and other "relevant market data." Although we note that you have not benchmarked any of your elements of compensation in the past, disclose why the compensation committee reviewed other compensation packages and how compensation elsewhere in the industry compared to your compensation levels.

        Response:    The Company has revised this disclosure in accordance with the Staff's comments. Please see the revisions on page 108 of the Amendment.

37.    Explain what you mean by "clinical and financial performance."

        Response:    The financial performance that affects the bonus pool established pursuant to the executive incentive program and the bonuses available for the presidents of the portfolio companies is annual net income before taxes. The Company has discretion as to the amount of bonus to allocate to each president of its portfolio companies and to each person who participates in the executive incentive bonus pool based upon such person's contribution to the clinical performance of the Company. The clinical measures include the Company's success in achieving positive survey results and the extent of positive patient and resident feedback. The Company has revised the disclosure on pages 108 and 111 of the Amendment to clarify what is meant by clinical and financial performance.

38.    We note the factors considered by the compensation committee in determining base salary. Identify the specific factors considered by the committee in determining the base salaries of your named executive officers for 2006.

        Response:    The compensation committee generally considers job responsibilities, individual experience and the value that each executive provides to the Company in determining base salary for the Company's executives. However, the compensation committee did not analyze any specific factors in addition to these factors in determining the base salaries of the executives for 2006. The Company has revised this disclosure in accordance with the Staff's comments. Please see the revisions on page 108 of the Amendment.

        The level of each president's base salary is generally determined based upon the Company's performance, the president's performance, the respective portfolio company's overall performance and considerations such as the cost of living in the markets in which the president serves. The base salary for executive directors is generally based upon individual experience and past performance as well as local market conditions. Management did not analyze any specific factors in addition to these factors in determining base salaries for the presidents or the executive directors for 2006. Please see the revised disclosure on pages 110-111.

39.    Identify the "relevant financial performance goals" for determining the annual cash bonuses for your named executive officers. We note the cap of 1.6 million for the bonus pool for 2006. Clarify whether the total amount of bonuses awarded compared to this cap.

        Response:    The Company has revised this disclosure to clarify that the bonus pool was established to fund the annual cash bonuses for the Company's executives is based solely upon annual net income before taxes. In addition, the Company has revised this disclosure to clarify that the bonus pool for 2006 was not subject to a cap. Please see the revisions on pages 108 and 110 to 112 of the Amendment.

40.    We note that bonuses are awarded at the discretion of the compensation committee upon the recommendation of the chief executive officer but that no bonus is awarded "absent our attainment of the relevant financial performance goals..." Clarify whether net income before taxes was the only financial performance goal considered and, if so, disclose what the goal was for 2006. Provide the same

12

for the short-term bonuses awarded to the presidents of your five portfolio companies and your executive directors.

        Response:    The Company has revised this disclosure to clarify that the executive bonus pool calculation and the bonuses that will be paid to presidents of the Company's five portfolio companies are based solely upon annual net income before taxes. The Company did not establish a goal for 2006 as the potential bonuses are unlimited and the bonus is correlated with the Company's annual net income before taxes. Please see the revisions on pages 108 and 110-111 of the Amendment.

        The financial metric used to establish bonuses for executive directors is their facilities' and their cluster's EBITDAR (earnings before net interest expense, taxes, depreciation, amortization and facility rent-cost of services). The Company has revised this disclosure to include this explanation. Please see the revisions on page 111-112 of the Amendment.

41.    Discuss what specific factors were considered by the compensation committee in determining to award the Christensens additional bonuses in 2006.

        Response:    Although the compensation committee has discretion as to whether to award the Christensens additional bonuses, it has historically always awarded these bonuses. The Company has revised this disclosure to include this explanation. Please see the revisions on page 109 of the Amendment.

42.    Identify what "relevant market data" was considered in determining compensation for board and committee service. Clarify who analyzed such data and decided what levels to pay.

        Response:    The Company has revised this disclosure in accordance with the Staff's comments. Please see the revisions on page 112 of the Amendment.

