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As filed with the Securities and Exchange Commission on October 5, 2007

Registration No. 333-142897

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

AMENDMENT NO. 3
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	Number of Shares Registered(1)	Proposed Maximum Offering Price per Share(2)	Proposed Maximum Aggregate Offering Price	Amount of Registration Fee(3)
Common Stock, $0.001 par value	4,600,000	$22.00	$101,200,000	$3,107

(1)

Includes 600,000 shares subject to the underwriters' over-allotment option.

(2)

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

(3)

The registrant previously paid $2,917 as a registration fee in connection with this Registration Statement on Form S-1, Registration No. 333-142897, filed on May 14, 2007, as amended.

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 September 7, 2007

PROSPECTUS

5,000,000 Shares

Common Stock

[ENSIGN LOGO]

This is an initial public offering of shares of common stock of The Ensign Group, Inc. We are offering 5,000,000 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 $16.00 and $18.00 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 11.

    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 750,000 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

[ENSIGN GROUP LOGO]

Locations: Northern California

1 Willits

2 Ukiah

3 Cloverdale

4 Santa Rosa

5 Santa Rosa

6 Sonoma

Locations: Southern California

7 Ventura

8 Oxnard

9 Camarillo

10 Panorama City

11 Rosemead

12 Glendora

13 Whittier

14 Whittier

15 Pomona

16 Upland

17 Redlands

18 Downey

19 Norwalk (1)

20 Bellflower

21 Palm Springs

22 Long Beach

23 Long Beach

24 Huntington Beach(1)

25 Costa Mesa

26 Laguna Hills

27 Vista

28 Escondido

29 Lemon Grove

30 San Diego

31 San Diego

(1) Assisted living services provided at this facility

Locations: National

32 Walla Walla, WA

33 Lynwood, WA

34 Hoquiam, WA

35 Pocatello, ID

36 Ogden, UT

37 Salt Lake City, UT

38 Salt Lake City, UT

39 Draper, UT

40 Glendale, AZ (1)

41 Scottsdale, AZ

42 Phoenix, AZ

43 Phoenix, AZ

44 Phoenix, AZ

45 Phoenix, AZ

46 Mesa, AZ (1)

47 Mesa, AZ (1)

48 Mesa, AZ

49 Tucson, AZ

50 Tucson, AZ

51 Tucson, AZ

52 Abilene, TX

53 Lewisville, TX

54 Carrollton, TX

55 Mesquite, TX

56 Temple, TX

57 Livingston, TX

58 San Antonio, TX

59 Richmond, TX

60 Rosenberg, TX (1)

61 McAllen, TX

Facility Locations, September 7, 2007

TABLE OF CONTENTS

	Page
PROSPECTUS SUMMARY	1
RISK FACTORS	11
FORWARD-LOOKING STATEMENTS	45
USE OF PROCEEDS	47
DIVIDEND POLICY	48
CAPITALIZATION	49
DILUTION	50
SELECTED CONSOLIDATED FINANCIAL DATA	51
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	54
INDUSTRY	86
BUSINESS	94
MANAGEMENT	107
COMPENSATION DISCUSSION AND ANALYSIS	112
TRANSACTIONS WITH RELATED PERSONS	132
PRINCIPAL AND SELLING STOCKHOLDERS	135
DESCRIPTION OF CERTAIN INDEBTEDNESS	138
DESCRIPTION OF CAPITAL STOCK	141
SHARES ELIGIBLE FOR FUTURE SALE	145
MATERIAL U.S. FEDERAL INCOME AND ESTATE TAX CONSIDERATIONS FOR NON-U.S. HOLDERS	148
UNDERWRITING	151
LEGAL MATTERS	155
EXPERTS	155
WHERE YOU CAN FIND MORE INFORMATION	155
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 September 30, 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 September 30, 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. We also have entered into agreements to purchase four of the 38 facilities that we operate under long-term lease arrangements, which are pending subject to certain closing conditions. For the year ended December 31, 2006 and the six months ended June 30, 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 key operational decisions made 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;

1

•

community-focused approach;



•

attractive asset base; and



•

investment in information technology.

Growth Strategy

        Much of our historical growth can be attributed to our expertise in acquiring underperforming facilities and transforming them into successful stand-alone 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 the following:

•

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. 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 2006.

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

•

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 contributed 1,668 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

2

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 under our loan agreement with General Electric Capital Corporation.

        In the first six months of 2007, we acquired three additional long-term care facilities 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 exercised an option to purchase one of our leased skilled nursing facilities for $3.3 million in cash. In addition, in July 2007, we entered into an operating lease agreement for a long-term care facility in Utah that is licensed for both skilled nursing and assisted living services. We did not make any material payments to the prior facility operator and we did not acquire any assets or assume any liabilities, other than our rights and obligations under a new operating lease and operations transfer agreement, as part of this transaction. We also simultaneously entered into a separate contract with the property owner to purchase the underlying property for $3.0 million, pending the property owner's resolution of certain boundary line issues with neighboring property owners. We expect that we will purchase the property under the contract if and when these title issues are resolved. Regardless of whether the title issues are resolved, we have the option to purchase the property for $3.0 million under the operating lease. In August 2007, we entered into an agreement that we expect will close on or before December 14, 2007, to purchase two skilled nursing facilities in California and one assisted living facility in Arizona, which also provides independent living services, for an aggregate purchase price of approximately $13.0 million. We currently operate these three facilities under master lease agreements. The lease agreements for the two skilled nursing facilities contain purchase options which are not currently exercisable. Upon the expected closing of these purchase agreements, we will own 27 of our facilities and operate 34 of our facilities under long-term lease arrangements with options to purchase nine of those 34 facilities.

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 11 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;



•

potential 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;

3

•

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 corporate address is 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.

4

The Offering

Common stock offered by Ensign	4,000,000 shares
Common stock to be outstanding after this offering	20,446,380 shares
Common stock offered by the selling stockholders pursuant to the over-allotment option	600,000 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, pay down debt 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 each of the first and second quarters of 2007, we have paid cash dividends to our stockholders of $0.04 per share, for an aggregate dividend of approximately $1,316,000. We also declared cash dividends of $0.04 per share as of September 30, 2007, for an aggregate dividend of $658,000, which is payable on or before October 31, 2007. For 2006, we paid cash dividends to our stockholders of $0.03 per share for each of 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 each of 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 each of 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 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. However, the future 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. 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 receive notice that we are in default under this agreement.

5

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

        The number of shares of common stock to be outstanding after this offering is based on 16,446,380 shares outstanding as of June 30, 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:

•

1,129,500 shares of common stock issuable upon the exercise of outstanding options at a weighted average exercise price of $6.21 per share;



•

4,000,000 shares of common stock offered by this prospectus; and



•

1,000,000 shares of common stock, subject to certain automatic annual increases, 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 600,000 additional shares of common stock from the selling stockholders;



•

no exercise of outstanding options;



•

the initial public offering price will be $21.00 per share (which is the midpoint of the price range set forth on the cover of this prospectus); and



•

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

6

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 six months ended June 30, 2006 and 2007 and the consolidated balance sheet data as of June 30, 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,									Six Months Ended June 30,
			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		$	168,727		$	198,247
Expenses:
	Cost of services (exclusive of facility rent and depreciation and amortization shown separately below)			199,986			239,379			284,847			133,350			161,001
	Facility rent—cost of services			14,773			16,118			16,404			8,090			8,333
	General and administrative expense			8,537			10,909			14,210			6,590			7,644
	Depreciation and amortization			1,934			2,458			4,221			1,758			3,186
		Total expenses		225,230			268,864			319,682			149,788			180,164
Income from operations				19,306			31,986			38,892			18,939			18,083
Other income (expense):
	Interest expense			(1,565	)		(2,035	)		(2,990	)		(1,337	)		(2,349	)
	Interest income			85			491			772			297			698
		Other expense, net		(1,480	)		(1,544	)		(2,218	)		(1,040	)		(1,651	)
Income before provision for income taxes				17,826			30,442			36,674			17,899			16,432
Provision for income taxes				6,723			12,054			14,125			7,081			6,600
Net income			$	11,103		$	18,388		$	22,549		$	10,818		$	9,832
Net income per share(1):
	Basic		$	0.83		$	1.35		$	1.66		$	0.80		$	0.72
	Diluted		$	0.63		$	1.05		$	1.34		$	0.65		$	0.58
Weighted average common shares outstanding(1):
	Basic			13,284,902			13,468,060			13,365,682			13,379,060			13,441,490
	Diluted			17,519,032			17,505,040			16,823,242			16,720,378			16,891,202

(See footnotes on following pages)

7

	As of December 31,						As of June 30, 2007		As of June 30, 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	$	12,939	$	89,974
Working capital		21,526		19,087		28,281		20,938		96,538
Total assets		80,255		119,390		190,531		195,609		271,209
Long-term debt, less current maturities		24,820		25,520		63,587		63,072		63,072
Redeemable, convertible preferred stock		2,725		2,725		2,725		2,725		—
Stockholders' equity		17,828		32,634		51,147		59,914		138,239
Cash dividends declared per common share	$	0.05	$	0.09	$	0.13	$	0.08	$	0.06

	Year Ended December 31,						Six Months Ended June 30,
	2004		2005		2006		2006		2007
	(in thousands)
Other Non-GAAP Financial Data:
EBITDA(3)	$	21,240	$	34,444	$	43,113	$	20,697	$	21,269
EBITDAR(3)		36,013		50,562		59,517		28,787		29,602

(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 4,000,000 shares offered by this prospectus at the assumed initial offering price of $21.00 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, 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 to exclude 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)

8

(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 partially based upon the achievement of 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)

9

(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 and notes thereto 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,						Six Months Ended June 30,
	2004		2005		2006		2006		2007
	(in thousands)
Consolidated Statement of Income Data:
Net income	$	11,103	$	18,388	$	22,549	$	10,818	$	9,832
Interest expense, net		1,480		1,544		2,218		1,040		1,651
Provision for income taxes		6,723		12,054		14,125		7,081		6,600
Depreciation and amortization		1,934		2,458		4,221		1,758		3,186
EBITDA		21,240		34,444		43,113		20,697		21,269
Facility rent—cost of services		14,773		16,118		16,404		8,090		8,333
EBITDAR	$	36,013	$	50,562	$	59,517	$	28,787	$	29,602

10

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 six months ended June 30, 2006 and 2007, we derived approximately 44%, 42%, 42% and 44% of our revenue, respectively, from the Medicaid program. For the years ended December 31, 2005 and 2006 and for the six months ended June 30, 2006 and 2007, we derived approximately 32%, 33%, 33% and 30% of our revenue, respectively, from the Medicare program. 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 ("DRA"), the Medicaid Voluntary Contribution and Provider-Specific Tax Amendments of 1991 and the Balanced Budget Act of 1997 ("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. Because state legislatures control the amount of state funding for Medicaid programs, cuts or delays in approval of such funding by legislatures could reduce the amount of, or cause a delay in, payment from Medicaid to skilled nursing

11

facilities. We expect continuing cost containment pressures on Medicaid outlays for skilled nursing facilities.

        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 Medicaid expenditures. 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 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 that took effect on October 1, 2007, and included a full market basket increase of 3.3%. 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

12

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 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:

•

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;



•

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



•

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



•

an increase in private litigation against us; and



•

damage to our reputation in various markets.

        We believe that billing and reimbursement errors and disagreements are common in our industry. We are regularly engaged in reviews, audits and appeals of our claims for reimbursement due to the subjectivities inherent in the processes related to patient diagnosis and care, recordkeeping, claims processing and other aspects of the patient service and reimbursement processes, and the errors and disagreements those subjectivities can produce.

        In 2004, our Medicare fiscal intermediary began to conduct selected reviews of claims previously submitted by and paid to some of our facilities. While we have always been subject to post-payment audits and reviews, more intensive "probe reviews" are relatively new and appear to be a permanent procedure with our fiscal 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 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 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 "targeted review," where a corrective action plan addressing perceived deficiencies must be prepared by the facility and approved by the fiscal intermediary. During a targeted review, additional claims are reviewed post-payment to ensure that the prescribed corrective

13

actions are being followed. Failure to make corrections or to otherwise meet the claim documentation and submission requirements could eventually result in Medicare decertification.

        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 based 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. If future Medicare reviews result in significant refund payments to the federal government, it would have an adverse effect on our financial results.

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 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.

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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 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:

•

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



•

adequacy and quality of healthcare services;



•

qualifications of healthcare and support personnel;



•

quality of medical equipment;



•

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



•

relationships with physicians and other referral sources and recipients;



•

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



•

operating policies and procedures;



•

certification of additional facilities by the Medicare program; and



•

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,

15

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 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, deferred prosecution or similar 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

16

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, deferred prosecution 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.

        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 at any given time. 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 focus of these investigations includes, among other things:

•

cost reporting and billing practices;



•

quality of care;



•

financial relationships with referral sources; and



•

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. Also, responding to enforcement efforts would divert material time, resources and attention from our management team and our staff, and could have a materially detrimental impact on our results of operations during and after any such investigation or proceedings, regardless of whether we prevail on the underlying claim.

        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

17

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:

•

conviction related to fraud;



•

conviction relating to obstruction of an investigation;



•

conviction relating to a controlled substance;



•

licensure revocation or suspension;



•

exclusion or suspension from state or other federal healthcare programs;



•

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



•

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



•

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.

        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 modify its guidelines or 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 adopted a rule that

18

requires 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 potential denial of payment date, thus risking the retroactive denial of revenue associated with those patients' care if the operators are later found to be out of compliance, or simply refusing admissions from the potential 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 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:

•

the purchase, construction or expansion of healthcare facilities;



•

capital expenditures exceeding a prescribed amount; or



•

changes in services or bed capacity.

19

        In addition, other states that do not require certificates of need have effectively barred the expansion of existing facilities and 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 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

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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, which would negatively impact our cash flow from operations.

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 surveys or inspections 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.

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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 six months ended June 30, 2006 and 2007, 75.0%, 75.7%, 75.0%, 74.8% and 74.2%, respectively, of our revenue was provided by 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 ("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

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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.

        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 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.

        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.

        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.

        Utah has no state-specific minimum staffing requirement 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 healthcare programs.

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        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.

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.

        In addition, plaintiffs' attorneys have become increasingly more aggressive in their pursuit of claims against healthcare providers, including skilled nursing providers and other long-term care companies, and have employed a wide variety of advertising and publicity strategies. Among other things, these strategies include establishing their own Internet websites, paying for premium advertising space on other websites, paying Internet search engines to optimize their plaintiff solicitation advertising so that that it appears in advantageous positions on Internet search results, including results from searches for our company and facilities, using newspaper, magazine and television ads targeted at customers of the healthcare industry generally, as well as at customers of specific providers, including us. From time to time, law firms claiming to specialize in long-term care litigation have named us, our facilities and other specific healthcare providers and facilities in their advertising and solicitation materials. These advertising and solicitation activities could result in more claims and litigation, which could increase our liability exposure and legal expenses, divert the time and attention of our personnel from day-to-day business operations, and materially and adversely affect our financial condition and results of operations.

        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

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company of significant monetary damages, fines and attorney fees (a portion of which may be awarded to 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.

        In addition, we contract with a variety of landlords, lenders, vendors, suppliers, consultants and other individuals and businesses. These contracts typically contain covenants and default provisions. If the other party to one or more of our contracts were to allege that we have violated the contract terms, we could be subject to civil liabilities. In one case, one of our landlords has filed suit alleging we are in default under one of our facility leases and is claiming damages arising from the alleged default. If we are unsuccessful in defending the litigation, we could be required to pay significant damages, which we believe have been adequately reserved for, and/or submit to other remedies available to the landlord under the lease agreement or applicable laws, which could have a material adverse effect on our financial condition and results of operations.

        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.

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

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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 management team and our staff, and could have a materially detrimental impact on our results of operations during and after any such investigation or proceedings.

We believe that the U.S. Department of Justice is conducting an investigation into the billing and 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 business, financial condition and results of operations could be materially and adversely affected and our stock price could decline.

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.

        While we believe that billing and reimbursement errors and disagreements are common in our industry, we take seriously our responsibility to act appropriately under applicable laws and regulations, including Medicare and Medicaid billing and reimbursement laws and regulations. Due to the potentially serious consequences that could arise from any impropriety in our billing and reimbursement processes, we investigate all allegations of impropriety or irregularity relative thereto, however ambiguous, and sometimes do so with the aid of outside auditors, attorneys and other professionals. For example, we initiated an internal investigation in November 2006 when we became aware of an allegation of possible reimbursement irregularities at one or more of our facilities and retained outside counsel to assist us in looking into these matters. This investigation is currently ongoing, and no conclusion regarding the allegation has yet been reached. At this time, we do not know what might be the ultimate outcome or findings of this investigation. If our internal investigation results in findings of significant billing and reimbursement noncompliance, our business, financial condition and results of operations could be materially and adversely affected and our stock price could decline.

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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 commitment 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 508 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 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

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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 charges, 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 and related resident copayments of approximately $75,000 during the six months ended June 30, 2007, $253,000 in 2006 and $215,000 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, four of our facilities are currently on prepayment review, and others may be placed on prepayment review in the future. If a facility fails prepayment review, the facility could then be subject to undergo targeted review, which is a review that targets perceived claims deficiencies. We have no facilities that are currently undergoing targeted 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 $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 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 other facilities may be identified for such status in the future. From time to time, we have opted to

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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. In the past, we have experienced inspection deficiencies that have resulted in the imposition of a provisional license and could experience these results in the future. We currently have no facilities whereby the provisional license status is the result of inspection deficiencies. 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 June 30, 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 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

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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;



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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;



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our local service offerings; and



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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 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

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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, one of our facilities is now surveyed every six months instead of every 12 to 15 months as a result of historical survey results that may date back to 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 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.

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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;



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



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



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



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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 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

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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.

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

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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. 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. 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 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. Moreover, our equity interests in four of our subsidiaries, including 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 the obligations under the master lease arrangement. 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 nine of our facilities and represented 2.6% and 10.4% of our net income for the year ended December 31, 2006 and the six months ended June 30, 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.

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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 June 30, 2007, we had $64.0 million of outstanding indebtedness under our Third Amended and Restated Loan Agreement (the "Term Loan"), our Amended and Restated Loan and Security Agreement, as amended (the "Revolver") and mortgage notes, plus $165.4 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 are currently in the process of amending our Revolver to both extend the maturity date and increase the amount of credit available to us thereunder, but we cannot assure you that we will be able to extend and increase the Revolver in a timely fashion or at all. If we are unable to do so, we intend to use proceeds of this offering and/or seek alternative sources of working capital financing to replace the Revolver, which may negatively impact our cash flow.

        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 of 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 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.

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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 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.

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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 facilities and 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. For example, in August 2007, we experienced a four week reimbursement delay in California due to a budget impasse in the California legislature that was resolved in September 2007. 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. In 2006, 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, which we are currently awaiting. 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. The balance on this mortgage as of June 30, 2007 was approximately $6.7 million. In addition, we would be required to pay a prepayment penalty of approximately $0.3 million if this mortgage was repaid on June 30, 2007. 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, upgrades to 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 an aggregate of approximately $380,000 in patient trust funds, some of which was recovered from the employees and some of which we were required to reimburse from our 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, the Revolver with General Electric Capital Corporation (the "Lender") restricts our ability to pay dividends to stockholders if we receive notice that we are in default under this agreement.

        While we do not have a formal dividend policy, we currently intend to continue to pay regular quarterly dividends to the holders of our common stock, but future dividends will continue to be at the

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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 including pursuant to the loan and security agreement governing our revolving line of credit, legal restrictions on the payment of dividends and other factors the board of directors deems relevant. From 2002 through 2006, we paid aggregate annual dividends equal to approximately 5% to 10% of our net income. 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 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 could 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 62.7% of the outstanding shares of our common stock assuming the underwriters do not exercise their over-allotment option, of which Roy Christensen, our Chairman of the board of directors, Christopher Christensen, our President and Chief Executive Officer, and Gregory Stapley, our Vice President and General Counsel, will beneficially own approximately 19.1%, 19.0% and 5.8%, 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.

40

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 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. We also intend to continue to actively pursue acquisitions of facilities and may issue shares of 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 $14.50 in pro forma as adjusted net tangible book value per share of common stock, based on an assumed public offering price of $21.00 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, improvements and upgrades at our existing facilities and the development and construction of new skilled nursing facilities, and to pay down debt 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 June 30, 2007, immediately after

41

the completion of this offering, we will have 20,446,380 shares of common stock outstanding. 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 16,446,380 shares of common stock that will be outstanding after this offering will be available for sale in the public markets pursuant to Rule 144 or Rule 701 promulgated under the Securities Act. Assuming the underwriters do not exercise their over-allotment option, 15,932,480 shares will be subject to lock-up agreements or market stand-off provisions 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 and market stand-off provisions will expire 180 days after the execution of the underwriting agreement, unless extended an additional 18 days under certain circumstances. As such, 3,237,300 of the shares of common stock subject to such lock-up agreements and market stand-off provisions will be immediately eligible for resale in the public markets and the remaining 12,695,180 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 1,129,500 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 1,000,000 shares of our common stock that are issuable under our 2007 Omnibus Incentive Plan. 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 January 1, 2008, in an amount equal to the lesser of (i) 1,000,000 shares of common stock; (ii) 2% 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. 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 and market stand-off provisions 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. This requirement will apply to us starting with our annual report for the year ended December 31, 2008.

        During 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.

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        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 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 Securities Exchange Act of 1934, as amended, 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

43

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 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.

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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;

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•

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 11 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.

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USE OF PROCEEDS

        The net proceeds from our sale of 4,000,000 shares of common stock in this offering are estimated to be approximately $75,600,000 based on an assumed initial public offering price of $21.00 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 $11,718,000. 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 facilities, for expansion, improvements and upgrades to our existing facilities and to pay down debt. We currently have approximately $13.5 million budgeted for significant capital refurbishments at existing facilities in 2007. We currently plan to use approximately $16.0 million of the net proceeds from this offering to purchase four facilities that we currently operate under operating lease agreements. Of this amount, we expect to use approximately $3.0 million to purchase one facility from Lone Peak Properties, LLC, in which the purchase is pending the property owner's resolution of certain boundary line issues with neighboring property owners. We expect to use the remaining $13.0 million to purchase three facilities from Health Care Properties, Inc. on or before December 14, 2007, but may choose to fund these purchases under our credit facility. As of September 30, 2007, we held options to purchase 12 of our leased facilities. 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, which mortgage note has a fixed interest rate of 7.49% and is due on September 1, 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. If we do not complete the transactions contemplated by the Commitment Letter described below in "Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources," we intend to use proceeds of this offering and/or seek alternative sources of working capital financing to replace the Revolver.

        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 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.

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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 approximate cash dividends we have paid to our stockholders since May 2003 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 28, 2007	$	658
$0.04	July 30, 2007	$	658
$0.04	October 31, 2007(1)	$	658

(1)

Dividend declared to stockholders of record as of September 30, 2007, which is expected to be paid by October 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. From 2002 to 2006, we paid aggregate annual dividends equal to approximately 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 receive notice that 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.

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CAPITALIZATION

        The following table summarizes our cash and cash equivalents and our capitalization at June 30, 2007:

•

on an actual basis;



•

on a pro forma basis to reflect (a) an amendment to our certificate of incorporation to reflect an increase in our authorized capitalization prior to the closing of the offering, and (b) 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 4,000,000 shares of common stock at an assumed initial public offering price of $21.00 per share (the midpoint of the price 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, the actual offering expenses incurred 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.

			June 30, 2007
			Actual			Pro Forma			Pro Forma As Adjusted
			(in thousands, except share data)
Cash and cash equivalents			$	12,939		$	12,939		$	89,974
Long-term debt, including current maturities				64,002			64,002			64,002
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; 75,000,000 shares authorized, 16,446,380 shares issued and outstanding, pro forma; 75,000,000 shares authorized, 20,446,380 shares issued and outstanding, pro forma as adjusted				14			17			21
Additional paid-in capital				1,784			4,506			80,102
Retained earnings				62,900			62,900			62,900
Common stock in treasury, at cost, 745,000 shares				(4,784	)		(4,784	)		(4,784	)
	Total stockholders' equity			59,914			62,639			138,239
		Total capitalization	$	126,641		$	126,641		$	202,241

The table above excludes, as of June 30, 2007:

•

1,129,500 shares of common stock issuable upon the exercise of outstanding options at a weighted average exercise price of $6.21 per share; and



•

1,000,000 shares of common stock, subject to certain automatic annual increases, 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.

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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 June 30, 2007 was approximately $57.2 million, or $3.48 per share of common stock (after giving effect to the conversion of all of our outstanding preferred stock into common stock). Pro forma net tangible book value per share as of June 30, 2007 represents our total tangible assets less total liabilities divided by the number of shares of our common stock outstanding as of June 30, 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 upon the closing of this offering, and our sale of 4,000,000 shares of common stock offered by this prospectus at the assumed public offering price of $21.00 per share (the midpoint of the price range set forth 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 June 30, 2007 would have been $132.8 million, or $6.50 per share of common stock. This represents an immediate increase in pro forma net tangible book value of $3.02 per share to our existing stockholders and an immediate dilution in pro forma net tangible book value of $14.50 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				$	21.00
	Pro forma net tangible book value per share as of June 30, 2007	$	3.48
	Increase per share attributable to new investors	$	3.02
Pro forma net tangible book value per share after this offering				$	6.50
Dilution per share to new investors				$	14.50

        The following table summarizes on a pro forma as adjusted basis as of June 30, 2007 (after giving effect to the conversion of all of our outstanding preferred stock into common stock), 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 $21.00 per share (the midpoint of the price range set forth 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	80.4	%	$	3,494,829	4.0	%	$	0.21
New investors		4,000,000	19.6			84,000,000	96.0		$	21.00
	Total	20,446,380	100.0	%	$	87,494,829	100.0	%	$	4.28

        If the underwriters exercise their over-allotment option in full, the number of shares held by new investors will increase to 4,600,000, or 22.5% 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 June 30, 2007. To the extent that these options are exercised, new investors will experience further dilution. As of June 30, 2007, options to purchase 1,129,500 shares of our common stock were outstanding at a weighted average exercise price of $6.21 per share. Assuming all of our outstanding options are exercised, new investors will own approximately 18.5% of the total number of shares of common stock outstanding after this offering while contributing approximately 88.9% 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 June 30, 2007 would be $3.65 per share, representing an immediate increase of $0.17 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 $14.52 per share to new investors in this offering.

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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 six months ended June 30, 2006 and 2007 and the consolidated balance sheet data as of June 30, 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,															Six Months Ended June 30,
			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		$	168,727		$	198,247
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			133,350			161,001
	Facility rent—cost of services			6,777			9,964			14,773			16,118			16,404			8,090			8,333
	General and administrative expense			4,115			6,246			8,537			10,909			14,210			6,590			7,644
	Depreciation and amortization			915			1,229			1,934			2,458			4,221			1,758			3,186
		Total expenses		96,187			145,961			225,230			268,864			319,682			149,788			180,164
Income from operations				5,916			12,046			19,306			31,986			38,892			18,939			18,083
Other income (expense):
	Interest expense			(1,104	)		(1,268	)		(1,565	)		(2,035	)		(2,990	)		(1,337	)		(2,349	)
	Interest income			8			4			85			491			772			297			698
		Other expense, net		(1,096	)		(1,264	)		(1,480	)		(1,544	)		(2,218	)		(1,040	)		(1,651	)
Income before provision for income taxes				4,820			10,782			17,826			30,442			36,674			17,899			16,432
Provision for income taxes				1,256			4,284			6,723			12,054			14,125			7,081			6,600
Net income			$	3,564		$	6,498		$	11,103		$	18,388		$	22,549		$	10,818		$	9,832
Net income per share(1):
	Basic		$	0.27		$	0.49		$	0.83		$	1.35		$	1.66		$	0.80		$	0.72
	Diluted		$	0.22		$	0.38		$	0.63		$	1.05		$	1.34		$	0.65		$	0.58
Weighted average common shares outstanding(1):
	Basic			12,701,574			12,905,250			13,284,902			13,468,060			13,365,682			13,379,060			13,441,490
	Diluted			16,571,686			16,985,350			17,519,032			17,505,040			16,823,242			16,720,378			16,891,202

(1)

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

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	As of December 31,										As of June 30, 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	$	12,939
Working capital		1,402		10,191		21,526		19,087		28,281		20,938
Total assets		32,246		62,538		80,255		119,390		190,531		195,609
Long-term debt, less current maturities		12,019		16,239		24,820		25,520		63,587		63,072
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		59,914
Cash dividends declared per common share	$	0.015	$	0.025	$	0.05	$	0.09	$	0.13	$	0.08

	Year Ended December 31,										Six Months Ended June 30,
	2002		2003		2004		2005		2006		2006		2007
Other Non-GAAP Financial Data:
EBITDA(1)	$	6,831	$	13,275	$	21,240	$	34,444	$	43,113	$	20,697	$	21,269
EBITDAR(1)		13,608		23,239		36,013		50,562		59,517		28,787		29,602

(1)

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 to exclude 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)

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(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 partially based upon the achievement of 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.

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

	Year Ended December 31,										Six Months Ended June 30,
	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	$	10,818	$	9,832
Interest expense, net		1,096		1,264		1,480		1,544		2,218		1,040		1,651
Provision for income taxes		1,256		4,284		6,723		12,054		14,125		7,081		6,600
Depreciation and amortization		915		1,229		1,934		2,458		4,221		1,758		3,186
EBITDA		6,831		13,275		21,240		34,444		43,113		20,697		21,269
Facility rent—cost of services		6,777		9,964		14,773		16,118		16,404		8,090		8,333
EBITDAR	$	13,608	$	23,239	$	36,013	$	50,562	$	59,517	$	28,787	$	29,602

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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 September 30, 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. We also have agreements to purchase four of the 38 facilities that we operate under long-term lease arrangements. The lease agreements on three of these four facilities contain options to purchase the underlying property, but they are not currently exercisable. Assuming the expected closing of these purchase agreements, we will own 27 of our facilities, operate 34 facilities under long-term lease arrangements and hold options to purchase nine of our leased facilities. The following table summarizes our facilities and licensed and independent living beds by ownership status as of September 30, 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		1,350		3,144		7,448
	Percent of total	39.7	%	18.1	%	42.2	%	100	%

(1)

Includes 671 beds in our 460 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.

        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

54

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 material amounts were paid to the prior facility operators and we did not acquire any assets or assume any liabilities, other than our rights and obligations under the new operating leases and operations transfer agreements, 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 $6.0 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 material amount was paid to the prior facility operator, and we did not acquire any assets or assume any liabilities, other than our rights and obligations under a new operating lease and operations transfer agreement, 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 a new operating lease agreement whereby we assumed the operations of a skilled nursing facility. No material amount was paid to the prior facility operator, and we did not acquire any assets or assume any liabilities, other than our rights and obligations under a new operating lease and operations transfer agreement. The other two facilities were purchased 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 1,668 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. We also entered into operating lease agreements whereby we assumed the operations of three skilled nursing facilities located in Utah, Idaho and Arizona. No material amounts were paid to the prior facility operators and we did not acquire any assets or assume any liabilities, other than our rights and obligations under the new operating leases and operations transfer agreements. In addition, in 2006, we 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 Third Amended and Restated Loan Agreement (the "Term Loan").

        In the first six months of 2007, we acquired three additional long-term care facilities for an aggregate purchase price of $9.4 million in cash, which included two skilled nursing facilities in Texas

55

and one skilled nursing facility in Utah. In July 2007, we exercised an option to purchase one of our leased skilled nursing facilities for $3.3 million in cash. In addition, in July 2007, we entered into an operating lease agreement for a long-term care facility in Utah that is licensed for both skilled nursing and assisted living services. Since the facility was not profitable at the time, the prior operator voluntarily relinquished its leasehold to its affiliated landlord for no material consideration. We did not make any material payments to the prior facility operator and we did not acquire any assets or assume any liabilities, other than our rights and obligations under a new operating lease and operations transfer agreement, as part of this transaction. We also simultaneously entered into a separate contract with the property owner to purchase the underlying property for $3.0 million, pending the property owner's resolution of certain boundary line issues with neighboring property owners. We expect that we will purchase the property under the contract if and when these title issues are resolved. Regardless of whether the title issues are resolved, we have the option to purchase the property for $3.0 million under the operating lease. In August 2007, we entered into an agreement that we expect will close on or before December 14, 2007, to purchase two skilled nursing facilities in California and one assisted living facility in Arizona, which also provides independent living services, for an aggregate purchase price of approximately $13.0 million. We currently operate these three facilities under master lease agreements. The lease agreements for the two skilled nursing facilities contain purchase options which are not currently exercisable. Upon the expected closing of these purchase agreements, we will own 27 of our facilities and operate 34 of our facilities under long-term lease arrangements with options to purchase nine of those 34 facilities.

        The following table sets forth the location and number of licensed and independent living beds located at our facilities as of September 30, 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	442	283	88	7,448

(1)

Includes 671 beds in our 460 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.

56

•

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 six months ended June 30, 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.

        Skilled and Quality Mix.    Like most skilled nursing providers, we measure both patient days and revenue by payor. Medicare and managed care patients, whom we refer to as high acuity patients, typically require a higher level of skilled nursing and rehabilitative care. 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,						Six Months Ended June 30,
	2004		2005		2006		2006		2007
Skilled Mix:
Days	19.4	%	22.4	%	24.3	%	24.7	%	23.1	%
Revenue	39.6	%	42.9	%	45.6	%	46.2	%	43.5	%
Quality Mix:
Days	33.5	%	36.0	%	37.4	%	37.9	%	36.2	%
Revenue	51.5	%	53.5	%	55.5	%	56.2	%	53.7	%

        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.

57

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

	Year Ended December 31,			Six Months Ended June 30,
	2004	2005	2006	2006	2007
Occupancy:
Licensed and independent living beds at end of period(1)	5,417	5,796	6,940	6,115	7,342
Available patient days	1,918,678	2,034,270	2,281,735	1,069,194	1,303,752
Actual patient days	1,557,008	1,668,566	1,849,932	878,189	1,013,624
Occupancy percentage	81.2%	82.0%	81.1%	82.1%	77.7%

(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 and other third-party payors, 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,												Six Months Ended June 30,
	2004				2005				2006				2006				2007
	$		%		$		%		$		%		$		%		$		%
	(in thousands, except percentages)
Revenue:
Medicare	$	72,301	29.6	%	$	96,208	32.0	%	$	117,511	32.8	%	$	56,105	33.3	%	$	59,696	30.1	%
Managed care		25,172	10.3			33,484	11.1			44,487	12.4			21,088	12.5			25,707	13.0
Private and other(1)		35,942	14.7			39,831	13.2			45,312	12.6			21,449	12.7			25,496	12.8
Medicaid		111,121	45.4			131,327	43.7			151,264	42.2			70,085	41.5			87,348	44.1
Total revenue	$	244,536	100.0	%	$	300,850	100.0	%	$	358,574	100.0	%	$	168,727	100.0	%	$	198,247	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 separately 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 base minimum rent amounts payable under lease agreements to third-party owners of the facilities that we operate but do not own and does not include taxes, insurance, impounds, capital reserves or other charges payable under the applicable lease agreements.

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        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



•

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 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.

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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 six months ended June 30, 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 estimates are recorded in the period the change or adjustment becomes known based on final settlements. We recorded retroactive adjustments that increased revenues by $0.2 million, $0.2 million and $0.8 million for the years ended December 31, 2005 and 2006 and for the six months ended June 30, 2007, respectively. The adjustment for 2005 does not include the 2004 retroactive adjustment to record a California state Medicaid rate increase. 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 six months ended June 30, 2007, we were to experience a decrease of 1% in our revenue, our revenue would decline by approximately $2.0 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 62% of our total accounts receivable as of December 31, 2004, 2005 and 2006 and June 30, 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 occurrence, $3.0 million per facility with a $6.0 million company aggregate.

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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 self-insured 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 $18.4 million as of December 31, 2005 and 2006 and June 30, 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 self-insured workers compensation liabilities recorded on an undiscounted basis in the accompanying consolidated balance sheets were $3.2 million, $4.5 million and $4.3 million as of December 31, 2005 and 2006 and June 30, 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 $0.8 million as of December 31, 2005 and 2006 and June 30, 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 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 $1.4 million as of December 31, 2006 and June 30, 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

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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 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 June 30, 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 annual 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 six months ended June 30, 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.

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        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 June 30, 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 six months ended June 30, 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 six months ended June 30, 2006 and 2007 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.

        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" ("SAB 107"), 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 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 six month period ended June 30, 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.

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        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.

        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 26, 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. This 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 $0.5 million during the year ended December 31, 2006 and the six months ended June 30, 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.

        During the period January 1, 2006 to July 26, 2006, we granted to certain of our employees and directors, options to purchase 686,000 shares of our common stock. These options have exercise prices ranging from $7.05 to $7.50 per share. The fair value of the common stock as of January 17, 2006 and July 26, 2006 was $5.96 and $15.09 per share, respectively. We have not granted any options subsequent to July 26, 2006.

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        The significant factors contributing to the difference between the fair value of the stock options granted on January 17, 2006 and July 26, 2006 and $21.00, the midpoint of the price range set forth on the cover of this prospectus, include the following:

•

Acquired Facilities.    Since March 1, 2006, we added an aggregate of 15 facilities located in Texas, Washington, Utah, Idaho, Arizona, and California that we had not previously operated. In the first quarter of 2006, we acquired one facility, and three or four facilities per quarter beginning with the second quarter of 2006 through the first quarter of 2007. In addition, in July 2007, we entered into an operating lease agreement for a long-term care facility in Utah that offers both skilled nursing and assisted living services. As a result of this growth strategy; we have increased the number of facilities we operate by 33% since March 1, 2006.



•

Increased Owned Properties.    We increased the number of owned facilities by approximately 188% from eight facilities as of February 28, 2006 to 23 facilities, which includes previously operated facilities, as of September 30, 2007.



•

Increased Revenue.    The increase in the number of facilities has significantly contributed to our revenue growth in the first six months of 2007. In addition, our revenue grew 19%, or $57.7 million, for the year ended December 31, 2006 as compared to the year ended December 31, 2005.



•

Increased Dividends.    We increased our average quarterly dividends by 23% to $0.04 per share for the first three quarters in 2007 as compared to an average of $0.033 in 2006. Average quarterly dividends for 2005 were $0.023 per share. While we do not have a formal dividend policy, we currently expect to continue to pay regular quarterly dividends to our common stockholders.



•

Relative Performance of Similar Public Companies.    The overall market valuations for certain key, publicly-traded competitors within the industry have increased since January 2006.



•

Elimination of Lack of Marketability.    Historically, our board of directors determined the estimated market price contemporaneously to the granting of options based upon the best valuation information available to our board at the time of grant. Starting in 2004, annual year-end weighted valuations were used by our board in assessing the estimated market price. These valuations took multiple factors into account including a discount for lack of marketability. In addition to the annual year-end weighted valuations, our board of directors determined fair market value contemporaneously with the granting of stock options based on our recent operating performance and a net income multiple derived from the annual weighted valuation

analysis. The exercise price was then set equal to the estimated market price as contemporaneously determined by the board, except for the July 2006 grants for which the valuation process is described above.

        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 $4.1 million in stock-based compensation expense for outstanding unvested options ratably over the next 3.7 weighted average years. As of December 31, 2006 and June 30, 2007, there were 148,400 and 142,000 vested, exercisable options outstanding, respectively, under our stock option plans.

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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.

        Our net deferred tax asset balances as of December 31, 2005 and 2006 and June 30, 2007 were approximately $8.1 million, $12.6 million and $13.9 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 statements 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.

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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 six months ended June 30, 2007, approximately 66.6% 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 June 30, 2007, we had approximately 5,506 full-time equivalent employees, a number of whom are 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

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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 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,						Six Months Ended June 30,
			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		79.0		81.2
	Facility rent—cost of services		6.0		5.4		4.6		4.8		4.2
	General and administrative expense		3.5		3.6		4.0		3.9		3.9
	Depreciation and amortization		0.8		0.8		1.2		1.1		1.6
		Total expenses	92.1		89.4		89.2		88.8		90.9
Income from operations			7.9		10.6		10.8		11.2		9.1
Other income (expense):
	Interest expense		(0.6	)	(0.7	)	(0.8	)	(0.8	)	(1.2	)
	Interest income		—		0.2		0.2		0.2		0.4
		Other expense, net	(0.6	)	(0.5	)	(0.6	)	(0.6	)	(0.8	)
Income before provision for income taxes			7.3		10.1		10.2		10.6		8.3
Provision for income taxes			2.7		4.0		3.9		4.2		3.3
Net income			4.6	%	6.1	%	6.3	%	6.4	%	5.0	%

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Six Months Ended June 30, 2007 Compared to Six Months Ended June 30, 2006

        Revenue.    Revenue increased $29.5 million, or 17.5%, to $198.2 million for the six months ended June 30, 2007 compared to $168.7 million for the six months ended June 30, 2006. Of the $29.5 million increase, skilled revenue (Medicare and managed care) increased $8.2 million, or 10.6%, Medicaid revenue increased $17.3 million, or 24.6%, and private and other revenue increased $4.0 million, or 18.9%. Approximately $26.5 million of this increase was due to revenue generated by facilities acquired during 2006 and 2007. We acquired three facilities during the six months ended June 30, 2007, which contributed approximately $5.2 million of the increase. In addition, approximately $21.3 million of the increase in revenue for the six months ended June 30, 2007 was due to the effect of having the full six 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 typically anticipate some period of lower occupancy rates, skilled mix and quality mix, with corresponding losses or reduced profitability, with respect to these operations. For the six months ended June 30, 2007, the occupancy rate, skilled mix and quality mix for facilities we acquired between January 1, 2006 and June 30, 2007 was 64.1%, 39.8% and 51.7%, respectively. These rates negatively impacted our overall company-wide occupancy rate, skilled mix and quality mix, which were 77.7%, 43.5% and 53.7%, respectively, during the six months ended June 30, 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 $3.0 million increase in revenue for the six months ended June 30, 2007 was primarily due to higher reimbursement rates relative to the six months ended June 30, 2006, as described below, offset by a decline in skilled mix and occupancy rate. Same facility occupancy rates declined 1.0%, which was primarily attributable to two facilities, where revenues decreased by an aggregate of $2.4 million, of which $1.9 million was attributable to Medicare. These two facilities experienced occupancy rate declines of 1.5% and 2.3% as compared to the six months ended June 30, 2006. These occupancy declines were primarily the result of mandatory and voluntary admission holds. These admission holds were lifted in March 2007 and these two facilities have been 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:

	Six Months Ended June 30,
					Percent Change
	2006		2007
Skilled Nursing Average Daily Revenue Rates:
Medicare	$	437.01	$	441.66	1.1	%
Managed care		270.51		292.30	8.1
Total skilled revenue		373.47		381.98	2.3
Medicaid		140.79		147.15	4.5
Private and other payors		150.17		159.29	6.1
Total skilled nursing revenue	$	199.52	$	203.07	1.8	%

        The average Medicare daily rate increased by approximately 1.1% in the six months ended June 30, 2007 as compared to the six months ended June 30, 2006, primarily as a result of statutory inflationary increases. The average Medicaid rate increase of 4.5% in the six months ended June 30,

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2007 relative to the same period in the prior year primarily resulted from increases in reimbursement rates. The change in the daily rate in the private and other payors 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:

		Six Months Ended June 30,
		2006		2007		2006		2007
		Days				Revenue
Percentage of Skilled Nursing Days and Revenue:
Medicare		15.3	%	13.9	%	33.5	%	30.2	%
Managed care		9.4		9.2		12.8		13.3
	Skilled mix	24.7		23.1		46.3		43.5
Private and other payors		13.2		13.0		10.0		10.2
	Quality mix	37.9		36.1		56.3		53.7
Medicaid		62.1		63.9		43.7		46.3
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 occupancy rates, which is described above.

Cost of Services (exclusive of facility rent and depreciation and amortization shown separately below). Cost of services increased $27.6 million, or 20.8%, to $161.0 million for the six months ended June 30, 2007 compared to $133.4 million for the six months ended June 30, 2006. Of the $27.6 million increase, $4.5 million was due to cost of services with respect to the three facilities acquired during the six months ended June 30, 2007 and $17.9 million reflected the impact of having a full six months of operations at the 11 facilities acquired during 2006. The remaining $5.2 million increase was primarily due to a $2.7 million increase in nursing labor, a $1.4 million increase in insurance costs and a $0.8 million increase in ancillary costs. The increase in nursing labor was primarily due to increases in nursing wages and benefits and our increased use of contract nursing personnel, primarily in Arizona due to a state-wide nursing shortage. Insurance costs increased $1.4 million, of which $0.4 million was a result of favorable retrospective worker's compensation adjustments realized during the six months ended June 30, 2006.

        Facility Rent—Cost of Services.    Facility rent—cost of services increased $0.2 million, or 3.0%, to $8.3 million for the six months ended June 30, 2007 compared to $8.1 million for the six months ended June 30, 2006. Of this increase, $0.6 million resulted from leased facilities that we acquired in 2006, which was offset in part by a decrease in rent expense of $0.4 million as a result of our purchase of three previously leased properties.

        General and Administrative Expense.    General and administrative expense increased $1.0 million, or 16.0%, to $7.6 million for the six months ended June 30, 2007 compared to $6.6 million for the six months ended June 30, 2006. The $1.0 million increase was primarily due to increases in professional fees of $0.8 million and stock-based compensation expense of $0.5 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 June 30, 2006 as we prepare to become a public company. The increase in stock-based compensation expense incurred was due to the granting of additional options during 2006. These increases were offset in part by a reduction in litigation costs due to the settlement of a class action lawsuit during 2006.

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        Depreciation and Amortization.    Depreciation and amortization expense increased $1.4 million, or 81.2%, to $3.2 million for the six months ended June 30, 2007 compared to $1.8 million for the six months ended June 30, 2006. This increase was related to the additional depreciation and amortization of facilities acquired in 2006 and 2007.

        Other Income (Expense).    Other income (expense) increased $0.7 million, or 55.4%, to $1.7 million for the six months ended June 30, 2007 compared to $1.0 million for the six months ended June 30, 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 six months ended June 30, 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 $0.4 million to $0.7 million for the six months ended June 30, 2007 compared to $0.3 million for the six months ended June 30, 2006. This increase primarily resulted from interest earned on our higher average cash balances during the six months ended June 30, 2007 within our insurance subsidiary's investment balances.

        Provision for Income Taxes.    Provision for income taxes decreased $0.5 million, or 6.8%, to $6.6 million for the six months ended June 30, 2007 compared to $7.1 million for the six months ended June 30, 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 0.6% 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 $300.9 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 we 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	%

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        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 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 separately 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.

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        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 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. 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 $2.4 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 $56.4 million, or 23.0%, to $300.9 million for the year ended December 31, 2005 compared to $244.5 million for the year ended December 31, 2004. Of the $56.4 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 separately 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			June 30, 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		$	100,269
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			80,154
	Facility rent—cost of services			3,918			3,961			4,085			4,154			4,055			4,035			4,170			4,144			4,155			4,178
	General and administrative expense			2,389			2,523			2,817			3,180			3,260			3,330			3,881			3,739			3,746			3,898
	Depreciation and amortization			584			566			638			670			752			1,006			1,103			1,360			1,532			1,654
		Total expenses		60,837			62,931			69,145			75,951			73,668			76,120			81,946			87,948			90,280			89,884
Income from operations				7,865			6,993			7,981			9,147			9,684			9,255			10,392			9,561			7,698			10,385
Other income (expense):
	Interest expense			(473	)		(487	)		(520	)		(555	)		(578	)		(759	)		(734	)		(919	)		(1,169	)		(1,180	)
	Interest income			77			107			142			165			162			135			203			272			392			306
		Other expense, net		(396	)		(380	)		(378	)		(390	)		(416	)		(624	)		(531	)		(647	)		(777	)		(874	)
Income before provision for income taxes				7,469			6,613			7,603			8,757			9,268			8,631			9,861			8,914			6,921			9,511
Provision for income taxes				2,964			2,662			3,128			3,300			3,661			3,420			3,480			3,564			2,784			3,816
Net income			$	4,505		$	3,951		$	4,475		$	5,457		$	5,607		$	5,211		$	6,381		$	5,350		$	4,137		$	5,695
Net income per share:
	Basic		$	0.33		$	0.29		$	0.33		$	0.40		$	0.41		$	0.39		$	0.47		$	0.39		$	0.30		$	0.41
	Diluted		$	0.26		$	0.23		$	0.26		$	0.31		$	0.33		$	0.32		$	0.38		$	0.31		$	0.24		$	0.34
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			13,462,976
	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			16,878,350

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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		June 30, 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	%	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		79.9
	Facility rent—cost of services		5.7		5.7		5.3		4.9		4.9		4.7		4.5		4.2		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		3.9
	Depreciation and amortization		0.9		0.8		0.8		0.8		0.9		1.2		1.2		1.4		1.6		1.6
		Total expenses	88.6		90.0		89.7		89.2		88.4		89.2		88.7		90.1		92.1		89.6
Income from operations			11.4		10.0		10.3		10.8		11.6		10.8		11.3		9.9		7.9		10.4
Other income (expense):
	Interest expense		(0.6	)	(0.7	)	(0.6	)	(0.7	)	(0.7	)	(0.9	)	(0.8	)	(0.9	)	(1.2	)	(1.2	)
	Interest income		0.1		0.2		0.2		0.2		0.2		0.2		0.2		0.2		0.4		0.3
		Other expense, net	(0.5	)	(0.5	)	(0.4	)	(0.5	)	(0.5	)	(0.7	)	(0.6	)	(0.7	)	(0.8	)	(0.9	)
Income before provision for income taxes			10.9		9.5		9.9		10.3		11.1		10.1		10.7		9.2		7.1		9.5
Provision for income taxes			4.3		3.8		4.1		3.9		4.4		4.0		3.8		3.7		2.9		3.8
Net income			6.6	%	5.7	%	5.8	%	6.4	%	6.7	%	6.1	%	6.9	%	5.5	%	4.2	%	5.7	%

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, as amended (the "Revolver"). As of December 31, 2006 and June 30, 2007, the maximum available for borrowing under the Revolver was approximately $20.0 million, but approximately $8.4 million of borrowing capacity was pledged to secure outstanding letters of credit. In September 2007, we negotiated a temporary increase in the maximum amount available to us under the Revolver from $20.0 million to $25.0 million. This temporary increase will be available to us through mid-November 2007.

        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, $14.8 million and $9.4 million for the years ended December 31, 2004, 2005 and 2006 and the six months ended June 30, 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, $5.3 million and $7.8 million for the years ended December 31, 2004, 2005 and 2006 and the six months ended June 30, 2006 and 2007, respectively. We currently have approximately $13.5 million budgeted for capital refurbishments at existing facilities in 2007.

        In the first six months of 2007, we acquired three additional long-term care facilities 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

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exercised an option to purchase one of our leased skilled nursing facilities for $3.3 million in cash. In addition, in July 2007, we entered into an operating lease agreement for a long-term care facility in Utah that is licensed for both skilled nursing and assisted living services. We did not make any material payments to the prior facility operator and we did not acquire any assets or assume any liabilities, other than our rights and obligations under a new operating lease and operations transfer agreement, as part of this transaction. We also simultaneously entered into a separate contract with the property owner to purchase the underlying property for $3.0 million, pending the property owner's resolution of certain boundary line issues with neighboring property owners. We expect that we will purchase the property under the contract if and when these title issues are resolved. Regardless of whether the title issues are resolved, we have the option to purchase the property for $3.0 million under the operating lease. This facility added approximately 106 beds to our operations. In August 2007, we entered into an agreement that we expect will close on or before December 14, 2007, to purchase two skilled nursing facilities in California and one assisted living facility in Arizona, which also provides independent living services, for an aggregate purchase price of approximately $13.0 million. We currently operate these three facilities under master lease agreements. The lease agreements for the two skilled nursing facilities contain purchase options which are not currently exercisable. Upon the expected closing of these purchase agreements, we will own 27 of our facilities and operate 34 of our facilities under long-term lease arrangements with options to purchase nine of those 34 facilities.

        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 matures 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 secured by certain of the properties, and to purchase other additional properties that we were previously leasing.

        In connection with the Term Loan, we have guaranteed the 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 June 30, 2007, we were in compliance with all loan covenants. As of June 30, 2007, our borrowing subsidiaries had $55.3 million outstanding on the Term Loan, with the right to draw an additional $9.0 million upon meeting certain covenants under the loan documents.

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        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 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 1.0%. 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 June 30, 2007, we had no outstanding borrowings under the Revolver and approximately $8.4 million of borrowing capacity was pledged to secure outstanding letters of credit. The Revolver was set to mature in March 2007 but has been extended until November 19, 2007. In September 2007, we negotiated a temporary increase in the maximum amount available to us under the Revolver from $20.0 million to $25.0 million. This temporary increase will be available to us through mid-November 2007.

        In October 2007, we secured a written commitment (the "Commitment Letter") from the Lender to amend and increase the Revolver by extending the term to 2012, increasing the available credit thereunder up to the lesser of $50.0 million or 85% of the eligible accounts receivable, and changing the interest rate to either, as we may elect from time to time, (i) the 1, 2, 3 or 6 month LIBOR (at our option) plus 2.5%, or (ii) the greater of (a) prime plus 1.0% or (b) the federal funds rate plus 1.5%. The Commitment Letter is contingent on final approval of the Lender's credit committee and the negotiation, execution and delivery of appropriate amendatory documentation, as well as other conditions precedent which are customary for financings of this type and the absence of any material adverse change to our business or financial condition at the time of closing. The Revolver contains typical representations and covenants for a loan of this type, a violation of which could result in a default under the Revolver and could possibly cause all amounts owed by us, including amounts due under the Term Loan, to be declared immediately due and payable. We cannot assure you that we will be able to amend and increase the Revolver on acceptable terms, on a timely basis, or at all. If we do not complete the transactions contemplated by the Commitment Letter, we intend to use proceeds of this offering and/or seek alternative sources of working capital financing to replace the Revolver.

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

        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 seek to raise additional capital to fund acquisitions and capital renovations, but such additional capital may not be available on acceptable terms, on a timely basis or at all.

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

	Year Ended December 31,									Six Months Ended June 30,
	2004			2005			2006			2006			2007
										(unaudited)
	(in thousands)
Net cash provided by operating activities	$	17,802		$	20,446		$	30,945		$	12,094		$	6,864
Net cash used in investing activities		(11,233	)		(20,872	)		(43,709	)		(20,411	)		(17,663	)
Net cash provided by (used in) financing activities		7,441			(2,694	)		26,620			(3,318	)		(1,753	)
Net increase (decrease) in cash and cash equivalents		14,010			(3,120	)		13,856			(11,635	)		(12,552	)
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		$	—		$	12,939

Six Months Ended June 30, 2007 Compared to Six Months Ended June 30, 2006

        Net cash provided by operations for the six months ended June 30, 2007 was $6.9 million compared to $12.1 million for the six months ended June 30, 2006, a decrease of $5.2 million. The decrease in cash flow in the first half of 2007 was primarily due to a decline in our operating results. 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 the number of our facilities.

        Net cash used in investing activities for the six months ended June 30, 2007 was $17.7 million compared to $20.4 million for the six months ended June 30, 2006, a decrease of $2.7 million. The decrease was primarily the result of cash we paid for our facility acquisitions in the six months ended June 30, 2007 compared to the six months ended June 30, 2006, partially offset by the increase in purchased property and equipment in the six months ended June 30, 2007 compared to the six months ended June 30, 2006.

        Net cash used in financing activities for the six months ended June 30, 2007 totaled $1.8 million compared to $3.3 million for the six months ended June 30, 2006, a decrease of $1.5 million. The decrease in cash used in financing activities in the six months ended June 30, 2007 compared to the six months ended June 30, 2006 primarily consisted of the repurchase of $2.8 million in treasury stock in the six months ended June 30, 2006, which did not recur in the six months ended June 30, 2007, partially offset by an increase in dividends paid in the six months ended June 30, 2007 as compared to the six months ended June 30, 2006.

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 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

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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.

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

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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, $8.2 million and $8.5 million for the years ended December 31, 2004, 2005 and 2006 and the six months ended June 30, 2006 and 2007, respectively.

        In July 2007, we exercised an option to purchase one of our leased skilled nursing facilities for $3.3 million in cash. In addition, in July 2007, we entered into an operating lease agreement for a long-term care facility in Utah that is licensed for both skilled nursing and assisted living services. We did not make any material payments to the prior facility operator and we did not acquire any assets or assume any liabilities, other than our rights and obligations under a new operating lease and operations transfer agreement, as part of this transaction. We also simultaneously entered into a separate contract with the property owner to purchase the underlying property for $3.0 million, pending the property owner's resolution of certain boundary line issues with neighboring property owners. We expect that we will purchase the property under the contract if and when these title issues are resolved. Regardless of whether the title issues are resolved, we have the option to purchase the property for $3.0 million under the operating lease. In August 2007, we entered into an agreement that we expect will close on or before December 14, 2007, to purchase two skilled nursing facilities in California and one assisted living facility in Arizona, which also provides independent living services, for an aggregate purchase price of approximately $13.0 million. We currently operate these three facilities under master lease agreements. The lease agreements for the two skilled nursing facilities contain purchase options which are not currently exercisable. Upon the expected closing of these purchase agreements, we will own 27 of our facilities and operate 34 of our facilities under long-term lease arrangements with options to purchase nine of those 34 facilities.

        Our long-term debt as of June 30, 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 June 30,

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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 $55.3 million at June 30, 2007.

•

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 June 30, 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 property, assignment of rents, and security agreement. The balance outstanding was approximately $6.7 million at June 30, 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 June 30, 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 the 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 June 30, 2007, there were no outstanding borrowings under the Revolver and $8.4 million of borrowing capacity 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 mature in March 2007, but we negotiated short-term extensions until November 19, 2007. In September 2007, we negotiated a temporary increase in the maximum amount available to us under the Revolver from $20.0 million to $25.0 million. This temporary increase will be available to us through mid-November 2007. Our Revolver is with the same lender as our Term Loan.

        In October 2007, we secured the Commitment Letter from the Lender to amend and increase the Revolver by extending the term to 2012, increasing the available credit thereunder up to the lesser of $50.0 million or 85% of the eligible accounts receivable, and changing the interest rate to either, as we may elect from time to time, (i) the 1, 2, 3 or 6 month LIBOR (at our option) plus 2.5%, or (ii) the greater of (a) prime plus 1.0% or (b) the federal funds rate plus 1.5%. The Commitment Letter is contingent on final approval of the Lender's credit committee and the negotiation, execution and delivery of appropriate amendatory documentation, as well as other conditions precedent which are customary for financings of this type and the absence of any material adverse change to our business or financial condition at the time of closing. The Revolver contains typical representations and covenants for a loan of this type, a violation of which could result in a default under the Revolver and could possibly cause all amounts owed by us, including amounts due under the Term Loan, to be declared immediately due and payable. If we do not complete the transactions contemplated by the Commitment Letter, we intend to use proceeds of this offering and/or seek alternative sources of working capital financing to replace the Revolver.

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.

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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.

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. We adopted FIN 48 at the beginning of fiscal year 2007. See Note 7 in Notes to the 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 June 30, 2007, we had no 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.

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        Our cash and cash equivalents and short-term investments as of June 30, 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 June 30, 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 2006.

        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 ("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, there were 38 million people in the United States in 2006 who were over 65 years old. The U.S. Census Bureau estimates 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

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services. In addition, states may, at their option, cover other services such as physical, occupational and speech therapies.

        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.

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        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 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

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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.

        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 September 30, 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 September 30, 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. We also have agreements to purchase four of the 38 facilities that we operate under long-term lease arrangements. The lease agreements on three of these four facilities contain options to purchase the underlying property, but they are not currently exercisable. Assuming the expected closing of these purchase agreements, we will own 27 of our facilities, operate 34 facilities under long-term lease arrangements and hold options to purchase nine of our leased facilities. For the year ended December 31, 2006 and the six months ended June 30, 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 $29.5 million, or 17.5%, to $198.2 million for the six months ended June 30, 2007 compared to $168.7 million for the six months ended June 30, 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 operational 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:

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continuing to grow our talent base and develop future leaders;



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increase mix of high acuity patients;



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focusing on organic growth and internal operating efficiencies;



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



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

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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 refers to our goal of setting the standard by which all others are 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 September 30, 2007:

Cumulative Facility Growth

	As of December 31,								As of September 30, 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	7,448

(1)

Includes 671 beds in our 460 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

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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.

        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 acts as a resource and 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 671 beds in our 460 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

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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 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 September 30, 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. We also have agreements to purchase four of the 38 facilities that we operate under long-term lease arrangements. The lease agreements on three of these four facilities contain options to purchase the underlying property. Assuming the expected closing of these purchase agreements, we will own 27 of our facilities, operate 34 facilities under long-term lease arrangements and hold options to purchase nine of our leased facilities. Assuming that we consummate our pending purchase agreements and that all of our purchase options were currently exercisable and that we exercised all purchase options, we would own approximately 59% 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 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 have installed 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.

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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 September 30, 2007, 13 prospective administrators were progressing through the various stages of this training 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 six month periods ended June 30, 2006 and 2007 averages of 82% 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

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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 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 34 facilities that we acquired from 2001 through the first quarter of 2006, the aggregate EBITDAR as a percentage of revenue improved from 11.4% during the first full three months of operations to 14.2% during the thirteenth through fifteenth months 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, each with its own president to oversee the operations of their portfolio companies;

•

The Flagstone Group, Inc., with 15 facilities and 1,792 licensed beds⁽¹⁾ in Southern California;



•

Touchstone Care, Inc., with ten facilities and 1,208 licensed beds⁽¹⁾ in the Los Angeles area and in Southern California's Inland Empire and Palm Springs markets;



•

Northern Pioneer Healthcare, Inc., with nine facilities and 812 licensed beds⁽¹⁾ in Northern California and Washington;



•

Keystone Care, Inc., with ten facilities and 1,154 licensed beds⁽¹⁾ in Texas; and



•

Bandera Healthcare, Inc., with 12 facilities and 1,952 licensed and independent living beds⁽¹⁾ in Arizona.

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        In addition, in late 2006 we formed a sixth future portfolio company, Milestone Healthcare, Inc., currently with five facilities and 530 licensed beds⁽¹⁾ in Utah and Idaho, as a direct result of the success of our New Market CEO Program, described below. Additionally, facilities are grouped together in clusters within each of the portfolio companies.

(1)

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

        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 produced a strong recruiting year for us and has facilitated 11 acquisitions in 2006 and three acquisitions during the first half of 2007. For example, during the first ten months following this reorganization, Keystone Care, Inc. nearly doubled our annualized revenue and doubled the 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 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 1,668 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. We also entered into operating lease agreements whereby we assumed the operations of three skilled nursing facilities located in Utah, Idaho and Arizona. No material amounts were paid to the prior facility operators and we did not acquire any assets or assume any liabilities, other than our

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rights and obligations under the new operating leases and operations transfer agreements. In addition, in 2006, we 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.

        In the first six months of 2007, we acquired three additional long-term care facilities 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 exercised an option to purchase one of our leased skilled nursing facilities for $3.3 million in cash. In addition, in July 2007, we entered into an operating lease agreement for a long-term care facility in Utah that is licensed for both skilled nursing and assisted living services. Since the facility was not profitable at the time, the prior operator voluntarily relinquished its leasehold to its affiliated landlord for no material consideration. We did not make any material payments to the prior facility operator and we did not acquire any assets or assume any liabilities, other than our rights and obligations under a new operating lease and operations transfer agreement, as part of this transaction. We also simultaneously entered into a separate contract with the property owner to purchase the underlying property for $3.0 million, pending the property owner's resolution of certain boundary line issues with neighboring property owners. We expect that we will purchase the property under the contract if and when these title issues are resolved. Regardless of whether the title issues are resolved, we have the option to purchase the property for $3.0 million under the operating lease. This facility added approximately 106 beds to our operations. In August 2007, we entered into an agreement that we expect will close on or before December 14, 2007, to purchase two skilled nursing facilities in California and one assisted living facility in Arizona, which also provides independent living services, for an aggregate purchase price of approximately $13.0 million. We currently operate these three facilities under master lease agreements. The lease agreements for the two skilled nursing facilities contain purchase options which are not currently exercisable. Upon the expected closing of these purchase agreements, we will own 27 of our facilities and operate 34 of our facilities under long-term lease arrangements with options to purchase nine of those 34 facilities.

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. In addition, we are currently in negotiations with our existing landlord to expand our office space by an additional 4,799 square feet. We anticipate that this expansion would expire coterminously with our existing lease.

        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 September 30, 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 September 30, 2007:

State	Leased without a Purchase Option	Leased with a Purchase Option	Owned	Total Licensed and Independent Living Beds(3)
California	1,654	1,026	849	3,529
Arizona	912	130	910	1,952
Texas	470	—	684	1,154
Utah	108	106	228	442
Washington	—	—	283	283
Idaho	—	88	—	88
Total	3,144	1,350	2,954	7,448
Skilled nursing	2,829	1,253	2,695	6,777
Assisted living(1)	231	97	259	587
Independent living(2)	84	—	—	84

(1)

Represents 460 assisted living units.

(2)

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

(3)

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 September 30, 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 six months ended June 30, 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 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 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

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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 six months ended June 30, 2007, assisted living services accounted for approximately 3% of our total revenue. As of September 30, 2007, we had 587 licensed assisted living beds in 460 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.

        Billing and Reimbursement.    Our revenue from government payors, including Medicare and state Medicaid agencies is subject to retroactive adjustments in the form of claimed overpayments and underpayments based on rate adjustments, asserted billing and reimbursement errors, and claimed overpayments and underpayments. We believe billing and reimbursement errors, disagreements, overpayments and underpayments are common in our industry, and we are regularly engaged with government payors and their fiscal intermediaries in reviews, audits and appeals of our claims for reimbursement due to the subjectivities inherent in the processes related to patient diagnosis and care, recordkeeping, claims processing and other aspects of the patient service and reimbursement processes, and the errors and disagreements those subjectivities can produce.

        We take seriously our responsibility to act appropriately under applicable laws and regulations, including Medicare and Medicaid billing and reimbursement laws and regulations. Accordingly, we employ accounting, reimbursement and compliance specialists who train, mentor and assist our clerical, clinical and rehabilitation staffs in the preparation of claims and supporting documentation, regularly monitor billing and reimbursement practices within our facilities, and assist with the appeal of overpayment and recoupment claims generated by governmental, fiscal intermediary and other auditors and reviewers. In addition, due to the potentially serious consequences that could arise from any impropriety in our billing and reimbursement processes, we investigate all allegations of impropriety or irregularity relative thereto, and sometimes do so with the aid of outside auditors, attorneys and other professionals. For example, in November 2006, we initiated an internal investigation into an allegation of possible reimbursement irregularities at one or more of our facilities and retained outside counsel to assist us in looking into these matters. While that investigation is currently ongoing and no conclusion regarding the allegation has yet been reached, we are generally pleased with our observations to date, although we cannot be certain that a third party looking into these matters or similar matters would agree with us in all cases.

        Whether information about our billing and reimbursement processes is obtained from external sources or activities such as Medicare and Medicaid audits or probe reviews, internal investigations such as the one currently underway, or our regular day-to-day monitoring and training activities, we collect and utilize such information to improve our billing and reimbursement functions and the various processes related thereto. While, like other operators in our industry, we experience billing and reimbursement errors, disagreements and other effects of the inherent subjectivities in reimbursement processes on a regular basis, we believe that we are in substantial compliance with applicable Medicare and Medicaid reimbursement requirements. We continually strive to improve the efficiency and accuracy and all of our operational and business functions, including our billing and reimbursement processes.

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

	Year Ended December 31,						Six Months Ended June 30,
	2004		2005		2006		2006		2007
	(in thousands)
Payor Sources for All Facilities:
Medicare	$	72,301	$	96,208	$	117,511	$	56,105	$	59,696
Managed care		25,172		33,484		44,487		21,088		25,707
Private and other payors(1)		35,942		39,831		45,312		21,449		25,496
Medicaid		111,121		131,327		151,264		70,085		87,348
Total revenue	$	244,536	$	300,850	$	358,574	$	168,727	$	198,247

(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:

								Six Months Ended June 30,
Percentage of Skilled Nursing Days:		Year Ended December 31,
		2004		2005		2006		2006		2007
Medicare		12.2	%	14.3	%	15.0	%	15.3	%	13.9	%
Managed care		7.2		8.1		9.3		9.4		9.2
	Skilled mix	19.4		22.4		24.3		24.7		23.1
Private and other payors		14.1		13.6		13.1		13.2		13.0
	Quality mix	33.5		36.0		37.4		37.9		36.1
Medicaid		66.5		64.0		62.6		62.1		63.9
Total skilled nursing		100.0	%	100.0	%	100.0	%	100.0	%	100.0	%

Labor

        The operation of our skilled nursing and assisted living facilities requires a large number of highly skilled healthcare professionals and support staff. At June 30, 2007, we had approximately 5,506 full-time equivalent employees. For the six months ended June 30, 2007, approximately 66.6% of our total expenses 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.

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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 June 30, 2007, we had approximately 5,506 full-time equivalent employees, of which approximately 69 were general and administrative personnel employed by our Service Center and the remaining employees were employed by our operating subsidiaries. In 2002, a majority of the 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.

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 and on a quarterly basis beginning in 2007, 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

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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.

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	48	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. We expect to identify a new president for our Flagstone portfolio company within the next six months. Mr. Christensen has served as a member of our board of directors since 1999, and currently sits on the board of directors' 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 acting 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.

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Mr. Stapley previously served as General Counsel for the Sedgwick Companies, an Orange 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 a member of 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 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 directors' 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

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a member of the Secretary of Health, Education and Welfare's Advisory Task Force during the Nixon Administration.

        Charles M. Blalack has served as a Director since 2001. He is currently Chairman of the board of directors' compensation committee and 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:

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



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



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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 Mr. Roy Christensen, Class II shall consist of Messrs. Blalack and Christopher Christensen, and Class III shall consist of Dr. Hubenette and Mr. Maloof. At each annual meeting of stockholders after the initial classification, the successors

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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 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 a majority 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:

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developing and reviewing policies relating to compensation and benefits;



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



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



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



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overseeing the preparation of the Compensation Discussion 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

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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:

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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;



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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;



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the approval of our transactions with related persons;



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



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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



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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. Charles M. Blalack serves 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:

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



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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;



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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;



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management succession planning; and



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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:

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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

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disciplinary guidelines to assist officers and employees charged with direct enforcement responsibility;

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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;



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



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



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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 should be 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

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

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Base salary;



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Annual and other short-term cash bonuses;



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Long-term incentive compensation; and



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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 industry 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 industry to the compensation of our executives. Our compensation committee reviewed the published compensation of the named executive officers of Genesis HealthCare Corporation, Kindred Healthcare, Inc., Manor Care, Inc., National Healthcare Corporation, Sun Healthcare Group, Inc. and Skilled Healthcare Group, Inc. We believe that the base salaries and the total compensation of our executives are approximately equal to or less than the median base salaries and median total compensation of executives with similar positions at these companies. However, although each company had a general counsel, our review did not identify an officer of any of these companies whose roles are comparable to those of Gregory K. Stapley, who serves as our Vice President, General Counsel and Secretary. Mr. Stapley's base salary and total compensation exceed the median base salaries and median total compensation of the general counsels of these companies. However, Mr. Stapley directly oversees many aspects of our business in his role as Vice President, and we believe that he significantly contributes to our success in areas outside of his roles as our General Counsel and Secretary. Each of our executives' 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 income before provision for income taxes, and the bonus pool has not

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historically been subject to a cap. Our compensation committee established the following formula for the 2006 bonus pool:

Annual Income Before Provision for Income Taxes ("EBT") in 2006	Bonus Pool
For EBT up to $20 million	EBT * 2.0%
For EBT greater than $20 million, but less than $30 million	$0.4 million + (amount of EBT between $20 million and $30 million * 5.0%)
For EBT greater than $30 million, but less than $35 million	$0.9 million + (amount of EBT between $30 million and $35 million * 10%)
For EBT greater than $35 million	$1.4 million + (amount of EBT greater than $35 million * 20%)

        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 income before provision for income 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, $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 amount of annual income before provision for income taxes that must be achieved in order to create the same bonus pool as the preceding year in order to increase the difficulty of receiving the same bonus. For example, in 2005, our income before provision for income taxes was $30.4 million. In order for the bonus pool in 2006 to equal the bonus pool in 2005, we needed to attain income before provision for income taxes of $35.5 million in 2006. 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. For 2007, the compensation committee has capped the executive bonus pool at $2.2 million.

        In addition to the annual bonus opportunity described above, our President and Chief Executive Officer have been eligible to earn an additional annual cash bonus equal to one-half of one percent of our income before provision for income 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

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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. Some of the restricted stock agreements provide for termination of our repurchase right upon the consummation of this offering. See "Employee Benefit Plans."

        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.

        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 "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. Typically, 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.

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        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 based upon their respective company's income before provision for income taxes. The amount 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 his portfolio company's annual income before provision for income 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

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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 generally equal to the fair market value of our common stock as determined on the date of the grant. Some of the restricted stock agreements provide for termination of our repurchase right upon the consummation of this offering. See "Employee Benefit Plans."

        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.

        For a description of the compensation paid to Christopher Christensen, see "Principal Elements of Executive Compensation" above.

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.

        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 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

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data that we obtain by reviewing director compensation by public companies in the skilled nursing industry. To establish board compensation for 2007, our compensation committee reviewed the published director compensation information of other skilled nursing companies, including Genesis HealthCare Corporation, Kindred Healthcare, Inc., Manor Care, Inc., National Healthcare Corporation, Sun Healthcare Group, Inc. and Skilled Healthcare Group, Inc. Based on these reviews, the Committee set its annual retainers for outside directors and the chairman of the board, payments for board and committee meeting attendance, and retainers to the chairpersons of each committee at levels that we believe are approximately equal to or less than the median cash compensation paid to directors of these companies, except that we believe that (i) the cash compensation payable to the chairperson of our audit committee is more than the median compensation paid to audit committee chairpersons of these other companies, and (ii) the cash compensation payable to the chairman of our board is approximately equal to or less than the median cash compensation paid to the chairpersons of the boards of directors of these other companies who receive compensation for their role as chairpersons of the board and who are not also serving as the chief executive officers of such companies.

        Since our inception we have made only two stock option grants to our non-employee directors, which vested immediately upon the grant date. In addition, Thomas Maloof purchased 100,000 shares of restricted stock for $6,250 on August 3, 2000. Our 2007 Omnibus Incentive Plan contains an automatic option grant program for our directors. Pursuant to the automatic option grant program, non-employee directors will each receive an option 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. Our board of directors and compensation committee considered the total compensation paid to directors of the companies named above in deciding to award these automatic option grants. However, our board of directors and compensation committee determined the amount of options to award based upon what they considered to be an appropriate incentive for board service to our company, and they did not attempt to base this number upon the number of options awarded to directors of these other companies.

Accounting and Tax Treatment of Compensation

        Internal Revenue Code Section 162(m) limits the amount that we may deduct for compensation paid to our principal executive officer and to each of our three most highly compensated officers (other than our principal financial officer) 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 equal to one half of one percent of our income before provision for income taxes, which formula was established and communicated to the executives when our 2006 income before provision for income taxes was undeterminable. Although our compensation committee had discretion to award these bonuses, it has historically awarded such bonuses if the executive's performance was satisfactory. 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.

						All Other Option Awards: Number of Securities Underlying Options(#)
		Estimated Future Payouts Under Non-Equity Incentive Plan Awards
									Closing Market Price on Grant Date ($/Sh)(3)
Name	Grant Date						Exercise or Base Price of Option Awards($/Sh)(1)	Grant Date Fair Value of Option Awards($)(2)
		Threshold($)	Target($)		Maximum($)
Roy E. Christensen Chairman of the Board		—	152,210	(4)	—	—	—	—	—
Christopher R. Christensen Chief Executive Officer and President		—	152,210	(4)	—	—	—	—	—
Alan J. Norman Chief Financial Officer	7/26/06	—	—		—	5,000(5)	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	(7)	— — —	11,000(6) 21,500(5) —	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	(8)	— — —	43,000(5) 8,000(6) —	7.50 7.50 —	416,670 77,520 —	15.09 15.09 —

(1)

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."

(2)

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.

(3)

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."

(4)

For 2006 performance, our President and Chief Executive Officer could earn a bonus equal to one-half of one percent of our income before provision for income 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.

(5)

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."

(6)

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."

(7)

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

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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.

(8)

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' income before provision for income 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.

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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)	168,000 168,000 201,600 189,000 —	— — — — —	— — — — —
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)	67,200 134,400 100,800 — — — —	— — — — — — —	— — — — — — —
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)	50,400 100,800 — — —	— — — — —	— — — — —

(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 with the exercised portion of partially exercised options vesting prior to the unexercised portion of such options.

(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. Some of the restricted stock agreements provide for termination of our repurchase right upon the consummation of this offering. See "Employee Benefit Plans."

(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 fully 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.

(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 fully 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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(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 fully 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 fully 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 fully 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 fully 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 fully 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	—		—	26,800	(3)	562,800
Gregory K. Stapley Vice President and General Counsel	—		—	—		—
David M. Sedgwick Vice President of Organizational Development	1,600	(4)	29,672	8,000	(4)	168,000
John Albrechtsen President, Touchstone Care, Inc.	4,800	(5)	91,176	—		—

(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 $21.00, which is the midpoint of the 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 $21.00, which is the midpoint of the price range set forth on the cover of this prospectus.

(3)

On March 30, 2006, Mr. Norman partially exercised a stock option to purchase 15,000 shares, leaving 15,000 additional shares unexercised. None of these 30,000 shares were vested at the time of exercise. On March 18, 2004 and December 23, 2003, Mr. Norman exercised stock options to purchase 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, with the exercised portion of the partially exercised option vesting prior to the unexercised portion of such options, of which 26,800 shares vested during 2006.

(4)

On April 25, 2006, Mr. Sedgwick exercised a stock option in full to purchase 8,000 shares, of which 1,600 shares were vested. On June 30, 2005, June 28, 2004 and December 31, 2003, Mr. Sedgwick exercised stock options to purchase 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 exercised in full stock options to purchase 4,000 and 8,000 shares, respectively, of which 1,600 and 3,200 shares respectively, were vested. 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.

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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. However, the administrator of our equity incentive plans has the authority to accelerate the vesting of options and restricted stock, in certain circumstances, subject to the terms of the plans.

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 and $1,500 for each board meeting and each committee meeting the director physically attends. 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 Messrs. Maloof and Blalack and Dr. Hubenette 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 Messrs. Maloof and Blalack and Dr. Hubenette received a stock option to purchase up to 20,000 shares of common stock which was fully vested upon the grant. Each of such directors exercised this stock option and received 20,000 shares of common stock, which they each still hold.

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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.

        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 June 30, 2007, options to purchase a total of 495,000 and 450,000 shares of our common stock were issued and outstanding at a weighted average exercise price of $5.38 and $5.46 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.

        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, we estimate that approximately 142,600 shares will no longer be subject to our repurchase right. In addition, we estimate that approximately 87,800 stock options that are immediately exercisable and subject to these restricted stock agreements could be exercised and would not be subject to the repurchase right.

        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

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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.

        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 and June 30, 2007, 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 June 30, 2007, options to purchase a total of 749,000 and 679,500 shares of our common stock were issued and outstanding at a weighted average exercise price of $6.68 and $6.71 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.

        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 generally 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 October 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 Directors' 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 1,000,000 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) 1,000,000 shares of common stock or (ii) 2% 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" within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended, for more than 2,500,000 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 of a 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 similar corporate transaction or event that affects the shares of our common stock such that an adjustment is necessary in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Omnibus Plan, then the number and type of shares of common stock (or other securities or other property) that are subject to outstanding awards and the purchase price or exercise price with respect to any outstanding award will be proportionately adjusted. The committee shall make such proportionate adjustments, if any, as the committee in its discretion may deem appropriate to reflect such event with respect to the aggregate number and kind of shares that may be issued under the 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 ("SAR").  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 2,500,000 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 Directors' 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 automatically receive an 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 based 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, vest and become exercisable in three equal annual installments on the completion of each year of service measured from the grant date and have a maximum term of ten years 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 automatically accelerate and then terminate unless assumed by the successor corporation.

        Unless earlier discontinued or terminated by the board, the Omnibus Plan will expire in October 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 and we may or may not continue to match at such a rate. 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, officer and other key employees 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. 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.

        We are not aware of any 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 "Compensation Discussion and Analysis" and the transactions described below.

Investor Rights 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 formerly 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. From January 1, 2007 through August 31, 2007, we paid Mr. Brady total cash compensation of $210,509. 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 chief executive officer of one of our facilities since April 2004. He previously served as executive director and chief executive officer at other of our facilities from 2002 to 2004. From January 1, 2007 through August 31, 2007, we paid Covey Christensen total cash compensation of $349,303. 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.

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        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 the same facility from January 2006 to August 2006. From January 1, 2007 through August 31, 2007, we paid Tyler Albrechtsen total cash compensation of $269,027. 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 amended and restated certificate of incorporation and amended and restated bylaws, require us to indemnify our directors and officers to the fullest extent permitted by Delaware law. In addition, the Investor Rights Agreement provides for indemnification of certain of our stockholders against liabilities described in the Investor Rights Agreement.

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."

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        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.

        On August 14, 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 person 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, pursuant to the policy, 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, pursuant to the policy, 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 and 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 its chair. Pursuant to the policy, 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. Pursuant to the policy, 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 June 30, 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 June 30, 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 June 30, 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		Shares of Common Stock to be Sold if Over-Allotment is Exercised in Full(2)
Name and Address of Beneficial Owners		Number of Shares(1)	Percent(1)	Number of Shares Being Offered By Selling Stockholders in this Offering(2)	Number of Shares	Percent
Named Executive Officers and Directors:
	Christopher R. Christensen(3)	3,893,000	23.7	—	3,893,000	19.0	160,000
	Alan J. Norman(4)	329,000	2.0	—	329,000	1.6	—
	Gregory K. Stapley(5)	1,189,000	7.2	—	1,189,000	5.8	69,000
	John P. Albrechtsen(6)	95,500	*	—	95,500	*	—
	David M. Sedgwick(7)	98,000	*	—	98,000	*	—
	Roy E. Christensen(8)	3,910,000	23.8	—	3,910,000	19.1	320,000
	Antoinette T. Hubenette	30,000	*	—	30,000	*	—
	Thomas A. Maloof	130,000	*	—	130,000	*	21,000
	Charles M. Blalack(9)	3,033,180	18.4	—	3,033,180	14.8	—
All Executive Officers and Directors as a Group (12 persons)(10)		13,050,680	77.7	—	13,050,680	62.7	570,000
Other Five Percent Stockholder:
	Ensign Group Investments, L.L.C.(11)	2,741,180	16.7	—	2,741,180	13.4	—
Other Selling Stockholder:
	V. Jay Brady(12)	762,500	4.6		762,500	3.7	30,000

*

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, the family trusts of Messrs. Christopher Christensen, Roy Christensen and Stapley and Messrs. Maloof and Brady have agreed to sell to the underwriters up to 160,000, 320,000, 69,000, 21,000 and 30,000 shares, respectively, of our common stock at the initial public offering price per share, less underwriting discounts and commissions. Assuming the over-allotment option is exercised in full, Messrs. Christopher Christensen, Roy Christensen, Gregory Stapley, Thomas Maloof and V. Jay Brady will beneficially own approximately 18.3%, 17.6%, 5.5%, 0.5% and 3.6%, respectively, of the common stock outstanding upon completion of the offering.

(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 June 30, 2007.

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(5)

Represents 1,173,000 shares held by the Stapley Family Trust dated April 25, 2006, 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 minor children.

(6)

Includes stock options to purchase 71,000 shares of common stock that are currently exercisable or exercisable within 60 days after June 30, 2007.

(7)

Includes stock options to purchase 52,500 shares of common stock that are currently exercisable or exercisable within 60 days after June 30, 2007.

(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 June 30, 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.

(12)

Includes stock options to purchase 42,500 shares of common stock that are currently exercisable or exercisable within 60 days after June 30, 2007. Mr. Brady is a former employee of our company, and within the last three years served as president of the Flagstone Group, Inc. and our vice president of executive development.

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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. The Term Loan will mature 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 secured by certain of the properties, to acquire interests in other properties that we were previously leasing with options to purchase 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.

        The guaranty related to the Term Loan contains covenants that, among other things, limit our ability to:

•

merge or consolidate with another entity:



•

sell or otherwise dispose of all or substantially all of our assets:



•

acquire all or substantially all of the assets of another entity; and



•

amend our certificate of incorporation or our bylaws.

        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 June 30, 2007, our borrowing subsidiaries had $55.3 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 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 Revolver was set to mature in March 2007 but was extended until November 19, 2007. In September 2007, we negotiated a temporary increase in the maximum amount available to us under the Revolver from $20.0 million to $25.0 million. This temporary increase will be available to us through mid-November 2007.

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        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.

        The Revolver contains affirmative and negative covenants, including limitations on:

•

certain indebtedness;



•

certain investments, loans, advances and acquisitions;



•

certain sales or other dispositions of our assets;



•

liens and negative pledges;



•

mergers, consolidations, liquidations and dissolutions;



•

transfer of operation or control of our facilities to third parties;



•

sale and leaseback transactions;



•

dividends and distributions during the existence of an event of default;



•

guarantees and other contingent liabilities;



•

affiliate transactions that are not in the ordinary course of business; and



•

certain changes in capital structure.

A violation of these or other representations or covenants of ours could result in a default under the Revolver and could possibly cause all amounts owed by the Company, including amounts due under the Term Loan, to be declared immediately due and payable.

        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 the event of our default, the Lender has the right to take possession of the foregoing with or without judicial process.

        As of June 30, 2007, we had no outstanding borrowings under the Revolver and approximately $8.4 million of borrowing capacity was pledged to secure outstanding letters of credit. In October 2007, we secured the Commitment Letter from the Lender to amend and increase the Revolver by extending the term to 2012, increasing the available credit thereunder up to the lesser of $50.0 million or 85% of the eligible accounts receivable, and changing the interest rate to either, as we may elect from time to time, (i) the 1, 2, 3 or 6 month LIBOR (at our option) plus 2.5%, or (ii) the greater of (a) prime plus 1.0% or (b) the federal funds rate plus 1.5%. The Commitment Letter is contingent on final approval of the Lender's credit committee and the negotiation, execution and delivery of appropriate amendatory documentation, as well as other conditions precedent and the absence of any material adverse change to our business or financial condition at the time of closing the transactions contemplated by the Commitment Letter. If we do not complete the transactions contemplated by the Commitment Letter, we intend to use proceeds of the offering and/or seek alternative sources of working capital financing to replace the Revolver.

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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.

        As of June 30, 2007, the balance outstanding on this mortgage loan was approximately $2.1 million.

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 June 30, 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 become effective upon the closing of this offering.

        Upon the closing of this offering, our authorized capital stock will consist of 75,000,000 shares of common stock, par value $0.001 per share, and 1,000,000 shares of preferred stock, par value $0.001 per share.

Common Stock

        At June 30, 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 June 30, 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 1,000,000 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

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common stock, including the loss of voting control. We currently have no plans to issue any shares of preferred stock.

        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 amended and restated certificate of incorporation and amended and restated bylaws that will become effective upon 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 amended and restated certificate of incorporation 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 amended and restated certificate of incorporation and amended and restated bylaws 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

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board of directors by enlarging the board of directors and filling the new directorships with its own nominees. The amended and restated 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 amended and restated certificate of incorporation and the amended and restated bylaws that will become effective upon the closing of this offering will provide that special meetings of the stockholders for any purpose 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 amended and restated certificate of incorporation that will become effective upon 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 June 30, 2007, options to purchase a total of 1,129,500 shares of common stock were outstanding, and there were up to 285,300 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."

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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.    Subject to the lock-up agreement, 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.

        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 Registrar and Transfer Company.

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 20,446,380 shares of common stock outstanding, assuming no exercise of any options after June 30, 2007. Of this amount, the 4,000,000 shares offered by this prospectus will be available for immediate sale in the public market as of the date of this prospectus, and 513,900 shares will be available for immediate sale pursuant to Rule 144(k). Following the expiration of lock-up agreements with the representatives of the underwriters and the market stand-off provisions, which extend for a period of not less than 180 days from the date of execution of the underwriting agreement and assuming such shares have been released from any repurchase right we may hold, 15,932,480 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	4,000,000	Freely tradable shares sold in this offering
Upon effectiveness	513,900	Shares eligible for sale under Rule 144(k)
180 days	15,932,480	Lock-up released; shares eligible for sale under Rules 144, 144(k) or 701
Over 180 days	0	Restricted securities held for less than one year

        The shares of common stock held by Christopher Christensen, Roy Christensen and Gregory Stapley are subject to lock-up agreements with the representatives of the underwriters. However, Christopher Christensen, Roy Christensen and Gregory Stapley have indicated to us that they intend to make bona fide gifts of an aggregate of approximately 70,200 shares of common stock to a charitable organization shortly after the consummation of this offering. D.A. Davidson has indicated that they will release these shares from the lock-up restrictions that would otherwise apply. Assuming these charitable donations occur and the lock-up restrictions are released, 70,200 shares that would otherwise be subject to lock-up restrictions will be freely tradable after these charitable donations.

        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 204,464 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

145

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 and market stand-off provisions.

        As a result of the lock-up agreements and market stand-off provisions 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 3,237,300 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 12,695,180 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, 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 96.9% of the shares of our common stock outstanding as of June 30, 2007, assuming the conversion of all of our preferred stock into common stock upon the completion of this offering, 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,

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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 June 30, 2007, there were outstanding options under our stock option plans to purchase 1,129,500 shares of common stock issuable upon the exercise of outstanding options at a weighted average exercise price of $6.21 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.

        We believe that we are not currently a "United States real property holding corporation" for U.S. federal income tax purposes. 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, the selling stockholders 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	4,000,000

        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 Financial Industry Regulatory Authority (formerly, 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 $2,520,000, 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 any transfer taxes, underwriting discounts and commissions payable in respect of the shares sold by the selling stockholders and other than fees, disbursements and expenses of counsel to 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 600,000 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, and the underwriters have agreed to indemnify us and the selling stockholders, against specified liabilities, including liabilities under the Securities Act, and to contribute to payments each may be required to make in respect of those liabilities.

Lock-Up Agreements and Market Stand-Off Provisions

        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 96.9% of the shares of our common stock outstanding as of June 30, 2007, assuming the conversion of all of our preferred stock into common stock upon the completion of this offering, 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

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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), or file (or participate in filing) any registration statement with the Securities and Exchange Commission (other than registration statements on 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 and market stand-off 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 and market stand-off 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.

        The shares of common stock held by Christopher Christensen, Roy Christensen and Gregory Stapley are subject to lock-up agreements with the representatives of the underwriters. However, Christopher Christensen, Roy Christensen and Gregory Stapley have indicated to us that they intend to make bona fide gifts of an aggregate of approximately 70,200 shares of common stock to a charitable organization shortly after the consummation of this offering. D.A. Davidson has indicated that they will release these shares from the lock-up restrictions that would otherwise apply. Assuming

153

these charitable donations occur and the lock-up restrictions are released, 70,200 shares that would otherwise be subject to lock-up restrictions will be freely tradable after these charitable donations.

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 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 are expected to 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.

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        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, 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.

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

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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 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 June 30, 2007 (Unaudited)	F-3
Consolidated Statements of Income for the Years Ended December 31, 2004, 2005 and 2006 and the Six Months Ended June 30, 2006 and 2007 (Unaudited)	F-4
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2004, 2005 and 2006 and for the Six Months Ended June 30, 2007 (Unaudited)	F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 2004 (Restated), 2005 (Restated) and 2006 and the Six Months Ended June 30, 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)

										June 30,
				December 31, 2005			December 31, 2006			2007			2007 Pro Forma
				(As Restated— See Note 17)						(unaudited)			(unaudited)
Assets
Current assets:
	Cash and cash equivalents			$	11,635		$	25,491		$	12,939		$	89,974	(a)(b)
	Accounts receivable—less allowance for doubtful accounts of $4,959, $7,543 and $7,408 at December 31, 2005 and 2006 and June 30, 2007, respectively				43,363			45,285			42,452			42,452
	Prepaid expenses and other current assets				4,274			4,185			7,738			6,303	(b)
	Deferred tax asset—current				4,459			8,844			7,674			7,674
		Total current assets			63,731			83,805			70,803			146,403
Property and equipment, net					43,644			87,133			100,619			100,619	(e)
Insurance subsidiary deposits					4,547			8,530			9,616			9,616
Deferred tax asset					3,673			3,714			6,197			6,197
Restricted and other assets					2,004			2,618			2,938			2,938
Intangible assets, net					1,791			2,659			2,564			2,564
Goodwill					—			2,072			2,872			2,872
			Total assets	$	119,390		$	190,531		$	195,609		$	271,209
Liabilities and stockholders' equity
Current liabilities:
	Accounts payable			$	11,029		$	12,329		$	11,978		$	11,978
	Accrued wages and related liabilities				18,238			24,026			20,177			20,177
	Accrued self-insurance liabilities—current				3,729			6,122			6,771			6,771
	Other accrued liabilities				11,114			12,106			10,009			10,009
	Current maturities of long-term debt				534			941			930			930
		Total current liabilities			44,644			55,524			49,865			49,865
Long-term debt—less current maturities					25,520			63,587			63,072			63,072	(d)
Accrued self-insurance liability					11,542			15,384			17,319			17,319
Deferred rent and other long-term liabilities					2,325			2,164			2,714			2,714
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 June 30, 2007 respectively; 1,000,000 pro forma shares authorized; no pro forma shares issued and outstanding at June 30, 2007; liquidation preference of $2,618, $2,401 and $2,330 at December 31, 2005 and 2006 and June 30, 2007, respectively					2,725			2,725			2,725			—	(c)
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 June 30, 2007, respectively; 75,000,000 pro forma shares authorized; 20,446,380 pro forma shares issued and outstanding at June 30, 2007 (unaudited)				14			14			14			21	(c)
	Additional paid-in capital				613			1,250			1,784			80,102	(c)
	Retained earnings				34,307			54,724			62,900			62,900
	Common stock in treasury, at cost, 400,000, 755,000 and 745,000 shares at December 31, 2005 and 2006 and June 30, 2007, respectively				(2,300	)		(4,841	)		(4,784	)		(4,784	)
		Total stockholders' equity			32,634			51,147			59,914			138,239
			Total liabilities and stockholders' equity	$	119,390		$	190,531		$	195,609		$	271,209

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,									Six Months Ended June 30,
			2004			2005			2006			2006			2007
												(unaudited)
Revenue			$	244,536		$	300,850		$	358,574		$	168,727		$	198,247
Expense:
	Cost of services (exclusive of facility rent and depreciation and amortization shown separately below)			199,986			239,379			284,847			133,350			161,001
	Facility rent—cost of services			14,773			16,118			16,404			8,090			8,333
	General and administrative expense			8,537			10,909			14,210			6,590			7,644
	Depreciation and amortization			1,934			2,458			4,221			1,758			3,186
		Total expenses		225,230			268,864			319,682			149,788			180,164
Income from operations				19,306			31,986			38,892			18,939			18,083
Other income (expense):
	Interest expense			(1,565	)		(2,035	)		(2,990	)		(1,337	)		(2,349	)
	Interest income			85			491			772			297			698
		Other expense, net		(1,480	)		(1,544	)		(2,218	)		(1,040	)		(1,651	)
Income before provision for income taxes				17,826			30,442			36,674			17,899			16,432
Provision for income taxes				6,723			12,054			14,125			7,081			6,600
Net income			$	11,103		$	18,388		$	22,549		$	10,818		$	9,832
Net income per share:
	Basic		$	0.83		$	1.35		$	1.66		$	0.80		$	0.72
	Diluted		$	0.63		$	1.05		$	1.34		$	0.65		$	0.58
Weighted average common shares outstanding:
	Basic			13,284,902			13,468,060			13,365,682			13,379,060			13,441,490
	Diluted			17,519,032			17,505,040			16,823,242			16,720,378			16,891,202

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)									(1,316	)							(1,316	)
Employee stock award compensation (unaudited)						503											503
Net income (unaudited)									9,832								9,832
FIN 48 transition amount (unaudited)									(340	)							(340	)
Balance—June 30, 2007 (unaudited)	13,705,200		$	14	$	1,784		$	62,900		745,000		$	(4,784	)	$	59,914

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,									Six Months Ended June 30,
					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		$	10,818		$	9,832
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation and amortization				1,934			2,458			4,221			1,758			3,186
		Deferred income taxes				(4,259	)		(3,913	)		(4,426	)		(958	)		(1,332	)
		Provision for doubtful accounts				3,415			3,092			4,191			2,438			1,247
		Stock compensation				—			—			443			4			503
		Loss (gain) on disposition of property and equipment				10			6			30			(3	)		14
		Change in operating assets and liabilities
			Accounts receivable			391			(19,189	)		(6,113	)		1,705			1,586
			Prepaid expenses and other current assets			6,047			(970	)		89			(1,726	)		(3,553	)
			Insurance subsidiary deposits			(354	)		(2,865	)		(3,983	)		(1,992	)		(1,086	)
			Accounts payable			(8,510	)		5,718			1,300			(267	)		(351	)
			Accrued wages and related liabilities			3,917			4,402			5,788			(614	)		(3,849	)
			Other accrued liabilities			949			6,314			782			(1,587	)		(2,047	)
			Accrued self-insurance			1,751			6,820			6,235			2,437			2,584
			Deferred rent liability			1,408			185			(161	)		81			130
				Net cash provided by operating activities		17,802			20,446			30,945			12,094			6,864
Cash flows from investing activities
	Purchase of property and equipment					(5,085	)		(5,685	)		(14,086	)		(5,343	)		(7,817	)
	Restricted and other assets					(134	)		(303	)		(656	)		(257	)		(405	)
	Cash payment for acquisitions					(6,014	)		(14,884	)		(28,967	)		(14,811	)		(9,441	)
				Net cash used in investing activities		(11,233	)		(20,872	)		(43,709	)		(20,411	)		(17,663	)
Cash flows from financing activities
	Net payments on revolver loan					(2,250	)		—			—			—			—
	Proceeds from long-term debt					15,896			1,500			34,782			2,560			—
	Payments on long term debt					(4,906	)		(859	)		(2,689	)		(2,230	)		(526	)
	Issuance of treasury stock upon exercise of options					—			—			259			—			—
	Issuance of common stock upon exercise of options					220			221			195			342			89
	Repurchase of common stock					—			(1	)		(1	)		—			(1	)
	Dividends paid					(983	)		(1,254	)		(1,975	)		(990	)		(1,315	)
	Payments of deferred financing costs					(536	)		(1	)		(1,151	)		(200	)		—
	Purchase of treasury stock					—			(2,300	)		(2,800	)		(2,800	)		—
				Net cash provided by (used in) financing activities		7,441			(2,694	)		26,620			(3,318	)		(1,753	)
Net increase (decrease) in cash and cash equivalents						14,010			(3,120	)		13,856			(11,635	)		(12,552	)
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		$	—		$	12,939

F-6

			Year Ended December 31,							Six Months Ended June 30,
			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		$	1,380	$	2,349
		Income taxes	$	10,395	$	14,000	$	18,105		$	8,625	$	10,815
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		$	—	$	49
	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		$	14,811	$	9,441
		Plus: lease acquisition costs		—		—		6			—		—
		Less: debt assumed		—		—		(2,104	)		—		—
		Cash paid	$	6,014	$	14,884	$	28,967		$	14,811	$	9,441

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 SIX MONTHS ENDED JUNE 30, 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 June 30, 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 June 30, 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.

        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.

Unaudited Interim Financial Information—The accompanying unaudited interim consolidated balance sheet as of June 30, 2007, the consolidated statements of income and cash flows for the six months ended June 30, 2006 and 2007, and the consolidated statements of stockholders' equity for the six months ended June 30, 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

F-8

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 June 30, 2007 and its results of operations and their cash flows for the six months ended June 30, 2006 and 2007. The results for the six months ended June 30, 2007 are not necessarily indicative of the results to be expected for the year ending December 31, 2007.

        Unaudited Pro Forma Information and Adjustments—The unaudited pro forma consolidated balance sheet information at June 30, 2007 reflects the conversion of all of the Company's outstanding preferred stock into common stock and the issuance of 4,000,000 common shares upon closing of the Company's initial public offering. The unaudited pro forma consolidated balance sheet information reflects the following adjustments:

(a)

Estimated gross proceeds to the Company of approximately $84,000 from the issuance and sale of 4,000,000 shares of common stock at an estimated initial public offering price of $21.00 per share, which is the midpoint of the price range set forth on the cover of the prospectus, net of estimated offering expenses of approximately $8,400. See note (b) below.



(b)

Reclassification of prepaid offering expenses accumulated up to June 30, 2007 which are included in the estimated offering expenses of $8,400. See note (a) above.



(c)

Conversion of 685,295 shares of the Company's Series A redeemable convertible preferred stock into an aggregate of 2,741,180 shares of common stock and the issuance and sale of 4,000,000 shares of the Company's common stock at an estimated initial public offering price of $21.00 per share, which is the midpoint of the price range set forth on the cover of the prospectus.



(d)

No debt reduction is reflected in the pro forma consolidated balance sheet information as no debt repayments are expected to be made by the Company until September 2008.



(e)

The purchase of two skilled nursing facilities in California and one assisted living facility in Arizona, which also provides independent living services, is expected to close on or before December 14, 2007 and the expected purchase of the long-term care facility in Utah is dependent upon the landlord's resolution of certain boundary line issues, as described in the "Use of Proceeds" section of the prospectus, the Company has not included an increase in property and equipment, net in the pro forma consolidated balance sheet information, as the Company may choose to fund these purchases under its credit facility.

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 healthcare services to residents and is recognized on the date services are provided at amounts billable to individual residents.

F-9

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 six months ended June 30, 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 recorded retroactive adjustments that increased revenue by $157, $157 and $768 for the years ended December 31, 2005 and 2006 and for the six months ended June 30, 2007, respectively. The Company records revenue from private pay patients as services are performed.

        Revenue for the years ended December 31, 2004, 2005 and 2006 and the six months ended June 30, 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	%

		Six Months Ended June 30,
		2006				2007
		(unaudited)
		Revenue		% of Revenue		Revenue		% of Revenue
Medicaid		$	70,085	41.5	%	$	87,348	44.1	%
Medicare			56,105	33.3			59,696	30.1
	Total Medicaid and Medicare		126,190	74.8			147,044	74.2
Managed care			21,088	12.5			25,707	13.0
Private and other payors			21,449	12.7			25,496	12.8
	Revenue	$	168,727	100.0	%	$	198,247	100.0	%

F-10

        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.

        Accounts receivable consist of the following:

		December 31,						June 30, 2007
		2005			2006
								(unaudited)
Medicaid		$	23,686		$	22,534		$	18,056
Managed care			10,288			12,972			13,223
Medicare			9,953			11,974			12,634
Private and other payors			4,395			5,348			5,947
			48,322			52,828			49,860
Less allowance for doubtful accounts			(4,959	)		(7,543	)		(7,408	)
	Accounts receivable	$	43,363		$	45,285		$	42,452

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.

F-11

        Property and equipment consist of the following:

		December 31,						June 30, 2007
		2005			2006
								(unaudited)
Land		$	9,019		$	17,265		$	19,673
Buildings and improvements			24,438			57,062			65,081
Equipment			7,599			11,818			14,398
Furniture and fixtures			2,827			3,761			5,010
Leasehold improvements			6,255			7,363			9,563
			50,138			97,269			113,725
Less accumulated depreciation			(6,494	)		(10,136	)		(13,106	)
	Property and equipment, net	$	43,644		$	87,133		$	100,619

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 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 $9,616 as of December 31, 2005 and 2006 and June 30, 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 June 30, 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 annual testing for

F-12

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 six months ended June 30, 2007 (unaudited).

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.

        Restricted and other assets consist of the following:

	December 31,				June 30, 2007
	2005		2006
					(unaudited)
Deposits with landlords	$	829	$	1,001	$	1,001
Capital improvement reserves with landlords and lenders		1,144		1,562		1,922
Other		31		55		15
	$	2,004	$	2,618	$	2,938

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

F-13

liability and professional malpractice liabilities recorded on an undiscounted basis in the accompanying consolidated balance sheets were $12,023, $16,013 and $18,382 as of December 31, 2005 and 2006 and June 30, 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' compensation liabilities are recorded on an undiscounted basis in the accompanying consolidated balance sheets and were $3,248, $4,504 and $4,321 as of December 31, 2005 and 2006 and June 30, 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 $797 as of December 31, 2005 and 2006 and June 30, 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 for each covered person which resets every plan year or a maximum of $6,000 per each covered person's lifetime 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 $1,387 at December 31, 2006 and June 30, 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

F-14

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 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 June 30, 2007 (unaudited) were $8,132, $12,558 and $13,871, 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 six months ended June 30, 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

F-15

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 June 30, 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).

        Historically, 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. Stock-based compensation expense recognized in the Company's consolidated statement of income for the year ended December 31, 2006 and the Company's unaudited consolidated statements of income for the six months ended June 30, 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). 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.

F-16

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.

        A reconciliation of the numerator and denominator used in the calculation of basic net income per common share follows:

		Year Ended December 31,									Six Months Ended June 30,
		2004			2005			2006			2006			2007
											(unaudited)
Numerator:
	Net income	$	11,103		$	18,388		$	22,549		$	10,818		$	9,832
	Preferred stock accretion		(3	)		—			—			—			—
	Preferred stock dividends		(137	)		(247	)		(356	)		(164	)		(220	)
	Net income available to common stockholders for basic net income per share	$	10,963		$	18,141		$	22,193		$	10,654		$	9,612
Denominator:
	Weighted average shares outstanding for basic net income per share(1)		13,284,902			13,468,060			13,365,682			13,379,060			13,441,490
	Basic net income per common share	$	0.83		$	1.35		$	1.66		$	0.80		$	0.72

(1)

Basic share amounts are shown net of contingently returnable shares, which total 677,600, 432,000, and 302,200 and 469,800 and 238,000 shares at December 31, 2004, 2005 and 2006 and June 30, 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,						Six Months Ended June 30,
		2004		2005		2006		2006		2007
								(unaudited)
Numerator:
	Net income	$	11,103	$	18,388	$	22,549	$	10,818	$	9,832
Denominator:
	Weighted average common shares outstanding		13,284,902		13,468,060		13,365,682		13,379,060		13,441,490
	Plus: incremental shares from assumed conversions(1)		4,234,130		4,036,980		3,457,560		3,341,318		3,449,712
	Adjusted weighted average common shares outstanding		17,519,032		17,505,040		16,823,242		16,720,378		16,891,202
	Diluted net income per common share	$	0.63	$	1.05	$	1.34	$	0.65	$	0.58

(1)

Fully diluted share amounts include contingently returnable shares, which total 677,600, 432,000, 302,200 and 469,800 and 238,000 shares at December 31, 2004, 2005 and 2006 and June 30, 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,		Six Months Ended June 30,
		2006		2007
				(unaudited)
Pro forma basic net income per common share
Numerator:
	Net income	$	22,549	$	9,832
Denominator:
	Weighted average common shares outstanding used in pro forma basic net income per common share		13,365,682		13,441,490
	Effect of preferred stock		2,741,180		2,741,180
	Adjusted weighted average common shares		16,106,862		16,182,670
	Common shares offered by prospectus		—		4,000,000
	Pro forma adjusted weighted average common shares		16,106,862		20,182,670
	Pro forma basic net income per common share	$	1.40	$	0.49
Pro forma diluted net income per common share
Numerator:
	Net income	$	22,549	$	9,832
Denominator:
	Weighted average common shares outstanding used in pro forma basic net income per common share		16,106,862		16,182,670
	Plus: incremental shares from assumed conversions		716,380		708,532
	Adjusted weighted average common shares outstanding used in pro forma diluted net income per common share		16,823,242		16,891,202
	Common shares offered by prospectus		—		4,000,000
	Pro forma adjusted weighted average common shares		16,823,242		20,891,202
	Pro forma diluted net income per common share	$	1.34	$	0.47

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.

F-19

        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.

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 material amount to the prior facility operator nor does the Company acquire any assets or assume any liabilities, other than rights and obligations under the operating lease and operations transfer agreement, 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 six months ended June 30, 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 six months ended June 30, 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)

F-20

        Goodwill recognized in these transactions amounted to $790, which is expected to be fully deductible for tax purposes. The Company recognized $33 in other intangible assets. During the three months ended June 30, 2007, the Company recognized an additional $5 of goodwill related to fiscal year 2007 acquisitions due to purchase price allocation adjustments.

        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 Company acquired the other three facilities 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 material 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)

(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 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 material consideration was paid to the property owner and the Company did not purchase any assets or assume

any liabilities, other than rights and obligations under the operating lease and operations transfer agreement, 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

F-21

material consideration was paid, and the Company did not purchase any assets or assume any liabilities, other than the Company's rights and obligations under the operating lease and operations transfer agreement, 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 material consideration was paid and the Company did not purchase any assets or assume any liabilities, other than the Company's rights and obligations under the operating lease and operations transfer agreement, 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.

        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 six months ended June 30, 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 material consideration was paid and the Company did not purchase any assets or assume any liabilities, other than rights and obligations under the operating lease and operations transfer agreement, 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

F-22

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.



•

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,				June 30, 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		800
Tradename and customer base intangible		733		180		33
	$	14,884	$	31,065	$	9,441

        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 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.

F-23

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.

        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.

F-24

The three facilities acquired during the six months ended June 30, 2007 were not material acquisitions to the Company, individually, or in the aggregate. These acquisitions have been included in the June 30, 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.

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

	June 30, 2007 (unaudited)
Intangible Assets	Weighted Average Life (Years)	Gross Carrying Amount		Accumulated Amortization			Net
Debt issuance costs	9.3	$	1,808	$	(594	)	$	1,214
Lease acquisition costs	15.5		1,071		(433	)		638
Customer base	0.3		213		(198	)		15
Tradename	30.0		733		(36	)		697
Total		$	3,825	$	(1,261	)	$	2,564

F-25

        Amortization expense was $292, $359, and $470, $220 and $200 for the years ended December 31, 2004, 2005 and 2006 and the six months ended June 30, 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

6. OTHER ACCRUED LIABILITIES

        Other accrued liabilities consist of the following:

		December 31,				June 30, 2007
		2005		2006
						(unaudited)
Quality assurance fee		$	3,532	$	1,863	$	1,756
Resident refunds payable			1,576		1,736		1,565
Deferred resident revenue			1,424		1,370		1,885
Cash held in trust for residents			813		1,070		1,145
Claim settlement			—		1,000		—
Dividends payable			500		657		658
Income taxes payable			1,455		1,885		—
Property taxes			395		638		642
Other			1,419		1,887		2,358
	Other accrued liabilities	$	11,114	$	12,106	$	10,009

        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.

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7. INCOME TAXES

        The provision for income taxes for the years ended December 31, 2004, 2005 and 2006 and the six months ended June 30, 2006 and 2007 (unaudited) is summarized as follows:

		December 31,									June 30,
		2004			2005			2006			2006			2007
											(unaudited)
Current:
	Federal	$	9,210		$	13,328		$	15,960		$	6,581		$	6,638
	State		1,772			2,639			2,592			1,458			1,243
			10,982			15,967			18,552			8,039			7,881
Deferred:
	Federal		(3,287	)		(3,395	)		(3,565	)		(717	)		(1,200	)
	State		(972	)		(518	)		(862	)		(241	)		(157	)
			(4,259	)		(3,913	)		(4,427	)		(958	)		(1,357	)
Interest income, gross of related tax effects			—			—			—			—			(18	)
Interest expense, gross of related tax effects			—			—			—			—			94
Total		$	6,723		$	12,054		$	14,125		$	7,081		$	6,600

        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 six months ended June 30, 2006 and 2007, respectively, is comprised as follows:

	December 31,						June 30,
	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		4.3
Non-deductible expenses	0.1		0.1		0.1		0.1		0.4
Net interest	—		—		—		0.0		0.3
Other adjustments	(0.4	)	—		0.3		0.1		0.2
Total income tax provision	37.7	%	39.6	%	38.5	%	39.6	%	40.2	%

F-27

        The Company's deferred tax assets and liabilities as of December 31, 2005 and 2006 and June 30, 2007 (unaudited) are summarized as follows:

		December 31,						June 30, 2007
		2005			2006
								(unaudited)
Deferred tax assets (liabilities):
	Accrued expenses	$	7,259		$	9,563		$	11,979
	Allowance for doubtful accounts		2,122			3,228			3,171
	State taxes		371			235			(437	)
	Tax credits		281			622			662
	Total deferred tax assets		10,033			13,648			15,375
	Depreciation and amortization		(294	)		(413	)		(392	)
	Prepaid expenses		(1,607	)		(677	)		(1,112	)
	Total deferred tax liabilities		(1,901	)		(1,090	)		(1,504	)
Net deferred tax assets		$	8,132		$	12,558		$	13,871

        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 $46 in the first half of 2007.

        The Company had state enterprise zone credit carryforwards as of December 31, 2005 and 2006 and June 30, 2007 (unaudited), of $281, $622, and $662, 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

F-28

quarter 2007 and communicated the outcome of the IRS examination to the examining state 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 June 30, 2007. At December 31, 2005 and 2006 and June 30, 2007 (unaudited), there were no outstanding borrowings under the Revolver and $8,449 of borrowing capacity was pledged to secure outstanding letters of credit in the same periods. The Revolver was set to mature in March 2007 but has been extended until November 19, 2007. The Company has secured a written commitment (the "Commitment Letter") from the lender to amend and increase the Revolver. See further discussion at Note 16.

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9. LONG-TERM DEBT

        Long-term debt consists of the following:

	December 31,						June 30, 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 deeds of trust on real property, assignments of rents, security agreements and fixture financing statements.	$	—		$	55,653		$	55,251
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			6,689
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 and security agreement and an assignment of rents		—			2,094			2,062
Mortgage note, principal, and interest of $22,049 payable monthly and continuing through February 2010, interest at fixed rate of 10%, collateralized by a 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			—
		26,054			64,528			64,002
Less current maturities		(534	)		(941	)		(930	)
	$	25,520		$	63,587		$	63,072

        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

F-30

agreement). As of December 31, 2006 and June 30, 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 cash 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 cash dividends may be paid on the common stock until accumulated cash 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

F-31

aggregate amount of cash dividends declared for each share of common stock into which each such 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 June 30, 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 affecting the outstanding Series A preferred stock) 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.

F-32

11. STOCKHOLDERS' EQUITY

        The Company effected a stock split on September 30, 2005, pursuant to which each share of common stock then outstanding was split and 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.

        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 shareholders if it receives notice that it is in default under this agreement. At December 31, 2005 and 2006 and June 30, 2006 and 2007 (unaudited), declared but unpaid preferred and common stock dividends totaled approximately $500, $657, $492 and $658, respectively, which were included in other accrued liabilities.

        Dividends declared for the years ended December 31, 2004, 2005 and 2006 and the six months ended June 30, 2006 and 2007 (unaudited), respectively, were as follows:

	Year Ended December 31,						Six Months Ended June 30,
	2004		2005		2006		2006		2007
							(unaudited)
Preferred stock	$	137	$	247	$	356	$	164	$	220
Common stock		698		1,255		1,776		818		1,096
	$	835	$	1,502	$	2,132	$	982	$	1,316

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.

F-33

        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 June 30, 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).

        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 six months ended June 30, 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 six months ended June 30, 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. Generally, 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 options granted prior to 2006 will vest in full upon the consummation of the Company's initial public offering or if such options have not been exercised before the consummation of the Company's initial public offering, such shares will vest in full upon exercise. At December 31, 2006 and June 30, 2007 (unaudited), there were 256,800 and 219,800, 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 June 30, 2007

F-34

(unaudited), to officers, key employees, directors, and consultants of the Company. Options granted to non-employee directors 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 June 30, 2007 (unaudited), there were 6,000 and 65,500, respectively, un-issued shares of common stock available for issuance under this plan, including shares that have been forfeited and are available for reissue.

        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

F-35

12. OPTIONS AND WARRANTS (continued)

        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	$ $	5.96 15.09
2005	7/26/2006	400,000	$	7.50	$	7.59	$	9.69	$	15.09

        No options were granted during the six month period ended June 30, 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.

F-36

        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 26, 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. This weighted valuation took into consideration the possibility of the Company 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), the Company recorded aggregate compensation expense of approximately $443 and $503 during the year ended December 31, 2006 and the six months ended June 30, 2007 (unaudited), respectively.

F-37

        The following table represents the employee stock option activity during the years ended December 31, 2004, 2005 and 2006 and the six months ended June 30, 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	(99,700	)	$	5.65
Exercised	(14,800	)	$	6.05
June 30, 2007 (unaudited)	1,129,500		$	6.21	142,000	$	3.83

        The following summary information reflects stock options outstanding, vesting and related details as of June 30, 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	6	26,800	$0.67-0.81
2004	90,800	$1.96-2.46		209,074	7	38,000	$1.96-2.46
2005	350,000	$4.99-5.75		1,987,508	8	73,800	$4.99-5.75
2006	638,700	$7.05-7.50		6,063,353	9	3,400	$7.05
Total	1,129,500		$	8,298,030		142,000

F-38

        During the year ended December 31, 2006 and the six months ended June 30, 2006 and 2007 (unaudited), the Company recognized $443, $4 and $503, respectively, in compensation expense, all of which was classified as general and administrative expense. The Company expects to recognize $169, $2 and $202, respectively, in tax benefits when the options vest and are exercised. As of December 31, 2006 and June 30, 2006 and 2007 (unaudited), the total fair value of shares vested was approximately $567, $183 and $528, respectively.

        In future periods, the Company expects to recognize approximately $4,102 in stock-based compensation expense over the next 3.7 weighted average years for unvested options that were outstanding as of June 30, 2007.

        There were 987,500 unvested and outstanding options at June 30, 2007, of which 785,362 are expected to vest. The weighted average contractual life for options vested at June 30, 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 June 30, 2007 (unaudited) was approximately $12,602, $8,525, $1,923 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 June 30, 2006 and 2007 (unaudited).

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 $8,238 and $8,481 for the years ended December 31, 2004, 2005 and 2006 and the six months ended June 30, 2006 and 2007 (unaudited), respectively.

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        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. Moreover, the Company's equity interests in four of its subsidiaries, including three of its operating companies, which operate three facilities held under a master lease arrangement with one of the Company's landlords, have been pledged to the landlord as additional security for its 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, 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.

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        Cost-Containment Measures—Both government and private pay sources have instituted cost-containment measures designed to limit payments made to providers of healthcare 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 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. The Company settled this

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class action suit and the settlement was approved by the affected class and the Court in April 2007. The ultimate amount of legal expenses and claims was approximately $1,100 which was paid as of June 30, 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 the Company's bank and then rescinded that subpoena. This rescinded subpoena 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

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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 business, financial condition and results of operations could be materially and 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 findings of significant billing and reimbursement noncompliance, 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 June 30, 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 62% of its total accounts receivable as of December 31, 2004, 2005 and 2006 and June 30, 2007 (unaudited), respectively. Revenue from reimbursements under the Medicare and Medicaid programs accounted for approximately 75%, 76%, 75% and 75%, and 74% of the Company's total revenue for the years ended December 31, 2004, 2005, and 2006 and the six months ended June 30, 2006 and 2007 (unaudited), respectively.

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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 $117 and $135 to the 401(k) Plan during the years ended December 31, 2004, 2005 and 2006 and the six months ended June 30, 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 (UNAUDITED)

        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, CA for an aggregate purchase price of $3,300, which was paid in cash. Purchasing this leased facility resulted in no net change in the number of beds.

        On July 16, 2007, the Company entered into an operating lease agreement for a long-term care facility in Draper, Utah that is licensed for both skilled nursing and assisted living services. Since the facility was not profitable at the time, the prior operator voluntarily relinquished its leasehold to its affiliated landlord for no material consideration. Likewise, the Company did not make any material payments to the prior facility operator for the operation, and the Company did not acquire any assets or assume any liabilities other than its rights and obligations under a new operating lease and operations transfer agreement. The Company also simultaneously entered into a separate contract with the property owner to purchase the underlying property for $3,000, pending the property owner's resolution of certain boundary line issues with neighboring property owners. The Company expects it

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will purchase the property under the contract if and when these title issues are resolved. Regardless of whether the title issues are resolved, the Company has the option to purchase the property for $3,000 under the operating lease. This facility adds approximately 106 beds to the Company's operations.

        On August 31, 2007, the Company entered into an agreement it expects to close on or before December 14, 2007, to purchase two skilled nursing facilities in California and one assisted living facility in Arizona, which also provides independent living services, for an aggregate purchase price of approximately $13,000. The Company currently operates these three facilities under master lease agreements. The lease agreements for the two skilled nursing facilities contain purchase options which are not currently exercisable. Purchasing these leased facilities will result in no net change in the number of beds. Upon the expected closing of these purchase agreements, the Company will own 27 facilities.

        On September 13, 2007, the Company negotiated a temporary increase in the maximum amount available under the Revolver from $20,000 to $25,000. This temporary increase will be available through November 19, 2007.

        On October 3, 2007, the Company secured the Commitment Letter from the Lender to amend and increase the Revolver by extending the term to 2012, increasing the available credit thereunder up to the lesser of $50,000 or 85% of the eligible accounts receivable, and changing the interest rate to either, as the Company may elect from time to time, (i) the 1, 2, 3 or 6 month LIBOR (at the Company's option) plus 2.5%, or (ii) the greater of (a) prime plus 1.0% or (b) the federal funds rate plus 1.5%. The Commitment Letter is contingent on final approval of the Lender's credit committee and the negotiation, execution and delivery of appropriate amendatory documentation, as well as other conditions precedent which are customary for financings of this type and the absence of any material adverse change to the Company's business or financial condition at the time of closing. The Revolver contains typical representations and covenants for a loan of this type, a violation of which could result in a default under the Revolver and could possibly cause all amounts owed by the Company, including amounts due under the Term Loan, to be declared immediately due and payable. If the Company does not complete the transactions contemplated by the Commitment Letter, it intends to use proceeds of its initial public offering and/or seek alternative sources of working capital financing to replace the Revolver.

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

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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

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[ENSIGN GROUP LOGO] Skilled Nursing ~ Rehabilitiation ~ Assisted Living

      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.

5,000,000 Shares

Common Stock

PRICE $        PER SHARE

D.A. DAVIDSON & CO.   STIFEL NICOLAUS

PROSPECTUS

                                     , 2007

[ENSIGN GROUP LOGO]

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	$	3,107
NASD filing fee		10,850
NASDAQ Global Market listing fee		100,000
Blue sky fees and expenses		5,000
Printing and engraving expenses		200,000
Legal fees and expenses		1,000,000
Accounting fees and expenses		1,150,000
Transfer Agent and Registrar fees		3,000
Miscellaneous		48,043
Total	$	2,520,000

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 amended and restated bylaws (Exhibit 3.4 to this registration statement), which will be effective upon the completion 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 amended and restated bylaws, which will be effective upon the completion 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 amended and restated certificate of incorporation (Exhibit 3.2 to this registration statement), which will be effective upon the completion of this offering, provides that we shall indemnify our directors and officers to the fullest extent permitted by law. Our amended and restated 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 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 amended and restated certificate of incorporation further provides that we are authorized to indemnify our directors

II-1

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 intend to enter into agreements to indemnify our directors, officers and other key employees in addition to the indemnification provided for in the amended and restated certificate of incorporation and amended and restated 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, the selling stockholders and our officers and directors, and by us of the underwriters, for certain liabilities arising under the Securities Act in connection with this offering. In addition, Section 1.10 of the Investor Rights Agreement (Exhibit 4.2 to this registration statement) provides for indemnification of certain of our stockholders against liabilities described in the Investor Rights Agreement.

        We also intend to purchase and maintain insurance on behalf of our directors, officers and other key employees against losses arising from any claim asserted against him or her in that capacity, subject to certain exclusions and limits.

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 September 30, 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 September 30, 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 412,800 shares have been cancelled and returned to the stock option plan pool. As of September 30, 2007, options to purchase 1,065,400 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)	Form of Certificate of Amendment to Fourth Amended and Restated Certificate of Incorporation, to be filed prior to completion of the offering
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., as amended
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 certain subsidiaries of The Ensign Group, Inc. in favor of General Electric Capital Corporation

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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

II-4

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

II-6

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
10.42**	Amendment No. 4, dated as of August 1, 2007, to the Amended and Restated Loan and Security Agreement, by and among The Ensign Group, Inc. and certain of its subsidiaries as Borrowers and General Electric Capital Corporation as Lender
10.43	Amendment No. 5, dated September 13, 2007, to the Amended and Restated Loan and Security Agreement, by and among The Ensign Group, Inc. and certain of its subsidiaries as Borrowers and General Electric Capital Corporation as Lender
10.44	Revolving Credit Note, dated as of September 13, 2007, in the original principal amount of $5,000,000 by The Ensign Group, Inc. and certain of its subsidiaries in favor of General Electric Capital Corporation
10.45	Agreement of Purchase and Sale and Joint Escrow Instructions, dated August 31, 2007, as amended on September 6, 2007
10.46	Commitment Letter, dated October 3, 2007, from General Electric Capital Corporation to The Ensign Group, Inc., setting forth the general terms and conditions of the proposed amendment to the revolving credit facility, which will increase the available credit thereunder to $50.0 million
10.47*	Pledge Agreement, dated September 30, 2003, by The Ensign Group, Inc. as Pledgor for the benefit of OHI Asset (CA), LLC as Creditor, under which Pledgor pledges its equity interests in certain of its subsidiaries to secure the payment and performance of the subsidiaries' obligations under a related Master Lease Agreement
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)

II-7

24.1**
Power of Attorney (included on signature pages hereto)

*

To be filed by amendment.

**

Previously filed.

+

Indicates management contract or compensatory plan.

II-8

(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	)
Six Months Ended June 30, 2007 (unaudited)
	Allowance for doubtful accounts	$	(7,543	)	$	(1,247	)	$	1,382	$	(7,408	)

        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-9

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-10

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 October 5, 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. 3 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)	October 5, 2007
/s/  ALAN J. NORMAN Alan J. Norman	Chief Financial Officer (principal financial and accounting officer)	October 5, 2007
* Roy E. Christensen	Chairman of the Board	October 5, 2007
* Antoinette T. Hubenette	Director	October 5, 2007
* Thomas A. Maloof	Director	October 5, 2007
* Charles M. Blalack	Director	October 5, 2007

*By:
/s/  CHRISTOPHER R. CHRISTENSEN Christopher R. Christensen
Attorney-in-fact

II-11

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)	Form of Certificate of Amendment to Fourth Amended and Restated Certificate of Incorporation, to be filed prior to completion of the offering
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., as amended
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 certain subsidiaries of The Ensign Group, Inc. in favor of General Electric Capital Corporation
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
10.42**	Amendment No. 4, dated as of August 1, 2007, to the Amended and Restated Loan and Security Agreement, by and among The Ensign Group, Inc. and certain of its subsidiaries as Borrowers and General Electric Capital Corporation as Lender

10.43	Amendment No. 5, dated September 13, 2007, to the Amended and Restated Loan and Security Agreement, by and among The Ensign Group, Inc. and certain of its subsidiaries as Borrowers and General Electric Capital Corporation as Lender
10.44	Revolving Credit Note, dated as of September 13, 2007, in the original principal amount of $5,000,000 by The Ensign Group, Inc. and certain of its subsidiaries in favor of General Electric Capital Corporation
10.45	Agreement of Purchase and Sale and Joint Escrow Instructions, dated August 31, 2007, as amended on September 6, 2007
10.46	Commitment Letter, dated October 3, 2007, from General Electric Capital Corporation to The Ensign Group, Inc., setting forth the general terms and conditions of the proposed amendment to the revolving credit facility, which will increase the available credit thereunder to $50.0 million
10.47*	Pledge Agreement, dated September 30, 2003, by The Ensign Group, Inc. as Pledgor for the benefit of OHI Asset (CA), LLC as Creditor, under which Pledgor pledges its equity interests in certain of its subsidiaries to secure the payment and performance of the subsidiaries' obligations under a related Master Lease Agreement
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

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 SIX MONTHS ENDED JUNE 30, 2006 AND 2007 (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
PART II INFORMATION NOT REQUIRED IN PROSPECTUS
SIGNATURES
EXHIBIT INDEX

EX-1.1

EXHIBIT 1.1

[                        ] Shares

THE ENSIGN GROUP, INC.

COMMON STOCK

UNDERWRITING AGREEMENT

[                        ], 2007

[                        ] Shares

THE ENSIGN GROUP, INC.

Common Stock
($0.001 par value)

Underwriting Agreement

[                        ], 2007

D. A. Davidson & Co.
Stifel, Nicolaus & Company, Incorporated
as Representatives of the several Underwriters

c/o D.A. Davidson & Co.
Two Centerpointe Drive, Suite 400
Lake Oswego, OR 97035

Ladies and Gentlemen:

        The Ensign Group, Inc., a Delaware corporation (the "Company"), proposes to issue and sell to the several Underwriters named in Schedule I hereto (the "Underwriters") for whom you are acting as representatives (the "Representatives") an aggregate of [                        ] shares of its common stock, $0.001 par value per share (the "Firm Shares"). The representative amounts of Firm Shares to be so purchased by the several Underwriters are set forth opposite their names in Schedule I hereto. In addition, each of the stockholders of the the Company identified on Schedule II hereto (collectively, the "Selling Stockholders" and each, a "Selling Stockholder") proposes to issue and sell to the several Underwriters not more than an aggregate of [                        ] additional shares of the Company's common stock, $0.001 par value per share (the "Additional Shares"), if and to the extent that the Underwriters shall have determined to exercise the right to purchase the Additional Shares granted to the Underwriters as set forth in Section 3 hereof. The Firm Shares and the Additional Shares are hereinafter collectively referred to as the "Shares." The shares of common stock, $0.001 par value per share of the Company to be outstanding after giving effect to the sales contemplated hereby, are hereinafter referred to as the "Common Stock."

        The Company has filed with the Securities and Exchange Commission (the "Commission") a registration statement on Form S-1 (File No. 333-142897), including the related preliminary prospectus or prospectuses, covering the registration of the Shares under the Securities Act of 1933, as amended (the "Securities Act"). After execution and delivery of this Agreement, the Company will prepare and timely file a prospectus in accordance with the provisions of Rule 430A ("Rule 430A") under the rules and regulations of the Commission under the Securities Act (the "Securities Act Regulations") and paragraph (b) of Rule 424 ("Rule 424(b)") of the Securities Act Regulations. The information included in such prospectus that was omitted from the registration statement at the time it became effective pursuant to Rule 430A is referred to as "Rule 430A Information." Each prospectus used before such registration statement became effective, and any prospectus that omitted the Rule 430A Information that was used after such effectiveness and prior to execution and delivery of this Agreement, is herein called a "preliminary prospectus." The registration statement, as amended at the time it became effective, including the exhibits and any schedules thereto, and including the Rule 430A Information, is hereinafter referred to as the "Registration Statement." The prospectus in the form first furnished by the Company to the Underwriters for use in confirming sales of Shares after the Registration Statement became effective, and filed, or required to be filed, by the Company with the Commission pursuant to Rule 424(b) is hereinafter referred to as the "Prospectus." If the Company files or has filed an abbreviated registration statement pursuant to Rule 462(b) of the Securities Act Regulations (the "Rule 462 Registration Statement"), then after such filing any reference herein to the term "Registration Statement" shall be deemed to include such Rule 462 Registration Statement.

        For purposes of this Agreement, "free writing prospectus" has the meaning set forth in Rule 405 of the Securities Act Regulations; "issuer free writing prospectus" has the meaning set forth in

Rule 433 of the Securities Act Regulations; "Time of Sale Prospectus" means the preliminary prospectus that was included in the Registration Statement immediately prior to the Applicable Time (as defined below); "Disclosure Package" collectively refers to the Time of Sale Prospectus together with the free writing prospectuses, if any, identified in Schedule III hereto, and the pricing information included on Schedule IV hereto; "Applicable Time" means     :         .m. (Pacific time) on                        , 2007(1) or such other time as agreed by the Company and the Representatives. For purposes of this Agreement, all references to the Registration Statement, any preliminary prospectus, the Prospectus or any amendment to any of the foregoing shall be deemed to include the copy filed with the Commission pursuant to its Electronic Date Gathering Analysis and Retrieval system ("EDGAR").

(1)

The "Applicable Time" will be the time, shortly after pricing, when the first sales are confirmed (whether orally or in writing).

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        1.    Representations and Warranties of the Company.    The Company represents and warrants to each of the Underwriters that:

        (a)   The Registration Statement has become effective under the Securities Act; no stop order suspending the effectiveness of the Registration Statement is in effect, and no proceedings for such purpose are pending before or, to the Company's knowledge, threatened by the Commission. The Commission has not issued any order preventing or suspending the use of any preliminary prospectus or any issuer free writing prospectus.

        (b)   (i) At the respective times the Registration Statement, any Rule 462(b) Registration Statement and any post-effective amendment thereto became or becomes effective, and on the Closing Date (as defined in Section 5 hereof) (and, if any Additional Shares are purchased, on the applicable Option Closing Date (as defined in Section 3 hereof)), the Registration Statement, the Rule 462(b) Registration Statement, and any amendments and supplements thereto complied and will comply in all material respects with the requirements of the Securities Act and the Securities Act Regulations and did not and will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; (ii) when filed with the Commission, the Time of Sale Prospectus and the Prospectus each conformed and, as amended or supplemented, will conform, in all material respects to the requirements of the Securities Act and the Securities Act Regulations; (iii) as of the Applicable Time, and as of the time of each sale of the Shares in connection with the offering when the Prospectus is not yet filed with the Commission, the Disclosure Package did not and will not include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading; and (iv) neither the Prospectus nor any amendment or supplement thereto, at the time the Prospectus or any such amendment or supplement was issued and on the Closing Date (and, if any Additional Shares are purchased, on the applicable Option Closing Date), in each case giving effect to any amendment or supplement, included or will include any untrue statement of a material fact or omitted or will omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that the Company makes no representation or warranty in this paragraph with respect to any Underwriter Information (as defined in Section 11 hereof).