Principal and Selling Stockholder, page 111

43.    Please note that it is our position that any selling stockholder who is a broker-dealer must be identified as an underwriter in the prospectus unless all of the securities being registered on behalf of that broker-dealer were received as compensation for underwriting activities. Please revise to identify any selling stockholders that are broker-dealers and to disclose that each such selling stockholder is an underwriter. Alternatively, if any selling stockholder who is a broker-dealer received or will receive all of the shares being registered on its behalf as compensation for underwriting activities, please supplementally identify each such selling stockholder and supplementally describe the nature of the transactions in which those shares were acquired.

        Response:    The Company is not aware that any of its selling stockholders currently is a broker-dealer. Each of the Company's selling stockholders has completed or will complete questionnaires which will indicate whether such selling stockholder is a broker-deal or an affiliate of a broker-dealer.

44.    Please note that it is our position that any selling stockholder who is an affiliate of a broker-dealer must be identified as an underwriter in the prospectus unless that selling shareholder represents that it purchased the shares being registered on its behalf in the ordinary course of its business and, at the time of the purchase of those shares, did not have any agreement or understanding, directly or indirectly, with any person to distribute those shares. Supplementally, please identify each selling shareholder that is an affiliate of a broker-dealer. Tell us whether those holders purchased the shares being registered in the ordinary course of business and whether the holder had any agreement or understanding at the time of purchase, directly or indirectly, with any person to distribute the shares. If so, please revise to identify those selling shareholders and to disclose that

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those selling shareholders are underwriters in connection with this registration statement. For the definition of "affiliate," please refer to Rule 405 of Regulation C.

        Response:    The Company is not aware that any of its selling stockholders currently is a broker-dealer. Each of the Company's selling stockholders has completed or will complete questionnaires which will indicate whether such selling stockholder is a broker-deal or an affiliate of a broker-dealer.

Description of Certain Indebtedness, page 114

45.    Please update in each instance to reflect indebtedness as of a date more recent than December 31, 2006.

        Response:    The Company has updated the Description of Certain Indebtedness section to reflect indebtedness as of March 31, 2007, in accordance with the Staff's comments. Please see the revisions on pages 132-133 of the Amendment.

Lock-Up Agreements, page 126

46.    Please revise to disclose the factors that may be used by the underwriters in determining whether to release the shares subject to the lock-up.

        Response:    Page 145 of the Amendment generally describes the factors that may be used by D.A. Davidson & Co. ("Davidson") in determining whether to release the shares subject to the lock-up. The Company supplementally advises the Staff that Davidson has informed the Company that they do not have any additional pre-established conditions regarding the waiver of the lock-up agreements and that they grant waivers after evaluating the unique facts and circumstances of each individual's request for such a waiver. Therefore, any additional disclosure regarding waivers would not be helpful or material to an investor because it would not be relevant to any decision by Davidson to waive lock-up restrictions in this transaction. For this reason, the Company has not included any additional disclosure in the Amendment in response to the Staff's comment.

Statements of Income, page F-4

47.    We note that you present depreciation and amortization as a separate line item in the statements of income. It appears that this presentation may not comply with the guidance in SAB Topic 11:B if the line item labeled operating expenses excludes depreciation and amortization that is directly attributed to the generation of revenue. Describe for us the nature and amount of each significant component of depreciation and amortization expense. Tell us how you considered the guidance in SAB Topic 11:B.

        Response:    In considering the guidance in SAB Topic 11:B and Rule 5-03(b)(2) of Regulation S-X, the Company has changed the description in the consolidated statement of operations of the line entitled "Operating expense" to "Cost of services". Further, in order to clarify that depreciation and amortization are not included in the "Cost of services" line item, the Company has updated the description to "Cost of services (exclusive of facility rent and depreciation and amortization)". Consistent with other companies in the Company's industry, the Company does not display a gross margin. The Company believes the revised presentation will assist the reader and will avoid placing undue emphasis on a "cash flow" presentation. Please see the revisions on page F-4 with conforming changes on this line item when displayed throughout the document.

        The Company capitalizes property and equipment at its original historical cost. The significant amortizable components of property and equipment include building and improvements, equipment, furniture and fixtures and leasehold improvements. Depreciation is computed using the straight-line method over the estimated useful lives of the depreciable assets ranging from three to 30 years. In

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Note 2 of the consolidated financial statement, the Company described the significant components of property and equipment and the related accumulated depreciation. Please see page F-11.