        (c)   Each preliminary prospectus and the Prospectus delivered to the Underwriters for use in connection with this offering was identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T.

        (d)   At the time of filing of the Registration Statement, any 462(b) Registration Statement, and any post-effective amendment thereto and at the date hereof, the Company was not and is not an "ineligible issuer" as defined in Rule 405 of the Securities Act Regulations. Any free writing prospectus that the Company is required to file pursuant to Rule 433(d) of the Securities Act Regulations has been, or will be, filed with the Commission in accordance with the requirements of the Securities Act and the Securities Act Regulations. Each free writing prospectus that the Company has filed, or is required to file, pursuant to Rule 433(d) of the Securities Act Regulations or that was prepared by or on behalf of or used or referred to by the Company complies or will comply in all material respects with the requirements of the Securities Act and the Securities Act Regulations. Except for the free writing prospectuses, if any, identified in Schedule III hereto, the Company has not prepared, used or referred to, and will not, without the prior consent of the Representatives, prepare, use or refer to, any free writing prospectus.

        (e)   The Company has been duly incorporated, is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, and has the corporate power and authority to own, lease and operate its properties and to conduct its business as described in the

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Disclosure Package and the Prospectus. Each subsidiary of the Company, direct or indirect (collectively, the "Subsidiaries"), has been duly organized, is validly existing as a corporation or company in good standing under the laws of the jurisdiction of its organization, and has the corporate power and authority to own, lease and operate its properties and conduct its business as described in the Disclosure Package and the Prospectus. The Subsidiaries listed in Exhibit 21.1 to the Registration Statement are all of the Company's direct and indirect subsidiaries. The Company and each of the Subsidiaries are duly qualified to transact business and are in good standing in each jurisdiction in which the conduct of their business or their ownership or leasing of property requires such qualification, except to the extent that the failure to be so qualified or in good standing would not be reasonably expected to result in a material adverse effect on the condition (financial or otherwise), properties, assets, liabilities, operations, earnings or business of the Company and the Subsidiaries taken as a whole, whether or not arising from transactions in the ordinary course of business (a "Material Adverse Effect").

        (f)    The outstanding shares of capital stock of the Subsidiaries that are corporations have been duly authorized and validly issued, are fully paid and non-assessable and are wholly-owned by the Company or another Subsidiary free and clear of all liens, encumbrances, equities and claims; and the outstanding membership interests and all management rights in the Subsidiaries that are limited liability companies have been duly authorized and validly issued and are wholly-owned by the Company or another Subsidiary free and clear of all liens, encumbrances, equities and claims, other than the security interest granted pursuant to the Pledge Agreement, dated as of September 30, 2003, between the Company and OHI Asset (CA), LLC, the master landlord under a lease agreement with certain of the Subsidiaries. No options, warrants or other rights to purchase, agreements or other obligations to issue or other rights to convert any obligations into shares of capital stock, membership or other ownership interests, or management rights in any of the Subsidiaries are outstanding.

        (g)   The information set forth under the caption "Capitalization" in the Disclosure Package and the Prospectus is true and correct. The issued and outstanding shares of capital stock of the Company, including all shares to be sold by the Selling Stockholders, have been duly authorized and validly issued and are fully paid and non-assessable; none of the outstanding equity securities of the Company was issued in violation of the preemptive or similar rights of any securityholder of the Company.

        (h)   The Firm Shares have been duly authorized for issuance and sale to the Underwriters pursuant to this Agreement and, when issued and delivered by the Company pursuant to this Agreement against payment of the consideration set forth herein, will be validly issued, fully paid and non-assessable. The Firm Shares conform to the description thereof contained in the Disclosure Package and the Prospectus. The issuance of the Firm Shares is not subject to any preemptive or similar rights of any securityholder of the Company that have not been validly waived prior to the date hereof. Immediately after the closing of the issuance and sale of the Firm Shares to the Underwriters, no shares of preferred stock of the Company will be outstanding and no holder of any securities of the Company will have any existing or future right to acquire shares of preferred stock of the Company.

        (i)    This Agreement has been duly authorized, executed and delivered by the Company.

        (j)    Neither the Company nor any of the Subsidiaries is in violation of its charter or bylaws (or similar organizational documents) or in default in the performance or observance of any obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease or other agreement or instrument to which the Company or any of the Subsidiaries is a party or by which it or any of them may be bound, or to which any of the property or assets of the Company or any of the Subsidiaries is subject

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(collectively, the "Agreements and Instruments"), except for such violations or defaults that would not reasonably be expected to result in a Material Adverse Effect; and the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated herein and in the Registration Statement (including the issuance and sale of the Firm Shares and the use of the proceeds from the sale of the Firm Shares as described in the Disclosure Package and the Prospectus under the caption "Use of Proceeds") and compliance by the Company with its obligations hereunder have been duly authorized by all necessary corporate action and do not and will not, whether with or without the giving of notice or passage of time or both, conflict with or constitute a breach of, or default or Repayment Event (as defined below) under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of the Subsidiaries pursuant to the Agreements and Instruments (except for such conflicts, breaches, defaults, Repayment Events, liens, charges or encumbrances that would not reasonably be expected to result in a Material Adverse Effect), nor will such action result in any violation of the provisions of the charter or bylaws of the Company or any of the Subsidiaries or any applicable law, statute, rule, regulation, judgment, order, writ or decree of any government, government instrumentality or court, domestic or foreign, having jurisdiction over the Company or any of the Subsidiaries or any of their assets, properties or operations, except for such violations that would not reasonably be expected to result in a Material Adverse Effect. As used herein, a "Repayment Event" means any event or condition which gives the holder of any note, debenture or other evidence of indebtedness (or any person acting on such holder's behalf) the right to require the repurchase, redemption or repayment of all or a portion of such indebtedness by the Company or any of the Subsidiaries.

        (k)   No filing with, or authorization, approval, consent, license, order, registration, qualification or decree of, any court or governmental authority or agency is necessary or required for the performance by the Company of its obligations hereunder, in connection with the offering, issuance or sale of the Firm Shares pursuant to this Agreement or the consummation of the transactions contemplated by this Agreement, except such as have been already obtained, made or filed or as may be required under the Securities Act, the Securities Act Regulations, state securities or Blue Sky laws, foreign securities laws, or by the Commission or the Financial Industry Regulatory Authority (formerly, the National Association of Securities Dealers, Inc.) ("FINRA").

        (l)    Since the respective dates as of which information is given in the Registration Statement, the Disclosure Package and the Prospectus, there has not occurred any adverse change which has had or is reasonably likely to have a Material Adverse Effect, whether or not occurring in the ordinary course of business, and there has not been any material business transaction entered into or any material business transaction that is probable of being entered into by the Company or any of the Subsidiaries, other than business transactions in the ordinary course of business, and changes and transactions described in the Registration Statement, the Disclosure Package and the Prospectus, as amended or supplemented.

        (m)  Neither the Company nor any of the Subsidiaries has sustained, since the date of the latest audited financial statements included in the Disclosure Package and the Prospectus, any material loss or material interference with its business from fire, explosion, flood or other natural disaster, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, other than as set forth or contemplated in the Disclosure Package and the Prospectus; and, since such date, there has not been any change in the shareholders' equity or other ownership interests or long-term debt of the Company or any of the Subsidiaries or any adverse change that could reasonably be expected to have a Material Adverse Effect, other than as set forth in the Disclosure Package and the Prospectus.

        (n)   The financial statements, together with related schedules and notes, included in the Registration Statement, the Disclosure Package and the Prospectus, present fairly the financial

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condition, results of operations and cash flows of the Company and the Subsidiaries at the indicated dates and for the indicated periods; such financial statements and related schedules and notes have been prepared in accordance with United States generally accepted accounting principles ("GAAP"), consistently applied throughout the periods involved, except as disclosed therein, and all adjustments necessary for a fair presentation of results for such period have been made; provided, however, that financial statements that are unaudited are subject to normal year-end adjustments and do not contain certain footnotes required by GAAP. The supporting schedules included in the Registration Statement, if any, present fairly in accordance with GAAP the information required to be stated therein. The other financial and statistical information and data included in the Registration Statement, the Disclosure Package and the Prospectus present fairly the information shown therein and have been compiled on a basis consistent with the financial statements presented therein and the books and records of the Company. The pro forma financial information included in the Registration Statement, the Disclosure Package and the Prospectus presents fairly the information shown therein, has been properly compiled on the pro forma bases described therein, and, in the opinion of the Company, the assumptions used in the preparation thereof are reasonable and the adjustments used therein are appropriate to give effect to the transactions or circumstances referred to therein.

        (o)   Deloitte & Touche LLP, which has certified certain financial statements of the Company as of and for the fiscal years ended December 31, 2004, 2005 and 2006 and delivered its opinion with respect to the audited financial statements and schedules included in the Registration Statement, the Disclosure Package and the Prospectus, is an independent registered public accounting firm with respect to the Company within the meaning of the Securities Act and the Securities Act Regulations.

        (p)   To the Company's knowledge, there is no action, suit, proceeding, inquiry or investigation before or brought by any court or governmental agency or body, domestic or foreign, now pending or, to the knowledge of the Company, threatened against or involving the Company or any of the Subsidiaries, which (i) is required to be disclosed in the Registration Statement, the Disclosure Package or the Prospectus and is not so disclosed, (ii) if determined adversely to the Company or a Subsidiary, as applicable, could reasonably be expected to result in a Material Adverse Effect, or (iii) could reasonably be expected to prevent the consummation of the transactions contemplated in this Agreement or the performance by the Company of its obligations hereunder, except, with respect to clauses (ii) and (iii) above, as described in the Registration Statement, the Disclosure Package and the Prospectus. The Company believes that the ultimate resolution of all pending legal claims and lawsuits to which the Company or any of the Subsidiaries is a party or of which any of their respective property or assets is subject which are not described in the Registration Statement, the Disclosure Package and the Prospectus, including routine litigation incidental to the business, will not have a Material Adverse Effect.

        (q)   To the Company's knowledge, there are no statutes or regulations that are required under the Securities Act Regulations to be described in the Registration Statement, the Disclosure Package or the Prospectus that are not described or filed as required. There are no contracts, mortgages, deeds of trust, loan or credit agreements, bonds, notes, debentures, evidences of indebtedness, leases, subleases or other instruments or agreements that are required under the Securities Act Regulations to be described in the Registration Statement, the Disclosure Package or the Prospectus or to be filed as exhibits to the Registration Statement that are not described or filed as required. Neither the Company nor any of the Subsidiaries has sent or received any notice indicating the termination of or intention to terminate any of the contracts or agreements referred to or described in the Registration Statement, the Disclosure Package or the Prospectus or filed as an exhibit to the Registration Statement, and no such termination has been threatened by the Company or any of the Subsidiaries or any other party to such contract or agreement.

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        (r)   To the Company's knowledge, the Company and each of the Subsidiaries are in compliance with all federal, state, local or foreign laws, rules, regulations, orders, decrees and judgments, including those relating to transactions with affiliates, that the Company knows or could be reasonably expected to know are applicable to the business of the Company and the Subsidiaries, including, without limitation, the applicable provisions of federal and state laws governing licensing, Certificate of Need, Medicare, Medicaid, and any other third party payor programs in which the Company or any of the Subsidiaries participates, all claims submission requirements and cost and financial reporting requirements, state and federal false claims acts, anti-kickback, physician self-referral and other fraud and abuse laws and regulations governing the provision of healthcare related goods or services, and all patient privacy laws and regulations, except as otherwise disclosed in the Disclosure Package and the Prospectus or where any such non-compliance, individually or in the aggregate, would not have a Material Adverse Effect; and neither the Company nor any of the Subsidiaries has received any written communication from any governmental agency or body initiating any investigation into the business or operations of the Company or any of the Subsidiaries or asserting that the Company or any of the Subsidiaries is not in compliance with any such laws, rules, regulations, orders, decrees and judgments, which investigation or assertion has not been withdrawn, rescinded or successfully appealed, or which investigation or non-compliance, individually or in the aggregate, has not been cured or resolved, except where such investigation or non-compliance would not have a Material Adverse Effect or except as otherwise accurately disclosed in all material respects to the best of the Company's knowledge in the Disclosure Package and the Prospectus.

        (s)   Except where the failure to make such required filings or payments could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect, the Company and each of the Subsidiaries have filed all United States federal, state, local and foreign tax returns required to be filed through the date hereof and have paid all taxes, penalties, interest, assessments, fees and other charges due thereon, other than those that are being contested in good faith and for which reserves have been provided in accordance with GAAP; and no tax deficiency has been determined adversely to the Company or any of the Subsidiaries that has had (nor does the Company or any of the Subsidiaries have knowledge of any tax deficiency that, if determined adversely to the Company or any of the Subsidiaries, could reasonably be expected to have) a Material Adverse Effect. The charges, accruals and reserves on the books of the Company and each of the Subsidiaries in respect of any income and corporation tax liability for any years not finally determined are adequate to meet any assessments or re-assessments for additional income tax for any years not finally determined.

        (t)    Neither the Company nor, to the knowledge of the Company, any of its affiliates has taken or will take, directly or indirectly, any action which is designed to or which constitutes or could reasonably be expected to cause or result in stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Shares. The Company acknowledges that the Underwriters may engage in passive market making transactions in the Shares in accordance with Regulation M under the Securities Exchange Act of 1934, as amended (the "Exchange Act").

        (u)   Neither the Company nor any of the Subsidiaries is, and after giving effect to the offering and sale of the Firm Shares and the application of the proceeds thereof as described in the Prospectus will be, required to register as an "investment company" as such term is defined in the Investment Company Act of 1940, as amended.

        (v)   Except as disclosed in the Disclosure Package and the Prospectus, to the Company's knowledge, the Company and each of the Subsidiaries (i) are in compliance in all material respects with any and all applicable foreign, federal, state and local laws, rules, regulations, ordinances, codes, policies or rules of common law or any judicial or administrative interpretation thereof,

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including any judicial or administrative order, consent, decree or judgment, relating to the protection of human health and safety, or the protection, clean-up or restoration of the environment or natural resources, including, but not limited to, those relating to the distribution, processing, generation, treatment, storage, disposal, transportation, other handling or release or threatened release of Hazardous Materials (collectively, "Environmental Laws"); (ii) have received all permits, licenses or other approvals required of them under applicable Environmental Laws to conduct their respective businesses; and (iii) are in compliance with all terms and conditions of any such permit, license or approval, except where such noncompliance with Environmental Laws, failure to receive required permits, licenses or other approvals or failure to comply with the terms and conditions of such permits, licenses or approvals would not, singly or in the aggregate, reasonably be expected to have a Material Adverse Effect. "Hazardous Materials" means any material (including, without limitation, pollutants, contaminants, hazardous or toxic substances or wastes, asbestos, silica, mixed dust, petroleum or constituents thereof, bacteria, radon, mold or fungi) that is regulated by or may give rise to liability under any Environmental Law. The Company has provided the Representatives copies of all material environmental studies, investigations, reports or assessments concerning the Company, the Subsidiaries, and any currently or previously owned or leased property within their possession or control.

        (w)  There are no costs or liabilities associated with Environmental Laws (including, without limitation, any capital or operating expenditures required for clean-up, closure of properties or compliance with Environmental Laws or for any permit, license or approval, any related constraints on operating activities and any potential liabilities to third parties) or, to the Company's knowledge, existing facts that could reasonably be expected to form the basis of an order for clean up or remediation, or an action, suit or proceeding by any private party or governmental body or agency, against or involving the Company or any of the Subsidiaries relating to Environmental Laws, which, singly or in the aggregate, would reasonably be expected to have a Material Adverse Effect.

        (x)   Except as disclosed in the Registration Statement, the Disclosure Package and the Prospectus and except for such rights as have been waived or satisfied in connection with the offering or sale of the Shares, there are no contracts, agreements or understandings between the Company and any person granting such person the right to require the Company to file a registration statement under the Securities Act with respect to any securities of the Company or to require the Company to include such securities with the Shares registered pursuant to the Registration Statement.

        (y)   Subsequent to the respective dates as of which information is given in each of the Registration Statement, the Disclosure Package and the Prospectus, (i) neither the Company nor any of the Subsidiaries have incurred any material liability or obligation, direct or contingent, or entered into any material transaction not in the ordinary course of business; (ii) the Company has not purchased any of its outstanding capital stock nor declared, paid or otherwise made any dividend or distribution of any kind on its capital stock other than ordinary and customary dividends; and (iii) there has not been any material change in the capital stock, short-term debt or long-term debt of the Company or the Subsidiaries, except in each case as described in the Registration Statement, the Disclosure Package and the Prospectus.

        (z)   The Company and each of the Subsidiaries have good and marketable title in fee simple to all real property (or have title insurance covering the interests in such real property) and good and marketable title to all personal property owned by them, in each case free and clear of all mortgages, pledges, liens, security interests, encumbrances and defects except such as are described in the Disclosure Package and the Prospectus or such as would not have, singly or in the aggregate, a Material Adverse Effect; any real property and buildings held under lease by the Company or any of the Subsidiaries is held by the Company or such Subsidiaries, as applicable,

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under valid, subsisting and enforceable leases with such exceptions as are not material and do not materially interfere with the use made and proposed to be made of such property and buildings by the Company and the Subsidiaries, in each case except as described in the Disclosure Package and the Prospectus or except as would not have, singly or in the aggregate, a Material Adverse Effect; and, except as otherwise disclosed in the Disclosure Package and the Prospectus, neither the Company nor the Subsidiaries have received any notice of any claim of any sort that has been asserted by anyone adverse to the rights of the Company or the Subsidiaries under any of such leases or affecting or questioning the rights of the Company or the Subsidiaries to continued possession of the premises under any such leases which, if decided adversely to the Company or a Subsidiary, as applicable, would have, singly or in the aggregate, a Material Adverse Effect.

        (aa) Except as disclosed in the Disclosure Package and the Prospectus, the Company and the Subsidiaries own, possess, license, have the right to use or can acquire on reasonable terms all patents, patent rights, licenses, inventions, copyrights, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks, trade names and other intellectual property necessary to carry on the business now operated by them (the "Intellectual Property"), and neither the Company nor any of the Subsidiaries has received any notice or is otherwise aware of any infringement of or conflict with asserted rights of others with respect to any of the Intellectual Property or of any facts or circumstances which would render any of the Intellectual Property invalid or inadequate to protect the interests of the Company and the Subsidiaries therein, and which infringement or conflict (if the subject of any unfavorable decision, ruling or finding) or invalidity or inadequacy, singly or in the aggregate, would reasonably be expected to result in a Material Adverse Effect.

        (bb) The Company is in compliance in all material respects with all presently applicable provisions of the Employee Retirement Income Security Act of 1974, as amended, including the regulations and published interpretations thereunder ("ERISA"); no "reportable event" (as defined in ERISA) has occurred with respect to an "pension plan" (as defined in ERISA) for which the Company would have any liability; the Company has not incurred and does not expect to incur liability under (i) Title IV of ERISA with respect to termination of, or withdrawal from any "pension plan" or (ii) Sections 412 or 4971 of the Internal Revenue Code of 1986, as amended, including the regulations and published interpretations thereunder (the "Code"); and each "pension plan" for which the Company would have any liability that is intended to be qualified under Section 401(a) of the Code is so qualified in all material respects and, to the Company's knowledge, nothing has occurred, whether by action or by failure to act, which would cause the loss of such qualification.

        (cc) No organized labor dispute with the employees of the Company or any of the Subsidiaries exists, except as described in the Disclosure Package and the Prospectus, or, to the knowledge of the Company, is threatened; and the Company is not aware of any existing or threatened labor disturbance by the employees of any of its principal suppliers, manufacturers or contractors that could have a Material Adverse Effect.

        (dd) Except as disclosed in the Disclosure Package and the Prospectus, there are no material business relationships or transactions with related persons which are required to be disclosed therein by Item 404 of Regulation S-K of the Securities Act Regulations and any such business relationship or related party transaction described therein is a fair and accurate description in all material respects of the relationships and transactions so described. The statements in the Disclosure Package and the Prospectus under the heading "Description of Certain Indebtedness," insofar as such statements summarize legal matters, agreements, documents or obligations discussed therein, are accurate and fair summaries of such legal matters, agreements, documents or obligations.

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        (ee) The Company and each of the Subsidiaries carries or is covered by insurance, with financially sound and reputable insurers in such amounts and covering such risks as is customarily maintained by companies of similar size engaged in the same or similar business and at the same or similar stage of development, except as described in the Disclosure Package and the Prospectus; and neither the Company nor any of the Subsidiaries has any reason to believe that it will not be able to renew its existing third-party insurance coverage as and when such coverage expires or to obtain similar third-party coverage from similar insurers as may be necessary to continue its business at a cost that would not have a Material Adverse Effect. To the extent the Company or any of the Subsidiaries is "self-insured" the Company or such Subsidiary, as applicable, has established reserves based on reasonable estimates to cover any claims under such insurance coverage that the Company believes to be adequate.

        (ff)  The Company and each of the Subsidiaries possess all certificates, authorizations, permits, approvals and licenses (collectively, the "Permits") issued by the appropriate federal, state, local and foreign regulatory authorities necessary to conduct their respective businesses as currently conducted and to own, lease and operate their respective properties in the manner described in the Disclosure Package and the Prospectus, except where failure to possess any such Permits would not have, singly or in the aggregate, a Material Adverse Effect; and, except as described in the Disclosure Package and the Prospectus, and except for citations and notices of deficiencies identified in annual, complaint, focus or other health, life safety or similar reports ("Surveys") issued by state departments of health, the Center for Medicare and Medicaid Services, or similar governmental agencies and received by the Company or its Subsidiaries, to the Company's knowledge, (i) neither the Company nor any of the Subsidiaries has received any notice of proceedings relating to the revocation or modification of any Permit which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would have a Material Adverse Effect, and (ii) no event has occurred which allows, or after notice or lapse of time would allow, revocation or termination of any Permit, except where the failure to fulfill or perform, or the resulting termination or impairment, would not have, singly or in the aggregate, a Material Adverse Effect; and (iii) with respect to any Survey which has not been cleared and for which a Plan of Correction is due, the applicable Subsidiaries have filed a Plan of Correction ("POC") that the Company reasonably believes will be acceptable and such POC has either been implemented or is in the process of being implemented within the required time frame.

        (gg) Neither the Company nor any of the Subsidiaries, nor, to the Company's knowledge, any director, officer, agent, employee, affiliate or other person associated with or acting on behalf of the Company or any of the Subsidiaries, has used any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expense relating to political activity; made any direct or indirect unlawful payment to any foreign or domestic government official or employee from corporate funds; violated or is in violation of any provision of the Foreign Corrupt Practices Act of 1977, as amended and the rules and regulations thereunder; or made any bribe, rebate, payoff, influence payment, kickback or other unlawful payment.

        (hh) The Company maintains a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorizations; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain asset accountability; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. Except as described in the Disclosure Package and the Prospectus, since the end of the Company's most recent audited fiscal year, there has been (A) no material weakness in the Company's internal control over financial reporting (whether or not remediated) and (B) no change in the Company's internal control over

10

financial reporting that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

        (ii)   The Company has taken all necessary actions to ensure that, upon the effectiveness of the Registration Statement, it will be in compliance with all provisions of the Sarbanes-Oxley Act of 2002 and all rules and regulations promulgated thereunder or implementing the provisions thereof (the "Sarbanes-Oxley Act") that are then in effect and with which the Company is required to comply as of the effectiveness of the Registration Statement; the Company is taking steps to ensure that it will be in compliance with other provisions of the Sarbanes-Oxley Act that will become applicable to the Company at times after the effectiveness of the Registration Statement.

        (jj)   The minute books and records of the Company and the Subsidiaries relating to proceedings of their respective shareholders, boards of directors, and committees of their respective boards of directors provided to counsel for the Underwriters are their original minute books and records or are true, correct and complete copies thereof, with respect to all proceedings of said shareholders, boards of directors and committees since the Company's and each respective Subsidiary's inception through the date hereof. In the event that definitive minutes have not been prepared with respect to any proceedings of such shareholders, boards of directors or committees, the Company has provided counsel for the Underwriters with originals or true, correct and complete copies of draft minutes or written agendas relating thereto, which drafts and agendas, if any, reflect all material events that occurred in connection with such proceedings.

        (kk) Except as described in the Disclosure Package and the Prospectus, no Subsidiary is prohibited or restricted, directly or indirectly, from paying dividends to the Company, or from making any other distribution with respect to such Subsidiary's capital stock or from repaying to the Company or any other Subsidiary any amounts which may from time to time become due under any loans or advances to such Subsidiary from the Company or such other Subsidiary, or from transferring any such Subsidiary's property or assets to the Company or to any other Subsidiary.

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        (ll)   Except with respect to the Subsidiaries or as disclosed in the Disclosure Package and the Prospectus, the Company does not own, directly or indirectly, any capital stock or other equity securities of any corporation or any ownership interest in any partnership, joint venture or other association.

        (mm) To the Company's knowledge, there are no affiliations or associations between any member of the National Association of Securities Dealers, Inc. ("NASD") and any of the Company's officers, directors or 5% or greater securityholders, except as set forth in the Registration Statement.

        (nn) Neither the Company nor any of its affiliates has, prior to the date hereof, made any offer or sale of any securities which could be "integrated" for purposes of the Securities Act or the Securities Act Regulations with the offer and sale of the Shares pursuant to the Registration Statement. Except as described in the Disclosure Package and the Prospectus, neither the Company nor any of its affiliates has sold, issued or distributed any shares of Common Stock during the six-month period preceding the date hereof, including any sales pursuant to Rule 144A under, or Regulations D or S of, the Securities Act, other than shares of Common Stock issued pursuant to employee benefit plans, qualified stock option plans or other employee compensation plans or outstanding options, rights or warrants described in the Disclosure Package and the Prospectus.

        (oo) All stock option awards granted by the Company have been appropriately authorized by the board of directors of the Company or a duly authorized committee thereof, including approval of the exercise or purchase price or the methodology for determining the exercise or purchase price and the substantive terms of the stock options awards; no stock options awards granted by the Company have been retroactively granted, or the exercise or purchase price of any stock option award determined as of a date prior to the date such option award was approved by the board of directors of the Company or a duly authorized committee thereof, except that stock options to purchase a total of 170,000 shares of Common Stock that were granted on February 10, 2002 were ratified and approved by the Company's Board of Directors on May 10, 2002; there is no action, suit, proceeding, formal inquiry or formal investigation before or brought by any court or governmental agency or body, domestic or foreign, now pending, or, to the knowledge of the Company, threatened, against or affecting the Company in connection with any stock option awards granted by the Company.

        (pp) The certificate required by Section 6(a) of this Agreement and signed by an officer of the Company and delivered to the Representatives or counsel for the Underwriters shall be deemed a representation and warranty by the Company to each Underwriter and shall be deemed to be part of this Section 1 and incorporated herein by reference.

        (qq) Other than as contemplated by this Agreement, there is no broker, finder or other party that is entitled to receive from the Company any brokerage or finder's fee or other fee or commission in connection with the execution and delivery of this Agreement or the consummation of any transactions contemplated hereby.

        (rr)  The Company believes that the minutes of meetings of the quality assurance and compliance committee of the Company's board of directors are privileged under the California Evidence Code. Such minutes do not reflect or describe any event or condition relating to the Company or any of the Subsidiaries which would result in a Material Adverse Effect, except as otherwise accurately described in all material respects in the Registration Statement, the Disclosure Package and the Prospectus.

        (ss)  Neither the Company nor any of its Subsidiaries has any preemptive right, right of first refusal or other similar right to purchase or otherwise acquire any of the Additional Shares to be

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sold by the Selling Stockholders to the Underwriters pursuant to this Agreement, other than such rights as have been waived.

        2.    Representations and Warranties of the Selling Stockholders.    Each Selling Stockholder, severally and not jointly, represents and warrants to each of the Underwriters that:

        (a)   (i) At the respective times the Registration Statement, any Rule 462(b) Registration Statement and any post-effective amendment thereto became or becomes effective, and on the Closing Date (and, if any Additional Shares are purchased, on the applicable Option Closing Date), the Registration Statement, the Rule 462(b) Registration Statement, and any amendments and supplements thereto did not and will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; (ii) as of the Applicable Time, and as of the time of each sale of the Shares in connection with the offering when the Prospectus is not yet filed with the Commission, the Disclosure Package did not and will not include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading; and (iii) neither the Prospectus nor any amendment or supplement thereto, at the time the Prospectus or any such amendment or supplement was issued and on the Closing Date (and, if any Additional Shares are purchased, on the applicable Option Closing Date), in each case giving effect to any amendment or supplement, included or will include any untrue statement of a material fact or omitted or will omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that the representations and warranties in this paragraph apply only to (A) information with respect to such Selling Stockholder set forth in the Registration Statement, the Disclosure Package, the Prospectus or any amendment or supplement thereto in reliance upon and in conformity with information furnished or confirmed in writing to the Company by or on behalf of such Selling Stockholder expressly for use therein and (B) information with respect to any position, office or other relationship that such Selling Stockholder or an immediate family member of such Selling Stockholder or, if such Selling Stockholder is a trust, the trustees or beneficiaries of such Selling Stockholder or an immediate family member of any such trustee or beneficiary, has had with, and that is material to, the Company or its affiliates within three years prior to the date of the Time of Sale Prospectus.

        (b)   The sale of Additional Shares by such Selling Stockholder pursuant hereto is not prompted by such Selling Stockholder's knowledge of any material information concerning the Company or any of the Subsidiaries which is not set forth in the Registration Statement and the Prospectus. All information relating to such Selling Stockholder furnished or confirmed in writing by or on behalf of such Selling Stockholder for use in the Registration Statement, the Disclosure Package or the Prospectus (or any amendment or supplement thereto) is and will be complete and accurate in all material respects as of the Applicable Time and on the Closing Date (and, if any Additional Shares are purchased, on the applicable Option Closing Date).

        (c)   Such Selling Stockholder has full right, power and authority to execute and deliver this Agreement, an Irrevocable Power of Attorney (the "Power of Attorney") appointing each of Christopher R. Christensen and Gregory K. Stapley as such Selling Stockholder's attorney-in-fact (collectively, the "Attorneys-in-Fact"), a Stockholder Irrevocable Election to Sell (the "Election to Sell"), and a Stock Custody Agreement (the "Custody Agreement") with Registrar and Transfer Company, as custodian (the "Custodian"), and to perform such Selling Stockholder's obligations under such agreements. Each of this Agreement, the Power of Attorney, the Election to Sell and the Custody Agreement have been duly authorized, executed and delivered by or on behalf of such Selling Stockholder and are valid and binding agreements of such Selling Stockholder, enforceable in accordance with its terms, except (i) as enforcement thereof may be limited by bankruptcy, insolvency or other similar laws relating to creditors' rights generally or by laws relating to the

13

availability of specific performance, injunctive relief or other general equitable principles; or (ii) as rights to indemnification and contribution are limited by applicable law. Each of the Attorneys-in-Fact, acting alone, is authorized to execute and deliver this Agreement and the certificates referred to in Section 6(m) hereof on behalf of such Selling Stockholder, to determine the purchase price to be paid by the Underwriters to such Selling Stockholder for the Additional Shares to be sold by such Selling Stockholder under this Agreement, to authorize the delivery to the Underwriters of the Additional Shares to be sold by such Selling Stockholder under this Agreement and to accept payment therefor, to duly endorse (in blank or otherwise) the certificate or certificates representing such Additional Shares or a stock power or powers with respect thereto and otherwise to act on behalf of such Selling Stockholder in connection with this Agreement and the transactions contemplated hereby.

        (d)   The execution, delivery and performance of this Agreement, the Power of Attorney, the Election to Sell and the Custody Agreement by or on behalf of such Selling Stockholder and the consummation of the transactions contemplated by such agreements (including the sale and delivery of the Additional Shares to be sold by such Selling Stockholder pursuant to this Agreement), and compliance by such Selling Stockholder with its obligations under such agreements, do not and will not, whether with or without the giving of notice or passage of time or both, conflict with or constitute a breach of, or default under, or result in the creation or imposition of any lien, charge or encumbrance upon any of the Additional Shares to be sold by such Selling Stockholder under this Agreement or any other property or assets of such Selling Stockholder pursuant to, any contract, indenture, mortgage, deed of trust, loan or credit agreement, bond, note, debenture, evidence of indebtedness, lease or other agreement or instrument to which such Selling Stockholder is a party or by which such Selling Stockholder is bound or to which any of the property or assets of such Selling Stockholder is subject, nor will such action result in any violation of the provisions of the organizational documents of such Selling Stockholder (if such Selling Stockholder is not a natural person)or any applicable law, statute, rule, regulation, judgment, order, writ or decree of any government, government instrumentality or court, domestic or foreign, having jurisdiction over such Selling Stockholder or any of its assets, properties or operations.

        (e)   Such Selling Stockholder is the sole legal, record and beneficial owner of the Additional Shares to be sold by such Selling Stockholder under this Agreement and will remain the sole legal, record and beneficial owner of such Additional Shares until the delivery of such Additional Shares to the Underwriters on the applicable Option Closing Date; provided, however, that if such Selling Stockholder is a trust, the trustees and beneficiaries of such Selling Stockholder may be deemed to beneficially own the Additional Shares to be sold by such Selling Stockholder under this Agreement. The Additional Shares to be sold by such Selling Stockholder under this Agreement are and, until delivery thereof to the Underwriters on the applicable Option Closing Date, will be free and clear of all liens, charges or encumbrances other than pursuant to this Agreement. Upon payment of the consideration for the Additional Shares to be sold by such Selling Stockholder as provided in this Agreement and the crediting of such Additional Shares to the security account or accounts of the Underwriters maintained with The Depository Trust Company ("DTC"), each of the Underwriters will become the legal owner of the Additional Shares purchased by it from such Selling Stockholder, free and clear of all liens, charges or encumbrances and, assuming that none of the Underwriters has "notice of an adverse claim" (within the meaning of Section 8-105 of the Uniform Commercial Code of the State of New York (the "UCC")) with respect to such Additional Shares, each of the Underwriters will acquire a "security entitlement" (within the meaning of UCC Section 8-102(a)(17)) to the Additional Shares purchased by such Underwriter from such Selling Stockholder, and no action based on any "adverse claim" (within the meaning of UCC Section 8-102(a)(1)) may be asserted successfully against such Underwriter with respect to

14

such Additional Shares. For purposes of this representation, such Selling Stockholder may assume that DTC is a securities intermediary as defined in Section 8-102(14) of the UCC.

        (f)    The Additional Shares to be sold by such Selling Stockholder under this Agreement are not subject to any option, warrant, put, call, right of first refusal or other right to purchase or otherwise acquire any such Additional Shares, other than a right of the Company that has been duly waived by the Company or pursuant to this Agreement.

        (g)   Such Selling Stockholder has not taken and will not take, directly or indirectly, any action designed to or that would constitute or that might reasonably be expected to cause or result in the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Additional Shares; provided that the foregoing shall not prohibit transactions effected in compliance with Regulation M under the Securities Act Regulations.

        (h)   (i) No filing with, or authorization, approval, consent, license, order, registration, qualification or decree of, any court or governmental authority or agency, domestic or foreign, (ii) no authorization, approval, vote or other consent of any stockholder (or other equity owner), if any, or creditor of such Selling Stockholder, and (iii) no authorization, approval, vote or other consent of any other person or entity, is necessary or required for the execution or delivery by such Selling Stockholder of, or the performance by such Selling Stockholder of its obligations under, this Agreement, its Custody Agreement, its Election to Sell or its Power of Attorney, for the sale and delivery by such Selling Stockholder of the Additional Shares to be sold by it under this Agreement, or for the consummation by such Selling Stockholder of the other transactions contemplated by this Agreement, its Custody Agreement, its Election to Sell or its Power of Attorney, except such as (A) have already been obtained, made or filed, (B) may be required under the Securities Act, the Securities Act Regulations, the Exchange Act or the rules and regulations of the Commission under the Exchange Act (the "Exchange Act Regulations") or state securities or Blue Sky laws, (C) may be required by FINRA or (D) may be required under the laws of any foreign jurisdiction in which the Additional Shares may be offered or sold.

        (i)    Except as has been disclosed in writing by such Selling Stockholder to the Representatives, neither such Selling Stockholder nor any affiliate of such Seller Stockholder, directly or indirectly through one or more intermediaries, controls, is controlled by, is under common control with or has any other association with a member of the NASD(within the meaning of Article I(rr) of the NASD By-Laws).

        (j)    Certificates for all of the Additional Shares to be sold by such Selling Stockholder pursuant to this Agreement, in form suitable for transfer by delivery and accompanied by duly executed stock powers endorsed in blank by or on behalf of such Selling Stockholder with signatures guaranteed, have been placed in custody with the Custodian for the purpose of effecting delivery hereunder and thereunder.

        (k)   Such Selling Stockholder does not have any preemptive rights, rights of first refusal or other similar rights to purchase or otherwise acquire any of the Shares that are to be sold by the Company or any of the other Selling Stockholders pursuant to this Agreement.

        (l)    Such Selling Stockholder agrees that the certificate required by Section 6(m) of this Agreement and signed by or on behalf of such Selling Stockholder and delivered to the Representatives or counsel for the Underwriters shall be deemed a representation and warranty by such Selling Stockholder to each Underwriter and shall be deemed to be part of this Section 2 and incorporated herein by reference.

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        3.    Agreements to Sell and Purchase.

        (a)   On the basis of the representations and warranties contained in this Agreement, but subject to the terms and conditions set forth herein, the Company hereby agrees to sell to the several Underwriters, and each Underwriter, agrees, severally and not jointly, to purchase from the Company the respective number of Firm Shares set forth in Schedule I hereto opposite its name at $[            ] per share (the "Purchase Price"), subject to adjustments in accordance with Section 13 hereof.

        (b)   On the basis of the representations and warranties contained in Section 2 of this Agreement, but subject to the terms and conditions set forth in this Agreement, each Selling Stockholder hereby grants to the Underwriters the right to purchase, severally and not jointly, up to all of the number of Additional Shares set forth opposite the name of such Selling Stockholder in Schedule II hereto at the Purchase Price. The Representatives may exercise this right on behalf of the Underwriters in whole or from time to time in part by giving written notice to the Company and the Selling Stockholders not later than 30 days after the date of this Agreement. Any such notice shall specify the number of Additional Shares to be purchased by the Underwriters and the date on which such Additional Shares are to be purchased (each, an "Option Closing Date"). Each Option Closing Date must be at least two business days after such written notice is given and may not be earlier than the Closing Date (as defined below) nor later than ten business days after the date of such notice. The Additional Shares may be purchased as provided in Section 5 hereof solely for the purpose of covering over-allotments made in connection with the offering of the Firm Shares. If the Underwriters' right to purchase is exercised as to all or any portion of the Additional Shares, each Underwriter, acting severally and not jointly, will purchase that number of Additional Shares then being purchased that bears the same proportion to the total number of Additional Shares then being purchased as the number of Firm Shares set forth in Schedule I hereto opposite the name of such Underwriter bears to the total number of Firm Shares, subject in each case to such adjustments as D.A. Davidson in its discretion shall make to eliminate any sales or purchases of fractional shares, and each Selling Stockholder will sell that number of Additional Shares to the Underwriters that bears the same proportion to the total number of Additional Shares then being purchased as the number of Additional Shares set forth in Schedule II hereto opposite the name of such Selling Stockholder bears to the total number of Additional Shares.

        4.    Public Offering.    The Company and each Selling Stockholder understand that the Underwriters propose to make a public offering, as described in the Prospectus, of their respective portions of the Shares as soon after the Registration Statement has been declared effective and this Agreement has been executed as the Representatives, in their sole judgment, determine is advisable and practicable.

        5.    Payment and Delivery.    Payment for the Firm Shares shall be made to the Company by wire transfer of immediately available funds to a bank account designated by the Company against delivery of the Firm Shares through the facilities of the Depository Trust Company for the respective accounts of the several Underwriters, unless the Representatives shall otherwise instruct, at 7:00 a.m. (Pacific time) on [                        ], 2007(2), or such other time on the same or such other date, not later than [                        ], 2007,(3) as shall be designated in writing by the Representatives. The time and date of such payment for and delivery of the Firm Shares are hereinafter referred to as the "Closing Date."

(2)

This date shall be the third (fourth, if pricing occurs after 4:30 p.m. (Eastern time)) business day after the date of this Agreement.

(3)

This date shall be ten business days after the otherwise designated Closing Date.

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        In the event the Underwriters exercise their right to purchase Additional Shares, payment for the Additional Shares shall be made to the Selling Stockholders by wire transfer of immediately available funds to a single bank account designated by the Custodian against delivery of such Additional Shares through the facilities of the Depository Trust Company for the respective accounts of the several Underwriters, unless the Representatives shall otherwise instruct, on each Option Closing Date as specified in a notice from the Representatives to the Company.

        The Firm Shares and the Additional Shares shall be registered in such names and in such denominations as the Representatives shall request in writing not later than one full business day prior to the Closing Date or the applicable Option Closing Date, as the case may be. Any transfer taxes payable in connection with the transfer of the Firm Shares and the Additional Shares to the Underwriters shall be paid by the Company.

        It is understood that the Representatives have been authorized, for their own account and the accounts of the several Underwriters, to accept delivery of and receipt for, and make payment of the purchase price for, the Firm Shares and any Additional Shares the Underwriters have agreed to purchase. D.A. Davidson, individually and not as the Representative, may (but shall not be obligated to) make payment for any Shares to be purchased by any Underwriter whose funds may not have been received by the Representatives by the Closing Date or any Option Closing Date, as the case may be, for the account of such Underwriter, but any such payment shall not relieve such Underwriter from any of its obligations under this Agreement.

        6.    Conditions to the Company's, the Selling Stockholders' and the Underwriters' Obligations.    The obligations of the Company to sell the Firm Shares to the Underwriters, the obligations of the Selling Stockholders to sell the Additional Shares to the Underwriters and the several obligations of the Underwriters to purchase and pay for the Firm Shares on the Closing Date (and to purchase and pay for the Additional Shares on any Option Closing Date) are subject to the conditions that the Registration Statement, including any Rule 462(b) Registration Statement, shall have become effective not later than 7:00 p.m. (Pacific time) on the date of this Agreement and, as of the Closing Date (and any Option Closing Date), no stop order suspending the effectiveness of the Registration Statement shall have been issued or proceedings therefore initiated or, to the knowledge of the Company, contemplated by the Commission, and any request on the part of the Commission for additional information shall have been complied with to the reasonable satisfaction of the Underwriters. All material required to be filed by the Company pursuant to Rule 433(d) of the Securities Act Regulations shall have been filed with the Commission within the applicable time period prescribed for such material. A prospectus containing the Rule 430A Information shall have been filed with the Commission in the manner and within the time period required by Rule 424(b) without reliance on Rule 424(b)(8) or a post-effective amendment providing such information shall have been filed and declared effective in accordance with the requirements of Rule 430A.

        The several obligations of the Underwriters are subject to the following further conditions:

        (a)   There shall not have been any Material Adverse Effect as of the Closing Date (and any Option Closing Date) since the date of this Agreement or since the respective dates as of which information is given in the Disclosure Package and the Prospectus, and the Representatives shall have received on the Closing Date (and each Option Closing Date) a certificate, dated as of the Closing Date (or the applicable Option Closing Date) and signed by the President or Chief Executive Officer and the Chief Financial Officer of the Company, to the effect that (i) there has been no Material Adverse Effect since the date of this Agreement or since the respective dates as of which information is given in the Disclosure Package and the Prospectus, (ii) the representations and warranties in Section 1 of this Agreement are true and correct with the same force and effect as though expressly made on and as of the Closing Date (or the applicable Option Closing Date), (iii) the Company has complied with all agreements hereunder and satisfied all

17

conditions on its part to be performed or satisfied hereunder on or prior to the Closing Date (or the applicable Option Closing Date), and (iv) to such officer's knowledge after reasonable inquiry, no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or, to each such officer's knowledge, contemplated by the Commission.

        (b)   The Representatives shall have received on the Closing Date and each Option Closing Date, if any, an opinion of Dorsey & Whitney LLP, counsel for the Company, dated as of the Closing Date or the applicable Option Closing Date, as the case may be, in form and substance reasonably satisfactory to counsel for the Underwriters, together with signed or reproduced copies of such opinion letter for each of the other Underwriters.

        (c)   The Representatives shall have received on the Closing Date and each Option Closing Date, if any, an opinion of Albright, Stoddard, Warnick & Albright, counsel for the Company, dated as of the Closing Date or the applicable Option Closing Date, as the case may be, in form and substance reasonably satisfactory to counsel for the Underwriters, together with signed or reproduced copies of such opinion letter for each of the other Underwriters.

        (d)   The Representatives shall have received on the Closing Date and each Option Closing Date, if any, an opinion of Solomon Harris, counsel for the Company, dated as of the Closing Date or the applicable Option Closing Date, as the case may be, in form and substance reasonably satisfactory to counsel for the Underwriters, together with signed or reproduced copies of such opinion letter for each of the other Underwriters.

        (e)   The Representatives shall have received on the Closing Date and each Option Closing Date, if any, an opinion of Hogan & Hartson L.L.P., counsel for the Company, dated as of the Closing Date or the applicable Option Closing Date, as the case may be, in form and substance reasonably satisfactory to counsel for the Underwriters, together with signed or reproduced copies of such opinion letter for each of the other Underwriters.

        (f)    The Representatives shall have received on the Closing Date and each Option Closing Date, if any, an opinion of Heller Ehrman LLP, counsel for the Underwriters, dated as of the Closing Date or the applicable Option Closing Date, as the case may be, in form and substance reasonably satisfactory to D. A. Davidson, together with signed or reproduced copies of such opinion letter for each of the other Underwriters.

        (g)   The Representatives shall have received on the Closing Date and each Option Closing Date, if any, an opinion of Dorsey & Whitney LLP, counsel for the Selling Stockholders, dated as of the Closing Date or the applicable Option Closing Date, as the case may be, in form and substance reasonably satisfactory to D. A. Davidson, together with signed or reproduced copies of such opinion letter for each of the other Underwriters.

        (h)   The Representatives shall have received, on the date of this Agreement, a letter dated as of such date, in form and substance reasonably satisfactory to the Representatives, from Deloitte & Touche LLP, confirming that it is an independent registered public accounting firm within the meaning of the Securities Act and the Securities Act Regulations, stating that in its opinion the financial statements and schedules examined by them and included in the Registration Statement comply in all material respects with the applicable accounting requirements of the Securities Act and the Securities Act Regulations, and containing such other statements and information of the type ordinarily included in accountants' "comfort letters" to underwriters with respect to the financial statements and certain financial and statistical information contained in the Registration Statement, the Disclosure Package and the Prospectus, together with signed or reproduced copies of such comfort letter for each of the other Underwriters.

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        (i)    The Representatives shall have received, on the Closing Date and each Option Closing Date, if any, a "bring-down" comfort letter dated as of such date, in form and substance reasonably satisfactory to the Representatives, from Deloitte & Touche LLP to the effect that it reaffirms the statements made in the comfort letter furnished by it pursuant to Section 6(h) hereof, together with signed or reproduced copies of such letter for each of the other Underwriters; provided, that any letter delivered on the Closing Date and any Option Closing Date pursuant to this Section 6(i) may use a "cut-off date" not earlier than three business days prior to the Closing Date or the Option Closing Date, as the case may be.

        (j)    On or before the Closing Date, the Shares shall have been approved for inclusion in the NASDAQ Global Market, subject only to official notice of issuance.

        (k)   FINRA shall have confirmed that it has not raised any objection with respect to the fairness and reasonableness of the underwriting terms and arrangements.

        (l)    The "lock-up" agreements, each substantially in the form of Exhibit A hereto, between D.A. Davidson, as representative of the several Underwriters, and each of the Company's officers and directors, each Selling Stockholder, each holder of one percent (1%) or greater of the outstanding Common Stock of the Company and each holder of outstanding convertible securities, warrants or stock options issued by the Company that convert into one percent (1%) or greater of the outstanding Common Stock and preferred stock (on an as converted basis) of the Company shall have been executed and delivered to D.A. Davidson on or before the date hereof and shall be in full force and effect as of the Closing Date.

        (m)  The Representatives shall have received on the Closing Date (and each Option Closing Date, if any), a certificate signed by an Attorney-in-Fact on behalf of the Selling Stockholders, dated as of the Closing Date (or the applicable Option Closing Date), to the effect that (i) the representations and warranties of each Selling Stockholder in Section 2 of this Agreement are true and correct with the same force and effect as though expressly made on and as of the Closing Date (or the applicable Option Closing Date), (ii) each Selling Stockholder has complied with all agreements and satisfied all conditions on its part to be performed or satisfied hereunder on or prior to the Closing Date (or the applicable Option Closing Date), and (iii) the information relating to such Selling Stockholder (including the information with respect to any shares of Common Stock or other securities of the Company which are owned or held by such Selling Stockholder) that is set forth in the Disclosure Package and the Prospectus (or any amendment or supplement thereto) does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein consisting of such information, in the light of the circumstances under which they were made, not misleading.

        (n)   Prior to the Closing Date, the Representatives shall have received a properly completed and executed United State Treasury Department Form W-9 or W-8 (or other applicable form) from each Selling Stockholder.

        (o)   On the Closing Date and each Option Closing Date, if any, counsel for the Underwriters shall have been furnished with such customary documents and opinions as they may require for the purpose of enabling them to pass upon the issuance and sale of the Shares as contemplated herein, or in order to evidence the accuracy of any of the representations and warranties, or the fulfillment of any of the covenants and conditions contained herein.

        (p)   If any condition specified in this Section shall not have been fulfilled when and as required to be fulfilled, this Agreement, or, in the case of any condition to the purchase of Additional Shares on an Option Closing Date which is after the Closing Date, the obligations of the several Underwriters to purchase the relevant Additional Shares, may be terminated by the Representatives by notice to the Company at any time at or prior to the Closing Date or such

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Option Closing Date, as the case may be, and such termination shall be without liability of any party to any other party except as provided in Section 7(o) of this Agreement and except that Section 1, Section 2 and Section 10 of this Agreement shall survive any such termination and remain in full force and effect.

        7.    Covenants of the Company.    The Company covenants with each Underwriter as follows:

        (a)   To furnish to the Representatives and counsel to the Underwriters, without charge, signed copies of the Registration Statement as originally filed and of each amendment thereto (including exhibits thereto) and, for delivery to each other Underwriter, a conformed copy of the Registration Statement as originally filed and of each amendment thereto (without exhibits thereto); and to furnish to each Underwriter, without charge, prior to 10:00 a.m. (Pacific time) on the second business day after the date of this Agreement and until the end of the period mentioned in Section 7(f) or (g) below, as many copies of the Disclosure Package, the Prospectus and any supplements and amendments thereto or to the Registration Statement as such Underwriter may reasonably request. The Registration Statement, the Disclosure Package, the Prospectus, and any amendments or supplements thereto furnished to the Underwriters pursuant to this Section 7(a) will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T.

        (b)   Before amending or supplementing the Registration Statement (including any filing under Rule 462(b)), the Time of Sale Prospectus or the Prospectus, to furnish to the Representatives a copy of each such proposed amendment or supplement and not to file any such proposed amendment or supplement to which the Representatives reasonably object, and to file with the Commission within the applicable period specified in Rule 424(b) of the Securities Act Regulations any prospectus required to be filed pursuant to such Rule.

        (c)   Before filing, using or making any reference to any free writing prospectus, to furnish to the Representatives a copy of each proposed free writing prospectus to be prepared by or on behalf of, used by, or referred to by the Company, and not to use or refer to any proposed free writing prospectus to which the Representatives reasonably object.

        (d)   Before making any filing pursuant to the Exchange Act or the Exchange Act Regulations, to furnish to the Representatives a copy of each such proposed filing during the period from the Applicable Time to the Closing Date and will furnish the Representatives with a copy of any such document a reasonable amount of time prior to such proposed filing, and will not file or use any such document to which the Representatives reasonably object.

        (e)   Not to take any action that would result in an Underwriter or the Company being required to file with the Commission pursuant to Rule 433(d) of the Securities Act Regulations a free writing prospectus prepared by or on behalf of the Underwriter that the Underwriter otherwise would not have been required to file thereunder.

        (f)    If the Disclosure Package is being used to solicit offers to buy the Shares at a time when the Prospectus is not yet available to prospective purchasers and any event shall occur or condition exist as a result of which it is necessary to amend or supplement the Disclosure Package in order to make the statements therein, in the light of the circumstances, not misleading, or if any event shall occur or condition exist as a result of which the Disclosure Package conflicts with the information contained in the Registration Statement then on file, or if, in the opinion of counsel for the Underwriters, it is necessary to amend or supplement the Disclosure Package to comply with applicable law, forthwith to prepare, file with the Commission and furnish, at its own expense, to the Underwriters and to any dealer upon request, either amendments or supplements to the Disclosure Package so that the statements in the Disclosure Package as so amended or supplemented will not, in the light of the circumstances when delivered to a prospective purchaser,

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be misleading, or so that the Disclosure Package, as amended or supplemented, will no longer conflict with the Registration Statement, or so that the Disclosure Package, as amended or supplemented, will comply with applicable law.

        (g)   If, during such period after the first date of the public offering of the Shares as in the opinion of counsel for the Underwriters the Prospectus (or in lieu thereof the notice referred to in Rule 173(a) under the Securities Act) is required by law to be delivered in connection with sales by an Underwriter or dealer, any event shall occur or condition exist as a result of which it is necessary to amend or supplement the Prospectus in order to make the statements therein, in the light of the circumstances when the Prospectus (or in lieu thereof the notice referred to in Rule 173(a) under the Securities Act) is delivered to a purchaser, not misleading, or if, in the opinion of counsel for the Underwriters, it is necessary to amend or supplement the Prospectus to comply with applicable law, forthwith to prepare, file with the Commission and furnish, at its own expense, to the Underwriters and to the dealers (whose names and addresses the Representatives will furnish to the Company) to which Shares may have been sold by the Representatives on behalf of the Underwriters and to any other dealers upon request, either amendments or supplements to the Prospectus so that the statements in the Prospectus as so amended or supplemented will not, in the light of the circumstances when the Prospectus (or in lieu thereof the notice referred to in Rule 173(a) under the Securities Act) is delivered to a purchaser, be misleading or so that the Prospectus, as amended or supplemented, will comply with applicable law.

        (h)   If at any time following the issuance of an issuer free writing prospectus there occurred or occurs an event or development as a result of which such issuer free writing prospectus conflicted or would conflict with the information contained in the Registration Statement or included or would include an untrue statement of a material fact or omitted or would omit to state a material fact necessary in order to make the statements therein, in light of the circumstances prevailing at the time of such issuance, not misleading, the Company will promptly notify the Representatives and will promptly amend or supplement, at its own expense, such issuer free writing prospectus to eliminate or correct such conflict, untrue statement or omission.

        (i)    To cooperate with the Underwriters in endeavoring to qualify the Shares for offer and sale under the securities or Blue Sky laws of such jurisdictions (domestic or, with the Company's consent, foreign) as the Representatives or counsel for the Underwriters designate in writing and to take such actions within the Company's control to maintain such qualifications in effect for so long a period as the Representatives may reasonably request; provided, however, that the Company shall not be required to qualify as a foreign corporation or to take any action that would subject it to general service of process in any such jurisdiction where it is not presently qualified.

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        (j)    During any period when the Prospectus is required under the Securities Act to be delivered in connection with the sale of the Shares, subject to Sections 7(b) and (c) hereof, will comply with the requirements of Rule 430A, and will notify the Representatives promptly, and confirm such notice in writing, (i) when any post-effective amendment to the Registration Statement shall become effective, or any supplement to the Prospectus or any amended Prospectus shall have been filed, (ii) of the receipt of any comments from the Commission, (iii) of any request by the Commission for any amendment to the Registration Statement or any amendment or supplement to the Prospectus or for additional information, (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of any order preventing or suspending the use of any preliminary prospectus, or of the suspension of the qualification of the Shares for offering or sale in any jurisdiction, or of the initiation or threatening of any proceedings for any of such purposes or of any examination pursuant to Section 8(e) of the Securities Act concerning the Registration Statement, and (v) if the Company becomes the subject of a proceeding under Section 8A of the Securities Act in connection with the offering of the Shares. The Company will use its best efforts to effect any filings required under Rule 424(b), in the manner and within the time period required by Rule 424(b) (without reliance on Rule 424(b)(8)). The Company will make every reasonable effort to prevent the issuance of any stop order and, if any stop order is issued, to obtain the lifting thereof at the earliest possible moment.

        (k)   During any period when the Prospectus is required under the Securities Act to be delivered in connection with the sale of the Shares, subject to Section 7(d) hereof, to file all documents required to be filed with the Commission pursuant to the Exchange Act within the time periods required by the Exchange Act and the Exchange Act Regulations.

        (l)    To make generally available to the Company's securityholders and to the Underwriters as soon as practicable an earning statement covering a period of at least twelve months beginning after the effective date of the Registration Statement which shall satisfy the provisions of Section 11(a) of the Securities Act and Rule 158 of the Securities Act Regulations.

        (m)  To use its best efforts to effect and maintain quotation, subject to notice of issuance, of the Shares on the NASDAQ Global Market.

        (n)   To use the net proceeds received by the Company from the sale of the Firm Shares in the manner specified in the Prospectus under the caption "Use of Proceeds."

        (o)   Whether or not the transactions contemplated in this Agreement are consummated or this Agreement is terminated, to pay or cause to be paid all expenses incident to the performance of its obligations and the obligations of the Selling Stockholders (except for expenses payable by the Selling Stockholders pursuant to Section 8 hereof) under this Agreement, including: (i) all fees or expenses in connection with the preparation and filing of the Registration Statement (including exhibits), any preliminary prospectus, the Disclosure Package, the Prospectus, any free writing prospectus prepared by or on behalf of, used by, or referred to by the Company and amendments and supplements to any of the foregoing and any such other documents as may be required in connection with the offering, purchase, sale, issuance or delivery of the Shares, including all printing costs associated therewith, and the mailing and delivery (including electronic delivery) of copies thereof to the Underwriters and dealers, (ii) the fees, disbursements and expenses of the Company's counsel, accountants and other advisors in connection with the registration and delivery of the Shares under the Securities Act, (iii) all costs and expenses related to the transfer and delivery of the Shares to the Underwriters, including any transfer or other taxes payable thereon, (iv) the cost (not to exceed $5,000) of printing and producing any Blue Sky or Legal Investment memorandum in connection with the offer and sale of the Shares under state securities laws and all expenses in connection with the qualification of the Shares for offer and sale under state

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securities laws as provided in Section 7(i) hereof, including filing fees and the reasonable fees and disbursements of counsel for the Underwriters in connection with such qualification and in connection with the Blue Sky or Legal Investment memorandum, (v) all filing fees and the reasonable fees and disbursements of counsel to the Underwriters (not to exceed $15,000) incurred in connection with the review and qualification of the offering of the Shares by FINRA, (vi) all fees and expenses in connection with the preparation and filing of the registration statement on Form 8-A relating to the Common Stock and all costs and expenses incident to listing the Shares on the NASDAQ Global Market, (vii) the cost of printing certificates representing the Shares, (viii) the costs and charges of any transfer agent, registrar or depositary, (ix) the costs and expenses of the Company relating to investor presentations on any "road show" undertaken in connection with the marketing of the offering of the Shares, including, without limitation, expenses associated with the preparation or dissemination of any electronic roadshow, expenses associated with the production of road show slides and graphics, fees and expenses of any consultants engaged in connection with the road show presentations with the prior approval of the Company, travel and lodging expenses of the representatives and officers of the Company and any such consultants, and the cost of any aircraft chartered with the prior approval of the Company in connection with the road show, (x) all other costs and expenses incident to the performance of the obligations of the Company hereunder for which provision is not otherwise made in this Section. It is understood, however, that except as provided in this Section, Section 8 entitled "Covenants of the Selling Stockholders," Section 10 entitled "Indemnity and Contribution," and the last paragraph of Section 13 below, the Underwriters will pay all of their costs and expenses, including fees and disbursements of their counsel, stock transfer taxes payable on resale of any of the Shares by them and any advertising expenses connected with any offers they may make.

        (p)   The Company also covenants with each Underwriter that, without the prior written consent of D. A. Davidson on behalf of the Underwriters, it will not, during the period ending 180 days after the date of the Prospectus, (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock or (ii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Common Stock, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise or (iii) file any registration statement (other than registration statements on Form S-8) with the Commission relating to the offering of any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock.

        The restrictions contained in the preceding paragraph shall not apply to (A) the Shares to be sold hereunder; (B) the issuance by the Company of Common Stock or options or other awards to purchase shares of Common Stock under the Company's 2005 Stock Incentive Plan, 2001 Stock Option, Deferred Stock and Restricted Stock Plan, and 2007 Omnibus Incentive Plan (the "Incentive Plans"), provided, however, that any recipient of awards issued pursuant to such plans shall have signed a "Lock-Up Agreement" in the form attached as Exhibit A hereto; and (C) the issuance by the Company of shares of Common Stock upon the exercise of an option or other award granted at any time under the Incentive Plans, or the conversion of a security outstanding on the date hereof, which Incentive Plans or class of securities are described in the Prospectus. Notwithstanding the foregoing, if (1) during the last 17 days of the 180-day restricted period the Company issues an earnings release or material news or a material event relating to the Company occurs; or (2) prior to the expiration of the 180-day restricted period, the Company announces that it will release earnings results during the 16-day period beginning on the last day of the 180-day period, the restrictions imposed by this Section 7(p) shall continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the occurrence of the

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material news or material event. The Company shall promptly notify D. A. Davidson of any earnings release, news or event that may give rise to an extension of the initial 180-day restricted period.

        8.    Covenants of the Selling Stockholders.    Each Selling Stockholder, severally and not jointly, will pay the following expenses incident to the performance of its obligations under this Agreement: (a) any stock transfer taxes, stamp duties, capital duties or other similar duties, taxes or charges, if any, payable in connection with the sale or delivery of its Additional Shares to the Underwriters (and such Selling Stockholder hereby authorizes the payment of any such amounts by deduction from any funds from time to time held for the account of such Selling Stockholder by the Custodian), (b) underwriting discounts and commissions payable in respect of the Additional Shares sold by such Selling Stockholder to the Underwriters, and (c) the fees, disbursements and expenses of its counsel.

        9.    Covenants of the Underwriters.    Each Underwriter severally covenants with the Company not to take any action that would result in the Company being required to file with the Commission under Rule 433(d) a free writing prospectus prepared by or on behalf of such Underwriter that otherwise would not be required to be filed by the Company thereunder, but for the action of the Underwriter.

        10.    Indemnity and Contribution.

        (a)   The Company agrees to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act, from and against any and all losses, claims, damages and liabilities (including, without limitation, reasonable attorneys' fees or other expenses reasonably incurred in connection with defending or investigating any such action or claim) (i) arising out of or based upon any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, or any amendment thereof, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or (ii) arising out of or based upon any untrue statement or alleged untrue statement of any material fact contained in any preliminary prospectus, including the Time of Sale Prospectus, or the Prospectus, or any supplement thereto, any issuer free writing prospectus or any issuer information (as defined in Rule 433(h)) that the Company has filed, or is required to file, pursuant to Rule 433(d) of the Securities Act Regulations, or caused by any omission or alleged omission to state therein a material fact necessary in order to make the statements therein, in light of the circumstances in which they were made, not misleading; provided, however, that this indemnity agreement shall not apply to such losses, claims, damages or liabilities caused by any such untrue statement or omission or alleged untrue statement or omission based upon any Underwriter Information (as defined in Section 11 hereof).

        (b)   Each Selling Stockholder agrees, severally and not jointly, to indemnify and hold harmless each Underwriter, each person, if any, who controls any Underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, the Company, its directors, each of its officers who signed the Registration Statement and each person, if any, who controls the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act from and against any and all losses, claims, damages and liabilities (including without limitation, reasonable attorney's fees or other expenses reasonably incurred in connection with defending or investigating any such action or claim) to the same extent as the foregoing indemnity from the Company to the Underwriters, but only with reference to information relating to such Selling Stockholder furnished or confirmed in writing to the Company by or on behalf of such Selling Stockholder expressly for use in the Registration Statement, or any amendment thereof, any preliminary prospectus, including the Time of Sale Prospectus, or the Prospectus, or any supplement thereto, or any issuer free writing prospectus; provided, however, that the liability under this subsection (b) of any Selling Stockholder shall be limited to an amount equal to the aggregate

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gross proceeds after underwriting commissions and discounts, but before expenses, to such Selling Stockholder from the sale of Additional Shares sold by such Selling Stockholder hereunder.

        (c)   Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, its directors, its officers who sign the Registration Statement, each Selling Stockholder and each person, if any, who controls the Company or such Selling Stockholder within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act to the same extent as the foregoing indemnity from the Company to such Underwriter, but only with reference to any Underwriter Information (as defined in Section 11 hereof).

        (d)   In case any proceeding (including any governmental investigation) shall be instituted involving any person in respect of which indemnity may be sought pursuant to Section 10(a), (b) or (c) above, such person (the "indemnified party") shall promptly notify the person against whom such indemnity may be sought (the "indemnifying party") in writing and the indemnifying party, upon request of the indemnified party, shall retain counsel reasonably satisfactory to the indemnified party to represent the indemnified party and any others the indemnifying party may designate in such proceeding and shall pay the reasonable fees and disbursements of such counsel related to such proceeding. In any such proceeding, any indemnified party shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (i) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel or (ii) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. It is understood that the indemnifying party shall not, in respect of the legal expenses of any indemnified party in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the fees and expenses of more than one separate firm (in addition to any local counsel) for all such indemnified parties and that all such reasonable fees and expenses shall be reimbursed as they are incurred. Such firm shall be designated in writing by D.A. Davidson, in the case of parties indemnified pursuant to Sections 10(a) and (b), and by the Company and the Selling Stockholders, in the case of parties indemnified by Section 10(c). The indemnifying party shall not be liable for any settlement of any proceeding (including any governmental investigation), in respect of which indemnity may be sought pursuant to Section 10(a), (b) or (c) above, effected without its written consent, but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment. Notwithstanding the foregoing sentence, if at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel as contemplated by the second and third sentences of this paragraph, the indemnifying party agrees that it shall be liable for any settlement of any proceeding effected without its written consent if (A) such settlement is entered into more than 30 days after receipt by such indemnifying party of the aforesaid request and (B) such indemnifying party shall not have reimbursed the indemnified party in accordance with such request prior to the date of such settlement. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such proceeding.

        (e)   The provisions of this Section 10 shall not affect any agreements among the Company and the Selling Stockholders with respect to indemnification of each other or contribution between themselves.

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        (f)    To the extent the indemnification provided for in Section 10(a), (b) or (c) is unavailable to an indemnified party or insufficient in respect of any losses, claims, damages or liabilities referred to therein, then each indemnifying party under such paragraph, in lieu of indemnifying such indemnified party thereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Selling Stockholders on the one hand and the Underwriters on the other hand from the offering of the Shares or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company and the Selling Stockholders on the one hand and of the Underwriters on the other hand in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative benefits received by the Company and the Selling Stockholders on the one hand and the Underwriters on the other hand in connection with the offering of the Shares shall be deemed to be in the same respective proportions as the net proceeds from the offering of the Shares (before deducting expenses) received by the Company and the Selling Stockholders and the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover of the Prospectus, bear to the aggregate public offering price (as set forth in the Prospectus) of the Shares. The relative fault of the Company and the Selling Stockholders on the one hand and the Underwriters on the other hand shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or and the Selling Stockholders on the one hand or the Underwriter Information on the other hand and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Underwriters' respective obligations to contribute pursuant to this Section 10 are several in proportion to the respective number of Shares they have purchased hereunder, and not joint.

        (g)   The Company, the Selling Stockholders and the Underwriters agree that it would not be just or equitable if contribution pursuant to this Section 10 were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation that does not take account of the equitable considerations referred to in Section 10(f). The amount paid or payable by an indemnified party as a result of the losses, claims, damages and liabilities referred to in Section 10(f) shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 10, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Shares underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages that such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. The liability under this subsection (g) of each Selling Stockholder shall be limited to an amount equal to the aggregate gross proceeds after underwriting commissions and discounts, but before expenses, to such Selling Stockholder from the sale of Additional Shares sold by such Selling Stockholder hereunder. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The remedies provided for in this Section 10 are not exclusive and shall not limit any rights or remedies which may otherwise be available to any indemnified party at law or in equity.

        (h)   The indemnity and contribution provisions contained in this Section 10 and the representations, warranties and other statements of the Company contained in this Agreement shall remain operative and in full force and effect regardless of (i) any termination of this

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Agreement, (ii) any investigation made by or on behalf of any Underwriter, any person controlling any Underwriter or any affiliate of any Underwriter or by or on behalf of the Company, its officers or directors or any person controlling the Company and (iii) acceptance of and payment for any of the Shares.

        11.    Information Furnished by the Underwriters.    The Company and the Underwriters acknowledge and agree that, as used herein, the term "Underwriter Information" shall mean information relating to any Underwriter furnished to the Company in writing by such Underwriter through D.A. Davidson & Co. expressly for inclusion in any preliminary prospectus, free writing prospectus, the Prospectus or the Registration Statement, including any amendment or supplement thereto, as such information is referred to in Section 1 and Section 10 hereof.

        12.    Termination.    The Underwriters may terminate this Agreement by notice given by the Representatives to the Company and the Selling Stockholders, if, after the execution and delivery of this Agreement and prior to the Closing Date, (i) trading generally shall have been suspended or materially limited on, or by, as the case may be, the New York Stock Exchange, the American Stock Exchange, or The NASDAQ Global Market, (ii) trading of any securities of the Company shall have been suspended by The NASDAQ Global Market, the Commission or any other governmental authority, (iii) a material disruption in securities settlement, payment or clearance services in the United States shall have occurred, (iv) any moratorium on commercial banking activities shall have been declared by federal or New York State authorities or (v) there shall have occurred any outbreak or escalation of hostilities, or any change in financial markets or any calamity or crisis that, in the Representatives' judgment, is material and adverse and which, singly or together with any other event specified in this clause (v), makes it, in the Representatives' judgment, impracticable or inadvisable to proceed with the offer, sale or delivery of the Shares on the terms and in the manner contemplated in the Disclosure Package or the Prospectus. If this Agreement is terminated pursuant to this Section 12, such termination shall be without liability of any party to any other party except as provided in Section 7(o) and except that Section 1, Section 2 and Section 10 shall survive any such termination and remain in full force and effect.

        13.    Effectiveness; Defaulting Underwriters.    This Agreement shall become effective upon the execution and delivery hereof by the parties hereto.

        If, on the Closing Date or an Option Closing Date, as the case may be, any one or more of the Underwriters shall fail or refuse to purchase Shares that it has or they have agreed to purchase hereunder on such date, and the aggregate number of Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase is not more than one-tenth of the aggregate number of the Shares to be purchased on such date, the other Underwriters shall be obligated severally in the proportions that the number of Firm Shares set forth opposite their respective names in Schedule I bears to the aggregate number of Firm Shares set forth opposite the names of all such non-defaulting Underwriters, or in such other proportions as the Representatives may specify, to purchase the Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase on such date; provided that in no event shall the number of Shares that any Underwriter has agreed to purchase pursuant to this Agreement be increased pursuant to this Section 13 by an amount in excess of one-ninth of such number of Shares without the written consent of such Underwriter. If, on the Closing Date, any Underwriter or Underwriters shall fail or refuse to purchase Firm Shares and the aggregate number of Firm Shares with respect to which such default occurs is more than one-tenth of the aggregate number of Firm Shares to be purchased on such date, and arrangements satisfactory to the Representatives and the Company for the purchase of such Firm Shares are not made within 36 hours after such default, this Agreement shall terminate without liability on the part of any non-defaulting Underwriter or the Company. In any such case either the Representatives or the Company shall have the right to postpone the Closing Date, but in no event for longer than seven days, in order that the required changes, if any, in the Registration Statement, in the Time of Sale

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Prospectus, in the Prospectus or in any other documents or arrangements may be effected. If, on an Option Closing Date, any Underwriter or Underwriters shall fail or refuse to purchase Additional Shares and the aggregate number of Additional Shares with respect to which such default occurs is more than one-tenth of the aggregate number of Additional Shares to be purchased on such Option Closing Date, the non-defaulting Underwriters shall have the option to (v) terminate their obligation hereunder to purchase the Additional Shares to be sold on such Option Closing Date or (vi) purchase not less than the number of Additional Shares that such non-defaulting Underwriters would have been obligated to purchase in the absence of such default. Any action taken under this paragraph shall not relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement.

        If this Agreement shall be terminated by the Underwriters, or any of them, because of any failure or refusal on the part of the Company to comply with the terms or to fulfill any of the conditions of this Agreement, or if for any reason the Company shall be unable to perform its obligations under this Agreement, the Company will reimburse the Underwriters or such Underwriters as have so terminated this Agreement with respect to themselves, severally, for all actual accountable expenses (including the fees and disbursements of their counsel) reasonably incurred by such Underwriters in connection with this Agreement or the offering contemplated hereunder.

        14.    No Advisory or Fiduciary Relationship.    The Company and the Selling Stockholders acknowledge and agree that (a) the Underwriters have acted at arms length, are not agents of, and owe no fiduciary duties to, the Company or its controlling persons, officers, directors, shareholders or creditors or the Selling Stockholders or their controlling persons, trustees or beneficiaries with respect to the purchase and sale of the Shares pursuant to this Agreement, including the determination of the public offering price of the Shares and any related discounts and commissions, (b) no Underwriter has assumed or will assume an advisory or fiduciary responsibility in favor of the Company or any Selling Stockholder with respect to the offering contemplated hereby or the process leading thereto (irrespective of whether such Underwriter has advised or is currently advising the Company or any Selling Stockholder on other matters) and no Underwriter has any obligation to the Company or any Selling Stockholder with respect to the offering contemplated hereby except the obligations expressly set forth in this Agreement, (c) the Underwriters may have interests that differ from those of the Company and the Selling Stockholders, and (d) the Underwriters have not provided any legal, accounting, regulatory or tax advice with respect to the offering contemplated hereby and the Company and the Selling Stockholders have consulted their own legal, accounting, regulatory and tax advisors to the extent they deemed appropriate. Each of the Company and each Selling Stockholder waives, to the fullest extent permitted by applicable law, any claims it may have against the Underwriters arising from an alleged breach of agency or fiduciary duty in connection with the offering of the Shares.

        15.    Applicable Law.    This Agreement shall be governed by and construed in accordance with the internal laws of the State of New York, without giving effect to any provisions relating to conflicts of laws.

        16.    Time.    Time shall be of the essence of this Agreement.

        17.    Successors and Assigns.    This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and assigns and the controlling persons, officers and directors referred to in Section 10. Nothing in this Agreement is intended or shall be construed to give to any other person any legal or equitable remedy or claim under or in respect of this Agreement or any provision herein contained. The term "successors and assigns" as herein used shall not include any purchaser, as such purchaser, of any of the Shares from the Underwriters.

        18.    Severability.    The invalidity or unenforceability of any section, paragraph or provision of this Agreement shall not affect the validity or enforceability of any other section, paragraph or provision hereof. If any section, paragraph or provision of this Agreement is for any reason determined to be

28

invalid or unenforceable, there shall be deemed to be made such changes as are necessary to make it valid and enforceable.

        19.    Headings.    The headings of the sections of this Agreement have been inserted for convenience of reference only and shall not be deemed a part of this Agreement.

        20.    Notices.    Except as otherwise provided herein, all communications hereunder shall be in writing and shall be deemed to have been duly given if mailed, hand delivered or telecopied and confirmed to the parties hereto as follows:

If to the Underwriters:

D.A. Davidson & Co.
Two Centerpointe Drive, Suite 400
Lake Oswego, OR 97035
Attention: Investment Banking

with a copy to:

Heller Ehrman LLP
4350 La Jolla Village Drive, 7^th Floor
San Diego, CA 92122
Attention: Kirt W. Shuldberg

If to the Company:

The Ensign Group, Inc.
27101 Puerta Real, Suite 450
Mission Viejo, CA 92691
Attention: General Counsel

with a copy to:

Dorsey & Whitney LLP
170 South Main Street, Suite 900
Salt Lake City, UT 84101
Attention: Nolan S. Taylor

If to the Selling Stockholders:

Christopher R. Christensen and Gregory K. Stapley
Attorneys-in-Fact
c/o The Ensign Group, Inc.
27101 Puerta Real, Suite 450
Mission Viejo, CA 92691

with a copy to:

Dorsey & Whitney LLP
170 South Main Street, Suite 900
Salt Lake City, UT 84101
Attention: Nolan S. Taylor

        Any party to this Agreement may change such address for notices by sending to the parties to this Agreement written notice of a new address for such purpose.

        21.    Entire Agreement; Amendments and Waivers.    This Agreement constitutes the entire agreement of the parties to this Agreement and supersedes all prior written or oral and all contemporaneous oral agreements, understandings and negotiations with respect to the conduct of the

29

offering and the purchase and sale of the Shares. This Agreement may not be amended or modified unless in writing signed by all of the parties hereto, and no condition herein (express or implied) may be waived unless waived in writing signed by each party whom the condition is meant to benefit.

        22.    Counterparts.    This Agreement may be signed in two or more counterparts, each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same instrument.

[Remainder of page intentionally left blank]

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        If the foregoing is in accordance with your understanding of our agreement, please sign and return to the Company a counterpart hereof, whereupon this instrument, along with all counterparts hereof, shall become a binding agreement in accordance with its terms.

        Any person executing and delivering this Agreement as Attorney-in-Fact for a Selling Stockholder represents by so doing that he has been duly appointed as Attorney-in-Fact by such Selling Stockholder pursuant to a validly existing and binding Power of Attorney which authorizes such Attorney-in-Fact to take such action.

Very truly yours,
THE ENSIGN GROUP, INC.
By:
	Name:	Christopher Christensen
	Title:	President and Chief Executive Officer
THE SELLING STOCKHOLDERS LISTED ON SCHEDULE II HERETO, ACTING SEVERALLY
By:
	Name:	Christopher Christensen
	Title:	Attorney-in-Fact
By:
	Name:	Gregory Stapley
	Title:	Attorney-in-Fact

CONFIRMED AND ACCEPTED
    as of the date first above written:

D. A. DAVIDSON & CO.
STIFEL, NICOLAUS & COMPANY,
    INCORPORATED

Acting severally on behalf of themselves
    and the several Underwriters named in
    Schedule I hereto.

By:	D. A. Davidson & Co.
By:
	Name:	[                        ]
	Title:	[                        ]

31

By:	Stifel, Nicolaus & Company, Incorporated
By:
	Name:	[                        ]
	Title:	[                        ]

32

SCHEDULE I

Underwriter		Number of Firm Shares To Be Purchased
D. A. Davidson & Co.
Stifel, Nicolaus & Company, Incorporated
	Total:

SCHEDULE II

Selling Stockholder		Maximum Number of Additional Shares to be Purchased Upon Exercise of Over-Allotment Option
Christensen Family Trust dated August 17, 1992
Christensen Family Trust dated October 24, 2005
Stapley Family Trust
V. Jay Brady
Thomas A. Maloof
	Total:

SCHEDULE III

Free Writing Prospectuses

SCHEDULE IV

Pricing Information

EXHIBIT A

FORM OF LOCK-UP AGREEMENT

                        , 2006

D.A. Davidson & Co.
  As Representative of the several
  Underwriters to be named in the
  Underwriting Agreement referred to below
Two Centerpointe Drive, Suite 400
Lake Oswego, OR 97035

Re:

The Ensign Group, Inc.—Proposed Public Offering

Ladies and Gentlemen:

        The undersigned understands that you, as Representative of the Underwriters, propose to enter into an Underwriting Agreement (the "Underwriting Agreement") with The Ensign Group, Inc., a Delaware corporation (the "Company"), providing for the public offering (the "Public Offering") by the underwriters to be named in the Underwriting Agreement (the "Underwriters"), of common stock, par value $0.001 per share, of the Company (the "Common Stock").

        In recognition of the benefit that the Public Offering will confer upon the undersigned as a holder of securities, director, officer and/or employee of the Company, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the undersigned agrees with each Underwriter that, during a period of 180 days from the date of the Underwriting Agreement (the "Lock-Up Period"), the undersigned will not, without the prior written consent of D.A. Davidson & Co., on behalf of the Underwriters, directly or indirectly, (1) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant for the sale of, or otherwise dispose of or transfer any shares of the Common Stock or any securities convertible into or exchangeable or exercisable for the Common Stock, whether now owned or hereafter acquired by the undersigned or with respect to which the undersigned has or hereafter acquires the power of disposition, or file, or cause to be filed, or make any demand for or exercise any right with respect to the filing of, any registration statement under the Securities Act of 1933, as amended (the "Securities Act"), with respect to any of the foregoing (collectively, the "Lock-Up Securities") or (2) enter into any swap or any other agreement or any transaction that transfers, in whole or in part, directly or indirectly, the economic consequence of ownership of the Lock-Up Securities, whether any such swap or transaction is to be settled by delivery of the Common Stock or other securities, in cash or otherwise. Solely with respect to the Public Offering and any registration statement filed under the Securities Act in connection therewith, the undersigned waives any "piggyback" registration rights pursuant to any agreement, understanding or otherwise relating to registration under the Securities Act, of any shares of Common Stock owned either of record or beneficially by the undersigned, including any rights to receive notice of the Public Offering. The undersigned hereby agrees that, to the extent that the terms of this Letter Agreement conflict with or are in any way inconsistent with any lock-up, market standoff, registration rights or similar provisions in any agreement or instrument to which the undersigned and the Company may be a party, this Letter Agreement supersedes such agreement or instrument with respect to the subject matter hereof.

        The foregoing restrictions are expressly agreed to preclude the undersigned from engaging in any hedging or other transaction which is designed to or reasonably expected to lead to or result in a sale or disposition of the Common Stock even if such Common Stock would be disposed of by someone other than the undersigned. Such prohibited hedging or other transactions would include without limitation any short sale or any purchase, sale or grant of any right (including without limitation any put option or put equivalent position or call option or call equivalent position) with respect to any shares of the Common Stock or with respect to any security that includes, relates to, or derives any significant part of its value from such Common Stock.

        Notwithstanding the foregoing, and subject to the conditions below, the undersigned may transfer the Lock-Up Securities in the transactions described in clauses (i) through (vi) below without the prior written consent of D.A. Davidson & Co., provided that (1) D.A. Davidson & Co. receives a signed lock-up agreement for the balance of the Lock-Up Period from each donee, trustee, distributee, or transferee, as the case may be, (2) any such transfer shall not involve a disposition for value, (3) such transfers (other than pursuant to clauses (i), (ii), (v) and (vi) below) are not required to be reported in any public report or filing under Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), during the Lock-Up Period and (4) the undersigned does not otherwise voluntarily effect any public report or filing under Section 16(a) of the Exchange Act regarding such transfers (other than pursuant to clauses (i), (ii), (v) and (vi) below) during the Lock-Up Period:

        (i)    as a bona fide gift or gifts;

        (ii)   to any trust for the direct or indirect benefit of the undersigned or the immediate family of the undersigned, or by any trust to its beneficiaries;

        (iii)  as a distribution to members, partners or stockholders of the undersigned;

        (iv)  to the undersigned's affiliates or to any investment fund or other entity controlled or managed by the undersigned;

        (v)   to any beneficiary of the undersigned pursuant to a will or other testamentary document or applicable laws of descent; or

        (vi)  to any corporation, partnership, limited liability company or other entity all of the beneficial ownership interests of which are held by the undersigned or immediate family of the undersigned.

        For purposes of this lock-up agreement, "immediate family" shall mean any relationship by blood, marriage or adoption, not more remote than first cousin.

        Furthermore, the foregoing restrictions shall not apply to (1) shares of Lock-Up Securities proposed to be sold pursuant to the Underwriting Agreement, (2) transactions relating to shares of Lock-Up Securities acquired in open market transactions after the completion of the Public 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 Exchange Act during the Lock-Up Period, or (3) the establishment of a securities trading plan pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, provided that no transfers occur under such plan during the Lock-Up Period.

        Notwithstanding the foregoing, if (a) during the last 17 days of the Lock-Up Period, the Company issues an earnings release or material news or a material event relating to the Company occurs, or (b) prior to the expiration of the Lock-Up Period, the Company announces that it will release earnings results during the 16-day period beginning on the last day of the 180-day period, the restrictions imposed by this Letter Agreement shall 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.

        In furtherance of the foregoing, the Company, and any duly appointed transfer agent for the registration or transfer of the securities described herein, are hereby authorized to decline to make any transfer of such securities if such transfer would constitute a violation or breach of this Letter Agreement.

        The undersigned hereby represents and warrants that the undersigned has full power and authority to enter into this Letter Agreement. All authority herein conferred or agreed to be conferred and any obligations of the undersigned shall be binding upon the successors, assigns, heirs and personal representatives of the undersigned.

A-2

        Whether or not the Public Offering actually occurs depends on a number of factors, including market conditions. Any Public Offering will only be made pursuant to an Underwriting Agreement, the terms of which are subject to negotiation between the Company and the Underwriters. The undersigned understands that the undersigned shall be released from all obligations under this Letter Agreement upon the earliest to occur, if any, of: (a) the date that the Company advises D.A. Davidson & Co. in writing, prior to the execution of the Underwriting Agreement, that it has determined not to proceed with the Public Offering; or (b) termination of the Underwriting Agreement (other than the provisions thereof which survive termination) prior to payment for and delivery of the Common Stock to be sold thereunder.

        The undersigned understands that the Underwriters are entering into the Underwriting Agreement and proceeding with the Public Offering in reliance upon this Letter Agreement.

	Very truly yours,
	Print Name:
(If stockholder is not an natural person:)
	By:
	Name:
	Title:

A-3

EX-3.1(A)

Exhibit 3.1(a)

CERTIFICATE OF AMENDMENT
OF THE
FOURTH AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
THE ENSIGN GROUP, INC.

Adopted in accordance with the provisions
of Section 242 of the General Corporation
Law of the State of Delaware

        The Ensign Group, Inc. (the "Corporation"), a corporation organized and existing under the laws of the State of Delaware, by its duly authorized officers, does hereby certify that:

FIRST:    The Board of Directors of the Corporation has duly adopted resolutions (i) authorizing the Corporation to execute and file with the Secretary of State of the State of Delaware an amendment of the Corporation's Fourth Amended and Restated Certificate of Incorporation, in order to increase the total number of shares of capital stock that the Corporation is authorized to issue to Seventy Six Million (76,000,000) shares, and to increase the total number of shares of Common Stock that the Corporation is authorized to issue to Seventy Five Million (75,000,000) shares, and (ii) declaring such amendment to be advisable, and (iii) directing that the appropriate officers of the Corporation solicit the approval of the Corporation's stockholders for such amendment.

SECOND:    Upon the effectiveness of this Certificate of Amendment of the Fourth Amended and Restated Certificate of Incorporation, the Fourth Amended and Restated Certificate of Incorporation, as amended, is hereby amended by deleting the first paragraph of Article IV in its entirety and replacing it with the following:

        "The Corporation is authorized to issue two classes of shares to be designated respectively "Preferred Stock" and "Common Stock." The total number of shares of capital stock which the Corporation is authorized to issue is Seventy Six Million (76,000,000) shares. The total number of shares of Preferred Stock authorized is One Million (1,000,000) shares with a par value of $0.001 per share. The total number of shares of Common Stock authorized is Seventy Five Million (75,000,000) shares with a par value of $0.001 per share."

THIRD:    This Certificate of Amendment has been duly adopted by the Board of Directors of the Corporation in accordance with Section 242 of the General Corporation Law of the State of Delaware.

FOURTH:    This Certificate of Amendment was approved by the holders of the requisite number of shares of capital stock of the Corporation, in accordance with the applicable provisions of Sections 216 and 242 of the General Corporation Law of the State of Delaware, by the written consent of the holders of a majority of the outstanding stock of each class of stock entitled to vote thereon as a class, and written notice of such action will be given to the holders of such shares of capital stock who did not so consent, in each case in accordance with Section 228 of the General Corporation Law of the State of Delaware.

IN WITNESS WHEREOF, the Corporation has caused this Certificate of Amendment of the Fourth Amended and Restated Certificate of Incorporation, as amended, to be executed by Christopher R. Christensen, its Chief Executive Officer and President, and attested to by Gregory K. Stapley, its Vice President, General Counsel and Secretary, this      day of October, 2007.

	THE ENSIGN GROUP, INC.
	By:
		Christopher R. Christensen Chief Executive Officer and President
ATTEST:
Gregory K. Stapley Vice President, General Counsel and Secretary

EX-3.2

Exhibit 3.2

FIFTH AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION OF
THE ENSIGN GROUP, INC.

        The undersigned, Christopher R. Christensen and Gregory K. Stapley, hereby certify that:

        FIRST:    They are the duly elected and acting Chief Executive Officer and Secretary, respectively, of The Ensign Group, Inc., a Delaware corporation (the "Corporation").

        SECOND:    The Certificate of Incorporation of the Corporation was originally filed in the Office of the Secretary of the State of Delaware on May 27, 1999.

        THIRD:    The Amended and Restated Certificate of Incorporation of the Corporation was filed in the Office of the Secretary of the State of Delaware on August 9, 2000; the Second Amended and Restated Certificate of Incorporation of the Corporation was filed in the Office of the Secretary of the State of Delaware on April 23, 2001; the Third Amended and Restated Certificate of Incorporation of the Corporation was filed in the Office of the Secretary of the State of Delaware on April 28, 2004; the Fourth Amended and Restated Certificate of Incorporation of the Corporation was filed in the Office of the Secretary of the State of Delaware on September 26, 2005; and a Certificate of Amendment to the Fourth Amended and Restated Certificate of Incorporation was filed in the Office of the Secretary of State of Delaware on                        .

        FOURTH:    The Fourth Amended and Restated Certificate of Incorporation of the Corporation is hereby amended and restated to read in its entirety as follows:

ARTICLE I

        The name of the Corporation is The Ensign Group, Inc. (the "Corporation").

ARTICLE II

        The address of the Corporation's registered office in the State of Delaware is 160 Greentree Drive, Suite 101, in the City of Dover, County of Kent, Delaware 19904. The name of the Corporation's registered agent at that address is National Registered Agents, Inc.

ARTICLE III

        The purpose of the Corporation is to engage in any lawful act or activity for which corporations may now or hereafter be organized under the Delaware General Corporation Law ("DGCL"), as amended from time to time.

ARTICLE IV

        The total number of shares of capital stock the Corporation is authorized to issue is Seventy Six Million (76,000,000) shares, consisting of Seventy Five Million (75,000,000) shares of common stock, par value $0.001 per share (the "Common Stock"), and One Million (1,000,000) shares of preferred stock, par value $0.001 per share ("Preferred Stock").

        A.    The holders of shares of the Common Stock shall be entitled to vote on all matters to be voted on by the stockholders of the Corporation and shall be entitled to one vote for each share thereof held of record.

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        B.    The Preferred Stock may be issued from time to time by the board of directors as shares of one or more classes or series, without further stockholder approval. Subject to the provisions hereof and the limitations prescribed by law, the board of directors is expressly authorized, by adopting resolutions providing for the issuance of shares of any particular class or series and, if and to the extent from time to time required by law, by filing with the Delaware Secretary of State a certificate setting forth the resolutions so adopted pursuant to the DGCL, to establish the number of shares to be included in each such class or series and to fix the designation and relative powers, including voting powers (which may be full, limited or non-voting powers), preferences, rights, qualifications and limitations and restrictions thereof, relating to the shares of each such class or series. The rights, privileges, preferences and restrictions of any such additional class or series may be subordinated to, pari passu with (including, without limitation, inclusion in provisions with respect to liquidation and acquisition preferences, redemption and/or approval of matters by vote), or senior to any of those of any present or future class or series of Preferred Stock or Common Stock. The board of directors is also authorized to increase or decrease the number of authorized shares of any class or series of Preferred Stock prior or subsequent to the issue of that class or series, but not below the number of shares of such class or series then outstanding. In case the number of shares of any class or series shall be so decreased, the shares constituting such decrease shall resume the status which they had prior to the adoption of the resolution originally fixing the number of shares of such class or series.

        The authority of the board of directors with respect to each class or series shall include, but not be limited to, determination of the following:

            (i)    the distinctive class or serial designation of such class or series and the number of shares constituting such class or series;

            (ii)   the annual dividend rate on shares of such class or series, if any, whether dividends shall be cumulative and, if so, from which date or dates;

            (iii)  whether the shares of such class or series shall be redeemable and, if so, the terms and conditions of such redemption, including the date or dates upon and after which such shares shall be redeemable, and the amount per share payable in case of redemption, which amount may vary under different conditions and at different redemption dates;

            (iv)  the obligation, if any, of the Corporation to retire shares of such class or series pursuant to a sinking fund;

            (v)   whether shares of such class or series shall be convertible into, or exchangeable for, shares of stock of any other class or classes and, if so, the terms and conditions of such conversion or exchange, including the price or prices or the rate or rates of conversion or exchange and the terms of adjustment, if any;

            (vi)  whether the shares of such class or series shall have voting rights, in addition to any voting rights provided by law, and, if so, the terms of such voting rights;

            (vii) the rights of the shares of such class or series in the event of voluntary or involuntary liquidation, dissolution or winding-up of the Corporation; and

            (viii) any other relative rights, powers, preferences, qualifications, limitations or restrictions thereof relating to such class or series.

ARTICLE V

        The number of directors to constitute the whole board of directors shall be such number (not less than four nor more than seven) as shall be fixed from time to time by resolution of the board of directors adopted by such vote as may be required in the bylaws. The board of directors shall be divided into three classes as nearly equal in number as may be feasible, hereby designated as Class I,

2

Class II and Class III, with the term of office of one class expiring each year. For the purposes hereof, the initial Class I, Class II and Class III directors shall be so designated by a resolution of the board of directors. Each director shall serve for a term ending on the third annual meeting of stockholders following the annual meeting of stockholders at which such director was elected, or until his or her earlier death, resignation or removal; provided, however, that the directors first elected to Class I shall serve for a term ending on the Corporation's first annual meeting of stockholders following the effectiveness of this Fifth Amended and Restated Certificate of Incorporation, the directors first elected to Class II shall serve for a term ending on the Corporation's second annual meeting of stockholders following the effectiveness of this Fifth Amended and Restated Certificate of Incorporation, and the directors first elected to Class III shall serve for a term ending on the Corporation's third annual meeting of stockholders following the effectiveness of this Fifth Amended and Restated Certificate of Incorporation. Subject to the rights, if any, of the holders of any Preferred Stock then outstanding, any vacancy in the board of directors, whether because of death, resignation, disqualification, an increase in the authorized number of directors, removal, or any other cause, may be filled by a vote of the majority of the remaining directors, although less than a quorum, or by a sole remaining director. When the board of directors fills a vacancy, the director chosen to fill that vacancy shall complete the term of the director he or she succeeds (or shall complete the term of the class of directors in which the new directorship was created) and shall hold office until such director's successor shall have been elected and qualified or until such director's earlier death, resignation or removal. No reduction of the authorized number of directors shall have the effect of removing any director prior to the expiration of such director's term of office. Directors shall continue in office until others are elected and qualified in their stead, or until their earlier death, resignation or removal. When the number of directors is changed, each director then serving as such shall nevertheless continue as a director of the class of which he or she is a member until the expiration of his or her current term, and any newly created directorships or any decrease in directorships shall be so assigned among the classes by a majority of the directors then in office, though less than a quorum, as to make all classes as nearly equal in number as may be feasible. Any director or the entire board of directors may be removed at any time by the affirmative vote of the holders of at least a majority of the shares then entitled to vote at an election of directors, but only for cause.

        Advance notice of stockholder nominations for the election of members of the board of directors and of business to be brought by stockholders before any meeting of the stockholders of the Corporation shall be given in the manner provided in the bylaws of the Corporation.

        Elections of directors need not be by written ballot unless the bylaws of the Corporation shall so provide.

ARTICLE VI

        To the extent permitted by law, any action required to be taken at any annual or special meeting of stockholders of the corporation, or any action which may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice and without a vote, if: (i) a consent in writing, setting forth the action so taken shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present, and (ii) such action has been earlier approved by the board of directors. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. Special meetings of stockholders may be called only by the Chairman of the Board or the Chief Executive Officer or by the board of directors acting pursuant to a resolution adopted by a majority of the board of directors.

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ARTICLE VII

        In furtherance and not in limitation of the power conferred upon the board of directors by law, the board of directors shall have power to adopt, amend, alter and repeal from time to time the bylaws of the Corporation by majority vote of all directors except that any provision of the bylaws requiring, for board action, a vote of greater than a majority of the board shall not be amended, altered or repealed except by such supermajority vote. The stockholders of the Corporation may only adopt, amend or repeal bylaws with the affirmative vote of the holders of at least a majority of the voting power of all of the shares of the Common Stock outstanding and entitled to vote thereon.

ARTICLE VIII

        The Corporation reserves the right to amend this Fifth Amended and Restated Certificate of Incorporation in any manner provided herein or permitted by the DGCL, and all rights and powers, if any, conferred herein on stockholders, directors and officers are subject to the reserved power. Notwithstanding the foregoing, without the affirmative vote of the holders of record of a majority of the voting power of all of the shares of the Common Stock outstanding entitled to vote thereon, the Corporation shall not alter, amend or repeal Article V, Article VI or Article VIII, of this Certificate of Incorporation or the provisions of Article IV providing for undesignated Preferred Stock.

ARTICLE IX

        A.    To the fullest extent permitted by the DGCL, as the same exists or as may hereafter be amended, a director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director.

        B.    The Corporation shall indemnify to the fullest extent permitted by law any person made or threatened to be made a party to an action or proceeding, whether criminal, civil, administrative or investigative, by reason of the fact that he or she, his or her testator or intestate is or was a director or officer of the Corporation or any predecessor of the Corporation, or serves or served at any other enterprise as a director or officer at the request of the Corporation, or any predecessor to the Corporation.

        C.    Neither any amendment nor repeal of this Article IX, nor the adoption of any provision of the Corporation's Certificate of Incorporation inconsistent with this Article IX, shall eliminate or reduce the effect of this Article IX in respect of any matter occurring, or any action or proceeding accruing or arising or that, but for this Article IX, would accrue or arise, prior to such amendment, repeal or adoption of an inconsistent provision.

        FIFTH:    This Fifth Amended and Restated Certificate of Incorporation has been duly approved by the board of directors of the Corporation in accordance with the provisions of Sections 242 and 245 of the General Corporation Law of the State of Delaware.

        SIXTH:    This Fifth Amended and Restated Certificate of Incorporation has been duly approved, in accordance with Sections 228, 242 and 245 of the General Corporation Law of the State of Delaware, by the written consent of the holders of the requisite number of the shares of outstanding Common Stock and the requisite number of the shares of outstanding stock of each class of stock entitled to vote thereon as a class and the requisite number of the shares of outstanding stock of each series of Preferred Stock, and written notice of such action will be given to the holders of such shares who did not so consent, in each case in accordance with Section 228 of the General Corporation Law of the State of Delaware.

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        IN WITNESS WHEREOF, The Ensign Group, Inc. has caused this Fifth Amended and Restated Certificate of Incorporation to be signed by its Chief Executive Officer and Secretary on this                     day of                                       , 2007.

THE ENSIGN GROUP, INC.
By:	Christopher R. Christensen, Chief Executive Officer
By:	Gregory K. Stapley, Secretary

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EX-3.3

Exhibit 3.3

BYLAWS
OF
THE ENSIGN GROUP, INC.,
a Delaware corporation

ARTICLE I. OFFICES

Section 1.1.    Registered Office.    The registered office shall be in the City of Wilmington, County of New Castle, State of Delaware.

Section 1.2.    Other Offices.    The corporation may also have offices at such other places both within and without the State of Delaware as the Board of Directors may from time to time determine or the business of the corporation may require.

ARTICLE II.
MEETINGS OF STOCKHOLDERS

Section 2.1.    Place of Meetings.    Meetings of stockholders shall be held at any place within or without the State of Delaware designated by the Board of Directors. In the absence of any such designation, stockholders' meetings shall be held at the principal executive office of the corporation.

Section 2.2.    Annual Meeting of Stockholders.    The annual meeting of stockholders shall be held each year on a date and a time designated by the Board of Directors. At each annual meeting directors shall be elected and any other proper business may be transacted.

Section 2.3.    Quorum; Adjourned Meetings and Notice Thereof.    A majority of the stock issued and outstanding and entitled to vote at any meeting of stockholders, the holders of which are present in person or represented by proxy, shall constitute a quorum for the transaction of business except as otherwise provided by law, by the Certificate of Incorporation, or by these Bylaws. A quorum, once established, shall not be broken by the withdrawal of enough votes to leave less than a quorum and the votes present may continue to transact business until adjournment. If, however, such quorum shall not be present or represented at any meeting of the stockholders, a majority of the voting stock represented in person or by proxy may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote thereat.

Section 2.4.    Voting.    When a quorum is present at any meeting, the vote of the holders of a majority of the stock having voting power present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which by express provision of the statutes, or the Certificate of Incorporation, or these Bylaws, a different vote is required in which case such express provision shall govern and control the decision of such question.

Section 2.5.    Proxies.    At each meeting of the stockholders, each stockholder having the right to vote may vote in person or may authorize another person or persons to act for him by proxy appointed by an instrument in writing subscribed by such stockholder and bearing a date not more than three years prior to said meeting, unless said instrument provides for a longer period. All proxies must be filed with the Secretary of the corporation at the beginning of each meeting in order to be counted in any vote at the meeting. Each stockholder shall have one vote for each share of stock having voting power, registered in his name on the books of the corporation on the record date set by the Board of Directors as provided in Article V, Section 5.6 hereof. All elections shall be had and all questions decided by a plurality vote.

Section 2.6.    Special Meetings.    Special meetings of the stockholders, for any purpose, or purposes, unless otherwise prescribed by statute or by the Certificate of Incorporation, may be called by the President and shall be called by the President or the Secretary at the request in writing of a majority of the Board of Directors, or at the request in writing of stockholders owning a majority in amount of the entire capital stock of the corporation issued and outstanding, and entitled to vote. Such request shall state the purpose or purposes of the proposed meeting. Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice.

Section 2.7.    Notice of Stockholder's Meetings.    Whenever stockholders are required or permitted to take any action at a meeting, a written notice of the meeting shall be given which notice shall state the place, date and hour of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called. The written notice of any meeting shall be given to each stockholder entitled to vote at such meeting not less than ten nor more than sixty days before the date of the meeting. If mailed, notice is given when deposited in the United States mail, postage prepaid, directed to the stockholder at his address as it appears on the records of the corporation.

Section 2.8.    Maintenance and Inspection of Stockholder List.    The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present.

Section 2.9.    Stockholder Action by Written Consent Without a Meeting.    Unless otherwise provided in the Certificate of Incorporation, any action required to be taken at any annual or special meeting of stockholders of the corporation, or any action which may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing.

ARTICLE III.
DIRECTORS

Section 3.1.    Number, Election and Tenure.    The total number of persons serving on the Board of Directors shall be not less than two (2) nor more than five (5) the exact number of directors to be determined from time to time by resolution of the Board. Until otherwise determined by such resolution, the Board shall consist of two (2) persons. Directors shall be elected at the annual meeting of stockholders and each director shall serve until such person's successor is elected and qualified or until such person's death, retirement, resignation or removal.

Section 3.2.    Vacancies.    Vacancies on the Board of Directors by reason of death, resignation, retirement, disqualification, removal from office, or otherwise, and newly created directorships resulting from any increase in the authorized number of directors may be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director. The directors so chosen shall hold office until the next annual election of directors and until their successors are duly elected and shall qualify, unless sooner displaced. If there are no directors in office, then an election of

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directors may be held in the manner provided by statute. If, at the time of filling any vacancy or any newly created directorship, the directors then in office shall constitute less than a majority of the whole Board (as constituted immediately prior to any such increase), the Court of Chancery of the State of Delaware (the "Court of Chancery") may, upon application of any stockholder or stockholders holding at least ten percent of the total number of the shares at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in office.

Section 3.3.    Powers.    The property and business of the corporation shall be managed by or under the direction of its Board of Directors. In addition to the powers and authorities by these Bylaws expressly conferred upon them, the Board may exercise all such powers of the corporation and do all such lawful acts and things as are not by statute or by the Certificate of Incorporation or by these Bylaws directed or required to be exercised or done by the stockholders.

Section 3.4.    Directors' Meetings.    The directors may hold their meetings and have one or more offices, and keep the books of the corporation outside of the State of Delaware.

Section 3.5.    Regular Meetings.    Regular meetings of the Board of Directors may be held without notice at such time and place as shall from time to time be determined by the Board.

Section 3.6.    Special Meetings.    Special meetings of the Board of Directors may be called by the President on forty-eight hours' notice to each director, either personally or by mail, by facsimile or by telegram; special meetings shall be called by the President or the Secretary in like manner and on like notice on the written request of two directors unless the Board consists of only one director; in which case special meetings shall be called by the President or Secretary in like manner or on like notice on the written request of the sole director.

Section 3.7.    Quorum.    At all meetings of the Board of Directors a majority of the authorized number of directors shall be necessary and sufficient to constitute a quorum for the transaction of business, and the vote of a majority of the directors present at any meeting at which there is a quorum, shall be the act of the Board of Directors, except as may be otherwise specifically provided by statute, by the Certificate of Incorporation or by these Bylaws. If a quorum shall not be present at any meeting of the Board of Directors the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. If only one director is authorized, such sole director shall constitute a quorum.

Section 3.8.    Action Without Meeting.    Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee.

Section 3.9.    Telephonic Meetings.    Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, members of the Board of Directors, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors, or any committee, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at such meeting.

Section 3.10.    Committees of Directors.    The Board of Directors may, by resolution passed by a majority of the whole Board, designate one or more committees, each such committee to consist of one or more of the directors of the corporation. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they

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constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board of Directors, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to amending the Certificate of Incorporation, adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, recommending to the stockholders a dissolution of the corporation or a revocation of a dissolution, or amending the Bylaws of the corporation; and, unless the resolution or the Certificate of Incorporation expressly so provide, no such committee shall have the power or authority to declare a dividend or to authorize the issuance of stock.

Section 3.11.    Minutes of Committee Meetings.    Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors when required.

Section 3.12.    Compensation of Directors.    Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, the Board of Directors shall have the authority to fix the compensation of directors. The directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary as director. No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings.

Section 3.13.    Indemnification.    

        (a)   The corporation shall, to the fullest extent permitted by the Delaware General Corporation Law (the "DGCL"), as the same exists or may hereafter be amended (but in the case of any such amendment, only to the extent that such amendment permits the corporation to provide broader indemnification rights than said law permitted the corporation to provide prior to such amendment), indemnify any and all persons whom it shall have power to indemnify under the DGCL from and against any and all of the expenses, liabilities or other matters referred to in or covered by the DGCL, and the indemnification provided for herein shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such person.

        (b)   The corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests

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of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful.

        (c)   The corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit vas brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which such Court of Chancery or such other court shall deem proper.

        (d)   To the extent that a director, officer, employee or agent of the corporation shall be successful on the merits or otherwise in defense of any action, suit or proceeding referred to in paragraphs (a) and (b) of this Section 3.13, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith.

        (e)   Any indemnification under paragraphs (a) and (b) of this Section 3.13 (unless ordered by a court) shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in paragraphs (a) and (b) of this Section 3.13. Such determination shall be made (1) by a majority vote of the directors who are not parties to such action, suit or proceeding, even though less than a quorum, or (2) if there are no such directors, or if such directors so direct, by independent legal counsel in a written opinion, or (3) by the stockholders.

        (f)    Expenses (including attorneys' fees) incurred by an officer or director in defending any civil, criminal, administrative or investigative action, suit or proceeding may be paid by the corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the corporation as authorized in this section. Such expenses (including attorneys' fees) incurred by other employees and agents may be so paid upon such terms and conditions, if any, as the board of directors deems appropriate.

        (g)   The indemnification and advancement of expenses provided by, or granted pursuant to, the other subsections of this section shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office.

        (h)   The Board of Directors may authorize, by a vote of a majority of a quorum of the Board of Directors, the corporation to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability under this Section 3.13.

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        (i)    For purposes of this Section 3.13, references to "the corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this Section 3.13 with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued.

        (j)    For purposes of this Section 3.13, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to any employee benefit plan; and references to "serving at the request of the corporation" shall include any service as a director, officer, employee or agent of the corporation which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the corporation" as referred to in this Section 3.13.

        (k)   The indemnification and advancement of expenses provided by, or granted pursuant to, this Section 3.13 shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person.

        (1)   The Court of Chancery is hereby vested with exclusive jurisdiction to hear and determine all actions for advancement of expenses or indemnification brought under this Section 3.13 or under any bylaw, agreement, vote of stockholders or disinterested directors, or otherwise. The Court of Chancery may summarily determine a corporation's obligation to advance expenses (including attorneys' fees).

ARTICLE IV.
OFFICERS

Section 4.1.    Officers.    The officers of this corporation shall be chosen by the Board of Directors and shall include a President, a Secretary, and a Chief Financial Officer. The corporation may also have at the discretion of the Board of Directors such other officers as are desired, including a Chairman of the Board, one or more Vice Presidents, one or more Assistant Secretaries and Assistant Treasurers, and such other officers as may be appointed in accordance with the provisions of Section 4.3 hereof. In the event there are two or more Vice Presidents, then one or more may be designated as Executive Vice President, Senior Vice President, or other similar or dissimilar title. At the time of the election of officers, the directors may by resolution determine the order of their rank. Any number of offices may be held by the same person, unless the Certificate of Incorporation or these Bylaws otherwise provide.

Section 4.2.    Election of Officers.    The Board of Directors, at its first meeting after each annual meeting of stockholders, shall choose the officers of the corporation.

Section 4.3.    Subordinate Officers.    The Board of Directors may appoint such other officers and agents as it shall deem necessary who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board.

Section 4.4.    Compensation of Officers.    The salaries of all officers and agents of the corporation shall be fixed by the Board of Directors.

Section 4.5.    Term of Office; Removal and Vacancies.    The officers of the corporation shall hold office until their successors are chosen and qualify in their stead. Any officer elected or appointed by the

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Board of Directors may be removed at any time by the affirmative vote of a majority of the Board of Directors. If the office of any officer or officers becomes vacant for any reason, the vacancy shall be filled by the Board of Directors.

Section 4.6.    Chairman of the Board.    The Chairman of the Board, if such an officer be elected, shall, if present, preside at all meetings of the Board of Directors and exercise and perform such other powers and duties as may be from time to time assigned to him by the Board of Directors or prescribed by these Bylaws. If there is no President, the Chairman of the Board shall in addition be the Chief Executive Officer of the corporation and shall have the powers and duties prescribed in Section 4.7 of this Article IV.

Section 4.7.    President.    Subject to such supervisory powers, if any, as may be given by the Board of Directors to the Chairman of the Board, if there be such an officer, the President shall be the Chief Executive Officer of the corporation, unless such an officer is elected separately by the Board of Directors, and shall, subject to the control of the Board of Directors, have general supervision, direction and control of the business and officers of the corporation. He shall preside at all meetings of the stockholders and, in the absence of the Chairman of the Board, or if there be none, at all meetings of the Board of Directors. He shall be an ex-officio member of all committees and shall have the general powers and duties of management usually vested in the office of President and Chief Executive Officer of corporations, and shall have such other powers and duties as may be prescribed by the Board of Directors or these Bylaws.

Section 4.8.    Vice President.    In the absence or disability of the President, the Vice Presidents in order of their rank as fixed by the Board of Directors, or if not ranked, the Vice President designated by the Board of Directors, shall perform all the duties of the President, and when so acting shall have all the powers of and be subject to all the restrictions upon the President. The Vice Presidents shall have such other duties as from time to time may be prescribed for them, respectively, by the Board of Directors.

Section 4.9.    Secretary.    The Secretary shall attend all sessions of the Board of Directors and all meetings of the stockholders and record all votes and the minutes of all proceedings in a book to be kept for that purpose; and shall perform like duties for the standing committees when required by the Board of Directors. He shall give, or cause to be given, notice of all meetings of the stockholders and of the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors or these Bylaws. He shall keep in safe custody the seal of the corporation, and when authorized by the Board, affix the same to any instrument requiring it, and when so affixed it shall be attested by his signature or by the signature of an Assistant Secretary. The Board of Directors may give general authority to any other officer to affix the seal of the corporation and to attest the affixing by his signature.

Section 4.10.    Assistant Secretaries.    The Assistant Secretary, or if there be more than one, the Assistant Secretaries in the order determined by the Board of Directors, or if there be no such determination, the Assistant Secretary designated by the Board of Directors, shall, in the absence or disability of the Secretary, perform the duties and exercise the powers of the Secretary and shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe.

Section 4.11.    Chief Financial Officer.    The Chief Financial Officer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the corporation and shall deposit all moneys, and other valuable effects in the name and to the credit of the corporation, in such depositories as may be designated by the Board of Directors. He shall disburse the funds of the corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the Board of Directors, at its regular meetings, or when the Board of Directors so requires, an account of all his transactions as

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Chief Financial Officer and of the financial condition of the corporation. If required by the Board of Directors, he shall give the corporation a bond, in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors, for the faithful performance of the duties of his office and for the restoration to the corporation, in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the corporation.

Section 4.12.    Assistant Treasurer.    The Assistant Treasurer, or if there shall be more than one, the Assistant Treasurers in the order determined by the Board of Directors, or if there be no such determination, the Assistant Treasurer designated by the Board of Directors, shall, in the absence or disability of the Chief Financial Officer, perform the duties and exercise the powers of the Chief Financial Officer and shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe.

ARTICLE V.
CERTIFICATES OF STOCK

Section 5.1.    Certificates.    Every holder of stock of the corporation shall be entitled to have a certificate signed by, or in the name of the corporation by, the Chairman or Vice Chairman of the Board of Directors, or the President or a Vice President, and by the Secretary or an Assistant Secretary, or the Chief Financial Officer or an Assistant Treasurer of the corporation, certifying the number of shares represented by the certificate owned by such stockholder in the corporation.

Section 5.2.    Signatures on Certificates.    Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer, transfer agent, or registrar at the date of issue.

Section 5.3.    Statement of Stock Rights, Preferences, Privileges.    If the corporation shall be authorized to issue more than one class of stock or more than one series of any class, the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualification, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate which the corporation shall issue to represent such class or series of stock, provided that, except as otherwise provided in Section 202 of the DGCL, in lieu of the foregoing requirements, there may be set forth on the face or back of the certificate which the corporation shall issue to represent such class or series of stock, a statement that the corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights.

Section 5.4.    Lost Certificates.    The Board of Directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require and/or to give the corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost, stolen or destroyed.

Section 5.5.    Transfers of Stock.    Upon surrender to the corporation, or the transfer agent of the corporation, of a certificate for shares duly endorsed or accompanied by proper evidence of succession,

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assignation or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books.

Section 5.6.    Fixing Record Date.    In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of the stockholders, or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix a record date which shall not be more than sixty nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting.

Section 5.7.    Registered Stockholders.    The corporation shall be entitled to treat the holder of record of any share or shares of stock as the holder in fact thereof and accordingly shall not be bound to recognize any equitable or other claim or interest in such share on the part of any other person, whether or not it shall have express or other notice thereof, save as expressly provided by the laws of the State of Delaware.

ARTICLE VI.
GENERAL PROVISIONS

Section 6.1.    Dividends.    Dividends upon the capital stock of the corporation, subject to the provisions of the Certificate of Incorporation, if any, may be declared by the Board of Directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of the Certificate of Incorporation.

Section 6.2.    Payment of Dividends.    Before payment of any dividend there may be set aside out of any funds of the corporation available for dividends such sum or sums as the directors from time to time, in their absolute discretion, think proper as a reserve fund to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for such other purpose as the directors shall think conducive to the interests of the corporation, and the directors may abolish any such reserve.

Section 6.3.    Checks.    All checks or demands for money and notes of the corporation shall be signed by such officer or officers as the Board of Directors may from time to time designate.

Section 6.4.    Fiscal Year.    The fiscal year of the corporation shall be fixed by resolution of the Board of Directors.

Section 6.5.    Corporate Seal.    The corporate seal shall have inscribed thereon the name of the corporation, the year of its organization and the words "Corporate Seal, Delaware". Said seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise.

Section 6.6.    Manner of Giving Notice.    Whenever, under the provisions of the statutes or of the Certificate of Incorporation or of these Bylaws, notice is required to be given to any director or stockholder, it shall not be construed to mean personal notice, but such notice may be given in writing, by mail, addressed to such director or stockholder, at his address as it appears on the records of the corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. Notice to directors may also be given by facsimile or by telegram.

Section 6.7.    Waiver of Notice.    Whenever any notice is required to be given under the provisions of the statutes or of the Certificate of Incorporation or of these Bylaws, a waiver thereof in writing, signed

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by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed to be equivalent to notice. Except as otherwise provided in Section 222 of the DGCL, attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened.

Section 6.8.    Annual Statement.    The Board of Directors shall present at each annual meeting, and at any special meeting of the stockholders when called for by vote of the stockholders, a full and clear statement of the business and condition of the corporation.

ARTICLE VII.
AMENDMENTS

Section 7.1.    Amendment by Directors or Stockholders.    These Bylaws may be altered, amended or repealed or new Bylaws may be adopted by the stockholders or by the Board of Directors, when such power is conferred upon the Board of Directors by the Certificate of Incorporation, at any regular meeting of the stockholders or of the Board of Directors or at any special meeting of the stockholders or of the Board of Directors if notice of such alteration, amendment, repeal or adoption of new Bylaws be contained in the notice of such special meeting. If the power to adopt, amend or repeal Bylaws is conferred upon the Board of Directors by the Certificate of Incorporation it shall not divest or limit the power of the stockholders to adopt, amend or repeal Bylaws.

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EXHIBIT B

SPECIMEN STOCK CERTIFICATE

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INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE

INCORPORATED ON MAY 27, 1999

Number Shares

THE ENSIGN GROUP, INC.

COMMON STOCK

Authorized Capital Stock: 5,000,000

Common Stock: 5,000,000 Shares, $.001 Par Value

THIS CERTIFIES THAT                        IS THE REGISTERED HOLDER OF                        SHARES OF COMMON STOCK OF

THE ENSIGN GROUP, INC.

HEREINAFTER DESIGNATED "THE CORPORATION," TRANSFERABLE ON THE BOOKS OF THE CORPORATION. UPON SURRENDER OF THIS CERTIFICATE PROPERLY ENDORSED OR ASSIGNED.

THE SHARES REPRESENTED HEREBY ARE RESTRICTED AS TO TRANSFER AS DESCRIBED OR SET FORTH ON THE RESERVE SIDE HEREOF.

WITNESS the seal of the Corporation and the signatures of its duty authorized officers the            day of                        , 1999.

J. Richard Toolson, Secretary Roy E. Christensen, Chief Executive Officer

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CERTIFICATE OF SECRETARY
OF
THE ENSIGN GROUP, INC.,
a Delaware corporation

        I, the undersigned, do hereby certify:

        (1)   That I am the duly elected and acting Secretary of The Ensign Group, Inc., a Delaware corporation; and

        (2)   That the foregoing Bylaws, comprising thirteen (13) pages, constitute the Bylaws of said corporation as duly adopted by Unanimous Written Consent of the Board of Directors of said corporation as of May 28, 1999.

        IN WITNESS WHEREOF, I have hereunto subscribed my name this 28th day of May, 1999.

/s/ J. Richard Toolson J. Richard Toolson
Secretary

AMENDMENT TO THE BYLAWS
OF
THE ENSIGN GROUP, INC.

        The undersigned, Gregory K. Stapley, is the duly elected and acting Secretary of The Ensign Group, Inc. (the "Corporation"), and does hereby certify that the following amendment was adopted by the unanimous written consent of the Board of Directors of the Corporation on June 6, 2000.

        Section 3.1 of Article III of the Bylaws of the Corporation is hereby amended and restated in its entirety to read in full as follows:

"Section 3.1. Number, Election and Tenure. The total number of persons serving on the Board of Directors shall be not less than four (4) nor more than seven (7), the exact number of directors to be determined from time to time by resolution of the Board. Directors shall be elected at the annual meeting of stockholders and each director shall serve until such person's successor is elected and qualified or until such person's death, retirement, resignation or removal."

        IN WITNESS WHEREOF, the undersigned has hereunto subscribed his name this 26th day of September, 2007.

/s/ Gregory K. Stapley Gregory K. Stapley, Secretary

EX-3.4

Exhibit 3.4

AMENDED AND RESTATED BYLAWS

OF

THE ENSIGN GROUP, INC.

(Effective as of                        , 2007)

ARTICLE I
OFFICES

        Section 1.01    Registered Office.    The registered office of The Ensign Group, Inc. (the "corporation") in the State of Delaware shall be at 160 Greentree Drive, Suite 101, Dover, Delaware 19904. The name of the corporation's registered agent at that address shall be National Registered Agents, Inc.

        Section 1.02    Other Offices.    The corporation also may have an office or offices at such other place or places either within or without the State of Delaware as the board of directors of the corporation (the "board" or the "board of directors") may from time to time determine or the business of the corporation may from time to time require.

        Section 1.03    Books and Records.    The books and records of the corporation may be kept at the corporation's headquarters in Mission Viejo, California or at such other locations within or without the State of Delaware as may from time to time be designated by the board of directors.

ARTICLE II
MEETINGS OF STOCKHOLDERS

        Section 2.01    Place of Meetings.    Each meeting of the stockholders of the corporation shall be held at such place either within or without the State of Delaware as shall be fixed by resolution of the board of directors and specified in the notice of said meeting. If no designation is made by the board of directors, the place of meeting shall be the principal office of the corporation.

        Section 2.02    Annual Meetings.    The annual meeting of the stockholders for the transaction of such business as may properly come before the meeting shall be held at such place, date and time as shall be determined by the board of directors.

        Section 2.03    Special Meetings.    A special meeting of the stockholders for any purpose or purposes may be called at any time only by the chairman of the board, the chief executive officer or by a majority of the board of directors. This Section 2.03 may not be altered, amended or repealed except by the board of directors or by the affirmative vote of holders of at least a majority of the outstanding voting stock of the corporation.

        Section 2.04    Notice of Annual and Special Meetings.    Except as otherwise required by law, written, printed or electronic notice stating the place, date and hour of each meeting of stockholders, whether annual or special, and the purposes for which the meeting is called shall be given not less than ten (10) days nor more than sixty (60) days before the date of the meeting, either personally, by mail or, to the extent permitted by law, by a form of electronic transmission (as such term is defined in the Delaware General Corporation Law), to each stockholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered when deposited in the U.S. mail with postage thereon prepaid, addressed to the stockholder at his address as it appears on the stock transfer books of the corporation. Notice given by a form of electronic transmission that satisfies the requirements of the Delaware General Corporation Law and has been consented to by the stockholder to whom notice is given shall be deemed given at the times specified with respect to the giving of notice by electronic transmission in the Delaware General Corporation Law. An affidavit of the corporation's secretary, an assistant secretary or an agent of the corporation that notice has been given shall, in the absence of fraud, be prima facie evidence of the facts stated in the affidavit.

        Section 2.05    Business at Annual and Special Meetings.    The business to be transacted at any annual or special meeting of stockholders shall be limited to business that is properly brought before the meeting. For the purposes of these bylaws, "properly brought before the meeting" shall mean the business that is (i) specified in the notice of the meeting (or any supplement thereto) given by or at the direction of the board of directors, (ii) otherwise brought before an annual meeting by or at the direction of the board of directors, or (iii) a proper matter for stockholder action under the Delaware General Corporation Law that has been otherwise properly brought before an annual meeting by a stockholder who is a stockholder of record on the date of the giving of the notice provided for in this Section 2.05 and on the record date for the determination of stockholders entitled to vote at such annual meeting and who complies with the notice procedures set forth in this Section 2.05. In order for business to be properly brought before an annual meeting by a stockholder, the stockholder must, in addition to any other applicable requirements, give written notice in proper form of such stockholder's intent to bring a matter before the annual meeting, which notice must be received by the secretary of the corporation at the corporation's principal executive offices no later than the close of business on the sixtieth (60th) day, nor earlier than the close of business on the ninetieth (90th) day, prior to the anniversary date of the immediately preceding annual meeting; provided, however, that in the event that no annual meeting was held in the previous year or the annual meeting is called for a date that is not within thirty (30) days before or after such anniversary date, notice by the stockholder to be timely must be so received not earlier than the close of business on the ninetieth (90th) day prior to such annual meeting and not later than the close of business on the later of the sixtieth (60th) day prior to such annual meeting, or not later than the close of business on the 10th day following the day on which public disclosure of the date of the meeting was made by the corporation, whichever occurs first. In no event shall the public announcement of a postponement or adjournment of an annual meeting to a later date or time commence a new time period for the giving of a stockholder's notice as described above. Except with respect to nominations for the election of directors, which shall be governed by Section 3.02 hereof, to be in proper form, each such notice shall set forth: (a) the name and address of the stockholder who intends to bring such matter before a meeting; (b) the class or series and number of shares of capital stock of the corporation entitled to vote at such meeting which are owned beneficially or of record by such stockholder; (c) a representation that the stockholder is a holder of record of stock of the corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to bring such matter before the meeting; (d) a description of the business desired to be brought before the meeting and the reasons therefor; (e) such other information regarding the stockholder and the business proposed by such stockholder as would be required to be included in the proxy statement pursuant to the rules and regulations of the Securities and Exchange Commission; and (f) a representation as to the stockholder's material interest in the business being proposed. In addition, the stockholder making such proposal shall promptly provide any other information reasonably requested by the corporation. Notwithstanding the foregoing, in order to include information with respect to a stockholder proposal in the proxy statement and form of proxy for a stockholder's meeting, stockholders must provide notice as required by, and otherwise comply with the requirements of, the Securities and Exchange Act of 1934, as amended, and the regulations promulgated thereunder. The presiding officer of the meeting shall refuse to acknowledge any business proposed to be brought before an annual or special meeting not made in compliance with the foregoing procedures. This Section 2.05 may not be altered, amended or repealed except by the board or by the affirmative vote of holders of at least a majority of the outstanding voting stock of the corporation.

        Section 2.06    Quorum and Adjourned Meetings.    The holders of a majority of the voting power of the stock entitled to vote at a meeting of the stockholders, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business, except as otherwise provided by statute or by the certificate of incorporation. Where a separate vote by a class or series or classes or series of stock is required at a meeting, the presence, in person or by proxy, of the

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holders of a majority of the voting power of each such class or series shall also be required to constitute a quorum. If, however, such quorum shall not be present or represented at any meeting of the stockholders, either the chairperson of the meeting or the holders of a majority of the voting power of the stock entitled to vote thereat, present in person or represented by proxy, shall have the power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting, at which the quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally noticed. Notice of an adjourned meeting need not be given if the time and place, if any, are announced at the meeting so adjourned, except that if the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. A quorum, once established at a meeting, shall not be broken by the withdrawal of the holders of enough voting power to leave less than a quorum. If a quorum is present at an original meeting, a quorum need not be present at an adjourned session of that meeting.

        Section 2.07    Required Vote.    When a quorum is present at any meeting, the vote of the holders of a majority of the voting power of the stock entitled to vote thereat, present in person or represented by proxy, shall decide any question brought before such meeting, unless the question is one upon which, by express provision of statute or by the certificate of incorporation or these bylaws, a different level of vote is required, in which case such express provisions shall govern and control the decision of such question. Notwithstanding the preceding sentence, elections of directors at all meetings of the stockholders at which directors are to be elected shall be by written ballot, and, except with respect to the right, if any, of the holders of any series of preferred stock or any other series or class of stock to elect additional directors under specified circumstances, a plurality of the voting power of the stock, present in person or represented by proxy, at the meeting and entitled to vote on the matter shall elect directors.

        Section 2.08    Conduct of Meetings of Stockholders.    The chairman of the board of directors, or if there shall be none or in his or her absence, the chief executive officer or if there shall be none or in his or her absence, the president, who is present at the meeting, or in all of their absences an individual designated by the board of directors, shall call to order and act as the chair of any meeting of the stockholders of the corporation. The secretary of the corporation shall serve as the secretary of the meeting or, if there shall be none or in his or her absence, the secretary of the meeting shall be such person as the chair of the meeting appoints. The board of directors may, to the extent not prohibited by law, adopt by resolution such rules, regulations and procedures for the conduct of the meeting of stockholders as it shall deem appropriate. Except to the extent inconsistent with such rules, regulations and procedures as adopted by the board of directors, the chair of the meeting shall have the right and authority to prescribe such rules, regulations and procedures and to take or refrain from taking such actions as, in the judgment of the chair of the meeting, are appropriate for the conduct of the meeting. To the extent not prohibited by applicable law or these bylaws, such rules, regulations and procedures, whether adopted by the board of directors or prescribed by the chair of the meeting, may include, without limitation, establishment of (i) an agenda or order of business for the meeting, (ii) the method by which business may be proposed and procedures for determining whether business has been properly (or not properly) introduced before the meeting, (iii) procedures for casting and the form of ballots to be used by stockholders in attendance at the meeting and the procedures to be followed for counting stockholder votes, (iv) rules, regulations and procedures for maintaining order at the meeting and the safety of those present, (v) limitations on attendance at or participation in the meeting to stockholders of record of the corporation, their duly authorized proxies or such other persons as the chair of the meeting shall determine, (vi) restrictions on entry to the meeting after the time fixed for commencement thereof and (vii) limitations on the time allotted to questions or comments by participants. Unless and to the extent otherwise determined by the board of directors or the chair of the meeting, it shall not be necessary to follow Roberts' Rules of Order or any other rules of

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parliamentary procedure at the meeting of stockholders. Following completion of the business of the meeting as determined by the chair of the meeting, the chair of the meeting shall have the exclusive authority to adjourn the meeting.

        Section 2.09    Conduct of Business.    No business shall be conducted at an annual meeting of stockholders of the corporation except business brought before the meeting in accordance with the procedures set forth in these bylaws. If the introduction of any business at an annual meeting of stockholders does not comply with the procedures specified in this Article, the chair of the meeting shall declare that such business is not properly before the meeting and shall not be considered at the meeting.

        Section 2.10    Stockholder List.    The secretary of the corporation shall prepare and make available, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, at the corporation's principal place of business. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present.

        Section 2.11    Inspectors of Elections.    The board of directors by resolution shall appoint one or more inspectors of election, which inspector or inspectors may include individuals who serve the corporation in other capacities, including, without limitation, as officers, employees, agents or representatives of the corporation, to act at the meeting (or any adjournment thereof) and make a written report thereof. Such inspector shall decide upon the qualification of the voters and shall certify and report the number of shares represented at the meeting and entitled to vote on any question, determine the number of votes entitled to be cast by each share, shall conduct the vote and, when the voting is completed, accept the votes and ascertain and report the number of shares voted respectively for and against each question, and determine, and retain for a reasonable period a record of the disposition of, any challenge made to any determination made by such inspector. One or more persons may be designated as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate has been appointed to act, or if all inspectors or alternates who have been appointed are unable to act, at a meeting of stockholders, the chairman of the meeting shall appoint one or more inspectors to act at the meeting. Each inspector, before discharging his or her duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his or her ability. The inspectors shall have the duties prescribed by the General Corporation Law of the State of Delaware.

        Section 2.12    Fixing Record Date.    If the corporation proposes to take any action for which the Delaware General Corporation Law would permit it to fix a record date, the board of directors may fix such a record date as provided under the Delaware General Corporation Law.

        Section 2.13    Action Without a Meeting.    To the extent permitted by law, any action required to be taken at any annual or special meeting of stockholders of the corporation, or any action which may be taken at any annual or special meeting of such stockholders, may be taken only with regards to an action that has been earlier approved by the board, without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken and earlier approved by the board, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing.

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ARTICLE III
BOARD OF DIRECTORS

        Section 3.01    General Powers.    The business, property and affairs of the corporation shall be managed under the direction of the board of directors.

        Section 3.02    Nomination of Directors.    Only persons who are nominated in accordance with the following procedures shall be eligible for election as directors, except as may be otherwise provided in the certificate of incorporation with respect to the right, if any, of holders of a class of preferred stock of the corporation to nominate and elect a specified number of directors. To be properly brought before an annual meeting of the stockholders, or any special meeting of the stockholders called for the purpose of electing directors, nominations for the election of a director must be (i) made by or at the direction of the board of directors (or any duly authorized committee thereof) and specified in the notice of meeting (or any supplement thereto) given by or at the direction of the board of directors, (ii) made by or at the direction of the board of directors (or any duly authorized committee thereof) to be brought before an annual meeting, or (iii) made by any stockholder of the corporation who is a stockholder of record on the date of the giving of the notice provided for in this Section 3.02 and on the record date for the determination of stockholders entitled to vote at such meeting and who complies with the notice procedures set forth in this Section 3.02. In addition to any other applicable requirements, for a nomination to be made by a stockholder, such stockholder must have given timely notice thereof in proper written form to the secretary of the corporation. To be timely, such stockholder's notice must be received by the secretary of the corporation at the corporation's principal executive offices, (i) in the case of an annual meeting, in accordance with the time provisions set forth in Section 2.05, and, (ii) in the case of a special meeting of the stockholders called for the purpose of electing directors, not later than the close of business on the tenth (10th) day following the day on which notice of the date of the special meeting was mailed or public disclosure of the date of the special meeting was made by the corporation, whichever first occurs. To be in proper written form, each such stockholder's notice shall set forth: (a) the name, age, business address, residence address and principal occupation or employment of each nominee, and the name and address of the stockholder making the nomination, (b) the class or series and number of shares of capital stock of the corporation entitled to vote at such meeting which are owned beneficially or of record by each nominee and by the stockholder making the nomination, (c) a representation that the nominating stockholder is a stockholder of record of the corporation's stock entitled to vote at the meeting and intends to appear in person or by proxy at such meeting to nominate the person specified in the notice, (d) each nominee's qualifications for membership on the board of directors, (e) all of the information relating to each nominee and the stockholder making the nomination that would be required in a proxy statement soliciting proxies for the election of the nominee as a director, or would otherwise be required, in each case pursuant to the rules and regulations of the Securities and Exchange Commission, (f) a description of all direct or indirect arrangements or understandings between the nominating stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to whose request the nomination is being made by the stockholder, (g) all other companies to which each nominee is being recommended as a nominee for director, (h) a signed written consent of the nominee to cooperate with reasonable background checks and personal interviews, to be named in the proxy statement and to serve as a director of the corporation, if elected, and (i) such additional information as the board of directors or a nomination or similar committee appointed by the board of directors may require pursuant to resolutions of the board of directors or such committee's charter. In addition, the stockholder making such nomination shall promptly provide any other information reasonably requested by the corporation. Notwithstanding the foregoing, in order to include information with respect to a stockholder nomination in the proxy statement and form of proxy for a stockholder's meeting, stockholders must provide notice as required by, and otherwise comply with the requirements of, the Securities and Exchange Act of 1934, as amended, and the regulations promulgated thereunder. The presiding officer of the meeting shall refuse to acknowledge the nomination of any person not

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made in compliance with the foregoing procedure. This Section 3.02 may not be altered, amended or repealed except by the board or by the affirmative vote of holders of at least a majority of the outstanding voting stock of the corporation.