        The Company amortizes its intangible assets including debt issuance costs, lease acquisition costs, customer base and tradename over their estimated weighted average lives which ranging from 0.3 to 15.5 years. The expected amortization expense and related accumulated amortization amounts are disclosed for each intangible asset category in Note 5 of the consolidated financial statement. Please see page F-25.

Note 2—Summary of Significant Accounting Policies

Self-Insurance, page F-12

48.    You disclose that cash and cash equivalents include capital of your captive insurance subsidiary that is subject to restrictions that limit your access to assets of the subsidiary. Separately disclose the amount of restricted cash on the face of the balance sheet and revise the statements of cash flows to reconcile to unrestricted cash. Refer to Rule 5-02.1 of Regulation S-X.

In disclosing the potential exposure attributed to self-insured liabilities at page F-13 you indicate that "[t]o the extent that the Company's actual liability exceeds its estimate of loss, its future earnings and financial condition will be adversely affected." If it is reasonably possible that the exposure to self insurance claims may result in a liability that materially exceeds the amount already accrued, paragraph 10 of SFAS 5 requires disclosure of the range of reasonably possible loss or a clear statement that a range cannot be estimated. Please clarify and revise the disclosures regarding these uncertainties to conform with the requirements of SFAS 5 or explain why no modification is necessary.

        Response:    The Company's insurance subsidiary is subject to requirements imposed under applicable laws. These requirements include, but are not limited to, maintaining minimum statutory capital of $120,000. The Company believes that the minimum statutory capital balance does not represent restricted cash and therefore has included this amount in cash and cash equivalents. In order to properly present the restrictions on cash and cash equivalents, the Company has classified cash and cash equivalents that are designated to support long-term insurance subsidiary liabilities as long-term insurance subsidiary deposits. Accordingly, the insurance captive maintains cash and cash equivalents and insurance subsidiary deposits. The Company has revised Note 2 of the consolidated financial statements to clarify its classifications related to the insurance captive. Please see the revisions on pages 59, F-11 to F-13 of the Amendment.

        The Company has also revised the disclosure regarding the uncertainties surrounding the potential self insurance exposure in accordance with the Staff's comments. Please see the revisions on pages 60 and F-13 to F-15 of the Amendment.

Pro Forma Net Income Per Common Share, page F-16

49.    Please delete the pro forma presentations for 2004 and 2005. You should present pro forma information for only the most recent fiscal year. Also clarify why the pro forma basic and diluted earnings per share are the same as the historical earnings per share data presented at pages F-15 and F-16.

        Response:    The Company has deleted the pro forma presentations for 2004 and 2005 in accordance with the Staff's comments. Please see the revisions on page F-19 of the Amendment. The Company has updated the calculation to reflect the effect of the conversion of the Company's preferred stock converted into common stock upon the closing of the Company's initial public offering, as if the conversion occurred on January 1, 2006. Please see the revised lead in paragraph and table on pages F-18 and F-19 of the Amendment.

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Note 3—Acquisitions, page F-18

50.    You disclose that you used an independent third-party valuation expert to determine the fair value of the assets of acquired facilities. While you are not required to refer to an independent valuation, when you do you should also disclose the name of the expert and include the expert's consent as an exhibit. If you decide to delete the reference to the independent valuation, you should revise the disclosures to describe the method and significant assumptions used in the valuation.

        Response:    The Company used an independent valuation expert; however, the Company has chosen not to refer to the named expert or include the expert's consent as an exhibit. Therefore, the Company has revised the disclosure to describe the method and significant assumptions used in the valuations. Please see the revisions on pages F-22 and F-23, of the Amendment.

Note 13—Commitments and Contingencies

Other Matters, page F-35

51.    Disclose the date that you retained outside counsel to investigate possible reported allegations concerning potential reimbursement irregularities at some of your facilities.

        Response:    The Company has revised this disclosure in accordance with the Staff's comments. Please see the revisions on pages 24 to 25 and F-41 to F-42 of the Amendment.

        Any comments or questions regarding the foregoing should be directed to the undersigned at (949) 540-1245. Thank you very much for your assistance with this matter.

Sincerely,

/s/  GREGORY K. STAPLEY, ESQ. Vice President and General Counsel

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