        Section 3.03    Number of Directors.    The number of directors to constitute the whole board of directors shall be such number (not less than four nor more than seven) as shall be fixed from time to time by resolution adopted by a majority of the entire board of directors. Directors need not be stockholders. This Section 3.03 may not be altered, amended or repealed except by the board or by the affirmative vote of holders of at least a majority of the outstanding voting stock of the corporation.

        Section 3.04    Quorum and Manner of Acting.    A majority of the number of the directors in office at the time shall constitute a quorum for the transaction of business at any meeting. Thereafter, a quorum shall be deemed present for purposes of conducting business and determining the vote required to take action for so long as at least a third of the total number of directors is present. Except as otherwise required by the certificate of incorporation or these bylaws, the affirmative vote of a majority of the directors present at any meeting at which a quorum is present shall be required for the taking of any action by the board of directors. In the absence of a quorum at any meeting of the board, such meeting need not be held, or a majority of the directors present thereat or, if no director is present, the secretary, may adjourn such meeting from time to time until a quorum shall be present. Notice of any adjourned meeting need not be given.

        Section 3.05    Offices; Place of Meetings.    The board of directors may hold meetings and have an office or offices at such place or places within or without the State of Delaware, as the board of directors may from time to time determine.

        Section 3.06    Annual Meeting.    A regular meeting of the board of directors shall be held without notice immediately after and at the same place as the annual meeting of the stockholders.

        Section 3.07    Regular Meeting.    Regular meetings of the board of directors shall be held at such places and at such times as the board of directors shall from time to time determine. Notice of regular meetings of the board of directors need not be given.

        Section 3.08    Special Meetings and Notice.    Special meetings of the board of directors shall be held whenever called by the chairman of the board, the chief executive officer or any two of the directors. Except as otherwise provided by law or by these Bylaws, notice of each such special meeting shall be given by the secretary (i) in person or by telephone to the director at least 24 hours in advance of the meeting, (ii) by personally delivering written notice to the director's last known business or home address at least 48 hours in advance of the meeting, (iii) by delivering an electronic transmission (including, without limitation, via telefacsimile or electronic mail) to the director's last known number or address for receiving electronic transmissions of that type at least 48 hours in advance of the meeting, (iv) by depositing written notice with a reputable delivery service or overnight carrier addressed to the director's last known business or home address for delivery to that address no later than the business day preceding the date of the meeting or (v) by depositing written notice in the U.S. mail, postage prepaid, addressed to the director's last known business or home address no later than the third business day preceding the date of the meeting. Each such notice shall state the time and place of the meeting but need not state the purposes thereof except as otherwise herein expressly provided. Notice of any such meeting need not be given to any director, however, if waived by him or her in writing or by facsimile, electronic transmission or similar means, or by mail, whether before or after such meeting shall be held, or if he or she shall be present at such meeting; and any meeting of the board shall be a legal meeting without any notice thereof having been given if all of the directors shall be present thereat.

        Section 3.09    Organization.    At each meeting of the board of directors, the chairman of the board, or in the absence of the chairman of the board, if they be directors, the chief executive officer, or in the absence of the chief executive officer, the president, or in the absence of the president, any director

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chosen by a majority of the directors present thereat, shall preside. The secretary, or in his or her absence an assistant secretary of the corporation, or in the absence of the secretary and all assistant secretaries, a person whom the chairman of such meeting shall appoint, shall act as secretary of such meeting and keep the minutes thereof.

        Section 3.10    Order of Business.    At all meetings of the board of directors, business shall be transacted in the order determined by the board of directors.

        Section 3.11    Action by Unanimous Consent.    Any action required or permitted to be taken at any meeting of the board of directors or of any committee thereof may be taken without a meeting if all members of the board or of such committee, as the case may be, consent to the action in writing or by electronic transmission. The writing or writings or electronic transmission or transmissions shall be filed with the minutes of the proceedings of the board of directors or of the relevant committee.

        Section 3.12    Telephone, etc. Meetings.    Members of the board of directors, or any committee designated by the board of directors, may participate in a meeting of the board of directors, or committee, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation shall constitute the presence of such person at such meeting.

        Section 3.13    Resignation.    Any director of the corporation may resign, as a director or as a committee member or both, at any time by giving notice in writing or by electronic transmission of his or her resignation to the chairman of the board, the chief executive officer or the secretary of the corporation. Such resignation shall take effect at the time specified therein (if the remaining directors agree to such time), or, if the time when it shall become effective shall not be specified therein, then it shall take effect when received. Except as aforesaid, the acceptance of such resignation shall not be necessary to make it effective.

        Section 3.14    Compensation.    Each director, in consideration of his or her serving as such, shall be entitled to receive from the corporation such amount per annum, or such fees for attendance at board and committee meetings, or both, or such other compensation, including options to acquire capital stock of the corporation, as the board of directors shall from time to time determine by resolution. The board of directors likewise may provide by resolution that the corporation shall reimburse each director or member of a committee for any expenses incurred by him or her on account of his or her attendance at any such meeting. Nothing herein contained shall be construed to preclude any director from serving the corporation in any other capacity and receiving proper compensation therefor.

        Section 3.15    Removal.    Unless otherwise specified by law or the certificate of incorporation, any director or the entire board of directors may be removed at any time by the affirmative vote of the holders of at least a majority of the shares then entitled to vote at an election of directors, but only for cause.

        Section 3.16    Vacancies.    Except as otherwise provided in the certificate of incorporation and subject to the rights, if any, of the holders of any preferred stock then outstanding, any vacancy in the board, whether because of death, resignation, disqualification, an increase in the authorized number of directors, removal, or any other cause, may be filled by a vote of the majority of the remaining directors, although less than a quorum, or by a sole remaining director. When the board fills a vacancy, the director chosen to fill that vacancy shall complete the term of the director he or she succeeds (or shall complete the term of the class of directors in which the new directorship was created) and shall hold office until such director's successor shall have been elected and qualified or until such director's earlier death, resignation or removal. No reduction of the authorized number of directors shall have the effect of removing any director prior to the expiration of such director's term of office.

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        Section 3.17    Chairman and Vice-Chairman of the Board.    The board of directors may elect from its members a chairman of the board and a vice chairman. If a chairman has been elected and is present, the chairman shall preside at all meetings of the board of directors and the stockholders. The chairman shall have such other powers and perform such other duties as the board of directors may designate. If the board of directors elects a vice chairman, the vice chairman shall, in the absence or disability of the chairman, perform the duties and exercise the powers of the chairman and have such other powers and perform such other duties as the board of directors may designate.

ARTICLE IV
COMMITTEES

        The board of directors may, by resolution or resolutions passed by a majority of the full board of directors, designate one or more committees, each such committee to consist of one or more directors of the corporation, which, to the extent provided in said resolution or resolutions and the committee's charter and subject to the limitations contained in the Delaware General Corporation Law, shall have and may exercise all the powers of the board of directors in the management of the business and affairs of the corporation. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the board of directors. The board of directors may make, alter and repeal a committee's charter or other rules for the conduct of such committee's business. Any such committee shall keep written minutes of its meetings and report the same to the board at the next regular meeting of the board. Unless the board or these bylaws shall otherwise prescribe the manner of proceedings of any such committee, meetings of such committee may be regularly scheduled in advance and may be called at any time by the chairman of the committee or by any two (2) members thereof; otherwise, the provisions of these bylaws with respect to notice and conduct of meetings of the board shall govern. The board of directors shall have power to change the members of any such committee at any time, to fill vacancies and to discharge any such committee, either with or without cause, at any time, unless otherwise provided in such committee's charter, or other rules for the conduct of its business, adopted by the board of directors.

ARTICLE V
OFFICERS

        Section 5.01    Number.    The principal officers of the corporation shall be chosen by the board of directors and shall be a chief executive officer, a chief financial officer, a president, one or more vice presidents as the board of directors from time to time may appoint (the number thereof and their respective titles to be determined by the board of directors and one or more of whom may be designated as executive or senior vice presidents), a secretary and a treasurer. In addition, there may be such subordinate officers, agents and employees as may be appointed in accordance with the provisions of Section 5.03. Any two or more offices may be held by the same person. Any officer may be, but need not be, a director or stockholder. The offices of the corporation for which officers may be elected shall be set forth from time to time by resolution of the board of directors.

        Section 5.02    Election, Qualification and Term of Office.    Each officer of the corporation shall be elected by the board of directors from time to time and shall hold office until his or her successor shall have been duly elected and qualified, unless a different term is specified in the resolution electing the officer, or until his or her death, or until he or she shall have resigned or shall have been removed in the manner herein provided.

        Section 5.03    Other Officers.    The corporation may have such other subordinate officers, agents and employees as the board of directors may deem necessary, including one or more assistant secretaries, one or more assistant treasurers, a controller and one or more assistant controllers, each of whom shall have such authority and perform such duties as the board of directors may from time to time determine.

8

        Section 5.04    Removal.    Any officer may be removed, either with or without cause, by resolution of the board of directors. Such removal from office shall not affect any rights that such removed officer may have under any employment or stockholder agreement.

        Section 5.05    Resignation.    Any officer may resign at any time by giving notice in writing or by electronic transmission to the board of directors, the chairman of the board or the chief executive officer. Any such resignation shall take effect at the time specified therein (if the board agrees to such time) or, if the time when it shall become effective shall not be specified therein, then it shall take effect when accepted by action of the board of directors. Except as aforesaid, the acceptance of such resignation shall not be necessary to make it effective.

        Section 5.06    Vacancies.    A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled for the unexpired portion of the term in the manner prescribed in these bylaws for regular election or appointment to such office.

        Section 5.07    Powers.    Unless otherwise specified by the board of directors, each officer shall have those powers and shall perform those duties that are (i) set forth in these bylaws (if any are so set forth), (ii) set forth in the resolution of the board of directors electing that officer or any subsequent resolution of the board of directors with respect to that officer's duties or (iii) commonly incident to the office held.

        Section 5.08    Chief Executive Officer.    The chief executive officer shall have general supervisory management over the business, affairs and policies of the corporation and over its officers, shall report to the board of directors and shall see that all orders and resolutions of the board of directors are carried into effect, all subject to the general direction and control of the board of directors. The chief executive officer shall have the authority to sign all certificates, contracts and other instruments on behalf of the corporation and take such actions required in connection therewith. In the absence of the chairman of the board for any reason, including the failure of the board of directors to elect the chairman of the board, or in the event of the chairman's inability or refusal to act, the chief executive officer shall have all the powers of, and be subject to all the restrictions upon, the chairman of the board.

        Section 5.09    President.    The president shall be subject to the direction and control of the chief executive officer and the board of directors and shall be responsible for the general active management of the business, affairs and policies of the corporation, shall perform such other duties as may be prescribed by the board of directors or the chief executive officer and shall have authority to sign all certificates, contracts and other instruments on behalf of the corporation and take such actions required in connection therewith. In the absence of the chief executive officer for any reason, including the failure of the board of directors to elect a chief executive officer, or in the event of the chief executive officer's inability or refusal to act, the president shall have all the powers of, and be subject to all the restrictions upon, the chief executive officer.

        Section 5.10    Chief Financial Officer.    The chief financial officer shall be subject to the direction and control of the board of directors and the chief executive officer, shall have primary responsibility for the financial affairs of the corporation and shall (i) keep accurate financial records for the corporation; (ii) deposit all moneys, drafts and checks in the name of, and to the credit of, the corporation in such banks and depositories as the board of directors shall, from time to time, designate or otherwise authorize; (iii) have the power to endorse, for deposit, all notes, checks and drafts received by the corporation; (iv) disburse the funds of the corporation in accordance with the corporation's policies and procedures as adopted by resolution of the board of directors, making or causing to be made proper vouchers therefor; (v) render to the chief executive officer and the board of directors, whenever requested, an account of all of his or her transactions as chief financial officer and of the financial condition of the corporation, and (vi) perform such other duties as may, from time to

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time, be prescribed by the board of directors or by the chief executive officer. The powers and duties specified herein may be modified or limited at any time by the board of directors.

        Section 5.11    Vice President.    The vice president or, if there be more than one, the vice presidents, in the order determined by the board of directors (or if there is no such determination, then in the order of their election), shall be subject to the direction and control of the board of directors and the chief executive officer, shall have such powers and duties as the board of directors or the chief executive officer may assign to them, and shall, in the absence of the president for any reason, including the failure of the board of directors to elect a president or in the event of the president's inability or refusal to act, perform the duties of the president, and, when so acting, have all the powers of, and be subject to all of the restrictions upon, the president. If the board of directors elects more than one vice president, then it shall determine their respective titles, seniority and duties. The vice president or vice presidents shall perform such other duties and have such other powers as the board of directors or the chief executive officer may from time to time prescribe.

        Section 5.12    Secretary.    The secretary shall, to the extent practicable, attend all meetings of the stockholders and the board of directors. The secretary shall record or cause to be recorded in books kept for such purpose the minutes of the meetings (and the actions by written consent) of the stockholders, the board of directors and all committees of which a secretary shall not have been appointed; shall see that all notices are duly given in accordance with the provisions of these bylaws and as required by law; shall be custodian of all corporate records (other than financial); shall see that the books, reports, statements, certificates and all other documents and records required by law are properly kept and filed; and, in general, shall perform all duties as may from time to time be assigned to him or her by the board of directors or the chief executive officer.

        Section 5.13    Assistant Secretary.    The assistant secretary, or if there be more than one, the assistant secretaries, in the order determined by the board of directors (or if there be no such determination, then in the order of their election), shall have such powers and duties as the board of directors or the chief executive officer may assign to them and shall, in the absence of the secretary for any reason, including the failure of the board of directors to elect a secretary or in the event of the secretary's inability or refusal to act, perform the duties and exercise the powers of the secretary and perform such other duties and have such other powers as the board of directors or chief executive officer may from time to time prescribe. Any assistant secretary shall have authority to attest by his or her signature to the same extent as the secretary.

        Section 5.14    Treasurer.    The treasurer shall have charge and custody of, and be responsible for, all funds and securities of the corporation, and shall deposit all such funds to the credit of the corporation in such banks, trust companies or other depositories as shall be selected by the board of directors or any officer or officers authorized by board of directors to make such determinations; shall disburse the funds of the corporation as may be ordered by the board of directors or any officer or officers authorized by the board of directors to make such determinations, making proper vouchers for such disbursements; shall keep full and accurate accounts of all funds received and paid on account of the corporation and shall render to the board of directors or the chief executive officer, whenever the board or the chief executive officer may require him or her so to do, a statement of all his or her transactions as treasurer; and, in general, shall perform all the duties incident to the office of treasurer and such other duties as from time to time may be assigned to him or her by the board of directors or the chief executive officer. In the absence of the chief financial officer for any reason, including the failure of the board of directors to elect a chief financial officer or in the event of the chief financial officer's inability or refusal to act, the treasurer shall perform the duties of the chief financial officer, and, when so acting, have all the powers of, and be subject to all of the restrictions upon, the chief financial officer.

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        Section 5.15    Assistant Treasurer.    The assistant treasurer, or if there be more than one, the assistant treasurers, in the order determined by the board of directors (or if there be no such determination, then in the order of their election), shall, in the absence of the treasurer, for any reason, including the failure of the board of directors to elect a treasurer, or the treasurer's inability or refusal to act, perform the duties and exercise the powers of the treasurer, and perform such other duties and have such other powers as the board of directors and chief executive officer may from time to time prescribe.

        Section 5.16    Compensation.    The compensation of the officers shall be fixed from time to time by or in the manner prescribed by the board of directors, and none of such officers shall be prevented from receiving compensation by reason of the fact that he or she is also a director of the corporation. The application of this Section 5.16 shall not affect the right any officer may have regarding compensation under an employment agreement.

ARTICLE VI
STOCK CERTIFICATES AND TRANSFERS

        Section 6.01    Stock Certificates.    The corporation's shares of stock shall be represented by certificates, provided that the board of directors may, subject to the limits imposed by law, provide by resolution or resolutions that some or all of any or all classes or series shall be uncertificated shares. Shares of stock represented by certificates shall be in such form as shall be approved by the board of directors, to the extent consistent with applicable law. Stock certificates shall be numbered in the order of their issue and shall be signed by or in the name of the corporation by (i) the chairperson or vice chairperson, if any, of the board of directors, the president or a vice president and (ii) the treasurer, an assistant treasurer, the secretary or an assistant secretary. Any or all of the signatures on a certificate may be a facsimile. In case any officer, transfer agent or registrar who signed or whose facsimile signature has been placed upon a certificate shall have ceased to be an officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if such person were such officer, transfer agent or registrar at the date of issue. Each certificate that is subject to any restriction on transfer shall have conspicuously noted on its face or back either the full text of the restriction or a statement of the existence of the restriction. Each certificate shall have on its face or back a statement that the corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences or rights.

        Section 6.02    Lost Certificates.    The board of directors may direct a new certificate or certificates or uncertificated shares to be issued in place of any certificate or certificates theretofore issued by the corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate or certificates or uncertificated shares, the board of directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or his/her legal representative, to advertise the same in such manner as it shall require and/or to give the corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost, stolen or destroyed or the issuance of such new certificate or certificates or uncertificated shares.

        Section 6.03    Stock Transfers.    The shares of the stock of the corporation shall be transferred on the books of the corporation by the holder thereof in person or by his attorney, (i) with regard to certificated shares, upon surrender for cancellation of certificates for the same number of shares, with an assignment and power of transfer endorsed thereon or attached thereto, duly executed, and with such proof of the authenticity of the signature as the corporation or its agents may reasonably require,

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and (ii) with regard to uncertificated shares, upon delivery of an instruction duly executed, and with such proof of the authenticity of the signature as the corporation or its agents may reasonably require. Whenever any transfer of shares shall be made for collateral security, and not absolutely, it shall be so expressed in the entry of transfer if, when the certificates are presented to the corporation for transfer or uncertificated shares are requested to be transferred, both the transferor and transferee request the corporation to do so.

ARTICLE VII
GENERAL PROVISIONS

        Section 7.01    Dividends.    Dividends upon the capital stock of the corporation, subject to the provisions of the certificate of incorporation, if any, may be declared by the board of directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of the certificate of incorporation. Before payment of any dividend, there may be set aside out of any funds of the corporation available for dividends such sum or sums as the directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for such other purposes as the directors shall think conducive to the interest of the corporation, and the directors may modify or abolish any such reserve in the manner in which it was created.

        Section 7.02    Contracts and Checks.    Except as otherwise required by law or the certificate of incorporation, any bonds, contracts, deeds, leases, checks, drafts or other orders for payment of money, demands for money, notes or other evidence of indebtedness, or other instruments may be executed and delivered in the name and on the behalf of the corporation by such officer or officers of the corporation as provided in these bylaws or as the board of directors may from time to time direct. Such authority may be general or confined to specific instances as the board of directors may determine, and unless so authorized by the board or by these bylaws, no officer, agent, or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or in any amount. The chairman of the board, the chief executive officer, the chief financial officer, the president or any vice president may execute bonds, contracts, deeds, leases, checks, drafts or other orders for payment of money, demands for money, notes or other evidence of indebtedness, and other instruments to be made or executed for or on behalf of the corporation. Subject to any restrictions imposed by the board of directors or the chairman of the board, the chief executive officer, the chief financial officer or the president of the corporation may delegate contractual powers to others under his jurisdiction, it being understood, however, that any such delegation of power shall not relieve such officer of responsibility with respect to the exercise of such delegated power.

        Section 7.03    Fiscal Year and Audits.    The fiscal year of the corporation shall begin on the first day of January and end on the thirty-first day of December of each year, unless otherwise fixed by resolution of the board of directors. The accounts, books and records of the corporation shall be audited upon the conclusion of each fiscal year by an independent certified public accountant selected by the board of directors, and it shall be the duty of the board of directors to cause such audit to be made annually.

        Section 7.04    Seal.    The Board of Directors may adopt a corporate seal having inscribed thereon the name of the corporation, the year of its organization and the words "Corporate Seal, Delaware." The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise.

        Section 7.05    Waiver of Notices.    Whenever notice is required to be given by these bylaws or the certificate of incorporation or by law, the person entitled to said notice may waive such notice in

12

writing, either before or after the time stated therein, and such waiver shall be deemed equivalent to notice.

        Section 7.06    Electronic Transmission.    For purposes of these bylaws, "electronic transmission" shall mean a form of communication not directly involving the physical transmission of paper that satisfies the requirements with respect to such communications contained in the Delaware General Corporation Law.

        Section 7.07    Voting Stock of Other Organizations.    Except as the board of directors may otherwise designate, each of the chief executive officer and the chief financial officer may waive notice of, and act as, or appoint any person or persons to act as, proxy or attorney-in-fact for the corporation (with power of substitution) at any meeting of the stockholders, members or other owners of any other corporation or organization the securities or ownership interests of which are owned by the corporation.

ARTICLE VIII
INDEMNIFICATION

        Section 8.01    Indemnification.    The corporation shall, to the fullest extent permitted by law, indemnify every person who is or was a party or is or was threatened to be made a party to any action, suit or proceeding, whether civil, criminal, administrative or investigative (an "Action"), by reason of the fact that such person is or was a director or officer of the corporation or is or was serving at the request of the corporation as a director, officer, trustee, plan administrator or plan fiduciary of another corporation, partnership, limited liability company, trust, employee benefit plan or other enterprise (an "Indemnified Person"), against all expenses (including attorneys' fees), judgments, fines and amounts paid in settlement or other disposition that the Indemnified Person actually and reasonably incurs in connection with the Action and shall reimburse each such person for all legal fees and expenses reasonably incurred by such person in seeking to enforce its rights to indemnification under this Article (by means of legal action or otherwise).

        Section 8.02    Advancement of Expenses.    Upon written request from an Indemnified Person, the corporation shall pay the expenses (including attorneys' fees) incurred by such Indemnified Person in connection with any Action in advance of the final disposition of such Action. The corporation's obligation to pay expenses pursuant to this Section shall be contingent upon the Indemnified Person providing the undertaking required by the Delaware General Corporation Law.

        Section 8.03    Non-Exclusivity.    The rights of indemnification and advancement of expenses contained in this Article shall not be exclusive of any other rights to indemnification or similar protection to which any Indemnified Person may be entitled under any agreement, vote of stockholders or disinterested directors, insurance policy or otherwise.

        Section 8.04    Heirs and Beneficiaries.    The rights created by this Article shall inure to the benefit of each Indemnified Person and each heir, executor and administrator of such Indemnified Person.

        Section 8.05    Effect of Amendment.    Neither the amendment, modification or repeal of this Article nor the adoption of any provision in these bylaws inconsistent with this Article shall adversely affect any right or protection of an Indemnified Person with respect to any act or omission that occurred prior to the time of such amendment, modification, repeal or adoption.

ARTICLE IX
AMENDMENTS

        Except as otherwise set forth in these bylaws, the certificate of incorporation or the Delaware General Corporation Law, these bylaws may be altered, amended or repealed, or new bylaws may be adopted, by the board of directors or a majority of the voting power of all of the shares of common stock outstanding and entitled to vote thereon. If the power to adopt, amend or repeal bylaws is conferred upon the board of directors by the certificate of incorporation, it shall not divest or limit the power of the stockholders to adopt, amend or repeal bylaws.

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CERTIFICATE OF SECRETARY
OF THE ENSIGN GROUP, INC.

        The undersigned, Gregory K. Stapley, hereby certifies that he is the duly elected and acting Secretary of The Ensign Group, Inc., a Delaware corporation, and that the Bylaws attached hereto constitute the Bylaws of said corporation as duly adopted by the board of directors on                        , 2007 to be effective as of                        , 2007.

        IN WITNESS WHEREOF, the undersigned has hereunto subscribed his name this    day of            , 2007.

Gregory K. Stapley,
Secretary

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EX-4.1

Exhibit 4.1

NUMBER		SHARES
THE ENSIGN GROUP, INC. INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE COMMON STOCK

THIS CERTIFIES that
CUSIP 29358P 10 1
SEE REVERSE SIDE FOR CERTAIN DEFINITIONS

is the owner of

FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK, PAR VALUE $0.001 PER SHARE OF
THE ENSIGN GROUP, INC.

transferable only on the books of the Corporation by the holder hereof in person or by Attorney upon surrender of this Certificate properly endorsed. This Certificate is not valid until countersigned by the Transfer Agent and registered by the Registrar.

IN WITNESS WHEREOF, the said Corporation has caused this Certificate to be signed by the facsimile signatures of its duly authorized officers and its Corporate seal to be hereunto affixed.

DATED:
  
/s/ Gregory K. Stapley Secretary THE ENSIGN GROUP, INC.
CORPORATE
SEAL
MAY 27,
1999
DELAWARE   
  
/s/ Christopher R. Christensen President

COUNTERSIGNED AND REGISTERED
            REGISTRAR AND TRANSFER COMPANY
            TRANSFER AGENT AND REGISTRAR

BY

        The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations:

TEN COM	-as tenants in common	UNIF GIFT MIN ACT-	Custodian
TEN ENT	-as tenants by the entireties		(Cust)                (Minor)
JT TEN	-as joint tenants with right of survivorship and not as tenants in common		under Uniform Gifts to Minors Act                             (State)

Additional abbreviations may also be used though not in the above list.

For Value Received,do hereby sell, assign and transfer unto

PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE

(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING POSTAL ZIP CODE OF ASSIGNEE)
   

Shares of the Common Stock represented by the within Certificate, and do hereby irrevocably constitute and appoint                                                                                                                            Attorney to transfer the said Shares on the books of the within named Corporation with full power of substitution in the premises.

Dated:                                                              

X
X
NOTICE:	THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE FACE OF THIS CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.

Signature(s) Guaranteed

By:
	THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.

EX-5.1

Exhibit 5.1

The Ensign Group, Inc.
27101 Puerta Real, Suite 450
Mission Viejo, CA 92691

Re:

Registration Statement on Form S-1
(SEC File Number 333-142897)

Ladies and Gentlemen:

        We have acted as counsel to The Ensign Group, Inc., a Delaware corporation (the "Company"), in connection with a Registration Statement on Form S-1, as amended (the "Registration Statement"), relating to the proposed issuance and sale by the Company of up to 4,000,000 shares of the Company's common stock (the "Company Shares"), and the sale by certain stockholders of the Company (the "Selling Stockholders") of up to 600,000 shares of the Company's common stock (the "Selling Stockholder Shares"), which Selling Stockholders' Shares are subject to the Underwriters' over-allotment option.

        This opinion is being furnished in accordance with the requirements of Item 16(a) of Form S-1 and Item 601(b)(5)(i) of Regulation S-K.

        We have examined such documents and have reviewed such questions of law as we have considered necessary and appropriate for the purposes of our opinions set forth below. In rendering our opinions set forth below, we have assumed the authenticity of all documents submitted to us as originals, the genuineness of all signatures and the conformity to authentic originals of all documents submitted to us as copies. We have also assumed the legal capacity for all purposes relevant hereto of all natural persons and, with respect to all parties to agreements or instruments relevant hereto other than the Company, that such parties had the requisite power and authority (corporate or otherwise) to execute, deliver and perform such agreements or instruments, that such agreements or instruments have been duly authorized by all requisite action (corporate or otherwise), executed and delivered by such parties and that such agreements or instruments are the valid, binding and enforceable obligations of such parties. As to questions of fact material to our opinions, we have relied upon certificates of officers of the Company and of public officials. We have also assumed that the Company Shares and the Selling Stockholder Shares will be priced by the Pricing Committee established by the authorizing resolutions adopted by the Company's Board of Directors in accordance with such resolutions and will be issued and sold as described in the Registration Statement.

        Based on the foregoing, and in reliance thereon, we are of the opinion that (i) the Company Shares and the Selling Stockholder Shares have been duly authorized by all requisite corporate action, (ii) the Company Shares, upon issuance, delivery and payment therefor as described in the Registration Statement and the related prospectus, as amended and supplemented through the date of issuance, will be validly issued, fully paid and nonassessable, and (iii) the Selling Stockholder Shares have been validly issued and are fully paid and nonassessable.

        Our opinions expressed above are limited to the Delaware General Corporation Law, and we express no opinion with respect to the applicability of any other laws.

        We hereby consent to the filing of this opinion as an exhibit to the Registration Statement, and to the reference to our firm under the heading "Legal Matters" in the Prospectus constituting part of the Registration Statement. In giving our consent, we do not admit that we are in the category of persons whose consent is required under Section 7 of the Securities Act of 1933, as amended, or the rules and regulations thereunder.

        This opinion letter is rendered as of the date of effectiveness of the Registration Statement and we disclaim any obligation to advise you of facts, circumstances, events or developments which may be brought to our attention after the effective date of the Registration Statement and which may alter, affect or modify the opinion expressed herein. Our opinion is expressly limited to the matters set forth

above and we render no opinion, whether by implication or otherwise, as to any other matters relating to the Company, the Company Shares or the Selling Stockholder Shares.

Very truly yours,

/s/ Dorsey & Whitney, LLP

2

EX-10.3

Exhibit 10.3

THE ENSIGN GROUP, INC.

2007 OMNIBUS INCENTIVE PLAN

Table of Contents

SECTION 1.		PURPOSE	1
SECTION 2.		DEFINITIONS	1
SECTION 3.		ADMINISTRATION	3
	(a)	Power and Authority of the Committee	3
	(b)	Power and Authority of the Board	4
SECTION 4.		SHARES AVAILABLE FOR AWARDS	4
	(a)	Shares Available	4
	(b)	Accounting for Awards	4
	(c)	Adjustments	5
SECTION 5.		ELIGIBILITY	5
SECTION 6.		AWARDS	5
	(a)	Options	5
	(b)	Stock Appreciation Rights	6
	(c)	Restricted Stock and Restricted Stock Units	6
	(d)	Performance Awards	7
	(e)	Dividend Equivalents	7
	(f)	Other Stock Grants	8
	(g)	Other Stock-Based Awards	8
	(h)	General	8
	(i)	Directors' Automatic Option Grant Program	9
SECTION 7.		AMENDMENT AND TERMINATION; ADJUSTMENTS	11
	(a)	Amendments to the Plan	11
	(b)	Amendments to Awards	11
	(c)	Correction of Defects, Omissions and Inconsistencies	11
SECTION 8.		INCOME TAX WITHHOLDING	11
SECTION 9.		GENERAL PROVISIONS	12
	(a)	No Rights to Awards	12
	(b)	Award Agreements	12
	(c)	Plan Provisions Control	12
	(d)	No Rights of Stockholders	12
	(e)	No Limit on Other Compensation Arrangements	12
	(f)	No Right to Employment	12
	(g)	Governing Law	12
	(h)	Severability	12
	(i)	No Trust or Fund Created	13
	(j)	Other Benefits	13
	(k)	No Fractional Shares	13
	(l)	Headings	13
	(m)	Section 16 Compliance; Section 162(m) Administration	13
	(n)	Conditions Precedent to Issuance of Shares	13
SECTION 10.		EFFECTIVE DATE OF THE PLAN	13
SECTION 11.		TERM OF THE PLAN	14

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THE ENSIGN GROUP, INC.
2007 OMNIBUS INCENTIVE PLAN

Section 1. Purpose

        The purpose of the Plan is to promote the interests of the Company and its stockholders by aiding the Company in attracting and retaining employees, officers, consultants, independent contractors and directors capable of assuring the future success of the Company, to offer such persons incentives to continue in the Company's employ or service and to afford such persons an opportunity to acquire a proprietary interest, or otherwise increase their proprietary interest, in the Company.

Section 2. Definitions

        As used in the Plan, the following terms shall have the meanings set forth below:

        (a)   "Affiliate" shall mean (i) any entity that, directly or indirectly through one or more intermediaries, is controlled by the Company and (ii) any entity in which the Company has a significant equity interest, in each case as determined by the Committee.

        (b)   "Automatic Option Grant Program" shall mean the Directors' Automatic Option Grant Program described in Section 6(i) of the Plan.

        (c)   "Award" shall mean any Option, Stock Appreciation Right, Restricted Stock, Restricted Stock Unit, Performance Award, Dividend Equivalent, Other Stock Grant or Other Stock-Based Award granted under the Plan.

        (d)   "Award Agreement" shall mean any written agreement, contract or other instrument or document evidencing an Award granted under the Plan. Each Award Agreement shall be subject to the applicable terms and conditions of the Plan and any other terms and conditions (not inconsistent with the Plan) determined by the Committee.

        (e)   "Board" shall mean the Board of Directors of the Company.

        (f)    "Change in Control" shall mean a change in ownership or control of the Company effected through any of the following transactions: (i) a merger, consolidation or other reorganization unless securities representing more than 50% of the total combined voting power of the voting securities of the successor corporation are immediately thereafter beneficially owned, directly or indirectly and in substantially the same proportion, by the persons who beneficially owned the Company's outstanding voting securities immediately prior to such transaction; (ii) a sale, transfer or other disposition of all or substantially all of the Company's assets; or (iii) the acquisition, directly or indirectly, by any person or related group of persons (other than the Company or a person that directly or indirectly controls, is controlled by, or is under common control with, the Company), of beneficial ownership (within the meaning of Rule 13d-3 of the Exchange Act) of securities possessing more than 50% of the total combined voting power of the Company's outstanding securities pursuant to a tender or exchange offer made directly to the Company's stockholders.

        (g)   "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time, and any regulations promulgated thereunder.

        (h)   "Committee" shall mean a committee of Directors designated by the Board to administer the Plan, which shall initially be the Company's compensation committee. The Committee shall be comprised of at least two Directors but not less than such number of Directors as shall be required to permit Awards granted under the Plan to qualify under Rule 16b-3 and Section 162(m) of the Code, and each member of the Committee shall each be an "Outside Director."

        (i)    "Company" shall mean The Ensign Group, Inc., a Delaware corporation, and any successor corporation.

        (j)    "Director" shall mean a member of the Board, including any Non-Employee Director.

        (k)   "Dividend Equivalent" shall mean any right granted under Section 6(e) of the Plan.

        (l)    "Eligible Person" shall mean any employee, officer, consultant, independent contractor or director providing services to the Company or any Affiliate who the Committee determines to be an Eligible Person. An Eligible Person must be a natural person.

        (m)  "Equity Restructuring" shall mean a dividend or other distribution (whether in the form of cash, Shares, other securities or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase or exchange of Shares or other securities of the Company, issuance of warrants or other rights to purchase Shares or other securities of the Company or other similar corporate transaction or event that affects the Shares such that an adjustment is necessary in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan.

        (n)   "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.

        (o)   "Fair Market Value" shall mean, with respect to any property (including, without limitation, any Shares or other securities), the fair market value of such property determined by such methods or procedures as shall be established from time to time by the Committee. Notwithstanding the foregoing and unless otherwise determined by the Committee, the Fair Market Value of a Share as of a given date shall be the closing sale price of one Share as reported on the Nasdaq Global Market or such other principal United States securities market for such Shares on the date as of which Fair Market Value is being determined, if the Shares are then listed on the Nasdaq Global Market or another principal United States securities market for such Shares.

        (p)   "Incentive Stock Option" shall mean an option granted under Section 6(a) of the Plan that is intended to qualify as an "incentive stock option" in accordance with the terms of Section 422 of the Code or any successor provision.

        (q)   "Non-Employee Director" shall mean any Director who is not also an employee of the Company or an Affiliate within the meaning of Rule 16b-3 (which term "Non-Employee Director" is defined in this paragraph for purposes of the definition of "Committee" only and is not intended to define such term as used elsewhere in the Plan).

        (r)   "Non-Qualified Stock Option" shall mean an option granted under Section 6(a) of the Plan that is not an Incentive Stock Option.

        (s)   "Option" shall mean an Incentive Stock Option or a Non-Qualified Stock Option.

        (t)    "Other Stock Grant" shall mean any right granted under Section 6(f) of the Plan.

        (u)   "Other Stock-Based Award" shall mean any right granted under Section 6(g) of the Plan.

        (v)   "Outside Director" shall mean any Director who is an "outside director" within the meaning of Section 162(m) of the Code.

        (w)  "Participant" shall mean an Eligible Person designated to be granted an Award under the Plan.

        (x)   "Performance Award" shall mean any right granted under Section 6(d) of the Plan.

        (y)   "Performance Goal" shall mean one or more of the following performance goals, either individually, alternatively or in any combination, applied on a corporate, subsidiary or business unit basis: 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

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retention, customer satisfaction, completion of key projects and strategic plan development and implementation. Such 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. The Committee shall establish the Performance Goals for an Award on or before the 90^th day of the applicable performance period for which Performance Goals are established and in no event after 25% of the applicable performance period has elapsed and in any event when the achievement of the applicable Performance Goals remains substantially uncertain. The Committee may appropriately adjust any evaluation of performance under such Performance Goals to exclude the effect of certain events, including any of the following events: asset write-downs; litigation or claim judgments or settlements; changes in tax law, accounting principles or other such laws or provisions affecting reported results; severance, contract termination and other costs related to exiting certain business activities; and gains or losses from the disposition of businesses or assets or from the early extinguishment of debt.

        (z)   "Person" shall mean any individual or entity, including a corporation, partnership, limited liability company, association, joint venture or trust.

        (aa) "Plan" shall mean The Ensign Group, Inc. 2007 Omnibus Incentive Plan, as amended from time to time, the provisions of which are set forth herein.

        (bb) "Qualified Performance Based Award" shall have the meaning set forth in Section 6(d) of the Plan.

        (cc) "Restricted Stock" shall mean any Share granted under Section 6(c) of the Plan.

        (dd) "Restricted Stock Unit" shall mean any unit granted under Section 6(c) of the Plan evidencing the right to receive a Share (or evidencing the right to receive a cash payment equal to the Fair Market Value of a Share if explicitly so provided in the Award Agreement) at some future date.

        (ee) "Rule 16b-3" shall mean Rule 16b-3 promulgated by the Securities and Exchange Commission under the Exchange Act, or any successor rule or regulation.

        (ff)  "Section 162(m)" shall mean Section 162(m) of the Code and the applicable Treasury Regulations promulgated thereunder.

        (gg) "Securities Act" shall mean the Securities Act of 1933, as amended.

        (hh) "Service" shall mean the Participant's performance of services for the Company (or any Affiliate) in the capacity of an employee, officer, consultant, independent contractor or director.

        (ii)   "Share" or "Shares" shall mean a share or shares of common stock, $0.001 par value per share, of the Company or such other securities or property as may become subject to Awards pursuant to an adjustment made under Section 4(c) of the Plan.

        (jj)   "Stock Appreciation Right" shall mean any right granted under Section 6(b) of the Plan.

Section 3. Administration

        (a)    Power and Authority of the Committee.    The Plan shall be administered by the Committee. Any Awards made to members of the Committee, however, should also be authorized by a disinterested majority of the Board. Subject to the express provisions of the Plan and to applicable law, the Committee shall have full power and authority to: (i) designate Participants; (ii) determine the type or types of Awards to be granted to each Participant under the Plan; (iii) determine the number of Shares to be covered by (or the method by which payments or other rights are to be determined in connection with) each Award; (iv) determine the terms and conditions of any Award or Award Agreement; (v) amend the terms and conditions of any Award or Award Agreement and accelerate the exercisability of any Option or waive any restrictions relating to any Award; (vi) determine whether, to

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what extent and under what circumstances Awards may be exercised in cash, Shares, other securities, other Awards or other property, or canceled, forfeited or suspended; (vii) interpret and administer the Plan and any instrument or agreement, including an Award Agreement, relating to the Plan; (viii) establish, amend, suspend or waive such rules and regulations and appoint such agents as it shall deem appropriate for the proper administration of the Plan; and (ix) make any other determination and take any other action that the Committee deems necessary or desirable for the administration of the Plan. Unless otherwise expressly provided in the Plan, all designations, determinations, interpretations and other decisions under or with respect to the Plan or any Award or Award Agreement shall be within the sole discretion of the Committee, may be made at any time and shall be final, conclusive and binding upon any Eligible Person and any holder or beneficiary of any Award. The administration of the Automatic Option Grant Program, however, shall be self-executing in accordance with the terms of that program so that neither the Board nor any Committee shall exercise any discretionary functions with respect to any Awards made under that program.

        (b)    Power and Authority of the Board.    Notwithstanding anything to the contrary contained herein, the Board may, at any time and from time to time, without any further action of the Committee, exercise the powers and duties of the Committee under the Plan, but only to the extent it would not cause a loss of any benefits under Section 162(m).

Section 4. Shares Available for Awards

        (a)    Shares Available.    Subject to adjustment as provided in Section 4(c) of the Plan, the aggregate number of Shares that may be issued under the Plan shall be 1,000,000, plus an automatic annual increase on the first day of each of the Company's fiscal years beginning on January 1, 2008 equal to the lesser of (i) 1,000,000 shares of Common Stock or (ii) two percent (2.0%) of the number of shares of Common Stock outstanding on the last day of the immediately preceding fiscal year or (iii) such lesser number as determined by the Board. Shares to be issued under the Plan may be either authorized but unissued Shares or Shares re-acquired and held in treasury. Any Shares that are used by a Participant as full or partial payment to the Company 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 Plan. In addition, if any Shares covered by an Award or to which an Award relates are not purchased or are forfeited, or if an Award otherwise terminates without delivery of any Shares, then the number of Shares counted against the aggregate number of Shares available under the Plan with respect to such Award, to the extent of any such forfeiture or termination, shall again be available for granting Awards under the Plan. Notwithstanding the foregoing, (i) the number of Shares available for granting Incentive Stock Options under the Plan shall not exceed 1,000,000, plus the automatic annual increase described above, subject to adjustment as provided in Section 4(c) of the Plan and subject to the provisions of Section 422 or 424 of the Code or any successor provision and (ii) the number of Shares available for granting Restricted Stock and Restricted Stock Units shall not exceed 1,000,000, plus the automatic annual increase described above, subject to adjustment as provided in Section 4(c) of the Plan.

        (b)    Accounting for Awards.    For purposes of this Section 4, if an Award entitles the holder thereof to receive or purchase Shares, the number of Shares covered by such Award or to which such Award relates shall be counted on the date of grant of such Award against the aggregate number of Shares available for granting Awards under the Plan. Any Shares that are used by a Participant as full or partial payment to the Company 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 under the Plan. In addition, if any Shares covered by an Award or to which an Award relates are not purchased or are forfeited, or if an Award otherwise terminates without delivery of any Shares, then the number of Shares counted against the aggregate number of Shares available under the Plan with

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respect to such Award, to the extent of any such forfeiture or termination, shall again be available for granting Awards under the Plan.

        (c)    Adjustments.    In the event of any Equity Restructuring, the number and type of Shares (or other securities or other property) subject to outstanding Awards, and the purchase price or exercise price with respect to any Award will be proportionately adjusted; provided, however, that the number of Shares covered by any Award or to which such Award relates shall always be a whole number. The adjustments provided under this Section 4(c) shall be nondiscretionary and shall be final and binding on the affected Participant and the Company. The Committee shall make such proportionate adjustments, if any, as the Committee in its discretion may deem appropriate to reflect such Equity Restructuring with respect to the aggregate number and kind of shares that may be issued under the Plan (including, but not limited to, adjustments of the limitations in Sections 4(a) and 6(d) hereof). Notwithstanding the above, in the event (i) of any reorganization, merger, consolidation, split-up, spin-off, combination, repurchase or exchange of Shares or other securities of the Company or any other similar corporate transaction or event or (ii) the Company shall enter into a written agreement to undergo such a transaction or event, the Committee may, in its sole discretion, cancel any or all outstanding Awards and pay to the holders of any such Awards that are otherwise vested, in cash, the value of such Awards based upon the price per share of capital stock received or to be received by other stockholders of the Company in such event.

Section 5. Eligibility

        Any Eligible Person shall be eligible to be designated a Participant. In determining which Eligible Persons shall receive an Award and the terms of any Award, the Committee may take into account the nature of the services rendered by the respective Eligible Persons, their present and potential contributions to the success of the Company or such other factors as the Committee, in its discretion, shall deem relevant. Notwithstanding the foregoing, an Incentive Stock Option may only be granted to full-time or part-time employees (which term as used herein includes, without limitation, officers and directors who are also employees), and an Incentive Stock Option shall not be granted to an employee of an Affiliate unless such Affiliate is also a "subsidiary corporation" of the Company within the meaning of Section 424(f) of the Code or any successor provision.

Section 6. Awards

        (a)    Options.    The Committee is hereby authorized to grant Options to Eligible Persons with the following terms and conditions and with such additional terms and conditions not inconsistent with the provisions of the Plan as the Committee shall determine:

        (i)    Exercise Price.    The purchase price per Share purchasable under an Option shall be determined by the Committee; provided, however, that such purchase price shall not be less than 100% of the Fair Market Value of a Share on the date of grant of such Option.

        (ii)    Option Term.    The term of each Option shall be fixed by the Committee at the time of grant, but shall not be longer than 10 years from the date of grant.

        (iii)    Time and Method of Exercise.    The Committee shall determine the time or times at which an Option may be exercised in whole or in part and the method or methods by which, and the form or forms (including, without limitation, cash, Shares, other securities, other Awards or other property, or any combination thereof, having a Fair Market Value on the exercise date equal to the applicable exercise price) in which payment of the exercise price with respect thereto may be made or deemed to have been made.

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        (iv)    Incentive Stock Options.    Notwithstanding anything in the Plan to the contrary, the following additional provisions shall apply to the grant of stock options which are intended to qualify as Incentive Stock Options:

        (A)  The Committee will not grant Incentive Stock Options in which the aggregate Fair Market Value (determined as of the time the option is granted) of the Shares with respect to which Incentive Stock Options are exercisable for the first time by any Participant during any calendar year (under this Plan and all other plans of the Company and its Affiliates) shall exceed $100,000.

        (B)  All Incentive Stock Options must be granted within ten years from the earlier of the date on which this Plan was adopted by the Board or the date this Plan was approved by the stockholders of the Company.

        (C)  Unless sooner exercised, all Incentive Stock Options shall expire and no longer be exercisable no later than 10 years after the date of grant; provided, however, that in the case of a grant of an Incentive Stock Option to a Participant who, at the time such Option is granted, owns (within the meaning of Section 422 of the Code) stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or of its Affiliate, such Incentive Stock Option shall expire and no longer be exercisable no later than 5 years from the date of grant.

        (D)  The purchase price per Share for an Incentive Stock Option shall be not less than 100% of the Fair Market Value of a Share on the date of grant of the Incentive Stock Option; provided, however, that, in the case of the grant of an Incentive Stock Option to a Participant who, at the time such Option is granted, owns (within the meaning of Section 422 of the Code) stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or of its Affiliate, the purchase price per Share purchasable under an Incentive Stock Option shall be not less than 110% of the Fair Market Value of a Share on the date of grant of the Incentive Stock Option.

        (E)  Any Incentive Stock Option authorized under the Plan shall contain such other provisions as the Committee shall deem advisable, but shall in all events be consistent with and contain all provisions required in order to qualify the Option as an Incentive Stock Option.

        (b)    Stock Appreciation Rights.    The Committee is hereby authorized to grant Stock Appreciation Rights to Eligible Persons subject to the terms of the Plan and any applicable Award Agreement. Each Stock Appreciation Right granted under the Plan shall confer on the holder upon exercise the right to receive a number of Shares equal to the excess of (a) the Fair Market Value of one Share on the date of exercise (or, if the Committee shall so determine, at any time during a specified period before or after the date of exercise) over (b) the grant price of the Stock Appreciation Right as determined by the Committee, which grant price shall not be less than 100% of the Fair Market Value of one Share on the date of grant of the Stock Appreciation Right. Subject to the terms of the Plan, the grant price, term, methods of exercise, dates of exercise and any other terms and conditions (including conditions or restrictions on the exercise thereof) of any Stock Appreciation Right shall be as determined by the Committee.

        (c)    Restricted Stock and Restricted Stock Units.    The Committee is hereby authorized to grant Restricted Stock and Restricted Stock Units to Eligible Persons with the following terms and conditions and with such additional terms and conditions not inconsistent with the provisions of the Plan as the Committee shall determine:

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        (i)    Restrictions.    Shares of Restricted Stock and Restricted Stock Units shall be subject to such restrictions as the Committee may impose (including, without limitation, a restriction on or prohibition against the right to receive any dividend or other right or property with respect thereto), which restrictions may lapse separately or in combination at such time or times, in such installments or otherwise as the Committee may deem appropriate.

        (ii)    Issuance of Shares.    Any Restricted Stock granted under the Plan may be evidenced in such manner as the Board may deem appropriate, including book-entry registration or issuance of a stock certificate or certificates, which certificate or certificates shall be held by the Company. Such certificate or certificates shall be registered in the name of the Participant and shall bear an appropriate legend referring to the restrictions and possible forfeiture applicable to such Restricted Stock, as set forth in the Award Agreement.

        (iii)    Forfeiture.    Except as otherwise determined by the Committee, upon a Participant's termination of Service (as determined under criteria established by the Committee) during the applicable restriction period, all applicable Shares of Restricted Stock and Restricted Stock Units at such time subject to restriction shall be forfeited and reacquired by the Company; provided, however, that the Committee may, when it finds that a waiver would be in the best interest of the Company, waive in whole or in part any or all remaining restrictions with respect to Shares of Restricted Stock or Restricted Stock Units.

        (d)    Performance Awards.    The Committee is hereby authorized to grant Performance Awards to Eligible Persons subject to the terms of the Plan. A Performance Award granted under the Plan (i) may be denominated or payable in cash, Shares (including, without limitation, Restricted Stock and Restricted Stock Units), other securities, other Awards or other property and (ii) shall confer on the holder thereof the right to receive payments, in whole or in part, upon the achievement of such Performance Goals during such performance periods as the Committee shall establish. Subject to the terms of the 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 shall be determined by the Committee. From time to time, the Committee may designate an Award granted pursuant to the Plan as an award of "qualified performance-based compensation" within the meaning of Section 162(m) of the Code (a "Qualified Performance Based Award"). Qualified Performance Based Awards shall, to the extent required by Section 162(m), be conditioned solely on the achievement of one or more objective Performance Goals, and such Performance Goals shall be established by the Committee within the time period prescribed by, and shall otherwise comply with the requirements of, Section 162(m). The Committee shall also certify in writing that such Performance Goals have been met prior to payment of the Qualified Performance Based Awards to the extent required by Section 162(m). Subject to adjustment as provided in Section 4(c), no Participant may be granted (i) Options or Stock Appreciation Rights during any performance period with respect to more than 2,500,000 Shares or (ii) Restricted Stock, Restricted Stock Units, Other Stock Grants or Other Stock-Based Awards in any performance period that are intended to comply with the performance-based exception under Section 162(m) of the Code and are denominated in Shares with respect to more than 2,500,000 Shares (the "Limitations"). In addition to the foregoing, the maximum dollar value that may be earned by any Participant in any performance period with respect to Performance Awards that are intended to comply with the performance-based exception under Section 162(m) of the Code and are denominated in cash is $5,000,000. If an Award is cancelled, the cancelled Award shall continue to be counted toward the applicable Limitations.

        (e)    Dividend Equivalents.    The Committee is hereby authorized to grant Dividend Equivalents to Eligible Persons under which the Participant shall be entitled to receive payments (in cash, Shares, other securities, other Awards or other property as determined in the discretion of the Committee) equivalent to the amount of cash dividends paid by the Company to holders of Shares with respect to a

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number of Shares determined by the Committee. Subject to the terms of the Plan, such Dividend Equivalents may have such terms and conditions as the Committee shall determine.

        (f)    Other Stock Grants.    The Committee is hereby authorized, subject to the terms of the Plan, to grant to Eligible Persons Shares without restrictions thereon as are deemed by the Committee to be consistent with the purpose of the Plan. Subject to the terms of the Plan and any applicable Award Agreement, such Other Stock Grant may have such terms and conditions as the Committee shall determine.

        (g)    Other Stock-Based Awards.    The Committee is hereby authorized to grant to Eligible Persons, subject to the terms of the Plan, such other Awards that are denominated or payable in, valued in whole or in part by reference to, or otherwise based on or related to, Shares (including, without limitation, securities convertible into Shares), as are deemed by the Committee to be consistent with the purpose of the Plan. Shares or other securities delivered pursuant to a purchase right granted under this Section 6(g) shall be purchased for such consideration, which may be paid by such method or methods and in such form or forms (including, without limitation, cash, Shares, other securities, other Awards or other property or any combination thereof), as the Committee shall determine, the value of which consideration, as established by the Committee, shall not be less than 100% of the Fair Market Value of such Shares or other securities as of the date such purchase right is granted.

        (h)    General.    

        (i)    Consideration for Awards.    Awards may be granted for no cash consideration or for any cash or other consideration as determined by the Committee and required by applicable law.

        (ii)    Awards May Be Granted Separately or Together.    Awards may, in the discretion of the Committee, be granted either alone or in addition to, in tandem with or in substitution for any other Award or any award granted under any plan of the Company or any Affiliate. Awards granted in addition to or in tandem with other Awards or in addition to or in tandem with awards granted under any such other plan of the Company or any Affiliate may be granted either at the same time as or at a different time from the grant of such other Awards or awards.

        (iii)    Forms of Payment under Awards.    Subject to the terms of the Plan and of any applicable Award Agreement, payments or transfers to be made by the Company or an Affiliate upon the grant, exercise or payment of an Award may be made in such form or forms as the Committee shall determine (including, without limitation, cash, Shares, other securities, other Awards or other property or any combination thereof), and may be made in a single payment or transfer, in installments or on a deferred basis, in each case in accordance with rules and procedures established by the Committee. Such rules and procedures may include, without limitation, provisions for the payment or crediting of reasonable interest on installment or deferred payments or the grant or crediting of Dividend Equivalents with respect to installment or deferred payments.

        (iv)    Limits on Transfer of Awards.    No Award (other than Other Stock Grants) and no right under any such Award shall be transferable by a Participant other than by will or by the laws of descent and distribution and the Company shall not be required to recognize any attempted assignment of such rights by any Participant; provided, however, that, if so determined by the Committee, a Participant may, in the manner established by the Committee, designate a beneficiary or beneficiaries to exercise the rights of the Participant and receive any property distributable with respect to any Award upon the death of the Participant; provided, further, that, if so determined by the Committee, a Participant may, at any time that such Participant holds such Option, transfer a Non-Qualified Stock Option to any "Family Member" (as such term is defined in the General Instructions to Form S-8 (or any successor to such Instructions or such Form) under the Securities Act), provided that the Participant may not receive any consideration for such transfer, the Family Member may not make any subsequent transfers other than by will or by the laws of descent and distribution and the Company receives written notice of such transfer. Except

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as otherwise determined by the Committee, each Award (other than an Incentive Stock Option) or right under any such Award shall be exercisable during the Participant's lifetime only by the Participant or, if permissible under applicable law, by the Participant's guardian or legal representative. Except as otherwise determined by the Committee, no Award (other than an Incentive Stock Option) or right under any such Award may be pledged, alienated, attached or otherwise encumbered, and any purported pledge, alienation, attachment or other encumbrance thereof shall be void and unenforceable against the Company or any Affiliate.

        (v)    Term of Awards.    Subject to Section 6(a)(iv)(C), the term of each Award shall be fixed by the Committee at the time of grant, but shall not be longer than 10 years from the date of grant.

        (vi)    Restrictions; Securities Exchange Listing.    All Shares or other securities delivered under the Plan pursuant to any Award or the exercise thereof shall be subject to such stop transfer orders and other restrictions as the Committee may deem advisable under the Plan, applicable federal or state securities laws and regulatory requirements, and the Committee may direct appropriate stop transfer orders and cause other legends to be placed on the certificates for such Shares or other securities to reflect such restrictions. If the Shares or other securities are traded on a securities exchange, the Company shall not be required, and shall have no liability for failure, to deliver any Shares or other securities covered by an Award unless and until such Shares or other securities have been and continue to be admitted for trading on such securities exchange. No Shares or other assets shall be issued or delivered pursuant to the Plan, and the Company shall have no liability for failure to issue or deliver Shares under the Plan, unless and until there shall have been compliance with all applicable requirements of applicable securities laws, including the filing and effectiveness of the Form S-8 registration statement for the Shares issuable pursuant to the Plan, and all applicable listing requirements of any stock exchange or trading system, including the Nasdaq Stock Market, on which Common Stock is then traded. No Shares shall be issued or delivered pursuant to the Plan, and the Company shall have no liability for failure to issue or deliver Shares under the Plan, if doing so would violate any internal policies of the Company.

        (vii)    Prohibition on Repricing.    Except as provided in Section 4(c) of the Plan, no Option or Stock Appreciation Right may be amended to reduce its initial exercise or grant price and no Option or Stock Appreciation Right shall be canceled and replaced with Options or Stock Appreciation Rights having a lower exercise or grant price, without the approval of the stockholders of the Company.

        (i)    Directors' Automatic Option Grant Program.    

        (i)    Automatic Grants — Election for a Three-Year Term.    Each non-employee director shall receive on the date at which he or she is appointed, elected or re-elected to serve a three-year term, a Non-Qualified Option to purchase 12,000 Shares. The exercise price for such Shares shall be 100% of the Fair Market Value of the Shares on the date of grant. Each such Option shall become exercisable in accordance with the vesting schedule below, shall be exercisable for 10 years following the date of grant and shall be generally subject to the terms and conditions set forth in the Plan. Each such Option shall vest in three equal annual installments of 4,000 Shares upon the non-employee director's completion of each year of service as a Board member over the three-year period measured from the date of grant. There shall be no limit on the number of such automatic Option grants any one non-employee director may receive over his or her period of Board service, and non-employee directors who have previously been employees of the Company (or any Affiliate) or who have received one or more Option grants from the Company prior to becoming a non-employee director shall be eligible to receive one or more such automatic Option grants over their period of continued Board service.

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        (ii)    Annual Automatic Grants — Election for Other Term.    In the event that a non-employee director is appointed, elected or re-elected to serve a term of less than three years, such non-employee director shall receive on the date of such appointment, election or re-election to serve a one-year term or a two-year term, a Non-Qualified Option to purchase 4,000 Shares or 8,000 Shares, as the case may be. The exercise price for such Shares shall be 100% of the Fair Market Value of the Shares on the date of grant. Each such Option shall become exercisable in accordance with the vesting schedule below, shall be exercisable for 10 years following the date of grant and shall be generally subject to the terms and conditions set forth in the Plan. Each such Option for 8,000 Shares shall vest in two equal annual installments of 4,000 Shares upon the non-employee director's completion of each year of service as a Board member over the two-year period measured from the date of grant, and each such Option for 4,000 Shares shall vest in a single installment of 4,000 Shares upon the non-employee director's completion of one year of service as a Board member measured from the date of grant. There shall be no limit on the number of such automatic Option grants any one non-employee director may receive over his or her period of Board service, and non-employee directors who have previously been employees of the Company (or any Affiliate) or who have received one or more Option grants from the Company prior to becoming a non-employee director shall be eligible to receive one or more such automatic Option grants over their period of continued Board service.

        (iii)    Termination of Board Service.    The following provisions shall govern the exercise of any options granted to non-employee directors pursuant to the Automatic Option Grant Program that are outstanding at the time the non-employee director ceases to serve as a Board member:

        (A)  Should the non-employee director's service as a Board member cease for any reason while one or more Options granted pursuant to this Automatic Option Grant Program are outstanding, then each such Option shall remain exercisable, for any or all of the vested Shares for which the Option is exercisable at the time of such cessation of Board service, until the earlier of (i) the termination date of the Option or (ii) the expiration of 90 days measured from the date the non-employee director's Board service ceases. Upon the expiration of the 90-day post-termination exercise period, or (if earlier) upon the termination date of the Option, the Option shall terminate with respect to any vested Shares for which the Option has not been exercised.

        (B)  Each Option granted pursuant to this Automatic Option Grant Program that is outstanding at the time of the non-employee director's cessation of Board service shall immediately terminate and cease to remain outstanding with respect to any and all unvested Shares for which the Option is not otherwise at that time exercisable.

        (iv)    Change in Control.    In the event of a Change in Control effected during the non-employee director's period of Board service, the vesting of each Option granted pursuant to this Automatic Option Grant Program at the time held by such non-employee director shall automatically accelerate so that each such Option shall, immediately prior to the specified effective date for the Change in Control, become exercisable for all of the Shares at the time subject to such Option and may be exercised for all or any portion of such Shares. Upon the consummation of the Change in Control, all Options granted pursuant to this Automatic Option Grant Program shall terminate and cease to be outstanding, unless assumed by the successor corporation.

        (v)    Remaining Terms.    The remaining terms and conditions of each Option granted pursuant to this Automatic Option Grant Program shall be substantially the same as the terms in effect for Options made under the Plan and shall be set forth in an Option Agreement.

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Section 7. Amendment and Termination; Adjustments

        (a)    Amendments to the Plan.    The Board may amend, alter, suspend, discontinue or terminate the Plan at any time; provided, however, that, notwithstanding any other provision of the Plan or any Award Agreement, without the approval of the stockholders of the Company, no such amendment, alteration, suspension, discontinuation or termination shall be made that, absent such approval:

        (i)    violates the rules or regulations of the National Association of Securities Dealers, Inc. or any other securities exchange that are applicable to the Company;

        (ii)   causes the Company to be unable, under the Code, to grant Incentive Stock Options under the Plan;

        (iii)  increases the number of shares authorized under the Plan as specified in Section 4(a);

        (iv)  permits the award of Options or Stock Appreciation Rights at a price less than 100% of the Fair Market Value of a Share on the date of grant of such Option or Stock Appreciation Right, as prohibited by Sections 6(a)(i) and 6(b) of the Plan or the repricing of Options or Stock Appreciation Rights, as prohibited by Section 6(h)(vii) of the Plan; or

        (v)   would prevent the grant of Options or Stock Appreciation Rights that would qualify under Section 162(m) of the Code.

        (b)    Amendments to Awards.    The Committee may waive any conditions of or rights of the Company under any outstanding Award, prospectively or retroactively. Except as otherwise provided herein or in an Award Agreement, the Committee may not amend, alter, suspend, discontinue or terminate any outstanding Award, prospectively or retroactively, if such action would adversely affect the rights of the holder of such Award, without the consent of the Participant or holder or beneficiary thereof. Notwithstanding the foregoing, the Committee shall not waive any conditions or rights of the Company, or otherwise amend or alter any outstanding Qualified Performance Based Award in such a manner as to cause such Award not to constitute "qualified performance based compensation" within the meaning of Section 162(m) of the Code.

        (c)    Correction of Defects, Omissions and Inconsistencies.    The Committee may correct any defect, supply any omission or reconcile any inconsistency in the Plan or in any Award or Award Agreement in the manner and to the extent it shall deem desirable to implement or maintain the effectiveness of the Plan.

Section 8. Income Tax Withholding

        In order to comply with all applicable federal, state or local income tax laws or regulations, the Company may take such action as it deems appropriate to ensure that all applicable federal, state or local payroll, withholding, income or other taxes, which are the sole and absolute responsibility of a Participant, are withheld or collected from such Participant. In order to assist a Participant in paying all or a portion of the federal, state and local taxes to be withheld or collected upon exercise or receipt of (or the lapse of restrictions relating to) an Award, the Committee, in its discretion and subject to such additional terms and conditions as it may adopt, may permit the Participant to satisfy such tax obligation by (i) electing to have the Company withhold a portion of the Shares otherwise to be delivered upon exercise or receipt of (or the lapse of restrictions relating to) such Award with a Fair Market Value equal to the amount of such taxes (but only to the extent of the minimum amount required to be withheld under applicable laws or regulations) or (ii) delivering to the Company Shares other than Shares issuable upon exercise or receipt of (or the lapse of restrictions relating to) such Award with a Fair Market Value equal to the amount of such taxes (but only to the extent of the minimum amount required to be withheld under applicable laws or regulations). The election, if any, must be made on or before the date that the amount of tax to be withheld is determined.

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Section 9. General Provisions

        (a)    No Rights to Awards.    No Eligible Person or other Person shall have any claim to be granted any Award under the Plan, and there is no obligation for uniformity of treatment of Eligible Persons or holders or beneficiaries of Awards under the Plan. The terms and conditions of Awards need not be the same with respect to any Participant or with respect to different Participants.

        (b)    Award Agreements.    No Participant will have rights under an Award granted to such Participant unless and until an Award Agreement shall have been duly executed on behalf of the Company and, if requested by the Company, signed by the Participant.

        (c)    Plan Provisions Control.    In the event that any provision of an Award Agreement conflicts with or is inconsistent in any respect with the terms of the Plan as set forth herein or subsequently amended, the terms of the Plan shall control.

        (d)    No Rights of Stockholders.    Except with respect to Shares of Restricted Stock as to which the Participant has been granted the right to vote, neither a Participant nor the Participant's legal representative shall be, or have any of the rights and privileges of, a stockholder of the Company with respect to any Shares issuable to such Participant upon the exercise or payment of any Award, in whole or in part, unless and until such Shares have been issued in the name of such Participant or such Participant's legal representative without restrictions thereto.

        (e)    No Limit on Other Compensation Arrangements.    Nothing contained in the Plan shall prevent the Company or any Affiliate from adopting or continuing in effect other or additional compensation arrangements, and such arrangements may be either generally applicable or applicable only in specific cases.

        (f)    No Right to Employment.    The grant of an Award shall not be construed as giving a Participant the right to be retained in the employ, or as giving a director of the Company or an Affiliate the right to continue as a director or an Affiliate of the Company or any Affiliate, nor will it affect in any way the right of the Company or an Affiliate to terminate a Participant's employment or Service at any time, with or without cause. In addition, the Company or an Affiliate may at any time dismiss a Participant from employment, or terminate the term of a director of the Company or an Affiliate, free from any liability or any claim under the Plan or any Award, unless otherwise expressly provided in the Plan or in any Award Agreement. Nothing in this Plan shall confer on any person any legal or equitable right against the Company or any Affiliate, directly or indirectly, or give rise to any cause of action at law or in equity against the Company or an Affiliate. The Awards granted hereunder shall not form any part of the wages or salary of any Eligible Person for purposes of severance pay or termination indemnities, irrespective of the reason for termination of employment. Under no circumstances shall any person ceasing to be an employee of the Company or any Affiliate be entitled to any compensation for any loss of any right or benefit under the Plan which such employee might otherwise have enjoyed but for termination of employment, whether such compensation is claimed by way of damages for wrongful or unfair dismissal, breach of contract or otherwise. By participating in the Plan, each Participant shall be deemed to have accepted all the conditions of the Plan and the terms and conditions of any rules and regulations adopted by the Committee and shall be fully bound thereby.

        (g)    Governing Law.    The validity, construction and effect of the Plan or any Award, and any rules and regulations relating to the Plan or any Award, shall be determined in accordance with the internal laws, and not the law of conflicts, of the State of Delaware.

        (h)    Severability.    If any provision of the Plan or any Award is or becomes or is deemed to be invalid, illegal or unenforceable in any jurisdiction or would disqualify the Plan or any Award under any law deemed applicable by the Committee, such provision shall be construed or deemed amended to

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conform to applicable laws, or if it cannot be so construed or deemed amended without, in the determination of the Committee, materially altering the purpose or intent of the Plan or the Award, such provision shall be stricken as to such jurisdiction or Award, and the remainder of the Plan or any such Award shall remain in full force and effect.

        (i)    No Trust or Fund Created.    Neither the Plan nor any Award shall create or be construed to create a trust or separate fund of any kind or a fiduciary relationship between the Company or any Affiliate and an Eligible Person or any other Person. To the extent that any Person acquires a right to receive payments from the Company or any Affiliate pursuant to an Award, such right shall be no greater than the right of any unsecured general creditor of the Company or any Affiliate.

        (j)    Other Benefits.    No compensation or benefit awarded to or realized by any Participant under the Plan shall be included for the purpose of computing such Participant's compensation under any compensation-based retirement, disability, or similar plan of the Company unless required by law or otherwise provided by such other plan.

        (k)    No Fractional Shares.    No fractional Shares shall be issued or delivered pursuant to the Plan or any Award, and the Committee shall determine whether cash shall be paid in lieu of any fractional Shares or whether such fractional Shares or any rights thereto shall be canceled, terminated or otherwise eliminated.

        (l)    Headings.    Headings are given to the Sections and subsections of the Plan solely as a convenience to facilitate reference. Such headings shall not be deemed in any way material or relevant to the construction or interpretation of the Plan or any provision thereof.

        (m)    Section 16 Compliance; Section 162(m) Administration.    The Plan is intended to comply in all respects with Rule 16b-3 or any successor provision, as in effect from time to time, and in all events the Plan shall be construed in accordance with the requirements of Rule 16b-3. If any Plan provision does not comply with Rule 16b-3 as hereafter amended or interpreted, the provision shall be deemed inoperative. The Board of Directors, in its absolute discretion, may bifurcate the Plan so as to restrict, limit or condition the use of any provision of the Plan with respect to persons who are officers or directors subject to Section 16 of the Exchange Act without so restricting, limiting or conditioning the Plan with respect to other Eligible Persons. With respect to Options and Stock Appreciation Rights, the Company intends to have the Plan administered in accordance with the requirements for the award of "qualified performance-based compensation" within the meaning of Section 162(m) of the Code.

        (n)    Conditions Precedent to Issuance of Shares.    Shares shall not be issued, and the Company shall not have any liability for failure to issue Shares, pursuant to the exercise or payment of the purchase price relating to an Award unless such exercise or payment and the issuance and delivery of such Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act, the Exchange Act, the rules and regulations promulgated thereunder, the requirements of any applicable Stock Exchange and the Delaware General Corporation Law. As a condition to the exercise or payment of the purchase price relating to such Award, the Company may require that the person exercising or paying the purchase price represent and warrant that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation and warranty is required by law.

Section 10. Effective Date of the Plan

        The Plan shall be effective as of the date on which the Company's registration statement on Form S-1 relating to the initial public offering of its common stock is declared effective by the Securities and Exchange Commission, subject to the prior approval of the Board and stockholders of the Company.

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Section 11. Term of the Plan

        No Award shall be granted under the Plan after (a) the tenth anniversary of the earlier of (i) the date on which this Plan was adopted by the Board or (ii) the date this Plan was approved by the stockholders of the Company, or (b) any earlier date of discontinuation or termination established pursuant to Section 7(a) of the Plan. However, unless otherwise expressly provided in the Plan or in an applicable Award Agreement, any Award theretofore granted may extend beyond such date, and the authority of the Committee provided for hereunder with respect to the Plan and any Awards, and the authority of the Board to amend the Plan, shall extend beyond the termination of the Plan.

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EX-10.4

Exhibit 10.4

THE ENSIGN GROUP, INC.
NON-INCENTIVE STOCK OPTION AGREEMENT

        This NON-INCENTIVE STOCK OPTION AGREEMENT (the "Agreement") is made this                          day of                         ,                          by and between The Ensign Group, Inc., a Delaware corporation (the "Company") and                         , an individual resident of                         ,                          ("Optionee"). All capitalized terms used herein but not defined herein shall have the meanings given to them in The Ensign Group, Inc. 2007 Omnibus Incentive Plan (the "Plan").

        1.    Grant of Option.    The Company hereby grants Optionee, on the date such grant was approved by the Committee (the "Grant Date"), the option (the "Option") to purchase all or any part of an aggregate of                          shares (the "Shares") of Common Stock of the Company at the exercise price of $                         per share according to the terms and conditions set forth in this Agreement and in the Plan. The Option will not be treated as an incentive stock option within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). The Option is issued under the Plan and is subject to its terms and conditions. A copy of the Plan will be furnished upon request of Optionee.

        The Option shall terminate at the close of business ten years from the Grant Date (the "Expiration Date") unless sooner terminated or cancelled in accordance with this Agreement or the Plan.

        2.    Vesting of Option Rights.

        (a)   Except as otherwise provided in this Agreement, the Option may be exercised for vested Shares by Optionee in accordance with the following schedule:

On or after each of
the following dates Number of Shares
with respect to which
the Option is vested and
exercisable

        (b)   During the lifetime of Optionee, the Option shall be exercisable only by Optionee and shall not be assignable or transferable by Optionee, other than by will or the laws of descent and distribution; provided however, that Optionee may transfer the Option to any "Family Member" (as such term is defined in the General Instructions to Form S-8 (or any successor to such Instructions or such Form) under the Securities Act), provided that the Participant may not receive any consideration for such transfer, the Family Member may not make any subsequent transfers other than by will or by the laws of descent and distribution and the Company receives written notice of such transfer.

        3.    Exercise of Option after Death or Termination of Service.    The Option shall terminate and may no longer be exercised if Optionee ceases to provide Service to the Company or its affiliates, except that:

        (a)   If Optionee's Service shall be terminated for any reason, voluntary or involuntary, other than for "Cause" (as defined in Section 3(e)) or Optionee's death or disability (within the meaning of Section 22(e)(3) of the Code), Optionee may at any time within a period of 3 months after such termination exercise the Option to the extent the Option was vested and exercisable by Optionee on the date of the termination of Optionee's Service.

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        (b)   If Optionee's Service is terminated for Cause, the Option shall be terminated as of the date of the act giving rise to such termination.

        (c)   If Optionee shall die while the Option is still exercisable according to its terms or if Optionee's Service is terminated because Optionee has become disabled (within the meaning of Section 22(e)(3) of the Code) while providing Service to the Company and Optionee shall not have fully exercised the Option, such Option may be exercised at any time within 12 months after Optionee's death or date of termination of Service for disability by Optionee, personal representatives or administrators or guardians of Optionee, as applicable or by any person or persons to whom the Option is transferred by will or the applicable laws of descent and distribution, to the extent of the full number of Shares Optionee was entitled to purchase under the Option on (i) the earlier of the date of death or termination of Service or (ii) the date of termination for such disability, as applicable.

        (d)   Notwithstanding the above, in no case may the Option be exercised to any extent by anyone after the Expiration Date of the Option.

        (e)   "Cause" shall mean (i) the willful and continued failure by Optionee substantially to perform his or her duties and obligations (other than any such failure resulting from his or her incapacity due to physical or mental illness), (ii) Optionee's conviction or plea bargain of any felony or gross misdemeanor involving moral turpitude, fraud or misappropriation of funds or (iii) the willful engaging by Optionee in misconduct which causes substantial injury to the Company or its affiliates, its other employees or the employees of its affiliates or its clients or the clients of its affiliates, whether monetarily or otherwise. For purposes of this paragraph, no action or failure to act on Optionee's part shall be considered "willful" unless done or omitted to be done, by Optionee in bad faith and without reasonable belief that his or her action or omission was in the best interests of the Company. However, if the term or concept has been defined in an employment agreement between the Company and Optionee, then Cause shall have the definition set forth in such employment agreement. The foregoing definition shall not in any way preclude or restrict the right of the Company (or any Affiliate) to discharge or dismiss Optionee or other person providing Service to the Company (or any Affiliate) for any other acts or omissions but such other acts or omissions shall not be deemed, for purposes of this Agreement, to constitute grounds for termination for Cause.

        4.    Method of Exercise of Option.    Subject to the foregoing, the Option may be exercised in whole or in part from time to time by serving written notice of exercise on the Company at its principal office within the Option period. The notice shall state the number of Shares as to which the Option is being exercised and shall be accompanied by payment of the exercise price. Payment of the exercise price shall be made (i) in cash (including bank check, personal check or money order payable to the Company), or (ii) with the approval of the Company (which may be given in its sole discretion), by delivering to the Company for cancellation shares of the Company's Common Stock already owned by Optionee having a Fair Market Value (as defined in the Plan) equal to the full exercise price of the Shares being acquired. Subject to Section 402 of the Sarbanes-Oxley Act of 2002, to the extent this Option is exercised for vested Shares, the Option may be exercised in whole or in part from time to time through a special sale and remittance procedure pursuant to which Optionee shall concurrently provide irrevocable instructions (1) to Optionee's brokerage firm to effect the immediate sale of the purchased Shares and remit to the Company, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate exercise price payable for the purchased Shares plus all applicable income and employment taxes required to be withheld by the Company by reason of such exercise, and (2) to the Company to deliver the certificates for the purchased Shares directly to such brokerage firm in order to complete the sale.

        5.    Miscellaneous.

        (a)    Plan Provisions Control.    In the event that any provision of the Agreement conflicts with or is inconsistent in any respect with the terms of the Plan, the terms of the Plan shall control. This

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Agreement (and any addendum hereto) and the Plan together constitute the entire agreement between the parties hereto with regard to the subject matter hereof.

        (b)    No Rights of Stockholders.    Neither Optionee, Optionee's legal representative nor a permissible assignee of this Option shall have any of the rights and privileges of a stockholder of the Company with respect to the Shares, unless and until such Shares have been issued in the name of Optionee, Optionee's legal representative or permissible assignee, as applicable.

        (c)    No Right to Employment.    The grant of the Option shall not be construed as giving Optionee the right to be retained in the employ of, or as giving a director of the Company or an Affiliate (as defined in the Plan) the right to continue as a director of the Company or an Affiliate with, the Company or an Affiliate, nor will it affect in any way the right of the Company or an Affiliate to terminate such employment or position at any time, with or without cause. In addition, the Company or an Affiliate may at any time dismiss Optionee from employment, or terminate the term of a director of the Company or an Affiliate, free from any liability or any claim under the Plan or the Agreement. Nothing in the Agreement shall confer on any person any legal or equitable right against the Company or any Affiliate, directly or indirectly, or give rise to any cause of action at law or in equity against the Company or an Affiliate. The Option granted hereunder shall not form any part of the wages or salary of Optionee for purposes of severance pay or termination indemnities, irrespective of the reason for termination of employment. Under no circumstances shall any person ceasing to be an employee of the Company or any Affiliate be entitled to any compensation for any loss of any right or benefit under the Agreement or Plan which such employee might otherwise have enjoyed but for termination of employment, whether such compensation is claimed by way of damages for wrongful or unfair dismissal, breach of contract or otherwise. By participating in the Plan, Optionee shall be deemed to have accepted all the conditions of the Plan and the Agreement and the terms and conditions of any rules and regulations adopted by the Committee and shall be fully bound thereby.

        (d)    Governing Law.    The validity, construction and effect of the Plan and the Agreement, and any rules and regulations relating to the Plan and the Agreement, shall be determined in accordance with the internal laws, and not the law of conflicts, of the State of Delaware.

        (e)    Severability.    If any provision of the Agreement is or becomes or is deemed to be invalid, illegal or unenforceable in any jurisdiction or would disqualify the Agreement under any law deemed applicable by the Committee (as defined in the Plan), such provision shall be construed or deemed amended to conform to applicable laws, or if it cannot be so construed or deemed amended without, in the determination of the Committee, materially altering the purpose or intent of the Plan or the Agreement, such provision shall be stricken as to such jurisdiction or the Agreement, and the remainder of the Agreement shall remain in full force and effect.

        (f)    No Trust or Fund Created.    Neither the Plan nor the Agreement shall create or be construed to create a trust or separate fund of any kind or a fiduciary relationship between the Company or any Affiliate and Optionee or any other person.

        (g)    Headings.    Headings are given to the Sections and subsections of the Agreement solely as a convenience to facilitate reference. Such headings shall not be deemed in any way material or relevant to the construction or interpretation of the Agreement or any provision thereof.

        (h)    Conditions Precedent to Issuance of Shares.    Shares shall not be issued, and the Company shall not have any liability for failure to issue Shares, pursuant to the exercise of the Option unless such exercise and the issuance and delivery of the applicable Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act of 1934, as amended, the rules and regulations promulgated thereunder, the requirements of any applicable Stock Exchange and the Delaware General Corporation Law. As a condition to the exercise of the purchase price relating to the Option, the Company may require that

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the person exercising or paying the purchase price represent and warrant that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation and warranty is required by law.

        (i)    Withholding.    In order to provide the Company with the opportunity to claim the benefit of any income tax deduction which may be available to it upon the exercise of the Option and in order to comply with all applicable federal or state income tax laws or regulations, the Company may take such action as it deems appropriate to insure that, if necessary, all applicable federal or state payroll, withholding, income or other taxes are withheld or collected from Optionee.

        (j)    Consultation With Professional Tax and Investment Advisors.    The holder of this Award acknowledges that the grant, exercise, vesting or any payment with respect to this Award, and the sale or other taxable disposition of the Shares acquired pursuant to the exercise thereof, may have tax consequences pursuant to the Code or under local, state or international tax laws. The holder further acknowledges that such holder is relying solely and exclusively on the holder's own professional tax and investment advisors with respect to any and all such matters (and is not relying, in any manner, on the Company or any of its employees or representatives). Finally, the holder understands and agrees that any and all tax consequences resulting from the Award and its grant, exercise, vesting or any payment with respect thereto, and the sale or other taxable disposition of the Shares acquired pursuant to the Plan, is solely and exclusively the responsibility of the holder without any expectation or understanding that the Company or any of its employees or representatives will pay or reimburse such holder for such taxes or other items.

IN WITNESS WHEREOF, the Company and Optionee have executed this Agreement on the date set forth in the first paragraph.

THE ENSIGN GROUP, INC.

By:

Name:

Title:

[OPTIONEE]

Name:

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EX-10.5

Exhibit 10.5

THE ENSIGN GROUP, INC.
RESTRICTED STOCK AWARD AGREEMENT

        This RESTRICTED STOCK AWARD AGREEMENT (the "Agreement") is made this                         day of                        ,                         , by and between The Ensign Group, Inc., a Delaware corporation (the "Company") and                        , an individual resident of                        ,                          ("Participant"). All capitalized terms used herein but not defined herein shall have the meanings given to them in The Ensign Group, Inc. 2007 Omnibus Incentive Plan (the "Plan").

        1.    Award.    The Company hereby grants to Participant a restricted stock award of                        shares (the "Shares") of Common Stock, par value $0.001 per share, of the Company according to the terms and conditions set forth herein and in the Plan. The Shares are Restricted Stock granted under Section 6(c) of the Plan. A copy of the Plan will be furnished upon request of Participant. With respect to the Shares, Participant shall be entitled at all times on and after the date of issuance of the Shares to exercise the rights of a stockholder of Common Stock of the Company, including the right to vote the Shares and the right to receive dividends declared on the Shares.

        2.    Vesting.    Except as otherwise provided in this Agreement so long as Participant is providing Service, the Shares shall vest in accordance with the following schedule:

On each of
the following dates Number of
Shares Vested

        3.    Restrictions on Transfer.    Until the Shares vest pursuant to Section 2 or Section 4 hereof, none of the Shares may be transferred, sold, pledged, alienated, attached or otherwise encumbered, and any purported transfer, sale, pledge, alienation, attachment or encumbrance shall be void and unenforceable against the Company, and no attempt to transfer the Shares, whether voluntary or involuntary, by operation of law or otherwise, shall vest the purported transferee with any interest or right in or with respect to the Shares.

        4.    Forfeiture; Early Vesting.    If Participant ceases to provide Service to the Company or any Affiliate (as defined in the Plan) prior to vesting of the Shares pursuant to Section 2 hereof, all of Participant's rights to all of the unvested Shares shall be immediately and irrevocably forfeited to the Company without payment by the Company of any amount with respect thereto, except that if Participant ceases to provide Service by reason of death prior to the vesting of Shares under Section 2 hereof, all Shares granted hereunder shall vest as of such termination of Service. Upon forfeiture, Participant will no longer have any rights relating to the unvested Shares, including the right to vote the Shares and the right to receive dividends declared on the Shares.

        5.    Distributions and Adjustments.

        (a)   If any Shares vest subsequent to any change in the number of character of the Common Stock of the Company (through any stock dividend or other distribution, recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase or exchange of shares, or otherwise), Participant shall receive upon such vesting the number and type of securities or other consideration which Participant would have received if such Shares had vested prior to the event changing the number or character of the outstanding Common Stock.

        (b)   Any additional shares of Common Stock of the Company, any other securities of the Company and any other property (except for regular cash dividends or other cash distributions) distributed with respect to the Shares prior to the date or dates the Shares vest shall be subject to the

same restrictions, terms and conditions as the Shares to which they relate and shall be promptly deposited with the Secretary of the Company or a custodian designated by the Secretary.

        6.    Miscellaneous.

        (a)    Issuance of Shares.    The Company shall cause the Shares to be issued in the name of Participant, either by book-entry registration or issuance of a stock certificate or certificates evidencing the Shares, which certificate or certificates shall be held by the Secretary of the Company or the stock transfer agent or brokerage service selected by the Secretary of the Company to provide such services for the Plan. The Shares shall be restricted from transfer and shall be subject to an appropriate stop-transfer order. If any certificate is used, the certificate shall bear an appropriate legend referring to the restrictions applicable to the Shares. Participant hereby agrees to the retention by the Company of the Shares and, if a stock certificate is used, agrees to execute and deliver to the Company a blank stock power with respect to the Shares as a condition to the receipt of this award of Shares. After any Shares vest pursuant to Section 2 hereof, and following payment of the applicable withholding taxes pursuant to Section 6(b) of this Agreement, the Company shall promptly cause to be issued a certificate or certificates, registered in the name of Participant or in the name of Participant's legal representatives, beneficiaries or heirs, as the case may be, evidencing such vested whole Shares (less any shares withheld to pay withholding taxes) and shall cause such certificate or certificates to be delivered to Participant or Participant's legal representatives, beneficiaries or heirs, as the case may be, free of the legend or the stop-transfer order referenced above. The value of any fractional Shares shall be paid in cash at the time certificates evidencing the Shares are delivered to Participant.

        (b)    Income Tax Matters.

        (i)    In order to comply with all applicable federal or state income tax laws or regulations, the Company may take such action as it deems appropriate to ensure that all applicable federal or state payroll, withholding, income or other taxes, which are the sole and absolute responsibility of Participant, are withheld or collected from Participant.

        (ii)   In accordance with the terms of the Plan, and such rules as may be adopted by the Committee under the Plan, Participant may elect to satisfy Participant's federal and state income tax withholding obligations arising from the receipt of, or the lapse of restrictions relating to, the Shares, by (i) delivering cash, check (bank check, certified check or personal check) or money order payable to the Company, (ii) having the Company withhold a portion of the Shares otherwise to be delivered having a Fair Market Value equal to the amount of such taxes, or (iii) delivering to the Company shares of Common Stock already owned by Participant having a Fair Market Value equal to the amount of such taxes. Any shares already owned by Participant must have been held by the Participant for no less than six months prior to the date delivered to the Company if such shares were acquired upon the exercise of an option or upon the vesting of restricted stock units or other restricted stock. The Company will not deliver any fractional Shares but will pay, in lieu thereof, the Fair Market Value of such fractional Shares. Participant's election must be made on or before the date that the amount of tax to be withheld is determined.

        (c)    Plan Provisions Control.    In the event that any provision of the Agreement conflicts with or is inconsistent in any respect with the terms of the Plan, the terms of the Plan shall control. This Agreement (and any addendum hereto) and the Plan together constitute the entire agreement between the parties hereto with regard to the subject matter hereof.

        (d)    No Right to Employment.    The issuance of the Shares shall not be construed as giving Participant the right to be retained in the employ, or as giving a director of the Company or an Affiliate the right to continue as a director of the Company or an Affiliate, nor will it affect in any way the right of the Company or an Affiliate to terminate such employment or position at any time, with or without cause. In addition, the Company or an Affiliate may at any time dismiss Participant from employment, or terminate the term of a director of the Company or an Affiliate, free from any liability

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or any claim under the Plan or the Agreement. Nothing in the Agreement shall confer on any person any legal or equitable right against the Company or any Affiliate, directly or indirectly, or give rise to any cause of action at law or in equity against the Company or an Affiliate. The Award granted hereunder shall not form any part of the wages or salary of Participant for purposes of severance pay or termination indemnities, irrespective of the reason for termination of employment. Under no circumstances shall any person ceasing to be an employee of the Company or any Affiliate be entitled to any compensation for any loss of any right or benefit under the Agreement or Plan which such employee might otherwise have enjoyed but for termination of employment, whether such compensation is claimed by way of damages for wrongful or unfair dismissal, breach of contract or otherwise. By participating in the Plan, Participant shall be deemed to have accepted all the conditions of the Plan and the Agreement and the terms and conditions of any rules and regulations adopted by the Committee (as defined in the Plan) and shall be fully bound thereby.

        (e)    Governing Law.    The validity, construction and effect of the Plan and the Agreement, and any rules and regulations relating to the Plan and the Agreement, shall be determined in accordance with the internal laws, and not the law of conflicts, of the State of Delaware.

        (f)    Securities Matters.    The Company shall not be required, and shall not have any liability for failure, to deliver Shares until the requirements of any federal or state securities or other laws, rules or regulations (including the rules of any securities exchange) as may be determined by the Company to be applicable are satisfied.

        (g)    Severability.    If any provision of the Agreement is or becomes or is deemed to be invalid, illegal or unenforceable in any jurisdiction or would disqualify the Agreement under any law deemed applicable by the Committee, such provision shall be construed or deemed amended to conform to applicable laws, or if it cannot be so construed or deemed amended without, in the determination of the Committee, materially altering the purpose or intent of the Plan or the Agreement, such provision shall be stricken as to such jurisdiction or the Agreement, and the remainder of the Agreement shall remain in full force and effect.

        (h)    No Trust or Fund Created.    Neither the Plan nor the Agreement shall create or be construed to create a trust or separate fund of any kind or a fiduciary relationship between the Company or any Affiliate and Participant or any other person.

        (i)    Headings.    Headings are given to the Sections and subsections of the Agreement solely as a convenience to facilitate reference. Such headings shall not be deemed in any way material or relevant to the construction or interpretation of the Agreement or any provision thereof.

        (j)    Consultation With Professional Tax and Investment Advisors.    The holder of this Award acknowledges that the grant, exercise, vesting or any payment with respect to this Award, and the sale or other taxable disposition of the Shares acquired pursuant to the exercise thereof, may have tax consequences pursuant to the Internal Revenue Code of 1986, as amended, or under local, state or international tax laws. The holder further acknowledges that such holder is relying solely and exclusively on the holder's own professional tax and investment advisors with respect to any and all such matters (and is not relying, in any manner, on the Company or any of its employees or representatives). Finally, the holder understands and agrees that any and all tax consequences resulting from the Award and its grant, exercise, vesting or any payment with respect thereto, and the sale or other taxable disposition of the Shares acquired pursuant to the Plan, is solely and exclusively the responsibility of the holder without any expectation or understanding that the Company or any of its employees or representatives will pay or reimburse such holder for such taxes or other items.

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IN WITNESS WHEREOF, the Company and Participant have executed this Restricted Stock Award Agreement on the date set forth in the first paragraph.

THE ENSIGN GROUP, INC.

By:

Name:

Title:

[Participant]

Name:

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EX-10.6

Exhibit 10.6

THE ENSIGN GROUP, INC.

INDEMNIFICATION AGREEMENT

THIS INDEMNIFICATION AGREEMENT (this "Agreement") is effective as of                        , by and between The Ensign Group, Inc., a Delaware corporation (the "Company"), and                        (the "Indemnitee").

WHEREAS, the Company desires to attract and retain the services of highly qualified individuals, such as Indemnitee, to serve the Company as directors and/or officers;

WHEREAS, Indemnitee currently is a member of the Company's Board of Directors and/or an officer of the Company;

WHEREAS, in order to induce Indemnitee to continue to provide services to the Company, the Company wishes to provide for the indemnification of, and advancement of expenses to, Indemnitee to the maximum extent permitted by law;

WHEREAS, Indemnitee and the Company agree that additional protection is necessary in the current business environment, and the Indemnitee and certain other directors, officers, employees, agents and fiduciaries of the Company may not be willing to continue to serve in such capacities and the Company may experience difficulties in attracting qualified persons to serve as officers or directors without additional protection for such persons;

WHEREAS, the Company and Indemnitee recognize the continued difficulty in obtaining liability insurance or desired coverage limits and terms for the Company's directors, officers, employees, agents and fiduciaries, the significant and continual increases in the cost of such insurance and the general trend of insurance companies to reduce the scope of coverage of such insurance;

WHEREAS, the Company and Indemnitee further recognize the substantial increase in corporate litigation in general, subjecting directors, officers, employees, agents and fiduciaries to expensive litigation risks at the same time as the availability and scope of coverage of liability insurance provide increasing challenges for the Company; and

WHEREAS, in view of the considerations set forth above, the Company desires that Indemnitee shall be indemnified by the Company as set forth herein.

NOW, THEREFORE, the Company and Indemnitee hereby agree as set forth below.

1.     Certain Definitions.

        (a)   "Business Day" shall mean any day other than a Saturday, Sunday, national holiday or other day on which banks in the State of Delaware are required or permitted to be closed.

        (b)   "Change in Control" shall be deemed to have occurred if, on or after the date of this Agreement, (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company acting in such capacity or a corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing more than 50% of the total voting power represented by the Company's then outstanding Voting Securities, (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Company and any new director whose election by the Board of Directors or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease

for any reason to constitute a majority thereof, or (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation other than a merger or consolidation which would result in the Voting Securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into Voting Securities of the surviving entity) at least 80% of the total voting power represented by the Voting Securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company (in one transaction or a series of related transactions) of all or substantially all of the Company's assets.

        (c)   "Claim" shall mean any threatened, pending or completed action, suit, proceeding, arbitration or other alternative dispute resolution mechanism whether brought by or in the right of the Company or otherwise, or any hearing, inquiry or investigation that Indemnitee in good faith believes might lead to the institution of any such action, suit, proceeding, arbitration or other alternative dispute resolution mechanism, whether civil, criminal, administrative, investigative or other, or any appeal therefrom.

        (d)   References to the "Company" shall include, in addition to The Ensign Group, Inc., any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger to which The Ensign Group, Inc. (or any of its wholly owned subsidiaries) is a party which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, employees, agents or fiduciaries, so that if Indemnitee is or was a director, officer, employee, agent or fiduciary of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee, trustee, agent or fiduciary of another corporation, partnership, joint venture, employee benefit plan, trust or other enterprise, Indemnitee shall stand in the same position under the provisions of this Agreement with respect to the resulting or surviving corporation as Indemnitee would have with respect to such constituent corporation if its separate existence had continued.

        (e)   "Expenses" shall mean any expenses including, without limitation, reasonable fees, charges and disbursements of counsel and all other costs, expenses and obligations paid or incurred by Indemnitee in connection with investigating, defending, being a witness in or participating in (including on appeal), or preparing to defend, be a witness in or participate in, any Claim relating to any Indemnifiable Event.

        (f)    "Expense Advance" shall mean an advance payment of Expenses to Indemnitee pursuant to Section 3(b).

        (g)   "Indemnifiable Event" shall mean any event or occurrence, whether occurring on, prior to, or after the date of this Agreement (i) related to the fact that Indemnitee is or was a director, officer, employee, agent or fiduciary of the Company, or any subsidiary of the Company, or is or was serving at the request of the Company as a director, officer, employee, trustee, agent or fiduciary of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, or (ii) by reason of any action or inaction on the part of Indemnitee while serving in any capacity set forth in clause (i).

        (h)   "Independent Legal Counsel" shall mean an attorney or firm of attorneys, selected in accordance with the provisions of Section 2(c), who shall not have otherwise performed services for the Company or Indemnitee within the last three years (other than with respect to matters concerning the rights of Indemnitee under this Agreement, or of other indemnitees under similar indemnity agreements). Notwithstanding the foregoing, Independent Legal Counsel shall not include any person or firm that, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or Indemnitee in an action to determine Indemnitee's rights under this Agreement.

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        (i)    "Losses" shall mean (i) any amounts or sums which Indemnitee is legally obligated to pay as a result of a Claim or Claims made against Indemnitee for Indemnifiable Events including, without limitation, damages, judgments, fines, penalties, ERISA excise taxes and penalties, and sums or amounts paid in settlement (if such settlement is approved in advance by the Company, which approval shall not be unreasonably withheld) of such Claim or Claims, and (ii) to the extent not paid in advance pursuant to the terms of this Agreement for any reason, Expenses.

        (j)    "Reviewing Party" shall mean any appropriate person or body consisting of a member or members of the Company's Board of Directors, or any other person or body appointed by the Board of Directors, who is not a party to the particular Claim for which Indemnitee is seeking indemnification, or Independent Legal Counsel as provided in Section 2(c).

        (k)   "Voting Securities" shall mean any securities of the Company (or a surviving entity as described in the definition of a "Change in Control") that vote generally in the election of directors.

2.     Indemnification.

        (a)    Agreement to Indemnify.    If Indemnitee was, is or becomes a party to or witness or other participant in, or is threatened to be made a party to or witness or other participant in, a Claim by reason of (or arising in part out of) an Indemnifiable Event, the Company will, to the fullest extent permitted by law, indemnify Indemnitee against, and will make Expense Advances from time to time of, any and all Expenses and Losses (including all interest, assessments and other charges paid or payable in connection with or in respect of such Expenses and Losses, but excluding amounts paid in settlement of any such Claim if such settlement was not approved by the Company) arising from or relating to such Claim (whether or not such Claim proceeds to judgment or is settled or otherwise is brought to a disposition) incurred by Indemnitee by reason of (or arising in part out of) such Indemnifiable Event.

        (b)    Review of Indemnification Obligations.    Notwithstanding the provisions of Section 2(a), (i) the obligations of the Company under Section 2(a) to make indemnification payments for Losses shall be subject to the condition that the Reviewing Party shall have determined (in a written opinion, in any case in which Independent Legal Counsel is the Reviewing Party) that Indemnitee would be permitted to be indemnified under this Agreement and applicable law, and (ii) the obligation of the Company to make an Expense Advance shall be subject to the condition that, if, when and to the extent that the Reviewing Party determines that Indemnitee would not be permitted to be so indemnified under applicable law, the Company shall be entitled to be reimbursed by Indemnitee (who hereby agrees to reimburse the Company) for all such amounts theretofore paid; provided, however, that if Indemnitee has commenced or thereafter commences legal proceedings in a court specified in Section 15 to secure a determination that Indemnitee should be indemnified under applicable law, any determination made by the Reviewing Party that Indemnitee would not be permitted to be indemnified under applicable law shall not be binding and Indemnitee shall not be required to reimburse the Company for any Expense Advance until a final judicial determination is made with respect thereto (as to which all rights of appeal therefrom have been exhausted or lapsed). Indemnitee's obligation to reimburse the Company for any Expense Advance shall be unsecured and no interest shall be charged thereon. If there has been no determination by the Reviewing Party within ten (10) Business Days after written demand by Indemnitee for Losses or Expense Advance is received by the Company, or if the Reviewing Party determines that Indemnitee substantively would not be permitted to be indemnified in whole or in part under this Agreement or applicable law, Indemnitee shall have the right to commence litigation seeking an initial determination by the court or challenging any such determination by the Reviewing Party or any aspect thereof, including the legal or factual bases therefor, and the Company hereby consents to service of process and to appear in any such proceeding. Absent such litigation, any determination by the Reviewing Party shall be conclusive and binding on the Company and Indemnitee.

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        (c)    Selection of Reviewing Party.    For matters that require a determination by the Reviewing Party in respect of Losses, the Reviewing Party shall be the following:

        (i)    If Indemnitee is a director or officer claiming a right to indemnity for Losses under this Agreement or under the Company's Certificate of Incorporation or Bylaws at the time a determination by the Reviewing Party is required (a "Current Director or Officer") and if no Change in Control has occurred that was not approved by a majority of the Company's Board of Directors who were directors immediately prior to such Change in Control (any such non-preapproved transaction, a "Triggering Change in Control"), then the Reviewing Party will be the members of the Company's Board of Directors who are not parties to the Claim for which indemnification is being sought, or a committee of such directors designated by majority vote of the directors who are not parties to the Claim for which indemnification is being sought, or if such directors or committee so decide, the Independent Legal Counsel.

        (ii)   If Indemnitee is not a Current Director or Officer and no Triggering Change in Control has occurred, then the Reviewing Party will be the Company's chief executive officer or chief financial officer, acting on behalf of the Company, unless the Indemnitee expressly demands in writing at the time that he or she makes a demand for indemnification of a Loss that Independent Legal Counsel be the Reviewing Party, in which event Independent Legal Counsel shall be the Reviewing Party.

        (iii)  If a Triggering Change in Control has occurred, then the Reviewing Party will be Independent Legal Counsel unless Indemnitee, in its sole discretion, waives the right to have Independent Legal Counsel be the Reviewing Party, in which case the Reviewing Party will be the members of the Company's Board of Directors who are not parties to the Claim for which indemnification is being sought.

In all circumstances where Independent Legal Counsel is the Reviewing Party, such Independent Legal Counsel shall be selected by Indemnitee and approved by the Company (which approval shall not be unreasonably withheld) and shall otherwise meet the definition of Independent Legal Counsel in Section 1(h).

        (d)    Independent Legal Counsel Opinion.    In any case in which Independent Legal Counsel is acting as the Reviewing Party, such counsel, among other things, shall render its written opinion to the Company and Indemnitee as to whether and to what extent Indemnitee would be permitted to be indemnified under this Agreement and applicable law. The Company agrees to abide by such opinion and to pay a reasonable retainer fee and the reasonable fees, charges and disbursements of any Independent Legal Counsel selected to act as the Reviewing Party and to indemnify fully such counsel against any and all expenses (including reasonable fees, charges and disbursements of counsel), claims, liabilities and damages arising out of or relating to this Agreement or its engagement pursuant hereto. Notwithstanding any other provision of this Agreement, the Company shall not be required to pay expenses of more than one Independent Legal Counsel in connection with all matters concerning the Indemnitee, and such Independent Legal Counsel shall be the Independent Legal Counsel for any or all other indemnitees making indemnification claims that relate to the same Claim as the Indemnitee's unless (i) the Company otherwise determines or (ii) any Indemnitee shall provide a written statement setting forth in detail a reasonable objection to such Independent Legal Counsel making any determination with respect to other indemnitees.

        (e)    Mandatory Payment of Expenses.    Notwithstanding any other provision of this Agreement other than Section 10, to the extent that Indemnitee has been successful on the merits or otherwise, including, without limitation, the dismissal of an action without prejudice, in defense of any Claim regarding any Indemnifiable Event, Indemnitee shall be indemnified against all Expenses incurred by Indemnitee in connection therewith.

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3.     Indemnification Procedure.

        (a)    Payment of Indemnification.    Payment of Expenses and Losses shall be made by the Company as soon as practicable but in any event no later than thirty (30) Business Days after written demand by Indemnitee therefor is received by the Company (which written demand shall include such documentation and information in reasonable detail as is reasonably necessary to determine whether and to what extent Indemnitee is entitled to indemnification, including but not limited to copies of invoices received by Indemnitee in connection with Expenses; provided that, in the case of invoices in connection with legal services, any reference to legal work performed or to expenditures made that would cause Indemnitee to waive any privilege accorded by applicable law shall not be included with the invoice), unless the Reviewing Party has provided a written determination to the Company that Indemnitee is not entitled to indemnification under applicable law. The Reviewing Party making the determination with respect to Indemnitee's entitlement to indemnification shall notify Indemnitee of such written determination no later than ten (10) Business Days thereafter.

        (b)    Expense Advances.    If so requested by Indemnitee, the Company shall advance any and all Expenses to Indemnitee (an "Expense Advance") within thirty (30) Business Days after the receipt by the Company of a statement or statements from Indemnitee requesting such advance or advances (which statement or statements shall satisfy the reasonable detail requirement of Section 3(a) above), whether prior to or after final disposition of any Claim relating to an Indemnifiable Event. Advances shall be made without regard to Indemnitee's ability to repay the Expenses and without regard to Indemnitee's ultimate entitlement to indemnification under the provisions of this Agreement. The Indemnitee shall qualify for advances solely upon the execution and delivery to the Company of an undertaking in form and substance reasonably satisfactory to the Company providing that the Indemnitee undertakes to repay the advance if and to the extent that it is ultimately determined that Indemnitee is not entitled to be indemnified by the Company. Advances shall include any and all reasonable Expenses incurred pursuing an action to enforce this right of advancement.

        (c)    Action to Compel Payment.    If a claim for indemnification for Losses or any Expense Advance pursuant to this Agreement is not paid in full for any reason (including, but not limited to, a decision adverse to the Indemnitee by the Reviewing Party, or the failure of the Reviewing Party to render its determination) within thirty (30) Business Days of the date of written demand, in the case of Expense Advance, or thirty (30) days of the date of written demand in the case of any other claim for indemnification of Losses or Expenses, then Indemnitee may file suit to recover the unpaid amount of such claim in a court specified in Section 15. The provisions of Sections 3(e) and 13 shall be applicable to any such action.

        (d)    Notice/Cooperation by Indemnitee.    Indemnitee shall, as a condition precedent to Indemnitee's right to receive Expense Advances and to be indemnified for Losses under this Agreement, give the Company notice in writing as soon as practicable of any Claim made against Indemnitee relating to an Indemnifiable Event for which a request for Expense Advance or for which indemnification for Losses will or could be sought under this Agreement. Notice to the Company shall be directed to the Chief Executive Officer of the Company at the address shown on the signature page of this Agreement (or such other address as the Company shall designate in writing to Indemnitee). In addition, Indemnitee shall give the Company such information and cooperation as the Company may reasonably require and as shall be within Indemnitee's power.

        (e)    Burden of Proof; No Presumption Against Indemnitee.    For purposes of this Agreement, the termination of any Claim relating to an Indemnifiable Event by judgment, order, settlement (whether with or without court approval) or conviction, or upon a plea of nolo contendere, or its equivalent, shall not create a presumption that Indemnitee did not meet any particular standard of conduct or have any particular belief or that a court has determined that Expense Advances or indemnification for Losses is not permitted by applicable law or hereunder. In addition, neither the failure of the

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Reviewing Party to have made a determination as to whether Indemnitee has met any particular standard of conduct or had any particular belief, nor an actual determination by the Reviewing Party that Indemnitee has not met such standard of conduct or did not have such belief, prior to the commencement of legal proceedings by Indemnitee to secure a judicial determination that Indemnitee should be entitled to receive Expense Advances or be indemnified for Losses under applicable law, shall be a defense to Indemnitee's claim or create a presumption that Indemnitee has not met any particular standard of conduct or did not have any particular belief. In connection with any determination by the Reviewing Party or otherwise as to whether Indemnitee is entitled to Expense Advances or indemnification for Losses under applicable law or hereunder, the burden of proof shall be on the Company to establish that Indemnitee is not so entitled.

        (f)    Notice to Insurers.    If, at the time of the receipt by the Company of a notice of a Claim relating to an Indemnifiable Event pursuant to Section 3(d), the Company has liability insurance in effect which may cover such Claim, the Company shall give prompt notice of the commencement of such Claim to the insurers in accordance with the procedures set forth in each of the Company's policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such Claim in accordance with the terms of such policies.

        (g)    Selection of Counsel.    In any Claim made against Indemnitee relating to an Indemnifiable Event for which a request for Expense Advance or for which indemnification for Losses will or could be sought under this Agreement, the Company shall be entitled to assume the defense of such Claim with counsel approved by Indemnitee (which approval shall not be unreasonably withheld) upon the delivery to Indemnitee of written notice of the Company's election so to do. After delivery of such notice, approval of such counsel by Indemnitee and the retention of such counsel by the Company, the Company will not be liable to Indemnitee under this Agreement for any fees of counsel subsequently incurred by Indemnitee with respect to the same Claim; provided that (i) Indemnitee shall have the right to employ Indemnitee's separate counsel in any such Claim at Indemnitee's expense and (ii) if (A) the employment of separate counsel by Indemnitee has been previously authorized by the Company, (B) Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and Indemnitee in the conduct of any such defense, or (C) the Company shall not continue to retain such counsel to defend such Claim, then the fees and expenses of Indemnitee's separate counsel shall be at the expense of the Company.

4.     Additional Indemnification Rights; Nonexclusivity.

        (a)    Scope.    The Company hereby agrees to make Expense Advances to, and indemnify, the Indemnitee to the fullest extent permitted by law, notwithstanding that such Expense Advances and indemnification are not specifically authorized by the other provisions of this Agreement, the Company's Certificate of Incorporation, the Company's Bylaws or by statute. In the event of any change after the date of this Agreement in any applicable law, statute or rule which expands the right of a Delaware corporation to indemnify a member of its board of directors or an officer, employee, agent or fiduciary, it is the intent of the parties hereto that Indemnitee shall enjoy by this Agreement the greater benefits afforded by such change. In the event of any change in any applicable law, statute or rule which narrows the right of a Delaware corporation to indemnify a member of its board of directors or an officer, employee, agent or fiduciary, such change, to the extent not otherwise required by such law, statute or rule to be applied to this Agreement, shall have no effect on this Agreement or the parties' rights and obligations hereunder except as set forth in Section 9(a).

        (b)    Nonexclusivity.    The rights to Expense Advances and indemnification for Losses provided by this Agreement shall be in addition to any rights to which Indemnitee may be entitled under the Company's Certificate of Incorporation, its Bylaws, any other agreement, any vote of stockholders or disinterested directors, the General Corporation Law of the State of Delaware, or otherwise. The

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indemnification provided under this Agreement shall continue as to Indemnitee for any action taken or not taken by Indemnitee while serving in an indemnified capacity even though Indemnitee may have ceased to serve in such capacity.

5.     No Duplication of Payments.

        The Company shall not be liable under this Agreement to make any payment in connection with any Claim made against Indemnitee to the extent Indemnitee has otherwise actually received payment, under any insurance policy, provision of the Company's Certificate of Incorporation, Bylaw or otherwise, of the amounts otherwise indemnifiable hereunder.

6.     Partial Indemnification.

        If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of Expenses or Losses incurred in connection with any Claim relating to an Indemnifiable Event, but not, however, for all of the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion of such Expenses or Losses to which Indemnitee is entitled.

7.     Mutual Acknowledgment.

        Both the Company and Indemnitee acknowledge that in certain instances, federal law or applicable public policy may prohibit the Company from indemnifying its directors, officers, employees, agents or fiduciaries under this Agreement or otherwise. Indemnitee understands and acknowledges that the Company has undertaken or may be required in the future to undertake with the Securities and Exchange Commission to submit the question of indemnification to a court in certain circumstances for a determination of the Company's right under public policy to indemnify Indemnitee.

8.     Liability Insurance.

        The Company shall, from time to time, make the good faith determination whether or not it is practicable for the Company to obtain and maintain a policy or policies with reputable insurance companies covering certain liabilities that may be incurred by its directors and officers. Notwithstanding the foregoing, the Company shall have no obligation to obtain or maintain such insurance if the Company determines in good faith that such insurance is not reasonably available, if the premium costs for such insurance are disproportionate to the amount of coverage provided, if the coverage provided by such insurance is limited by exclusions so as to provide an insufficient benefit, or if the Indemnitee is covered by similar insurance maintained by a parent or subsidiary of the Company. The Indemnitee shall be entitled to the protection of any such insurance policies the Company may elect to maintain generally for the benefit of its directors and officers (and to the extent the Company maintains such an insurance policy or policies, the Indemnitee shall be covered by such policy or policies in accordance with its or their terms, to the maximum extent of the coverage available for any officer or director of the Company).

9.     Exceptions.

        Notwithstanding any other provision of this Agreement to the contrary, the Company shall not be obligated pursuant to the terms of this Agreement:

        (a)    Excluded Action or Omissions.    To indemnify Indemnitee for acts, omissions or transactions for which Indemnitee is prohibited from receiving indemnification under applicable law.

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        (b)    Claims Initiated by Indemnitee.    To indemnify for Losses or make Expense Advances to Indemnitee with respect to Claims initiated or brought voluntarily by Indemnitee and not by way of defense, except (i) with respect to actions or proceedings brought to establish or enforce a right to receive Expense Advances or indemnification for Losses under this Agreement or any other agreement or insurance policy or under the Company's Certificate of Incorporation or Bylaws now or hereafter in effect relating to Claims for Indemnifiable Events, (ii) in specific cases if the Board of Directors has approved the initiation or bringing of such Claim, or (iii) as otherwise required under Delaware Law.

        (c)    Lack of Good Faith.    To indemnify Indemnitee for any Expenses incurred by the Indemnitee with respect to any proceeding instituted (i) by Indemnitee to enforce or interpret this Agreement, if a court specified in Section 15 determines that each of the material assertions made by the Indemnitee in such proceeding was not made in good faith or was frivolous, or (ii) by or in the name of the Company to enforce or interpret this Agreement, if a court specified in Section 15 determines that each of the material defenses asserted by Indemnitee in such proceeding was made in bad faith or was frivolous.

        (d)    Claims Under Section 16(b).    To indemnify Indemnitee for expenses and the payment of profits arising from the purchase and sale by Indemnitee of securities in violation of Section 16(b) of the Securities Exchange Act of 1934, as amended, or any similar successor statute.

10.   Period of Limitations.

        No legal action relating to the entitlement of Indemnitee to Expense Advances or indemnification for Losses shall be brought and no such cause of action shall be asserted by or in the right of the Company against Indemnitee, Indemnitee's estate, spouse, heirs, executors or personal or legal representatives after the expiration of two years from the date of accrual of such cause of action, and any claim or cause of action of the Company shall be extinguished and deemed released unless asserted by the timely filing of a legal action within such two-year period; provided, however, that if any shorter period of limitations is otherwise applicable to any such cause of action, such shorter period shall govern.

11.   Counterparts.

        This Agreement may be executed in one or more counterparts, each of which shall constitute an original.

12.   Binding Effect; Successors and Assigns.

        This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors, assigns (including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business and/or assets of the Company), spouses, heirs and personal and legal representatives. The Company shall require and cause any successor (whether direct or indirect, and whether by purchase, merger, consolidation or otherwise) to all, substantially all, or a substantial part, of the business and/or assets of the Company, by written agreement in form and substance satisfactory to Indemnitee, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place, provided that if the Company continues to exist it shall remain jointly and severally liable with such successor for the obligations hereunder. This Agreement shall continue in effect regardless of whether Indemnitee continues to serve as a director, officer, employee, agent or fiduciary (as applicable) of the Company or of any other enterprise, including subsidiaries and employee benefit plans of the Company, at the Company's request.

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13.   Attorneys' Fees.

        In the event that any action is instituted by Indemnitee under this Agreement or under any liability insurance policies maintained by the Company to enforce or interpret any of the terms hereof or thereof, Indemnitee shall be entitled to be paid all Expenses incurred by Indemnitee with respect to such action if Indemnitee is ultimately successful in such action, and shall be entitled to the advancement of Expenses with respect to such action, unless as a part of such action a court specified in Section 15 determines that each of the material assertions made by Indemnitee as a basis for such action were not made in good faith or were frivolous. In the event of an action instituted by or in the right of the Company under this Agreement to enforce or interpret any of the terms of this Agreement, Indemnitee shall be entitled to be paid all Expenses incurred by Indemnitee in defense of such action (including costs and expenses incurred with respect to Indemnitee's counterclaims and cross-claims made in such action), and shall be entitled to the advancement of Expenses with respect to such action, unless as a part of such action a court specified in Section 15 determines that each of Indemnitee's material defenses to such action were made in bad faith or were frivolous.

14.   Notice.

        Unless otherwise set forth in this Agreement, all notices, requests, demands and other communications required or permitted under this Agreement shall be in writing and shall be deemed effectively given (i) if delivered by hand and signed for by the party addressed, on the date of such delivery, (ii) if delivered by Federal Express or similar overnight courier, freight prepaid, on the first Business Day after the date of deposit, or (iii) if mailed by domestic certified or registered mail with postage prepaid, on the fifth Business Day after the date postmarked. Notices shall be addressed if to Indemnitee, at Indemnitee's address as set forth beneath Indemnitee's signature to this Agreement and if to the Company at the address of its principal corporate offices (attention: Chief Executive Officer) or at such other address as such party may designate by ten (10) Business Days' advance written notice to the other party hereto.

15.   Consent to Jurisdiction.

        The Company and Indemnitee each hereby irrevocably consent to the exclusive jurisdiction and venue of the courts of the State of Delaware for all purposes in connection with any action or proceeding which arises out of or relates to this Agreement, and agree that any action instituted under this Agreement shall be commenced, prosecuted and continued only in the Court of Chancery of the State of Delaware in and for New Castle County, which shall be the exclusive and only proper forum for adjudicating such a claim. The Company and Indemnitee irrevocably waive any right to object that any action brought in such court is in an inconvenient forum.

16.   Severability.

        The provisions of this Agreement shall be severable in the event that any of the provisions hereof (including any provision within a single section, paragraph or sentence) are held by a court of competent jurisdiction to be invalid, void or otherwise unenforceable, and the remaining provisions shall remain enforceable to the fullest extent permitted by law. Furthermore, to the fullest extent possible, the provisions of this Agreement (including, without limitations, each portion of this Agreement containing any provision held to be invalid, void or otherwise unenforceable, that is not itself invalid, void or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable.

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17.   Choice of Law.

        This Agreement shall be governed by and its provisions construed and enforced in accordance with the laws of the State of Delaware, as applied to contracts between Delaware residents, entered into and to be performed entirely within the State of Delaware, without regard to the conflict of laws principles thereof.

18.   Subrogation.

        In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all documents required and shall do all acts that may be necessary to secure such rights and to enable the Company effectively to bring suit to enforce such rights.

19.   Amendment and Termination.

        No amendment, modification, termination or cancellation of this Agreement shall be effective unless it is in writing signed by both the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed to be or shall constitute a waiver of any other provisions hereof (whether or not similar), nor shall such waiver constitute a continuing waiver.

20.   Integration and Entire Agreement.

        This Agreement sets forth the entire understanding between the parties hereto and supersedes and merges all previous written and oral negotiations, commitments, understandings and agreements relating to the subject matter hereof between the parties hereto.

21.   No Construction as Employment Agreement.

        Nothing contained in this Agreement shall be construed as giving Indemnitee any right to be retained in the employ of the Company or any of its subsidiaries or affiliated entities.

22.   Contribution.

        To the fullest extent permissible by applicable law, if the indemnification provided for in this Agreement is held by a court specified in Section 15 to be unavailable to Indemnitee for any reason whatsoever, then the Company, in lieu of indemnifying Indemnitee, shall contribute to the amount incurred by Indemnitee for Losses in connection with any Claim relating to an Indemnifiable Event, in such proportion as is fair and reasonable in light of all of the circumstances of such Claim in order to reflect (i) the relative benefits received by the Company and Indemnitee as a result of the event(s) and/or transaction(s) giving cause to such Claim; and/or (ii) the relative fault of the Company (and its directors, officers, employees, agents and fiduciaries) and Indemnitee in connection with such event(s) and/or transaction(s); and/or (iii) any other relevant equitable considerations.

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IN WITNESS WHEREOF, the parties hereto have executed this Indemnification Agreement as of the date first above written.

COMPANY:
THE ENSIGN GROUP, INC., a Delaware corporation
By:	Christopher Christensen,     Chief Executive Officer and President
	27101 Puerta Real, Suite 450     Mission Viejo, CA 92691

INDEMNITEE:

Print Name:                                                                   

Address:                                                                         

Facsimile:                                                                       

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EX-10.43

Exhibit 10.43

$20,000,000.00

AMENDMENT NO. 5 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 September 13, 2007

AMENDMENT NO. 5 TO AMENDED AND
RESTATED LOAN AND SECURITY AGREEMENT

THIS AMENDMENT NO. 5 TO AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT (this "Amendment") is made as of this 13^th day of September, 2007 (the "Effective Date"), 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

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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 November 19, 2007, unless terminated as provided in this Section 2.8 (the "Term")."

2.    Real Estate Loan Documents.    The parties acknowledge and agree that (i) the terms of the financing made pursuant to the Real Estate Loan Documents (the "Fixed Asset Loan") have materially changed since the Loan Agreement was executed and that the parties intended to exclude any requirement that the Fixed Asset Loan be prepaid upon termination or expiration of the Loan Agreement and (ii) notwithstanding anything to the contrary in the Loan Agreement or related documents, Borrower shall in no event be required to prepay the Fixed Asset Loan or be deemed to be in default for failure to prepay the Fixed Asset Loan upon termination or expiration of this Loan Agreement.

3.    Temporary Commitment Increase.

        a.     The Maximum Loan Amount shall be increased from $20,000,000 to $25,000,000 (the "Temporary Maximum Loan Amount") on a temporary basis from the Effective Date until the date that is sixty (60) days from the Effective Date (the "Temporary Maximum Loan Amount Increase"). The temporary increase in the Maximum Loan Amount shall be evidenced by that certain promissory note attached as Exhibit A hereto (the "Overline Note").

        b.     During the term of the Temporary Maximum Loan Amount Increase, Clause (b) of Section 1.45 of the Loan Agreement shall be temporarily amended and restated in its entirety as follows; provided that after the term of the Temporary Maximum Loan Amount Increase, Clause (b) of Section 1.45 of the Loan Agreement shall be amended and restated in its entirety to the language in effect prior to giving effect to this Amendment:

        "(b) the Account remains unpaid more than one hundred fifty (150) days past the claim or invoice date (but in no event more than one hundred five (165) days after the applicable Medical Services have been rendered);"

4.    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.

5.    Effective Date.    This Amendment shall be effective upon Lender's receipt of this Amendment executed by a duly authorized member and/or officer of each Borrower; provided that Borrower, as a condition to the effectiveness of this Amendment, agrees that, upon demand of Lender at any time after the date of this Amendment, to cause each of Ensign's subsidiaries that (a) is a skilled nursing facility operator; (b) does not constitute a Borrower under the Loan Agreement and (c) would be necessary to provide a sufficient Borrowing Base to support the advance made pursuant to the Overline Note, as determined by the Lender in its sole discretion, to execute a Security Agreement, in form and substance reasonably satisfactory to Lender, granting Lender a security interest in any and all of the Accounts of such subsidiaries.

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6.    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.

7.    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.

8.    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.

9.    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.

10.    Governing Law.    This Amendment shall be governed by and construed in accordance with the laws of the State of Maryland.

11.    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.

12.    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]

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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/  JOHN WARDEN
Name:	John Warden
Title:	Authorized Signatory

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		BORROWER:
ATTEST/WITNESS:		THE ENSIGN GROUP, INC. a Delaware corporation
By:	/s/  ALAN J. NORMAN Alan J. Norman Vice President	By:	/s/  GREGORY K. STAPLEY Gregory K. Stapley Vice 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/  DANIEL H. WALKER Daniel H. Walker	By:	/s/  BEVERLY WITTEKIND Beverly Wittekind Secretary
		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

6

ATTEST/WITNESS:		By:	Northern Pioneer Healthcare, Inc. Its Sole Member
By:	/s/  DANIEL H. WALKER Daniel H. Walker	By:	/s/  BEVERLY WITTEKIND Beverly Wittekind Secretary
		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/  DANIEL H. WALKER Daniel H. Walker	By:	/s/  BEVERLY WITTEKIND Beverly Wittekind Secretary
		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/  DANIEL H. WALKER Daniel H. Walker	By:	/s/  BEVERLY WITTEKIND Beverly Wittekind Secretary

7

		ATLANTIC MEMORIAL HEALTHCARE ASSOCIATES, INC. ROSE PARK HEALTHCARE ASSOCIATES, INC.
ATTEST/WITNESS:		each, a Nevada corporation
By:	/s/  DANIEL H. WALKER Daniel H. Walker	By:	/s/  BEVERLY WITTEKIND Beverly Wittekind Secretary
		NORTHERN OAKS HEALTHCARE, INC. SALADO CREEK SENIOR CARE, INC. MCALLEN COMMUNITY HEALTHCARE, INC. WELLINGTON HEALTHCARE, INC.
ATTEST/WITNESS:		each, a Nevada corporation
By:	/s/  DANIEL H. WALKER Daniel H. Walker	By:	/s/  BEVERLY WITTEKIND Beverly Wittekind Secretary

8

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

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EXHIBIT A
Overline Note

10

SCHEDULES TO AMENDMENT NO. 5 TO
AMENDED & RESTATED LOAN AGREEMENT

Sched	Description	Matters Covered
1.39	Permitted Liens:	(i)    Landlord's liens, both statutory and contractual, contained in or created by the various leases, security agreement, pledges and related documentation covering the locations described in Schedule 4.15, but only to the extent that such liens are contractually subordinated to Lender's liens and security interests pursuant to agreements between Lender and such landlords that are satisfactory to Lender.
		(ii)(a)    The lien of the Deed of Trust and Assignment of Rents by and between Ensign Southland LLC as Trustor and Continental Wingate Associates, Inc. as Beneficiary, affecting the California Property and recorded January 30, 2001 at Document No. 01-0161647 in the office of the Los Angeles County Recorder, securing indebtedness in the original principal amount of $7,455,100, (b) all liens created or extended in connection with that certain Second Amended and Restated Loan Agreement for a loan in the amount of $64,692,11.67 by and among Valley Health Holdings LLC, Sky Holdings AZ LLC, Terrace Holdings AZ LLC, Plaza Health Holdings LLC, Rillito Holdings LLC, Mountainview Communitycare LLC, Meadowbrook Health Associates LLC, Cedar Avenue Holdings LLC, Granada Investments LLC, as borrowers, and General Electric Capital Corporation, as lender, dated December 29, 2006; and (c) the lien of the Deed of Trust and Security Agreement encumbering TEGI subsidiary Cherry Hill Health Holdings, Inc.'s Pacific Care Center facility, Hoquiam, Washington, securing a non-prepayable assumed $2,475,000 loan that existed when the property was acquired in 2006.
		(iii)    Liens permitted to be created by Sections 6.23 and 7.1(d) of the Loan Agreement.
4.1	Subsidiaries:	See attached organizational chart for existing subsidiaries of The Ensign Group, Inc.
4.5	Pending or Threatened Litigation:	There is currently no pending or threatened litigation which the Borrower believes would materially threaten Borrower's viability or ability to repay the Obligations; further, all claims pending or threatened against the Borrower are either covered by insurance or, to the extent they are not, Borrower believes it has accrued adequate reserves in connection therewith.
4.8	Defaults:	Relating to the representations in Section 4.8 of the Loan Agreement, and without admitting any default, reference is made to Schedule 4.5 above.
4.13	Non-compliance with Law:	To the best of the actual knowledge of the officers of Borrower, there does not currently exist any material non-compliance with applicable laws.

11

4.14	Environmental Matters:	To the best of the actual knowledge of the officers of The Ensign Group, Inc., there are no material adverse environmental matters associated with any of the properties occupied by TEGI's operating subsidiaries which require remediation or pose a present threat of material harm or liability.
4.15	Places of Business with patient census:	See consolidated Schedule 4.15(a)/4.16 and Schedule 4.15(b) at the end of this Exhibit A.
4.16	Licenses:	The entity which currently holds or possesses the right to use the operating license for each of the facilities is as shown in consolidated Schedule 4.15(a)/4.16.
4.17	Stock Ownership:	See separate Schedule 4.17 at the end of this Exhibit A.
4.19	Borrowings:	Other than normal trade creditors, some or all of the entities comprising the Borrower are currently indebted to the following creditors in the following manners and amounts:
		a.    General Electric Capital Corporation; $20,000,000 Revolving Credit Facility for working capital.
		b.    General Electric Capital Corporation; $64,692,111.67 fixed asset loan secured by Deeds of Trust encumbering the assets owned by Valley Health Holdings LLC, Sky Holdings AZ LLC, Terrace Holdings AZ LLC, Ensign Highland LLC, Plaza Health Holdings LLC, Rillito Holdings LLC, Mountainview Communitycare LLC, Cedar Avenue Holdings LLC and Granada Investments LLC.
		c.    Continental Wingate Associates, Inc.; $7,455,100 HUD-insured Loan secured by a Deed of Trust and Assignment of Rents on Ensign Southland LLC's Southland Care Center & Home facility, Norwalk, California.
		d.    Wells Fargo Bank, N.A.; $2,475,000 loan secured by a Deed of Trust and Security Agreement on Cherry Hill Health Holdings, Inc.'s Pacific Care Center facility, Hoquiam, Washington.
4.20	Labor Disputes:	A union organizing election was held at Sonoma Healthcare Center in May, 2002 at which a majority of the approximately 60 employees classified as Housekeeping, Laundry and CNAs voted to have union representation from SEIU Local 250. On August 30, 2004, the National Labor Relations Board certified the union. The union has requested bargaining, and bargaining is ongoing. Operations at the facility and throughout the company have not been materially disrupted by union issues at any time since the original organizing election.
4.22	Joint Ventures:	None
7.12	Transactions with Affiliates:	Pursuant to an internal corporate restructuring the entire equity interests in various operating entities were assigned by The Ensign Group, Inc. to its several regional subsidiaries as set forth on the attached organization chart.

12

Where an affiliate of The Ensign Group, Inc. owns the real property underlying a facility, the real estate holding subsidiary and the operating subsidiary enter into a lease agreement with respect to the facility. The attached organization chart indicates those instances where TEGI affiliates own the occupied property. The standard lease form used for such affiliate transactions has been reviewed and approved by Lender's counsel in connection with the fixed asset financing referenced in Schedule 1.39(ii)(b) above.

Ensign Facility Services, Inc., a subsidiary of TEGI, has entered into separate Consulting Services Agreements with each of the operating subsidiaries listed in the attached organizational chart, to provide centralized accounting, legal, risk management, information technology human resources and similar support and services. A standard management fee which does not exceed five percent (5%) of monthly revenues is charged for such services.

—See Attached Schedules 4.15(a)/4.16, 4.15(b) and 4.17—

13

Schedule 4.1

The Ensign Group, Inc.
(Delaware Corporation; Qualified in California)

The Flagstone Group, Inc.
SOUTHERN CALIFORNIA

Arroyo Vista Nursing Center
City Heights Health Associates LLC
Permunitum LLC*

Atlantic Memorial Healthcare Center
Atlantic Memorial Healthcare Associates, Inc.

Brookfield Healthcare Center
Downey Community Care LLC
Moenium Holdings LLC*

Carmel Mountain. Rehabilitation & Healthcare Center
Bernardo Heights Healthcare, Inc.
CM Health Holdings LLC

Lemon Grove Care & Rehabilitation Center
Lemon Grove Health Associates LLC

Palm Terrace Healthcare & Rehabilitation Center
Gate Three Healthcare LLC

Palomar Vista Healthcare Center
West Escondido Healthcare LLC

Rose Villa Healthcare Center
Bell Villa Care Associates LLC
Moenium Holdings LLC*

Royal Court Healthcare
Ensign Whittier West LLC

Sea Cliff Healthcare Center
HB Healthcare Associates LLC

Shoreline Healthcare Center
Rose Park Healthcare Associates, Inc.
Long Beach Health Associates LLC**

Southland Care Center
Southland Management LLC
Ensign Southland LLC

Victoria Healthcare Center
Costa Victoria Healthcare LLC

Vista Knoll Specialized Care Facility
Vista Woods Health Associates LLC
Permunitum LLC*

Whittier Hills Health Care Center
Ensign Whittier East LLC

Bandera Healthcare, Inc.
ARIZONA

Catalina Healthcare Center
Presidio Health Associates LLC
Rillito Holdings LLC

Coronado Healthcare Center
North Mountain Healthcare LLC
Adipiscor LLC*

Desert Sky Health and Rehabilitation Center
Glendale Healthcare Associates LLC
Sky Holdings AZ LLC

Desert Terrace Nursing Center
24^th Street Healthcare Associates LLC
Terrace Holdings AZ LLC

East Mesa Healthcare Center
Sunland Health Associates LLC
Adipiscor LLC*

Grand Court of Mesa
Brown Road Senior Housing LLC
Moenium Holdings LLC*

Greenfields Assisted Living
Greenfields Assisted Living LLC

Highland Manor Health & Rehabilitation Center
Highland Healthcare LLC
Ensign Highland LLC

North Mountain Medical & Rehabilitation Center
Radiant Hills Health Associates LLC
Valley Health Holdings LLC

Osborn Health and Rehabilitation
RenewCare of Scottsdale, Inc.

Sabino Canyon Rehabilitation and Care Center
Ensign Sabino LLC
Meadowbrook Health Associates LLC

Waverly Park Healthcare Center
Park Waverly Healthcare LLC
Adipiscor LLC*

Milestone Healthcare, Inc.
UTAH

Arlington Hills Healthcare Center
Avenues Healthcare, Inc.
Tenth East Holdings LLC

Draper Rehabilitation and Care Center
South Valley Healthcare, Inc.
Fort Street Health Holdings LLC***

Holladay Healthcare Center
Olympus Health, Inc.
Cottonwood Health Holdings LLC

Mt. Ogden Health & Rehabilitation Center
Washington Heights Healthcare, Inc.

IDAHO

Pocatello Care and Rehabilitation Center
Pocatello Health Services, Inc.

Miscellaneous

(Held by The Ensign Group, Inc.)

SERVICE CENTER

Ensign Facility Services, Inc.
(Nevada Corporation; Qualified in California)

SELF-INSURANCE

Standardbearer Insurance Company, Ltd.
(Cayman Islands Exempted Company)

SHELF ENTITIES

Bayshore Healthcare, Inc.

Cardiff Healthcare, Inc.

Ensign Bellflower LLC

Ensign Napa LLC

Hueneme Healthcare, Inc.

Pomerado Ranch Healthcare, Inc.

RB Heights Health Holdings LLC

Regal Road Health Holdings LLC

South C Health Holdings LLC

Trousdale Health Holdings LLC

Walnut Grove Compuscare LLC

Keystone Care, Inc.
TEXAS

Cambridge Health & Rehabilitation Center
Richmond Senior Services, Inc.
Golfview Holdings LLC

Cambridge Square Retirement Center
Rosenburg Senior Living, Inc.
Avenue N Holdings LLC

Carrollton Health & Rehabilitation Center
Carrollton Heights Healthcare, Inc.
Trinity Mill Holdings LLC

Lake Village Nursing & Rehabilitation Center
Grand Villa Phx, Inc.
Verde Villa Holdings LLC

Northern Oaks Living & Rehabilitation Center
Northern Oaks Healthcare, Inc.

Salado Creek Living & Rehabilitation Center
Salado Creek Senior Care, Inc.

The Village Care Center
McAllen Community Healthcare, Inc.

Timberwood Nursing & Rehabilitation Center
Livingston Care Associates, Inc.
Polk Health Holdings LLC

Wellington Place Living & Rehabilitation Center
Wellington Healthcare, Inc.

Willow Bend Nursing & Rehabilitation Center
Town East Healthcare, Inc.
Mesquite Health Holdings LLC

Northern Pioneer Healthcare, Inc.
NORTHERN CALIFORNIA

Cloverdale Healthcare Center
Ensign Cloverdale LLC

Northbrook Nursing & Rehabilitation Center
Ensign Willits LLC

Park View Gardens at Montgomery
Ensign Montgomery LLC
Mountainview Communitycare LLC

Sonoma Healthcare Center
Ensign Sonoma LLC

Summerfield Health Care Center
Ensign Santa Rosa LLC

Ukiah Convalescent Hospital
Ensign Pleasanton LLC

WASHINGTON

Emerald Hills Healthcare Center
Lynnwood Health Services, Inc.
Snohomish Health Holdings LLC

Pacific Care Center
Hoquiam Healthcare, Inc.
Cherry Health Holdings, Inc.

Park Manor Rehabilitation Center
Manor Park Healthcare LLC

Plaza Health Holdings LLC

Touchstone Care, Inc.
SOUTHERN CALIFORNIA

Arbor Glen Care Center
Ensign San Dimas LLC
Arrow Tree Health Holdings LLC

Brookside Healthcare Center
Redbrook Healthcare Associates LLC

Camarillo Healthcare Center
Camarillo Community Care, Inc.
Granada Investments LLC

Claremont Care Center
Claremont Foothills Health Associates LLC
Permunitum LLC*

Glenwood Care Center
C Street Health Associates LLC

Mission Care Center
Ramon Healthcare Associates, Inc.

Panorama Gardens Nursing & Rehabilitation Center

Premier Care Center for Palm Springs
Ensign Palm I LLC

Upland Rehabilitation and Care Center
Upland Community Care, Inc.
Cedar Avenue Holdings LLC

Victoria Care Center
Victoria Ventura Healthcare LLC

KEY

Line 1: Facility Name
Line 2: Operating Entity: Held, as represented, by an operating group
Line 3: Holding Entity: All held by The Ensign Group, Inc.
* Master tenant/sublessor
** Owns property adjacent to the facility and will hold the facility property on exercise of option to buy at lease end.
*** Fort Street has the option to buy the property in January 2008

Unless noted otherwise, all entities are organized in Nevada and qualified to do business where located.
All subsidiaries are wholly owned.

Schedule 4.15(b)—Census data as of 9/7/2007

Facility	Beds	Census
The Flagstone Group, Inc. (S.Cal)
Atlantic Memorial	100	89
Palm Terrace	99	98
Sea Cliff	182	176
Sea Cliff ALF	84	60
Shoreline	75	66
Victoria	79	74
Arroyo Vista	53	50
Carmel Mountain	120	108
Lemon Grove	158	150
Palomar Vista	74	71
Vista Knoll	120	109
Brookfield	70	65
Rose Villa	53	47
Royal Court	162	147
Southland Care	120	119
Southland Home	70	55
Whittier Hills	160	148
Subsidiary Totals	1779	1632
Northern Pioneer (N.Cal & WA)
Cloverdale	72	64
Northbrook	71	35
Park View	116	103
Sonoma	137	118
Summerfield	70	57
Ukiah	58	52
Emerald Hills	120	52
Pacific Care	100	79
Park Manor	79	66
Subsidiary Totals	823	626
Touchstone (S.Cal)
Arbor Glen	95	92
Brookside	97	83
Camarillo	114	94
Claremont Care	99	94
Glenwood	99	92
Panorama Gardens	149	142
Premier Care	99	89
Mission Care	58	52
Ventura	187	156
Upland Rehab	203	173
Subsidiary Totals	1200	1067

Bandera Healthcare, Inc. (AZ)
Catalina	102	89
Sabino Canyon	107	95
Waverly Park	200	92
Desert Sky	186	140
Desert Sky Assisted	105	75
East Mesa	201	145
Grand Court	174	174
Greenfields	141	141
Scottsdale	120	120
Coronado	191	175
Desert Terrace	108	78
Highland Manor	107	87
North Mountain	155	141
Subsidiary Totals	1897	1552
Keystone (TX, UT & ID)
Cambridge Health and Rehab	118	60
Cambridge Square ALF	44	37
Carrollton Healthcare Center	108	83
Draper Rehab & Care Center	89	50
Lake Village	120	87
Northern Oaks	96	83
Salado Creek	124	77
The Village	113	89
Timberwood Nursing Home	120	93
Wellington Place	140	82
Willowbend Nursing & Rehab Ctr	162	75
Arlington Hills	108	60
Holladay	120	90
Mt Ogden	108	60
Pocatello Care & Rehab Ctr	88	62
Subsidiary Totals	1658	1088
The Ensign Group, Inc. Totals	7357	5965

Schedule 4.16

FACILITY	Facility Legal Name	PHONE	FAX	ADDRESS	INFO 7/2007
Arbor Glen Care Center	Ensign San Dimas LLC	(626) 963-7531	(626) 914-7566	1033 East Arrow Highway Glendora, CA 91740	98 SNF
Arlington Hills Healthcare Center	Avenues Healthcare, Inc.	(801) 322-5521	(801) 322-0934	165 South 1000 East Salt Lake City, UT 84102	108 SNF
Arroyo Vista Nursing Center	City Heights Health Associates LLC	(619) 283-5855	(619) 284-6327	3022 45th Street San Diego, CA 92105	53 SNF
Atlantic Memorial Healthcare Center	Atlantic Memorial Healthcare Associates, Inc.	(562) 424-8101	(562) 424-9041	2750 Atlantic Avenue Long Beach, CA 90806	109 SNF
Brookfield Healthcare Center	Downey Community Care LLC	(562) 869-2567	(562) 869-8788	9300 Telegraph Road Downey, CA 90240	70 SNF
Brookside Healthcare Center	Redbrook Healthcare Associates LLC	(909) 793-2271	(909) 792-6477	105 Terracina Blvd. Redlands, CA 92373	97 SNF
Camarillo Healthcare Center	Camarillo Community Care, Inc.	(805) 482-9805	(805) 388-8242	205 Granada Street Camarillo, CA 93010	114 SNF
Cambridge Health & Rehabilitation Center	Richmond Senior Services, Inc.	(281) 344-9191	(281) 344-9320	1106 Golfview Richmond, TX 77469	118 SNF
Cambridge Square Retirement Center	Rosenburg Senior Living, Inc.	(281) 344-8444	(281) 344-1050	2700 Avenue N Rosenberg, TX 77471	44 ALF
Carrollton Health & Rehabilitation Center	Carrollton Heights Healthcare, Inc.	(972) 245-1573	(972) 245-6082	1618 Kirby Road Carrollton, TX 75006	120 SNF
Claremont Care Center	Claremont Foothills Health Associates LLC	(909) 593-1391	(909) 596-8319	219 East Foothill Blvd. Pomona, CA 91768	99 SNF
Carmel Mountain Rehab & Healthcare Center	Bernardo Heights Healthcare, Inc.	(858) 673-0101	(858) 673-8320	11895 Avenue of Industry San Diego, CA 92128	120 SNF
Catalina Healthcare Center	Presidio Health Associates LLC	(520) 795-9574	(520) 321-4983	2611 North Warren Ave. Tucson, AZ 85719	102 SNF
Cloverdale Healthcare Center	Ensign Cloverdale LLC	(707) 894-5201	(707) 894-9324	300 Cherry Creek Road Cloverdale, CA 95425	72 SNF
Coronado Healthcare Center	North Mountain Healthcare LLC	(602) 256-7500	(602) 943-7697	11411 North 19th Avenue Phoenix, AZ 85029	185 SNF
Desert Sky Health & Rehabilitation Center	Glendale Healthcare Associates LLC	(623) 931-5800	(623) 931-8776	5125 North 58th Avenue Glendale, AZ 85301	189 SNF 103 ALF
Desert Terrace Nursing Center	24th Street Healthcare Associates LLC	(602) 273-1347	(602) 273-6260	2509 North 24th Street Phoenix, AZ 85008	108 SNF
Draper Rehabilitation and Care Center	South Valley Healthcare, Inc.	(801) 571-2704	(801) 571-8921	12702 South Fort Street Draper, UT 84020	89 SNF
East Mesa Healthcare Center	Sunland Health Associates LLC	(480) 832-8333	(480) 830-2466	51 South 48th Street Mesa, Arizona 85206	188 SNF
Emerald Hills Healthcare Center	Lynnwood Health Services, Inc.	(425) 776-5512	(425) 776-3230	5821 188th Street SW Lynnwood, WA 98037	95 SNF
Glenwood Care Center	C Street Health Associates LLC	(805) 983-0305	(805) 983-2514	1300 North C Street Oxnard, CA 93030	99 SNF
Grand Court of Mesa	Brown Road Sr Housing LLC	(480) 844-7336	(480) 844-7045	262 East Brown Road Mesa, AZ 85201	117 ILF 50 SC
Greenfields Assisted Living Community	Greenfields Assisted Living LLC	(480) 649-3911	(480) 649-1330	723 East 2nd Avenue Mesa, AZ 85204	141 ALF
Highland Manor Health & Rehab Center	Highland Healthcare LLC	(602) 264-9039	(602) 264-1017	4635 N. 14th Street Phoenix, AZ 85014	107 SNF

Holladay Healthcare Center	Olympus Health, Inc.	(801) 277-7002	(801) 272-0622	4782 South Holladay Blvd. Salt Lake City, UT 84117	120 SNF
Lake Village Nursing & Rehab. Center	Grand Villa PHX, Inc.	(972) 436-7571	(972) 221-4187	169 Lake Park Road Lewisville, TX 75057	120 SNF
Lemon Grove Care & Rehab Center	Lemon Grove Health Associates LLC	(619) 463-0294	(619) 461-1064	8351 Broadway Lemon Grove, CA 91945	158 SNF
Mission Care & Rehabilitation Center	Ramon Healthcare Assoc, Inc.	(626) 607-2400	(626) 607-2490	4800 Delta Avenue Rosemead, CA 91770	59 SNF
Mt. Ogden Health and Rehabilitation Center	Washington Heights Healthcare, Inc.	(801) 479-5700	(801) 476-8913	375 East 5350 South Washington Terr., UT 84405	108 SNF
North Mountain Medical & Rehab Center	Radiant Hills Health Associates LLC	(602) 944-1666	(602) 944-8549	9155 North 3rd Street Phoenix, AZ 85020	155 SNF
Northern Oaks Living & Rehab Center	Northern Oaks Healthcare, Inc.	(325) 676-1677	(325) 676-3941	2722 Old Anson Road Abilene, TX 79603	96 SNF 0 ALF
Northbrook Nursing and Rehab Center	Ensign Willits LLC	(707) 459-5592	(707) 459-4727	64 Northbrook Way Willits, CA 95490	72 SNF
Osborn Health and Rehabilitation	RenewCare of Scottsdale, Inc.	(480) 994-1333	(480) 990-3895	3333 North Civic Ctr Plaza Scottsdale, AZ 85251	130 SNF
Pacific Care Center	Hoquiam Healthcare, Inc.	(360) 532-7882	(360) 537-7216	3035 Cherry Street Hoquiam, WA 98550	109 SNF
Palm Terrace Healthcare & Rehab Center	Gate Three Healthcare LLC	(949) 587-9000	(949) 951-3174	24962 Calle Aragon Laguna Woods, CA 92637	99 SNF
Palomar Vista Healthcare Center	West Escondido Healthcare LLC	(760) 746-0303	(760) 738-1749	201 North Fig Street Escondido, CA 92025	74 SNF
Panorama Gardens Nursing & Rehabilitation Center	Ensign Panorama LLC	(818) 893-6385	(818) 893-2924	9541 Van Nuys Blvd. Panorama City, CA 91402	151 SNF
Park Manor Rehabilitation Center	Manor Park Healthcare LLC	(509) 529-4218	(509) 522-1729	1710 Plaza Way Walla Walla, WA 99362	79 SNF
Park View Gardens at Montgomery	Ensign Montgomery LLC	(707) 525-1250	(707) 525-0159	3751 Montgomery Drive Santa Rosa, CA 95405	122 SNF
Pocatello Care and Rehabilitation Center	Pocatello Health Services, Inc.	(208) 478-3333	(208) 478-3331	527 Memorial Drive Pocatello, ID 83201	88 SNF
Premier Care Center for Palm Springs	Ensign Palm I LLC	(760) 323-2638	(760) 323-1723	2990 East Ramon Road Palm Springs, CA 92264	99 SNF
Rose Villa Healthcare Center	Bell Villa Care Associates LLC	(562) 925-4252	(562) 925-1130	9028 Rose Street Bellflower, CA 90706	53 SNF
Royal Court Healthcare	Ensign Whittier West LLC	(562) 693-7701	(562) 693-6037	12385 E. Washington Blvd Whittier, CA 90606	162 SNF
Sabino Canyon Rehab & Care Center	Ensign Sabino LLC	(520) 722-5515	(520) 886-8082	5830 East Pima Tucson, AZ 85712	112 SNF
Salado Creek Living & Rehab Center	Salado Creek Senior Care, Inc.	(210) 824-7331	(210) 824-1334	603 Corrine San Antonio, TX 78218	120 SNF
Sea Cliff Healthcare Center	HB Healthcare Associates LLC	(714) 847-3515	(714) 847-4315	18811 Florida Street Huntington Bch, CA 92648	182 S/I 84 ALF
Shoreline Healthcare Center	Rose Park Healthcare Associates, Inc.	(562) 494-4421	(562) 494-2731	4029 East Anaheim St. Long Beach, CA 90804	75 SNF
Sonoma Healthcare Center	Ensign Sonoma LLC	(707) 938-8406	(707) 938-4400	1250 Broadway Sonoma, CA 95476	144 SNF
Southland & Southland Living	Southland Management LLC	(562) 868-9761	(562) 863-0336	11701 Studebaker Road Norwalk, CA 90650	120 SNF 75 ALF

Summerfield Healthcare Center	Ensign Santa Rosa LLC	(707) 539-1515	(707) 539-0630	1280 Summerfield Road Santa Rosa, CA 95405	70 SNF
Timberwood Nursing & Rehabilitation Center	Livingston Care Associates, Inc.	(936) 327-4446	(936) 327-8435	4001 Highway 59 North Livingston, TX 77351	120 SNF
Ukiah Convalescent Hospital	Ensign Pleasanton LLC	(707) 462-8864	(707) 462-0718	1349 South Dora Ukiah, CA 95482	57 SNF
Upland Rehabilitation & Care Center	Upland Community Care, Inc.	(909) 985-1903	(909) 949-4975	1221 East Arrow Hwy Upland, CA 91786-4911	206 SNF
The Village Care Center	McAllen Community Healthcare, Inc.	(956) 664-8900	(956) 664-8906	615 No. Ware Road McAllen, TX 78501	114 SNF
Victoria Care Center	Victoria Ventura Healthcare LLC	(805) 642-1736	(805) 639-3198	5445 Everglades Street Ventura, CA 93003	188 SNF
Victoria Healthcare Center	Costa Victoria Healthcare LLC	(949) 642-0387	(949) 646-0313	340 Victoria Street Costa Mesa, CA 92627	79 SNF
Vista Knoll Specialized Care Facility	Vista Woods Health Associates LLC	(760) 630-2273	(760) 630-0913	2000 Westwood Road Vista, CA 92083	119 SNF
Waverly Park Healthcare Center	Park Waverly Healthcare LLC	(520) 882-6151	(520) 620-1547	2001 N. Park Avenue Tucson, AZ 85719	200 SNF
Wellington Place Living & Rehab Center	Wellington Healthcare, Inc.	(254) 778-4231	(254) 778-2877	1802 So. 31st Temple, TX 76504	140 SNF
Whittier Hills Healthcare Center	Ensign Whittier East LLC	(562) 947-7817	(562) 943-5347	10426 Bogardus Avenue Whittier, CA 90603	160 SNF
Willowbend Nursing & Rehab. Center	Town East Healthcare, Inc.	(972) 279-3601	(972) 613-4539	2231 Highway 80 East Mesquite, TX 75150	162 SNF

Schedule 4.17

CONFIDENTIAL

The Ensign Group, Inc. Significant Shareholders		Balance September 2007	% Ownership
Count
1	Roy Christensen	3,910,000	22.12	%
2	Christopher R. Christensen and Terri M. Christensen as Co-Trustees of the Christensen Family Trust dated 10/24/05	3,893,000	22.02	%
3	Gregory K. Stapley & Deborah S. Stapley as Co-trustees of the Stapley Family Trust uad 04/25/06	1,180,000	6.68	%
4	Jay Brady	720,000	4.07	%
5	Richard Toolson	600,000	3.39	%
6	Alan Norman	309,000	1.75	%
7	Blalack Trust	292,000	1.65	%
8	Gordon Buechs	120,400	0.68	%
9	Thomas Maloof	120,000	0.68	%
11	Cory Monette	76,000	0.43	%
12	David Sedgwick	45,500	0.26	%
13	Mike Dalton	45,500	0.26	%
14	Antoinette Hubenette	30,000	0.17	%
15	John Albrechtsen	24,500	0.14	%
16	Barry Port	9,500	0.05	%
17	Other	2,315,200	13.10	%
	Common shares issued	13,690,600
	Common shares reserved for issuance under 2001 Incentive Plan	495,000	2.80	%
	Common shares reserved for issuance under 2005 Incentive Plan	749,000	4.24	%
	Preferred shares (Common Share equivalent)	2,741,180	15.51	%
	Total Shares Outstanding	17,675,780	100.00	%

EX-10.44

Exhibit 10.44

REVOLVING CREDIT NOTE

$5,000,000.00 September 13, 2007û

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, 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, 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, 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 and WELLINGTON HEALTHCARE, INC., a Nevada corporation (collectively and individually, "Borrower"), jointly and severally, promises to pay, in lawful money of the United States, to the order of GENERAL ELECTRIC CAPITAL CORPORATION, a Delaware corporation (together with its successors and assigns, "Lender"), the principal sum of FIVE MILLION and No/100 Dollars ($5,000,000.00), 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 as amended as of the date hereof by and among Borrower and Lender.

        1.     All capitalized terms used and not otherwise specifically defined in this Revolving Credit Note (the "Note") shall have the meanings given to them in the Loan Agreement.

        2.     This Note shall evidence the undersigned's obligation to repay certain 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) sixty (60) days from the date of this Note, 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 "Overline Note" referred to in the Amendment No. 5 to the Loan Agreement dated as of the date hereof among the Borrower and the Lender, 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

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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,

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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

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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 APPEAR ON FOLLOWING PAGES]

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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/  GREGORY K. STAPLEY Gregory K. Stapley Vice 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 LLCv 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/  DANIEL H. WALKER Daniel H. Walker	By:	/s/  BEVERLY WITTEKIND Beverly Wittekind Secretary
		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/  DANIEL H. WALKER Daniel H. Walker	By:	/s/  BEVERLY WITTEKIND Beverly Wittekind Secretary

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		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/  DANIEL H. WALKER Daniel H. Walker	By:	/s/  BEVERLY WITTEKIND Beverly Wittekind Secretary
		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/  DANIEL H. WALKER Daniel H. Walker	By:	/s/  BEVERLY WITTEKIND Beverly Wittekind Secretary
		ATLANTIC MEMORIAL HEALTHCARE ASSOCIATES, INC. ROSE PARK HEALTHCARE ASSOCIATES, INC.
ATTEST/WITNESS:		each, a Nevada corporation
By:	/s/  DANIEL H. WALKER Daniel H. Walker	By:	/s/  BEVERLY WITTEKIND Beverly Wittekind Secretary
		NORTHERN OAKS HEALTHCARE, INC. SALADO CREEK SENIOR CARE, INC. MCALLEN COMMUNITY HEALTHCARE, INC. WELLINGTON HEALTHCARE, INC.
ATTEST/WITNESS:		each, a Nevada corporation
By:	/s/  DANIEL H. WALKER Daniel H. Walker	By:	/s/  BEVERLY WITTEKIND Beverly Wittekind Secretary

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EX-10.45

Exhibit 10.45

AGREEMENT OF PURCHASE AND SALE
AND JOINT ESCROW INSTRUCTIONS

        This Agreement of Purchase and Sale and Joint Escrow Instructions dated August 31, 2007 ("Agreement") is entered into by and between Ensign Bellflower LLC, a Nevada limited liability company, ("Ensign"), Trousdale Health Holdings LLC, a Nevada limited liability company ("Trousdale"), and Moenium Holdings LLC, a Nevada limited liability company ("Moenium", and together with Ensign and Trousdale, collectively, jointly, and severally, the "Buyer"), and Health Care Investors III, a California general partnership ("HCI") and Health Care Property Investors, Inc., a Maryland corporation dba in Arizona as HC Properties, Inc. ("HCPI", and together with HCI, collectively, jointly and severally, the "Seller").

Background:

        A.    Seller owns the skilled nursing facilities and the underlying real properties located at (i) 9028 Rose Street, Bellflower, California 90706, commonly known as the Rose Villa Healthcare Center (the "Bellflower Property"), (ii) 9300 Telegraph Road, Downey, California 90240, commonly known as Brookfield Healthcare Center (the "Downey Property"), and (iii) the assisted living community and the underlying real property located at 262 East Brown Road, Mesa, Arizona 85201, commonly known as the Grand Court of Mesa (the "Mesa Property"). The Mesa Property, the Bellflower Property, and the Downey Property, are each individually referred to as the "Real Property", and collectively as the "Real Properties").

        B.    Buyer, and its affiliates, have been occupying and operating the facilities located at each Real Property since February 1, 2003, pursuant to that certain Master Lease Agreement dated January 31, 2003, between Seller, as Landlord, and Moenium as Tenant (as amended, the "Lease"), and various subleases between Moenium, as Sublandlord and Buyer's affiliates, as Subtenants; and

        C.    Seller and Buyer wish to enter into this Agreement in order to set forth the definitive terms and conditions upon which Buyer will purchase and Seller will sell the Real Properties and certain assets located therein and used in connection with the operation thereof.

        Now, therefore, Buyer and Seller (individually, "Party," and collectively, "Parties") hereby agree between themselves and instruct Chicago Title (in its capacity as escrow holder under this Agreement), as follows:

1.    Definitions.    In addition to any other terms defined elsewhere in this Agreement, the terms defined in this Section 1 and in the Glossary of this Agreement shall have the meanings set forth in this Section and in the Glossary, respectively. Buyer and Seller agree that this Section and the Glossary contain substantive agreements between the Parties and do not merely contain definitions.

        1.1   "Closing Date" shall mean 8:00 a.m., pacific standard time, September 7, 2007; provided, however, Buyer shall have the one time right to extend such date upon written notice delivered to Seller and Escrow no later than September 7, 2007, to a mutually agreeable closing date no later than December 31, 2007.

        1.2   "Contingency Expiration Date" shall mean 5:00 p.m., pacific standard time, September 5, 2007.

        1.3   "Deposit" shall mean Six Hundred Thirty Five Thousand Dollars and Zero Cents ($635,000.00).

        1.4   "Escrow" shall mean Escrow Holder's escrow number                         .

        1.5   "Opening of Escrow" shall mean the date on which a fully executed original or copy of this Agreement is delivered to Escrow Holder by Buyer or Seller. Escrow Holder shall promptly notify the

Parties of the date of the Opening of Escrow. The date set forth in such notice shall be conclusive and binding upon the Parties, absent manifest error.

        1.6   "Property" shall mean all of Seller's right, title and interest, if any, in and to the Real Properties, and the Personal Property therein.

        1.7   "Purchase Price" shall mean Twelve Million Seven Hundred Thousand Dollars ($12,700,000.00), which is allocated as follows: (a) Two Million One Hundred Thousand Dollars ($2,100,000.00) for the Bellflower Property; (b) Three Million Three Hundred Twenty Thousand Dollars ($3,320,000.00) for the Downey Property; (c) Seven Million Two Hundred Eighty Thousand Dollars ($7,280,000.00) for the Mesa Property.

        1.8   "Title Company" shall mean Chicago Title Insurance Company (in its capacity as the title insurer under this Agreement) (i) for the Mesa Property, the title office located at 1201 S. Alma School Road, #6550, Mesa, Arizona 85210 (Attention Alan Costley whose phone number is 480-969-3645 and fax number is 480-827-9685), and (ii) for the Bellflower and Downey Properties, the title office located at 917 Glenneyre, Laguna Beach, CA 92651 (Attention Debbi Faber whose phone number is 949-494-7531 and fax number is 949-497-5106), or another title insurance company that Seller may elect to issue the Title Policy.

2.    Purchase and Sale.    Seller hereby agrees to sell and Buyer hereby agrees to purchase the Property on the terms and conditions set forth in this Agreement.

3.    Purchase Price.    

        3.1    Payment.    The price and consideration to be paid by Buyer to Seller for the Property shall be the Purchase Price. Buyer shall pay the Purchase Price to Seller as follows:

        3.1.1    Deposit.    Concurrent with Buyer's execution of this Agreement, Buyer shall deliver to Escrow Holder the Deposit in Cash made payable to Escrow Holder. Escrow Holder shall place the Deposit in an interest-bearing account with a Federally insured bank or savings and loan association with interest thereon to accrue to Buyer's benefit, under Buyer's Federal Tax Identification number                         . At Seller's request, Escrow Holder shall invest the Deposit with multiple banks or savings and loan association so that not more than $100,000 of the Deposit is on deposit at any time with any one (1) bank or savings and loan association. At the Close of Escrow, the Deposit, together with the interest accrued thereon, shall be applied to and credited towards the Purchase Price.

        3.1.2    Balance of Purchase Price.    By no later than 5:00 p.m., pacific standard time, one (1) business day prior to the Closing Date, Buyer shall deliver to Escrow Holder in Cash the balance of the Purchase Price, plus Buyer's share of costs, expenses, fees, charges, prorations and other amounts required to be paid by Buyer hereunder, less any credits due to Buyer hereunder.

4.    Buyer's Contingencies.    

        4.1    Contingencies.    Buyer's obligation to purchase the Property is contingent on the actual or deemed satisfaction or waiver by Buyer of each of the following conditions (collectively "Buyer's Contingencies" and individually "Buyer's Contingency") by the dates set forth below for each Buyer's Contingency:

        4.1.1    Preliminary Title Report.    Buyer's reasonable approval, by on or before the Contingency Expiration Date, of a preliminary title report ("Preliminary Title Report" or "PTR") of the Property prepared by the Title Company ("Title Contingency"). Prior to entering into this Agreement, Buyer acknowledges and agrees that Buyer has obtained the Preliminary Title Report together with a copy of the underlying documents referred to in Schedule B of the Preliminary Title Report. Buyer shall not have the right to disapprove of the Preliminary Title Report for any of the Pre-Approved Title Exceptions (as defined in the Glossary).

        4.1.2    Due Diligence.    Buyer's reasonable approval, by on or before the Contingency Expiration Date, of the results of Buyer's review and inspection of the Property and the Property Information (as defined in the Glossary) (the "Due Diligence Contingency").

        4.2    Due Diligence.    

        4.2.1 Buyer's Contingencies are in favor of and may be waived by Buyer. Buyer shall not unreasonably disapprove of a Buyer's Contingency. Buyer shall, at Buyer's sole cost and expense, promptly, diligently, continuously and in good faith continuously pursue the satisfaction of all of Buyer's Contingencies.

        4.2.2 Buyer shall, at no charge to Seller, provide Seller true, correct and complete copies of any applications, reports or other materials filed with or provided to a governmental agency in connection with satisfying Buyer's Contingencies, and provide Seller copies of any correspondence, documents, materials and other information provided to or received from a governmental agency or others in connection with satisfying Buyer's Contingencies.

        4.2.3 Buyer shall not, without Seller's prior written consent or except as otherwise expressly provided herein, communicate directly with any governmental agency or authority regarding the Property, including, but not limited to, requesting a governmental agency or authority to conduct an inspection, review, testing or other investigation of the Property.

        4.3    Disapproval Notice.    Buyer shall provide to Seller and Escrow Holder written notice of Buyer's disapproval or conditional approval of a Buyer's Contingency on or before the date set forth herein for satisfaction of such Buyer's Contingency ("Buyer's Contingency Disapproval Notice"). If Seller and Escrow Holder have not received a Buyer's Contingency Disapproval Notice on or before the date set forth herein for satisfaction of a Buyer's Contingency, then it shall be conclusively deemed that Buyer has approved of such Buyer's Contingency. Buyer's conditional approval of any of Buyer's Contingencies shall be deemed Buyer's disapproval of such Buyer's Contingency. Any conditional approval or disapproval by Buyer of a Buyer's Contingency shall be in writing and shall describe in detail the reasons for such disapproval.

        4.4    Seller's Right to Terminate or Cure.    If Buyer properly and timely provides a Buyer's Contingency Disapproval Notice, then Seller shall have the right, in Seller's sole, absolute and unfettered discretion, within ten (10) business days following receipt of Buyer's Contingency Disapproval Notice, but not later than the Closing Date, elect to cure ("Cure Election") the matter or item specified in Buyer's Contingency Disapproval Notice ("Disapproved Item"), or elect to terminate this Agreement effective immediately upon notice by Seller ("Termination Election"). If Seller fails to make the Cure Election, then Seller shall be deemed to have made the Termination Election.

        4.4.1 If Seller makes the Cure Election and for any reason whatsoever, the Disapproved Item has not been cured prior to the Closing Date, then Seller shall not be subject to any liability therefor, and Seller shall not be considered to be in breach or default hereunder, and Buyer may, by giving written notice to Seller, on or before the earlier of two (2) business days before the Closing Date or two (2) business days after Seller's notice to Buyer that a Disapproved Item will not be cured, (i) elect to proceed with the purchase of the Property subject to the Disapproved Item, or (ii) elect to terminate this Agreement. Buyer's failure to timely, properly and in writing elect to terminate this Agreement as provided in this Section shall conclusively be deemed as Buyer's election to proceed with the purchase of the Property subject to the Disapproved Item.

        4.4.2 If Buyer elects to or is deemed to have elected to proceed with purchasing the Property subject to the Disapproved Item, then Buyer shall accept the Property subject to the Disapproved Item, without any cause of action, Claim or damages against Seller and without any abatement, reduction or holdback of the Purchase Price, and Buyer shall complete the purchase of the Property in compliance herewith, on or before the Closing Date. If Buyer or Seller elects to (or is deemed to have elected to) terminate this Agreement, then the provisions of Section 6 (Termination) shall govern.

5.    Seller's Contingencies.    

        5.1   Seller's obligation to sell the Property is conditioned and contingent on the fulfillment and satisfaction of each of the following conditions (collectively referred to as "Seller's Contingencies", and individually as a "Seller's Contingency") on or before the date set forth below for each Seller's Contingency:

        5.1.1 Buyer shall have timely performed all of the obligations required by the terms of this Agreement to be performed by Buyer, including, but not limited to, delivering to Escrow Holder the Purchase Price and all other funds and documents required of Buyer before the Closing Date;

        5.1.2 All representations and warranties made by Buyer to Seller under this Agreement shall be true and correct as of the Closing Date;

        5.2   Seller's Contingencies are for the benefit of and may be waived by Seller. If any of Seller's Contingencies are not satisfied, then Seller shall have the right, in Seller's sole and absolute discretion, to terminate this Agreement, in which event the provisions of Section 6 (Termination) shall govern.

6.    Termination For Failure of Contingencies or Occurrence of Material Taking or Material Uninsured Damage.    If, in accordance with the terms hereof, this Agreement is terminated (or is deemed to have been terminated) by either Buyer or Seller due to failure of any of Buyer's Contingencies or Seller's Contingencies, or due to the occurrence of a Material Taking or a Material Uninsured Damage, then this Agreement shall terminate upon the following terms and conditions:

        6.1   Buyer shall, within five (5) days after such termination, at no charge to Seller, deliver to Seller the following (which obligation shall survive the termination of this Agreement):

        6.1.1 All originals and copies of the Property Information supplied by Seller to Buyer and a true, correct and complete copy of all other Property Information obtained by Buyer;

        6.1.2 Documents reasonably requested by Seller or Escrow Holder to confirm the termination of this Agreement and the Escrow established hereunder;

        6.2   Neither Party shall thereafter have any liability to the other Party under this Agreement, except (i) to the extent that Buyer may have breached this Agreement (in which case Seller shall have the right to pursue all of Seller's rights and remedies against Buyer), and (ii) the obligations of the Parties hereunder which by the express provisions of this Agreement survive termination.

        6.3   Provided that Buyer is not in breach or default hereunder, and subject to Buyer's compliance with all of the other terms and conditions in this Agreement for return of the Deposit, Escrow Holder shall return to Buyer the Deposit; and

        6.4   Buyer shall be responsible for payment of one hundred percent (100%) of the cancellation fees and expenses of the Escrow Holder and the Title Company.

7.    Seller's Disclosures, Representations and Warranties.    

        7.1    Natural Hazards Disclosure.    Seller and Buyer acknowledge that the Disclosure Statutes (as defined below) provide that a seller of real property must make certain disclosures regarding certain natural hazards potentially affecting the property, as more particularly provided therein. As used in this Agreement, "Disclosure Statutes" means, collectively, California Government Code Section 8589.3, 8589.4 and 51183.5, California Public Resources Code Section 2621.9, 2694 and 4136 and any other California statutes that require Seller to make disclosure concerning the Property. Seller will deliver, or cause to be delivered to Buyer a Natural Hazard Disclosure Report for the Property (the "Report"). The Report will be delivered to Buyer promptly after execution of this Agreement, but in no event later than 10 days before the Contingency Expiration Date. Buyer hereby agrees as follows with respect to the Disclosure Statutes and the Report:

        7.1.1 The delivery of the Report to Buyer as provided above shall be deemed to satisfy all obligations and requirements of Seller under the Disclosure Statutes.

        7.1.2 Seller shall not be liable for any error or inaccuracy in, or omission from, the information in the Report.

        7.1.3 The Report is being provided by Seller for purposes of complying with the Disclosure Statutes and shall not be deemed to constitute a representation or warranty by Seller as to the presence or absence in, at or around of the Property of the conditions that are the subject of the Disclosure Statutes.

The Report is for Seller and Buyer only and is not for the benefit of, or be used for any purpose by, any other party, including, without limitation, insurance companies, lenders or governmental agencies.

        7.2   Subject to satisfaction of Seller's Contingencies, and except as otherwise disclosed by or referred to in the Property Information, Seller hereby represents and warrants to Buyer as follows:

        7.2.1 HCI is a general partnership duly formed, validly existing and in good standing under the laws of the State of California; HCPI is a corporation duly formed, validly existing and in good standing under the laws of the State of Maryland, and is qualified to do business and is in good standing in the State of Arizona. Seller has the legal power, right and authority to enter into this Agreement and all documents and instruments referenced herein, and to consummate the transactions contemplated hereby.

        7.2.2 Except as otherwise stated herein, requisite action (corporate, trust, partnership, company or otherwise) has been taken by Seller in connection with entering into this Agreement, the instruments referenced herein, and the consummation of the transactions contemplated hereby; no consent of any partner, shareholder, creditor, investor, judicial or administrative body, authority or other party is required.

        7.2.3 The individuals executing this Agreement and the instruments referenced herein on behalf of Seller and the partners, officers or trustees of Seller, if any, have the legal power, right, and actual authority to bind Seller to the terms and conditions hereof and thereof.

        7.2.4 This Agreement and all documents required hereby to be executed by Seller are and shall be valid, legally binding obligations of and enforceable against Seller in accordance with their terms, subject only to applicable bankruptcy, insolvency, reorganization, moratorium laws or similar laws or equitable principles affecting or limiting the rights of contracting parties generally.

        7.2.5 Neither the execution and delivery of this Agreement and documents referenced herein, nor the incurrence of the obligations set forth herein, nor the consummation of the transactions herein contemplated, nor compliance with the terms of this Agreement and the documents referenced herein conflict with or result in the material breach of any terms, conditions or provisions of, or constitute a default under, any bond, note, or other evidence of indebtedness or any contract, indenture, mortgage, deed of trust, loan, partnership agreement, lease or other agreements or instruments to which Seller is a party or affecting the Property.

        7.3   The representations and warranties made in this Agreement by Seller shall survive the Close of Escrow for only a period of six (6) months following the Close of Escrow.

        7.4   If Buyer shall have actual knowledge as of the Close of Escrow that any of the representations or warranties of Seller contained herein are false or inaccurate, and Buyer nonetheless closes the transaction hereunder and acquires the Property, then Seller shall have no liability or obligation respecting such false or inaccurate representations or warranties (and any cause of action resulting therefrom shall terminate upon the closing hereunder).

        7.5   Seller's representations and warranties herein shall be enforceable only by the named Buyer herein, and not any other successor or assignee of Buyer's interest under this Agreement or of the Property.

        7.6   If at any time prior to the Close of Escrow, Buyer knows, has reason to know or should have known that any of the promises, covenants, representations, warranties, of Seller are false or have been breached and fails to notify Seller in writing within three (3) days following the discovery thereof or the

time that such fact was discoverable or should have been discovered, then Seller shall not be liable to Buyer for such breach.

        7.7   All of Seller's representations and warranties shall be subject to any facts, information and other matters disclosed by, referred to or set forth in the Property Information.

        7.8   The total and aggregate obligation of Seller pursuant to the provisions of this Section 7 in the event of a Seller breach shall in no event exceed a maximum of Five Hundred Thousand Dollars ($500,000.00).

8.    Buyer's Disclosures, Representations and Warranties.    

        8.1   Buyer hereby represents and warrants to Seller as follows:

        8.1.1 Moenium is a limited liability company duly formed, validly existing and in good standing under the laws of the State of Nevada, and is in good standing and authorized to do business in the State of Arizona; Ensign and Trousdale are limited liability companies duly formed, validly existing and in good standing under the laws of the State of Nevada, and are in good standing and authorized to do business in the State of California. Buyer has the legal power, right and authority to enter into this Agreement and all documents and instruments referenced herein, and to consummate the transactions contemplated hereby.

        8.1.2 All requisite action (corporate, trust, partnership, company or otherwise) has been taken by Buyer in connection with the entering into of this Agreement and the instruments referenced herein, and the consummation of the transactions contemplated hereby. No consent of any partner, shareholder, creditor, investor, judicial or administrative body, authority or other party is required.

        8.1.3 Buyer is not, and will not be, a person or entity with whom Seller is restricted from doing business under the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, H.R. 3162, Public Law 107-56 (commonly known as the "USA Patriot Act") and Executive Order Number 13224 on Terrorism Financing, effective September 24, 2001 and regulations promulgated pursuant thereto (collectively, "Anti-Terrorism Laws"), including, without limitation, persons and entities named on the Office of Foreign Asset Control Specially Designated Nationals and Blocked Persons List.

        8.1.4 The individuals executing this Agreement and the instruments referenced herein on behalf of Buyer have the legal power, right and actual authority to bind Buyer to the terms and conditions hereof and thereof.

        8.1.5 This Agreement and all documents required hereby to be executed by Buyer are, and shall be, valid, legally binding obligations of, and enforceable against, Buyer in accordance with their terms.

        8.1.6 Neither the execution and delivery of this Agreement and documents referenced herein, nor the incurrence of the obligations set forth herein, nor the consummation of the transactions herein contemplated, nor compliance with the terms of this Agreement and the documents referenced herein conflict with or result in the material breach of any terms, conditions or provisions of, or constitute a default under, any bond, note, or other evidence of indebtedness or any contract, indenture, mortgage, deed of trust, loan, partnership agreement, lease or other agreements or instruments to which Buyer is a party.

        8.1.7 No representation, warranty or statement of Buyer in this Agreement or in any document, certificate or schedule furnished or to be furnished to Seller pursuant hereto contains or will contain any untrue statement or a material fact, omits or will omit to state a material fact necessary to make the statements or facts contained therein not misleading.

        8.1.8 Buyer has adequate financial resources to make timely payment of all sums due from Buyer hereunder and to perform all of its obligations hereunder. Buyer acknowledges that this is an "all cash" transaction and the Closing of this transaction is not contingent upon, and no extensions will be granted for, Buyer obtaining any financing.

        8.2   Buyer's representations and warranties shall survive the Close of Escrow.

9.    Acknowledgments by Buyer.    Buyer hereby expressly acknowledges, agrees, represents and warrants as follows:

        9.1   Buyer and its affiliates have been exclusively occupying each of the Real Properties since January 2003 pursuant to "triple net" leases whereby Buyer is solely responsible for all taxes, insurance, maintenance, and utilities of the Property.

        9.2   Buyer has substantial experience with real property;

        9.3   Buyer is acquiring the Property in an "AS IS, WHERE IS" basis and condition, with all faults, whether known or unknown;

        9.4   Except as otherwise expressly provided in this Agreement, neither Seller nor any Seller Parties have made any representations or warranties of any kind, nature or description, direct or implied, verbal or written, with respect to the Property or the Property Information;

        9.5   Buyer is relying upon Buyer's own independent investigation of the Property in entering into this Agreement and purchasing the Property;

        9.6   Buyer shall by the expiration of the period for satisfaction of Buyer's Contingencies fully and thoroughly investigate and inspect each and every aspect of the Property and the Property Information, including, but not limited to, the following: Physical condition of the Property; the composition, condition, stability, compaction and buildability of the Property's soil and geology; size and dimensions of the Property; income and expenses of the Property; rights and obligations of any tenants or other occupants of the Property; accuracy, completeness or adequacy of the legal description of the Property; all documents, encumbrances, exceptions and other matters affecting title of the Property; all federal, state, county, municipal and local laws, rules and regulations affecting the Property, including, but not limited to, environmental and other laws dealing with Hazardous Substances; the Americans with Disabilities Act; zoning, land and other use restrictions, conditional use permits, development agreements, permits, permit restrictions, redevelopment plans, building codes, taxes, bonds, assessments; the Property's fitness or suitability for any particular purpose, use or enjoyment (including, without limitation, those intended or desired by Buyer); the feasibility of development of the Property; and present or future availability and adequacy of services and utilities, including, but not limited to, water, electricity, gas, telephone, heating, ventilation, air conditioning, sprinklers, sewers, plumbing, storm drain, drainage, elevators, escalators, landscaping, janitorial, window washing, security, patrol, guards, parking attendants and valets;

        9.7   If Buyer fails, decides or elects not to perform any investigation, inspection or review of the Property or the Property Information, Buyer is doing so at Buyer's own risk, and Buyer is accepting and assuming all risks and Claims associated therewith; and

        9.8   Time is of the essence of Buyer's obligations under this Agreement, including, but not limited to, with respect to the Close of Escrow on or before the Closing Date.

10.    Release by Buyer.    

        10.1 Buyer, on behalf of Buyer and Buyer Parties, hereby expressly and unconditionally does release, acquit and discharge Seller and the Seller Parties from and against any and all known, unknown, past, present or future Claims, directly or indirectly arising from, in connection with, caused by or related to:

        10.1.1 Any past, present or future condition of the Property, including, but not limited to, the Environmental Damages, however arising, including, but not limited to any violation of Environmental Requirements, or the presence of any Hazardous Substance, whether or not caused by the negligence of Seller;

        10.1.2 Any and all statements, representations, warranties, determinations, conclusions, assessments, assertions or any other information contained in any of the Property Information, the

inaccuracy, incompleteness or unreliability of any of the Property Information; any errors, omissions or mistakes in the Property Information, or Buyer's reliance, dependence or use of the Property Information; and

        10.1.3 Any defect, inaccuracy or inadequacy in title of the Property, legal description of the Property, covenants, conditions, restrictions, encumbrances or encroachments which affect the Property, and Buyer waives any rights of subrogation that the Title Company may have against Seller, so long as the policy of title insurance issued to Buyer at the Close of Escrow is not invalidated thereby.

        10.2 Buyer hereby acknowledges and agrees that (i) Buyer may hereafter discover facts different from or in addition to those now (or as of the Close of Escrow) known or believed to be true regarding the Property and/or Property Information, (ii) Buyer's agreement to release, acquit and discharge Seller and Seller Parties as set forth herein shall remain in full force and effect, notwithstanding the existence or discovery of any such different or additional facts, (iii) Buyer knowingly and voluntarily waives any and all rights, benefits and privileges to the fullest extent permissible under any federal, state, local, or other laws which do or would negatively affect validity or enforceability of all or part of the releases set forth in this Agreement, and (iv) Buyer specifically waives the provisions of California Civil Code Section 1542, which Section provides:

"A general release does not extend to claims which the creditor does not know or suspect to exist in his or her favor at the time of executing the release, which if known by him or her must have materially affected his or her settlement with the debtor."

        10.3 The provisions of this Section shall survive the Close of Escrow.

11.    Indemnity by Buyer.    

        11.1 Buyer, on behalf of Buyer and Buyer Parties, hereby expressly and unconditionally agrees to protect, indemnify, defend (with counsel reasonably satisfactory to Seller) and hold harmless Seller and Seller Parties from and against any and all Claims directly or indirectly arising from, in connection with, caused by, or related to, any of the following:

        11.1.1 Use or occupancy of the Property by Buyer, Buyer Parties or Buyer's Consultants, including, but not limited to, performance of any Tests;

        11.1.2 Any acts, omissions or negligence of Buyer, Buyer Parties or Buyer's Consultants;

        11.1.3 Past, present or future condition of the Property, including, but not limited to, any Environmental Damages, the violation of any Environmental Requirements or the presence of any Hazardous Substances (whether or not disclosed by or referred to in the Property Information); and

        11.1.4 Buyer's breach of or default under this Agreement.

        11.2 The obligation of Buyer herein shall include, but not be limited to, the burden and expense of defending all Claims, suits and administrative proceedings (with counsel reasonably approved by Seller), even if such Claims, suits or proceedings are groundless, false or fraudulent, and conducting all negotiations of any description, and paying and discharging, when and as the same become due, any and all Claims, judgments, penalties or other sums due against the Seller.

        11.3 The obligations of Buyer and Buyer Parties under this Section shall survive the Close of Escrow, and any subsequent transfer of title to the Property (whether by sale, foreclosure, deed in lieu of foreclosure or otherwise), and shall not be affected by any investigation by or on behalf of Buyer, or by any information which Buyer may have or would obtain with respect thereto, including, but not limited to, the Property Information.

12.    Buyer's Inspection of Property.    Following any Test, unless otherwise directed in writing by Seller, Buyer shall, at Buyer's sole cost and expense, restore the Property to the condition in which the Property existed prior to performance of such Test, which restoration shall be performed by Buyer as

may be directed by Seller, including, but not limited to, recompaction and/or removal of any excavated or disrupted soil, dirt and materials. Buyer's obligation to restore the Property under this Section shall not be satisfied by payment of the liquidated damages, if any, provided hereunder. If Buyer is otherwise entitled to the return of Buyer's Deposit or other funds pursuant to this Agreement, Buyer's compliance with the terms and conditions of this Section shall be a condition precedent thereto. Buyer's obligations under this Section shall survive the termination of this Agreement or the Close of Escrow.

13.    Close of Escrow.    

        13.1 Buyer and Seller shall close the purchase and sale of the Property on or before the Closing Date and perform (or cause to be performed) their respective obligations under this Agreement to accomplish the Close of Escrow on the Closing Date.

        13.2 At the Close of Escrow, Escrow Holder shall cause the Title Company to issue the Title Policy.

        13.3 If, as a result of Buyer's defaults or delays, the Close of Escrow shall not have occurred on or before the Closing Date, then Seller shall have the right, in Seller's sole and absolute discretion, to (i) terminate this Agreement, without liability by Seller to Buyer and without limiting any of Seller's rights against Buyer as a result thereof, by giving written notice to Buyer, or (ii) extend the date for the Closing Date. Buyer hereby acknowledges that time is of the essence with respect to performance of Buyer's obligations under this Agreement, including, but not limited to, with respect to the Close of Escrow on or before the Closing Date.

14.    Deliveries to Escrow Holder.    

        14.1 On or before the Closing Date, Seller shall deliver or cause to be delivered to Escrow Holder the following:

        14.1.1 For the Bellflower Property and the Downey Property (collectively, the "California Properties"), a fully executed grant deed conveying the California Properties to Buyer in the form of Exhibit A-1 hereof, and for the Mesa Property (the "Arizona Property"), a fully executed special warranty deed conveying the Arizona Property to Buyer in the form of Exhibit A-2 hereof.

        14.1.2 A fully executed Bill of Sale conveying title to the Personal Property to Buyer in the form attached hereto as Exhibit B ("Bill of Sale");

        14.1.3 A fully executed certification of nonresident alien status in the form attached hereto as Exhibit C ("FIRPTA Certificate");

        14.1.4 For the California Properties, a fully executed California Real Estate Withholding Exemption Certificate in the form provided by Escrow Holder ("California Affidavit");

        14.1.5 For the Arizona Property, an Affidavit of Property Value pertaining to the Arizona Property (the "APV");

        14.1.6 A Lease Termination Agreement terminating the Lease in the form attached hereto as Exhibit D ("Lease Termination Agreement"); and

        14.1.7 Such other instruments or instructions as Escrow Holder or the Buyer may reasonably request in order to consummate this transaction and such other documents required of Seller under the terms of this Agreement.

        14.2 On or before the Closing Date, Buyer shall deliver to Escrow Holder:

        14.2.1 The Purchase Price, plus such additional funds as are required to pay charges payable by Buyer hereunder, less any credit to which Buyer is entitled under the terms hereof;. It shall be a condition to Closing that Buyer must purchase all of the Properties in accordance with this Agreement for the Purchase Price. Buyer's failure to pay any portion of the Purchase Price shall be a default under this Agreement in which case Seller shall not have any obligation to sell any of

the Properties to Buyer and Seller shall be entitled to the liquidated damages as provided in this Agreement;

        14.2.2 Fully executed corporate resolutions authorizing Buyer to enter into this transaction and to execute all documents necessary in connection therewith;

        14.2.3 An APV pertaining to the Arizona Property;

        14.2.4 The Lease Termination Agreement; and

        14.2.5 Such other instruments or instructions as Escrow Holder or the Seller may reasonably request in order to consummate this transaction and such other documents required of Buyer under the terms of this Agreement.

15.    Escrow Holder.    

        15.1 At the Close of Escrow, Escrow Holder shall promptly undertake all of the following in the following manner:

        15.1.1 Disburse all funds deposited with Escrow Holder by Buyer in payment of the Purchase Price as follows:

        15.1.1.1 Deduct all items including prorations and credits, if any, chargeable to the account of Seller pursuant to the provisions hereof.

        15.1.1.2 Disburse the balance of the Purchase Price to Seller promptly upon the Close of Escrow.

        15.1.2 Cause the recording of the Special Warranty Deed and the APV and the Grant Deed (with documentary transfer tax information to be affixed after recording) and any other documents which the Parties hereto may mutually direct to be recorded in the Official Records and obtain conformed copies thereof for distribution to Buyer and Seller.

        15.1.3 Direct the Title Company to issue the Title Policy to Buyer. If the Title Company named herein fails or refuses to issue to Buyer the Title Policy, then Seller shall have the right to select another reputable title insurance company doing business in the Southern California region to issue the Title Policy.

        15.1.4 Deliver to Buyer the following: Bill of Sale, FIRPTA Certificate, and the California Affidavit.

        15.2 Seller and Buyer agree to deposit an executed original or originally executed counterparts of this Agreement with Escrow Holder within two (2) business days following the execution of this Agreement by Buyer and Seller. Escrow Holder is hereby directed by the Parties to take all actions, recordings and disbursements reasonably necessary in order to follow the instructions of the Parties hereto contained in this Agreement and all amendments. In addition, Buyer and Seller agree to execute, deliver and be bound by any reasonable and customary supplemental escrow instructions of Escrow Holder or other instruments as may reasonably be required by Escrow Holder in order to consummate the transaction contemplated by this Agreement. Any such supplemental instructions shall not conflict with, amend or supersede any portions of this Agreement. If there is any inconsistency between such supplemental instructions and this Agreement, this Agreement shall govern and control in all respects.

        15.3 If this Agreement or any matter relating hereto shall become the subject of any litigation or controversy, Buyer and Seller agree, jointly and severally, to hold Escrow Holder free and harmless from any loss or expense, including attorneys' fees, that may be suffered by Escrow Holder by reason thereof. In the event conflicting demands are made or notices served upon Escrow Holder with respect to this Agreement, the Buyer and Seller expressly agree that Escrow Holder shall be entitled to file a suit in interpleader and obtain an order from the court requiring Buyer and Seller to interplead and litigate their several claims and rights among themselves. Upon the filing of the action in interpleader, Escrow Holder shall be fully released and discharged from any obligations imposed upon Escrow Holder by this Agreement.

        15.4 Escrow Holder shall not be liable for the sufficiency or correctness as to form, manner, execution or validity of any instrument deposited with Escrow Holder, nor as to the identity, authority or rights of any person executing such instrument, nor for failure to comply with any of the provisions of any agreement, contract or other instrument filed with Escrow Holder or referred to herein. Escrow Holder's duties hereunder shall be limited to the safekeeping of such money, instruments or other documents received by Escrow Holder, and for their disposition in accordance with the terms of this Agreement. Notwithstanding the foregoing, if Escrow Holder is also acting as the Title Company under the terms of this Agreement, nothing in this Section shall limit the liability of Escrow Holder under the Title Policy.

16.    Charges.    

        16.1 Buyer shall be responsible for 100% of the costs of preparing and recording the Grant Deed and Special Warranty Deed, 100% of the Escrow Holder's fees, and 100% of any other closing costs associated with this transaction including, without limitation any documentary and city transfer taxes, and any other sales taxes. Seller shall not be responsible for any recording fees, any Escrow Holder's fees, any documentary transfer taxes, any city transfer taxes or other sales taxes, or any other closing costs associated with this transaction.

        16.2 Buyer shall pay the Title Company's normal and customary premium for a Standard Title Policy, and Buyer shall also pay the additional cost for an Extended Title Policy and any endorsements to the Title Policy.

17.    Prorations.    Buyer acknowledges and agrees that Buyer shall be responsible at Buyer's sole cost and expense for all of the costs and expenses associated with the Property regardless of the Closing Date by virtue of the fact that Buyer is currently required to pay for such costs and expenses as the Tenant under the Lease. But to the extent necessary and for purposes of distinguishing between Buyer's obligations to pay for such costs and expenses as the Tenant under the Lease versus as the owner of the Property, the following shall be prorated between Seller and Buyer as of 12:01 a.m. on the date of the Close of Escrow, based upon the actual number of days in a year or a month, as follows:

        17.1 All real estate taxes, bonds and assessments on the Property for the current fiscal or calendar year (as the case may be). In no event shall Seller be charged with or be responsible for any increase in the real estate taxes on the Property resulting from the sale of the Property or from any improvements made or leases entered into on or after the Close of Escrow. If any bond or assessment on the Property is payable in installments, then the installment for the current period shall be prorated (with Buyer assuming the obligation to pay any installment due after the Close of Escrow). All real estate tax refunds, rebates or reductions for the period prior to the Close of Escrow and which are received or payable after the Close of Escrow shall belong to and be paid to Seller.

        17.2 All operating expenses of the Property, including, without limitation, utility charges, maintenance charges, service charges, management fees, and other costs and expenses.

        17.3 All fixed and additional rentals, security deposits if any, and other tenant charges, due under the Lease.

        17.4 In the event that there are any unknown amounts to be prorated as of the Close of Escrow, then Seller and Buyer will prorate the same promptly after the Close of Escrow and outside the Escrow.

18.    Confidentiality and Publicity.    

        18.1 Except as otherwise specifically provided herein or as required by law (including, but not limited to, Buyer's status as a publicly held company or in connection with Buyer's initial public offering resulting in Buyer becoming a publicly held company) Buyer shall not cause or permit Buyer or Buyer Parties to disclose, disseminate or release the Confidential Information by any means or methods to anyone, and shall treat the Confidential Information on a strictly confidential basis ("Confidentiality Provision"). The obligations of Buyer and Buyer Parties under this Section shall survive the termination of this Agreement.

19.    Damage; Condemnation.    

        19.1 If, prior to the Close of Escrow, a Material Uninsured Damage or a Material Taking occurs, Buyer may, within two (2) days after the occurrence thereof, as Buyer's sole and exclusive remedy, elect to terminate this Agreement, in which event this Agreement and the Escrow shall terminate, neither Party shall have any further rights, obligations or liabilities to the other hereunder. If Buyer does not timely elect to terminate this Agreement due to the occurrence of a Material Uninsured Damage or a Material Taking, then Buyer shall be deemed to have waived such termination right, the Close of Escrow shall occur as provided and scheduled herein, there shall be no reduction in the Purchase Price, and Seller shall assign to Buyer (which assignment shall be without any recourse to Seller) and Buyer shall be entitled to receive the compensation, awards and proceeds, if any, minus Seller's costs associated therewith, including without limitation, any deductibles and attorneys' fees resulting from such Material Uninsured Damage or Material Taking.

        19.2 If, prior to the Close of Escrow, the Property is damaged or destroyed by a casualty or other causes (except for a Material Uninsured Damage), or the Property is taken, condemned by any eminent domain proceeding (except for a Material Taking), then Buyer shall have no right to terminate this Agreement therefor, the Close of Escrow shall occur as provided and scheduled herein, there shall be no reduction in the Purchase Price, Seller shall assign to Buyer (which assignment shall be without any recourse to Seller) and Buyer shall be entitled to receive the compensation, awards and insurance proceeds, if any associated therewith including, without limitation, any deductible and attorneys' fees, minus Seller's costs resulting from such casualty, taking or condemnation, and Buyer shall pay any deductibles to the extent not paid by Seller.

        19.3 Buyer and Seller each expressly waive the provisions of any statute or case law concerning risk of loss, damage, destruction or condemnation during escrow (including, but not limited to, California Civil Code 1662, 1932 and 1933) and agree that the provisions of this Section shall supersede the provisions of such cases or statutes.

20.    Seller's Default.    

        20.1 If this sale and purchase shall not be successfully consummated as a result of Seller's inability to deliver title of the Property to Buyer, or the refusal of the Title Company or another title insurer to deliver to Buyer the policy of title insurance required under this Agreement, then Seller shall have no liability to Buyer of any kind or nature and this Agreement shall be terminated. In such event, Buyer shall be entitled to the return of all funds paid to Escrow Holder, together with interest accrued thereon.

        20.2 If Seller fails to perform any of Seller's obligations under this Agreement, then Buyer shall immediately give written notice thereof to Seller, which notice shall specify in detail the manner and reasons for Seller's alleged default, and such notice shall be accompanied by documents, information and matters reasonably necessary to substantiate Buyer's claims of Seller's default. Seller shall not be deemed or construed to be in default of Seller's obligations under this Agreement unless Seller fails to cure such default within five (5) days after Seller's receipt of such written notice from Buyer; provided,

however, if the nature of Seller's default is such that more than five (5) days are reasonably required for its cure, then Seller shall not be deemed to be in default of its obligations hereunder if Seller, within five (5) days receipt of Buyer's notice of default, commences to take steps toward curing the alleged default.

        20.3 Notwithstanding anything to the contrary herein, as an express material consideration and condition for Seller to enter into this Agreement, Buyer hereby releases, acquits and discharges Seller and Seller Parties from and against any and all consequential, incidental, indirect, special, collateral, exemplary or punitive damages arising out of, in connection with or related to Seller's violation, breach or default of this Agreement, including, but not limited to, any Claim for loss of profit, loss of opportunity, loss of production or loss of use, regardless of whether the damages sought are based on contract, tort, statute or otherwise, and irrespective of whether sole, concurrent or other negligence, whether active or passive, or strict liability is involved or is asserted.

        20.4 Notwithstanding anything to the contrary herein, as an express material consideration and condition for Seller to enter into this Agreement, Buyer agrees that, if the Close of Escrow shall have occurred (and Buyer shall not have waived, relinquished or released any applicable rights pursuant to any further limitation set forth herein), Seller's liability for any violation, breach or default of Seller's representations, warranties, covenants, indemnities or other obligations (whether express or implied) of Seller under this Agreement (or any document executed or delivered in connection herewith) shall under no circumstances exceed Five Hundred Thousand Dollars ($500,000.00) in the aggregate.

        20.5 No constituent partner in or agent of Seller, nor any advisor, trustee, director, officer, employee, beneficiary, shareholder, participant, representative or agent of any corporation or trust that is or becomes a constituent partner in Seller shall have any personal liability, directly or indirectly, under or in connection with this Agreement or any agreement made or entered into under or pursuant to the provisions of this Agreement, or any amendment or amendments to any of the foregoing made at any time or times, heretofore or hereafter, and Buyer and its successors and assigns and, without limitation, all other persons and entities, shall look solely to Seller's assets for the payment of any Claim or for any performance, and Buyer, on behalf of Buyer and Buyer's successors and assigns, hereby waives any and all such personal liability.

21.    No Right to Assign.    The rights and obligations of Buyer under this Agreement shall not be assigned by Buyer.

22.    Exchange.    

        Seller reserves the right to accomplish this transaction as an exchange sufficient to meet the requirements of Section 1031 of the Internal Revenue Code of 1986, as amended, and Buyer agrees to cooperate with Seller to accomplish the same. Seller shall pay the escrow and title company costs and expenses in connection with such exchange. Buyer agrees that as a part of accommodating Seller's exchange of the Property, Buyer shall accept a deed of the Property from Seller's exchange accommodator.

23.    No Real Estate Broker's Commissions.    Seller and Buyer each represent and warrant to the other that (i) neither has had any dealings with any person, firm, broker or finder in connection with the negotiation of this Agreement and/or the consummation of the purchase and sale contemplated hereby; that (ii) no broker or other person, firm or entity are entitled to any commission, compensation or finder's fee in connection with this transaction. Seller and Buyer do each hereby indemnify and hold the other harmless from and against any Claims, including, without limitation, Claims for compensation, commission or charges which may be claimed by any broker, finder or other similar party, by reason of any dealings or actions of the indemnifying Party.

24.    Miscellaneous.    

        24.1 The waiver by either Party of the performance of any covenant, condition or promise, shall not invalidate this Agreement, nor shall it be considered a waiver of any other covenant, condition or

promise. The waiver by either Party of the time for performing any act shall not constitute a waiver of time for performing any other act or any identical act required to be performed at a later time.

        24.2 All amendments and supplements to this Agreement must be in writing and executed by each Party hereto.

        24.3 This Agreement may be executed in several counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument. However, this Agreement shall not be binding on any Party until all Parties have executed this document, either all on one document or in counterparts.

        24.4 Time is of the essence of this Agreement.

        24.5 It is understood and acknowledged that there are no oral agreements between the Parties hereto affecting this Agreement and that this Agreement supersedes and cancels any and all previous negotiations, arrangements, brochures, advertisements, set-ups, agreements and understandings, if any, between the Parties hereto or displayed by Seller to Buyer with respect to the subject matter thereof, and none thereof shall be used to interpret or construe this Agreement. This Agreement contains all of the terms, covenants, conditions, warranties and agreements of the Parties relating in any manner to the sale of the Property, shall be considered to be the only agreement between the Parties hereto and their representatives and agents. All negotiations and oral agreements acceptable to both Parties have been merged into and are included herein. There are no other representations or warranties between the Parties, and all reliance with respect to representations is based totally upon the representations and agreements contained in this Agreement, if any.

        24.6 The necessary grammatical changes required to make the provisions hereof apply either to corporations, limited liability companies, partnerships or individuals, men or women, as the case may require, shall in all cases be assumed as though in each case fully expressed. The captions herein are for convenience only and shall not be deemed to limit, construe, affect or alter the meaning hereof. If any term, provision or condition contained in this Agreement shall, to any extent, be invalid or unenforceable, the remainder of this Agreement, or the application of such term, provision or condition to persons or circumstances other than those with respect to which it is invalid or unenforceable, shall not be affected thereby, and each and every other term, provision and condition of this Agreement shall be valid and enforceable to the fullest extent possible permitted by law.

        24.7 The language in this Agreement shall be construed in accordance with the laws of the State for interpretation of contracts and according to such language's normal and usual meaning, and not strictly for or against either Buyer or Seller, regardless of the Party who drafted this Agreement.

        24.8 All exhibits referenced herein and the Glossary are incorporated herein by reference as if fully set forth in this Agreement.

        24.9 If either Party commences litigation or arbitration against the other under this Agreement, for damages for the breach hereof or otherwise for enforcement of any remedy hereunder, the Parties hereto agree to and hereby do waive any right to a trial by jury and, in the event of any such commencement of litigation or arbitration, the prevailing Party shall be entitled to recover from the other Party such costs and reasonable attorneys' fees as may have been incurred, including, without limitation, any and all costs incurred in enforcing, perfecting and executing such judgment or award.

        24.10 This Agreement and the rights and remedies of the Parties hereunder shall be governed by the laws of the State of California.

        24.11 This Agreement shall be binding upon and shall inure to the benefit of the Parties hereto and their respective heirs, executors, administrators, successors and assigns.

25.    Notices.    

        25.1 All notices, requests, demands or other communications hereunder shall be in writing and shall be addressed as follows:

If to Buyers:	c/o Ensign Facility Services, Inc. 27101 Puerta Real, Suite 450 Mission Viejo, CA 92691 Attn: Gregory K. Stapley Phone: (949) 487-9500 Fax: (949) 540-3007
If to Sellers:	c/o Health Care Property Investors, Inc. 2760 Kilroy Airport Way, Suite 300 Long Beach, CA 90806-2473 Attn: Ms. Jeana Park Phone: (562) 733-5101 Fax: (562) 733-5201
If to Title Company:	Chicago Title Company Escrow/Order No:                          1201 S. Alma School Rd., Suite 6550 Mesa, AZ 85210-2111 Attn: Alan Costley Phone: (480) 969-3645 Fax: (480) 695-1686

or such other addresses as either Party from time to time may specify in writing to the other in accordance with this notice provision. All notices hereunder shall be effective (a) upon confirmation of telefacsimile transmission to the other Party, (b) upon delivery or attempted delivery after having been deposited in United States Mail, certified, postage prepaid, or sent by Federal Express or other reliable overnight courier service that provides written evidence of delivery, or (c) upon delivery, if delivered by personal service.

26.    LIQUIDATED DAMAGES.    BUYER AND SELLER AGREE THAT IT WOULD BE EXTREMELY DIFFICULT AND IMPRACTICABLE TO DETERMINE THE AMOUNT AND EXTENT OF DETRIMENT TO SELLER SHOULD BUYER FAIL OR REFUSE TO CONSUMMATE THE PURCHASE AND SALE TRANSACTION HEREIN PROVIDED FOR WITHIN THE TIME AND IN THE MANNER SET FORTH HEREIN. BUYER AND SELLER THEREFOR AGREE THAT IF BUYER FAILS TO COMPLETE THE PURCHASE AND SALE OF THE PROPERTY AS HEREIN PROVIDED BY REASON OF ANY DEFAULT ON BUYER'S PART, THEN SELLER SHALL BE ENTITLED TO LIQUIDATED DAMAGES IN THE AMOUNT OF THE DEPOSIT WHICH IS A REASONABLE ESTIMATE OF SELLER'S DAMAGES. SELLER SHALL BE ENTITLED TO RETAIN SAID SUM AS LIQUIDATED DAMAGES AND, EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN THIS AGREEMENT, SUCH DAMAGES SHALL BE SELLER'S SOLE AND EXCLUSIVE REMEDY, WHETHER AT LAW OR IN EQUITY, FOR BUYER'S FAILURE OR REFUSAL TO CONSUMMATE THIS PURCHASE AND SALE TRANSACTION AND IN SUCH EVENT, THE ESCROW HOLDER SHALL, UPON WRITTEN DEMAND BY SELLER, IMMEDIATELY DELIVER SUCH SUM TO SELLER BY WIRE TRANSFER OR CASHIER'S CHECK IN IMMEDIATELY AVAILABLE "SAME DAY" FUNDS.

Seller's Initials /s/  EJH Buyer's Initials /s/  GKS

        The Parties have executed this Agreement on the dates set forth immediately below their respective signatures.

BUYERS:
ENSIGN BELLFLOWER LLC, a Nevada limited liability company
By:	The Ensign Group, Inc., its Managing Member
By:	/s/  GREGORY K. STAPLEY Gregory K. Stapley Vice President & General Counsel
TROUSDALE HEALTH HOLDINGS LLC, a Nevada limited liability company
By:	The Ensign Group, Inc., its Managing Member
By:	/s/  GREGORY K. STAPLEY Gregory K. Stapley Vice President & General Counsel
MOENIUM HOLDINGS LLC, a Nevada limited liability company
By:	The Ensign Group, Inc., its Managing Member
By:	/s/  GREGORY K. STAPLEY Gregory K. Stapley Vice President & General Counsel

SELLERS:
HEALTH CARE INVESTORS III, a California general partnership
By:	Health Care Property Investors, Inc., a Maryland corporation, its General Partner
By:	/s/  EDWARD J. HENNING Name: Edward J. Henning Title: Executive Vice President
HEALTH CARE PROPERTY INVESTORS, INC., a Maryland corporation, dba in Arizona as HC Properties, Inc.
By:	/s/  EDWARD J. HENNING Name: Edward J. Henning Title: Executive Vice President

ACCEPTANCE

                                hereby acknowledges receipt of a fully executed original or counterparts of that certain Agreement of Purchase and Sale and Joint Escrow Instructions dated             , 2007 by and between            ("Seller") and            ("Buyer") and agrees to act as Escrow Holder thereunder and to be bound by and strictly perform the terms thereof as such terms apply to Escrow Holder.

Dated:
	By	Its Authorized Agent

GLOSSARY

        1.     "Buyer Parties" shall mean Buyer, Buyer's Consultants, their agents, brokers, representatives, employees, attorneys, lenders, insurers, servants, officers, directors, shareholders, partners, parents, subsidiaries, affiliates, trustees, administrators, executors, contractors, subcontractors, experts, licensees, affiliates, predecessors, heirs, devisees, invitees, and their respective successors and assigns.

        2.     "Claim(s)" shall mean any and all claims, demands, damages, judgements, liabilities, losses, debts, obligations, charges, controversies, lawsuits, actions, suits, causes of action (whether in tort or contract, law or equity or otherwise), proceedings, fines, penalties, costs, expenses, attorneys' fees, consultants' fees of whatever character, nature or kind, in law or in equity, whether known or unknown, contingent or otherwise, matured or unmatured, foreseeable or unforeseeable, liquidated or unliquidated.

        3.     "Close of Escrow" shall mean the date Buyer and Seller have each satisfied or waived (or are deemed to have waived) their respective contingencies hereunder, Buyer and Seller have each performed their respective obligations under this Agreement, including, but not limited to, delivery to Escrow Holder of all documents, funds and other items required by Escrow Holder or under this Agreement, and the Escrow Holder is in a position to record a deed of the Real Property to Buyer.

        4.     "Confidential Information" shall mean the Property Information, this Agreement, any of the terms and conditions of this Agreement, the existence of this Agreement, the identity of Seller and all organizational documents, capital structure information, ownership information, business plans, employee information, marketing plans and strategies of Seller; excluding, however, the following: (i) Information which is or becomes generally available to the public (other than as a result of an unauthorized disclosure, dissemination or release by Buyer or Buyer Parties); (ii) information developed by Buyer or Buyer Parties independently of any information and/or materials disclosed, disseminated or released by Seller or Seller Parties hereunder; or (iii) information which is or was received by or available to Buyer or Buyer Parties on a non-confidential basis from a source other than Seller or Seller Parties who is lawfully possessing and lawfully entitled to disclose such information.

        5.     "Environmental Damages" shall mean all claims, judgments, damages, losses, penalties, fines, liabilities (including strict liability), encumbrances, liens, costs, and expenses of investigation and defense of any claim, whether or not such claim is ultimately defeated, and of any good faith settlement of judgment, of whatever kind or nature, contingent or otherwise, matured or unmatured, foreseeable or unforeseeable, including, without limitation, reasonable attorneys' fees and disbursements and consultants' fees, any of which are incurred at any time as a result of the existence of Hazardous Substances in, upon, about or beneath the Property or migrating or threatening to migrate to or from the Property, or the existence of a violation of Environmental Requirements pertaining to the Property, regardless of whether the existence of such Hazardous Substance or the violation of Environmental Requirements arose before or after the present ownership or operation of the Property, and, including, without limitation:

        (i)    Damages for injury to persons, property or natural resources occurring upon or off of the Property, foreseeable or unforeseeable, including, without limitation, lost profits, consequential damages, the cost of demolition and rebuilding of any improvements on real property, interest and penalties including, but not limited to, Claims brought by or on behalf of employees and tenants of Buyer;

        (ii)   Fees incurred for the services of attorneys, consultants, contractors, experts, laboratories and all other costs incurred in connection with the investigation or remediation of such Hazardous Substances or violation of Environmental Requirements including, but not limited to, the preparation of any feasibility studies or reports or the performance of any cleanup, remediation, removal, response, abatement, containment, closure, restoration or monitoring work required by any federal, state or local governmental agency or political subdivision, or reasonably necessary to make full economic use of the Property or any other property or otherwise expended in connection

with such conditions, and including, without limitation, any attorneys' fees, costs and expenses incurred in enforcing this Agreement or collecting any sums due hereunder;

        (iii)  Liability to any third person or governmental agency to indemnify such person or agency for costs expended in connection with the items referenced in this Section; and

        (iv)  Damages for the loss of business, restriction on the use of, or adverse impact on the use of the Property.

        6.     "Environmental Requirements" shall mean all applicable present and future statutes, regulations, rules, ordinances, codes, licenses, permits, orders, approvals, plans, authorizations, concessions, franchises, and similar items, of all governmental agencies, authorities, departments, commissions, boards, bureaus, or instrumentalities of the United States, states and political subdivisions thereof (collectively "Governmental Bodies") and all applicable judicial, administrative, and regulatory decrees, judgments, and orders relating to the protection of human health or the environment, including, without limitation:

        (i)    All requirements, including, but not limited to, those pertaining to reporting, licensing, permitting, investigation, or remediation of emissions, discharges, releases, or threatened releases of Hazardous Substances, chemical substances, pollutants, contaminants, or hazardous or toxic substances, materials or wastes whether solid, liquid, or gaseous in nature, into the air, surface water, groundwater, or land, or relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport, or handling of Hazardous Substances, chemical substances, pollutants, contaminants, or hazardous or toxic substances, materials, or wastes, whether solid, liquid, or gaseous in nature; and

        (ii)   All requirements pertaining to the protection of the health and safety of employees, tenants, or the public.

        7.     "Hazardous Substance(s)" shall mean any substance, material or matter (including, but not limited to, asbestos and petroleum, gasoline, crude oil or any products, by-products or fractions thereof) whose nature, quantity or manner of existence, use, management, control, handling, manufacture, creation, generation, storage, disposal, discharge, removal, treatment, containment, remediation or transportation (i) is or becomes injurious or potentially injurious to the environment, or to public health, safety or welfare, or (ii) is regulated or becomes regulated under any federal, state, county, municipal and local laws, statutes, rules, regulations and ordinances either in existence as of the date of this Agreement or enacted or promulgated after the date of this Agreement, (iii) may or does give rise to liability under any common law theory based on nuisance (private or public), waste, trespass, negligence, strict liability or tortious conduct, or (v) the presence of which requires investigation or remediation under any federal, state or local statute, regulation, ordinance, order, action, policy or common law, including, but not limited to, the following:

        (x)   Which is or becomes defined as a "hazardous waste," "hazardous substance," pollutant or contaminant under any federal, state or local statute, regulation, rule or ordinance or amendments thereto including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act (42 U.S.C. Section 9601 et seq.) and/or the Resource Conservation and Recovery Act (42 U.S.C. Section 6901 et seq.); or

        (y)   Which is toxic, explosive, corrosive, flammable, infectious, radioactive, carcinogenic, mutagenic, or otherwise hazardous and is or becomes regulated by any governmental authority, agency, department, commission, board, agency or instrumentality of the United States, the States of California and Arizona, or any political subdivision thereof; or

        (z)   The presence of which on the Property causes or threatens to cause a nuisance upon the Property or to adjacent properties or poses or threatens to pose a hazard to the health or safety of persons on or about the Property; or

        (xx) Which contains, without limitation, gasoline, diesel fuel, other petroleum hydrocarbons, polychlorinated biphenyls (PCBs), asbestos, urea formaldehyde foam insulation, or radon gas.

        8.     "Improvements" shall mean Seller's right, title and interest in the permanent improvements located on the Real Property.

        9.     "Material Taking" shall mean a condemnation action as a result of which (i) the Improvements are damaged or destroyed, the reasonable repair cost of which in Seller's good faith estimate exceeds ten percent (10%) of the Purchase Price.

        10.   "Material Uninsured Damage" shall mean damage to or destruction of the Improvements caused by a casualty not covered by insurance the reasonable repair cost of which in Seller's good faith estimate exceeds ten percent (10%) of the Purchase Price.

        11.   "Official Records" shall mean the official records of the local county where the Real Property is located.

        12.   "Permitted Title Exceptions" shall mean the Pre-Approved Title Exceptions and any exceptions, matters or items affecting the Property's title which are otherwise approved (or deemed to have been approved) by Buyer pursuant to the terms of this Agreement.

        13.   "Personal Property" shall mean the furniture, fixtures, equipment, supplies and other items of personal property owned by Seller (and not the tenants), located at the Real Properties and used exclusively in connection with the operation and management of the Real Properties.

        14.   "Pre-Approved Title Exceptions" shall mean any exceptions, matters or items:

        14.1     Set forth as the Title Company's standard printed exceptions or exclusions from coverage for the type of policy to be issued by the Title Company;

        14.2     Any mortgages, deeds of trust or other liens or monetary encumbrances voluntarily and intentionally created by Seller and shown on the Preliminary Title Report, any mechanic's or materialmen's liens recorded against the Property as a result of work done by or on behalf of Seller, tax or judgment liens against Seller all of which Seller shall, at Seller's sole cost and expense, remove (or cause not to be shown in the Title Policy or cause the Title Company to affirmatively insure over) at or prior to the Close of Escrow; provided that, nothing contained in this Agreement shall require the release or discharge of any lien arising from Buyer's Tests;

        14.3     Lien of real property taxes, bonds or assessments (general and special);

        14.4     Notices of non-responsibility;

        14.5     Any covenant, condition, restriction, easement (such as utility easements, including, but not limited to, telephone, electrical, gas, water or power), or matters, exceptions or encumbrances that do not materially interfere with or hinder use of the Real Property in the same manner used by Buyer (and its affiliates) as the Tenant (and subtenants) under the Lease (and subleases);

        14.6     Created, caused or suffered by Buyer, Buyer's breach or default under this Agreement, or acts or omissions of Buyer or Buyer Parties;

        14.7     Any survey of the Property, including, but not limited to, an ALTA Survey, of the Property;

        14.8     Persons or parties in possession of the Property;

        14.9     Water rights, claims or title to water, whether or not shown by the public records;

        14.10     Reservations in patents;

        14.11     Creditors' rights;

        14.12     Oil, gas and minerals in or under the Real Property, provided that there is no right of entry on or within the surface or upper 500 feet of the Real Property; or

        14.13     Elsewhere provided in this Agreement to be a Pre-Approved Title Exception.

        15.   "Property Information" shall mean any and all materials, documents, agreements, lists, reports, studies, maps, surveys, rent rolls, income or expense statements, operating statements, projections, estimates, tax bills or any other information that Buyer has obtained or will hereafter obtain regarding the Property from any source.

        16.   "Real Property" shall mean Seller's right, title and interest in the Real Property and the Improvements.

        17.   "Seller Parties" shall mean Seller, Seller's agents, brokers, representatives, employees, attorneys, lenders, insurers, servants, officers, directors, shareholders, partners, parents, subsidiaries, affiliates, trustees, administrators, executors, contractors, subcontractors, experts, licensees, affiliates, predecessors, heirs, devisees, invitees, and their respective successors and assigns.

        18.   "Test(s)" shall mean any and all tests, inspections, investigations, examinations and all other work by or on behalf of Buyer, Buyer Parties or Buyer's Consultants.

        19.   "Title Policy" shall mean a CLTA Standard Coverage Owner's Policy of Title Insurance in the amount of the Purchase Price, subject to the Permitted Title Exceptions, or at Buyer's election and sole cost and expense (without delaying the Closing Date), an ALTA Extended Coverage Owner's Policy of Title Insurance.

LIST OF EXHIBITS

Exhibit No.	Description
A-1	Grant Deed
A-2	Special Warranty Deed
B	Bill of Sale
C	FIRPTA Affidavit
D	Lease Termination Agreement

EXHIBIT "A-1"
TO AGREEMENT OF PURCHASE
AND SALE AND JOINT ESCROW INSTRUCTIONS

GRANT DEED

RECORDING REQUESTED BY
AND WHEN RECORDED MAIL TO:
    Attention:              
MAIL TAX STATEMENT TO:
    Attention:            

(Space Above Line for Recorder's Use Only)

GRANT DEED

        In accordance with Section 11932 of the California Revenue and Taxation Code, Grantor has declared the amount of the transfer tax that is due by a separate statement which is not being recorded with this Grant Deed.

        FOR VALUE RECEIVED,                        (collectively, "Grantor"), grants to                         ("Grantee"), all that certain real property situated in the City of                        , County of                        , State of California, described on Exhibit A attached hereto and by this reference incorporated herein (the "Property").

        TO HAVE AND TO HOLD the Property with all the rights, privileges and appurtenances thereto belonging, or in any way appertaining, unto the said Grantee and Grantee's successors and assigns.

        SUBJECT TO the following:

(a)

All liens, encumbrances, easements, covenants, conditions, restrictions and other matters of record or matters ascertainable by an inspection or survey of the Property;

(b)

Interests of parties in possession; and

(c)

A lien not yet delinquent for taxes for real property and personal property, and any general or special assessments against the Property.

Dated:	, 2007	Grantor
		By:
		Name:
		Title:

Exhibit "A-1"

STATE OF CALIFORNIA	)
	)	ss.
COUNTY OF LOS ANGELES	)

        On                        , 2007, before me, the undersigned, a Notary Public in and for said County and State, personally appeared                        , 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 within instrument.

WITNESS my hand and official seal.

Notary Public

Exhibit "A-1"

EXHIBIT "A-1"
SCHEDULE 1

BELLFLOWER, CA PROPERTY
LEGAL DESCRIPTION

THAT PORTION OF LOT 6 IN BLOCK 30, CALIFORNIA CO-OPERATIVE COLONY TRACT, IN THE COUNTY OF LOS ANGELES, STATE OF CALIFORNIA, AS PER MAP RECORDED IN BOOK 21 PAGES 15 AND 16 OF MISCELLANEOUS RECORDS, IN THE OFFICE OF THE COUNTY RECORDER OF SAID COUNTY, DESCRIBED AS FOLLOWS:

BEGINNING AT THE INTERSECTION OF THE EAST PROLONGATION OF THE CENTER LINE OF ROSE AVENUE, AS SHOWN ON MAP TRACT NO. 5023, RECORDED IN BOOK 58 PAGE 1 OF MAPS, WITH THE CENTER LINE OF LAKEWOOD BOULEVARD, FORMERLY CERRITOS AVENUE, 60 FEET WIDE, AS.SHOWN ON SAID MAP; THENCE NORTH 89 DEGREES 42 MINUTES 20 SECONDS EAST, ALONG A LINE THAT PASSES THROUGH THE POINT OF INTERSECTION OF THE CENTER LINE OF CLARK AVENUE, WITH THE WEST PROLONGATION OF THE CENTERLINE OF ROSE AVENUE, AS SAID AVENUES ARE SHOWN ON MAP OF BELLFLOWER ACRES, SHEET NO. 1, RECORDED IN BOOK 16 PAGE 136 OF MAPS, 30 FEET TO A POINT IN THE WEST LINE OF SAID LOT & TO THE POINT OF BEGINNING; THENCE NORTH 89 DEGREES 42 MINUTES 20 SECONDS EAST, 425 FEET; THENCE PARALLEL WITH THE CENTER LINE OF LAKEWOOD BOULEVARD, SOUTH 0 DEGREES 16 MINUTES 10 SECONDS EAST, 230.45 FEET TO A POINT IN THE NORTH LINE OF LOT 3, TRACT NO. 8084 SHEET NO. 4, RECORDED IN BOOK 171 PAGE 27 OF MAPS; THENCE THEREON SOUTH 89 DEGREES 47 MINUTES 26 SECONDS WEST, 425 FEET TO THE WEST LINE OF SAID LOT 6; THENCE ALONG SAID WEST LINE, NORTH 0 DEGREES 16 MINUTES 10 SECONDS WEST, 229.83 FEET TO THE POINT OF BEGINNING.

EXCEPT THE NORTH 30 FEET THEREOF.

ALSO EXCEPT THE WESTERLY 250 FEET THEREOF.

Exhibit "A-1"
Schedule 1

EXHIBIT "A-1"
SCHEDULE 2

DOWNEY, CA PROPERTY
LEGAL DESCRIPTION

That portion of the Rancho Santa Gertrudes, in the City of Downey, in the County of Los Angeles, State of California, beginning at the intersection of Old Telegraph Road, "so-called", with the Northerly prolongation of the Easterly line of Tract No. 23734, as per map recorded in Book 628, Pages 25 and 26 of maps, in the office of the County Recorder of said County; thence Southerly, along said prolongation, to the Northeasterly corner of Lot 10 of said Tract No. 23734; thence Easterly, along the Easterly prolongation of the Northerly line of said Lot 10, to the Westerly line of the land described in the deed to F. L. Alles, recorded in Book 568, Page 33 of Deeds, in said Recorder's Office; thence Northerly along said Westerly line of the Land of Alles, to the Northwesterly corner thereof, being also a point in said Southerly line of Old Telegraph Road; thence Westerly, along said Southerly line, to the point of beginning.

Exhibit "A-1"
Schedule 2

EXHIBIT "A-2"

When recorded mail to:

SPECIAL WARRANTY DEED

        For good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the undersigned,                         , the Grantor, does hereby convey to                        , the Grantee, the following real property (the "Property") situated in Maricopa County, Arizona, together with all rights and privileges appurtenant thereto and any improvements located thereon:

SEE EXHIBIT "A" ATTACHED HERETO AND INCORPORATED HEREIN BY THIS REFERENCE.

SUBJECT TO current taxes and other current assessments; reservations in patents; all easements and declarations, rights-of-way, encumbrances, liens, covenants, conditions, restrictions, reservations, obligations, liabilities and other matters as may appear of record or to which reference is made in the public record; any and all conditions, easements, encroachments, rights-of-way, or restrictions which an accurate ALTA survey, or a physical inspection, of the Property would reveal; the applicable zoning and use regulations of any municipality, county, state or the United States affecting the Property; all Permitted Exceptions as defined in the Purchase and Sale Agreement; and any matters created by Grantee.

        AND the Grantor hereby binds itself and its successors to warrant and defend the title as against all acts of the Grantor herein and no other, subject to the matters above set forth.

DATED:	, 2007.
GRANTOR:

By:

Its:

Exhibit "A-2"

STATE OF	)
	) ss.
County of	)

        Acknowledged before me this    day of                        2007, by                        , the                        of                         , for and on behalf of the company.

Notary Seal/Stamp Notary Public

Exhibit "A-2"

EXHIBIT "A-2"
SCHEDULE 1

MESA, AZ PROPERTY

LEGAL DESCRIPTION

        All that real property located in the County of Maricopa, State of Arizona, described as follows:

Commencing for a tie at the Northeast corner of Section 15, Township 1 North, Range 5 East of the Gila and Salt River Base and Meridian, Maricopa County, Arizona;

thence South 89 degrees 32 minutes 27 seconds West along the North line of said Section 15, a distance of 540.35 feet;

thence South, a distance of 100.00 feet to the True Point of Beginning,

thence continuing South, a distance of 394.68 feet to a point an a curve which is concave Southerly and whose radius bears South 16 degrees 12 minutes 02 seconds East, a distance of 1845.00 feet;

thence Westerly along said curve through a central angle of 5 degrees 05 minutes 25 seconds a distance of 163. 91 feet to a point of reverse curvature of a curve concave Northerly with a radius of 1755.00 feet;

thence Westerly along said curve through & central angle of 10 degrees 30 minutes 41 seconds a distance of 321.97 feet;

thence North 532.43 feet to a point on the South right of way of the Consolidated Canal;

thence North 89 degrees 32 minutes 27 seconds East along said right of way which is parallel to and 100.00 feet South of the North line of said Section 15, a distance of 464.19 feet to the True Point of Beginning.

Exhibit "A-2"
Schedule 1

DECLARATION OF DOCUMENTARY TRANSFER TAX

DO NOT RECORD

County Recorder

                        County, California

        It is hereby requested that this Declaration of Documentary Transfer Tax not be recorded with the attached Grant Deed, but be affixed to the Grant Deed after it is recorded and before it is returned.

        The Grant Deed names                        , as Grantor, and                        , as Grantee. The property being transferred is located in the City of                        , County of                        , State of California.

        The undersigned Grantor hereby declares that the amount of Documentary Transfer Tax due on the attached Grant Deed is $                        , computed on the full value of the interest or property conveyed.

        I declare under penalty of perjury that the foregoing is true and correct.

Dated:	, 2007	GRANTOR
		By:
		Name:
		Title:	Manager

Exhibit “A-2”

EXHIBIT "B"
TO AGREEMENT OF PURCHASE
AND SALE AND JOINT ESCROW INSTRUCTIONS

BILL OF SALE

                    , a            ("Seller"), for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, hereby assigns, transfers, conveys and sets over to            , a            ("Buyer"), all of Seller's right, title and interest, if any, in and to the following ("Personal Property"): [*all personal property, if any, owned by Seller, located on the real property commonly known as            ("Real Property") as of the date hereof, and used in connection with the ownership and management of the Real Property described on Exhibit "A" attached hereto and incorporated herein by this reference.

        Buyer hereby acknowledges and agrees that Seller has not and is not making any representations or warranties of any kind, nature or description, express or implied, verbal or written, with respect to the Personal Property, including, but not limited to, the existence, type, nature, condition, quantity, quality or location of such Personal Property, the ownership, title, liens, leases, adverse claims or any other encumbrances affecting the Personal Property, or Seller's right, power or authority to transfer the Personal Property to Buyer.

        Buyer shall pay all sales taxes and other taxes associated with the transfer of the Personal Property to Buyer.

        THE PERSONAL PROPERTY IS BEING TRANSFERRED TO AND ACCEPTED BY BUYER "AS IS, WHERE IS" AND WITH ALL FAULTS, KNOWN OR UNKNOWN, AND SELLER MAKES NO REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, WITH RESPECT TO THE PERSONAL PROPERTY, INCLUDING, WITHOUT LIMITATION, ANY WARRANTY AS TO CONDITION, MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.

        Executed on this            day of                        , 2007.

Exhibit “B”

EXHIBIT "C"
TO AGREEMENT OF PURCHASE
AND SALE AND JOINT ESCROW INSTRUCTIONS

(                        )

FIRPTA AFFIDAVIT

        Section 1445 of the Internal Revenue Code of 1986, as amended (and the Income Tax Regulations promulgated thereunder) provides that a transferee (buyer) of a United States real property interest must withhold tax if the transferor (seller) is a foreign person. To inform the transferee that withholding of tax is not required upon the disposition of a United States real property interest by                        (hereinafter the "Seller"), the undersigned hereby certifies the following on behalf of Seller:

        Seller is not a foreign corporation, foreign partnership, foreign trust, or foreign estate (as those terms are defined in the Internal Revenue Code and Income Tax Regulations);

        Sellers' United States Federal Tax Identification Number is                        ; and

        Seller's address is                                                                         .

        Seller understands that this certification may be disclosed to the Internal Revenue Service by transferee and that any false statement contained herein could be punished by fine, imprisonment, or both.

        Under the penalties of perjury, I declare that I have examined this certification and to the best of my knowledge and belief it is true, correct and complete, and I further declare that I have authority to sign this document on behalf of Seller.

        Executed this            day of                        , 2007.

Exhibit "C"

EXHIBIT "D"

LEASE TERMINATION AGREEMENT

Exhibit "D"

EXTENSION NOTICE LETTER

Daniel H Walker
Counsel direct fax (949) 540-3007
direct line (949) 540-1247
dawalker@ensigngroup.net

September 6, 2007

Health Care Property Investors, Inc.
Health Care Investors III
c/o Jeana Park, Esq.
3760 Kilroy Airport Way, Suite 300
Long Beach, CA 90806-2473

Chicago Title Company
c/o Alan Costley
1201 S. Alma School Rd., Suite 6550
Mesa, AZ 85210-2111

Dear Jeana and Alan,

        As required by Section 1.1 of that certain Agreement of Purchase and Sale and Joint Escrow Instructions, dated August 31, 2007 (the "Purchase Agreement"), notice is hereby given that the Closing Date, as defined in the Purchase Agreement, is extended to December 14^th, 2007.

        As discussed with you, Jeana, your expressed willingness to close the transaction prior to December 14^th, 2007 on a mutually agreeable date is much appreciated.

        It is great to work with each of you. Please let me know if you have any questions.

Sincerely,

/s/ Daniel H. Walker

Daniel H. Walker
Counsel for Ensign Bellflower LLC,
Trousdale Health Holdings LLC and
Moenium Holdings LLC

EX-10.46

Exhibit 10.46

October 3, 2007

CONFIDENTIAL

Christopher Christensen
Chief Executive Officer and Director

Alan Norman
Chief Financial Officer

Gregory K. Stapley
Vice President and General Counsel

The Ensign Group, Inc.
27101 Puerto Real
Suite 450
Mission Viejo, California 92691

Re: Commitment for $50 Million Credit Facility

Gentlemen:

        General Electric Capital Corporation ("GE Capital") has approved the terms of a $50 million senior secured credit facility (the "Credit Facility") upon the general terms and conditions outlined in the summary of terms (the "Summary of Terms") attached as Exhibit A to this commitment letter (including the Summary of Terms, this "Commitment Letter"). This commitment is based upon our understanding of the transactions described in the Summary of Terms and upon the information that you have provided to us. The Credit Facility would be used to refinance certain existing indebtedness of The Ensign Group, Inc. (the "Company") and its subsidiaries, and to provide financing for ongoing working capital and capital expenditure needs and expenses relating to the Credit Facility.

        By your acceptance of this Commitment Letter, you agree to pay all costs and expenses incurred by GE Capital in connection with due diligence and analysis, examination and appraisals, environmental analysis, documentation, negotiation, syndication and closing of the Credit Facility including, but not limited to, per diem charges of auditors, appraisers and consultants, legal fees and other out-of-pocket expenses incurred by GE Capital, whether or not GE Capital closes the proposed Credit Facility.

        The Summary of Terms is intended to be indicative of the principal terms of the Credit Facility and does not purport to specify all of the terms, conditions, representations and warranties, covenants and other provisions that will be contained in the final loan documents for the Credit Facility. The commitment of GE Capital hereunder is subject to the execution and delivery of final legal documentation acceptable to GE Capital and its counsel incorporating, without limitation, the terms set forth in this Commitment Letter and the Summary of Terms.

        GE Capital is delivering this Commitment Letter to you in reliance upon the accuracy of all information furnished to GE Capital by you or on your behalf and with the understanding that you will not disclose this Commitment Letter or the contents thereof or GE Capital's involvement or interest in providing financing for the proposed transaction to any third party (including, without limitation, any financial institution or intermediary) without GE Capital's prior written consent other (a) than to governmental and regulatory authorities as may required under applicable law, (b) and your advisors and officers on a need-to-know basis and (c) as may be necessary to accomplish any filings with the Securities and Exchange Commission or similar governmental entity. Except as provided in (c) above, you agree to inform all such persons who receive information concerning GE Capital or this commitment that such information is confidential and may not be disclosed to any other person. GE Capital reserves the right to review and approve, in advance, all materials, press releases,

advertisements and disclosures that you or your affiliates prepare that contain GE Capital's or any affiliate's name or describe GE Capital's financing commitment.

        By executing this Commitment Letter, you agree, whether or not GE Capital closes the proposed Credit Facility, to indemnify GE Capital, each other lender involved in the Credit Facility, and their respective affiliates, and their respective directors, officers, employees, agents, auditors, accountants, consultants and counsel (each, an "Indemnitee") from, and hold each of them harmless against, any and all losses, liabilities, claims, actions, suits, proceedings, damages or expenses including amounts paid in settlement, legal fees and defense costs, incurred by any of them arising out of or by reason of any environmental matters, investigation, litigation or other proceeding brought or threatened in connection with, or arising out of, this Commitment Letter or the Credit Facility under consideration, the documentation related thereto, any other financing or transaction related thereto, any actions or failures to act in connection therewith, any loan made or proposed to be made hereunder or otherwise relating to any such loan made or proposed to be made hereunder, provided, that you shall have no obligation to an Indemnitee under this paragraph to the extent resulting from the gross negligence or willful misconduct of that Indemnitee as finally determined by a non appealable judgment of a court of competent jurisdiction. Under no circumstances shall GE Capital or any of its respective affiliates or any other Indemnitee be liable to you, your affiliates or any other entity or person for any punitive, exemplary, consequential, lost anticipated profits or indirect damages in connection with this Commitment Letter, the Credit Facility, the documentation related thereto or any other financing or transaction, regardless of whether the commitment herein is terminated or the Credit Facility closes. The provisions of this paragraph shall remain in full force and effect regardless of whether definitive financing documentation shall be executed and delivered and notwithstanding the termination of this Commitment Letter or the commitment of GE Capital hereunder.

You and GE Capital hereby expressly waive any right to trial by jury of any claim, demand, action or cause of action arising in connection with this Commitment Letter, any transaction relating hereto, or any other instrument, document or agreement executed or delivered in connection herewith, whether sounding in contract, tort or otherwise. You and GE Capital consent and agree that the state or federal courts located in New York County, State of New York, shall have exclusive jurisdiction to hear and determine any claims or disputes between or among any of the parties hereto pertaining to this Commitment Letter, any transaction relating hereto, any other financing related thereto, and any investigation, litigation, or proceeding related to or arising out of any such matters, provided, that you and GE Capital acknowledge that any appeals from those courts may have to be heard by a court located outside of such jurisdiction. You and GE Capital expressly submit and consent in advance to such jurisdiction in any action or suit commenced in any such court, and hereby waive any objection which either of them may have based upon lack of personal jurisdiction, improper venue or inconvenient forum.

        This Commitment Letter is governed by and shall be construed in accordance with the laws of the State of New York applicable to contracts made and performed in that State.

        GE Capital shall have access to all relevant facilities, personnel and accountants, and copies of all documents which GE Capital may request, including business plans, financial statements (actual and pro forma), books, records, and other documents.

        This Commitment Letter supersedes all prior discussions, writings, indications of interest and proposals with respect to the Credit Facility previously delivered to you or your affiliates by GE Capital or any of its affiliates. Unless extended in writing by GE Capital, in its discretion, the commitment contained herein shall expire upon the first to occur of: (a) 5:00 p.m., New York time on October 3, 2007, unless you shall have prior to that date and time executed and delivered a copy of this letter to the attention of the undersigned; or (b) 5:00 p.m., New York time on November 30, 2007, unless the transactions contemplated and described by this Commitment Letter are consummated on or before

2

that date pursuant to written credit documentation signed by GE Capital. Upon expiration of the commitment contained herein, GE Capital and its affiliates shall have no liability or obligation hereunder. Expiration of this commitment shall not affect your obligations hereunder, including to pay any fees, costs or expenses provided for herein or in any other agreements entered into between you and GE Capital.

        This letter may be executed in counterparts which, taken together, shall constitute an original. This letter may be delivered by facsimile transmission with the same effect as if originally executed copies of this letter were personally delivered to the parties hereto.

        We appreciate the opportunity you have given us to deliver a financing commitment and look forward to working with you.

Sincerely,
	GENERAL ELECTRIC CAPITAL CORPORATION
	By:	/s/  JEFFERY P. HOFFMAN
	Name:	Jeffery P. Hoffman Its Duly Authorized Signatory

AGREED AND ACCEPTED THIS 3^rd DAY OF OCTOBER, 2007:

THE ENSIGN GROUP, INC.

By:	/s/  ALAN NORMAN
Name:	Alan Norman
Title:	CFO

3

Exhibit A

SUMMARY OF PROPOSED TERMS AND CONDITIONS
FOR $50 MILLION SENIOR SECURED CREDIT FACILITY

I.    DESCRIPTION OF THE TRANSACTION AND THE PARTIES:

TRANSACTION:		The Ensign Group, Inc. (the "Company") has requested an aggregate of $50 million in senior secured financing (the "Financing") to be used to acquire certain assets, repay debt, provide funds for working capital of the Credit Parties in the ordinary course, capital expenditures, and other corporate purposes to be agreed upon, and finance fees and expenses related to the Facility. Based on information currently available to Agent, it is anticipated that the Financing shall be comprised of a $50 million senior secured credit facility.
BORROWER(S):		The entities attached on Schedule 1 hereto, any other skilled nursing or ancillary skilled nursing entities of the Company expected to generate eligible receivables (other than any real property holding companies), and all of their subsidiaries.
GUARANTOR(S):		The Ensign Group, Inc. (collectively with the Borrower, the "Credit Parties").
LENDERS:		General Electric Capital Corporation or one of its affiliates ("GECC"), and other financial institutions acceptable to Agent and reasonably acceptable to the Borrowers.
AGENT:		General Electric Capital Corporation
II.    DESCRIPTION OF THE SENIOR SECURED FACILITIES:
FACILITY:		Senior secured facilities totaling up to $50 million (collectively, the "Facility"):
REVOLVING CREDIT FACILITY:		A Revolving Credit Facility in an aggregate principal amount of up to $50 million (the "Revolving Credit Facility"). On Borrowers' request, Agent may agree to make a portion of the Revolving Credit Facility, not in excess of $10 million, available for the issuance of letters of credit ("Letters of Credit"), on terms and conditions to be determined.
	Use of Proceeds:	At closing, to repay existing debt (at Borrowers' request) and to finance fees and expenses relating to the Facility. Post closing, to acquire assets (both leased and owned properties) and provide funds for working capital of the Credit Parties in the ordinary course, capital expenditures and other corporate purposes to be agreed upon.
	Term:	Five years (60 months) from the closing of the Facility (the "Closing").
	Availability:	Advances under the Revolving Credit Facility shall be made on a borrowing base equal to eighty-five percent (85%) of the Borrowers' eligible accounts receivable, consistent with the existing credit facility between GECC and the Borrowers. Agent would retain the right from time to time to establish and/or modify advance rates, standards of eligibility and reserves against availability in Agent's reasonable credit judgment. Verification of the foregoing is subject to results of a field examination satisfactory to Lender in its discretion. The face amount of any and all Letters of Credit will reduce availability under the Revolving Credit Facility on a dollar-for-dollar basis.
This term sheet does not purport to summarize all of the terms and conditions of the Financing or any financing.

4

	Subject to compliance with the financing documents, the Borrower may borrow, repay and re-borrow under the Revolving Credit Facility. All principal amounts outstanding under the Revolving Credit Facility will be payable at maturity, whether at the stated maturity, on acceleration or otherwise.
III.    INTEREST AND FEES
INTEREST:	At Borrowers' option, absent a default or event of default, either:
	(a)  1, 2, 3 or 6 month reserve-adjusted LIBOR; or
	(b)  the Index Rate (to be defined as the higher of the Prime Rate as reported by the Wall Street Journal and the federal funds rate plus 0.50%);
	in each case, plus the Applicable Margin, as set forth below:

Applicable Margins	LIBOR +	Index Rate +
Revolving Credit Facility	2.50%	1.00%

		All interest shall be payable monthly in arrears or at the end of the applicable LIBOR period.
	Default Rate:	On and after the occurrence of a default, Agent will be entitled to assess interest and letter of credit fees at the rate otherwise applicable plus two percent (2%).
FEES:
	Unused Facility Fee:	Borrowers shall pay an unused facility fee ("Unused Facility Fee") equal to 0.25% per annum on the average unused daily balance of the Revolving Credit Facility, which shall be payable monthly in arrears. The average unused daily balance of the Revolving Credit Facility will be calculated on the basis of a $30 million Revolving Credit Facility amount, until outstandings under the Revolving Credit Facility (including Letters of Credit) exceed $30 million, at which point the average unused daily balance will be calculated on the basis of a $50 million Revolving Credit Facility amount. The Unused Facility Fee will not be assessed during the first six months after Closing.

IV.    SECURITY

Agent and Lenders shall receive a fully perfected first priority security interest in all assets of Borrowers.

Agent shall establish full cash dominion by means of (i) lockboxes into which all customers of the Credit Parties will be directed to make all payments of receivables and (ii) deposit account control agreements for deposit accounts into which any proceeds of any receivables are deposited, consistent with the existing credit facility between GECC and the Borrowers.

This term sheet does not purport to summarize all of the terms and conditions of the Financing or any financing.

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All collateral will be free and clear of other liens and encumbrances, except those acceptable to Agent. The financing documents shall contain customary cross-default and cross-acceleration provisions, including, without limitation, a cross default to that certain Second Amended and Restated Loan Agreement ("RE Loan Agreement") dated as of June 30, 2006 by and among Valley Health Holdings LLC, Sky Holdings AZ LLC, Terrace Holdings AZ LLC, Ensign Highland LLC, Plaza Health Holdings LLC, Rillito Holdings LLC, Mountainview CommunityCare LLC and Meadowbrook Health Associates LLC (collectively, the "RE Borrowers"), General Electric Capital Corporation (as "RE Agent" and a RE Lender) and the other financial institutions who are parties to the agreement as lenders ("RE Lenders"), as such RE Loan Agreement may be amended, supplemented or otherwise modified from time to time.

V.    PROVISIONS RELATING TO PREPAYMENTS

OPTIONAL PREPAYMENTS:	Subject to compliance with the terms of the financing documents and the payment of any LIBOR breakage fees, Borrowers may borrow, repay and re-borrow under the Revolving Credit Facility in its discretion without permission or penalty.
MANDATORY PREPAYMENTS:	Mandatory prepayments to include: (a) a prepayment in an amount equal to the amount by which the outstanding balance under the Revolving Credit Facility exceeds availability and/or the maximum aggregate commitment amount of the Revolving Credit Facility, and (b) following a disposition of assets, receipt of insurance or condemnation proceeds and the issuance of any equity (excluding (i) the initial public offering of stock of The Ensign Group, Inc. and (ii) provided that no event of default has occurred and is continuing and Borrower is in pro forma compliance with financial covenants, any secondary offerings of stock of The Ensign Group, Inc.), debt securities (subject to a $5,000,000 basket), a prepayment in such amounts (and subject to such baskets, if any), as shall be agreed upon.
VI.    CERTAIN CONDITIONS
CONDITIONS TO CLOSING:	Lenders' obligation to close the Facility and to make an initial funding thereunder at Closing shall be conditioned upon satisfaction (in Agent's and its counsel's sole discretion) of certain conditions precedent as are customary for financings of this type and otherwise deemed appropriate by the Agent for this transaction in its sole discretion, including but not limited to those pertaining to completion of all due diligence, negotiation, execution and delivery of all definitive documents pertaining to the Facility, receipt by Lenders of all fees and expenses payable on the Closing, receipt of customary deliverables from the Credit Parties, including all governmental and third party approvals, consents and undertakings (including all landlord waivers that can be obtained through commercially reasonable efforts by the Credit Parties, to the extent satisfactory landlord waivers have not already been obtained by Agent), legal opinions and evidence of solvency, review of the Credit Parties' cash management system, receipt of satisfactory lien, tax lien, judgment and litigation searches, absence of any material adverse change.
This term sheet does not purport to summarize all of the terms and conditions of the Financing or any financing.

6

CONDITIONS TO FUNDING:	The making of any advances shall be subject to (a) the accuracy of all representations and warranties, (b) no default or event of default at the time of or after giving effect to the making of such advance and (c) the absence of any material adverse change in the business, financial or other condition of the Credit Parties, their industry or the collateral, or in Lenders' ability to enforce its rights under the financing documents.
VII.    CERTAIN DOCUMENTATION MATTERS
	The financing documents shall contain such representations, warranties, covenants (affirmative, negative, financial and collateral), indemnities, events of default and protective provisions as are customary for financings of this type and otherwise deemed appropriate by the Agent for this transaction in its sole discretion, including, without limitation, the following:
	•  Borrowers shall provide Agent, at Borrowers' cost and expense, with access to Borrowers' facilities, management and auditors for the purposes of auditing and inspecting the collateral, the facilities and the Borrowers' records.
	•  Limitation on amendments to leases of real property with affiliates.
	•  Financial reporting requirements shall be consistent with the existing credit facility between GECC and the Borrowers.
	•  Financial covenants shall include, but may not be limited to, a minimum Fixed Charge Coverage Ratio.
	— Covenant levels are to be determined.
	— For the purpose of covenant calculations, it is anticipated that EBITDA will be defined as LTM EBITDA. However, with recent acquisitions, at Agent's discretion, and after the acquisition has been held by Borrowers for at least 3 months, a Run Rate EBITDA calculation may be used starting with an annualized 3-month Run Rate and progressing to longer period annualized Run Rates until 12 months expires at which time LTM EBITDA would be used subject to a calculation methodology to be determined. Borrowers shall have the right and option to add any new facility to the credit facility and include such facility's operating company as a Borrower at any time within the first twelve (12) months following the acquisition thereof; provided that such new facility shall not be included in financial covenant calculations until it is added to the credit facility.

This term sheet does not purport to summarize all of the terms and conditions of the Financing or any financing.

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Schedule 1

Borrowers

Ensign San Dimas LLC
Avenues Healthcare, Inc.
City Heights Health Associates LLC
Atlantic Memorial Healthcare Associates, Inc.
Downey Community Care LLC
Redbrook Healthcare Associates LLC
Camarillo Community Care, Inc.
Richmond Senior Services, Inc.
Carrollton Heights Healthcare, Inc.
Claremont Foothills Health Associates LLC
Bernardo Heights Healthcare, Inc.
Presidio Health Associates LLC
Ensign Cloverdale LLC
North Mountain Healthcare LLC
Glendale Healthcare Associates LLC
24th Street Healthcare Associates LLC
South Valley Healthcare, Inc.
Sunland Health Associates LLC
Lynnwood Health Services, Inc.
C Street Health Associates LLC
Highland Healthcare LLC
Olympus Health, Inc.
Grand Villa PHX, Inc.
Lemon Grove Health Associates LLC
Ramon Healthcare Assoc, Inc.
Washington Heights Healthcare, Inc.
Radiant Hills Health Associates LLC
Northern Oaks Healthcare, Inc.
Ensign Willits LLC
RenewCare of Scottsdale, Inc.
Hoquiam Healthcare, Inc.
Gate Three Healthcare LLC
West Escondido Healthcare LLC
Ensign Panorama LLC
Manor Park Healthcare LLC
Ensign Montgomery LLC
Pocatello Health Services, Inc.
Ensign Palm I LLC
Bell Villa Care Associates LLC
Ensign Whittier West LLC
Ensign Sabino LLC
Salado Creek Senior Care, Inc.
HB Healthcare Associates LLC
Rose Park Healthcare Associates, Inc.
Ensign Sonoma LLC
Southland Management LLC
Ensign Santa Rosa LLC
Livingston Care Associates, Inc.
Ensign Pleasanton LLC
Upland Community Care, Inc. McAllen Community Healthcare, Inc.
Victoria Ventura Healthcare LLC
Costa Victoria Healthcare LLC
Vista Woods Health Associates LLC
Park Waverly Healthcare LLC
Wellington Healthcare, Inc.
Ensign Whittier East LLC
Town East Healthcare, Inc.

This term sheet does not purport to summarize all of the terms and conditions of the Financing or any financing.

8

EX-10.55

Exhibit 10.55

SECOND AMENDMENT TO LEASE
(Mission Ridge)

        THIS SECOND AMENDMENT TO LEASE ("Second Amendment") is made and entered into as of the              day of October, 2007, by and between MISSION RIDGE ASSOCIATES LLC, a Delaware limited liability company ("Landlord"), and ENSIGN FACILITY SERVICES, INC., a Nevada corporation ("Tenant").

R E C I T A L S:

        A.    Landlord and Tenant, entered into that certain Office Lease dated as of August 28, 2003 (the "Lease"), as amended by that certain First Amendment to Lease Agreement dated January 15, 2004, whereby Landlord leased to Tenant and Tenant leased from Landlord certain office space located in that certain building located and addressed at 27101 Puerta Real, Mission Viejo, California 92691 (the "Building").

        B.    By this Second Amendment, Landlord and Tenant desire to expand the Premises and to otherwise modify the Lease as provided herein.

        C.    Unless otherwise defined herein, capitalized terms as used herein shall have the same meanings as given thereto in the Lease.

        NOW, THEREFORE, in consideration of the foregoing recitals and the mutual covenants contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:

A G R E E M E N T:

        1.     The Premises.    Landlord and Tenant hereby agree that pursuant to the Lease, Landlord currently leases to Tenant and Tenant currently leases from Landlord that certain office space in the Building containing 15,920 rentable (14,242 usable) square feet located on the fourth (4^th) floor of the Building and commonly known as Suite 450 (the "Original Premises"), as further described in the Lease.

        2.     Expansion of the Premises.    Effective as of the Expansion Effective Date (defined below), the "Premises", as defined in the Lease, is increased to approximately 20,719 rentable square feet on the fourth (4^th) floor of the Building by the addition of space containing approximately 4,799 rentable (4,929 usable) square feet described as Suite Nos. 460 and 470 on the fourth (4^th) floor of the Building as shown on Exhibit A attached hereto (the "Expansion Space"). From and after the Expansion Effective Date, the Original Premises and the Expansion Space, collectively, shall be deemed the Premises, as defined in the Lease and as used herein. The Lease Term for the Expansion Space shall commence on the Expansion Effective Date and end on the Lease Expiration Date. The Expansion Space is subject to all the terms and conditions of the Lease except as expressly modified herein and except that Tenant shall not be entitled to receive any allowances, abatements or other financial concessions granted with respect to the Original Premises unless such concessions are expressly provided for herein with respect to the Expansion Space.

2.1

The Expansion Effective Date shall be the later to occur of (i) October             , 2007 ("Target Expansion Effective Date"), and (ii) the date upon which the Tenant Improvements (as defined in the "Tenant Work Letter" attached as Exhibit B hereto) in the Expansion Space have been substantially completed; provided, however, that if Landlord shall be delayed in substantially completing the Tenant Improvements in the Expansion Space as a result of the occurrence of a Tenant Delay (defined below), then, for purposes of determining the

1

Expansion Effective Date, the date of substantial completion shall be deemed to be the day that said Tenant Improvements would have been substantially completed absent any such Tenant Delay(s). A "Tenant Delay" means any act or omission of Tenant or its agents, employees, vendors or contractors that actually delays substantial completion of the Tenant Improvements, including, without limitation, the following:

2.1.1

Tenant's failure to furnish information or approvals within any time period specified in the Lease or this Second Amendment, including the failure to prepare or approve preliminary or final plans by any applicable due date;



2.1.2

Tenant's selection of equipment or materials that have long lead times after first being informed by Landlord that the selection may result in a delay;



2.1.3

Changes requested or made by Tenant to previously approved plans and specifications;



2.1.4

The performance of work in the Expansion Space by Tenant or Tenant's contractor(s) during the performance of the Tenant Improvements; or



2.1.5

If the performance of any portion of the Tenant Improvements depends on the prior or simultaneous performance of work by Tenant, a delay by Tenant or Tenant's contractor(s) in the completion of such work.

The Expansion Space shall be deemed to be substantially completed on the date that Landlord reasonably determines that all Tenant Improvements have been performed (or would have been performed absent any Tenant Delays), other than any details of construction, mechanical adjustment or any other matter, the noncompletion of which does not materially interfere with Tenant's use of the Expansion Space. The adjustment of the Expansion Effective Date and, accordingly, the postponement of Tenant's obligation to pay rent on the Expansion Space shall be Tenant's sole remedy and shall constitute full settlement of all claims that Tenant might otherwise have against Landlord by reason of the Expansion Space not being ready for occupancy by Tenant on the Target Expansion Effective Date.

2.2

In addition to the postponement, if any, of the Expansion Effective Date as a result of the applicability of Section 2.1 of this Second Amendment, the Expansion Effective Date shall be delayed to the extent that Landlord fails to deliver possession of the Expansion Space for any other reason (other than Tenant Delays), including but not limited to, holding over by prior occupants. Any such delay in the Expansion Effective Date shall not subject Landlord to any liability for any loss or damage resulting therefrom. If the Expansion Effective Date is delayed, the Lease Expiration Date shall not be similarly extended.

        3.     Monthly Base Rent.    Notwithstanding anything to the contrary in the Lease, as of the Expansion Effective Date, Tenant shall pay, in accordance with the provisions of this Section 3 (but subject to Section 4 below), monthly Base Rent for the Expansion Space as follows:

Months	Monthly Base Rent		Monthly Base Rent Per Rentable Square Foot of Premises
Expansion Effective Date-12	$	13,873.60	$	2.90
13-24	$	14,112.80	$	2.95

Landlord and Tenant acknowledge that the foregoing schedule is based on the assumption that the Expansion Effective Date is the Target Expansion Effective Date. If the Expansion Effective Date is other than the Target Expansion Effective Date, the schedule set forth above with respect to the payment of any installment(s) of monthly Base Rent for the Expansion Space shall be appropriately adjusted on a per diem basis to reflect the actual Expansion Effective Date, and the actual Expansion Effective Date shall be set forth in a confirmation letter to be prepared by Landlord. However, the

2

effective date of any increases or decreases in the monthly Base Rent rate shall not be postponed as a result of an adjustment of the Expansion Effective Date as provided above.

        4.     Base Rent Abatement.    Notwithstanding anything above to the contrary and provided that the Tenant faithfully performs all of the terms and conditions of the Lease (as modified by this Second Amendment), Landlord hereby agrees to abate Tenant's obligation to pay Tenant's monthly Base Rent for the first (1^st) full month following the Expansion Effective Date. During such abatement period, Tenant shall still be responsible for the payment of all other monetary obligations under the Lease (as modified by this Second Amendment). In the event of a default by Tenant under the terms of the Lease (as modified by this Second Amendment) that results in early termination pursuant to the provisions of Article 19 of the Lease, then as a part of the recovery set forth in Article 19 of the Lease, Landlord shall be entitled to the recovery of the monthly Base Rent that was abated under the provisions of this Section 4.

        5.     Tenant's Share of Operating Expenses, Tax Expenses and Utilities Costs; Base Year. Notwithstanding anything to the contrary in the Lease, For the period commencing with the Expansion Effective Date and ending on the Lease Expiration Date, Tenant's Share for the Expansion Space is 4.14%. Tenant's Share for the Expansion Space and the Original Premises is, collectively, 17.86%. The Expense Base Year and the Utilities Base Year for the Expansion Space shall be the calendar year of 2007.

        6.     Parking.    In addition to the parking passes to which Tenant is entitled under the Lease, Tenant shall be entitled to four (4) parking passes for every 1,000 usable square foot of the Expansion Space. Tenant's use of such parking passes shall be in accordance with, and subject to, all provision of Article 23 of the Original Lease. In addition, Tenant shall be responsible at all times for the full amount of any taxes imposed by any governmental authority in connection with the rental of such parking passes by Tenant or the use of the parking facilities by Tenant.

        7.     Improvements to the Expansion Space.    Tenant hereby agrees to accept the Expansion Space in its "AS-IS" condition. Tenant hereby acknowledges that Landlord shall not be obligated to provide or pay for any improvement work or services related to the improvement of the Expansion Space, except as may be expressly provided otherwise in this Second Amendment. Landlord shall perform improvements to the Expansion Space in accordance with the terms of Exhibit B attached hereto. Tenant also acknowledges that Landlord has made no representation or warranty regarding the condition of the Expansion Space.

        8.     Brokers.    Each party represents and warrants that it has had no dealings with any real estate broker, agent or finder in connection with the Expansion Space except for the Staubach Company ("Broker") with this Second Amendment. Tenant further represents and warrants to Landlord that Tenant will not receive (i) any portion of any potential brokerage commission or finder's fee payable to Broker in connection with this lease or (ii) any other form of compensation or incentive from Broker with respect to this Second Amendment. Broker will receive a commission from Landlord, should an amendment be fully executed by Landlord and Tenant, equal to four (4%) percent of the total lease consideration. Each party further agrees to defend, indemnify and hold harmless the other party from and against any claim for commission or finder's fee by any entity (other than Broker and the Grubb & Ellis Company) who claims or alleges that they were retained or engaged by the first party or at the request of such party in connection with this Second Amendment.

        9.     Defaults.    Tenant hereby represents and warrants to Landlord that, as of the date of this Second Amendment, Tenant is in full compliance with all terms, covenants and conditions of the Lease and that there are no breaches or defaults under the Lease by Landlord or Tenant, and that Tenant knows of no events or circumstances which, given the passage of time, would constitute a default under the Lease by either Landlord or Tenant.

3

        10.   Signing Authority.    Tenant hereby represents and warrants that Tenant is a duly formed and existing entity qualified to do business in the State of California and that Tenant has full right and authority to execute and deliver this Second Amendment and that each person signing on behalf of Tenant is authorized to do so. Tenant hereby represents and warrants that neither Tenant, nor any persons or entities holding any legal or beneficial interest whatsoever in Tenant, are (i) the target of any sanctions program that is established by Executive Order of the President or published by the Office of Foreign Assets Control, U.S. Department of the Treasury ("OFAC"); (ii) designated by the President or OFAC pursuant to the Trading with the Enemy Act, 50 U.S.C. App. § 5, the International Emergency Economic Powers Act, 50 U.S.C. §§ 1701-06, the Patriot Act, Public Law 107-56, Executive Order 13224 (September 23, 2001) or any Executive Order of the President issued pursuant to such statutes; or (iii) named on the following list that is published by OFAC: "List of Specially Designated Nationals and Blocked Persons." If the foregoing representation is untrue at any time during the Extended Lease Term, a default under the Lease will be deemed to have occurred, without the necessity of notice to Tenant.

        11.   Guaranty.    At Landlord's option, this Second Amendment shall be of no force and effect unless and until accepted in writing by any guarantors of the Lease, who by signing that certain Reaffirmation of Guaranty of Lease, dated on or about the date hereof, shall agree that their guaranty shall apply to the Lease as amended herein, unless such requirement is waived by Landlord in writing.

        12.   No Further Modification.    Except as set forth in this Second Amendment, all of the terms and provisions of the Lease shall remain unmodified and in full force and effect.

        13.   ERISA.    To satisfy compliance with the Employee Retirement Income Security Act of 1974, as amended, Tenant represents and warrants to Landlord and The Prudential Insurance Company of America, a New Jersey corporation ("Prudential"), that:

        (a)   Tenant is not an "employee benefit plan" (as that term is defined in Section 3(3) of ERISA); and

        (b)   Tenant is not acquiring an interest in the Expansion Space as a plan asset subject to ERISA but for Tenant's own investment account; and

        (c)   Tenant is not an "affiliate" of Prudential as defined in Section IV(b) or PTE 90-1;

        (d)   Tenant is not a "party in interest" (as that term is defined in Section 3(14) of ERISA) to the Virginia Retirement System; and

        (e)   Tenant agrees to keep the identity of the Virginia Retirement System confidential, except to the extent that Tenant may be required to disclose such information as a result of (i) legal process, or (ii) compliance with ERISA or other Laws governing Tenant's operations.

        14.   Limitation of Liability.    Redress for any claim against Landlord under the Lease and this Second Amendment shall be limited to and enforceable only against and to the extent of Landlord's interest in the Building. The obligations of Landlord under the Lease are not intended to and shall not be personally binding on, nor shall any resort be had to the private properties of, any of its trustees or board of directors and officers, as the case may be, its investment manager, the general partners thereof, or any beneficiaries, stockholders, employees, or agents of Landlord or the investment manager.

4

        IN WITNESS WHEREOF, this Second Amendment has been executed as of the day and year first above written.

"Landlord":	MISSION RIDGE ASSOCIATES LLC, a Delaware limited liability company
	By:	Legacy Partners Commercial, L.P., a California limited partnership, as Manager and Agent for Owner
		By:	Legacy Partners Commercial, Inc., General Partner
			By:	Debra Smith
				Its: Executive Vice President

"Tenant":	ENSIGN FACILITY SERVICES, INC., a Nevada corporation
	By:
		Name:
		Its:
	By:
		Name:
		Its:

5

EXHIBIT A—OUTLINE AND LOCATION OF EXPANSION SPACE
attached to and made a part of the Amendment dated as of October             , 2007, between
MISSION RIDGE ASSOCIATES LLC, a Delaware limited liability company ("Landlord"), and
ENSIGN FACILITY SERVICES, INC., a Nevada corporation ("Tenant")

        This Exhibit A is intended only to show the general layout of the Expansion Space as of the beginning of Expansion Effective Date. It does not in any way supersede any of Landlord's rights set forth in the Lease with respect to arrangements and/or locations of public parts of the Building and changes in such arrangements and/or locations. It is not to be scaled; any measurements or distances shown should be taken as approximate.

A-1

EXHIBIT B—TENANT WORK LETTER
attached to and made a part of the Amendment dated as of October             , 2007, between
MISSION RIDGE ASSOCIATES LLC, a Delaware limited liability company ("Landlord"), and
ENSIGN FACILITY SERVICES, INC., a Nevada corporation ("Tenant")

        As used in this Exhibit B, the "Premises" shall be deemed to mean the Expansion Space, as defined in the Second Amendment to which this Exhibit B is attached.

        1.     Landlord shall perform improvements to the Premises substantially in accordance with the plans prepared by Hattox Design Group, dated June 22, 2007, and most recently revised August 27, 2007 (the "Plans"). The improvements to be performed by Landlord in accordance with the Plans are hereinafter referred to as the "Tenant Improvements." It is agreed that construction of the Tenant Improvements will be completed at Landlord's sole cost and expense (subject to the Maximum Amount and further subject to the terms of Section 4 below) using Building standard methods, materials and finishes. Landlord and Tenant agree that Landlord's obligation to pay for the cost of the Tenant Improvements (inclusive of the cost of preparing Plans, architect's and engineer's fees, cost of permits and obtaining permits, materials, labor, general contractor's fees and overhead, a construction management fee equal to three percent (3%) of the total construction costs, and other related costs) shall be limited to $47,990.00 (the "Maximum Amount") and that Tenant shall be responsible for the cost of the Tenant Improvements, plus any applicable state sales or use tax, if any, to the extent that it exceeds the Maximum Amount. Landlord shall enter into a direct contract for the Tenant Improvements with a general contractor selected by Landlord. In addition, Landlord shall have the right to select and/or approve of any subcontractors used in connection with the Tenant Improvements. Landlord's supervision or performance of any work for or on behalf of Tenant shall not be deemed a representation by Landlord that such Plans or the revisions thereto comply with applicable insurance requirements, building codes, ordinances, laws or regulations, or that the improvements constructed in accordance with the Plans and any revisions thereto will be adequate for Tenant's use, it being agreed that Tenant shall be responsible for all elements of the design of the Plans (including, without limitation, compliance with law, functionality of design, the structural integrity of the design, the configuration of the Premises and the placement of Tenant's furniture, appliances and equipment).

        2.     If Landlord's estimate and/or the actual cost of the Tenant Improvements shall exceed the Maximum Amount, Landlord, prior to commencing any construction of the Tenant Improvements, shall submit to Tenant a written estimate setting forth the anticipated cost of the Tenant Improvements, including but not limited to labor and materials, contractor's fees and permit fees. Within three (3) business days thereafter, Tenant shall either notify Landlord in writing of its approval of the cost estimate, or specify its objections thereto and any desired changes to the proposed Tenant Improvements. If Tenant notifies Landlord of such objections and desired changes, Tenant shall work with Landlord to reach a mutually acceptable alternative cost estimate.

        3.     If Landlord's estimate and/or the actual cost of construction shall exceed the Maximum Amount (such amounts exceeding the Maximum Amount being herein referred to as the "Excess Costs"), Tenant shall pay to Landlord such Excess Costs, plus any applicable state sales or use tax thereon, upon demand. The statements of costs submitted to Landlord by Landlord's contractors shall be conclusive for purposes of determining the actual cost of the items described therein. The amounts payable by Tenant hereunder constitute rent payable pursuant to the Lease, and the failure to timely pay same constitutes an event of default under the Lease.

        4.     If Tenant shall request any revisions to the Plans, Landlord shall have such revisions prepared at Tenant's sole cost and expense and Tenant shall reimburse Landlord for the cost of preparing any such revisions to the Plans, plus any applicable state sales or use tax thereon, upon demand. Promptly upon completion of the revisions, Landlord shall notify Tenant in writing of the increased cost in the Tenant Improvements, if any, resulting from such revisions to the Plans. Tenant, within one (1) business

B-1

day, shall notify Landlord in writing whether it desires to proceed with such revisions. In the absence of such written authorization, Landlord shall have the option to continue work on the Premises disregarding the requested revision. Tenant shall be responsible for any Tenant Delay in completion of the Premises resulting from any revision to the Plans. If such revisions result in an increase in the cost of the Tenant Improvements, such increased costs, plus any applicable state sales or use tax thereon, shall be payable by Tenant upon demand. Notwithstanding anything herein to the contrary, all revisions to the Plans shall be subject to the approval of Landlord.

        5.     Any portion of the Maximum Amount which exceeds the cost of the Tenant Improvements or is otherwise remaining after the later of (i) December 31, 2007 or (ii) the date that the Tenant Improvements are substantially complete, shall accrue to the sole benefit of Landlord, it being agreed that Tenant shall not be entitled to any credit, offset, abatement or payment with respect thereto.

        6.     This Exhibit B shall not be deemed applicable to any additional space, other than the Expansion Space contemplated by this Amendment, added to the Premises at any time or from time to time, whether by any options under the Lease, as amended hereby, or otherwise, or to any portion of the original Premises or any additions to the Premises in the event of a renewal or extension of the original Term of the Lease, whether by any options under the Lease or otherwise, unless expressly so provided in the Lease or any amendment or supplement to the Lease.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

B-2

REAFFIRMATION OF
GUARANTY OF LEASE

        THIS REAFFIRMATION OF GUARANTY OF LEASE dated as of October         , 2007 is made by The Ensign Group, Inc., a Delaware corporation ("Guarantor") with respect to that certain Guaranty of Lease dated as of August 29, 2003 (the "Guaranty") by Guarantor in favor of MISSION RIDGE ASSOCIATES LLC, a Delaware limited liability company ("Lessor") with respect to that certain Lease Agreement dated August 28, 2003 by and between Mission as "Lessor" and ENSIGN FACILITY SERVICES, INC., a Nevada corporation ("Lessee"), as Lessee (as the same may have been amended, supplemented or otherwise modified from time to time, the "Lease"), covering certain office space located in Mission Viejo, California, as more particularly described in the Lease.

RECITALS

        WHEREAS, Lessor and Lessee desire to amend the Lease upon certain terms and conditions more fully set forth in that certain Second Amendment to Lease of even date herewith (the "Amendment"); and

        WHEREAS, the Amendment is not effective until Guarantor reaffirms the Guaranty;

        NOW THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt and sufficiency of which the Guarantor hereby acknowledges, Guarantor hereby agrees:

REAFFIRMATION

        AS A MATERIAL and necessary inducement to Lessor to fulfill its obligations with respect to the Amendment, Guarantor hereby unconditionally and irrevocably reaffirms the Guaranty on the same terms and conditions as set forth therein and confirms that Guarantor's obligations under the Guaranty shall and do extend to Lessee's obligations under the Amendment, including but not limited to the payment of rent and all other sums now or hereafter becoming due or payable under the Lease, as amended by the Amendment.

EXECUTED as of this                          day of October, 2007.

THE ENSIGN GROUP, INC., a Delaware corporation
By:	Christopher R. Christensen President
By:	Gregory K. Stapley Vice President

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
Bayshore 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 (6)	Nevada
Camarillo Community Care, Inc. (6)	Nevada
Carrollton Heights Healthcare, Inc. (4)	Nevada
Cardiff Healthcare, Inc.	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 (6)	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. (4)	Nevada
Greenfields Assisted Living LLC (2)	Nevada
HB Healthcare Associates LLC (1)	Nevada
Highland Healthcare LLC (2)	Nevada
Hoquiam Healthcare, Inc. (5)	Nevada
Hueneme Healthcare, Inc.	Nevada
Keystone Care, Inc.	Nevada

Lemon Grove Health Associates LLC (1)	Nevada
Livingston Care Associates, Inc. (4)	Nevada
Long Beach Health Associates LLC	Nevada
Lynnwood Health Services, Inc. (5)	Nevada
Manor Park Healthcare LLC (5)	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. (3)	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
Pomerado Ranch Healthcare, Inc.	Nevada
Presidio Health Associates LLC (2)	Nevada
Radiant Hills Health Associates LLC (2)	Nevada
Ramon Healthcare Associates, Inc. (6)	Nevada
RB Heights Health Holdings LLC	Nevada
Redbrook Healthcare Associates LLC (6)	Nevada
Regal Road Health Holdings LLC	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 C 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. (4)	Nevada
Trinity Mill Holdings LLC	Nevada
Trousdale Health Holdings LLC	Nevada
Upland Community Care, Inc. (6)	Nevada
Valley Health Holdings LLC	Nevada
Verde Villa Holdings LLC	Nevada
Victoria Ventura Healthcare LLC (6)	Nevada
Vista Woods Health Associates LLC (1)	Nevada

2

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.

(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. 3 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 statements 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 heading "Experts" in such Prospectus.

/S/ DELOITTE & TOUCHE LLP

Costa Mesa, California
October 4, 2007

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CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

CORRESP